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Struggling businesses can be rescued once they are under the protection of formal restructuring or insolvency proceedings. Often this is done through a so-called “pre-pack” – a seamless purchase of the business, completed by and immediately after the appointment of administrators. Existing management teams are typically well-placed to lead a successful bid.
This note explores the risks to those management teams of personal liability which can arise from re-using the business or trading names formerly used by their insolvent company. It also considers the ways in which those risks can be avoided.
If you are affected by any of the issues covered in this guidance note, please speak to a member of our UK Restructuring & Insolvency team (details below).
In many corporate insolvencies, the company’s brand may be a key asset for a prospective purchaser and its realisable value may offer the liquidator or administrator the best prospect of a meaningful return to creditors.
Often, the insolvent company’s management are well placed to make a successful bid and to take up a senior role with the eventual purchaser who intends to make use of any acquired brands. However, management teams need to be aware of the associated risks. They need to take advice and prompt action if they are involved with a company which has or which plans to re-use the name, brands or trading style of an insolvent company of which they were a director or shadow director* and which is in or may ultimately enter insolvent liquidation.
Under UK law there is a general restriction which prohibits persons (who, in this note, we call Relevant Persons) from:
The other company in such cases is often referred to as a “phoenix company” as it is often (but not always) a recently-formed company which takes the place of the old. For ease in this note we will simply call this so-called “phoenix” Newco and the insolvent company Oldco. The general restriction on re-use of names is intended to prevent creditors of Oldco from incurring further losses by dealing with Newco in the mistaken belief that it is Oldco and in ignorance of the liquidation of Oldco in which they may be a creditor.
Unless one of a limited range of exceptions or limitations applies (see below), a Relevant Person who breaches the restriction will be at heightened risk of:
Relevant Persons should take this issue very seriously and take appropriate advice and pre-emptive steps even if Oldco is not currently in liquidation. In particular, they should be aware that the risk of liability may arise in future even if Oldco is first placed into administration (perhaps with Newco acquiring the trading name at that point) and is only later placed into liquidation.
The exceptions to or limitations on the general restriction are:
- the Newco has purchased the whole or substantially the whole of the business of Oldco in a deal with its liquidator or, prior to its liquidation, with its administrator (perhaps via a pre-pack purchase), administrative receiver or CVA supervisor; and
- the Relevant Person gives written notice of the purchase and re-use of the prohibited name within 28 days of its completion to all of Oldco’s creditors (and publishes it in an official publication called the Gazette) before Newco uses the name, provided that the prescribed procedure and requirements for the contents of the notice are strictly complied with.
- If they apply for permission within 7 business days of the start of Oldco’s liquidation, the Relevant Person then has temporary protection from liability for acting in an otherwise prohibited role from the start of the liquidation until the earlier of 6 weeks or the date of the court’s decision.
- The application and evidence must be sent to the Secretary of State for Business, Energy & Industrial Strategy who may seek to involve Oldco’s liquidator or administrator. Their support or non-objection may be critical to the outcome of the application.
- The court has a wide discretion but will focus primarily on: whether the Relevant Person is responsible for Oldco’s demise; any evidence of misconduct; the value paid by Newco in any acquisition; and on the risk to and awareness of affected creditors.
- The court cannot grant retrospective relief for a breach that has already occurred.
- The Relevant Person will also need to fund both their own costs of applying and (ordinarily) those of the Secretary of State and liquidator or administrator.
Please note: the process for obtaining permission in Northern Ireland differs to that in England, Wales and Scotland and requires an application to be made before the Bankruptcy Master in the High Court of Justice in Northern Ireland within 7 business days of the start of Oldco’s liquidation. Further information regarding the position in Northern Ireland is set out in our recent insight: https://www.tlt.com/insights-and-events/insight/reusing-your-liquidated-companys-name-in-a-new-company/
Relevant Persons should take advice in good time before acting in order to determine if and how any of the above might apply.
We have a UK-wide team of experts who regularly advise management teams and other stakeholders in such situations. If you would like further information or advice about the issues discussed in this insight please contact a member of TLT’s Restructuring & Insolvency team.
* A shadow director is defined in applicable insolvency legislation as someone in accordance with whose directions or instructions the directors of a company are accustomed to act.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.
11 July 2022
News 17 JUNE 2022