Phoenix company restrictions: a general guide for directors

UK corporate insolvencies are rising, driven by spiralling inflation, widespread disruption in the supply of goods and labour and the withdrawal of UK Government Covid support schemes and other temporary pandemic protections from creditor pressure.

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).

Liability for phoenixing – the re-use of insolvent company names

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. 

The restriction on the re-use of insolvent company names

Under UK law there is a general restriction which prohibits persons (who, in this note, we call Relevant Persons) from:

• acting as a director or otherwise being concerned in any way in the promotion, formation or management of a company that has (or is known by) a name or trading style that is the same as that of a company that is in insolvent liquidation or which is so similar as to suggest an association with the insolvent company;
• where the Relevant Person is or has at any time in the 12 months prior to the insolvent company’s entry into liquidation also been a director or shadow director* of the insolvent company.

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.

The risk of personal liability

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:

• criminal liability in form of a fine or imprisonment;
• civil liability for the debts of Newco; and/or
• disqualification from being concerned in any way in the promotion, formation or management of any company for anything up to 15 years.

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 and circumstances when the restriction will not apply

The exceptions to or limitations on the general restriction are:

• The 5-year limitation - The restriction applies such that the Relevant Person cannot be a director of any Newco within 5 years of the start of the insolvent liquidation of Oldco.
• Notice to creditors – It is possible for a Relevant Person to avoid liability if:

- 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. 

• Obtaining the court’s permission – A Relevant Person can seek the court’s permission to act vis-à-vis Newco in a manner that would otherwise be prohibited.  

- 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/

• 12 months’ prior use of the name – A Relevant Person will not be in breach of the restriction and may take on a directorship or other management role with Newco re-using an otherwise prohibited name if Newco has been known by the prohibited name(s) for at least 12 months prior to the start of the liquidation of Oldco and has not been dormant at any time in that period.  This can be helpful in cases involving a group of companies known by similar names and, potentially, in cases where Newco acquires and re-uses Oldco’s names more than a year before its liquidation.

Relevant Persons should take advice in good time before acting in order to determine if and how any of the above might apply.

Further information

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.