Company Directors – Use of Prohibited Names

01 February 2010

Mark Rosser looks at the consequences of using prohibited names.

Given the number of Phoenix type businesses that have emerged in the recession from companies that have got into financial difficulties, it is perhaps pertinent to look at what protection the law gives to others who come into contact with such companies.

There has always been a danger of confusion between an insolvent company and a new company that seeks to trade using a similar name, thus hoping to benefit from any remaining goodwill that had not been extinguished during the insolvency process. However, under the Insolvency Act 1986 it is an offence for someone to become a director of another company under or known by a prohibited name within a period of five years if they were the director of the insolvent company at any time during the year before it went into liquidation. A prohibited name is any name by which the liquidated company was known at any point in the 12 months prior to the liquidation, or indeed, any name similar enough to suggest an association with that company.

A recent case has demonstrated the use of the Insolvency Act provisions. A director of a bed company called Furntex Limited used the trading name DreamSleeper and went into liquidation owing more than £500,000 to creditors. Shortly before the insolvency took place, one of the directors of Furntex Limited incorporated a new company called DreamSleeper Limited and began trading as a bed company as its predecessor. This company also failed and was placed into liquidation costing creditors nearly £200,000. A conviction was sought against the director for contravention of the Insolvency Act and he received a suspended prison sentence and 150 hours of community service, as well as being banned from serving as a director for three years.

This case highlights the fact that it is not simply the names registered at Companies House that need to be the same or similar in order to breach the statute, as a similarity in trading names will be sufficient.

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