Case Study - Bonus Breaks Limited - Application to Court for permission to reuse the name of an insolvent company
Can a phoenix company apply to Court to reuse a prohibited name?
(Please note that this case study is in no way related to Bonusbreaks Limited which is a totally separate limited company, registered in Scotland under the number: SC415494)
In this legal case know as Bonus Breaks Limited a director applied to the court for permission to reuse the name of the former company by the restart phoenix company. Permission of the court was sought under The Insolvency Act 1986 Section 216 (and the related Insolvency Rule 4.228) to reuse the company name of the insolvent company.
1. A director of an insolvent company sought leave (permission) from the Court to act as a director of a new successor phoenix company with a similar name.
IT WAS HELD BY JUSTICE MORRITT THAT:
1. The penalties imposed by Sections 216 and 217 of The Insolvency Act 1986 can be overcome by falling under one of the three exceptions set out under The Insolvency Rules 1986 - One of which was by obtaining leave of the court.
2. Doubt was cast by the Court on the insolvency practitioners view of the meaning of the first exception under The insolvency Rules 1986. Under this Rule, a new company may take on a similar name to the old company, where it purchases the whole or substantially the whole of the business of the old company. The definition of business, in contrast with the view commonly held by practitioners does not necessarily include the old company's liabilities as well as its assets. (Since this case has been heard Insolvency Rule 4.228 has been beefed up and a Form - known nas Form 4.73 - must be advertised and sent to each creditor of the previous insolvent company within set time scales).
3. Although the company was heavily insolvent and should have ceased trading before it did, there were mitigating factors:-
a) No suggestion of dishonesty with the applicant taking advice from two qualified persons.
b) The applicant always kept proper books.
4. The applicant lost substantial sums of her own money.
In addition, there were favourable indicators as to the stability of the new company.
(1) Paid up share capital of £50,000 meant there was no requirement to borrow from a bank.
(2) Cash flow forecasts had been satisfactorily met.
(3) Benefit of £2.5 million pounds of quotations from the old company had been obtained.
(4) The applicant was one of two Directors, the other of which had a track record in and would be responsible for the financial and managerial aspects of the business.
5. It was also noted that two major creditors supported the application and the success of the new company would result in royalties being paid to the old company.
6. Leave was therefore, granted on the giving of an undertaking not to redeem shares or buy any of its own shares out of the distributable profits for two years, thus ensuring the capital base of the company was maintained.
If you wish to set up a phoenix company and reuse what otherwise would be a prohibited name then you may not have to apply to Court for permission. There is a detailed procedure set out in The Insolvency Rules 1986 to buy the name from the Liquidator of the original company.