Subject to exceptions, a director of a company that has entered insolvent liquidation is restricted from being involved in the management of a company with a similar name (section 216, IA 1986). A breach of section 216 results in the director being responsible for debts and liabilities of the second company incurred during the period of the breach (section 217, IA 1986).
To avoid this liability, a director seeking to use a similar name should make an application to the Court for permission (Your Business Lawyer can help with that). The process, known as a Section 216 Application allows one to reuse a company name (or similar name) after liquidation.

However, in a recent High Court case, the Court reminded would be directors that a failure to make such an application would amount to a breach of regulations and potential personal liability on the director.

The High Court (Deputy Judge Vos) has held that a director in breach of section 216 of the Insolvency Act 1986 (IA 1986) is automatically responsible under section 217 IA for liabilities of the company established in proceedings against that company during the period of the breach, without the need for fresh proceedings against the director.
In considering the risk of injustice to a creditor who would have to prove liability twice and incur additional expense if required to bring separate proceedings against the director, and, on the other hand, the risk of injustice to a defaulting director who would be liable as a result of proceedings to which they were not a party, the court held that Parliament had intended to allocate the risk to the director since:
  • The ordinary meaning of “relevant debts of a company” in section 217 of the IA 1986 covers liability which has been established by proceedings against the company.
  • The purpose of section 217 is to protect creditors of the company.
  • A director could apply to be joined as a party to the proceedings against the company, or protect themselves from liability by applying for permission to be involved with the company or by falling within one of the exceptions to section 216.
Obiter, the court found that had it reached a different conclusion, the director would not be estopped from disputing the judgment against the company, nor would it be an abuse of process.

In the actual case, although the contract that the company’s liability was based on was entered into before the director had breached section 216 of the IA 1986, the court held that they were still liable since the breach of the contract had occurred during the period in which the director was in breach of section 216. The cause of action against the company arose only when the contract was breached, and it was at this point that liability was incurred.

Case; PSV 1982 Ltd v Langdon [2021] EWHC 2475 (Ch) (08 September 2021)(Deputy Judge Vos)
Source: Practical Law