Essay on Companies and the UK Insolvency Law

Essay on Companies and the UK Insolvency Law

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The re-use of an insolvent company is protected by UK insolvency law. It helps to protect the interests of investors and creditors are not damaged by a lack of transparency relating to the director's involvement with an insolvent company, and continued involvement with its phoenix.

In UK, Investors and creditors were protected under rule 4.228 and rule 4.229 of the Insolvency Rules 1986. Rule 4.228 requires notice has to be given to all the creditors of the insolvent company stating the directors’ intention to act with the business of the insolvent company and purpose of any changes to the company name. Under rules 4.229 provides directors must obtain the permission from the court in order to reuse the company name. This must be done within 7 days of the liquidation then will not fall under section 216. The reason behind these rules is the desire to prevent investors and creditors being tricked into thinking that the same business is ongoing.
Besides, section 216 of Insolvency Act 1986 restricts a director of re-using the old company’s name. Directors are prohibited from incorporating or involved in setting up a new company with the same or similar name as the old company for a period of 5 years from liquidation. This section imposes personal liability on the directors. If a person breach of this section is liable to imprisonment or a fine, or both . In order to convince its customers and creditors the company is the same entity, the directors of the original company may often change the new company name only very slightly. Thus, the scope of this section has been widened by the UK courts, applying it where the same business is conducted by the same entity and even if only one word...

... middle of paper ... a director of the third company within five years after the liquidation of the two companies. The third company was funded by a creditor, Mr. Silverleaf. When the third company was wound up, Mr. Silverleaf then had knowledge of the previous two companies’ failures and claimed a debt of close to ₤135,000 . Mr. Silverleaf was successful in bringing proceedings under sections 216 and 217 of Insolvency Act 1986 even there’s no evidence of any asset transfer between the companies.

However, there are some limitations. Section 216 and 217 only provide personal liability for the debts of the phoenix company’s creditors but not the creditors of the original company. The phoenix company may not even have any debts. Besides, section 216 is not in tackling issue of fraudulent phoenix activity where the company chosen an entirely different name.

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