Directors automatically liable for company debts when using a prohibited company name
16 November 2021: In a recent decision, the court held that where a director is in breach of the rules relating to the re-use of a company name, and a creditor has obtained judgment against the new company using the prohibited name, the director is automatically personally liable for the debt without the creditor having to issue separate proceedings against the director.
The law relating to the re-use of a company name states that where a company goes into insolvent liquidation, any director who held office in the preceding twelve months is prohibited from being a director of, or involved in the management of, a company with the same or a similar name for five years. Breach of this is a criminal offence and the director(s) in breach are personally liable for the new company’s debts as a consequence. There are three exceptions to this rule:-
- Where the court gives permission;
- If the new company acquired the business of the insolvent company from a liquidator or administrator and relevant notice of such is given to creditors within 28 days; or
- If the new company has already been trading for twelve months prior to the insolvency.
In the recent case in question, a creditor commenced proceedings against a company they said was trading with a prohibited name and asked the court to initially determine if the director would be automatically liable for the debt if their proceedings were successful in due course. The director argued that a judgment is only binding on the parties to it. However, the judge determined that once liability is established the director in breach of the rules is automatically responsible for that liability along with the company against who the proceedings were commenced. The creditor does not have to commence subsequent proceedings against the director personally to establish their liability for the debt. In reaching his verdict the judge said he would find it surprising if the intention of parliament was to put the creditor to additional cost and risk of proving liability all over again and that the wording of the relevant rules imposes an automatic liability on a defaulting director.
This judgment is likely to be relied upon in future proceedings by creditors of companies trading out of the ashes of an insolvency, especially given that it means a creditor can proceed straight to enforcement against a director personally, so directors must ensure that proper advice is taken when looking to avail of the exceptions mentioned above in order to avoid personal liability. The management team at BRI are very well-placed to discuss such matters, and any insolvency matters more generally, so please get in touch for a confidential discussion without any obligation.