Company Prohibited Names – The “Whitewash” Procedure (June 2009)

Section 216 of the Insolvency Act 1986 prohibits a director of a company that enters insolvent liquidation ("Oldco") from being involved in the management of a new company ("Newco") with a prohibited name. This is a name that is similar to Oldco's

Serious consequences can arise from a breach of section 216. A breach is a criminal offence punishable by imprisonment and / or a fine. There can also be civil consequences in the form of personal liability and exposure for Newco's debts whilst he is a director of that company.

There is no "grace period" under Section 216; an offence is committed even if the director is involved for a few days.

One option is to seek the court's permission to act in a way that would otherwise be prohibited by Section 216 of the Act. However, where Newco is to acquire the assets of Oldco from the liquidator or administrator for the purposes of carrying on the existing business of Oldco ("the arrangement"), the so-called "whitewash" procedure under Rule 4.228 of the Insolvency Rules 1986 provides a more cost-effective avoidance mechanism.

The whitewash procedure involves serving Oldco's creditors with details of the arrangement publishing notice in the prescribed form in the London Gazette within 28 days of conclusion of the arrangement.

Directors ought to be aware that the relatively new provisions give rise to a number of potential pitfalls. For example there is a difficulty which arises from a drafting deficiency in the prescribed form of notice when Oldco enters liquidation without having first been in administration.

A solution to this is to form Newco with an inoffensive name, serve and publish the requisite notice after the date of the creditors' meeting and then change Newco's name to one which by virtue of the notice will no longer be prohibited.

Given the potential pitfalls it is advisable to seek specialist legal advice.

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