A business fails, the company is liquidated, and the same people reopen the next day under the same name — without the debts. Sections 429A to 429F of the Companies Act 1997 address that.
Section 429A — the prohibition
Except with the permission of the Court, or unless an exception in sections 429D to 429F applies, a director of a failed company shall not, for a period of five years after the date of commencement of the liquidation —
(a) be a director of a phoenix company; or
(b) directly or indirectly be concerned in or take part in the promotion, formation, or management of a phoenix company; or
(c) directly or indirectly be concerned in or take part in the carrying on of a business that has the same name as the failed company’s preliquidation name or a similar name.
Contravention is an offence, triable on indictment, penalty under section 413(4) — up to K200,000 or five years, or both.
Paragraphs (a) and (b) are about a phoenix company. Paragraph (c) prohibits being concerned in the carrying on of a business under the same or a similar name — whether that business is run through a company, a partnership, or a sole trader.
The prohibition is about the name, not the assets. Buying the failed company’s business from the liquidator is permitted; carrying it on under the old name, as a director of the failed company, is not — unless an exception applies.
Section 429B — the definitions
“Failed company” — a company placed in liquidation at a time when it was unable to pay its due debts.
“Director of a failed company” — a person who was a director at any time in the 12 months before the commencement of its liquidation.
“Preliquidation name” — any name, including any trading name, of the failed company in the 12 months before the liquidation commenced.
“Similar name” — a name so similar to a preliquidation name as to suggest an association with that company.
“Phoenix company” — a company that, at any time before, or within five years after, the commencement of the liquidation, is known by a preliquidation name of the failed company or a similar name.
(2) A company is known by a name if that is its registered name or if it carries on business, or part of its business, under that name.
Resigning does not help. Anyone who was a director in the 12 months before the liquidation is a director of the failed company.
Trading names count, both for the failed company’s preliquidation name and for how the phoenix company is “known by” a name. Registering the new company under a neutral name and trading under the old one does not avoid section 429A.
The company may pre-date the failure. A phoenix company includes one known by the name at any time before the liquidation — so a dormant company incorporated with a similar name years earlier, and activated after the collapse, is caught.
Section 429C — personal liability for the phoenix company’s debts
(1) A person who contravenes section 429A(1)(a) or (b) is personally liable for all of the relevant debts of the phoenix company.
(2) A person (A) involved in the management of a phoenix company is personally liable for all of its relevant debts if (a) in that management, (A) acts or is willing to act on instructions given by another person (B), and (b) at that time (A) knows that (B) is contravening section 429A(1)(a) or (b).
“Relevant debts” are the debts and liabilities incurred by the phoenix company during the period when the person liable was involved in its management — or, under subsection (2), while (A) was acting or willing to act on (B)’s instructions — and the phoenix company was known by the preliquidation name or a similar name.
(4) Liability is joint and several.
(5) A person involved in management who was at any time acting on the instructions of someone they knew to be contravening section 429A is presumed, unless the contrary is shown, to have been willing at any later time to act on any instructions from that person.
The classic arrangement puts a spouse, relative or employee in as sole director while the disqualified person runs the business. Subsection (2) makes the front person personally liable for the phoenix company’s debts, jointly and severally with the person who is actually contravening.
And subsection (5) is a continuing presumption: once shown to have taken instructions knowingly, the person is presumed to have remained willing to do so. Rebutting it requires evidence of a genuine break.
Sections 429D to 429F — the three exceptions
Section 429A does not apply to a person named in a successor company notice. A successor company is one that acquires the whole or substantially the whole of the business of a failed company under arrangements made by a liquidator or receiver.
The notice must be sent to all creditors of the failed company for whom the successor company has an address, within 20 working days after the acquisition arrangements are made, and must specify the name and registered number of the failed company, the circumstances of the acquisition, the name assumed or proposed, and any change of name made or proposed — and, for each person named, their full name, the duration of their directorship of the failed company, and the extent of their involvement in its management.
A person does not contravene section 429A if they apply to the Court within five working days after the commencement of the liquidation for an exemption. The temporary period runs from commencement of the liquidation to the earlier of (a) the close of six weeks after commencement, and (b) the date the Court makes an exemption order.
The prohibitions in section 429A(1)(a) and (b) do not apply to a phoenix company that has been known by the same or a similar name if (a) it has been known by it for not less than the 12 months before liquidation commences, and (b) it has not been dormant during those 12 months.
A company has not been dormant if transactions required by section 188 to be recorded in its accounting records have occurred throughout that period.
They protect genuine cases. 429D covers a real sale of the business by a liquidator or receiver, on terms that creditors are told exactly who is involved and how. 429E gives a short breathing space to apply to the Court — but only five working days from commencement, which is very tight. 429F protects a sister company that genuinely traded under the shared name for the whole preceding year.
Note that section 429F excuses only paragraphs (a) and (b) of section 429A(1). And note what none of them excuse: these provisions sit alongside sections 425 to 429, section 423, and the civil claims a liquidator may bring for transactions at an undervalue with related parties over a five-year look-back.
If you are buying a failed business
- Establish whether the seller is a liquidator or receiver. Only then is the section 429D route available.
- Send the successor company notice within 20 working days, to every creditor whose address you have, with all the prescribed content — including each named person’s directorship and involvement.
- If you cannot use 429D, apply to the Court within five working days of the commencement of the liquidation, and rely on section 429E in the meantime.
- Or change the name — the prohibition attaches to the name, and a genuinely different name that does not suggest an association takes the business outside sections 429A to 429C.
- Check the trading names as well as the registered name, for both the failed company and the new one.
Sources
- Companies Act 1997 — ss 188, 344, 413, 423, 425–429, 429A–429F
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.