If one business fails, can I start again?
There are all sorts of reasons why businesses fail. The pandemic, for example, led to 400,000 business failures in a single year. Thankfully, if you have to liquidate your company due to its poor performance, it has no bearing on your ability to start again.
As long as you have acted in line with your legal duties as a director when running the first business, there’s nothing to stop you from incorporating a new company after liquidation. However, there are a few things you need to be aware of along the way.
Are there any restrictions when starting a new business after liquidation?
Are there any restrictions when starting a new business after liquidation?
There are only a couple of rules you need to be aware of and they focus on your new company’s name. According to the Insolvency (Scotland) (Receivership and Winding up) Rules 2018, any director who has been involved in a company in the 12 months before its liquidation cannot do either of the following for five years:
- Become a director of a company that has the same or a similar business name without court approval; or
- Be involved in forming, promoting or managing a company with a name that suggests it is a continuation of the previous business.
If you give your new company the same or a similar name as the liquidated business without the court’s approval, you could be fined, be made personally liable for the debts of the new company or even receive a custodial sentence.
Why can I not use the same business name after liquidation?
The rules around reusing business names are in place to protect customers and creditors from ‘Phoenixism’. Phoenixism occurs when directors liquidate their companies with the deliberate intention to avoid paying their creditors. They then start a new company with the same or a similar business name and effectively continue trading without the old company’s debts.
When can I use the same or a similar business name after liquidation?
When can I use the same or a similar business name after liquidation?
In some cases, a director might want to use the same or a similar name as the failed company to benefit from its goodwill and get the new company off the ground. There are some exceptions to the rules around the reuse of company names that could allow you to do this.
You apply to the court
Company directors can apply to the court for permission to use the liquidated business’s name for a new venture. You must do so within seven days of the company’s liquidation. The court will look at whether the new company has sufficient financial backing and a reputable leadership team when making its decision.
The new company was already known by the name
If you had already set up and traded a new company with the same or a similar name in the 12 months before you liquidated the old company, the new company may be able to continue using the name. Importantly, the new company must not have been dormant during those 12 months.
You buy the old business’s assets from the liquidator
During the liquidation process, you may be able to buy the assets of the old business, including its name, from the Insolvency Practitioner who administers the liquidation. To adopt the name, you must advertise your intentions to trade the new company with the same or a similar name in the Edinburgh Gazette. The rules here are strict and you will benefit from appointing an experienced liquidator.
Other considerations when starting a company after insolvency
Other considerations when starting a company after insolvency
As well as the business name, there are a few other things to think about when starting a new company after liquidation.
- Paying an HMRC security deposit – If your old company had tax debts that it could not repay in full, HMRC may request that you pay a security deposit to protect against future defaults when you start the new company. If the new business defaults on its tax payments, HMRC will use the security to cover the liabilities.
- Paying a fair price for the assets of the old business – If you buy assets from the old company, including the business name, you must pay the fair market value for them. The Insolvency Practitioner will have the assets independently valued as part of the liquidation.
- Issues with suppliers and lenders – Financial institutions and suppliers may be wary of giving the new company credit following the failure of the old business. Initially, that could make trading with the new company challenging.
Personal guarantees are not written off – Any debts the old company cannot pay as part of the liquidation are written off, but that does not include debts you’ve personally guaranteed. Creditors can enforce these guarantees and your personal assets could be at risk.
Need advice?
Need advice?
If your company is struggling with unmanageable debts or poor cash flow and you want to close it down and start something new, we can help. Our licenced Insolvency Practitioners will guide you through the liquidation process and help you make informed decisions. Get in touch for a free, same-day consultation or arrange an in-person meeting at one of our offices in Scotland.
