A director is not automatically personally liable simply because a new business starts after an old company has gone into liquidation. A properly structured phoenix company or business rescue may be lawful. The personal risk usually arises where the new business uses a prohibited name, where assets or goodwill have been transferred improperly, or where the same pattern of unpaid liabilities continues.
The most direct legal route to personal liability in this area is section 217 of the Insolvency Act 1986. This can make a director or other relevant person personally responsible for debts of a company using a prohibited name if the section 216 rules have been breached.
This guide explains when personal liability can arise, how section 217 works, how it differs from director disqualification, and what evidence may help a director understand and reduce the risk.
At a Glance
A director may become personally liable for phoenix company debts where they are involved in managing a company or business using a prohibited name in breach of section 216 of the Insolvency Act 1986. Section 217 can make them personally responsible for relevant debts incurred during the period of breach.
What personal liability risk applies to phoenix companies?
The phrase phoenix company is often used broadly. It may describe a legitimate successor business that buys assets from an insolvent company and continues trading. It may also describe abusive phoenixism, where liabilities are left behind while the same business continues for the benefit of the same people.
Personal liability does not arise just because a director starts again. The key issue is whether a statutory route or separate claim allows creditors, HMRC, a liquidator or another party to pursue the director personally. In a prohibited name case, the main statutory route is section 217.
Other routes may also exist depending on the facts. A liquidator may consider liquidator claims against directors, including misfeasance, transactions at an undervalue or wrongful trading. HMRC may consider tax enforcement options. The Insolvency Service may consider whether the same conduct supports director disqualification proceedings.
When does section 217 Insolvency Act 1986 apply?
Section 217 is linked to section 216. Section 216 restricts certain former directors of a company in insolvent liquidation from being involved with another company or business using the same or a similar name for five years, unless an exception applies or court permission is obtained.
If that restriction is breached, section 217 can make the person personally responsible for relevant debts of the new company. This is why the rules on reusing a company name after liquidation should be considered before the new business starts trading, before assets are bought, and before customers are told that the business will continue under the same or similar identity.
Government guidance confirms that sections 216 and 217 were introduced to tackle phoenix syndrome and can apply even where there was no misconduct or dishonesty in the failure of the first company. That point matters because a director may be exposed through misunderstanding the technical rules, not only through deliberate abuse.
What is a prohibited name?
A prohibited name is not limited to the registered name of the liquidated company.It can include
- the company’s registered name in the 12 months before liquidation,
- another name by which the company or part of its business was known,
- a trading name,
- a brand name,
- a registered trade mark, or
- a similar name suggesting an association with the liquidated company.
This is often the point directors miss. A new company may have a different Companies House name but still trade under the old name, use the same website identity, present itself to customers in the same way, or rely on the same goodwill. If the trading identity suggests continuity with the liquidated company, section 216 needs careful review.
The issue should also be checked where the old business used a personal name, regional trading style, abbreviated brand or domain name. The practical question is whether the name used by the new business may suggest an association with the liquidated company.
What debts can a director be liable for under section 217?
Section 217 refers to relevant debts. In practical terms, this means debts and liabilities of the company incurred at a time when the person was involved in management in breach of section 216, or where another person acted on their instructions in circumstances covered by the section.
The timing of the debt can be important.
- A debt may need to be considered by reference to when the liability was incurred, not simply when a contract was first entered into or when a later demand was made.
- This can be a fact-sensitive exercise and should be reviewed against the documents.
The Court of Appeal decision in PSV 1982 Ltd v Langdon is an important reminder of the seriousness of section 217 liability. It considered the proper construction of section 217 and a claim that a director was personally liable for a company debt under sections 216 and 217. The case shows why directors should not assume that the limited liability of the new company will always protect them.
Does the director need to have acted dishonestly?
Not necessarily. A section 216 breach can arise because the statutory rules have not been followed. The restriction is technical and can apply even where the director did not intend to mislead creditors or act dishonestly.
That does not mean conduct is irrelevant.
- Dishonesty, creditor deception, asset stripping, repeated unpaid tax liabilities or poor records may make the position more serious.
- Those factors may affect negotiation with creditors, claims by a liquidator, HMRC enforcement and any later disqualification assessment.
For FWJ content and client advice, the balanced point is important: a director should not panic simply because a similar name has been used, but they should not ignore the issue either. The legal consequences can be significant if the section 216 rules have been breached.
Can liability arise if the director was not formally appointed?
Yes, depending on the facts. Section 216 is concerned with involvement in promotion, formation or management, not only formal appointment at Companies House. A person who acts as a de facto director, gives instructions behind the scenes or is effectively managing the business may still be at risk.
This is particularly relevant where a family member, employee or nominee is formally appointed as director while the former director continues to make decisions. If the former director remains the real decision-maker, the absence of formal appointment may not be enough to avoid risk.
The same issue can overlap with acting while disqualified where a director is already subject to a disqualification order or undertaking. In those cases, personal liability, criminal liability and further disqualification risk may all need to be considered.
How is personal liability different from director disqualification?
Personal liability and director disqualification are separate risks. Section 217 is about whether a person can be made personally responsible for relevant debts. Director disqualification is about whether a person’s conduct makes them unfit to be involved in the management of a company.
The same facts can give rise to both issues. For example, repeated insolvent failures, unpaid HMRC liabilities, continuation of the same trade, use of the same goodwill and poor creditor transparency may all be relevant to disqualification risk. However, a creditor claim for personal liability and an Insolvency Service investigation are not the same process.
Where a director has already been disqualified, the question may become whether they need section 17 permission to act as a director or whether their involvement in the new business creates a further breach. That issue should be treated separately from section 217 personal liability.
What if HMRC is pursuing the debt?
HMRC is often a key creditor in phoenix company cases. If the liquidated company left VAT, PAYE, National Insurance, corporation tax or other liabilities unpaid, HMRC may look closely at whether the new business is repeating the same pattern.
- A section 217 issue may arise if a prohibited name has been used.
- Separate HMRC risks may also arise, including demands for security, enforcement against the company, or joint and several liability notices in repeated insolvency and non-payment cases.
Where tax liabilities are central to the dispute, directors should take advice on both HMRC claims against directors and our guide to HMRC phoenixism and joint and several liability notices. The evidence needed for HMRC may overlap with the evidence needed for section 216 and section 217, but the legal tests are different.
What if a liquidator or creditor is pursuing the director?
A creditor may rely on section 217 if it says the company debt was incurred while the prohibited name rules were being breached. A liquidator may also investigate whether the old company’s assets, goodwill or customer base were transferred to the new business at an undervalue or without proper process.
This can lead to more than one type of claim. For example, a director may face
- a section 217 argument from a creditor,
- a liquidator’s claim concerning asset transfers, and
- questions about whether they complied with their directors’ duties when a company is in financial difficulty.
If a liquidator alleges breach of duty, misapplication of assets or improper transfer of value, our guide to misfeasance claims against directors may be relevant. The director’s response should be based on documents, valuations and the legal route being used by the claimant.
What evidence can reduce personal liability risk?
The evidence will depend on the allegation. In a prohibited name case, the key documents often include liquidation dates, Companies House records, trading names, website screenshots, invoices, email signatures, asset purchase agreements, valuations, Gazette notices, creditor notices, board minutes and correspondence with the insolvency practitioner.
Where section 217 is alleged, the director should also gather records showing when each debt was incurred, what role they had at that time, whether they were involved in management, whether any section 216 exception applied, and whether the name was changed or permission was sought.
Evidence of proper process can make a real difference. Independent valuations, transparent asset purchase documents, timely creditor notices, separate accounting records, tax compliance controls and clear governance in the new company may all help explain that the new business was a legitimate rescue rather than abusive phoenixism.
What should a director do if section 217 is raised?
A director should first avoid making admissions without understanding the statutory test. It is important to identify whether section 216 applied, whether the name was prohibited, whether the director was caught by the restriction, whether an exception applied and which debts are said to be relevant debts.
The next step is to review the chronology and documents. The dates of liquidation, name use, trading activity, debt creation and management involvement are often central. If the director has already reused a name, our guidance on what happens when a director has already reused a company name after liquidation may also be relevant.
Where proceedings have been threatened, the response should usually be calm, evidenced and legally structured. A director may have arguments on name similarity, timing, management involvement, debt classification, statutory exceptions or quantum.
How FWJ can help you
FWJ advises directors on phoenix company concerns, section 216 prohibited names, section 217 personal liability, HMRC tax risk and director disqualification. We can help establish whether the rules apply, what debts are in issue and what evidence is needed to protect the director’s position.
We also advise directors facing connected claims after company liquidation, including liquidator claims, HMRC enforcement, Insolvency Service enquiries and allegations that a new company is an abusive phoenix. The aim is to clarify the risk, respond accurately and reduce avoidable personal exposure.
