Creditors who petition the court for the winding-up of a company or the bankruptcy of an individual as a debt-collecting remedy are not free from risk.

HHJ Peter Coulson QC sets out in Jacob v Vockrodt [2007] EWHC 2403 (QB) when petitioning is an abuse of process that could involve the tort of malicious presentation of a bankruptcy petition.

The key parts of the judgement on abuse of process are:

Mr. Davies relied on the well-known passage in the judgment of Harman J in Re a Company [1983] BCLC 492 in which he said:

"First, it is trite law that the Companies Court is not and should not be used as (despite the methods in fact often adopted) a debt-collecting court. The proper remedy for debt collecting is an execution upon a judgment, a distress, a garnishee order or some such procedure. On a petition in the Companies Court, in contrast with an ordinary action there is not a true lis between the petitioner and the company which they can deal with as they will. The true position is that a creditor petitioning the Companies Court is invoking a class right (see Re Crigglestone v. Coal Co. [1986] 2 Ch 327) and his petition must be governed by whether he is truly invoking that right on behalf of himself and all others of his class rateably, or whether he has some private purpose in view. It has long been an order that a petition presented for the purpose of putting pressure on the company is not properly presented: see Re a Company [1894] 2 Ch. 349 and, in a slightly different context, Re Bellador Silk Ltd. [1965] 1 All ER 667."

It is, of course, right that a bankruptcy petition must not be utilised where the petitioner knows that the debt is the subject of a bona fide dispute, but chooses to proceed with the petition in any event, so as to put illegitimate pressure on the other party to pay the debt. But the authorities cited above cannot be taken as authority for any wider principle or proposition. In my judgment, the correct approach to the facts, in a situation where the petition has failed and it is subsequently suggested that the presentation was malicious, was that applied in Partizan Ltd v OJ Kilkenny & Co Ltd [1998] 1 BCLC 157 by Rimer J, when he concluded at page 173:

"It follows that I am not satisfied that, when it presented the petition, Kilkenny was moved by notice or considerations different in any way from those which ordinarily motivate creditors who petition to wind up a company on the grounds that a debt claimed to be due to them (not being one which is regarded by the petitioner as disputed on substantial grounds) is unpaid despite demand; namely, at least an element of hope that, if the company can pay the debt despite its previous failure to do so, it will pay it and, if it cannot do so, a hope and expectation that it will be placed in liquidation so that there can be an orderly realisation of its assets for the benefit of its creditors generally."

What the cases show (and the point I take Rimer J to be addressing by the phrase in brackets in the quotation from his judgment set out above), is that the presentation of a petition is an abuse of process only if the petitioner knows or believes that the debt is in truth the subject of a substantial dispute.

Take care when petitioning if there is a substantial dispute!

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Section 216 of the Insolvency Act 1986 restricts the use by a Phoenix company or successor business of a similar name or trading style to that of a company in insolvent liquidation.

That is well known, as are the exceptions ñ or are they?

The Exceptions

S216 works by making any director of the insolvent company who is involved in managing the successor, unless he has leave of the court and subject to the exceptions in rules 4.228 to 4.230 Insolvency Rules 1986, both liable to criminal prosecution and personally liable (under s217) for the debts of the successor.

• The first exception, giving notice to creditors (rule 4.228), will rarely be available, contrary to widely adopted practice, because the notice must be given before the relevant director is involved with the successor, as the Court of Appeal made clear recentlyin Churchill & Churchill v First Independent Factors and Finance Ltd ([2006] EWCA Civ 1623).


• The second exception, a six week grace period following an application for leave made to the court no later than 7 days after the date of liquidation (rule 4.229), may be more common but requires an application anyway.


• The third exception, when the successor company has been known by the prohibited name for 12 months prior to the liquidation (rule 4.230), will also not assist most directors who wish to acquire and continue a business from an insolvent company.

Consequences

The first exception does not work in the way many people have thought. Notice to creditors is ineffective if the director is already a director, shadow director or de facto director of the successor business (but the notice cannot be given until the transaction has occurred).

What s216 therefore requires in most cases is an application to court for permission to be involved with a similarly named business, as a recent article ìRe-use of company names: the efficacy of the notice procedure called into questionî points out (Recovery, Summer 2006, p25).

Unless the application is made before the end of the first week of liquidation, making use of the second exception, there may be a period of several weeks during which the business cannot be transferred, pending the hearing.

Since the criminal and civil liabilities that result from breaching s216 are strict and automatic, and the court will actively consider whether approval is appropriate, and the court is unlikely to give retrospective permission (following Arden LJ in ESS Production Ltd v Sully [2005] EWCA Civ 554), a director would be ill-advised to rely on seeking permission after the event.

Sales by administrators

There are most likely to be unforeseen difficulties when the business was sold to the director by an administrator, administrative receiver or voluntary arrangement supervisor some time before the company went into liquidation. S216 will apply if the vendor company goes into insolvent liquidation at any time during the 12 months after it stopped being known by the prohibited name being used by the purchaser.

The only way for a director to avoid liability in these circumstances is to apply to court under s216. The application should be made before liquidation ñ although there is some doubt as to whether this would be valid ñ or within 7 days afterwards (making use of the six week period within which the application can be heard without liability attaching from the date of liquidation, provided the application is successful).

Addressing the problem

The situation is clearly unsatisfactory as MBO directors cannot wholly avoid the risk of liability and the Insolvency Service is therefore considering an urgent, albeit not retrospective, rule change.

In the meantime, directors involved in purchasing a business from an administrator may seek to agree with the officeholder that he avoids using insolvent liquidation as an exit mechanism. They are also likely to want him to avoid the vendor company being known by the prohibited name from the date of sale.

For those who have already breached s216 following an insolvency sale, in the mistaken belief that notice to creditors when the director was already involved with the successor was adequate, an application under s216 now would at least offer the prospect of relief from personal liability for the successor companyís future debts. Otherwise the director, whilst he remains involved in management of the successor company, will continue to be personally liable for all the successor companyís debts for up to 5 years after the liquidation of the vendor company.

Phoenixes beware!

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