How do the anti-phoenix provisions of s216 Insolvency Act 1986 work in real life?

• Ken Bates was a director of the old Leeds United Football Club Limited (company number 05334247) ("Oldco") from 17 January 2005 until 7 March 2006. Oldco went into compulsory liquidation on 6 March 2006.
• He was also a director of The Leeds United Association Football Club Limited ("AFC") from 20 January 2005 until 4 May 2007. AFC went into administration on 4 May 2007.
• Since 21 January 2005 he has been a director of:
  • Leeds United Stadium Limited ("Stadium");
  • Leeds United Retail Limited ("Retail"); and
  • Leeds United Investments Limited ("Investments") .
• Stadium and Retail went into compulsory liquidation on 27 June 2007.

So far, so good:

• When Oldco went into liquidation Mr Bates had been a director of the other Leeds United companies for more than 12 months.
• Under the "third exception" in r4.230 Insolvency Rules 1986 he therefore did not have to apply to court for permission to continue to Act as a director of those companies.

But:

• Investments was dormant at some time during the 12-month period before Oldco's liquidation. It filed dormant company accounts for the years ended 30 June 2005 and 30 June 2006.
• The third exception does not apply to a company that has been dormant at any time during the 12-month period.

So:

• Unless Mr Bates applied by 13 March 2006 for leave to act as a director of Investments, and was given leave before 17 April 2006, making use of the "second exception" in r4.229, he was in breach of s216.
• He could therefore be subject to criminal penalties. Although Investments may be dormant he could also be liable personally for any debts it may incurs during the 5 years to 6 March 2011.

Chapter 2 - Summer 2007

Shortly before AFC went into administration on 4 May 2007, Mr Bates became a director of  Leeds United 2007 Limited (1 May 2007) and Leeds United Football Club Limited (company number 05765697) ("Newco") (3 May 2007).

The Guardian reports here that:

• KPMG, AFC's administrators, think an application to court was made;
• HM Revenue & Customs, a creditor challenging the Company Voluntary Arrangement proposed by AFC's administrators, thinks that Mr Bates does not have the court's permission to act as a director of Newco;
• the Insolvency Service has no notice of any such application; and
• Mr Bates made no comment.

Unless Mr Bates obtained leave of the court to act as a director of the two companies before he began to act, he would be in breach of s216.

The "first exception" under r4.228, notifying creditors when a new company acquires the business from an administrator or other appointed insolvency practitioner, could not apply in this case as Mr Bates was already a director of Newco. This difficulty is explained in our previous post here.

The law may be changing to overcome that difficulty (from 6 August 2007, as explained in previous posts, here and here), but that change will not be retrospective and will not help in this case.

A real challenge for Mr Bates is that if he did not have permission, it is too late, he is in breach and may well be liable for Newco's debts up to 6 March 2011.

As an aside, Mark Taylor, Mr Bates' solicitor, became a director of Newco on 4 April 2006, two months before Oldco went into liquidation. He was also a director of Olcdco  and was caught in the trap highlighted in our previous post, arising from the decision in Churchill & Anor v First Independent Factors & Finance Ltd [2006] EWCA Civ 1623 (30 November 2006). He cannot have applied to court successfully unless the court took the highly unusual step of granting retrospective permission.

What went wrong?

They used the wrong company to buy the business (and may have failed to make an application).

Leaving aside the 2006 problem of Investments, Messrs Bates and Taylor should have obtained permission from the court before becoming directors of the company they used to buy the business from the administrators. There was plenty of time to have done so between 1 May 2007 (if not before) and 10 July 2007 when Newco bought AFC's business from the administrators.

So did Ken Bates break the law?

I don't know, but he has to have made some timely and successful court applications to have avoided breaching s216!

• Email This
• Print
• Comments
• Trackbacks

Question: I am the director of an insolvent company and want to use a similar name in my new business. Can it be done and what are the pitfalls?

Answer: Yes it can be done. The main pitfalls are the penalties if you get the details wrong - imprisonment or a fine, or both, and personal liability for the debts of your new company!

Q: So how can I use the name I want without risk?

A: Either:

1. you buy the business from the insolvency practitioner appointed to the insolvent company and send certain information to its creditors;
2. you apply to court for permission to use the new name; or
3. the new company has been known by the new name for 12 months before the old company went into formal insolvency.

Q: So as long as I give notice or get permission there will be no problem?

A: As you might expect, the law is not entirely straightforward:

• the points above apply from 6 August 2007 (until then problems with the wording of the law and a Court of Appeal decision made it much more difficult - our technical posts explain this here);
• there are strict time limits for giving notice and making court applications; and
• making a court application costs money and the court may say no!

Q: So what should I do?

A: This is a tricky and specialised area where you should take advice from an independent insolvency practitioner or a specialist insolvency lawyer.

• Email This
• Print
• Comments (4)
• Trackbacks

As anticipated in our earlier posts on phoenix companies here and here, the amendment to the Insolvency Rules to remedy the problem caused by the Court of Appeal decision in Churchill v First Independent Factors has now been published.

The relevant statutory instrument is The Insolvency (Amendment) Rules 2007, SI 2007/1974, which comes into force on 6 August 2007.

• Email This
• Print
• Comments
• Trackbacks

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 as reported in an earlier post.

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, is both liable to criminal prosecution and personally liable (under s217) for the debts of the successor.

The first exception - when notice is given to creditors (rule 4.228) was found wanting by the Court of Appeal in Churchill & Churchill v First Independent Factors and Finance Ltd ([2006] EWCA Civ 1623).

The draft Insolvency (Amendment) Rules 2007 have therefore been produced to substitute a new version of rule 4.228 with effect from 23 July 2007.

The new rule will enable a director - as had been intended but not achieved by the original rule - to give notice to creditors and so avoid contravening s216 if the insolvent company's business is acquired from an insolvency practitioner.

Most insolvency MBOs will therefore be able to avoid an application to court, provided the notice is given either:

• before the director becomes involved with management of the successor; or
• before the successor uses a prohibited name.

Circumstances in which an application may still be required include:

• where the director is involved with management of a business or a company using a prohibited name and there is no acquisition of the whole (or substantially the whole) of the insolvent company's business; and
• where the director is already a director of a company with a prohibited name, but that company has not been known by that name for 12 months prior to the date of liquidation or has been dormant during that period.

The complexities of these requirements mean that to be sure of avoiding the criminal and civil consequences of contravening s216, directors of insolvent companies who anticipate involvement with a similarly named business take specific professional advice about this issue.
 

• Email This
• Print
• Comments (3)
• Trackbacks