According to the Yorkshire Post's article "6pm update: Bates free to stay at Elland Road - Yorkshire Post", Ken Bates, Mark Taylor and Shaun Harvey have been "allowed to continue to remain directors of the club after their involvement in a previous Leeds United-related liquidation left them in breach of insolvency rules".

We gave the background to this story in a previous post. The detail of the recent judgment is not clear from the press report, which suggests that the judge gave retrospective leave for the three men to act as directors of the club. Does anyone have a copy of the judgement so we can see what really happened?

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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!

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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.

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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 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.
 

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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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