Articles and Publications
What's in a Name? Directors Beware!
04/Aug/2005
The name of a company is part of its brand and image and a great tool for promoting a business. However, very few directors will consider that a name could put them both at risk from a financial and a criminal prospective if it is misused in certain circumstances.
Sections 216 and 217 of the Insolvency Act were introduced to prevent the so called "phoenix syndrome" i.e. a company would be put into liquidation or receivership, transfer the assets to a new company at a fraction of market value and carry on trading leaving creditors at the old company high and dry. The sections prevent a director of a company that has gone into liquidation from being a director of another company for a period of five years after the liquidation of the old company where the name of the new company is either the same or so similar as to suggest an association with the liquidated company. If a director is found in contravention of statutory provisions then he can be found personally liable for all the company’s debts and also be subject to criminal liability.
There are three exceptions to the statutory provisions and they are found in Rules 4.228, 4.229 and 4.230 of the Insolvency Rules 1986.
The first exception is where the successor company acquires the whole of the business of an insolvent company from the insolvency practitioner and notice is given to the creditors of the insolvent company within 28 days of the transaction. The second excepted case is where the director applies to court for leave to use a prohibited name such application be made within six weeks of the insolvent company proceeding into liquidation. The third excepted case is where the director has been involved with a company known by a prohibited name for at least twelve months prior to the date the insolvent company went into liquidation. In the case of ESS Production Limited the Court of Appeal has recently given some useful insight into the third excepted case.
In this particular case Mr Sulley was the director of a number of companies which all used the initials "ESS" in their names or trading names. The company of which Mr Sulley was a director, which also included ESS in its name had gone into liquidation. At the time Mr Sulley was a director of another company that subsequently changed its registered name to a name which included ESS and therefore was a prohibited name under section 216 of the Act. A creditor of the prohibited named company in respect of goods sold and delivered sought to make Mr Sulley personally liable for its debts. Mr Sulley submitted that the third excepted case in Rule 4.230 applied because the prohibited named company had been known by that name for twelve months before the liquidating company went into liquidation. The creditor submitted that Mr Sulley could not rely on the exception because the prohibited name for the purposes of Rule 4.230 was the name which had become the company’s registered name and not a name which included the ESS initials.
The Court of Appeal held that the crucial part of the prohibited name was ESS which itself suggested an association with the liquidating company. The prohibited named company had never actually used ESS as a trading name but had informally been known as ESS for many years. The name ESS was a name by which the prohibited name company had been known before the liquidating company actually went into liquidation. It was therefore a name which the company used in the course of its business and for the purposes of its business as a promotional and shorthand name. The court therefore decided it was a name under which the company carried on business and it was not necessary for them to find that ESS was the only name under which the company carried on business or that it was the name which the company used in connection with all the functions of its trading.
The Court of Appeal’s decision is to be welcomed as it does give some useful clarification as to the effect of Rule 4.230. It does, however, show how directors can potentially be innocently caught by the provisions of 216 and 217 of the Insolvency Act 1986 when they are directors of groups of companies all bearing similar names.
Sections 216 and 217 of the Insolvency Act were introduced to prevent the so called "phoenix syndrome" i.e. a company would be put into liquidation or receivership, transfer the assets to a new company at a fraction of market value and carry on trading leaving creditors at the old company high and dry. The sections prevent a director of a company that has gone into liquidation from being a director of another company for a period of five years after the liquidation of the old company where the name of the new company is either the same or so similar as to suggest an association with the liquidated company. If a director is found in contravention of statutory provisions then he can be found personally liable for all the company’s debts and also be subject to criminal liability.
There are three exceptions to the statutory provisions and they are found in Rules 4.228, 4.229 and 4.230 of the Insolvency Rules 1986.
The first exception is where the successor company acquires the whole of the business of an insolvent company from the insolvency practitioner and notice is given to the creditors of the insolvent company within 28 days of the transaction. The second excepted case is where the director applies to court for leave to use a prohibited name such application be made within six weeks of the insolvent company proceeding into liquidation. The third excepted case is where the director has been involved with a company known by a prohibited name for at least twelve months prior to the date the insolvent company went into liquidation. In the case of ESS Production Limited the Court of Appeal has recently given some useful insight into the third excepted case.
In this particular case Mr Sulley was the director of a number of companies which all used the initials "ESS" in their names or trading names. The company of which Mr Sulley was a director, which also included ESS in its name had gone into liquidation. At the time Mr Sulley was a director of another company that subsequently changed its registered name to a name which included ESS and therefore was a prohibited name under section 216 of the Act. A creditor of the prohibited named company in respect of goods sold and delivered sought to make Mr Sulley personally liable for its debts. Mr Sulley submitted that the third excepted case in Rule 4.230 applied because the prohibited named company had been known by that name for twelve months before the liquidating company went into liquidation. The creditor submitted that Mr Sulley could not rely on the exception because the prohibited name for the purposes of Rule 4.230 was the name which had become the company’s registered name and not a name which included the ESS initials.
The Court of Appeal held that the crucial part of the prohibited name was ESS which itself suggested an association with the liquidating company. The prohibited named company had never actually used ESS as a trading name but had informally been known as ESS for many years. The name ESS was a name by which the prohibited name company had been known before the liquidating company actually went into liquidation. It was therefore a name which the company used in the course of its business and for the purposes of its business as a promotional and shorthand name. The court therefore decided it was a name under which the company carried on business and it was not necessary for them to find that ESS was the only name under which the company carried on business or that it was the name which the company used in connection with all the functions of its trading.
The Court of Appeal’s decision is to be welcomed as it does give some useful clarification as to the effect of Rule 4.230. It does, however, show how directors can potentially be innocently caught by the provisions of 216 and 217 of the Insolvency Act 1986 when they are directors of groups of companies all bearing similar names.
