Kuits act for Directors in obtaining helpful High Court clarification on “Phoenix Company” provisions - Kuits Solicitors Manchester
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Kuits act for Directors in obtaining helpful High Court clarification on “Phoenix Company” provisions

Kuits act for Directors in obtaining helpful High Court clarification on “Phoenix Company” provisions

30th April 2020 - Published by Kuits restructuring & insolvency team

Ian Michael (Auctioneers) Limited (“Oldco”) entered Members’ Voluntary Liquidation (solvent liquidation) in October 2017. A newco was incorporated just before Oldco entered MVL and traded using a similar name. In 2020, the MVL of Oldco was converted to a creditors voluntary liquidation as it was deemed insolvent.

“Prohibited Name” and the Exceptions

If a company enters insolvent liquidation, the directors of that company are prevented from trading through a company using a “prohibited name” (effectively the same or a similar name) under section 216 of the Insolvency Act 1986 (“Act”), unless one of three exceptions apply as defined in rule 22 of the Insolvency (England and Wales) Rules 2016 (“Rules”).

The effect of breaching section 216 is severe: directors can face prosecution and risk fines, imprisonment and confiscation order; directors can be disqualified from being a director; directors can face personal liability for any debts incurred by the new company.

In this case, it could not be said with certainty that any of the three exceptions applied:

The first excepted case (under rule 22.4 of the Rules) was not relevant because the directors had not bought the business of Oldco from the liquidators.

The second excepted case (under rule 22.6 of the Rules) potentially did not assist because application to court under section 216 of the Act needs to be issued within 7 business days of oldco entering insolvent liquidation. Where a liquidation converts from solvent liquidation to insolvent liquidation, section 96 of the Act deems that the insolvent liquidation commenced when the liquidation started.

The third excepted case (under rule 22.7 of the Rules) potentially did not assist because the newco had not traded under the prohibited name for at least 12 months at the point that Oldco was deemed to have entered insolvent liquidation.

The Case

In advising Kuits’ clients in this case, it was resolved:

  • to seek a declaration that the third excepted case applied; and/or
  • to apply for retrospective permission under the rule 22.6 of the Rules and seek to vary the time limit for compliance with rule 22.6.

The case came before District Judge Obodai in the Business and Property Courts in Manchester.

District Judge Obodai found that the third excepted case should apply in this case, as the wording of rule 22.7 of the Rules should be interpreted as applying from when Oldco is actually deemed insolvent.

Effect

This case was something of a lacuna, but the ruling provides helpful clarification in the situation where a company enters solvent liquidation and is subsequently deemed to have entered insolvent liquidation in a case where a newco was set up.

This case would not be of assistance where a solvent liquidation was converted less than 12 months in.

Given the consequences of breach of section 216, we would still advise directors to apply to court to seek the declaration to protect themselves as much as possible.

Covid-19

To enter solvent liquidation, the directors have to swear a statutory declaration of solvency confirming that all creditors will be paid in full with statutory interest within 12 months of the commencement of the winding up.

Any statutory declarations made in 2019/early 2020 based on asset values or debtor realisations may prove harder to comply with because of Covid-19. If directors set up a newco in these circumstances, it is foreseeable that section 216 of the Act will apply and this case will be relevant.

 

Re: Ian Michael Auctioneers Limited (in liquidation): CR-2020-MAN-000104; judgment given 6 April 2020

Kuit Steinart Levy LLP instructed Asa Tolson of 23 Essex Street Chambers

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