ESS Production Ltd ((in Administration)) v Sully
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Chadwick,Lord Justice Auld |
| Judgment Date | 11 May 2005 |
| Neutral Citation | [2005] EWCA Civ 554 |
| Docket Number | Case No: A2/2004/1323 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 May 2005 |
[2005] EWCA Civ 554
Lord Justice Auld
Lord Justice Chadwick and
Lady Justice Arden
Case No: A2/2004/1323
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The Southampton County Court
(HHJ Hughes QC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Aubrey Craig (instructed by Messrs Bell Pope) for the Appellant
Timothy Mayer (instructed by Messrs Blake Lapthorn Linnell) for the Respondent
This is an appeal, with the permission of the judge, pursuant to CPR 52.14, from the order of HHJ Hughes QC sitting in the Winchester County Court dated 4 June 2004. By his order, the judge entered judgment for the respondent, and ordered the appellant to pay £21,450.65 plus interest.
The claim in these proceedings is a claim pursuant to section 217 of the Insolvency Act 1986 ("the 1986 Act"). In summary this section imposes personal liability on a director of a company whose company goes into liquidation (a "liquidating company") and who then becomes a director of a company which is known by the same or a similar name (a "prohibited name company"). (Liability can be incurred by becoming involved in the management of the prohibited name company in other ways but in this judgment I refer only to a person becoming liable by reason of becoming a director of that company). Section 217 must be read with section 216 of the 1986 Act, which imposes criminal liability in these circumstances. Section 216 enables a director to make an application to the court for leave which, if granted, will prevent a breach of section 216 or 217. In addition, section 216 permits certain circumstances to be excluded from both sections by the Insolvency Rules. For simplicity I will refer to both sections 216 and 217 and the relevant Insolvency Rules as statutory provisions.
Before I set out the provisions of sections 216 and 217 and the relevant provisions of the Insolvency Rules, a little explanation of the background to this set of statutory provisions is needed. Sections 216 and 217 were measures designed to deal with the problem of "phoenix" trading. The nature of the "phoenix" problem was described thus by the Steering Group of the Department of Trade's independent Company Law Review, of which I was a member, in its final report in 2001:
"15.55 The "phoenix" problem results from the continuance of the activities of a failed company by those responsible for the failure, using the vehicle of a new company. The new company, often trading under the same or a similar name, uses the old company's assets, often acquired at an undervalue, and exploits its goodwill and business opportunities. Meanwhile, the creditors of the old company are left to prove their debts against a valueless shell and the management conceal their previous failure from the public."
The Company Law Review Steering Group went on to point out that not all phoenix situations were bad. "At the worst", some phoenix situations resulted from unscrupulous activities of the directors. However, others resulted from the failure of businesses "though misfortune or naive good faith". The only proper course, if a company could not trade out of its difficulties, was for it to enter liquidation. Moreover, "the only way [for the controllers] to continue an otherwise viable business and their own and their employees' ability to earn their livelihood may be for them to do so in a new vehicle using the assets and trading style of the original company." (para.15.56). The Company Law Review Steering Group recognised that good and bad phoenix situations shared many characteristics and accordingly it was difficult to target bad phoenix situations alone. This may help explain why, as we shall see from the relevant Insolvency Rules, the exclusions in the Insolvency Rules from the wide net drawn by sections 216 and 217 do not proceed on the basis of distinguishing honest from unscrupulous traders. They are drawn in much more limited terms. In Thorne v Silverleaf [1994] 1 BCLC 637, Peter Gibson LJ observed that it was clear that sections 216 and 217 apply to a wider set of circumstances than the case of a person attempting to exploit the goodwill of a previous insolvent company.
I now set out sections 216 and 217:
"216 (1) This section applies to a person where a company ("the liquidating company") has gone into insolvent liquidation on or after the appointed day and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.
(2) For the purposes of this section, a name is a prohibited name in relation to such a person if—
(a) it is a name by which the liquidating company was known at any time in that period of 12 months, or
(b) it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.
(3) Except with leave of the court or in such circumstances as may be prescribed, a person to whom this section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation—
(a) be a director of any other company that is known by a prohibited name, or
(b) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or
(c) in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.
(4) If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.
(5) In subsection (3) "the court" means any court having jurisdiction to wind up companies; and on an application for leave under that subsection, the Secretary of State or the official receiver may appear and call the attention of the court to any matters which seem to him to be relevant.
(6) References in this section, in relation to any time, to a name by which a company is known are to the name of the company at that time or to any name under which the company carries on business at that time.
(7) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.
(8) In this section "company" includes a company which may be wound up under Part V of this Act.
217 (1) A person is personally responsible for all the relevant debts of a company if at any time—
(a) in contravention of section 216, he is involved in the management of the company, or
(b) as a person who is involved in the management of the company, he acts or is willing to act on instructions given (without the leave of the court) by a person whom he knows at that time to be in contravention in relation to the company of section 216.
(2) Where a person is personally responsible under this section for the relevant debts of a company, he is jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise, is so liable.
(3) For the purposes of this section the relevant debts of a company are—
(a) in relation to a person who is personally responsible under paragraph (a) of subsection (1), such debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company, and
(b) in relation to a person who is personally responsible under paragraph (b) of that subsection, such debts and other liabilities of the company as are incurred at a time when that person was acting or was willing to act on instructions given as mentioned in that paragraph.
(4) For the purposes of this section, a person is involved in the management of a company if he is a director of the company or if he is concerned, whether directly or indirectly, or takes part, in the management of the company.
(5) For the purposes of this section a person who, as a person involved in the management of a company, has at any time acted on instructions given (without the leave of the court) by a person whom he knew at that time to be in contravention in relation to the company of section 216 is presumed, unless the contrary is shown, to have been willing at any time thereafter to act on any instructions given by that person.
(6) In this section "company" includes a company which may be wound up under Part V.
There are three sets of circumstances excluded from sections 216 and 217 by the Insolvency Rules: (1) where the insolvency practitioner sells the business of the insolvent company to the successor company and notice is given to the creditors of the liquidating company; (2) where the director makes an application to the court for leave to be a director of the prohibited name company within seven days of the liquidating company entering liquidation; and (3) where the prohibited name company had been known by the prohibited name for the whole of the twelve months prior to the liquidation of the liquidating company. It is only in the second set of circumstances that there is any application to the court.
The relevant provisions of the Insolvency Rules are rules 4.227 to 4.230 which provide as follows:
"4.227 Application for leave under section 216(3)
When considering an application for leave under section 216, the court may call on the liquidator, or any former liquidator, of the liquidating company for a report of the circumstances in which that company became insolvent, and the extent (if any) of the applicant's apparent responsibility...
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