Take care when reusing company names

9th November 2021

The High Court has recently been required to determine whether the defendant director of a company in liquidation was personally liable for its debts and liabilities, providing a reminder of the importance of section 216 of the Insolvency Act 1986.

Generally speaking, under section 216 of the Insolvency Act 1986 (the Act) a director of a company that has entered insolvent liquidation is restricted from being involved in the management of a company with a similar name, often a so-called ‘phoenix company’, for a period of five years from the date of the insolvent liquidation. If a director acts in contravention of this rule, it is a criminal offence and he becomes responsible for the debts and liabilities of the phoenix company which are incurred during the period of the breach (section 217 of the Act).

In a recent case in the High Court,[1] it has been held that a director in breach of section 216 is automatically responsible under section 217 for the judgment debt owed by a company pursuant to proceedings against that company during the period of the breach, without the need for fresh proceedings to be brought by the creditor against the director. This is the case even though there was no contravention of section 216 when the contract, which ultimately gave rise to the debt when it was breached, was entered into.

The facts

The debt in question in the current case arose out of the sale of a yacht. The yacht was built by a company called Discovery Yachts Limited (DYL), of which the defendant was a director. The yacht was sold to the customer by Discovery Yachts Sales Limited (DYSL). Discovery Yachts Group Ltd (DYGL) acquired DYSL and entered into an agreement with the customer to have the yacht repaired. That agreement was breached in January 2018. The customer sued DYGL and obtained a judgment sum plus interest and costs. The judgment debt was not paid. DYGL entered liquidation and the claimant sought to recover the debt from the director pursuant to sections 216 and 217 of the Act. The claimant’s case was based on the fact that in October 2017, DYL had gone into liquidation. As the defendant was a director of DYL, its insolvency meant that, under section 216, he was prohibited for five years from being a director of, or involved in the management of, a company with the same or a similar name, such as DYGL. Section 217 provides that a person would be personally liable for all the debts of the company incurred while they were in contravention of section 216.

Held

The court held that once liability is established in proceedings against a company, the defaulting director automatically becomes responsible for that liability. Accordingly, the judgment and consequential orders obtained in the proceedings in the commercial court were sufficient to establish liability for the purposes of section 217 even though the director was not a party to the proceedings. The court held that it is not necessary to bring separate proceedings against the defaulting director.

WM Comment

This is a timely reminder of the restrictions on reusing company names and that liability for directors who breach section 216 is strict. We may see an increase in phoenix companies over the next few months so this case may be helpful to creditors looking to ensure that defaulting directors are properly held personally responsible.

[1] PSV 1982 Ltd v Langdon [2021] EWHC 2475 (Ch)