A Warning: Directors of Insolvent Companies
In certain circumstances the insolvency regime in England and Wales allows phoenix companies to form from the remains of an insolvent company.
This includes using the same or similar name to the failed company. The regime however requires strict adherence to its provisions, failure of which may result in a fine, imprisonment and/or the directors may become personally liable for the phoenix company’s debts.
If you are a director of an insolvent company you may be contemplating a “pre-pack” purchase of your company back from an insolvency practitioner. If so have you considered the laws on phoenix companies? They are set out in sections 216 and 217 of the Insolvency Act 1986 (“the Act”).
This section prescribes that a person:
- Who was a director or shadow director of a company in insolvent liquidation;
- For a period 12 months prior to the day before it entered into liquidation;
- That that person cannot be involved whether directly or indirectly in the Ã‚Ëœpromotion, formation or management of any such company, or be concerned or take part in the carrying on of a business carried on under a prohibited name;
- This sanction lasts for a period of 5 years.
What is a prohibited name?
This is defined under section 216(2) of the Act as any name by which the liquidated company was known within the 12 months prior to the day before the liquidation, or a name which is similar enough to suggest an association.
What happens if you breach these provisions?
You could be liable to a fine or imprisonment. Section 217 of the Act also provides that the person involved in the management of the company (or a person acting on instruction of someone) will be personally liable for the debts of the phoenix company that are incurred during the time of his or her involvement.
Exceptions to these provisions
The Insolvency Rules 1986 provide three exceptions:
- Where a company acquires the whole or substantially the whole of the business of an insolvent company under an arrangement with the liquidator, administrator, administrative receiver or supervisor of a voluntary arrangement upon notice to the creditors. If the sale is not made by a liquidator, for example in an administration, a director must ensure that he has given proper notice to the creditors before he involves himself in the company or he may still attract liability;
- Upon leave of the court. The director must act quickly as time constraints are tight. He or she must make an application to the court within 7 days of the liquidation and the court will then have 6 weeks to make a decision. The court will have to be convinced that the phoenix company has access to sufficient capital and such an application should evidence this fact;
- The court’s leave is not required where the phoenix company was known under the prohibited name for a period of 12 months prior to the day before the liquidation and has not been dormant for those 12 months.
Persons that find themselves as directors of insolvent companies are easily caught out by these provisions and should seek legal advice as soon as possible. Failure to do so may result in a fine, imprisonment and/or personal liability for the debts as described above.
Summit Law LLP is a Law Society Lexcel accredited firm of solicitors which specialises in insolvency law and who regularly advise individual directors and insolvency practitioners on complex corporate matters. If you are concerned about your position why not give our corporate insolvency team a call on +44 (0) 207 467 3980?
The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of Summit law LLP. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.
You are strongly advised to obtain advice from a Solicitor about your specific case or matter and not rely on the information or comments in this article.