You may have read from my website that funders of creditors of new companies are taking a major interest in ‘phoenix’ businesses which fail, firstly assessing whether in their view the veil of incorporation can be lifted, and then taking the directors through the courts to make them personally liable for newco’s debts, including their debt, for having breached the detailed provisions of s216 of the Insolvency Act.
Here’s one recent case – the Classic Conservatories case – where this has happened. In this case, on the application of a company which bought the debt owed to a creditor of newco, the director of the phoenix, Mr Mountford, was made personally liable for the debts of the new company because the court ruled that the name used by newco was sufficiently close to trigger off the re-use provisions of the Insolvency Act and that he had failed to follow the relevant procedures.
There are several points to note from this case:
- Ignorance of the rules, and when they do and don’t apply, is no excuse;
- The purchaser of the debt had bought it ‘at a deep discount’. This suggests to me that the purchaser bought it after newco’s liquidation. If that is right, then there are finance companies out there actively looking for opportunities to make a profit out of directors’ ignorance. Directors of phoenixes are at much greater risk of being attacked than they may think they are because such funders have far deeper pockets and have much more experience and are much more willing to pursue directors who fail to follow the procedures than normal unsecured trade creditors;
- ‘Company names’ can be anything from abbreviations used, through to such things as MacDonalds’ Golden ‘M’ should it ever (which seems most unlikely) have problems.
Ignore the rules at your peril!