UK: Myth Of The Phoenix

Last Updated: 28 August 2008
Article by Keith Mahoney

Judgment in First Independent Factors & Finance Limited v Ian Josef Mountford was given by HHJ Lewison on 23 April 2008. It concerns the familiar situation where a company is in liquidation and another company subsequently trades with a similar name and at least one common director.

Sections 216 & 217 of the Insolvency Act 1986 restrict the activity of directors in such situations. Their operation is complex. Broadly, the law applies where a director of the original insolvent company ("Oldco") becomes involved in the management of another company ("Newco") within 5 years of the liquidation of Oldco, and Newco trades using a name which is "so similar... as to suggest an association" with Oldco. There are prescribed "excepted cases" (which are beyond the scope of this article), but if those do not apply then the common director is guilty of a criminal offence and can be personally liable for the debts of Newco, unless he obtains permission of the court.1

The similarly-named business in these circumstances is sometimes referred to as a "phoenix". Since the mythical phoenix arose from the ashes of its predecessor, it might be thought that the law only applies to a company specifically formed after the liquidation of the original company. Mountford shows that this is not so – the law applies equally to a company already in existence at the time the first company is placed in liquidation.2

Mr Mountford was a director of two companies:

  1. Classic Roofs Limited (CRL) which began trading in July 2002 predomin-antly as a manufacturer of roofs, mainly for conservatories. This company was placed into liquidation in February 2004.
  2. Classic Conservatories & Windows Limited (CCWL) had been dormant throughout the life of CRL but began trading in about May 2004 having acquired all the plant, machinery, furniture and equipment of CRL at book value. Its business was predominantly the construction of conservatories. This company was placed into liquidation in January 2005.

The claimant First Independent Factors purchased two debts owed by CCWL at a discount, believing that a good return could be achieved by recovering payment from Mr Mountford personally under Sections 216 & 217.

Mr Mountford submitted that:

  1. Since First Independent Factors had never traded with CCWL and had simply taken an assignment of debts after liquidation, Sections 216 & 217 did not apply and the claim was an abuse of process.
  2. Sections 216 & 217 did not apply because CCWL was not a phoenix company as it existed at the time CRL was placed in liquidation.
  3. The businesses of the two companies were different so the name CCWL was not a prohibited name.

The court held that:

  1. Debt factoring is perfectly legitimate. The assignee of the debt stood in the shoes of the assignor. If the assignor could have made the claim, so can the assignee.
  2. Although the law might not have been intended to apply to pre-existing companies such as CCWL, Sections 216 & 217 were clear and not limited to newly formed companies: "Metaphors can be convenient shorthand ways of referring to a complex phenomenon. But legal rules are not framed in terms of metaphor. In my judgment it is not a permissible method of interpreting the rule to allow the ill-defined metaphorical idea of a "phoenix" to distort the meaning of the rule."
  3. The question was whether the similarity between the two names was such as to give rise to a probability that members of the public, comparing the names in the relevant context, would associate the two companies with each other. It is necessary to compare the names of the two companies in the context of all the circumstances in which they were actually used or likely to be used, e.g.
  • the types of product dealt with
  • the locations of the business
  • the types of customers dealing with the companies and
  • those involved in the operation of the businesses.

In this case:

  • Although "classic" was a common word used by over 2 million businesses, this did not of itself mean that the name was not prohibited. A common surname may provide sufficient link. Whether the use of the word suggests an association depends on the context.
  • One business was concerned with the manufacture of roofs and the other with the construction of conservatories. However, both were involved in the conservatory business and a roof is a principal component of a conservatory. The fact that the businesses were different did not negate an association. A perceived association may be present because of a strong brand name.
  • The customer bases were different (supplying trade c.f. supplying individual home-owners) but there were common suppliers of materials, a common landlord, and an overlap in the geographical spread of customers.
  • Whilst the companies did not trade from the same location their premises were on the same business park.
  • There were similarities between the companies' logos.
  • Mr Mountford himself was a common link. His name appeared on the letterhead and invoices of both companies.

Taking all factors together and in the context in which the two names were used, the judge held that CCWL did suggest an association with CRL. Accordingly, Mr Mountford was personally liable for the debts of CCWL.

The case is a reminder of the need for directors to seek professional advice in such circumstances. Contact Keith Mahoney on 0117 926 4121 or by email kwm@meadeking.co.uk to explore how the risk of personal liability might be avoided.

Footnotes

1 Sections 216 & 217 do not apply if Oldco has been placed into administration. Thus modern phoenix situations flowing from "pre-packaged" sales to the existing management will not be covered. If however Oldco in administration is subsequently placed into liquidation the issues described in this article will apply.

2 Where Newco has already been trading for at least a year by the time Oldco is placed in liquidation the common director may be able to rely on another exemption.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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