England and Wales: The phoenix syndrome, director's liability and S 727 of the Companies Act (1985)

Judgment in First Independent Factors & Finance Ltd v Mountford [2008] EWHC 835 (Ch) was given today. The trial judge, Lewison J., was required to consider a number of issues concerning Sections 216 and 217 of the Insolvency Act (1986). The main purpose of these sections is to deal with what has become known as the "phoenix syndrome": the continuation of a company's business, through a new company, where the original company has gone into insolvent liquidation. Section 216 prohibits the directors of the insolvent company from re-using the insolvent company's name (or a similar name) as part of the new venture. Contravention of Section 216 can result in the director's personal liability for the debts of the new company.

With regard to Sections 216 and 217, Lewison J. made the following points:

(a) Whilst the "phoenix syndrome" is the main target, the words of Sections 216 and 217 include situations that cannot be described as falling within this description. The operation of Sections 216 and 217 should not be confined to cases of "phoenix syndrome". [Ad Valorem Factors Ltd v Ricketts [2004] 1 All ER 894 was cited in support].

(b) When deciding whether a name suggests an association with another company, the person through whose eyes this should be considered is someone who might deal with the company or business. This person is closer to Laddie J's formulation of a "reasonable person in the relevant commercial field" (in HM Revenue & Customs v Walsh [2006] BCC 431) than Simon Brown LJ's reference to "members of the public" (in Ad Valorem Factors).

(c) "Association" can be based on ownership (e.g., between members of the same group of companies) or assets (e.g., where a successor company has the goodwill of the liquidated company).

(d) The defence available under rule 4.230 of the Insolvency Rules (1986) applies where a company was previously trading. Rule 4.230 referred to "company" and this could not be interpreted as "business".

(e) The court does not have the power under Section 727 of the Companies Act (1985) to relieve a director against liability imposed by Sections 216 and 217.

[Section 727 of the 1985 Act has been replaced by Section 1157 of the Companies Act (2006), the latter coming into force on 1 October 2008].