Insolvency Update

Restriction on the re-use of a company name does not apply to insolvent partnerships

In the recent decision of Re Newtons Coaches Limited (Newton and another v Secretary of State for Business Energy and Industrial Strategy) [2016] EWHC 3068 (Ch) (29 November 2016 the High Court held that the restrictions on the re-use of a company name pursuant to Section 216 of the Insolvency Act 1986 (“the Act”) do not apply to partners of a partnership that had been wound up.

The Law

Section 216 of the Act was introduced to avoid the practice known as the “phoenix” problem, where the business or activities of a company which had gone into insolvent liquidation were continued by those responsible for the failure using a new company.

It applies to a person who was a director or shadow director of the liquidating company at any time in the 12 months before the liquidation. Except with the leave of the court (or in certain other, prescribed, excepted cases), the person is prohibited from being a director of or, in any way concerned in, the promotion, formation or management of another company known by the same name (or a substantially similar name) as the liquidating company for five years.

This type of company name is known as a “prohibited name” but the substantive prohibition created by the regime is on the director’s direct or indirect involvement in the business of the new company with a prohibited name.

A breach of Section 216 of the Act is both a civil and a criminal offence  and results in personal liability of the director and any person who acts on his instructions knowing the director to be in breach for the debts of the company during the period of prohibition.

Section 216 (8) of the Act states that a company includes a company which may be wound up under Part V of the Act. Part V (section 220 to section 229 of the Act) applies to the winding up of unregistered companies, defined as including any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom.

The prohibition on phoenix trading therefore also applies to other types of business entities which trade with a prohibited name.

Insolvent partnerships are governed by the Insolvent Partnerships Order 1994 (“the Order”) which effectively modifies the Act (and Company Directors Disqualification Act 1986) for insolvent partnerships. Insolvency partnerships are usually wound up under Article 7 of the Order as unregistered companies for the purposes of the Act. Article 7 of the Order states that Part V of the Act shall apply in relation to the winding up of an insolvent partnership as an unregistered company.

The Facts

The applicants had previously carried on a business as a partnership. Following the insolvent winding up of the partnership, the applicants wanted to be involved in the management of a new company with a similar name to the trading name of the insolvent partnership. The new company, owned by the applicants’ spouses (who were also company directors) had purchased the partnership’s goodwill for value from the liquidator of the partnership.

The respondent considered that Section 216 of the Act applied as a partnership is an unregistered company for the purposes of Part V and names of the insolvent partnership and the new company were similar and therefore potentially prohibited. The respondent did not object, however, to the court granting the partners permission to manage the new company provided the partnerships creditors received notice.

The Decision

The High Court granted the partners’ application. It considered there were three factors which differentiated the facts of the case from the legislative regime which applied to limited liability entities, namely:

• The partners would remain personally liable for the debts of the partnership;
• The insolvency of the partnership (and therefore any failure in management of the partnership business) would not be hidden;
• The new business would not appear to be the same because it operates as a limited company.

Accordingly, the mischief that Section 216 of the Act is aimed at is not needed in relation to partnerships. The court considered that the natural meaning of Section 216(8) of the Act, when combined with the purposive background of the legislation, applied only to unregistered companies that could be wound up under Part V of the Insolvency Act 1986.

Comment

This the first reported decision which considered the application of Section 216 of the Act to partners seeking to carry on their business following the stand alone liquidation of their partnership, possibly because winding up petitions are very rarely presented against partnerships without concurrent bankruptcy petitions also being presented against the partners.

Where just the partnership is wound up, the liquidator will usually attempt to recover any deficiency from the estates of the individual partners. However, this is a time-consuming exercise and carries the inherent risk that the partners’ asset values will diminish in the intervening period. There is also some uncertainty that the liquidator’s claim would rank pari passu with the individual partners’ bankruptcy creditors without judicial intervention where concurrent petitions are not presented against the partnership and the partners.

It may still be possible to argue that Section 216 of the Act applies to insolvent partnerships, on the basis that the effect of the Order modifies Section 221(5) of the Act to the effect that (and to the extent that they are applicable to the winding up of a company) all the legislative provisions applicable to the winding up of companies apply to the winding up of a partnership as an unregistered company subject to certain exceptions.

For further information about this case or for any queries regarding insolvency please contact our Senior Associate Solicitor, Lauren Hartigan-Pritchard, on 01905 677051 or lhartiganpritchard@thursfields.co.uk