The phoenix phenomenon rises again
When a company goes into liquidation, that company's creditors will often suffer a quantifiable loss. In part to protect those – and any future – creditors, the directors are prohibited from reusing the insolvent company's name for a period of 5 years from the date of insolvency. Companies run counter to this provision are known as "phoenix" companies. Contravening the law is a serious matter for directors.
In a recent case, the Department for Business Enterprise and Regulatory Reform ("DBERR") successfully prosecuted the director of a bed company on the basis of his trading under a prohibited name in terms of section 216 of the Insolvency Act 1986.
The Facts
Paul Raine was a director of Furntex Limited, which traded as Dreamsleeper. The company entered voluntary liquidation on 19 February 2007 with debts of over £500,000. Prior to the liquidation, Raine incorporated a company with the name Dreamsleeper Limited. In August 2008 Dreamsleeper Limited was also liquidated. It's debts totalled almost £200,000.
The Statutory Restriction
Section 216 of the Insolvency Act applies to any person who has been a director or shadow director of a company at any point in the 12 months prior to that company's insolvency. It provides that that person may not hold office as a director, or be otherwise involved with a company whose name (being a registered or trading name) is similar to that of the insolvent company. This prohibition lasts for a period of 5 years from the date of insolvency. The penalty is imprisonment or a fine, or both.
Under section 217 of the Act, the director may also be found personally liable for debts incurred while trading under the prohibited name.
The Sentence
DBERR prosecuted Raine under section 216. Magistrates at Bishop Auckland Magistrates Court expressed the view that this had been a serious and deliberate breach. At sentencing on 21 May 2009, and despite pleading guilty, Raine was sentenced to a 12 week suspended prison sentence and 150 hours of community service. He was also banned from acting as a director for 3 years.
Craig and further contraventions
This latest prosecution follows that of Craig in December 2008. In Craig's case the pursuers were Glasgow City Council who brought an action under section 217 against the directors of one company for the rates liability of another. The court found the directors liable but held that the liability should be limited to debts and liability incurred during the period of the contravention only.
Taken together Craig and Raine demonstrate that while the courts are keen to punish directors for bad behaviour, they are at pains to make the penalty proportionate to the extent of the wrongdoing. Where the remedy sought is pecuniary this will be reflected in the court's willingness to limit the financial award and where the remedy is a criminal sanction the sentence will reflect the perceived extent of the wrong. There is concern that instances of director fraud are increasing due to the strain of operating in the current market. It may be hoped that both cases will serve as a legitimate deterrent to directors' bad behaviour and serve to emphasise the seriousness of contravening the Act.
For further information please contact: Fiona Carlin