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The Court of Appeal has just delivered a
ruling that will affect the advice to be given to directors of
insolvent companies who set up new companies to acquire the
business and assets. Frequently the newco will be given a
name that is prohibited under s216 Insolvency Act 1986 by reason of
its similarity to the name of the old company.
In many cases the director sets up
newco. Newco buys the business and assets from the insolvency
practitioner. Newco changes name, and then gives notice under
rule 4.228 of the Insolvency Rules, usually naming the director as
being a director.
We have recently advised in a case where the
effectiveness of a rule 4.228 notice to protect the individual was
challenged, on the grounds that the individual was already a
director of the newco before the notice was given. The Court
of Appeal has now ruled in a similar case, Churchill &
Churchill -v- First Independent Factors & Finance Limited
[2006] EWCA CIV 1623 (30 November 2006).
Rule 4.229 contains the provision that the
notice given to creditors of the insolvent company “may name a
person to whom s216 may apply as having been a director … of the
insolvent company …, with a view to his being a director of the
successor company or being otherwise associated with its
management”.
The Court of Appeal has ruled that the words
“with a view to” are prospective, ie forward looking. The
purpose of rule 4.228 is to alert creditors of the insolvent
company to the fact that a person who was involved in managing that
company is also to be involved in managing the successor
company. The court therefore held that to ensure that that
purpose is achieved, notice must be given before
that person becomes involved in managing the successor company.
Eric and Peter Churchill were already
directors of the newco when it acquired the business of the
insolvent company from the liquidator. Accordingly, the court
ruled that the notice given under rule 4.228 did not protect them
from personal liabilty under s217 Insolvency Act 1986.
This is an important decision that will affect
the advice to be given by those advising directors of an insolvent
business who buy the business from an insolvency
practitioner. At the very least those directors should be
advised to take separate legal advice. That legal advice may
be to apply to court for permission under s216(3) to be a director
of the newco. Otherwise, of course, this difficulty could be
avoided if newco does not adopt, or carry on business under, a
prohibited name.
09/01/07 - STOP PRESS: We are informed
by reliable sources close to government that urgent
amendments are to be
introduced to amend the wording of IR 4.228 in view
of the
Churchill decision. These amendments, it is hoped, will take effect in April
2007 and will apply to
proceedings commencing after they take effect.
26/04/07 - STOP PRESS 2: We are aware that a draft
statutory instrument has now been circulated to give effect to the
necessary changes to Insolvency Rule 4.228. Watch this space for
more details.
28/06/07 - STOP PRESS 3: The published date for
introduction of the new Insolvency Rule 4.228 is 6 August 2007. The
change will not operate retrospectively and notice will still be
required before a director acts in any way which may be prohibited
under s.216 Insolvency Act 1986. We shall issue an updated news
entry concerning the change at that time.
For further information, please contact
Mike
Pavitt, or another member of Blake Lapthorn's Insolvency & Business Recovery team.
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