Vol 4 (2007) - Issue 3

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Liabilities of Directors of Phoenix Companies – Churchill v First Independent Factors and Finance Limited [2006] EWCA Civ 1623

The Insolvency Act in 1986 introduced a number of new provisions designed to deal with the problems posed by a ‘phoenix’ company, where the business of an insolvent company was simply sold on to the former owners/controllers which then carried on business effectively as if nothing had happening, leaving behind the claims of creditors of the old company. Section 216 of the 1986 Act therefore made it a criminal offence for the name of a company which had gone into insolvent liquidation to be used by a director of that company. However, the Insolvency Rules at the same time specified three excepted cases where the prohibition does not apply.

The first such excepted case is where a successor company acquires the whole, or substantially the whole, of the business of an insolvent company under arrangements made by a liquidator, administrator, administrative receiver or supervisor of a CVA. In such a case, the successor company may give a notice within 28 days of the completion of the arrangements to the insolvent company’s creditors notifying them of, amongst other things, the name that the successor company has assumed or proposes to use. In addition, the notice may:

‘name a person to whom section 216 may apply as having been a director or shadow director of the insolvent company, and give particulars as to the nature and duration of that directorship, with a view to his being a director of the successor company or being otherwise associated with its management’.

In practice, this provision has been understood as enabling a director of an insolvent company to become a director of the successor company, to then acquire the assets of the insolvency company from the liquidator or other office-holder and for the successor company then to give notice under rule 4.228 naming that director. However, in the recent case of Churchill v First Independent Factors and Finance Limited, the Court of Appeal rejected this approach to the rule.

The background to the decision in Churchill was that the Claimant, First Independent Factors and Finance Limited, had acquired various claims of creditors of companies which were potentially subject to section 216 and had then sought to pursue these claims against the relevant individual directors. In many cases, this has involved First Independent attempting to identify and rely on defects in the notices given under rule 4.228 which, if effective, would otherwise except the case from falling within section 216. In this context, First Independent has sought to argue that a notice given under rule 4.228 at a time after the relevant director has assumed office with the successor company does not fall within the scope of the rule and is therefore ineffective. In the Churchill case the Court of Appeal upheld this argument.

The facts of the Churchill case involved a fairly typical scenario. The Churchills were two brother who had been directors of a company called Arctic Distribution Ltd (‘the insolvent company’), which went into insolvent liquidation in July 2001. As at that date they were also directors of another company, Arctic Distribution (2001) Ltd (‘the successor company’), and they continued to act as directors of that company. In October 2001, the insolvent company, acting by its liquidator, sold its goodwill to the successor company. Notice was given under rule 4.228 to the creditors of the insolvent company within 28 days of the sale naming both brothers.