A recent judgment illustrates why directors of liquidated companies need to be careful when choosing which companies to work with. The case of PSV 1982 Ltd v Langdon  EWHC 2475 (Ch) demonstrates one of the ways in which a director of a company can be held personally liable for company debts. It acts as a reminder to directors of liquidated companies that they are restricted from being involved in other companies using the same or a similar name.
The law on the re-use of company names post-insolvency
Under section 216 of the Insolvency Act 1986, a director of a company that has entered insolvent liquidation is restricted from being involved in the management of a company with the same or a similar name for a period of five years from the date of liquidation. Exceptions to this general prohibition are set out in section 216(3) of the 1986 Act and rule 22 of the Insolvency (England and Wales) Rules 2016.
Breaching section 216 results in the director being responsible for the debts and liabilities of the second company during the period of the breach under section 217. The liability of a director can be both civil and criminal in nature.
What happened in this case?
In this case, Mr Langdon was the director of a company that had gone into voluntary liquidation owing its unsecured creditors over £700,000. This company built and supplied a yacht with alleged defects which was purchased by a third party. The purchaser issued a claim against the seller company in respect of the defects in excess of £1m. The third party successfully obtained a judgment in the Commercial Court for damages, and the claimant, PSV, had taken an assignment of this debt. In addition, there was an agreement entered into by one of Mr Langdon’s other companies to undertake repair work on the yacht, this being the second company trading with a similar name – contrary to section 216.
PSV therefore sought to claim that Mr Langdon was personally liable to pay them under section 217. Mr Langdon defended the claim on the basis that he was not party to the original proceedings in the Commercial Court, and the contract in question was entered into a matter of days prior to the first company entering liquidation.
The court’s decision
In the High Court, Deputy Judge Vos held that a director in breach of section 216 is automatically responsible under section 217 for company liabilities during the period of breach. The operation of section 216 involves a balancing of risks of injustice between the creditor and the defaulting director. On one hand, there is a risk to the creditor affected that they would need to prove liability twice and incur additional expense if required to bring separate proceedings against a director. On the other hand, there is a risk that the defaulting director could be found liable as a result of proceedings to which they were not a party.
The court found that the primary purpose of section 217 is to protect creditors of a company (rather than directors). The ordinary meaning of the words “relevant debts of a company” used in section 217 covered any liability established by proceedings against the company and covered debts incurred at the time that the person is involved in the management of the company or acting on instructions of someone contrary to section 216. At this point, Mr Langdon’s options were:
- To be joined as party to the proceedings against the company
- To protect himself by applying for permission to be involved with the second company
- To ensure he fell within one of the exceptions to section 216.
Although the contract in question was entered into before Mr Langdon had breached section 216, Deputy Judge Vos found that he was still liable. This was because the breach of the contract by the second company had occurred during the time when Mr Langdon was in breach of section 216. The cause of action against the company gave rise to the liability and this was sufficient to make him personally liable.
The implications of the decision
The decision of Deputy Judge Vos shows that where liability is established against a company in these circumstances, the claimant can proceed straight to enforcement against the director. This is particularly useful to creditors where the company in question is impecunious.
Ultimately, the case serves as a reminder to directors to act with caution when their company enters insolvent liquidation. The threat of automatic personal liability is often overlooked by directors in this area but can be avoided by seeking specialist advice at an early stage or by asking the court for permission to be involved in a second company with a similar name.