Reusing names of insolvent companies – directors beware

The ruling of Lewison, Asplin and Arnold LJJ in PSV 1982 Ltd v Langdon [2022] EWCA Civ 1319, in the Court of Appeal is a timely reminder to comply with Section 216 of the Insolvency Act 1986 (the ‘Act’) for directors looking to use the name of a liquidated company. The provision of a notice may give protection against liability passing to them personally under section 217 of the Act for any debts incurred by the liquidated company before the use of the prohibited name.

Section 216 of the Act provides that when an individual has been a director (including a de jure or shadow director) of a company that is placed into an insolvent liquidation within 12 months of their appointment, that director may not be a director, or involved directly or indirectly in the affairs of a company, with a prohibited name for a period of five years after the date of liquidation, except with leave of the court. Any person who acts in contravention Section 216, is liable to imprisonment or a fine, or both. This prohibition is automatic and requires no application by any other party.

A prohibited name is a name which is either the same name by which the insolvent company was known during the 12 months prior to the liquation, or a name so alike to that of the insolvent company to suggest an association with that company. A prohibited name can include a registered name and/or trading names.

Case law has established that what is considered similar is judged widely and will take into account where the companies operate in the same markets, so care should be taken by directors and should be advised to avoid any names that may be ambiguous. In Ricketts v Ad Valorem Factors, the court found that the name ‘Air Equipment Co Ltd’ was so similar to the name ‘Air Component Co Ltd’ so as to suggest an association with the latter and that the words ‘equipment’ and ‘component’ could be used interchangeably. Similarly in Revenue and Customs Commissioners v Walsh, the court considered that the names ‘SG&T Walsh Company Limited’ and ‘Walsh Construction Limited’ were so similar to suggest an association where the customers serviced by both companies were the same or similar.

Exemptions of Section 216

Whilst Section 216 is a strict liability offence, certain exceptions were incorporated into the Act and the Insolvency (England and Wales) Rules 2016, IR 2016, SI 2016/1024, to cover the commercial reality. The exemptions are as follows:

(1) To give notice to all creditors of the company in the prescribed form (within the relevant time deadline);

(2) Where the successor business has been known by the prohibited name continuously for at least 12 months prior to liquidation, and where both companies have not been dormant during that period; and/or

(3) An application to Court for leave to use the prohibited name.

The consequences of breaching section 216 are set out in Section 217 of the Act, which includes that the director acting in contravention is personally liable for all the relevant debts of the successor company. Such personal liability applies jointly and severally to the individual acting in breach, the successor business, and any third party involved in the management of the successor company who knowingly acts upon the instructions of an individual acting in breach.

Case law

In PSV 1982 Ltd v Langdon [2022]PSV the applicant sought payment of an assigned debt from Mr Langdon, the director of Discovery Yachts Group Limited, (“DYGL”) in the sum of £1,125,824.67 being a judgment debt against DYGL.

The original debt had been obtained in respect of a breach of contract between Discovery Yachts Sales Limited (‘DYSL’), and Mr Andrew France for the purchase of a yacht in October 2015. The Judgment records the agreed facts that DYSL provided a warranty and maintenance for a period of 12 months and that Discovery Yachts Limited (‘DYL’), built the yacht, and supplied it to DYSL. In August 2016, Mr Langdon became a director of DYL and DYSL. The yacht was delivered to Mr France in January 2017, and he notified DYSL of defects thereafter.

In early April 2017, DYGL – known at that time as Tradewinds Marine Limited – purchased the shares in DYSL and the business and assets of DYL. Tradewinds Marine Limited changed its name to DYGL on 21 April 2017. Mr Langdon one of three directors of DYGL, described himself as managing director. He resigned as a director of DYL on 18 April 2017. DYL was placed into insolvent liquidation on 12 October 2017 and therefore “Discovery Yachts” became a prohibited name.

Commercial proceedings were commenced by Mr France in April 2018 against DYGL and a hearing was listed for 11 December 2019. However, on 5 December 2019, the board of DYGL (chaired by Mr Langdon) resolved to place DYGL into administration and a Notice of Intention to Appoint an Administrator was filed on 6 December 2019 with Mr Christopher Moore appointed as administrator on 19 December 2019. Judgment was handed down on 19 December 2019 which concluded that DYGL had, in September 2017, agreed to assume liability for repairs and that DYGL had breached that agreement in January 2018. DYSL was also placed in to a CVL as of 9 December 2019.

In the trial of the preliminary issues, Discovery Yachts Ltd (04520591) PSV 1982 Ltd v Langdon [2021] EWHC 2475 (Ch),. Mr Langdon accepted that as from 12 October 2017, he was in breach of section 216 of the Act as “Discovery Yachts” was a prohibited name and he did not obtain permission from the court to act as a director of DYGL following the entry into liquidation of DYL, and none of the exceptions (above) applied. Mr Langdon stated he was unaware that he could or might be made liable for the debts of the Discovery Yachts group companies if they continued to trade under the Discovery Yachts name after the liquidation of DYL.

The judge held  the effect of Section 217 of the Act –  once a liability is established in proceedings against a company, a defaulting director automatically becomes responsible for that liability. He states it would be surprising “if Parliament had intended that a creditor who had established a liability in proceedings against a company should have to prove that liability all over again, and incur afresh the costs of so doing, in order to recover the liability from the defaulting director”. It was also held that the liability to pay damages would not arise if there were no breach of the contract. Therefore, the liability is incurred when the breach takes place giving rise to a cause of action for breach of contract (i.e., in January 2018) at which time DYGL was operating under a prohibited name.

The Court of Appeal upheld the previous finding, dismissing the appeal, stating  that where judgment is obtained against a company using a prohibited name in proceedings to which its director was not a party, but could have exercised their right to do so, that judgment itself is sufficient to establish the existence of the company’s liability in subsequent proceedings brought against the director under Section 217.

It further determined that the relevant liability is incurred when the contract is breached rather than when it is entered into. Also, that for the purposes of Section 217 “It must, therefore, have been the intention of Parliament to provide the remedy under section 217 where there is a breach of contract at a time when there is a contravention of section 216 even if there was no contravention at the time the contract was entered into.” Therefore, the relevant liability is incurred while the company is using a prohibited name if the breach of contract giving rise to the liability or the judgment against the company is obtained while the company was using that prohibited name even if the contract which gave rise to the cause of action was entered into prior to the company using the prohibited name.

Liability attaches even if the person was unaware of the provisions of Section 216 and 217 of the Act and there was no intention to cause confusion.  Section 216 is a strict liability offence, and the court therefore has no discretion if breach is proven.