The recent High Court decision in Grove v TSSN Ltd (in liq)  HC 2402 is the first case considering an opposed application for permission for the director of the failed company to act as a director of a phoenix company, under the provisions of the Companies Act added in 2007. Phoenix companies are companies that have the same or a similar name to a company that has gone into liquidation at a time when it was unable to pay its debts (Companies Act 1993, section 386B) either before or within five years of the failed company going into liquidation.
Grove (applicant), was a director and shareholder of TSSN Limited (TSSN), which has been called, until June 2010, The Stepping Stones Nursery Limited. The other director/shareholder was the applicant's brother. The business of TSSN was growing deciduous ornamental trees, primarily for export. The business, which had previously been successful, suffered during the global financial crisis. In late 2009, TSSN's bank withdrew its support. Touchstone Capital Partners Limited agreed to an arrangement whereby the business of TSSN was sold to a new company, Stepping Stones Nursery Limited (the phoenix company), which was owned 60% by Touchstone and 40% by the Grove brothers. The applicant was a director of the phoenix company. TSSN was put into liquidation. The applicant applied, some seven months after the liquidation of TSSN, for permission to be a director and take part in the management of the phoenix company. The application was opposed by the liquidators of TSSN.
Drawing on English case law, the Judge said that the two principal considerations were: the consequences for the phoenix company and those having dealings with it, of the applicant remaining, or not remaining, as a director and/or involved in the management of the phoenix company; and whether the applicant was a person whose conduct in relation to the failed company or the phoenix company made him unfit to be a director of the phoenix company.
The Judge found that there would be detriment to the phoenix company if the applicant was not permitted to continue to be involved in the management of the company, given the applicant's experience and contacts in the market. However, the Judge found that there would be no similar detriment if the applicant were not permitted to be a director of the phoenix company, as the applicant's responsibilities were primarily of a management rather than governmental type. In respect of the second matter, the Judge found that the applicant's actions in remaining a director of the phoenix company despite being aware that it was prohibited by the Companies Act, and thereby committing a serious offence, "must be viewed as a serious adverse reflection on his fitness to be a director of the phoenix company". The Judge therefore granted permission for the applicant to take part in the management of the phoenix company, but did not grant him permission to be a director of the phoenix company. The decision (and Grove's delay) is a salutary lesson: anyone triggering the phoenix company provisions must seek the Court's permission as soon as possible.