At the end of 2006 a decision of the Court of Appeal in Churchill v First Independent Factors and Finance Limited (Churchill) caused consternation among those involved in the management of insolvent companies who are also involved in the management of the company that acquires the whole or a substantial part of the insolvent business.

Sections 216 and 217 Insolvency Act 1986 provide that a person who is a director of a company when it goes into liquidation may be personally liable for the debts of another company if he is also a director of that second company and it is known by a “prohibited name”, meaning a name that is so similar to the name of the insolvent company as to suggest an association with it. However there are circumstances specified in rule 4.228 of the Insolvency Rules 1986 where the provisions of sections 216 and 217 will not apply; namely where a successor company acquires the whole or substantially the whole of the insolvent company through arrangements made by an insolvency practitioner appointed by the insolvent company who gives notice to the insolvent company’s creditors within 28 days of completion of the arrangements advising them (inter alia) of the circumstances of the acquisition by the successor company, the successor company’s name (where it would otherwise be a prohibited name) and naming any director of the insolvent company and that he is to be a director of the successor company.

The surprise in the Court of Appeal’s decision in Churchill was that the court held that to be effective notice under rule 4.228 the notice would have to be given before the person became a director of the successor company. In many cases where a business is sold by a company in administration the rule 4.228 notice is given, but following Churchill there would be no protection for directors involved in the management of the successor company and previously directors of the company in administration in the event that the first company enters liquidation within 12 months of the business sale. Immediately following the decision in Churchill, the Insolvency Service announced that they would be amending rule 4.228 to remove the potential problems for directors stemming from the Court of Appeal judgment.

The Insolvency (Amendment) Rules 2007 are expected to come into force on 6 August 2007. The draft new rule is now available on the Insolvency Service website: http://www.insolvency.gov.uk/insolvencyprofessionandlegis lation/legislation/uk/amendmentsrules.doc

There is no change in the new rule 4.228 to the provision for a director of a company which goes into insolvent liquidation to act as a director of a company with a prohibited name where that company acquires the whole or substantially the whole of the business of the insolvent company, subject to compliance with certain notice requirements. One notable change is that unlike the previous rule, it will be possible for a person who was involved in the management of the insolvent company to carry on business under a prohibited name other than by way of a company, subject to the same notice requirements. The new rule expands the notice requirements as follows: 

  • Notice must be published in the Gazette and given to all creditors whose name and address is known to the director or could be ascertained by him on making reasonable enquiries. 
  • The prescribed notice may be given before the company enters into insolvent liquidation, for example where it is in administration or administrative receivership and may go into liquidation later. In cases where the company is not in insolvent liquidation, notice can be given where the director of the insolvent company is already a director of the acquiring company. However, notice must always be given before a director acts in a way that would be prohibited by section 216.
  • The notice to creditors must be in Form 4.73 (which is a new form). In all cases the notice must state: (1) the name and registered number of the insolvent company, (2) the name of the director or shadow director, (3) that it is his intention to act (or, where the company has not entered liquidation, to act or continue to act) in any or all of the ways specified in section 216(3) in connection with the carrying on of the business of the insolvent company, (4) the prohibited name, or where the company has not entered liquidation, the name under which the business is being or will be carried on which would be prohibited in the event that the company goes into liquidation.

NOTE: the new rule 4.228 will only apply where arrangements for the acquisition of the business from the insolvent company are entered into on or after 6 August 2007. Where an arrangement has been completed before that date, the former rule will continue to apply.