Case law update

IPA Insolvency Practitioner newsletter, November 2024

Prepared by Andrew Cawkwell, Associate Director at Manolete Partners PLC.

Andrew is Associate Director with Manolete Partners Plc and covers the North East region.

Andrew qualified as a solicitor in 2003 and has been a partner at multi office firms Watson Burton LLP and Muckle LLP. Andrew was the very first dual qualified practising solicitor and Certified Turnaround Professional accredited by the European Association of Certified Turnaround Professionals and won ‘Turnaround Practitioner of the Year’ at the 2016 TRI Awards. Andrew is also a national board director of Turnaround Management Association (UK) and is a member of R3.

Re-use of Company Names and Non-Dormancy Requirements

Maxima Creditor Resolutions Ltd v Fealy & Anor [2024] EWHC 2694 (Ch)

In this judgment, delivered on 1st November 2024 by His Honour Judge Hodge KC, sitting in the Business and Property Courts in Manchester, the court considered the application of the “non-dormancy requirement” under rule 22.7 of the Insolvency (England and Wales) Rules 2016, specifically in the context of prohibited company names and directors’ personal liability for debts under sections 216 and 217 of the Insolvency Act 1986. The case offers significant guidance on the practical application of these provisions in non-“phoenix company” scenarios.

Background

The proceedings concerned a claim brought by Maxima Creditor Resolutions Ltd (“Maxima”) against the defendants, Mr John Thomas Fealy and Mr Thomas Joseph Barrett, who were directors of McFee Interiors Ltd (“Interiors”) and McFee Ltd (“ML”). Maxima sought to hold the directors personally liable for debts incurred by ML under sections 216 and 217 of the Insolvency Act, alleging the unlawful re-use of the “McFee” name following the liquidation of Interiors. ML had incurred debts, including those owed to Distributor Limited and Compton and Casburn Limited, which were later assigned to Maxima. The defendants argued that ML had been trading for more than 12 months before Interiors entered liquidation, thus exempting them from liability under the third exception in rule 22.7.

The Applications

Maxima issued a claim on 27 January 2023 seeking recovery of the debts assigned to it, arguing that ML’s use of the name “McFee” after Interiors’ liquidation was prohibited, and the directors were personally liable for the debts. The defendants relied on the third exception under rule 22.7, which allows directors to avoid liability if the second company had not been dormant during the 12 months before the liquidation of the first company. A limitation defence was also raised, with the defendants asserting that the claim was statute-barred under the Limitation Act 1980.

The Issues

Three key issues arose for the court’s consideration:

1. Was ML dormantduring the 12 months before Interiors’ liquidation, thereby disqualifying the directors from relying on the third exception in rule 22.7?
2. Was the claim statute-barred under the Limitation Act 1980, or had the debts been acknowledged in ML’s statement of affairs?
3. Were the directors personally liable for ML’s debts incurred using the prohibited company name?

The Decision

His Honour Judge Hodge KC dismissed Maxima’s claim, finding that the defendants were entitled to rely on the third exception in rule 22.7. The court accepted the defendants’ evidence that ML had been actively trading from 16th November 2012, more than 12 months before Interiors entered into voluntary liquidation on 20th November 2013. The judge highlighted that ML had engaged in significant accounting transactionsthroughout the relevant period, including the start of trading and the mobilisation of resources for projects. As such, ML was not dormant during the 12 months before Interiors’ liquidation, and the exception applied.

The Judge noted:

“The evidence clearly shows that ML had been actively trading and undertaking significant accounting transactions throughout the period. There was no period of dormancy, and the mischief that sections 216 and 217 seek to address—the exploitation of a phoenix company—is not present in this case.”

On the limitation issue, the court found that the debts had been acknowledged in ML’s statement of affairs, signed by Mr Barrett on 14th February 2017, which restarted the limitation period under sections 29 and 30 of the Limitation Act 1980. Therefore, the claim, issued in January 2023, was not statute-barred.

Summary

The court found that ML was not dormant at any time during the 12 months before Interiors’ liquidation and that the directors could rely on the third exception in rule 22.7 to avoid personal liability. The court also determined that the limitation defence did not bar the claim, as the debts had been acknowledged in ML’s statement of affairs (although this was obiter as the defence of limitation was abandoned by counsel at trial). The claim was dismissed, and the court invited the parties to agree on a costs order. His Honour Judge Hodge KC commented on the importance of ensuring clarity in the application of insolvency rules to prevent directors from being unfairly penalised for legitimate business practices.

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