Section 216 of the Insolvency Act 1986 states that it is a criminal offence for a person who has been a director of a company at any time during the 12 months prior to that company going into insolvent liquidation, to be involved in the management, promotion or formation, of a company with the same or similar name (aka “the prohibited name”) in the ensuing 5 years. We have a dedicated page here.
This offence is colloquially known as “phoenix trading” and the legislation aims to protect the public from not realising they are in fact dealing with an entirely new legal entity. There are a number of statutory exceptions and if you think you may be in breach of the s216 provisions or require advice before an insolvent liquidation is to occur you should take specialist insolvency legal advice as soon as possible.
Not only is it a criminal offence, but it has very severe civil penalties as well. One of which is a director being at risk of becoming personally liable for all debts of the second company during the period of infringement (s217 Insolvency Act 1986).
This particular consequence was recently considered in the case of PSV 1982 Limited -v- Langdon  EWHC 2475 (Ch), in which Deputy High Court Judge Vos determined that a director who has breached s216 will be automatically personally liable under s217.
Background of the Commercial Court Case
As is usually the case with s216 allegations, the history of the facts leading up to the matter are not straightforward.
In October 2015, Mr France entered into a contract with Discovery Yachts Sales Limited (DYSL). At this time, DYSL was owned by a Mr John Charnley, who also owned Discovery Yachts Limited (DYL), a company that built and supplied the yachts to DYSL. The Defendant was a director of DYL between August 2016 and April 2017.
Following the yacht being delivered to Mr France in January 2017, he complained about a number of apparent defects.
In and around April 2017, Tradewinds Marine Limited (TML) (owned by the Defendant) purchased shares in DYSL, subsequently changing its name from TML to Discovery Yachts Group Limited (DYGL) on 21 April 2017.
Accordingly, by September 2017, the Defendant was one of three directions as DYGL.
DYL was then placed into insolvent liquidation on 12 October 2017 and the Defendant was subsequently in breach of section 216.
Mr France and Elusive Yachting then commenced proceedings in April 2018 against the Discovery Yacht group companies. On 5 December 2019, the board of DYGL agreed to place DYGL into administration. Following the hearing on Mr France’s claim, the judge concluded that DYGL had, in September 2017, agreed to repair the yacht but had subsequently breached that in January 2018, accordingly, judgment was awarded to Mr France and DYGL was ordered to pay various sums, which pursuant to a consent order of 26 June 2020, DYGL and DYSL (both then in liquidation) agreed to pay a total of £575,000.
The claims were then assigned to PSV, the Claimant on 18 March 2020 and the sum PSV sought to recover from the Defendant comprises of the judgment debt, interest, estimated cost of further repairs and legal costs, totalling £1,125,824.67.
The High Court Case
The High Court judge had to consider, amongst other things, whether the established liabilities per the commercial court proceedings, could be sought against the Defendant personally pursuant to s217, given that he was not a party to the proceedings that gave rise to the said liabilities.
The Defendant accepted that he was in breach of s216 because (para 32):
- He was a director of DYL until 18 April 2017.
- DYL entered into insolvent liquidation on 12 October 2017.
- At that time, he was a director of DYGL.
- “Discovery Yachts” was a prohibited name within the meaning of s216
- He did not obtain the Court’s permission to act as a director of DYGL following the entry into liquidation of DYL, nor did any of the statutory exceptions apply.
The Judge held that once a liability has been established, a director in breach of 216 will be automatically responsible for that liability and, further, that “it is not necessary for the liability to be established in separate proceedings against the director” (para 46).
There was further interesting discussion as to when the liability was incurred, see paras 91 – 103. In this particular case it was held that the liability was incurred when the contract was breached in January 2018, thus during the period of the director’s breach,
The consequences of acting in breach of s216 are severe, given that it has both criminal and civil consequences, however, more so in light of this judgment given that the personal liability will be automatic for a director. Therefore, any persons in such a situation should seek legal advice at the earliest opportunity to ensure they do not risk breaching section 216 of the Insolvency Act 1986.