Using the same or similar name of a company that is in insolvent liquidation is prohibited by s 216 of the Insolvency Act 1986 (IA).

A director who acts in breach of s216 by being a director of, or being involved in the promotion, formation or management of a company that is using a prohibited name, risks personal and potentially criminal liability (s217 IA 1986) – unless one of three “excepted cases” set out in the Insolvency Rules 2016 (Rules) applies.

The purpose behind s216 IA was to stop the so called “phoenix” syndrome whereby a shelf company was brought to life using the same or similar name to a company that has gone into liquidation by the same directors. The prohibition and risk for acting in breach of s216 was therefore aimed at preventing directors from liquidating one company (often after having run up significant debt) and then continuing business under the guise of a new company which, to the outside world, appeared to be the same company they had always done business with. The directors would be protected by the limited liability status of the new shelf company and trade on the goodwill of the liquidated company – all at the expense of creditors.

Although not all companies using the same or similar name are “phoenix” companies, there is no easy way to distinguish between the good and the bad cases. This is why s216 and 217 of the IA are so widely drawn (to capture all potential cases) but is also the reason why there are exceptions.

Commonly directors will rely on the “first” exception by informing creditors that they intend to be involved in a business that is using the same or similar name. This is done by sending a notice to creditors of the insolvent company informing them of their intention to do that – although the process is a little more nuanced than that. The second exception requires a court application.

The third exception allows a director to be involved in a company that is already using the same or similar name of the company that has gone into insolvent liquidation if (a) that “other” company has been known by that name for at least 12 months before the insolvent company went into liquidation, and (b) the “other” company was not dormant during those 12 months.

But what does “non dormant” mean? The decision in Maxima Creditor Resolutions Ltd v Fealy & Anor [2024] EWHC 2694 (Ch) considered this point for the first time. 

What is meant by a non-dormant company?

It is helpful to briefly set out the facts of Maxima Creditor.

McFee Interiors Limited (Interiors) entered creditors voluntary liquidation (CVL) on 30 November 2013. At this time the defendants (former directors of Interiors) were also directors of a company called McFee Ltd (ML) which they continued to trade following Interiors entering CVL. ML went into CVL itself some years later, on 14 February 2017. 

Maxima is a company that takes assignment of debts due to creditors from companies that are insolvent, and it bought two debts owed to creditors of ML. Maxima then issued a claim against the former directors to recover payment of those debts from the directors personally under s216/217.

The former directors accepted that they were directors of both companies at all relevant times, they accepted that “McFee” was a prohibited name and that they had not sought the court’s permission to use that name. The question for the court was therefore whether they could rely on the third exception – their position being that ML had been trading for just over 12 months (53 weeks and one day to be precise) prior to Interiors entering CVL.

When it comes to whether a company is dormant or not, it is necessary to look at s1169 of the Companies Act 2006. This says that a company is ‘dormant’ during any period in which it has no significant accounting transactions – this being a transaction that is required by s386 of the Companies Act to be entered into the company’s accounting records.

The directors argued that they only needed to demonstrate that ML was non-dormant at some point during the 12 months prior to Interiors’ liquidation – taking the point that once a company has made one significant accounting transaction, it then ceases to be dormant. 

Maxima’s argued that the directors must show that ML undertook s386 transactions throughout the whole of the qualifying 12 month period – and there was no evidence of that. They said it was not sufficient to simply demonstrate that trading at some point in that period was enough, or that ML had engaged in some activities such as tendering or preparing to transact business. There had to be evidence of actual transactions involving the receipt or expenditure of money affect ML’s balance sheet – and there were no such transactions.

Unfortunately for the directors given the length of time that had expired – some 9 and a half years since ML was incorporated – they found it difficult to find much in the way of documentation to evidence their position – much of the paperwork having been destroyed.

The judge preferred the view of Maxima – that the directors must be able to show that the company undertook transactions that were required by s386 of the Companies Act 2006 to be included in ML’s accounting records throughout the whole of the 12-month qualifying period. But despite the evidential difficulties, found on the evidence that ML was engaged in significant accounting transactions and therefore ML was non dormant and the third exception applied.

Key takeaways

The findings in this case are helpful, it confirms that for the third exception to apply

• The relevant company must have engaged in transactions throughout the whole of the 12-month period to engage the third exception – trading at some point will not suffice
• Filing of non-dormant accounts for the relevant period is not sufficient evidence on its own to evidence non-dormancy
• Trading means more than preparing to transact business, there must be evidence of at least one significant accounting transaction that is required to be entered in the company’s financial records at the start of the 12-month qualifying period and evidence of such transactions continuing thereafter – for example, in this case there was evidence that ML had incurred liability to make payment for materials and equipment and to pay for labour

It is also helpful in confirming that a director is not required to show that there were significant accounting transactions 24/7 seven days a week during the whole of the 12-month qualifying period – that takes matters too far.