 |
  |
 |
        |
|
 |
Phoenix Rules and MBOs in Insolvency Situations Two recent developments in relation to Section 216 of the Insolvency Act 1986 (the Act) have made management buy outs (MBOs) from insolvent companies more difficult where it is the management’s intention to use the insolvent company’s name for the new company. The first of these was the Court of Appeal decision in Churchill v. First Independent Factors and Finance Limited [2006] EWCA Civ 1623. The Churchill Case At the time the company went into liquidation, its directors were also directors of another company (the successor company). The insolvent company, acting by its liquidator, sold its goodwill and assets to the successor company. Proceedings were commenced against the directors for breach of section 216. It was claimed that the directors should be jointly and severally liable for the debts of the successor company. The directors did not challenge the fact that they were prohibited from using the insolvent company’s name by section 216, but they claimed that they had satisfied the requirements of an exemption under Rule 4.228 of the Insolvency Rules 1986 by giving notice to the insolvent company’s creditors and therefore the successor company (of which they were directors) could validly use the insolvent company’s name. The Court of Appeal decided that the notice under Rule 4.228 could only be given by a person who was not yet a director of the successor company. Accordingly, because the notice had been given by the directors after they had been appointed as directors of the successor company it was not validly given in accordance with Rule 4.228 and they were in breach of section 216 and liable for the relevant debts of the successor company. The second development is the introduction of a new Rule 4.228, which came into force on 6 August 2007 and is in the Insolvency (Amendment) Rules 2007. Rule 4.228 now clarifies the position with regard to the timing of the notice to creditors specifically stating that it must be given before appointment as a director or involvement in the management of a successor company. The new Rule 4.228 also requires that the notice to creditors be made in a prescribed form 4.73. Notice also needs to be published in the London Gazette. The Churchill decision and the new Rule 4.228 will be of great interest to insolvency practitioners and directors contemplating MBOs in such circumstances. In practice In future, it will be more difficult to comply with Rule 4.228 in MBOs in insolvency situations where there is a desire to use the same or a similar company name as the insolvent company. It is still possible to obtain court’s approval to the use, but this is usually considered an expensive alternative. In future, however, it might be the only option. Any breach of section 216 is not only a criminal offence but, under section 217, also gives rise to personal liability for all relevant debts of the successor company. This liability applies not only to the director involved but also to anyone who knowingly acts on the instructions of that director. This can therefore have dangers for all board members and senior management of the successor company. SGH is involved in advising many directors and insolvency practitioners on distressed company sales. Please contact a member of our team to arrange an initial consultation: Contact
|
.
|
||||||||||||||||
Recent Articles:
|
