England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CANTERBURY COUNTY COURT
HHJ Mitchell
4RH01828

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th November 2006

Lord Justice Jonathan Parker :

INTRODUCTION

1. At issue on this appeal are the circumstances in which a person who was a director of a company when it went into insolvent liquidation may be brought within an exception to the provisions of sections 216 and 217 of the Insolvency Act 1986 ("the Act") – provisions which would otherwise render that person liable for the debts and liabilities of a new company of which he is a director, being a company having a name which is so similar to the name of the company in liquidation as to suggest an association with that company (i.e. a "prohibited name" within the meaning of section 216).
2. Specifically, the appeal raises a pure question of construction of rule 4.228 of the Insolvency Rules 1986.
3. The appellants are Mr Eric Churchill and Mr Peter Churchill, who are brothers. They were directors of a company called Arctic Distribution Ltd ("the old company") when it went into insolvent liquidation on 3 July 2001. As at that date they were also directors of another company, Arctic Distribution (2001) Ltd ("the new company"), and thereafter they continued to act as such. By a Sale Agreement dated 18 October 2001 the old company (acting by its liquidator) sold its goodwill to the new company. On 25 October 2004 First Independent Factors and Finance Ltd, the respondent to the appeal, commenced the present proceedings against the appellants in the Reigate County Court claiming the sum of £23,163.02 as being the total sum due and owing by the new company to three of its creditors who had assigned their debts to the respondent. The claim is made on the footing that by virtue of sections 216 and 217 of the Act the appellants are jointly and severally liable for those debts.
4. The appellants deny liability. They accept that the name of the new company is a "prohibited name" but they contend that by virtue of a notice given by the new company under rule 4.228 of the Insolvency Rules the relevant provisions of sections 216 and 217 have been disapplied, thus relieving them from liability for the debts and liabilities of the new company.
5. The respondent denies that the new company gave notice under rule 4.228. It accepts that the issue as to whether or not such notice was given is not suitable for determination on an application for summary judgment but it nonetheless applies for summary judgment on the footing that, even if notice was given as alleged by the appellants, such notice would not, on the true construction of the rule, have operated to relieve the appellants from liability for the sum claimed.
6. By his order dated 15 December 2005 District Judge Polden, sitting in the Tunbridge Wells County Court, entered summary judgment for the respondent for the sum claimed, and awarded the costs of the application to the respondent on an indemnity basis. He refused the appellants permission to appeal.
7. The appellants applied to the judge for permission to appeal and for the appeal to be transferred direct to the Court of Appeal. Those applications were heard by HHJ Mitchell, sitting in the Canterbury County Court, on 26 April 2006. At the hearing, the judge heard full argument as to the true construction of rule 4.228. By his order, the judge declined to direct that the appeal be transferred direct to the Court of Appeal; instead, he granted the appellants permission to appeal and dismissed the appeal with costs.
8. The appellants applied to the Court of Appeal for permission for a second appeal. On 21 June 2006 Chadwick LJ granted such permission on the papers.

THE RELEVANT LEGISLATIVE PROVISIONS

The Insolvency Act 1986

9. Section 216(1) of the Act provides, so far as material, that section 216 applies to a person where a company (defined in the subsection as "the liquidating company") goes into insolvent liquidation and such person was a director of that company at any time during the period of 12 months preceding its liquidation.
10. Section 216(3) provides, so far as material, that except with the leave of the court "or in such circumstances as may be prescribed" a person to whom the section applies shall not, in the period of 5 years following the liquidation of the liquidating company, act as a director of any other company which is known by a "prohibited name".
11. Section 216(2) defines "prohibited name" as meaning a name by which the liquidating company was known at any time during the 12 months preceding its liquidation or a name so similar to such a name as to suggest an association with the company. As already noted, the appellants accept that the name of the new company is a "prohibited name" within the meaning of section 216(2).
12. Section 216(4) provides that a person who acts in contravention of the section is liable to imprisonment or a fine or both. Section 217(1) of the Act provides, so far as material, that a person who acts in contravention of section 216 is personally responsible for the debts and liabilities of the company incurred whilst he was so acting.

The Insolvency Rules 1986

13. Rules 4.228 to 4.230 in Chapter 22 of the Insolvency Rules "prescribe" the cases which are excepted from the application of section 216 of the Act. There are three such cases. This appeal is concerned only with the first of those three cases, viz. that which is prescribed by rule 4.228.
14. Rule 4.228 is in the following terms:

"(1) Where a company ("the successor company") acquires the whole, or substantially the whole, of the business of an insolvent company, under arrangements made by an insolvency practitioner acting as its liquidator, administrator or administrative receiver, or as supervisor of a voluntary arrangement under Part 1 of the Act, the successor company may for the purposes of section 216 give notice under this Rule to the insolvent company's creditors,

(2) To be effective, the notice must be given within 28 days from the completion of the arrangements, to all creditors of the insolvent company of whose addresses the successor company is aware in that period; and it must specify –

(a) the name and registered number of the insolvent company and the circumstances in which its business has been acquired by the successor company.

(b) the name which the successor company has assumed, or proposes to assume for the purpose of carrying on the business, if that name is or will be a prohibited name under section 216, and

(c) any change of name which it has made, or proposes to make, for that purpose under section 28 of the Companies Act.

(3) The notice may name a person to whom section 216 may apply as having been a director or shadow director of the insolvent company, and give particulars as to the nature and duration of that directorship, with a view to his being a director of the successor company or being otherwise associated with its management.

(4) If the successor company has effectively given notice under this Rule to the insolvent company's creditors, a person who is so named in the notice may act in relation to the successor company in any of the ways mentioned in section 216(3), notwithstanding that he has not the leave of the court under that section."

15. The second excepted case, which is prescribed by rule 4.229, is where a person who has been a director or shadow director of the liquidating company applies to the court for leave under section 216(3) within seven days of the liquidation. Rule 4.229 provides that in such circumstances the applicant may act in any of the ways prohibited by that subsection for a maximum period of 6 weeks after the date of the liquidation. The rule thus allows a short period of grace pending the hearing of an application for leave pursuant to section 216(3).
16. The third excepted case, which is prescribed by rule 4.230, is where the "other company" referred to in section 216(3) has been known by the "prohibited name" for the full period of 12 months preceding the liquidation and has not been dormant at any time during that period. In such a case, the leave of the court under section 216(3) is not required.

THE APPELLANTS' CASE

17. The appellants allege that that the new company has effectively operated the procedure prescribed by rule 4.228, with the consequence that they are relieved from personal liability for the debts of the new company.
18. Thus, they allege firstly that by the Sale Agreement dated 18 October 2001 the new company acquired "the whole, or substantially the whole, of the business" of the old company, for the purposes of rule 4.228(1). They rely on the fact that clause 1 of the Sale Agreement expressly described the transaction in those terms.
19. Secondly, they allege that within 28 days after the signing of the Sale Agreement notice was given by the new company to creditors of the old company, and that such notice was effective under the terms of rule 4.228.
20. Thirdly, they contend that, on the true construction of rule 4.228, such notice relieved them from personal liability for the debts of the new company, notwithstanding that throughout the period from the liquidation of the old company until the giving of the notice they had continued to act as directors of the new company. They are unable to produce a copy of the notice, stating as the reason for their inability to do so the fact that the computer on which the notices were saved has been either lost or disposed of.
21. In opposition to the respondent's application for summary judgment, the appellants contend that the issue as to whether notice was in fact given pursuant to rule 4.228 is not suitable for determination on an application for summary judgment, and that, given that the respondent denies that such notice was given, the action must go to trial. The appellants contend that the issue as to the true construction of rule 4.228 is one of some complexity, as well as being of some general importance to insolvency practitioners, and that their case on the construction of the rule has a real prospect of success. In those circumstances, they contend, the issue as to the true construction of the rule should also go to trial.

THE RESPONDENT'S CASE

22. As already noted, the respondent denies that notice was given by the new company to creditors of the old company, either in the terms alleged or at all. Nor, for that matter, does it accept that the transaction effected by the Sale Agreement was a sale of "the whole, or substantially the whole, of the business" of the old company. Nonetheless, it contends that it is in any event entitled to summary judgment for the sum claimed on the basis that on the true construction of rule 4.228 notice under the rule cannot be given retrospectively, that is to say in respect of a person who is already a director or involved in the management of the successor company. Rather, it contends, notice under rule 4.228 can only be given prospectively, that is to say in respect of a person who is not (as yet) a director or involved in the management of the successor company. Accordingly, even if notice was given as alleged, such notice would not have been effective to relieve the appellants from liability under section 217(1), being a liability which had already arisen by reason of their having acted as directors of the new company prior to the giving of the alleged notice.

THE JUDGMENT OF THE DISTRICT JUDGE

23. HHJ Mitchell, in the course of his judgment, described the District Judge's judgment as comprehensive, and as a model of clarity. I respectfully agree.
24. In the course of oral argument before the District Judge, Mr Thomas Williams (appearing for the appellants, as he has throughout) submitted, as he has submitted to us, that the word "may" in rule 4.228(3) imports a degree of discretion, in contrast to the word "must" in rule 4.228(2). The District Judge rejected that submission, saying this (in paragraph 42 of his judgment):

"In my judgment there is some merit in [Mr Williams'] submissions when he submits … that rule 4.228(3) sits uncomfortably with the other parts of rule 4.228 and it appears to be unhappily drafted because it imports an element of discretion into the content of the notice: something which the other elements of the rule forbid. However in my judgment to understand the rule properly it is necessary to consider carefully the effect of the notice and this is covered by rule 4.228(4). It provides that '[i]f the successor company has effectively given notice under this Rule to the insolvent company's creditors, a person who is so named in the notice [my emphasis] may act in relation to the successor company in any of the ways mentioned in section 216(3), notwithstanding that he has not the leave of the court under that section'. In my judgment it is clear therefore that to be an effective notice the person who has been a director or had been a director of the insolvent company and wanted to act as a director of the successor company or otherwise be associated with its management must be named in the notice. Unless they are named then that person cannot act in any of the ways mentioned in section 216(3) … without getting the prior permission of the court."

25. In paragraph 53 of his judgment, the District Judge concluded that the words "with a view to" in rule 4.228(3) are clearly prospective. He continued (in paragraph 55 of his judgment):

"In my judgment the words must be given their literal interpretation and a valid notice can only be given, as the claimant submits, before a person becomes a director of the successor company. I do not accept that this interpretation leads to the absurd result that the defendants claim. The literal interpretation is consistent with the policy behind the Act preventing phoenix companies from stepping into the shoes of the liquidating company with the minimum of notice to the trading public and it is important to note that the creditors do not appear to have any right to object to the director's involvement in the successor company. The procedure appears to exist merely to alert creditors of the insolvent company who may be considering trading with the new company to the fact of the director's intended involvement in the new company."

THE JUDGMENT OF HHJ MITCHELL

26. After quoting passages from a number of textbooks which had been cited to him by Mr Ian Clarke (appearing for the respondent, as he has throughout) – including a sentence from Gore-Browne on Companies, to which further reference is made below – Judge Mitchell concluded (in paragraph 42 of his judgment) "that in order to claim the dispensation [provided by rule 4.228] the director must make application before he becomes a director". He continued:

"In my judgment that is the appropriate construction. It is the construction which District Judge Polden arrived at, and in my judgment it is the right construction of, in particular, rule 4.228(4). I would say that in my judgment, the interpretation is that they may insert the names of directors, but if they do not insert the names of directors, they cannot claim the benefit of rule 4.228(4)."

27. He accordingly dismissed the appeal.

THE APPELLANTS' GROUNDS OF APPEAL

28. By their grounds of appeal, the appellants contend: firstly, that on its true construction rule 4.228 does not require a director of the insolvent company to be named prospectively in order to avoid personal liability; and secondly, that summary judgment in favour of the respondent should not be given since the appellants' argument as to the true construction of rule 4.228 enjoys reasonable prospects of success.

THE ARGUMENTS ON THIS APPEAL

The arguments for the appellants

29. In support of the first of the two grounds of appeal, Mr Williams in substance repeats the submissions which he made, unsuccessfully, to District Judge Polden and to Judge Mitchell.
30. He accepts that the expression "with a view to" has a prospective flavour, but he relies strongly on the word "may" in rule 4.228(3) as importing a discretion. He submits that a notice which names a person "with a view to" that person being a director of the new company is not the only kind of notice which the new company may give in order to operate the rule 4.228 procedure effectively.
31. He invites the court to adopt a purposive approach to the construction of rule 4.228, characterising it as a rule which is woefully drafted. He referred us to a number of passages in Bennion on Statutory Interpretation 4^th edition, 2002, in support of the general proposition that a person should not be penalised except by clear law. He points out, correctly, that a person who acts in contravention of section 216 not only commits a criminal offence but is also subjected to civil liability for the debts and liabilities of the successor company incurred whilst he so acted.
32. Mr Williams points out that although in an earlier edition of Gore-Browne on Companies the learned editors expressed the view that rule 4.228 is "unavailable if the director is already working with the management of the successor company", that sentence does not appear in the latest edition. On noticing this, Mr Williams contacted Ms Fiona Tolmie, of the Centre for Insolvency Law and Policy at Kingston University, who is the editor of that part of the text book in which the sentence formerly appeared, and inquired as to the reason why that sentence had been omitted from the latest edition of the work. He placed before us an e-mail from Ms Tolmie sent in response to that inquiry. In her e-mail, Ms Tolmie explains that she deleted the sentence on the basis that the words "with a view to his being a director of the successor company" do not exclude the possibility of his already being a director. Further, she considers that, in so far as the wording of the rule is ambiguous, it would be relevant to consider what purpose rule 4.228 is intended to serve. If, as she presumes, such purposes are (a) to alert creditors of the connection between the old and the new companies, and (b) to ensure that creditors of the old company know about the transfer transaction approved by an insolvency practitioner as a means of ensuring that phoenixes should only arise in circumstances in which greater value could not be obtained by transferring the business to anyone else, she is unable to see why it should make any difference in achieving those purposes whether the person in question is already a director at the time of the notice or subsequently becomes a director. Mr Williams naturally adopted those views of Ms Tolmie.
33. Mr Williams did not pursue his second ground of appeal, although he did not formally abandon it.

The arguments for the respondent

34. As to the first ground of appeal, Mr Clarke submits, in his written skeleton argument, that on its true construction rule 4.228 operates only where directors of the company in liquidation are not directors of, or involved in the management of, the successor company at the date when the notice is given: i.e. it only applies where an insolvency practitioner sells the business of the company in liquidation, or a substantial part of it, to a company which is genuinely under new management. He submits that that accords with the policy of the Act, whereas the appellants' construction does not.
35. He submits that the expression "with a view to" is plainly prospective, and that the word "may" in rule 4.228(3) does not import any discretion.
36. He submits that the second ground of appeal is misconceived. The issue is one of pure construction, the resolution of which does not require any factual investigation.

CONCLUSIONS

37. In the first place, Mr Williams was plainly right not to pursue his second ground of appeal. As Waller LJ said in Wootton v. Telecommunications Ltd (CA, unreported, judgments delivered on 4 May 2000) at paragraph 33:

"… it is clearly right that the summary procedure should not be used for the purpose of a mini trial. But that should in no way be misunderstood in the sense that, certainly if there was a matter of construction in relation to which no factual evidence would be of any materiality, then it would be perfectly proper, as it always has been prior to the new rules, to resolve that matter in a summary procedure."

38. See also Carter v. Clarke [1990] 2 All ER 209 at 213g-h per Lord Donaldson MR, a case under the old rules.
39. The instant case is just such a case. There are no surrounding facts to be taken into account in construing rule 4.228: the issue is one of pure construction of the words of the rule. I accordingly turn to that issue.
40. In my judgment the respondent's construction of rule 4.228 is the correct one, for the following main reasons.
41. First, as Mr Williams accepts, the expression "with a view to his being a director …" plainly has a prospective flavour to it.
42. Secondly, the word "so" in the expression "a person who is so named" can only refer, in my judgment, to a person who is named in the notice "with a view to his being a director …".
43. Thirdly, the word "may" in rule 4.228(3) does not, on its true construction, introduce any element of discretion: it is no more than an echo of the word "may" in rule 4.228(1). It is, in my judgment, merely permissive, in the sense that a person who would otherwise be in contravention of section 216 may except himself from the provisions of the section by means of the notice procedure prescribed by the rule. If he chooses to avail himself of that procedure, then, as the District Judge rightly concluded, to be effective the notice must name him.
44. Fourthly, if rule 4.228 had been intended to have retrospective effect (in the sense described earlier) one would have expected to find some express provision to that effect. Not only does rule 4.228 contain no such provision, but rule 4.229 strongly suggests that such a construction of rule 4.228 was not intended.
45. Fifthly, in the context of the 'Phoenix phenomenon' the particular purpose of rule 4.228 is to alert creditors of the company in liquidation to the fact that a person who was involved in the management of that company is also to be involved in the management of the successor company, so that such creditors can make an informed assessment of the risk of extending credit to the new company. To ensure that that purpose is achieved, notice must be given to such creditors before the person in question starts to involve himself in the management of the successor company.
46. I accordingly conclude that the sentence which appeared in earlier editions of Gore-Browne on Companies but which does not appear in the latest edition (see paragraph 32 above) was a correct statement of the position; and that on the true construction of rule 4.228 any notice given by the new company, purportedly under rule 4.228, following completion of its acquisition of the old company's goodwill would not have been effective to relieve the appellants from liability for contravening section 216 by acting as directors of the new company prior to the giving of the notice.

RESULT

47. I would dismiss this appeal.

Lord Justice Moore-Bick:

48. I agree.

Lord Justice Ward:

49. I also agree.