England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM CIVIL JUSTICE CENTRE

		Priory Courts, 33 Bull Street Birmingham
		23 April 2008

Mr. Justice Lewison:

Introduction

1. Classic Conservatories & Windows Ltd went into creditors' voluntary liquidation on 19 January 2005. The estimated deficiency as regards unsecured creditors exceeds £251,000. Its unsecured creditors included two suppliers, Nicholas Gray Building Plastics and Genesis PVCU Ltd. First Independent Factors and Finance Ltd has bought their debts at a deep discount, and now seeks to recover those debts from Mr Ian Mountford, who was a director of Classic Conservatories & Windows Ltd when it went into liquidation. The basis on which Mr Mountford is said to be liable is that he has incurred personal liability for the debts of Classic Conservatories & Windows Ltd under section 217 of the Insolvency Act 1986, because he has been in breach of section 216 of that Act.
2. Mr Stenhouse, who appeared for Mr Mountford, took a preliminary point. He submitted that a claim made by a company such as the claimant, which has simply bought the debts of two creditors, and has never traded with the failed company, is outside the mischief against which sections 216 and 217 are directed. He submits that it is an abuse of process for an assignee of a debt who has never traded with the defunct company, and who has taken his assignment of the debt after the entry into liquidation of the defunct company, to sue a former director under section 217. He says that the court should dismiss the claim as being an abuse of process. I have no hesitation in rejecting this submission. Debt factoring is a perfectly legitimate business decision for any creditor. I cannot see that it makes any difference whether the debt was acquired before or after the defunct company went into liquidation. The creditor is, in my judgment, entitled to salvage what he can out of a bad trade debt. If the only way of salvaging anything is to sell the debt to a debt factor, that is entirely within his right. The assignee of the debt will stand in the shoes of the assignor. If the assignor could have made the claim, so can the assignee.

The facts

3. Mr Mountford began trading as a sole trader in 1998. His trading name was "Classic Conservatories & Windows" or "Classic Conservatories". At first he worked from his home address at 9 Duke Road, Burntwood, Staffordshire. On 8 July 1999 he bought two companies off the shelf. One was called Wavelength Concerts Ltd; the other was called Classic Conservatories & Windows Ltd. Mr Mountford was appointed a director of each company upon its incorporation. On 23 July each of the two companies changed its registered office to 9 Duke Road (which was Mr Mountford's home). Mr Mountford bought the companies on the advice of his accountant. He had been advised to incorporate his business (hence the acquisition of Classic Conservatories & Windows Ltd). He also had in mind the possibility of setting up another business (hence the acquisition of Wavelength Concerts Ltd). However, Mr Mountford decided that the time was not right to act on his accountant's advice by incorporating his business.
4. As Mr Mountford's personal business grew he took premises at Hednesford Road, Heath Hayes, Cannock, in Staffordshire. Mr Mountford's personal business consisted of the construction of conservatories for private individual home owners. His client base at that time was largely within 20 miles of his trading base. His method of operation consisted of buying in parts from manufacturers or fabricators and then erecting conservatories for clients. His profit came from a mark up on parts and the labour charges. The conservatories that Mr Mountford built were usually made of PVCU, but typically they had brick or concrete bases. Although Mr Mountford said that his trading name was "Classic Conservatories & Windows", the business was also known as "Classic Conservatories". His accounts described him as trading as "Classic Conservatories" and many invoices addressed to him also use that trading name.
5. Although Mr Mountford had bought Wavelength Concerts Ltd in 1999 it remained dormant until 2002. On 19 June 2002 Wavelength Concerts Ltd changed its name to Classic Roofs Ltd. It began trading in about July 2002. The business of Classic Roofs Ltd was the manufacture of roofs for the trade: building companies, building firms and construction companies. Mr Mountford himself, in his capacity as sole trader under the name of Classic Conservatories & Windows, was one of its customers. The majority of the roofs that it manufactured were conservatory roofs; but a substantial proportion (perhaps exceeding 30 per cent) consisted of other types of roof. The directors of Classic Roofs Ltd were Mr Mountford and Mr Paul Tooth. Mr Mountford and Mr Tooth were also the sole shareholders in the company. Mr Tooth had been employed by Mr Mountford in his personal business and, according to the records, continued to draw a salary from that business even after Classic Roofs Ltd began trading. Mr Mountford was also the company secretary of Classic Roofs Ltd. Classic Roofs Ltd also operated in Staffordshire, but over a wider area than Mr Mountford himself. In addition it operated in Leicestershire, Lancashire, Shropshire and the West Midlands. Its customers were trade customers rather than individual private home owners.
6. Mr Tooth and Mr Mountford found premises at Canal View Business Park, Wheelhouse Road, Rugely in the summer of 2002. They were acting on behalf both of Classic Roofs Ltd and also for Mr Mountford's personal business. Mr Mountford took Unit 2 on the Canal View Business Park, and Classic Roofs Ltd took Unit 11. The landlord of both units was the same; and the deal reflected the fact that the two businesses were taking two units simultaneously.
7. Classic Conservatories & Windows has a letter head which incorporated a logo. The logo consisted of the single word "Classic" within a diagrammatic representation of a conservatory surmounted by a finial with two wings projecting from each side of the conservatory. On the letterheads I have seen the address is given as 9 Duke Road, Burntwood, Staffs rather than the unit at Canal View Business Park. However, I have not seen a letterhead that post-dates Mr Mountford's move to Unit 2. A telephone number, fax number and e mail address (classicconservatories.co.uk) were also given. The letterhead also showed Mr Mountford as proprietor. I have not seen any letterhead used by Classic Roofs Ltd, but I have seen examples of its invoices. The invoice bears the words "Classic Roofs Ltd" in a fancy font which is similar to that used for the word "Classic" on the Classic Conservatories & Windows letterhead. Those words are placed within a diagrammatic representation of a conservatory, whose roof is also surmounted by a finial which is strikingly similar to the roof and finial on the Classic Conservatories & Windows letterhead. Beneath the words "Classic Roofs Ltd" are the words "Conservatory Roof Fabricators". Its address is given as Unit 11 on the Canal View Business Park. A telephone number and fax number are also given. They differ from the telephone number and fax number given for Classic Conservatories & Windows (even the STD code differs). Some of the invoices show Mr Mountford and Mr Tooth as directors of the company.
8. Up to and including the year ending 31 July 2003 Mr Mountford signed off the accounts of Classic Windows and Conservatories Ltd. They were in the form appropriate for a dormant company, and the directors' report stated that the company had not traded during the year. On 27 January 2004 Classic Conservatories & Windows Ltd changed its registered office to Unit 2, Canal View Business Park.
9. On 16 February 2004 Classic Roofs Ltd entered into insolvent liquidation. Its creditors included BPK Developments Ltd (the landlord of the unit); Molan (UK) Ltd (a supplier of polycarbonate sheets); and Roof 2000 Ltd (who supplied bar length).
10. Mr Mountford was concerned by the failure of Classic Roofs Ltd. He decided to act on the advice that his accountant had previously given him and transfer his personal business to Classic Conservatories & Windows Ltd. I have not seen the documentation by which this was done. Mr Mountford says that the transfer took place at the end of the financial year, with effect from 1 May 2004. It is the case that the last set of accounts for Mr Mountford's personal business were made up to 30 April 2004, which tallies with his evidence. On 13 May 2005 Classic Conservatories & Windows Ltd acquired all the plant, machinery, furniture and equipment belonging to Classic Roofs Ltd at book value. It also acquired at least one motor vehicle belonging to Classic Roofs Ltd.
11. Classic Conservatories & Windows Ltd had a letterhead printed. It adopted the same logo as Mr Mountford had used for his personal business of Classic Conservatories & Windows. The address of the company was given as Unit 2, Canal View Business Park. Its telephone and fax numbers were given. They differed from the telephone and fax numbers that had been used by Classic Roofs Ltd (but this time the STD codes were the same). The letterhead showed Mr Mountford as managing director. With the aid of Mr Jones, an enthusiastic salesman, the company's customer base spread. It was no longer confined to a twenty mile radius but extended further afield. It was, however, still concentrated in the Midlands.
12. By December 2004 the company was in trouble; and on 19 January 2005 it went into insolvent liquidation. Its creditors included BPK Developments Ltd (the landlord); Molan UK Ltd, and Roof 2000 Ltd. It had other creditors, one or two of whom had also been creditors of Classic Roofs Ltd. The liquidator has taken no proceedings against Mr Mountford in respect of the management of the company or any of the liquidation debts. However, he has no funds with which to do so.

The law

13. Sections 216 and 217 provide as follows:

"216 Restriction on re-use of company names

(1) This section applies to a person where a company ("the liquidating company") has gone into insolvent liquidation on or after the appointed day and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.

(2) For the purposes of this section, a name is a prohibited name in relation to such a person if—

(a) it is a name by which the liquidating company was known at any time in that period of 12 months, or

(b) it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.

(3) Except with leave of the court or in such circumstances as may be prescribed, a person to whom this section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation—

(a) be a director of any other company that is known by a prohibited name, or

(b) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or

(c) in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.

(4) If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.

(5) In subsection (3) "the court" means any court having jurisdiction to wind up companies; and on an application for leave under that subsection, the Secretary of State or the official receiver may appear and call the attention of the court to any matters which seem to him to be relevant.

(6) References in this section, in relation to any time, to a name by which a company is known are to the name of the company at that time or to any name under which the company carries on business at that time.

(7) For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(8) In this section "company" includes a company which may be wound up under Part V of this Act.

217 Personal liability for debts, following contravention of s 216

(1) A person is personally responsible for all the relevant debts of a company if at any time—

(a) in contravention of section 216, he is involved in the management of the company, or

(b) as a person who is involved in the management of the company, he acts or is willing to act on instructions given (without the leave of the court) by a person whom he knows at that time to be in contravention in relation to the company of section 216.

(2) Where a person is personally responsible under this section for the relevant debts of a company, he is jointly and severally liable in respect of those debts with the company and any other person who, whether under this section or otherwise, is so liable.

(3) For the purposes of this section the relevant debts of a company are—

(a) in relation to a person who is personally responsible under paragraph (a) of subsection (1), such debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company, and

(b) in relation to a person who is personally responsible under paragraph (b) of that subsection, such debts and other liabilities of the company as are incurred at a time when that person was acting or was willing to act on instructions given as mentioned in that paragraph.

(4) For the purposes of this section, a person is involved in the management of a company if he is a director of the company or if he is concerned, whether directly or indirectly, or takes part, in the management of the company.

(5) For the purposes of this section a person who, as a person involved in the management of a company, has at any time acted on instructions given (without the leave of the court) by a person whom he knew at that time to be in contravention in relation to the company of section 216 is presumed, unless the contrary is shown, to have been willing at any time thereafter to act on any instructions given by that person.

(6) In this section "company" includes a company which may be wound up under Part V."

14. The liquidating company, for the purposes of this case, is Classic Roofs Ltd. It is common ground that:

i) It went into liquidation on 16 February 2004. The estimated deficiency as regards creditors was £45,000-odd;

ii) Mr Mountford was a director of Classic Roofs Ltd when it went into liquidation;

iii) Mr Mountford did not have the leave of the court under section 216 (3) to act as a director of Classic Conservatories & Windows Ltd;

iv) Classic Conservatories & Windows Ltd was a dormant company until it began trading in the summer of 2004 following the entry into liquidation of Classic Roofs Ltd.

15. The first question that I have to decide is whether Classic Conservatories & Windows Ltd was a prohibited name in relation to Mr Mountford. It is not suggested that Classic Roofs Ltd was known by that name. So more precisely the question is whether Classic Conservatories & Windows Ltd is a name so similar to Classic Roofs Ltd as to suggest an association with that company.
16. If I come to the conclusion that the answer to that question is "yes", the second question that I have to decide is whether Mr Mountford has a defence under rule 4.230 of the Insolvency Rules 1986. That rule provides:

"The court's leave under section 216(3) is not required where the company there referred to, though known by a prohibited name within the meaning of the section—

(a) has been known by that name for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation, and

(b) has not at any time in those 12 months been dormant within the meaning of section 252(5) of the Companies Act."

17. The principal target of sections 216 and 217 is what is often called the "phoenix syndrome". The 'phoenix' problem results from the continuance of the activities of a failed company by those responsible for the failure, using the vehicle of a new company. The new company, often trading under the same or a similar name, uses the old company's assets, often acquired at an undervalue, and exploits its goodwill and business opportunities. Meanwhile, the creditors of the old company are left to prove their debts against a valueless shell and the management conceal their previous failure from the public. The phoenix company rises out of the ashes of the defunct company. However, although the "phoenix syndrome" is the principal target of the sections, the words of the sections encompass factual situations that cannot be described in those terms. The court should not adopt a strained interpretation of the words of the statute simply in order to confine its operation to true cases of phoenix syndrome: Ad Valorem Factors Ltd v Ricketts [2004] 1 All ER 894. As Mummery LJ made clear in that case, Ad Valorem Factors Ltd v Ricketts itself was not a phoenix case, yet the director was liable. Moreover, it is difficult to distinguish between good and bad phoenix situations and between honest and unscrupulous traders; and the sections do not attempt to do so: Thorne v Silverleaf [1994] B.C.C. 109; ESS Production Ltd v Sully [2005] BCC 435. However, neither section should be construed to include transactions which are not within those sections on their fair interpretation. Moreover, since section 216 (3) refers expressly to "such circumstances as may be prescribed" the sections should be construed together with the rules so as to produce a rational and coherent scheme: ESS Production Ltd v Sully.
18. In deciding whether a name suggests an association with another company, the question to be asked is whether the similarity between the two names is such as to give rise to a probability that members of the public, comparing the names in the relevant context, will associate the two companies with each other, whether as successor companies or as part of the same group: Ad Valorem Factors Ltd v Ricketts per Simon Brown LJ. In assessing the degree of similarity between names it is necessary to make a comparison of the names of the two companies in the context of all the circumstances in which they were actually used or likely to be used: the types of product dealt in, the locations of the business, the types of customers dealing with the companies and those involved in the operation of the two companies: Ad Valorem Factors Ltd v Ricketts per Mummery LJ. Although Simon Brown LJ referred to the probability that "members of the public" would make the association, in Commissioners for HM Revenue & Customs v Walsh [2006] BCC 431 Laddie J said that whether there is an association is to be assessed by having regard to the likely impact of the company names "on a reasonable person in the relevant commercial field". Since the purpose of the sections is to protect those who might be dealing (whether as customers or suppliers) with the company or business operating under the prohibited name, it seems to me that the person through whose eyes the assessment must be made is someone who might deal with the company or business. That person is closer to the formulation of Laddie J than to an ordinary member of the public.
19. The statute speaks of "an association". It does not say what kind of association it means. None of the cases try to define what kind of association counts, and I will not attempt to do so. It is, however, clear that an association of ownership (as between members of the same group of companies) or an association of assets (as in the case of a successor company using the goodwill of the liquidating company) will both count.
20. Although the cases deal mainly with the alleged similarities between the name of one company and another company, the scope of section 216 is not confined to companies. This is clear from section 216 (3) (c) which prohibits a person from being concerned in any way "in the carrying on of a business carried on (otherwise than by a company) under a prohibited name". Section 216 (3)(c) would thus extend to a sole trader using a trading name which was a prohibited name or a partnership using a prohibited name. However, the consequences of carrying on a business (otherwise than by a company) under a prohibited name are not the same as the consequences of being a director of a company with a prohibited name. Section 217 (1) makes a person who contravenes section 216 personally liable for all the relevant debts "of a company". It does not make him personally liable for the debts of anyone else. In most cases this will not matter, because a sole trader will be responsible for his own debts anyway; and a partner will be responsible for the debts of the partnership. But there may be cases where a person is indirectly involved in the carrying on of a non-corporate business under a prohibited name in which he is not contractually liable for the debts of the business. In such a case, the statute does not make him liable.
21. Mr Stenhouse argues that even if Classic Conservatories & Windows Ltd is a prohibited name as regards Mr Mountford he is entitled to rely on rule 4.230. He relies in particular on the purpose underlying rule 4.230 and its recognition that in circumstances falling within that rule the mischief against which section 216 is directed does not exist. As Chadwick J explained in Penrose v Secretary of State for Trade and Industry [1996] 1 WLR 482:

"The third excepted case in rule 4.230 shows that the mischief is not thought to exist in a case where the company having a prohibited name has been established and trading under that name for a period of not less than 12 months before the liquidating company went into liquidation. The former director of the liquidating company can join, or can remain, a member of the board of such a company without restriction. That must be because the mischief is not perceived to exist when the company having a prohibited name is not a phoenix."

22. This explanation was endorsed by the Court of Appeal in ESS Production Ltd v Sully. In that case Arden LJ said:

"The purpose of the third excepted case is to exclude the operation of section 216 and 217 where the prohibited name company was not a "phoenix" company."

23. In that case the Court of Appeal held that a number of companies which formed an informal group of companies linked by the acronym "ESS" fell within the scope of rule 4.230. As Arden LJ said:

"Since (as already explained) the object of rule 4.230 is to take outside sections 216 and 217 companies which are not phoenix companies, and since companies within the same group (formal or informal) often share a common word or acronym in their names, it is reasonable to infer that Parliament intended that the third excepted case should cover group companies whether the group was formal or informal."

24. Chadwick LJ also made similar points. He said:

"It is important to keep in mind that the mischief to which section 216 of the 1986 Act is directed is the potential for confusion (or deception) in a case where a phoenix company arises from the ashes of an insolvent liquidation. The potential for confusion exists where 2 conditions are satisfied: (i) the company is known by a name by which the liquidating company was known within the period of 12 months ending with the day before it went into liquidation or by a name which is so similar to that name "as to suggest an association with" the liquidating company - section 216(2) of the Act; and (ii) in a case within section 216(2)(b) the company which is known by a name which is so similar as to suggest an association with the liquidating company is indeed a phoenix. There is no mischief where an active company which, prior to the liquidation of the liquidating company, is already known by a name suggestive of association with the liquidating company ....continues to carry on business."

25. From these observations Mr Stenhouse derives the following principles:

i) sections 216 and 217 Insolvency Act 1986 and Rules 4.227 to 4.230 Insolvency Rues 1986 are to be read and interpreted and applied together as a code;

ii) the interpretation and application of the code and of the individual provisions must be done in a way that applies common sense, achieves rationality, and ensures that the provisions are not applied to situations where the mischief they are intended to prevent is not present;

iii) it is repeatedly stated in ESS Productions Ltd v Sully that the mischief that the code and provisions are intended to prevent is confusion arising from the phoenix phenomenon;

iv) the confusion that arises from the "phoenix phenomenon" is present only where 2 conditions are satisfied:

a) the company is known by a name by which the liquidating company was known within the period of 12 months ending with the day before it went into liquidation or by a name which is so similar to that name "as to suggest an association with" the liquidating company; and

b) in a case within section 216(2)(b), the company which is known by a name which is so similar as to suggest an association with the liquidating company is indeed a phoenix.

v) If there is no phoenix phenomenon and no phoenix company, the confusion that the provisions are designed to prevent does not arise and the provisions should not be applied. There is no mischief if there is no phoenix.

vi) Rule 4.230 exists to prevent the code and the provisions from being applied in situations where the mischief of the phoenix phenomenon does not exist.

vii) There is no mischief at all where a company has been known by a name suggestive of an association before a liquidated company goes into liquidation and continues to carry on business with that name after the liquidation takes place.

viii) In the present case, Classic Conservatories & Windows Ltd is not, and has never been alleged to be, a phoenix company. It did not arise out of Classic Roofs Ltd. None of the assets or profits of Classic Roofs Limited went into Classic Conservatories & Windows Ltd. Classic Conservatories & Windows Ltd did not continue any part of the liquidated business of Classic Roofs Ltd, and was not ever intended to do so. The only business taken over by Classic Conservatories & Windows Ltd was that of Mr Mountford's personal business trading as "Classic Conservatories & Windows."

26. Metaphors can be convenient shorthand ways of referring to a complex phenomenon. But legal rules are not framed in terms of metaphor. In my judgment it is not a permissible method of interpreting the rule to allow the ill-defined metaphorical idea of a "phoenix" to distort the meaning of the rule. As the Court of Appeal pointed out in Ad Valorem Factors Ltd v Ricketts the statute (and, I would add, the rule) should not be given a distorted interpretation in order to confine it to "phoenix cases". In addition although the Court of Appeal in ESS Productions Ltd v Sully emphasised the purpose of the rule, they nevertheless stressed that the court's task was to arrive at a fair interpretation of the rule. Mr Stenhouse advanced two submissions. The first was that the court should simply declare that the facts of this case do not fall within the Code and were not intended by Parliament to fall within the Code and provisions, and therefore the relevant director is not liable. What Mr Stenhouse's primary submission amounted to was the submission that the court should disapply the statute if the case was not a "phoenix case". I do not consider that the court has any such dispensing power as Mr Stenhouse advocated. It is directly contrary to Ad Valorem Factors Ltd v Ricketts which binds me. I therefore reject this submission. The second submission was that the court should interpret rule 4.230 in such a way that the word "company" as used in the rule is a reference not only to the formal structure of the company but is also a reference to its business as carried on by the company, so that:

(i) if the business carried on by the company has actually been in existence "for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation"; and

(ii) the business has been known by the prohibited name during that period; and

(iii) the business has not been dormant for any part of that 12 month period

then the exception under 4.230 applies.

27. However, as Mr Clarke who appeared for the Claimant pointed out, the terms in which rule 4.230 is drafted refer repeatedly to companies. The rule begins by saying that the leave of the court is not required under section 216 (3) where "the company there referred to" satisfies certain conditions. The expression "the company there referred to" must mean the company referred to in section 216 (3). Companies are referred to in section 216 (3) (a) and (b) but not in section 216 (3)(c). Rule 4.230 (b) requires that the company should not have been dormant within the meaning of section 252 (5) of the Companies Act 1985. Section 252 (5) contains a definition of "dormant" which simply cannot be applied to the business of a sole trader. That is the meaning of "dormant" in the rule. I do not consider that Mr Stenhouse's suggested construction is a permissible construction of the rule. In my judgment rule 4.230 applies only to a company which falls within the description contained in the rule. It is common ground that Classic Conservatories & Windows Ltd was dormant within the period of twelve months preceding the entry into liquidation of Classic Roofs Ltd. It does not therefore fall within the description contained in rule 4.230. If Classic Conservatories & Windows is a prohibited name in relation to Mr Mountford, rule 4.230 does not exempt him.
28. Accepting, as I do, that the section and the rule should be read together to produce a rational and coherent code, I must ask myself why the rule applies only to a company. The answer, I think, is that the purpose of asking for leave under section 216 (3) is two-fold. The first is to avoid the criminal penalty which attaches to a contravention of section 216. This would apply to any of the three ways in which section 216 may be contravened. The second is to avoid personal liability for debts. But that purpose will only rarely apply in a case where the contravention consists of carrying on a business otherwise than through a company. In most cases, as I have said, the sole trader or partner will be personally liable for the debts of the business anyway. If a person is willing to accept personal liability for the debts of a business, then the need for the exception is much reduced. Suppose that Mr Mountford had chosen not to incorporate his personal business after the liquidation of Classic Roofs Ltd. He would in those circumstances have remained liable for the debts of the business (which would in truth have been his personal debts) and the creditors would have been able to pursue him for them. By transferring his personal business to a previously dormant company, he would be able to escape personal liability unless he contravened section 216. Looked at in terms of mischief, it seems to me that the mischief is still there. The exception in rule 4.230 is aimed at a situation where there is a previously established and active business trading with limited liability. Customers and suppliers who deal with such a business will know that they are dealing with an entity with limited liability, just as they always have done. Where, however, a non-corporate business (with an individual standing behind it with personal liability) is transferred to an entity with limited liability, previous suppliers and customers may not notice the change. It may be that this is not a complete explanation and that there is a lacuna in the scheme. If so it would not be for the first time; but it is for Parliament or the Insolvency Rules Committee to correct defects in the scheme. It is not for the courts to give strained or artificial meanings to statutory provisions.
29. I might add that there was, in any event, rather more of a connection between Classic Roofs Ltd and Classic Conservatories & Windows Ltd than Mr Stenhouse allowed. The only assets recorded in the sworn statement of affairs relating to Classic Roofs Ltd were plant and machinery, furniture and equipment, motor vehicles and book debts. Classic Conservatories & Windows Ltd acquired all the plant and machinery, all the furniture and equipment and at least one of the motor vehicles.
30. If the court concludes that there has been a contravention of section 216, the statutory consequences appear to follow automatically. It has been said that the court has no discretion in the matter: Thorne v Silverleaf; Ad Valorem Factors Ltd v Ricketts. However, in ESS Production Ltd v Sully, Arden LJ left open the possibility that the court might have power to relieve a director from liability under section 727 of the Companies Act 1985. Mr Stenhouse submitted that the court did have power under section 727 to relieve Mr Mountford if he had contravened section 216. Section 727 (1) provides:

"If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit."

31. The Court of Appeal considered the scope of section 727 in Customs & Excise Commissioners v Hedon Alpha Ltd [1981] 1 QB 818. The question was whether directors of a company could be relieved from liability to pay betting duty for which the company was liable. The liability of the directors arose because of statutory provisions imposing liability on them jointly and severally with the company. The statutory provision then in force was section 448 of the Companies Act 1948, but it is in the same terms as section 727. The judge rejected the argument that section 448 could apply to relieve a director against liability to pay a debt, and the Court of Appeal agreed. Stephenson LJ said that section 448 was:

"inapplicable to the commissioners' claim because it is inapplicable to any claim by third parties to enforce any liability except a director's liability to his company or his director's duties under the Companies Acts. … If Parliament had wished to provide a director, whom it exceptionally makes liable to discharge a company liability, with the protection of s 448 or some other protection, it would, in my judgment, have done so by express words, either by subjecting the statutory liability to the right to claim relief under s 448 or, as in the Social Security Act 1975, by subjecting it to some other restriction."

32. Ackner LJ said:

"I accept that the true ambit of s 448, with one limited exception, is restricted to claims by or on behalf of the company or its liquidator against the officer or auditor for their personal breaches of duty."

33. The exception is not relevant for present purposes. Griffiths LJ agreed that the section did not apply to claims against directors brought by strangers. The present claim is a claim brought by a third party (or stranger). It does not involve any contravention by Mr Mountford of any of his duties under the Companies Act. Rather, the claim against him is based on a statutory liability imposed by section 217 of the Insolvency Act 1986. It is, in my judgment, on all fours with the claim in Hedon Alpha. I hold therefore that I am bound by authority to reject the proposition that the court has power under section 727 of the Companies Act 1985 to relieve Mr Mountford against liability imposed by section 216 and 217 of the Insolvency Act 1985.

Was Classic Conservatories & Windows a prohibited name?

34. I come at last to the real question: was Classic Conservatories & Windows a prohibited name in relation to Mr Mountford? To put the question another way, would that name have suggested an association with Classic Roofs Ltd in the mind of a reasonable person dealing or proposing to deal with Classic Conservatories & Windows Ltd?
35. The verbal link between the two names is "Classic". An internet search carried out by Mr Mountford revealed a very large number of enterprises which incorporated the word "classic" in their business names. They included car dealers, lift manufacturers, builders, roofers, stationers and so on. In all there were over 2 million of them. But the fact that the verbal link is a common word does not of itself mean that the name is not prohibited in relation to a particular person. A common surname may provide a sufficient link. So may a common word like "air". Moreover, the question is not whether the word "classic" suggests an association with other businesses which incorporate the word "classic" in their trading names, but more specifically whether the use of the word as part of the name of Classic Conservatories & Windows Ltd suggests an association with Classic Roofs Ltd. It all depends on the context. One of the pieces of context which in my judgment is relevant is the way in which the word "Classic" was used by each of the two companies. In the case of Classic Conservatories & Windows Ltd, the word was used as part of that composite phrase. But in the case of Classic Roofs Ltd, in addition to its collocation with the word "roof", that company was also described on its invoices as conservatory roof fabricators. So there was a contextual link, not just with roofs, but more specifically with conservatory roofs.
36. Mr Stenhouse said that the businesses of the two companies were different: Classic Roofs Ltd fabricated roofs, while Classic Conservatories & Windows Ltd did not manufacture. It assembled conservatories. It is true that the two businesses were not precisely the same. But they both operated in similar or adjacent fields of commerce, principally associated with conservatories. Some 70 per cent of the roofs that Classic Roofs fabricated were conservatory roofs, and as I have said its invoices described itself as a conservatory roof fabricator. Both companies were in the conservatory business. One of the principal components of a conservatory is its roof. In addition Classic Conservatories & Windows did on occasion represent to customers that it made roofs in its own factory and its letterhead said that it had a factory. I think also that the similarities between the logos of the two companies (especially the depiction of the conservatory roof surmounted by a finial) would have pointed to a link between them. In addition, the fact that companies have different businesses does not negate an association between them (as in groups of companies). Whether there is a perceived association may depend on the strength of the brand name. One example that was referred to in evidence was "Virgin". As is well known the Virgin businesses run from retailing music to air and rail transport and banking. Yet "Virgin" provides a well known link between the businesses which would lead a potential customer or supplier to suppose that they were associated.
37. Mr Stenhouse then said that the customer base of the two businesses was different. Classic Roofs Ltd supplied the trade, while Classic Conservatories & Windows Ltd supplied individual home owners. That is no doubt true, but a business' customers are only one side of the equation. The other side consists of its suppliers. Those suppliers included a common landlord and common suppliers of materials. As I have said there were other common unpaid creditors of both companies. The geographical spread of the customers of the two businesses was not identical but there was a considerable overlap.
38. It is also the case that both companies traded from the same business park. It is true that they did not share precisely the same premises, but they traded in very close proximity. That proximity would of itself have suggested an association between the two.
39. Both companies had a further common link in the person of Mr Mountford who was a director of each. Moreover, his name appeared on the public communications of each of the two companies (i.e. the letterhead and the invoices).
40. Taking all these factors together, I have come to the conclusion that in the context in which the two names were used, Classic Conservatories & Windows Ltd did suggest an association with Classic Roofs Ltd. It follows that it was a prohibited name in relation to Mr Mountford. I have decided that Mr Mountford is not entitled to rely on rule 4.230; and that the court does not have power to relieve him from liability under section 727 of the Companies Act 1985. It follows therefore that he is personally liable for the debts of Classic Conservatories & Windows Ltd; and that I must give judgment for the Claimant.