Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 141
A564/10	OPINION OF LORD BANNATYNE in the cause THE ADVOCATE GENERAL FOR SCOTLAND for and on behalf of the Commissioners of Her Majesty's Revenue and Customs Pursuer; against THOMAS REILLY First Defender: and STEPHEN REILLY Second Defender; ­­­­­­­­­­­­­­­­­________________

Pursuer: Artis; Office of the Solicitor to the Advocate General for Scotland

Defender: Party

19 August 2011

Background
Procedural history
[1] By interlocutor dated 11 January 2011 the pursuer obtained decree in absence against the second defender for payment to the pursuer of the various sums concluded for in the summons. Since that date the action has been defended by only the first defender.

[2] On 13 January 2011 the pursuer enrolled a motion in the following terms:

For summary decree in terms of Rule 21.2 against the first defender, repelling his pleas-in-law, in terms of the conclusions of the summons and for expenses. After sundry procedure and the parties being heard in part on the said motion, it was conceded on behalf of the pursuer in relation to certain of the conclusions that it was not appropriate to seek summary decree and that these matters required to be adjudicated upon at proof.

[3] As the matter came before me on 28 July 2011 the pursuer's motion was confined to seeking summary decree in terms of only the fourth to eighth conclusions.

The dispute
[4] In terms of these conclusions the pursuer sought decree against the first defender for certain sums said to be due and resting owing by a company called Aquaseal UK Ltd to the Revenue and Customs all as is more fully detailed in articles of condescendence 13 to 15. The pursuer contended that the first defender's liability for these debts arose by operation of sections 216 and 217 of the Insolvency Act 1986.

[5] Section 216 defines the circumstances in which criminal liability is imposed on directors and others for acting without the leave of the court, in relation to a company known by a prohibited name. Said section is in the following terms:

"(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."

Section 217 makes specified individuals personally liable for the debts of a company following contravention of section 216. Said section is in the following terms:

"(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."

Submissions for the pursuer
[6] For the purposes of sections 216 and 217 of the Act Aqua Seal IT Limited was the liquidating company.

[7] It was not disputed that the first defender was a director of that company from 17 December 2002 to 20 February 2003 (see: Answer 2 at page 8 of the Closed Record).

[8] On 29 May 2003 an interlocutor was pronounced at Glasgow Sheriff Court ordering the winding up of that company in pursuance of the Insolvency Act 1986 on the basis that the company was unable to pay its debts (6/45 of process). Accordingly the said liquidation fulfilled the definition of an insolvent liquidation in terms of section 216(7) of the Act.

[9] Resulting from the above, the first defender was a director of the liquidating company within 12 months of the day before the said company went into liquidation and was thus a person who fell within the terms of section 216(1) of the Act.

[10] It was thus submitted that if without the leave of the court the first defender was involved in the management of a company with a prohibited name as defined by section 216(2) of the Act he was personally responsible for all relevant debts of the company with the prohibited name (section 217(1)(a)). Being involved in the management is defined in terms of section 217(4) and includes being a director of the company with the prohibited name.

[11] It was not disputed that the first defender thereafter within five years (see section 216 subsection (3) of the Act) without the leave of the court became a director of Aquaseal UK Ltd which traded under the name Aquaseal (see: Answer 4 at page 10 of the Closed Record).

[12] Counsel submitted that the name Aquaseal UK Ltd was almost identical to Aqua Seal IT Ltd and for that reason was a prohibited name in terms of section 216(2)(b) of the Act. In further support of the contention that it was a prohibited name he pointed to the following: the two companies carried on similar trades, namely the supply and installing of roof coating, wall covering and flat roofing products and associated work and that they both traded out of premises in Glasgow.

[13] Counsel referred me to a single authority in which sections 216 and 217 had been considered: Ricketts v Ad Valorem Factors Ltd 2003 EWCA Civ 1706.

[14] Counsel accepted that the facts of the case were very different to those in the instant case. However, he submitted that of relevance were the observations of Mummery LJ as to the proper interpretation of these sections. At paragraphs 18 to 20 he says:

"18. I appreciate the relevance of a purposive interpretation, but the legal position is that, if the name of Air Equipment is a prohibited name within the natural and ordinary meaning of the language of s.216(2), this case is caught by the restrictions, even if this is not a 'phoenix syndrome' case and even if the sanctions of criminal liability seem to be harsh. In Thorne v Silverleaf [1994] BCC 109 at p.113G Peter Gibson LJ said -

'But it is clear that the sections as enacted apply to a wider set of circumstances than the case of a person attempting to exploit the goodwill of a previous insolvent company. However in the absence of an application under s.216(3) for leave, the court is left with no discretion on the application of the sections, and so long as the statutory provisions remain unaltered a creditor of a company is entitled to take advantage of them, if they can be shown to be applicable.'

19. A director is able to protect himself from the risk of committing criminal offences and from the burden of personal liability for the debts of the successor company in two ways: he can resign his directorship and take no further part in the management of the successor company; or he can make an immediate application to the court for leave under s.216 to act in relation to a company with a prohibited name. If an application is made for leave the court has a discretion to allow the director to act in relation to a company using a prohibited name if, for example, the court is satisfied that there is no risk to the creditors of the old company or to the creditors of the new company beyond that which is permitted by the law relating to the incorporation of limited liability companies: see Penrose v Secretary of State for Trade and Industry [1995] BCC 311; [1996] 1 WLR 482.

20. In argument reference was made to the not uncommon case of a group of associated companies which, for understandable reasons, are known by names so similar to one another as to suggest an association with each other. The directors of the associated companies would be placed in a difficult situation if one company in the group went into insolvent liquidation and directors of the liquidating company in the group remained directors of one or more of the other companies in the group, which continued to use prohibited names. That would not be a case of the serial succession of phoenix companies sinking into insolvency and yet it would be caught by s.216(2) if the interpretation adopted by the district judge were upheld. In my judgment, the solution is not to be found in distortion of the clear language of the statutory provisions by unacceptable methods of judicial interpretation. In many cases of groups of associated companies the terms of the exception in r.4.230, which plainly contemplate that the situation under discussion could be caught by the restrictions, would apply. The present case does not fall within that exception, as Air Equipment was not known by a prohibited name for the whole of the 12 months before Air Component went into liquidation."

[15] Counsel submitted that this was the correct construction of section 216.

[16] He also referred me to paragraph 22 where Mummery LJ considered the proper approach to section 216(2) and says this:

"22. In my judgment, the district judge was entitled to find that the name of Air Equipment was so similar to the name of Air Component as to suggest an association with it. I have reached the same conclusion. It is necessary, of course, 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. When viewed in that context I have no doubt that the name of Air Equipment suggests an association with Air Component. Once that conclusion has been reached the court has no discretion in the matter of the personal liability of Mr Ricketts. The case falls within ss.216 and 217 even in the absence of proof that there has been any express misrepresentation or that anyone has actually been deceived or confused into thinking that there was an association."

[17] Counsel submitted that this was the correct approach to deciding whether the names of two companies suggested an association between them and that therefore the name of Aquaseal UK Ltd was prohibited in terms of section 216(2).

[18] So far as the issue of establishing that Aquaseal UK Ltd had debts as fourth to eighth concluded for and that these were relevant debts within the meaning of section 217(3), counsel first referred to production 6/35. This was a certificate in terms of section 25A of the Commissioners for Revenue and Customs Act 2005 ("the 2005 Act") in relation to the five separate debts which were sought in terms of conclusions 4 to 8.

[19] Section 25A(1) and (2) is in the following terms:

"(1) A certificate of an officer of the Revenue and Customs that, to the best of the officer's knowledge and belief, a relevant sum has not been paid is sufficient evidence that the sum mentioned in the certificate is unpaid.

(2) In subsection (1) 'relevant sum' being a sum payable to the Commissioners under or by virtue of an enactment ..."

[20] In Inland Revenue Commissioners v Findlay McClure & Co 1982 SLT 417 in terms of similar provisions the court held that on the basis of such a certificate the pursuers were entitled to decree de plano. Counsel submitted that in light of the said decision, this certificate for the purpose of this motion was sufficient to establish that these sums were due and resting owing by the company.

[21] Counsel also relied on the decision in Lord Advocate v McKenna 1989 SC 158 where it was held that it was incompetent to challenge the validity of assessments against which no appeal had been taken. He submitted that insofar as the assessments referred to in this certificate were concerned these had not been challenged by way of appeal.

[22] It was not disputed that if these debts were owed they were incurred while the first defender was involved in the management of Aquaseal UK Ltd as a director.

[23] As regards the arguments advanced on behalf of the first defender, counsel submitted first that the fact that the name Aquaseal was used by a number of other companies which had clearly had no relationship with the first defender was an irrelevant consideration when considering whether the name Aquaseal UK Ltd was prohibited so far as the first defender was concerned.

[24] Secondly, the interlocutor of 29 May 2003 winding up Aqua Seal IT Ltd was not challenged therefore it was the subject of an insolvent liquidation and the first defender's arguments relative to this were irrelevant.

[25] Thirdly, so far as Aquaseal UK Ltd not being insolvent at the relevant time he again pointed to the basis on which it had been wound up and again submitted in the absence of a challenge to the interlocutor winding the company up the first defender's submissions were irrelevant.

[26] Fourthly, in relation to the argument that the debts of Aquaseal UK Ltd had been paid as part of a full and final settlement agreed between the first defender and the liquidator of that company he contended that any settlement reached was wholly separate to the present dispute and was therefore irrelevant.

[27] For these reasons counsel moved that summary decree should be granted in the limited terms which he now sought.

The first defender's reply
[28] The first defender began his response by saying that the basis of the pursuer's case was that Aqua Seal IT Ltd was insolvent as at the relevant date.

[29] It was his position that the pursuer's case did not get off the ground. Aqua Seal IT Ltd he submitted was not insolvent as at the relevant date.

[30] He pointed to the fact that the basis of the insolvency was a single debt allegedly owed to the pursuers (see 6/1 of process). It was his position that he did not accept this debt was owed and he referred to letters written to Customs and Excise regarding this matter (see 7/39; 7/44 and 7/61 of process). He also referred to a letter from Aqua Seal IT Ltd's accountants stating that the company was not insolvent as at the relevant date (7/35 of process). In addition he claimed that the demand upon which the liquidation had been founded 6/43 of process had not been served on the company.

[31] Secondly, it underlay to some extent the first defender's argument that summary decree should not be pronounced that he had been a director of Aqua Seal IT Ltd for a very short time and during most of that time, if not all of it, the company was not trading. He accordingly submitted that in those circumstances sections 216 and 217 should on the grounds of equity not be applied to him.

[32] Thirdly, he challenged that Aquaseal UK Ltd was a prohibited name. In relation to this issue he argued that Aquaseal was a generic term for a particular type of roof and wall surfacing. From that as I understood it he argued that it could not be a prohibited name. He said that on checking he had found some 30 companies who used Aquaseal in their name not connected to Aqua Seal IT Ltd although he produced no evidence in support of this contention.

[33] He submitted under reference to the following productions that the two companies did different things. Reference was made to 6/17, 6/18, 6/19 which were documents relating to Aquaseal UK Ltd and 7/34 of process which related to Aqua Seal IT Ltd. He said that the two companies had different staff, different customers, different creditors and operated in different towns.

[34] For all these reasons it was his submission that Aquaseal UK Ltd was not a prohibited name.

[35] Fourthly he argued that Aquaseal UK Ltd was not indebted to the Commissioners of Revenue and Customs as set out by them in their pleadings and was not insolvent at the time it was put into liquidation. In support of this he made reference to a Bank of Scotland statement dated 17 November 2006 showing a credit balance for the company of £47,393. He also referred to the following section in 6/21 of process which was a letter from Hastings & Co to Mr W B Smylie of HM Revenue & Customs. At page 3 of that letter the following is said:

"I do believe that Aquaseal UK Ltd was a profitable trading entity ...".

[36] In addition he denied that the petition 6/59 of process for the winding up of Aquaseal UK Ltd had been served on the company. He claimed that 6/61 of process the certificate of service of that petition was fake and that Mr Javed the person upon whom it was said to have been served denied service.

[37] Lastly under reference to 7/55, 7/57, 7/58 and 6/30 of process, he submitted that he had paid a substantial sum in the course of the liquidation of Aquaseal UK Ltd and that this was in full and final settlement of all claims and for this further reason nothing was due to HM Revenue and Customs.

Discussion
[38] In considering whether a summary decree should be granted, I had regard to the approach as set out in the opinion of the Committee in Henderson v 3052775 Nova Scotia Ltd 2006 SC (HL) 85 at paragraph 19:

"[19] In our view, therefore, a judge who is considering a motion for summary decree is entitled to proceed not merely on what is said in the defences, but on the basis of any facts which can be clarified, from documents, articles and affidavits, without trespassing on the role of the proof judge in resolving factual disputes after hearing the evidence. The judge can grant summary decree if he is satisfied, first, that there is no issue raised by the defender which can be properly resolved only at proof and, secondly, that, on the facts which have been clarified in this way, the defender has no defence to all, or any part, of the action. In other words, before he grants summary decree, the judge has to be satisfied that, even if the defender succeeds in proving the substance of his defence as it has been clarified, his case must fail. So, if the judge can say no more than that the defender is unlikely to succeed at proof, summary decree will not be appropriate: it is only appropriate where the judge can properly be satisfied on the available material that the defender is bound to fail and so there is nothing of relevance to be decided in a proof."

[39] Given the way that submissions developed there were four key questions in deciding first whether any issue raised by the first defender could only be resolved at proof and, second, whether the first defender had no defence at all relative to the part of the case which is now the subject of the motion.

[40] First, I am satisfied that Aqua Seal IT Ltd has gone into insolvent liquidation. Given the interlocutor 6/45 of process ordering the winding up of Aqua Seal IT Ltd in pursuance of the Insolvency Act 1986 on the basis that the company was unable to pay its debts I without hesitation, hold that it did go into insolvent liquidation within the meaning of section 216. The first defender did not challenge the existence of the said interlocutor. That interlocutor still stands and of itself incontrovertibly establishes the said company has gone into insolvent liquidation.

[41] It appeared to underlie the submission of the first defender that I should look behind this interlocutor. It would, of course, be incompetent for me to follow such a course. There are methods of reviewing the decision of an inferior court such as the Sheriff Court, however I do not understand that any such course has been followed in relation to this interlocutor.

[42] In any event, even if I were able to look behind that interlocutor and examine the issue of whether the debt which founded the petition for the winding up of the company, was due and resting owing any such investigation would inevitably result in my holding that the said debt had been established to be due and resting owing by the company. The debt is certified in terms of section 25A of the 2005 Act (6/69 of process). There was in addition no submission by the first defender and nor did he have any pleadings or produce any evidence that the assessment for £9,100 (the founding debt) had been appealed against. The correspondence to which the first defender referred me challenging the debt could not in light of the foregoing relevantly challenge the founding debt. In these circumstances there is no relevant basis upon which the defender could challenge the pursuer's position that Aqua Seal IT Ltd went into insolvent liquidation. 6/43 page 2 of process a recorded posting receipt confirmed that the demand had been served on Aqua Seal IT Ltd.

[43] I am satisfied that there is nothing in this first line of defence. It was additionally argued that having regard to the circumstances of the first defender's directorship of Aqua Seal IT Ltd as submitted by him the court should exercise a discretion in his favour and not apply section 217. Given the clear wording of the section there is no room for the court exercising such a discretion.

[44] The second question is this: Am I satisfied that Aquaseal UK Ltd is a prohibited name.

[45] Comparing the two names Aqua Seal IT Ltd and Aquaseal UK Ltd they are clearly on the face of it very similar. Aquaseal in very slightly different forms appears in both names. The only real difference between the two names is the use in one of the letters IT and in the other the use of the letters UK. That is a difference of very little materiality when the names are looked at as a whole. Clearly the major component in both names is Aquaseal.

[46] However there is, of course, no unique identifier, in the sense of the use of a personal name and there were submissions made by the first defender that Aquaseal was a generic term used by companies operating in the area of wall and roof covering.

[47] In approaching this issue as to whether the names are so similar as to suggest an association between the two companies, the court requires to make the comparison in the context of all of the circumstances in which they were used or were likely to be used.

[48] I observe that the two companies carried on very similar, if not the same type of work, namely: the supply and installation of roof and exterior wall coverings and associated work.

[49] 6/7 of process showed the involvement of Aqua Seal IT Ltd in this type of work. At bullet point 4 of that document they offered to coat the roof in Aquaguard protective coating. 6/17 to 6/19 of process to which I was referred by the first defender clearly show Aquaseal UK Ltd involved in carrying out the same type of work. 7/34 upon which the first defender relied to distinguish the type of business which Aqua Seal IT Ltd did from that which was carried on by Aquaseal UK Ltd does in my judgement not show this. It again refers to the name Aquaguard a type of protective coating and refers to the company carrying out work on roofs and walls among other areas.

[50] I would secondly observe that both companies traded from premises in Glasgow. Aqua Seal IT Ltd from 9 Hilton Terrace, Glasgow (see: 6/1 and 7/34 of process) and Aquaseal UK Ltd from 1 Donaldson Crescent, Kirkintilloch, Glasgow G66 1FX (see: 6/21 of process at page 10).

[51] When looked at against that background the use of the name Aquaseal UK Ltd is so similar as to suggest an association with Aqua Seal IT Ltd.

[52] The third question was this: had the pursuer established that the five sums concluded for in conclusions 4 to 8 are relevant debts.

[53] The pursuers had produced the section 25A certificate, 6/35 of process in order to satisfy the court that the sums variously concluded for were due and unpaid. In response to this the first defender argued that these sums were not due and resting owing. The first defender's position was this: as at 12 December 2006 when an interlocutor ordering Aquaseal UK Ltd to be wound up (see 6/63 of process) was pronounced the company was not insolvent and should not have been placed in liquidation. In support of this I was directed to a short section of 6/21 of process to which I referred earlier in this opinion. There was also produced a bank statement showing a substantial credit balance of the company as at 17 November 2006.

[54] As regards this challenge to the company having been placed in liquidation, that again is irrelevant in that there is an interlocutor placing the company in liquidation the existence of which is unchallenged. No challenge in any proper form has been taken to that interlocutor. The company was placed in liquidation due to its inability to pay its debts.

[55] As regards the reference to the passage in 6/21 of process the context of that whole document has to be had regard to. The following passages in the letter and in the interim liquidator's report which accompany it properly put that passage in context:

A At page 1 of the letter:

"It is clear that upon the directors becoming aware that HMRC were taking steps to pursue the company, they deliberately set about transferring all the assets of the company and the business to a successor entity being Myrie Developments Ltd.

An examination of the company's bank account has shown that after the date of the liquidation but prior to the winding up order being granted the directors withdrew sums in excess of £38,000 from the company's bank account leaving it overdrawn and ensuring that this money was not available to the general body of creditors".

B. In the interim liquidator's report at paragraph 6 the following is said;

"I do feel it significant to mention the financial position reflected by the company's bank statements which show that income into the bank account during the period 1 January 2006 to 31 December 2006 was in excess of £1m. Of equal significance is the fact that as at the date of my appointment being 12 December 2006, the account was overdrawn some £28,951 and yet on 15 November 2006 the balance in the account was £52,028 in credit. From the statements that I have received to date I can see no evidence that the account was overdrawn at any time during its operation until such time that the directors had already taken steps to transfer the company's business and this appears to be a further deliberate attempt to diminish the company's assets even further."

C. Lastly I would refer to paragraph 7.4 of the interim liquidator's report which was in the following terms:

"Given all of the above and based on current information, it is unlikely that a dividend will be payable to any class of creditor." The total deficiency at that time was calculated to be £120,342 (see: page 5)

[56] Given the foregoing passages in my view the short passage upon which the first defender relied in said letter and the bank statement which he produced in no way established that this company was not insolvent at the relevant date.

[57] As regards the first defender's contention that the petition for the winding up of Aquaseal UK Ltd had not been served on the company. The certificate of service by messenger at arms 6/61 of process clearly establishes proper service.

[58] Lastly there was the separate issue of whether the relevant debts had been paid as a result of payments made by the first defender in full and final settlement. Certain payments had been made by directors of Aquaseal UK Limited to the liquidator of that company as set out in full in paragraph 1.1 of the summary of the liquidator's intromissions. These payments, however, were made in settlement of entirely separate actions in terms of sections 127 and 212 of the Insolvency Act 1986. These sections deal with respectively avoidance of property dispositions after commencement of the winding up of the company, and misapplication of funds, misfeasance, and breach of statutory duty by among others directors of a company. These were payments made to the liquidator not to the pursuer. The present action is in terms of section 216 and 217 of the Insolvency Act 1986 and is not brought by the liquidator. Thus any settlement of these separate actions with the liquidator can have no relevance to the present action. These payments did not settle the claims presently made in this action.

[59] I am satisfied that in terms of the various disputed issues no defence at all has been raised by the first defender to the pursuer's motion. I am satisfied that even if the first defender proved the substance of his defence as is pled on record and as argued before me, his case must fail. In my view the pursuer has fulfilled all the relevant parts of sections 216 and 217 of the Insolvency Act 1986.

Decision
[60] For the foregoing reasons I grant the pursuers motion for summary decree as amended and accordingly grant summary decree in terms of conclusions 4 to 8 and repel the first defender's pleas-in-law to that extent. The issue of expenses was not addressed and I have had that matter put out by order for discussion.