Partnerships and Phoenixing | Mayo Wynne Baxter
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Partnerships and Phoenixing

In business and in the media reference is often made to company’s phoenixing. Essentially a company ceases trading one day and then starts up the next, using the same staff, premises, directors or name (sometimes there is a little bit of invention with a subtle change in the name).

In previous blogs the issue of re-using a prohibited name has been explored, Section 216 of the Insolvency Act 1986 is the provision which has the intention to stop this practice. The fact that the Insolvency Act is 30 years old and articles like this are still being written is a comment on who successful the provisions are.

Section 216 applies to a person who was a director or shadow director of the company that enters into an insolvent liquidation at any time in the 12 months prior to the liquidation. Any such person cannot without the permission of the court (unless they are covered by one of the excepted cases within the Insolvency Rules) be a director of or, be in any way concerned in, the promotion, formation or management of another company known by the same name (or one so similar so as to suggest an association) as the liquidating company for five years. The name of the company that went into liquidation is what is referred to as a “prohibited name.”

Breach of section 216 is a criminal offence and results in personal liability of the director and any person who acts on instructions knowing the director to be in breach of section 216 for the relevant debts of the company during the period of prohibition.

In a recently reported case, Re Newtons Coaches Ltd, [2016] EWHC 3068 (Ch) the Court held that the provisions of section 216 did not apply to partners where the partnership had been wound up.

A partnership can be wound up under the Insolvency Act as an unregistered company. In this case the partners having wound up their insolvent partnership wanted to be involved in the management of a new company which had a similar name to the trading style of the insolvent partnership. This company was owned by the applicants’ spouses (who were also the company’s directors) and had purchased the partnership’s goodwill for value from the liquidator of the partnership.

The Secretary of State, who was a Respondent to the application did not object to the application but was of the view that section 216 applied as a partnership is an unregistered company for the purposes of Part V of the Insolvency Act 1986 and that names of the insolvent partnership and new company were similar and therefore potentially prohibited. The Secretary of State only sought to have it ordered that the partners gave notice to the partnerships’ creditors.

The respondent did not object, however, to the court granting the partners permission to manage Newco provided the partnerships creditors received notice.

In what appears to be the only reported case on this the application of section 216 to the winding up of a partnership, the court identified three factors which differentiated a partnership from registered companies, unregistered companies and Limited Liability Partnerships which would be caught by the provisions of section 216.

In coming to this decision the court looked at a number of established cases. Having regard to the mischief that section 216 sought to remove, the Court referred to Mr Justice Lewison, as he then was, in First Independent Factors & Finance Limited v Ian Josef Mountford [2008] EWHC 835, [2008] 2 B.C.L.C. 297 as follows:—

“[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.”

At paragraph 7 of the Judgment reference was made to the decision of Mr Justice Chadwick, as he then was, in Penrose and Another v Secretary of State for Trade and Industry [1996] 1 WLR 482 and it was stated that “through his identification of the two principal requirements to be satisfied if permission is to be granted. First the court must be satisfied that the business of the old, insolvent company has not been acquired by the new company at an undervalue. Second, those creditors of the old company are not misled into believing there has been no change in corporate vehicle. The learned judge also explained that section 216 and the exceptions to its application within the Insolvency Rules did not consider any mischief arose if the company having a prohibited name is not a phoenix (see pages 489G – 490B).”

The three distinctive factors leading to the decision by the Court were:

  1. The partners would remain personally liable for the debts of the partnership.
  2. The insolvency of the partnership (and therefore any failure in management of the partnership business) would not be hidden.
  3. The new business would not appear to be the same because it operates as a limited company.

Therefore the mischief that section 216 is aimed at is not needed in relation to partnerships. The application by the partners was therefore allowed

The Secretary of State was not represented at the hearing but addressed the court in correspondence which stated that he considered the regime applied.

If the above raises issues for you please do not hesitate to contact Darren Stone, Head of Insolvency, on 01273 775533.

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