In the case of PSV 1982 Ltd v Langdon [2021EWHC 2475 (Ch), the court has held that where a director is in breach of Section 216 of the Insolvency Act 1986 (IA86) (which sets out the restrictions on the re-use of company names), where a creditor obtains judgment against the company trading with the prohibited name the director is automatically liable for the debt without the creditor having to issue separate proceedings against him.
Section 216 applies to a person who has been a director of a company at any time in the 12 months prior to the company going into insolvent liquidation. Such a person is prohibited for five years from being a director of, or involved in the management of, a company with the same or a similar name for a period of five years. Breach of this prohibition is a criminal offence and renders the director personally liable for the debts of the company trading with a prohibited name.
There are three exceptions to the general prohibition as set out in Section 216(3) of the IA86 and Rule 22 of the Insolvency (England and Wales) Rules 2016 as follows:
- where the court gives permission,
- if the new company acquires the business of the insolvent company from a liquidator or administrator and notice is given to all the creditors of the insolvent company within 28 days, and
- the new company has been actively carrying on business for 12 months before the insolvency of the old company.
Section 217 IA86 states that a person is personally responsible (jointly and severally with the company) for the relevant debts of a company if at any time, in contravention of Section 216, he is involved in the management of the company.
In this case the creditor issued proceedings against the company trading with a prohibited name and asked the court to determine as a preliminary issue the question as to whether the director would be automatically liable if the claim succeeded.
The director argued that it is a well-established principle that a judgment is only binding as between the parties to the proceedings.
However, in his judgment the judge found that the effect of Section 217 is that once liability is established in proceedings against the company, the defaulting director automatically becomes responsible for that liability. It is not necessary for the liability to be established in separate proceedings against the director.
Giving the phrase "the relevant debts of a company" its ordinary meaning, the judge found that it was difficult to see why that would not encompass a liability which had been established by proceedings against the company. In that context it would be surprising if Parliament had intended that a creditor who had established a liability in proceedings against a company should have to incur the risk and expense of having to prove that liability all over again in order to recover the liability from the defaulting director.
By way of protection for the director, in reaching his decision the judge noted that it would be possible for a director to apply to be joined as a party to the proceedings if the possibility of personal liability under Section 217 Insolvency Act 1986 existed. The one person who is clearly in a position to know whether the provisions of Section 217 might be relevant is a director himself. The judge also noted the protections built into the insolvency legislation in the form of the three exceptions referred to above. These protections support the case for interpreting Section 217 as imposing an automatic liability on the defaulting director once liability has been established in proceedings against the company.
The judge said he had no hesitation in concluding that Parliament intended any risk to lie with the director rather than the creditor and that there was no reason to import a requirement that the creditor must establish the company's liability against the director when they have already established that liability as against the company.
In practical terms this means that where liability is established against the company, the claimant can proceed straight to enforcement against the director. This may come as a surprise to a director especially in circumstances where he was no longer a director at the time proceedings were commenced by the creditor against the company and as such had no opportunity to participate in the proceedings.
There will undoubtedly be cases where the company is impecunious, hence the unpaid debt, and in these circumstances the creditor may still decide not to issue proceedings against the company but to apply to court instead for a declaration under section 217 as a court order will be required for all methods of enforcement against the director with the exception of bankruptcy proceedings.