Ricketts v Ad Valorem Factors Ltd.

This appeal turns on the construction and application of sections 216 and 217 of the Insolvency Act 1986 (the 1986 Act). The sections affect the directors of a company, which has gone into insolvent liquidation. The directors are subject to liabilities if they act in relation to other companies known by a name, which is either the same as, or is similar to, that of the insolvent company. Contravention of the specified restrictions renders directors (and similarly placed persons), who act without the leave of the court, guilty of a criminal offence and personally liable for the debts and other liabilities of the successor company.

The provisions are another example of a limited, though significant, departure from the general principles of corporate law that a company is a legal entity separate and distinct from its directors and members, so that only the company is liable for its debts and the creditors of the company do not have a right of recourse to the assets of the directors and members for payment of the company’s debts. It is surprising to learn that the sections have been very rarely used over the last 15 years in order to fasten directors with personal liability: see Introduction to Company Law (2003) by Professor Paul Davies at p 100 n.61 As the arguments on this appeal have demonstrated, the provisions extend beyond the particular abuses of the privilege of limited liability at which they were directed.

The Air Component Company Limited (Air Component) was incorporated in 1971. On 10 February 1998 it went into creditors’ voluntary liquidation. At that date Mr Christopher Ricketts, the appellant, was a director, having been appointed on 2 January 1998. Air Component has since been dissolved.

From 2 March 1998 Mr Ricketts was a director of another company, which has also become insolvent. It was incorporated in 1997 under the name Getseen Limited and changed its name to Air Equipment Limited on 15 December 1997. Following a complaint from a third party, it changed its name on 3 February 1998 to Air Equipment Company Limited (Air Equipment). 0n 21 October 1999 Air Equipment went into creditors’ voluntary liquidation owing debts, the recovery of which is sought in this action.

Air Equipment owed £6,596.96 to Hankison UK Limited for unpaid goods and services supplied and delivered to it between May and November 1999. The debt was assigned by Hankison to Ad Valorem Factors Limited, the respondent, which carries on a debt factoring business. Notice of the assignment was given to the liquidator of Air Equipment.

Ad Valorem claimed payment of the debt and interest directly from Mr Ricketts on the ground that he was personally liable for the debts of Air Equipment by virtue of s 216 and 217 of the 1986 Act.

On 28 November 2002 District Judge Mackenzie, sitting in the Redditch County Court, gave summary judgment under CPR Part 24 against Mr Ricketts for £8,235.03 and costs. The appeal, for which the District Judge granted permission, has been brought directly to this court by use of the leapfrog procedure in CPR Part 52.14. As the District Judge said in granting permission, the point raised is one of considerable importance to the general public, as well as to the parties.

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.”

“(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 the 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 the 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 another 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)

[Definition of “the court”]

(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)

[Definition of insolvent liquidation]

(8)

[Definition of “company”]

Section 217 makes specified individuals personally liable for the debts of a company following a 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 a company, he acts or is willing to act on instructions given (without the leave of the court) by a person whom he knows at the 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 (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 the 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)

[Acting on instructions]

(6)

[Definition of company]

Chapter 22 of the Insolvency Rules 1986 (the Rules) governs applications for leave to act in relation to a company with a prohibited name and also prescribes exceptions as to when a person may act without such leave. The present case does not fall within any of the three exceptions prescribed in rules 4.226 to 4.230. It is, however, relevant to note two points on the Rules: first, a director may continue to act without the leave of the court, if he has applied for the leave of the court within 7 days from the date on which the company goes into liquidation; secondly, by virtue of rule 4.230, the leave of the court is not required where the successor company referred to in section 216 (3) has been known by a prohibited name for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation and has not at any time in those 12 months been dormant.

Most of the requirements of sections 216 and 217 are plainly satisfied: the liquidating company, Air Component, went into insolvent liquidation; Mr Ricketts was a director of Air Component from 2 January 1998, that is at a time in the period of twelve months ending with the day before it went into liquidation on 10 February 1998; Mr Ricketts was a director of Air Equipment from 2 March 1998, that is in the period of five years beginning with the day on which Air Component went into liquidation; the leave of the court was not sought or obtained for Mr Ricketts to act in relation a company known by the name of Air Equipment; and, while Mr Ricketts was a director of it, Air Equipment incurred the debts to Hankison which Ad Valorem, as assignee, seeks to recover from Mr Ricketts personally.

The essential question for the District Judge was whether the name of Air Equipment was a “prohibited name” within s 216(2)(b). That turns on whether the name of Air Equipment was so similar to the name of Air Component as to suggest an association with Air Component.

In his careful judgment the District Judge concluded that the name of Air Equipment was a prohibited name. He observed that the word “Air” was in the name of both companies; in an industry dealing with the sale of air compressors the words “equipment” and “component” could be used interchangeably; the two companies were operating in a very similar, if not the same, market from the West Midlands region; and there was continuity of Mr Ricketts’ interest in the two companies.

In holding that the claim for personal liability had been made out, he said-

“ It is clear that the statute did not require that anyone was misled. It merely requires that the name suggests an association. That is a very low threshold. It does not require any evidence that anyone in the particular circumstances of the case either was subjectively or could have been objectively misled into believing that there was a connection. It seems to me that the court need not and should not import words into the statute that are not there so as to make it easier for the defendant to escape liability. The purpose of the statute, it seems to me, was to impose liability regardless of proof of anyone being misled but putting the onus on the director or appropriate person to come to court and obtain clearance in the event of any reasonable doubt over the name. No such application was made and the defendant has fallen short of his duty to obtain clearance.”

The approach of the judge to the interpretation of section 216 (2) was criticised on the ground that it did not take account of the particular purpose for which the provisions were enacted or the severity of the criminal sanctions imposed for contravention of the section.

It is common ground that the sections were enacted to curb the “Phoenix Syndrome,” a vivid expression coined to cover those cases in which the privileges of limited liability are exploited by those

“ who set up companies with vestigial capital; immediately run up debts, often taking deposits from consumers for goods and services which are never delivered; transfer the assets of the first company at an undervalue to a second company; allow the first company to cease trading, with its creditors confined to that company’s inadequate assets; and then begin the process all over again with the second(or third or fourth) company.” [Introduction to Company Law: Professor Paul Davies at pp. 99-100]

This is not a “Phoenix syndrome” case: there was no transfer of assets by Air Component to Air Equipment at an undervalue; there was no evidence that the companies were used to run up debts and to avoid their payment either on the part of Air Component or Air Equipment; there was no evidence that creditors of Air Equipment or anyone else had been misled by the similarity of the names of the two companies or the fact that Mr Ricketts was a director of both of them.

In those circumstances it was contended that, if a purposive approach had been adopted to the construction of s 216(2), the judge would not have concluded that the name of Air Equipment was a prohibited name, especially in the context of the harsh consequences of criminal sanctions for offences of strict liability committed in contravention of the restrictions: see R v. Cole [1998] BCC 87.

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] 1 BCLC 637 at 642I 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 s216(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.”

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 [1996] 1 WLR 482.

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 Rule 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.

I return to the key question: was the name of Air Equipment a prohibited name? The judge was criticised for finding, on an application for summary judgment and without hearing any oral evidence, that the name of Air Equipment was a prohibited name. The result was said to be an unreasonable restriction on the right to the lawful use of ordinary words in a specialised field. This case was to be distinguished from those in which a unique identifier, such as a personal name, was used, as in Thorne (Mike Spencer) and Penrose (Hudson), so as to indicate clearly an association between two companies. In this case the words used were common English words in everyday use and they referred to the respective specialist products in which the companies were dealing. Like Air Component, Air Equipment did business in the product “air”. The words “component” and “equipment” were different, the former referring to constituent parts and the latter to apparatus and tools. The use of the different names would give the reasonable man the impression that the sales of the two companies would be different. A third party would not know of Mr Ricketts’ interest in both companies.

In my judgment, the 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 sections 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.

I would dismiss the appeal.

I agree with Mummery LJ’s judgment and conclusion on this appeal but, because of the surprisingly long reach of this legislation and the obvious importance of the point at issue, I wish to add a short judgment of my own. In doing so I gratefully adopt my Lord’s exposition of the relevant facts and law, repeating none of this save for the all-important provision around which this appeal must necessarily turn, s216(2) of the Insolvency Act 1986:

“… a name is a prohibited name … if -

(a)

it is a name by which the liquidating company was known …, or

(b)

it is a name which is so similar to [the name by which the liquidating company was known] as to suggest an association with that company.”

The issue in these proceedings is whether Air Equipment Company Limited is a prohibited name. The name of the liquidating company here was The Air Component Company Limited. The critical question therefore arising is whether Air Equipment Company Limited is “a name so similar to [The Air Component Company Limited] as to suggest an association with that company”.

In holding that Air Equipment Company Limited is a prohibited name, the District Judge below said that “within the industry dealing with the sale of air compressors the words “equipment” and “component” might be interchangeable. … It is a matter of commonsense interpretation that these two words could be used interchangeably”. He furthermore repeatedly emphasised that “the statute requires the one name only to ‘suggest’ an association”. “That”, he observed, “is a very low threshold”.

For my part I have some difficulty with each limb of that approach. As to the words “equipment” and “component”, they do not seem to me interchangeable. Rather I find it unsurprising that the two names were not in fact the names of successor companies but rather the names of related companies within the same group. My Lord has for convenience from time to time in his judgment adopted the expression “successor company” to refer to Air Equipment Company Limited, the longer lasting of the two companies in question here. As he makes plain, however, it was itself already in existence before The Air Component Company Limited went into liquidation, the appellant simultaneously having been a director of both.

At one point in the argument I wondered whether s216(2)(b) applied in the case of companies within the same group of companies as opposed to the case of a Phoenix company as that concept is ordinarily understood: the use of a new successor company, often trading under the same or similar name, using the old company’s assets, often acquired at an undervalue, and exploiting its goodwill and business opportunities. It became plain, however, that the provision is no less applicable in the case of group companies than Phoenix companies. Indeed, certain of the exceptions provided for by the Rules (see paragraph 10 of Mummery LJ’s judgment) necessarily imply it.

It is accordingly not necessary to conclude that the words “equipment” and “component” are, as the District Judge thought, “interchangeable”. It is sufficient if the respective names of these companies considered in the context of all the circumstances in which they were actually used or likely to be used (see paragraph 22 of Mummery LJ’s judgment), suggested an association, suggested in other words that they were part of the same group.

I turn to the other aspect of the District Judge’s judgment about which I am uneasy, his view that the legislative requirement that an association be merely “suggested” indicates “a very low threshold”. In construing this provision it is important to bear in mind the draconian consequences, both criminal and civil, which can all too easily flow from finding a company’s name to be a prohibited name. As stated in section 271 of Bennion on Statutory Interpretation, 4^th Edition, at p705, the court should strive to avoid adopting a construction which penalises someone where the legislator’s intention to do so is doubtful, or penalises him in a way which is not made clear. With this well-established principle of construction in mind, I would construe the phrase “as to suggest” in s216(2)(b) rather more stringently than indicated by the judgment below. To my mind the similarity between the two names must be 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 here, as part of the same group.

Even, however, adopting this somewhat stricter approach to the construction and application of this provision, I for my part would conclude, in common with the judge below and with my Lord, that there was indeed an association between these two companies. I too, therefore, would dismiss this appeal.