ESS Production Ltd (In Administration) v Sully

This is an appeal, with the permission of the judge, pursuant to CPR 52.14, from the order of HHJ Hughes QC sitting in the Winchester County Court dated 4 June 2004. By his order, the judge entered judgment for the respondent, and ordered the appellant to pay £21,450.65 plus interest.

The claim in these proceedings is a claim pursuant to section 217 of the Insolvency Act 1986 (“the 1986 Act”). In summary this section imposes personal liability on a director of a company whose company goes into liquidation (a “liquidating company”) and who then becomes a director of a company which is known by the same or a similar name ( a “prohibited name company”). (Liability can be incurred by becoming involved in the management of the prohibited name company in other ways but in this judgment I refer only to a person becoming liable by reason of becoming a director of that company). Section 217 must be read with section 216 of the 1986 Act, which imposes criminal liability in these circumstances. Section 216 enables a director to make an application to the court for leave which, if granted, will prevent a breach of section 216 or 217. In addition, section 216 permits certain circumstances to be excluded from both sections by the Insolvency Rules. For simplicity I will refer to both sections 216 and 217 and the relevant Insolvency Rules as statutory provisions.

Before I set out the provisions of sections 216 and 217 and the relevant provisions of the Insolvency Rules, a little explanation of the background to this set of statutory provisions is needed. Sections 216 and 217 were measures designed to deal with the problem of “phoenix” trading. The nature of the “phoenix” problem was described thus by the Steering Group of the Department of Trade’s independent Company Law Review, of which I was a member, in its final report in 2001:

“15.55

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 Company Law Review Steering Group went on to point out that not all phoenix situations were bad. “At the worst”, some phoenix situations resulted from unscrupulous activities of the directors. However, others resulted from the failure of businesses “though misfortune or naive good faith”. The only proper course, if a company could not trade out of its difficulties, was for it to enter liquidation. Moreover, “the only way [for the controllers] to continue an otherwise viable business and their own and their employees’ ability to earn their livelihood may be for them to do so in a new vehicle using the assets and trading style of the original company.” (para.15.56). The Company Law Review Steering Group recognised that good and bad phoenix situations shared many characteristics and accordingly it was difficult to target bad phoenix situations alone. This may help explain why, as we shall see from the relevant Insolvency Rules, the exclusions in the Insolvency Rules from the wide net drawn by sections 216 and 217 do not proceed on the basis of distinguishing honest from unscrupulous traders. They are drawn in much more limited terms. In Thorne v Silverleaf [1994] 1 BCLC 637, Peter Gibson LJ observed that it was clear that sections 216 and 217 apply to a wider set of circumstances than the case of a person attempting to exploit the goodwill of a previous insolvent company.

I now set out sections 216 and 217:

“216 (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 (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.

There are three sets of circumstances excluded from sections 216 and 217 by the Insolvency Rules: (1) where the insolvency practitioner sells the business of the insolvent company to the successor company and notice is given to the creditors of the liquidating company; (2) where the director makes an application to the court for leave to be a director of the prohibited name company within seven days of the liquidating company entering liquidation; and (3) where the prohibited name company had been known by the prohibited name for the whole of the twelve months prior to the liquidation of the liquidating company. It is only in the second set of circumstances that there is any application to the court.

The relevant provisions of the Insolvency Rules are rules 4.227 to 4.230 which provide as follows:

“4.227

Application for leave under section 216(3)

When considering an application for leave under section 216, the court may call on the liquidator, or any former liquidator, of the liquidating company for a report of the circumstances in which that company became insolvent, and the extent (if any) of the applicant’s apparent responsibility for its doing so.

It is clear from the first excepted case that there must be disclosure to the creditors of the liquidating company so that they are not misled if they agree to extend credit to the new vehicle. The purpose of the third excepted case is to exclude the operation of sections 216 and 217 where the prohibited name company was not a “phoenix” company. These points were made by Chadwick J (as he then was) in Penrose v Secretary of State for Trade and Industry [1996] 1WLR 482 at 489 in a passage cited by the judge:

“The purposes for which section 216 was enacted can be gleaned – in part at least – from the excepted cases under the rules. Rule 4.228 permits a director of an insolvent company to act as director of a new company with a prohibited name provided that the business of the insolvent company has been acquired under arrangements made by an insolvency practitioner and notice has been given to the creditors of the insolvent company.

That rule identifies, and meets, two elements of mischief: first, the danger that the business of the old insolvent company has been acquired at an undervalue – or is otherwise to be expropriated – to the detriment of its creditors; and, secondly, the danger that creditors of the old company may be misled into the belief that there has been no change in the corporate vehicle. The phoenix must be disclosed as such.

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.”

A similar point was made by Mummery LJ in Ricketts v Ad Valorem Factors Ltd [2004] 1 BCLC 1. He pointed out (at [20]) that if one member of a group of companies with associated names went into liquidation, reliance could be placed on rule 4.230. The other member of the court, Simon Brown LJ, agreed with Mummery LJ on this point ([29]). In the Ricketts case, however, this court did not have to consider whether a company could bring itself within rule 4.230 if it traded under more than one name.

I refer below to the period of twelve months specified in rule 4.230 (a) as “the qualifying period”. Under rule 4.230, a company is not a phoenix company if either it traded under the prohibited name or that name was its registered name and it was not in the qualifying period a dormant company for the purposes of section 252(5) of the Companies Act 1985 (see rule 4.230 (a) and (b)). The requirement in rule 4.230 (b) was clearly to avoid the device of a company being kept “on the shelf” with a prohibited name, ready to be used when the liquidating company went into liquidation.

As appears below, in the present case the appellant must fail unless he can bring himself within the third excepted case in rule 4.230.

On 7 May 1999, ESS Fabricating Ltd (“the liquidating company”) went into liquidation and the appellant, Mr Sully, was at that stage a director. At the same time he was a director of another company, then called Electronic Sales Services Ltd. As appears below, this company subsequently changed its name to a prohibited name for the purposes of section and so I refer to this company as “the prohibited name company”. Mr Sully was the principal shareholder of this company, and a number of other companies, some of which used the acronym “ESS” in their name or trading name. This was an informal group of companies, bound together by their association with Mr Sully, and I will refer to it as the ESS group.

The liquidating company sold its business and assets. Coincidentally the purchaser was the respondent, another, and then solvent, member of the ESS group. Rule 4.228 was not complied with on this sale, and accordingly there is no question of the appellant bringing himself within the first excepted case.

The prohibited name company changed its name to ESS Solutions Ltd on 22 December 1999, and thus within the five year period following the liquidation of the liquidating company. The company’s new name was a prohibited name for the purpose of section 216. However, the second excepted case in rule 4.229 did not apply as the name of the prohibited name company was not a prohibited name at the date of the liquidation of the liquidating company.

The prohibited name company changed its name again to Special Products Solutions Ltd on 14 June 2001. It is not suggested that that name was a prohibited name. Accordingly the period for which the registered name of the prohibited name company was a prohibited name was from 22 December 1999 to 14 June 2001. At all material times, its business was the installation of electric components into cabinets and it purchased ready-made cabinets to accommodate these components from other companies, originally related companies. The liquidating company manufactured some of the cabinets which it used. The prohibited name company went into insolvent liquidation on 28 October 2002.

The respondent to this appeal is a creditor of the prohibited name company in respect of goods sold and delivered to the prohibited name company between November 2000 and February 2001. The respondent entered administration on 27 November 2000.

When the case came before the judge, the following matters were admitted:-

Accordingly, the only issue before the judge was whether the appellant could rely on the third excepted case in rule 4.230 of the Insolvency Rules 1986.

The judge noted that the situation in the present case did not result from unscrupulous phoenix trading on the part of Mr Sully. However, the judge directed himself that he had no discretion as to whether personal liability should be imposed. On this he referred to the Thorne case, where Peter Gibson LJ held in relation to sections 216 and 217 of the 1986 Act:

“In the absence of an application under section 216(3) for leave, the court is left with no discretion on the application of the sections, and … a creditor is entitled to take advantage of them, if they can be shown to be applicable”.

The judge noted that this court had confirmed this approach in the Ricketts case. I would add two points here about the observations of Peter Gibson LJ in the Thorne case. First, in addition to applying for leave under section 216(3), a director may rely on the three excepted cases in rules 4.228 to 4.230. Second, no consideration has been given on this appeal or in the earlier cases as to whether section 727 of the Companies Act 1985 could be invoked by a director as an application under section 217 of the 1986 Act, and I accordingly leave that question open.

The judge noted that the case turned on the third excepted case and that he had not been referred to any reported case dealing with this exception. He held that the expression “known by” in rule 4.230 should be construed consistently with section 216 (6). He concluded that “the name of the company at that time” for the purposes of section 216 (6) was the company’s registered name. The crucial question was the meaning of the succeeding expression, namely “any name under which the company carries on business at that time.”

The judge then made his findings as to the name by which the company was known. The judge heard evidence from Mr Sully and other witnesses. The judge found that Mr Sully was, like all the witnesses, trying to tell the truth so that minor errors did not indicate unreliability.

The judge referred to paragraphs 43 to 47 of Mr Sully’s witness statement. These exhibited a number of copy documents including letters and copy faxes. These showed the use of “ESS” or “ESS Ltd” by third parties as well as staff. There was, however, no reference to a trading name properly so called, on any of the documents produced. The audited accounts and bank account of the prohibited name company were always in its registered name and made no reference to a trading name or “ESS”.

In his evidence, Mr Sully said that all of the group companies traded under the banner “ESS”, which was a sort of informal collective trading style and name. Mr Sully accepted that “ESS” had never been put forward as a trading name for any of those companies. However, Mr Sully had designed the ESS logo in 1986 and thereafter it was used by all the companies. Mr Sully accepted that, when he used the expression “traded as”, he really meant “promoted as”.

The judge found that the effect of Mr Sully’s evidence was that the prohibited name company had never used “ESS” as a trading name, but had informally been known as “ESS” for many years. He found that the rest of the evidence called on behalf of the appellant supported that conclusion.

The respondent called a Mr James Eadie, who was a business manager of another group company. He gave a witness statement in which he stated that none of the companies traded as ESS. On his evidence, none of them was known as ESS. He always drew a distinction as to which ESS company was involved. He did not have anything to do with the prohibited name company and did not know how that company had been promoted. The judge accepted this evidence.

The judge concluded that the differences between the evidence of Mr Eadie and the evidence called on behalf of the appellant were largely ones of emphasis. All witnesses agreed that none of the group companies used “ESS” as a trading name properly so-called. That meant that all formal business, including invoicing, payments, banking, accounts and the like were in the registered name. However, the name “ESS” or “ESS Ltd” was often, but not always, used on informal documents. The judge noted that that was hardly surprising, as ESS was quicker and easier to write or type.

The judge then dealt with what he called “the knockout submission”, which is essentially the point raised by the respondent’s notice on this appeal. Essentially the argument is based on the fact that the admitted prohibited name was ESS Solutions Ltd, and the prohibited name company did not have that name at any point in the qualifying period. Accordingly, rule 4.230 could not apply. The judge rejected this argument. He noted that the respondent had pleaded, and until closing submissions argued, that it was the common element of “ESS” which made the name of the prohibited name company a prohibited name. Accordingly, the judge rejected the submission.

The judge then turned to the third excepted case. He held that the cases of Thorne and Ricketts made it clear that liability is strict, and no discretion was permitted to the court. He held that this was less harsh than might appear because of the possibility of applying for leave from the court. In conclusion, he held that the three excepted cases were specific and narrowly drawn, and had to be applied accordingly.

The judge rejected the argument that, as liability was wide, the exception too had to be wide. He held that rule 4.230 was to be construed with the assistance of section 216(6). He saw no inconsistency there. The appellant’s argument confused the effect of section 216, which was to impose a wide liability, with the effect of the third excepted case which is to create a narrow exception to wide liability. He held that there was nothing illogical or inconsistent about such a construction.

The judge then turned to the interpretation of the phrase “to any name under which the company carries on business”. He noted that section 216(6) did not refer to “any name under which the company carries on any part of its business”. Accordingly, he held that the company must carry on the whole of its business under the name in question. He held that this construction accorded “with the need to protect the creditors of companies who, by definition, would have traded with the company. A person does not become the creditor of another company merely by having a regard to the latter’s promotional activity.”.

The judge also concluded that a “name” does not include a convenient abbreviation that is used by telephonists and others who are unconcerned with the business as a whole. He cited the case of a bored telephonist employed by Marks and Spencer plc who used the term “Marks and Sparks”. He held that the telephonist did not thereby fix her employer with “carrying on business” under that sobriquet. Similarly, the casual use of “ESS” on a message sent by fax did not, without more, establish that the prohibited name company was carrying on business under that name “ESS”.

The judge then noted that the word “name” in section 216(6) and rule 4.230 was in the singular. He held that if a variety of different names can be seen to have been used in connection with the affairs of the company, that inevitably suggests that there cannot be a “name under which the company carries on business”. “It is simply suggestive of short cuts by the staff”. In this case, the prohibited name company was known at different times and by different people by its registered name, by the name ESS Ltd and by the letters ESS.

The judge held that it was a necessary ingredient of the phrase “any name under which the company carries on business at that time” that the name was used in all functions of trading. The intention of Parliament was to stamp out phoenix companies whether or not they used the words “trading as” prior to a prohibited name.

The judge emphasised the words in the above citation “established and trading under that name” used by Chadwick J in Re Penrose in the passage set out above. The judge also found support from the commentary by Sealy and Milman in Annotated Guide to the Insolvency Legislation (7 ed) (Sweet & Maxwell).

The judge concluded that the prohibited name company could not be said “to carry on business” under a name that was not used for its formal purposes, such as on its bank accounts, statutory accounts, or dealings with HM Customs & Excise and so on.

The judge held that the principal significance of ESS was to assist in the promotion of the informal group. That did not, however, mean that each company carried on business as “ESS”. In terms of the business undertaken, each had to be further identified by the adjective, for example Fabricating, to avoid confusion.

The judge rejected an argument based on a possible claim in passing off on the hypothesis that the liquidating company was Electronic Sales Services Ltd, and the successor company was called ESS Solutions Ltd. The judge held that the question whether a common director of both companies would be within section 217 depended on whether the liquidating company had carried on business in the sense he held to be necessary.

In conclusion, the judge held that the prohibited name company had not carried on business under the name “ESS”.

The judge noted that he reached his conclusion with no great enthusiasm. The assets of the liquidating company had been sold to the respondent. The claim was not within the mischief to which the Act was directed.

Mr Aubrey Craig, for the appellant, submits that the judge was wrong to say that ESS was not a name under which the prohibited name company carried on business. The name ESS had been used since 1986, shortly after the company was incorporated. The company had never been known as ESS Solutions prior to the change of name in December 1999. The name Electronic Sales Services Ltd had never been alleged to be a prohibited name.

Mr Craig accepts that rule 4.230 is to be read with section 216(6). Accordingly, it is not enough for the appellant to show that the prohibited name company was known by the name “ESS”. He must show that the prohibited name company carried on business under the name “ESS” throughout the twelve months prior to the liquidating company’s liquidation. Mr Craig also accepts that the name of the prohibited name company has to be known, in the sense set out in section 216(6), to the public and not simply among employees of the company.

Mr Craig submits that on the judge’s findings, the prohibited name company did carry on business under the name ESS, even though it never used the words “trading as” ESS. Mr Craig refers to the evidence of Mr Rankin and Mr Dobromylski. He also refers us to certain faxes sent by third parties. These faxes refer to the recipient of the fax as “ESS” or “ESS Ltd”. He also points to the logo used by the company on its notepaper. This logo was also placed on a metal badge on its products. This logo said ESS in large capital letters. Underneath was the name of the company.

Mr Craig points out that the judge accepted that the prohibited name company used the name ESS informally. Mr Craig submits that the judge was wrong to say that the company could not carry on business under more than one name, and that that name had to cover all its business. He submits that the company would have had a claim in passing off if a third party had tried to use the name “ESS”.

Mr Craig submits that section 216 does not require that the company should have carried on business under a single name, or that it should have carried out formal parts of its business under the prohibited name. Mr Craig submits that these are likewise not requirements of rule 4.230. To construe rule 4.230 in this way, as the judge did, results on his submission in asymmetric interpretation of section 216 and rule 4.230.

Mr Timothy Mayer, for the respondent, seeks to uphold the judgment of the judge. He relies on letters sent by the company which, while bearing the logo described above, also include the name of the company beneath the director’s signature. Mr Mayer submits that, in line with the Ricketts case, the expression “carrying on business” should be given its plain and ordinary meaning. If the meaning is wider than trading, the prohibited name company must nonetheless be doing something under the prohibited name whereby its financial position is affected. Mr Mayer points to the obligation of registered companies to maintain accounting records (sections 221 and 222 of the Companies Act 1985) and to the exception in rule 4.230 for dormant companies, that is companies which have not entered into any significant accounting transactions. The reference to dormant companies in rule 4.230 shows that the important question is whether the company’s financial position was affected by any transaction entered into under the prohibited name.

The question whether a company is carrying on business is a question of fact. The court must look at all the circumstances: see Kirkwood v Gadd [1910] AC 422.

Mr Craig submits that rule 4.230 should be construed purposively. He emphasises that the prohibited name company in this case was not a phoenix company. Nor did it misappropriate any goodwill of the liquidating company. Indeed, the whole of its business and assets were sold to the respondent. Mr Craig puts the point two ways. The expression “a prohibited name” should be construed as including the plural, with the result that the expression “under that name” in rule 4.230 would include the situation where business is carried on under a number of names. Alternatively, he submits that by using the acronym “ESS” throughout the twelve month period, the prohibited name company substantially complied with rule 4.230 and should be held to have done so.

Mr Mayer submits that, if the appellant is right on his wide construction of the phrase “carrying on business”, the result is that liability will be imposed in wide circumstances too. He points out that in the Ricketts case, Simon Brown LJ urged caution where the legislative intent was doubtful. Section 216 imposes criminal penalties.

Mr Mayer submits that the judge’s approach to carrying on business provides the best protection for creditors. If the appellant is right, there would be difficulties in drawing the line between carrying on business and not carrying on business under the prohibited name. The real danger would be that liability would be far wider than intended.

Mr Mayer submits that the statutory accounts of the company must be maintained under the prohibited name if that name is to be treated as one under which it carries on business for the purposes of rule 4.230.

In conclusion, on this issue, Mr Mayer submits that the name “ESS” was merely an informal shorthand used by the prohibited name company.

Mr Mayer also submits that if a company could have more than one name for the purposes of section 216, the existence of the prohibited name would depend on the capricious use of acronyms and logos by employees and others.

Mr Mayer submits that passing off is a different situation. When determining whether liability has arisen under section 217, the court should confine its attention to the statutory requirement. I agree with Mr Mayer on this point. This appeal raises questions of statutory interpretation and the law of passing off does not assist on these points.

As to the meaning of carrying on business, Mr Mayer relies on Re Sarflax Ltd [1979] 1Ch. 592, in which it was made clear that a company carried on business even if it was only collecting in book debts as part of an orderly realisation of its assets.

The respondent cross-appeals on the ground that, since it is conceded that the prohibited name is ESS Solutions Ltd, and since that name was only acquired by the prohibited name company seven months after the liquidation of the liquidating company, the requirements of rule 4.230 can never be satisfied. For the purposes of this submission, Mr Mayer relies on the precise wording of rule 4.230. The opening words refer to “a prohibited name”. Paragraph (a) of the rule requires there to have been a carrying on of business “under that name”. He submits that the rule does not say “that name or any other name”.

Mr Mayer also submits that it was open to the appellant to apply to the court for permission to use the prohibited name. In that way, he would have avoided liability under section 217: see section 216(3) of the 1986 Act.

In paragraphs 1 to 10 of this judgment I explained the background to the relevant statutory provisions. In this part of the judgment, I make some general observations and then turn to the crucial issue, which is the interpretation of rule 4.230 and related provisions.

In this case, the prohibited name company used the prohibited name not because it wished to take over the business or goodwill of the liquidating company, but because both companies formed part of the informal group of companies known by the acronym “ESS”. The critical part of the prohibited company’s name was this acronym. However this acronym did not form part of the prohibited company’s registered name during any part of the twelve months prior to the liquidation of the liquidating company. This is the qualifying period for the purposes of rule 4.230.

Had the registered name of the prohibited name company included the acronym ESS for the whole of the qualifying period, the situation would have been within rule 4.230. This case would then have been an illustration of the application of rule 4.230 operates in the context of group companies. For this purpose, it would not matter whether the group was a group of companies for the purposes of section 262 or section 736 of the Companies Act 1985, and an informal group of companies, such as the ESS group in the present case. 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.

The next general observations I would make are these. Since the liability imposed by section 216 is criminal, and in addition since section 217 imposes what may be a significant personal liability on a director for the debts of a company incorporated with limited liability, neither section should be construed to include transactions which are not within those sections on their fair interpretation. In addition, the opening clause of section 216(3) mandates that sections 216 and 217 should be read together with rules 4.227 to rule 4.230. The aim of any interpretation of all these provisions should thus be to create a coherent and rational scheme. In my judgment, in the absence of clear wording to the contrary, the court may fairly assume that Parliament intended the scheme of criminal and personal liability under these provisions to be coherent and rational.

In the qualifying period, the acronym ESS formed no part of the prohibited name company’s registered name. Accordingly the appellant can only bring his case within the third excepted case if he can show that the prohibited name company was “known by” that acronym during the whole of the relevant period (rule 4.230 (a)). I agree with the judge that the expression “known by” in rule 4.230 must have the same meaning as in section 216 (6). Indeed, section 11 of the Interpretation Act 1978 (“the 1978 Act”), provides that, where an Act confers power to make subordinate legislation, expressions used in that legislation have the meanings as in the principal Act, unless the contrary intention appears. The definition of “subordinate legislation” in section 21(1) of the 1978 Act includes rules made under the principal Act in question, and so that term would include the Insolvency Rules.

In this case, the respondent submits in its respondent’s notice that the prohibited name company had to have the same prohibited name throughout the whole of the twelve month period. Mr Mayer argues that, since it is admitted that “ESS Solutions Ltd” is the admitted prohibited name, the appellant must fail because he cannot show that that was the name of the prohibited name company for the whole of the qualifying period.

The judge rejected this argument on the grounds that the crucial part of the prohibited name was “ESS”. I agree with him on this. That acronym of itself suggests an association with the liquidating company. However, he went on to hold that the company had to have a single prohibited name under which it carried on the whole of its business. Both the respondent’s notice, and the judge’s conclusion on this latter point, raise essentially the same issue of statutory interpretation. Does rule 4.230 apply if the prohibited name company has more than one name either at the same time or sequentially in the qualifying period? To answer this question, it is necessary to consider both rule 4.230 and also section 216(6), which applies for the purposes of rule 4.230.

The question so stated envisages a number of possibilities, including the following:

The first example clearly falls within section 216(6). At first sight, the second example is also within section 216(6) but I would like to leave open the question whether a company is known by its registered name for the purposes of section 216 if it carries on business with the public under some other name. This would arise for example where “Widgets Limited” is a prohibited name but the company trades under an entirely different name. Suppose further that it carries on business under two trading names, such as “Office Designs” and “Office Equipment”. The judge’s interpretation of section 216(6) is that the latter alternative in section 216(6) applies only where the company carries on the whole of its business under a trading name. If this interpretation is correct, it not only reduces the scope of application of sections 216 and 217 where the company carries on business under a trading name. It also by the same token makes it more difficult for a director to rely on the third excepted case. Furthermore, sections 216 and 217 do not simply cancel each other out in this regard. The function of the words “known by”, which are defined by sections 216(6), in sections 216 and 217 is to identify the companies known by a prohibited name in the five years following the liquidation of the liquidating company. In section 216(6), as it applies to rule 4.230, the function of those words is to determine whether the prohibited name company was known by the prohibited name in the qualifying period, that is the twelve months prior to the liquidation of the liquidating company. Depending on the facts, a person may seek to rely on the wider meaning of “known by” in rule 4.230, even though that wider meaning is not relied upon as against him to impose liability. Rule 4.230 is thus not simply a mirror image of sections 216 and 217 in this respect. It has to be remembered therefore that the application of a narrow meaning to “known by” in section 216(6) also results in a restriction of the circumstances in which liability under sections 216 and 217 can be excluded.

I then turn to the third and fourth examples given in paragraph 65 above (c and d), starting with the third example.

Looking at rule 4.230 on its own, it would in my judgment be contrary to common sense if the respondent’s argument were correct and the prohibited name company had to have the same prohibited name throughout the qualifying period. It is very common for companies to change their name. Moreover, section 216 (which forms part of the same statutory scheme as rule 4.230) contemplates that a company may have more than one prohibited name. Section 216 (2) (a) contemplates that a company may change its name since it proceeds on the basis that a company might have more than one name during the period of twelve months prior to its liquidation. Likewise, section 216 (6) provides that a name by which a company is known is either the registered name of the company or “any name” under which the company carries on business at the relevant time. Since a change of name is a common corporate act, in my judgment it is most unlikely that Parliament would have intended that the third excepted case (rule 4.230) should be incapable of application where a name change had taken place in the relevant period.

With those points in mind, I turn to consider whether rule 4.230 can be read as applying where a company has more that one prohibited name in the period of twelve months prior to the liquidation of the liquidating company. By virtue of sections 6 and 23 (1) of the 1978 Act, words in the Insolvency Rules in the singular include the plural “unless the contrary intention appears”. Accordingly, I have to consider whether the contrary intention appears from rule 4.230 that there should only be one prohibited name in the qualifying period. I do that by considering the effect of rule 4.230 if the expression “prohibited name” is read in the plural. It would then read:

As explained above, section 216(6) applies for the purposes of rule 4.230. The judge is, of course, correct that section 216(6) does not say “any part of its business”, or indeed “any” business (the expression used in section 458 of the Companies Act 1985 and section 213 of the 1986 Act, which both concern fraudulent trading). But by the same token section 216(6) does not use words such as “the whole of its business” or “its ordinary business” or words to like effect. Moreover, there are a number of textual indications that a company need not have the same name for the whole of its business. First, it is clear that the company can for the purposes of section 216(6) have one name as it registered name and another name as its trading name. Second, section 216(6) refers to “any name” under which the company carries on business. Third, the words used in section 216(6) are “carries on business” not “carries on its business”. The difference is important. It means that, under the latter part of section 216(6), the court has to ask: “was any name by which the company was known (at the relevant time) a name under which it carried on business?”, not “was the name by which the company was known (at the relevant time) the name by which the company carried on its business?”. Furthermore, if carried to its ultimate, the judge’s reasoning means that there would be very few companies who could be proved to have used even a single trading name for all purposes. Even a company which trades under a business name usually uses its registered name for documents which require to be filed at Companies House, such as statutory accounts. Finally, if the judge is right, then his interpretation must apply also for the purposes of sections 216 and 217. This would have the effect of reducing the scope of those sections since they would not apply where the prohibited name was only a trading name unless the company carried on 100% of its business under that name. That would make it possible to evade the operation of those sections by the simple device of carrying on a small amount of business under the registered name. I do not consider that Parliament could have intended that those sections should be so easily evaded.

In forming his view that, to fall within section 216(6), the company had to carry on the whole of its business under a name other than its registered name, the judge was no doubt influenced by the fact that section 216 creates criminal liability. It is an important principle of statutory construction that a person should not be penalised except under clear law. Simon Brown LJ relied on this principle in the Ricketts case at [30]:

“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 s 271 of Bennion on Statutory Interpretation (4th edn) p 705, 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 s 216(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.”

However, I do not consider that that principle justifies the judge’s interpretation of section 216(6). Indeed the judge’s interpretation involves writing in the words “its”, or “the whole of its”, before “business” in section 216(6). In my judgment, the meaning of “carries on business” in section 216(6) is not doubtful. It encompasses a situation where a company carries on some, but not necessarily all, of its business under a prohibited name. In any event, the principle against doubtful penalisation must be of less potency where, as here, the provision to which it is sought to be applied (section 216) also applies to widen the circumstances in which a person may be relieved of (criminal or civil) liability under rule 4.2340. As a separate point, I likewise do not consider that the words “established and trading” from the judgment of Chadwick J in the Penrose case assisted the judge in his interpretation of section 216(6) since they were not addressed to the point of construction with which the judge was dealing.

That brings me to an important argument in favour of the judge’s interpretation of section 216(6). If the judge is wrong, a person can incur criminal or personal liability merely by virtue of the fact that the company carried on some of its trading activities under a prohibited name. Moreover, there is the question of personal liability. Does the director then become liable for all the debts which the company incurs at any time when it is carrying on a part of its business under a prohibited name, i.e. even those debts which are incurred under a name which is a not a prohibited name? If that is the effect of sections 216 and 217 it would be a factor which might well lead to the conclusion that the judge was right. I consider this argument in paragraphs 74 to 78 below.

Section 217 imposes liability for “relevant debts” of the company: I will set out subsections (1) and (3) again because they are critical to the question of measure of liability:

“217(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)

…

(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.”

Read literally, the effect of section 217(3)(a) is that, once a company has a prohibited name, a director becomes personally liable for all its debts incurred while he was a director. So, if a director holds office from 1 January 2000 to 31 December 2005, and the company trades under a prohibited name for the calendar year 2003, he would, if section 217(3)(a) is read literally, be liable for all the debts which the company incurs between 1 January 2000 and 31 December 2005, not just for those incurred in 2003. (Liability under subsections (1)(b) and (3) (b) would appear to be limited to the time when the defendant knows that the director is acting in contravention of section 216 and thus cannot extend to period when there was no contravention of section 216.) It is unlikely that Parliament intended liability under section 217(1)(a) and (3)(a) to extend to debts incurred when there was no contravention and accordingly in my judgment section 217(3)(a) must be read as restricted to the time during which there is a contravention of section 216. I now return to section 216 to see precisely what constitutes a contravention of that section. It is to be a director of a company that is known by a prohibited name. So if a company carried on 50% of its business under a name which was not prohibited, the director would not by virtue of that corporate activity commit an offence.

Can a similar limitation be read into section 217(3)(a)? In order that the (implicit) requirement for a contravention of section 216 is satisfied, there must in my judgment be read into that paragraph a requirement that the company should be known by a prohibited name. Section 217(3)(a) would then read:

“(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 the company was known by a prohibited name…”

Section 216(6) would then have to be applied. Accordingly, it would have to be shown that the company’s registered name was a prohibited name or that the company was carrying on business under a prohibited name.

I have referred above to the principle against doubtful penalisation. That principle should be applied to the imposition of a civil liability as well as to the imposition of criminal liability (see the passage from Bennion cited by Simon Brown LJ). Applying that principle, the court would in my judgment reach the conclusion that the director was personally liable only for debts incurred in the course of carrying on business under the prohibited name. In my judgment, section 217(3)(b) would be similarly construed so as not to impose wider liability than section 217(3)(a). Accordingly the measure of liability under section 217(3)(b) would not extend beyond the amount of the debts incurred under the prohibited name.

On that basis, the measure of liability in section 217(3) would not constitute a contrary intention that the word “name” in rule 4.230 should not include the plural. I must next consider whether there is any other ground for holding that such contrary intention exists. So far as I am aware, there is only one remaining ground for this,, which I consider in the next paragraph.

If the singular of “name” in rule 4.230 includes the plural, then as a linguistic matter rule 4.230 would permit both contemporaneous and consecutive use of more than one prohibited name in the qualifying period. Thus, a company could have had had one prohibited name for say three months and another for nine months. Rule 4.230 would also permit a company to have several names at the same time. However, if either of these possibilities (contemporaneous or consecutive use of multiple names) conflicts with the reason for the third excepted case, then “the contrary intention” would appear for the purposes of the 1978 Act, and rule 4.230 could not be read as including “names” (plural). I have already held that the policy behind the third excepted case is that identified by Chadwick J in the Penrose case, viz. to exclude from section 216 and 217 companies which are not phoenix companies. Moreover, as I have explained above, it is common for companies to change their names. If the prohibited name company had to have the same name and one name only throughout the relevant period of twelve months, only some non-phoenix companies would benefit from the third excepted case. Thus in my judgment, the interpretation of rule 4.230 as including rather than excluding multiple prohibited name use promotes the policy behind rule 4.230.

Accordingly I conclude that the judge was wrong to hold that for the purposes of section 216(6), which is incorporated into rule 4.230, the trading name of the company must be the only name which the company uses. The appellant could therefore bring his case within rule 4.230 if on the facts the prohibited name company carried on part of its business in the qualifying period under the name ESS. Moreover, in my judgment, the expressions “a prohibited name” and “that name” in rule 4.230 include the plural. Further, in my judgment liability under section 217(3) is limited to debts incurred under a prohibited name.

As to the facts, I remind myself that the carrying on of business involves the repetition of acts (see Smith v Anderson (1880) 15 Ch.D 247, 277-278 per Bowen LJ), and (if it be relevant) that to carry on business a company need not actively carry on a trade (Re Sarflax Ltd [1979] Ch. 592). The judge was satisfied that the prohibited named company used the acronym “ESS” informally throughout the qualifying period prior to the liquidation of the liquidating company. It is important to bear in mind that the logo “ESS” was invented shortly after the incorporation of the prohibited name company in 1986 so that that term had been in use for very many years. The logo appeared in large letters on the prohibited name company’s note-paper and, importantly, on its products. Use of the acronym ESS in these ways was not casual or trivial or insubstantial so that it could not be said that the company did not carry on business under the name ESS. The fact that the prohibited name company’s registered name also appeared below those letters does not in my judgment prevent the name “ESS” from being a name under which the prohibited name company carried on business. (Indeed, section 4 of the Business Names Act 1985 requires the name of the company to be so stated). Likewise the fact that the prohibited name company then issued invoices under its correct name does not in my judgment prevent it from carrying on a part of its business under the name “ESS”. That ESS was a name under which the prohibited name company carried on business is confirmed by the fact that there is evidence that some creditors would refer to the prohibited name company as “ESS” or “ESS Limited”. The prohibited name company treated those communications as communications with itself. The acceptance of the communications was part of the carrying on of business.

Accordingly in my judgment, the name “ESS” was a prohibited name under which the prohibited name company “carried on business” within the meaning of section 216(6) for the whole of the qualifying period. That means that the company was “known by” a prohibited name during that period for the purposes of rule 4.230(a). Thus rule 4.230(a) was satisfied. (It is not in issue that the prohibited name company was not a dormant company for the purposes of rule 4.230(b)).

There is one further point with which I must deal. A director may apply for leave to act as a director of a particular company in order to avoid liability under section 217 arising where he proposes to be a director of a company with a prohibited name. (Obviously, any director who was aware of a problem under section 217 should make that application, and nothing in this judgment diminishes the wisdom of that course or, where applicable, following the route in the first excepted case). Mr Mayer submits that the fact that a director may apply for leave justified the judge’s restrictive interpretation of rule 4.230. However, there are many situations in which an application for permission cannot be made. For example, a person may become liable under section 217 even if he had ceased to be a director of the liquidating company some months earlier and did not know that the liquidating company had gone into liquidation. In any event, whenever a director makes an application outside the seven day period permitted by rule 4.229, there will inevitably be a delay until the Court can make its order. Although the point has not been fully argued, it is in my provisional view likely and certainly possible that the Court would not give leave with retrospective effect. In those circumstances a director would be exposed to liability in a situation for which he could not effectively have sought leave. In addition I have already noted that, if the judge’s interpretation of section 216(6) is correct, it also narrows the effect of sections 216 and 217 in a manner which in my judgment could not have been intended by Parliament.

For all the above reasons I would allow the appeal and dismiss the cross-appeal.

By its claim in these proceedings ESS Production Limited (a company in administration) sought an order that Mr David Sully was personally liable, under 217(1) of the Insolvency Act 1986, for debts owed to it by Special Products Solutions Limited. For the reasons which he gave in a judgment delivered on 4 June 2004 His Honour Judge Iain Hughes QC held that the claimant was entitled to judgment on that claim. But, as he said, he reached that conclusion with no great enthusiasm; and he granted Mr Sully permission to appeal. I agree with Lady Justice Arden that that appeal should be allowed. In making these observations of my own, I gratefully adopt her account of the facts and her rehearsal of the relevant statutory provisions.

The basis of the claim may be summarised as follows: (i) a third company, ESS Fabricating Limited, went into insolvent liquidation on 7 May 1999; (ii) during the twelve months ending on that day Mr Sully was a director of ESS Fabricating Limited (“the liquidating company”); (iii) Special Products Solutions Limited (“the company”), was incorporated under the name Electronic Sales Services Limited, but changed that name to ESS Solutions Limited on 22 December 1999 – [that name was changed to the present name on 4 June 2001]; (iv) in relation to Mr Sully ESS Solutions Limited was a prohibited name for the purposes of section 216 of the 1986 Act; (v) Mr Sully was a director of the company, and was involved in its management, throughout the period from 22 December 1999 until his resignation from that office on or about 7 March 2001; and (vi) Mr Sully was, by reason of those matters, in contravention of section 216 of the Act during that period.

The matters which I have described under (i) to (v) in the preceding paragraph are not in issue. Nor is it in issue that, but for the provisions in rule 4.230 of the Insolvency Rules 1986 (“the third excepted case”), it would follow that, by reason of those matters, Mr Sully was, indeed, in contravention of section 216 of the 1986 Act. The issue on this appeal is whether the judge was right to hold that, in the circumstances of this case, rule 4.230 did not have the effect that Mr Sully did not need the leave of the court to be a director of the company while it was known by the prohibited name ESS Solutions Limited. That question turns on whether, in the context of rule 4.230 read in conjunction with the provisions of section 216 of the Act, it can properly be said that the company “has been known by that name” for the whole of the period of twelve months ending on 6 May 1999 (the day before the liquidating company went into liquidation).

It is clear that the company was not known by the name “ESS Solutions Limited” at any time before 22 December 1999. It was submitted on behalf of the claimant that that was fatal to a defence that relied on rule 4.230. The judge rejected that submission (described in his judgment as “the knockout submission”) on the ground that it was only the acronym “ESS” that provided the link between the name of the liquidating company (ESS Fabricating Limited) and the prohibited name (ESS Solutions Limited). Accordingly, in his judgment, the relevant question was whether the company was known (before 22 December 1999) by a name which included that acronym.

The claimant, as respondent to the appeal, has pursued that submission by a respondent’s notice. Although I was, at first, attracted to the submission – which may be said to give literal effect to the words used in rule 4.230 – I have come to the conclusion that the judge was correct to take the view that he did on that point.

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 two conditions are satisfied: (i) the company is known by a name by which the liquidating company was known within the period of twelve 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 – for example a company within the same group – continues to carry on business. As I sought to point out in Penrose v Secretary of State for Trade and Industry [1996] 1 WLR 482, 490A-B, the third excepted case has been included in the statutory scheme in order to avoid the result that section 216 of the Act will have application in a case where the mischief does not exist. That was, I think, accepted by this Court in Ricketts v Ad Valorem Factors Ltd [2003] EWCA Civ 1706 at [20], [2004] 1 BCLC 1, 7d-f.

It follows, as it seems to me, that proper effect is given to rule 4.230 by reading the words “that name” in sub-paragraph (a) as extending to any name which, if it were the name by which the company had continued to be known, would be a prohibited name and which includes the same word or words (or other feature) which provide the link between the prohibited name by which the company is, in fact, known and the name by which the liquidating company was known before it went into liquidation. In the present case the word or feature which provides the link is the acronym ESS.

The question, therefore, is whether the company was known, in the twelve months before the liquidating company went into liquidation, by a name which included the acronym ESS. And, in that context, it is important to have in mind the direction in section 216(6) of the 1986 Act that:

“References . . . to a name by which a company is known are to the name of the company . . . or to any name under which the company carries on business. . . .”

The judge answered that question in the negative. His reasoning may, I think, fairly be summarised as follows. (1) The legislature, in using the phrase “to any name under which the company carries on business at that time” in section 216(6) of the Act was using words “which included as a necessary ingredient . . . the concept of all the functions of trading” – paragraph 43 of the judgment. (2) No name which included the acronym ESS appeared on any of the company’s formal documentation. (3) A company could not be said “to carry on business” or to be “established and trading” under a name “that is not used for any of its formal purposes – paragraph 46. (4) The problem “fatal to the defendant’s case” was that “although the evidence establishes that Electronic Sales Services Limited [the name of the company before 22 December 1999] was often informally known as ‘ESS’ for many years the evidence does not establish that Electronic Sales Services Limited carried on business under the name ‘ESS’”.

For my part, I think that, in treating the phrase “any name under which the company carries on business” as requiring, as a necessary ingredient, “the concept of all the functions of trading”, the judge fell into error. As Lady Justice Arden has pointed out, the phrase is not “any name under which the company carries on its business”. And the phrase includes, in terms, “any name”. The judge accepted, at paragraph 46 of his judgment, that “‘ESS’ or some slight variation thereof, was a sort of promotional or shorthand name, used over a period of time when convenient by a variety of employees and third parties”; and, at paragraph 47, that “the initials ‘ESS’ were included in each name in order to present the appearance of a comprehensive group of companies . . .” In my view that should have led him to conclude that ESS was a name by which the company was known in the period before 7 May 1999; that it was a name which the company used in the course of its business and for the purposes of that business (in that its business was promoted, or intended to be promoted, by association with a ‘group’); and that it was a name “under which the company carried on business” during the relevant period. It was not necessary to find that ESS was the only name under which the company carried on business; nor that it was the name which the company used in connection with “all the functions of trading”.

For those reasons, and for the much fuller reasons given by Lady Justice Arden – with which I agree – I, too, would allow this appeal.

For the reasons given by Lord Justice Chadwick and Lady Justice Arden, I agree that the appeal should be allowed.