Phoenix rising

The recent case of Re Newtons Coaches [2016] EWHC 3068 considered whether a partnership falls within the remit of s.216 Insolvency Act 1986 (“IA 86”). The case looked at what s.216 is designed to prevent and the nature of partnerships in the context of both the Insolvent Partnerships Order 1994 (“IPO 94”) and the IA 86. The Registrar held that s.216 does not apply to partners of a partnership that has been wound up.

Background to restriction on reuse of prohibited names

S.216 IA 86 imposes restrictions on the use of certain company names by persons who have been previously involved with a company that has entered insolvent liquidation (“failed company”). The section was enacted to restrict and prevent the ‘phoenix phenomenon’, by which former controllers of a failed company set up a newco with the same or a similar name to the failed company in order to obtain its goodwill whilst jettisoning its creditors.

Under s.216, a person who has been a director or shadow director of a failed company is prohibited from acting as a director of or be concerned or take part in directly or indirectly the management of another company or business (“successor company”) with the same or a similar name (“a prohibited name”) for a period of 5 years following the liquidation without permission of the court.

There are both criminal and civil penalties for a breach of s.216: criminal sanctions are up to two years’ imprisonment and/or an unlimited fine on indictment or six months’ imprisonment and/or the statutory maximum fine of £5,000 on a summary basis; in a civil case the individual can be made personally liable for the debts of the successor company.

There are three exceptions to the general prohibition under s.216 (Insolvency Rules 1986 (“IR 86”) 4.228 – 4.230):

  • where an individual gives notice in accordance with rule 4.228 IR 86;
  • where an individual applies to the court for permission in accordance with rule 4.229 IR 86;
  • where the successor company has been known by a prohibited name for 12 months preceding the liquidation of the liquidating company and has not been dormant at any time in those 12 months in accordance with r 4.230 IR 86.

Re Newtons Coaches Limited

The Applicants in this case carried on a partnership under the name “Newtons of Guildford” (“the Partnership”). The Partnership was wound up on 14 October 2016. The Applicants wished to be involved in a company called Newtons Coaches Limited (“NCL”), which at the time of the application was being run by the Applicants’ wives. NCL had purchased for value the goodwill of the Partnership and the Partnership’s liquidators did not have any objection to the purchase or the Applicants being involved in NCL.

Given the similarity of the names of the Partnership and NCL, the Applicants were concerned that s.216 would apply to them and they made an application seeking the court’s permission under rule 4.229 IR 86. The Secretary of State for Business Energy and Industrial Strategy contended that s.216 applied to the Partnership and made written submissions to the court to this effect. The Applicants submitted that s.216 did not apply to them but sought the court’s view in any event.

Partnerships are ordinarily wound up under Article 7 of the Insolvent Partnerships Order 1994 (“IPO 94”) which states that the provisions of Part V IA 86 shall apply in relation to the winding up of a partnership as an unregistered company.

The Registrar considered what mischief s.216 was designed to prevent and whether the Applicants could potentially be engaged in a breach of the provisions. He concluded that the scenario was different in relation to partnerships because they were not limited liability businesses. The Applicants therefore would remain personally liable for the debts of the Partnership and its failure could not be hidden; NCL was not the same business as it was a limited liability company.

The Registrar also considered the definition of “company” under s.216(6) IA 86 and whether this would include a partnership. S.216(6) states as follows:

“In this section ‘company’ includes a company which may be wound up under Part V of this Act”.

The Registrar found that whilst a partnership could be wound up as an unregistered company under Part V IA 86, that does not make a partnership “a company” for the purposes of s.216. Having analysed the natural meaning of the words used in and the intention of s.216(6), the Registrar concluded that s.216 does not apply to a partnership but only “a company” which may be wound up under Part V IA 86.

Whilst the IPO 94 applies certain provisions of IA 86 to insolvent partnerships, there are some important distinctions in relation to how a partnership as opposed to a company is treated in an insolvency context. Re Newtons Coaches makes it clear that the application of s.216 IA 86 is one of those distinctions.