Non-Dormancy Exception From Re-Use Of Company Name Restrictions

The case of Maxima Creditor Resolutions Ltd v Fealy & Anor [2024] EWHC 2694 (Ch) (“Maxima”) was a case about the re-use of a company name and whether the relevant company was dormant within 12 months of liquidation. In this case, the directors were found not in breach on the grounds of non-dormancy.

What was interesting was whether to fall within an exception for the re-use of company names the other company that could have been said to re-use the name needed to trade each and every day of the 12 months prior to liquidation. Perhaps unsurprisingly this was found not to be necessary.

Phoenix Companies Mischief

The general restriction on phoenix companies is Section 216 of the Insolvency Act 1986.

The section prohibits the so-called phoenix company syndrome where a company goes into liquidation with the assets often hoovered up or transferred at an undervalue to a newly constituted company by the directors using a similar name that then continues to trade rising from the ashes of the old business with the customers often unaware of the position. When deposits for example only, are paid, customers may be aware for some time they have lost money. 

In a departure from the limited liability of a company when the Insolvency Act 1986 sprouted, it included Section 217 of the Insolvency Act 1986 which set out the consequence for a Section 216 breach which is all about how to be personally liable for a Phoenix company.

Exceptions To The Re-Use Of Company Names Restrictions

However, various exceptions exist to avoid the effects of Section 216, one of which arises when a company is not a phoenix company because it has already been trading for at least 12 months prior to the date of the liquidation of the relevant company and it has during that 12 month period been known by the same or similar name to the company that went into liquidation. This is set out in Rule 22.7 of the Insolvency (England and Wales) Rules 2016:

22.7. The court’s permission under section 216(3) is not required where the company there referred to though known by a prohibited name within the meaning of the section —

(a) has been known by that name for the whole of the period of 12 months ending with the day before the liquidating company went into liquidation; and

(b) has not at any time in those 12 months been dormant within the meaning of section 1169(1), (2) and (3)(a) of the Companies Act.

The test for trading is that of dormancy as set out in Section 1169 of the Companies Act 2006 which relevantly provides:

(1) For the purposes of the Companies Acts a company is ‘dormant’ during any period in which it has no significant accounting transaction.

(2) A ‘significant accounting transaction’ means a transaction that is required by section 386 to be entered in the company’s accounting records.

The Phoenix Company Trilogy

Practitioners familiar with this area of the law will need no introduction to the trilogy of relevant cases that have shaped Sections 216 and 217.

Bedtime reading for those unfamiliar might stretch over several days in respect of the following:

• Ricketts v Ad Valorem Factors Limited [2003] EWCA Civ 1706
• ESS Production Limited (in administration) v Sully [2005] EWCA Civ 554
• First Independent Factors & Finance Ltd v Mountford [2008] EWHC 835 (Ch)

What Is Dormancy For The Purpose Of Exemption On The Re-Use Of Company Names?

The judge in Maxima said dormancy for the purpose of Section 216 does not require the company to be transacting all the time:

In my judgment, that construction does not mean that the defendants bear the burden of proving that ML was actually undertaking significant accounting transactions every day during the 12 months qualifying period prior to Interiors’ liquidation. I agree with Mr Goldstein that it would be taking matters too far to require the defendants to prove that ML was undertaking significant accounting transactions 24 hours a day, seven days a week, for the entire 12 months qualifying period. Once a company has commenced undertaking significant accounting transactions, it is to be considered as non-dormant unless and until it ceases trading. Mr Cole implicitly recognised this by: (1) focussing his cross-examination of Mr Fealy on the early part of the 12 months qualifying period starting on 19 November 2012; and (2) refraining from any suggestion that ML had ceased to trade at any time during the qualifying 12 months period once trading had actually started.

I also accept Mr Cole’s further submission that it is not enough to invoke the third excepted case for the defendants to show that ML had engaged in some business activity, such as tendering, or providing services, or in preparing to transact business. There must be evidence of at least one significant accounting transaction at the very start of the 12 months qualifying period that is required to be entered in the second company’s financial records, and of such transactions continuing thereafter throughout that 12 months period. I reject Mr Goldstein’s primary submission that all that the defendants need to demonstrate, in order to bring themselves within the third excepted case, is that ML was trading at some point during the qualifying period encompassed by ML’s financial year ending 30 November 2013 (but with reference to the period of 12 months ending on 19 November 2013). ML’s filing of non-dormant accounts for the financial year ending 30 November 2013 is not sufficient to establish non-dormancy for the purposes of the third excepted case.

However, I accept Mr Goldstein’s fallback position that ML had in fact entered into significant accounting transactions from (at the latest) 16 November 2012 up to and beyond 19 November 2013, and thus for the full 12 months qualifying period. It is clear on the evidence – and I so find – that whether or not it had actually paid for them, from and including 16 November 2012 ML had incurred liability to make payment for the materials and equipment (such as the mobile tower) required by the plasterers, and to pay for their labour; and that ML was entitled to look to Murphy Construction to reimburse the cost of such materials (with appropriate agreed mark-up) and labour. I am satisfied that such matters were significant accounting transactions that were required to be entered in ML’s accounting records. It follows – and I also find as a fact – that ML was non-dormant during the whole of the 12 months qualifying period; and that the defendants are therefore entitled to rely upon the third excepted case by way of defence to the present claim.