CASE 2

BONUS BREAKS LIMITED

Leave of the court sought under Insolvency Act 1986 Section 216.

FACTS

1. A director of an insolvent company sought leave to act as a director of a new company with a similar name.

HELD per Morritt J

1. Section 216 can be overcome by falling under one of the three exceptions under the Insolvency Rules or by leave of the court.

2. Doubt was cast on the practitioners view of the first exception under the insolvency Rules. Under this, a new company may take on a similar name to the old company, where it purchases the whole or substantially the whole of the business of the old company. The definition of business, in contrast with the view commonly held by practitioners does not necessarily include the old company's liabilities as well as its assets.

3. Although the company was heavily insolvent and should have ceased trading before it did, there were mitigating factors:-

a) No suggestion of dishonesty with the applicant taking advice from two qualified persons.

b) The applicant always kept proper books.

4. The applicant lost substantial sums of her own money.

In addition, there were favourable indicators as to the stability of the new company.

(1) Paid up share capital of £50,000 meant there was no requirement to borrow from a bank.

(2) Cash flow forecasts had been satisfactorily met.

(3) Benefit of £2.5 million pounds of quotations from the old company had been obtained.

(4) The applicant was one of two Directors, the other of which had a track record in and would be responsible for the financial and managerial aspects of the business.

5. It was also noted that two major creditors supported the application and the success of the new company would result in royalties being paid to the old company.

6. Leave was therefore, granted on the giving of an undertaking not to redeem shares or buy any of its own shares out of the distributable profits for two years, thus ensuring the capital base of the company was maintained.