Phoenix Company Case Study - Thorne v Silverleaf - Personal liability following the use of a prohibited company name
A director of a successor phoenix company business will have personal liability for debts of the successor company if the insolvent predecessor company's name is improperly reused. Improper reuse of an insolvent company's name is a breach of Sections 216 and 217 of The Insolvency Act 1986 and serious implications arise - Imprisonment, fine and personal liability.
The legal case known as Thorne v Silverleaf explains how an individual became personally responsible for all the debts of the phoenix company purely because he had not followed the requisite Insolvency Rules set out at Rules 4.226 to 4.230 of The Insolvency Rules 1986.
FACTS OF THE CASE
1. Mr Thorne was a director of three companies over a period of 25 years:
a. Mike Spence (Reading) Limited
b. Mike Spence (Motorsport) Limited
c. Mike Spence (Classic Cars) Limited
2. The first two of these three companies had previously gone into liquidation with Mr Thorne as a director. The third company was then formed and substantial monies procured from a Mr Silverleaf under an oral joint venture agreement.
3. Mr Silverleaf began to take a closer interest in the running of the company, attending 9 or 10 monthly meetings.
4. On default of the agreement, Mr Silverleaf demanded the drawing up of an accountants report on the company which put Mr Thorne's indebtedness to Mr Silverleaf at £135,000. Mr Silverleaf obtained summary judgment against the company and Mr Thorne personally under Sections 216 and 217 of The Insolvency Act 1986.
THE COURT HELD THAT
1. The name of the company was so similar to the previous two as to make it a prohibited name under Section 216 (2) of The Insolvency Act 1986
2. As Mr Thorne was a director of the first two companies in the 12 months preceding their liquidation and went on within five years of their liquidation to be a director in a company with a prohibited name, he was liable to criminal sanctions under Section 216 (4).
3. Mr Thorne as a person involved in the management of a third company was jointly and severally liable for its liabilities incurred at the time of his involvement, along with the company and any other persons liable (Section 217).
4. Although the sections go further than is required to curb the 'Phoenix Syndrome' the Court has no discretion to withhold their application.
5. Mr Thorne's argument that Mr Silverleaf is aiding and abetting the crime should be precluded by public policy from profiting from his own wrong, was rejected for three reasons:-
5.1 Public policy will not automatically intervene in every crime or wrong committed by a person.
5.2 Mr Silverleaf had not profited as he was entitled to the debt in any event.
5.3 In any event, Mr Silverleaf had not, in the view of the Court, aided and abetted as he had only participated in the management of the company to the extent that many institutional lenders would to monitor a loan.
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