Sections 216 and 217 of the Insolvency Act impose draconian sanctions on directors of liquidated companies who reuse "prohibited names". Prohibited names are names that are identical to, or "suggest an association with", a company that has gone into liquidation and of which they were previously directors. The sanctions include criminal penalties and personal liability for debts. It has always been difficult for advisers to confidently advise directors whether a proposed name for a new company would be a prohibited name, given the vague nature of the phrase "suggest an association".

The following question was published in the Financial Times on 23 July 2011 and answered by Richard Curtin, a lawyer in the London office of Faegre & Benson LLP.

I run a food and drinks company supplying products to football clubs.  But we recently heard that one of the clubs we supply will probably go into liquidation very soon and we are concerned that we may not receive the money we're owed by it. Is there any action we can take now to make sure we are credited if and when the club becomes insolvent?

The liquidator of Onslow Ditching Ltd (ODL), sought a declaration against two directors (on three grounds), seeking damages/fines or a contribution of assets from each director for:

A recent High Court case involving unlawful loans to directors illustrates the potential pitfalls involved in calculating limitation periods, and the circumstances in which the usual six year statutory limitation period will not apply to a recovery claim against a fiduciary.

Facts

Broadside Colours and Chemicals Ltd was a family firm supplying dyes to the textile trade. The directors were Geoffrey Button, his wife Catherine Button, and their son James Button. Only the father and son were shareholders.

In this case, a liquidator had commenced proceedings against the former director of a company in relation to transactions which were alleged to have been made at an undervalue and/or with an intention to defraud creditors and/or which were preferential. It was also alleged that the former director had acted in breach of his fiduciary duties in procuring or permitting the transactions to take place.

A recent Supreme Court judgement has confirmed that where an individual, Mr X, acts as director of company A, and company A is the sole director of company B, that will not necessarily make Mr X a “de facto” director of company B.

The Court decided that the mere fact of acting as a director of a corporate director was not enough to render the individual a de-facto director, “something more” would be required, such as the director holding himself out in correspondence as a director of company B.

The administrators of St George’s Property Services (London) Ltd appealed from a decision granting the application of the 2 shareholders and directors of the company to remove the administrators and to appoint replacement insolvency practitioners who were willing to make an application under s 244 of the Insolvency Act 1986 (UK) in respect of an exorbitant credit transaction to which the company was a party.

The case of Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (in administration) highlights that care needs to be taken to ensure that Retention of Title (RoT) clauses are effective. More information on ROT clauses is available in our 'Litigation survival guide - part 3. Retention of title: sellers beware!'

The facts

On 21 May 2010, Justice Floyd handed down his judgment in Bloomsbury International Ltd (in administration) v Mark Alan Holyoake.1 The case sheds light on the circumstances in which it is appropriate for a cross-undertaking provided by administrators on behalf of an insolvent company to be fortifi ed by a bank guarantee.

Facts

In a decision handed down just before the end of term, auditors have won an important House of Lords ruling limiting their liability in cases where a “one man” company is used as a vehicle for fraud. The Law Lords dismissed by a majority of three to two a negligence claim brought against an audit firm for failing to detect a massive fraud at Stone & Rolls, a trading company that fell in the late 1990s – holding that the liquidators could not bring a claim for damages when the company itself was responsible for the fraud.

Background