| Date | 21 May 2003 |
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| Judgment | Archer Structures Limited v Christopher Griffiths, 30 April 2003 |
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| The Issue | The responsibility of directors of a company trading with a name similar to an earlier insolvent company. |
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| Implication |
Directors may be jointly and severally liable for the debts of a company under Sections 216 and 217 of the Insolvency Act 1986, where that company has been reformed to escape the debts of a predecessor company. |
printIt has been called the "phoenix syndrome" and it is particularly prevalent in the construction industry. The phoenix syndrome is where a limited liability company is put into liquidation to avoid its debts and then almost immediately after a new company is formed to continue trading in similar style to the old. The new company, risen from the ashes, will often have the same registered office and the same company directors. Certain measures were taken in the Insolvency Act 1986 to eradicate this problem. These measures were examined in the recent case of Archer Structures v Christopher Griffiths. Mr Griffiths was a director of MPJ Construction Ltd. It seems that company could not pay its debts and in February 1999 a creditors winding up petition was presented to the court. The company was wound up by court order in April 1999. Amazingly however, whilst all that was going on, a new company had been formed, styled MPJ Contractors Ltd. Although there was a change of name from "Construction" to "Contractors", little else seemed to have changed. Mr Griffiths was appointed a director of the new company "Contractors", and it continued, it seems, to have difficulty in paying its debts. Almost one year later, Archer Structures issued proceedings in the County Court against Contractors, claiming approximately £80,000 for construction works carried out as a subcontractor. Contractors counterclaimed approximately £70,000, but failed to present any particulars of the counterclaim or to take part in the proceedings. In consequence, in May 2001, judgment was entered against Contractors in favour of Archer, for £80,000. This was not however paid. Contractors was up to the old tricks of its predecessor company Construction. Once again, a creditors winding up petition had again been presented, and in June 2001 a winding up order was granted by the court. The official receiver was appointed liquidator. His summary of Contractors' assets and liabilities valued the company at nil. Since there was clearly no prospect that Archer would obtain satisfaction against its judgment, it turned its attention to Griffiths, the director, and to the effects of Sections 216 and 217 of the Insolvency Act 1986. Sections 216 and 217 provide, in summary, that where a person is a director of a company that goes into liquidation he may not, within a five year period, without the leave of the court, be a director of a company with a similar name, where the name might suggest an association with the previous company. If he does, he will be personally liable for the debts of the new company. Archer claimed that Griffiths was in breach of Section 216 and that under Section 217 of the Act, it was entitled to payment of the debt of £80,000 that had been awarded against Contractors. Griffiths deployed two arguments to wriggle free. Firstly, he argued that the name MPJ Contractors Ltd was not so similar to the name MPJ Construction Ltd as to suggest an association with that company. He argued that the companies' letter headings and compliment slips were entirely different, using different typeface and formatting. Her Honour Judge Frances Kirkham rejected this notion very quickly. She commented that it was obvious that the name MPJ Contractors Ltd was as close to MPJ Construction Ltd as it was possible to be. Indeed, in preparing for the hearing, Judge Kirkham noted that she had needed an aide-memoire to try to avoid being confused between the two. The difference between the various styles of letter heading was to be ignored, as it would drive a coach and horse through the legislation if it were correct. Given the mischief at which the legislation was aimed at, it was appropriate to take a purposeful approach to Section 216. This led inevitably to the conclusion that there was an association between the two companies. This was the case before one even considered additionally that the two companies had shared registered offices and had directors in common. This conclusion meant that Section 217 applied. Griffiths was jointly and severally liable for Contractors debts. Griffiths argued however that his liability under Section 217 was to pay the debt due from Contractors to Archer. That debt was not the £80,000, but the balance due, if any, after the debts owed by Archer to Contractors had been set off against the judgment sum by applying Rule 4.90 of the Insolvency Rules. By Rule 4.90, there was a mandatory set-off of debts existing at the date of liquidation. This meant, according to Griffiths, that the counterclaim which MPJ Contractors had previously raised, but which had not been considered by the County Court ought now to be taken into account. Judge Kirkham was unimpressed with this argument. Rule 4.90 operated to adjust the respective liabilities of a third party and the insolvent company. In her judgment, the rule applied to the company, not to a director. The mischief to which Section 217 was directed, gave rise to the personal responsibility of a director. That liability, in her judgment, continued notwithstanding the insolvency of the company. In consequence, Griffith was personally liable for the relevant debts of MPJ Contractors and, in particular, for the judgment debt of £80,000 owed to Archer, plus accrued interest and costs.
CJ-0319
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