Churchill & Anor v First Independent Factors & Finance Ltd

A notice under rule 4.228 of the Insolvency Rules 1986 operates prospectively. It can protect a person from the prohibition in section 216 of the Insolvency Act 1986 only where the person is named with a view to becoming a director or otherwise becoming involved in management of the successor company. It cannot retrospectively relieve liability incurred by acting as a director before the notice was given.

The word “may” in rule 4.228(3) is permissive. It does not create a discretion to give an effective notice without naming the relevant person. A pure question of construction may properly be decided summarily where factual evidence cannot affect the issue.

The appellants were directors of an insolvent company and also directors of a successor company whose name was accepted to be a prohibited name under section 216 of the Insolvency Act 1986. The successor company allegedly acquired the old company’s goodwill and later gave creditors notice under rule 4.228 of the Insolvency Rules 1986.

The respondent claimed that sections 216 and 217 made the appellants personally liable for debts incurred while they acted as directors. A District Judge entered summary judgment. HHJ Mitchell granted permission to appeal but dismissed the appeal. The central questions were whether rule 4.228 could operate retrospectively and whether the construction issue was suitable for summary determination.

Appeal dismissed. The question of construction was suitable for summary judgment. As the issue depended only on the words of rule 4.228, and no surrounding facts could affect their meaning, deciding it summarily did not involve an impermissible mini-trial.

1. Rule 4.228 must be read as operating prospectively. The expression “with a view to his being a director” has a prospective flavour. The reference to a person “so named” in rule 4.228(4) therefore means a person named for the purpose of becoming a director or otherwise becoming involved in management of the successor company.
2. The word “may” in rule 4.228(3) is permissive and echoes rule 4.228(1). It permits a person who would otherwise contravene section 216 to use the notice procedure. It does not introduce a discretion enabling an unnamed or already-involved director to obtain the benefit of the rule.
3. A retrospective construction would have been expected to contain express words to that effect. Rule 4.229 reinforces the conclusion that rule 4.228 was not intended to operate retrospectively.
4. The purpose of the rule, in the context of the phoenix phenomenon, is to alert creditors before the person starts to participate in management, enabling them to assess the risk of extending credit to the successor company. A notice given after the appellants had acted as directors could not relieve them from liability under section 217 for that prior contravention of section 216.

The Court of Appeal therefore dismissed the appeal.

• Court of Appeal (Civil Division) [2006] EWCA Civ 1623: appeal dismissed.
• Canterbury County Court: HHJ Mitchell granted permission to appeal but dismissed the appeal with costs.
• Tunbridge Wells County Court: District Judge Polden entered summary judgment for the respondent for £23,163.02 and awarded costs on an indemnity basis.