Churchill & Anor v First Independent Factors & Finance Ltd

The Court of Appeal decided a pure point of statutory construction under the Insolvency Rules 1986, rule 4.228, read with sections 216 and 217 of the Insolvency Act 1986. The court held that the rule permits a successor company to give notice to creditors identifying persons who are to be directors of the successor company, but that the wording of rule 4.228(3) and (4) is prospective.

Accordingly, to obtain the protection afforded by the rule a person who was a director of the insolvent company must be named in the notice before he becomes a director or otherwise begins to act for the successor company; a retrospective notice given after the person has already acted will not relieve him from liability under sections 216 and 217. The construction was supported by the language of the rule, its context, and the underlying policy of guarding against phoenix companies.

The appellants, two brothers who had been directors of an insolvent company (the old company), continued as directors of a new company (the successor company) which had acquired the old company's goodwill by a sale agreement. The respondent, assignee of creditors of the new company, sought summary judgment against the appellants personally under sections 216 and 217 of the Insolvency Act 1986 on the basis that the new company's name was a 'prohibited name' and the appellants had acted as directors of that company without leave of the court. The appellants relied on a purported notice said to have been given under rule 4.228 of the Insolvency Rules 1986, which they said disapplied the application of sections 216 and 217.

• Nature of the application: summary judgment for sums claimed arising from alleged personal liability under ss.216–217; appellants asserted effectiveness of a rule 4.228 notice as a defence.
• Procedural posture: claim began in the Reigate County Court; District Judge Polden (Tunbridge Wells County Court) entered summary judgment for the respondent on 15 December 2005; HHJ Mitchell (Canterbury County Court) refused to transfer and dismissed the appellants' appeal on 26 April 2006; permission to bring the second appeal to the Court of Appeal was granted by Chadwick LJ on 21 June 2006.
• Issues framed: (i) whether a rule 4.228 notice was capable, as a matter of construction, of operating retrospectively to relieve persons already acting as directors at the time the notice was given; and (ii) whether the question was one suitable for determination on summary judgment.

The Court of Appeal approached the appeal as a pure question of construction. It concluded that the phrase 'with a view to his being a director' is prospective; the reference to 'a person who is so named' in rule 4.228(4) unambiguously refers to a person named under rule 4.228(3) with that prospective purpose; and the permissive word 'may' in rule 4.228(3) does not introduce a discretion to cure past contraventions. The court further noted that if retrospective effect had been intended an express provision would be expected and that rule 4.229 (a short grace period pending an application for leave) pointed away from retrospective effect. The court dismissed the appeal, holding that any notice given after the appellants had already acted as directors could not relieve them of liability under sections 216 and 217. The court accepted that the matter was appropriate for summary determination because it raised a pure point of construction.

Appeal dismissed. The Court of Appeal held that rule 4.228 must be read prospectively: a successor company’s rule 4.228 notice can only relieve a person from ss.216–217 liability if the person is named in the notice with a view to his becoming a director (or otherwise becoming involved) before he so acts. A retrospective notice given after the person has already acted as a director will not relieve him of liability. The construction followed the language of the rule, its context (including rule 4.229) and the policy against phoenix companies.

Claim began in the Reigate County Court (claim by respondent 25 October 2004). District Judge Polden (Tunbridge Wells County Court) entered summary judgment for the respondent on 15 December 2005 and refused permission to appeal. HHJ Mitchell (Canterbury County Court) granted the appellants permission to appeal but dismissed the appeal on 26 April 2006. Chadwick LJ granted permission to bring a second appeal to the Court of Appeal on 21 June 2006; the Court of Appeal dismissed the appeal on 30 November 2006 ([2006] EWCA Civ 1623).