Insolvency News: Phoenix Company regulation with teeth?
The Neuberg family operated a business producing light metal products and traded under the name Neuberg Metal Spinners for many years. In 1998 a company operated by Mr Neuberg called Neuberg Metal Spinners Limited went into liquidation. Despite this, the family business continued to trade under the name Neuberg Metals but through a new company, Watergate Services Limited, of which Mrs Neuberg was the sole director and secretary.
Watergate went into insolvent liquidation 2001. Mrs Neuberg then began to trade in her own name Karen Neuberg trading as Neuberg Metal Spinners .
Section 216 of the 1986 Insolvency Act prohibits company directors from continuing to trade in the same name as an insolvent company for 5 years after liquidation, the rationale being that if companies can trade using the same name then unsuspecting creditors may continue to trade with them without knowledge of the insolvency.
There are certain exceptions, namely
1) obtaining permission from the court
2) acquiring the business from an insolvency office holder where the creditors are notified within certain time limits and
3) where the trading name was already being used by the successor business for 12 months prior to the liquidation.
The legislation imposes both civil and criminal sanctions against directors who are in breach. Most of the reported cases are civil cases relating to personal liability for the successor company’s debts where there has been a breach.
While criminal prosecutions are not common, the Neuberg case highlights the drastic consequences that can flow from a successful prosecution through confiscation proceedings.
In accordance with Section 216, Mrs Neuberg was warned not to use the name Neuberg Metal Spinners , but continued to do so well into 2002. She was charged with trading under a prohibited name contrary to Section 216. She pleaded guilty and was sentenced to community service and was disqualified from holding a directorship for 5 years.
The prosecution also sought a confiscation order under the Proceeds of Crime Act 2002 (POCA) which is intended to deprive criminals of the proceeds of their crime i.e. the property from which they have benefitted as a result of their criminal conduct.
In Neuberg, the Court of Appeal stated the criminal conduct was the carrying on of a business under a prohibited name and this gave rise to a benefit to Mrs Neuberg. Although the business being operated was a lawful business it was carried on through an unlawful vehicle.
The court held that the “benefit” was in fact the whole turnover of the business as opposed to the net profits.
Its turnover was £288,948 and its realisable assets were valued at £100,000.
The court held that a proportionate confiscation order was £100,000 which Mrs Neuberg was ordered to pay . If she defaulted the judge ordered that she be imprisoned for 2 years.
Directors and lenders providing finance to successor businesses should be aware of the severe consequences for directors falling foul of Section 216. A criminal prosecution could lead to a confiscation order based on the company’s entire turnover for the period when it used the prohibited name.
If directors are buying a business back from an insolvency practitioner and consider the name to be essential to its ongoing success they would be well advised to invest the relatively modest cost of going through the notice procedure or applying for the court’s permission rather than risking ruinous liabilities for breach.