Vol 5 (2008) - Issue 5

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The Long Reach of s. 216 Insolvency Act 1986 and the Effect of Contravention of the Restriction on the Re-use of a Prohibited Company Name: Frederick Hawkes v (1) Simone Cuddy (2) Michael Cuddy (3) Neath Rugby Club [2007] EWCA Civ 1072; [2007] EWHC 1789

The Court of Appeal’s decision to approve the reasoning of His Honour Judge Allen QC in relation to the proper construction and effect of section 216 Insolvency Act 1986 (‘IA’) has shown the potentially long reach of that section. Whilst the initial purpose of the section, together with section 217 IA, was to combat unscrupulous directors seeking to take advantage of an insolvent company’s goodwill, the sections have been used as a useful debt-recovery tool for creditors against the directors or management of a failed company.1 Hawkes v Cuddy shows once again that the sections have yet wider relevance than previously anticipated and highlights the importance of a timely application to court for permission to act as a director in the event of there being any doubt as to a successor company’s name.

At the time of its introduction, it was envisaged that the aim of the section, one of the few new provisions to be introduced into the Insolvency Act 1986 (as a late amendment), together with section 217 was to provide an automatic prohibition of the re-use of a company or trading name (or a similar name) by a successor company when the former company had entered into insolvent liquidation. This was to combat the so-called ‘phoenix syndrome’ which was prevalent in the 1970s and 1980s and was considered at length in the Cork Committee’s report.2 The section also provides that a director of the insolvent company may not be a director of the successor company for a period of five years. The Insolvency Rules 1986 provide three exceptions to the latter prohibition on a director by rules 4.228 to 4.230. Under 4.228 notice has to have been given to the creditors that the whole or substantially the whole of the company’s assets had been purchased from the liquidator, administrator or administrative receiver of the former company, under 4.229 permission of the court may be sought and granted, and under 4.230 the prohibited name regime is not applicable where the second company was using the proscribed name and trading for at least 12 months prior to liquidation of the first company. Contravention of section 216 is dealt with in section 217 which contains both civil and penal sanctions.

Background facts of the case

On 28 May 1998 the Welsh Rugby Union (‘WRU’) established a private company, Gower Park Limited (‘GPL’) to run Neath Rugby Football Club and appointed Mr Cuddy as one of its directors. GPL traded as ‘Neath’. The WRU reorganised Welsh rugby for the 2003/04 season, forming regional sides. The clubs known as Neath RFC and Swansea RFC agreed to be equal shareholders in a new joint venture company which would own and manage the regional side which came to be known as simply the Ospreys.

Mr Cuddy was interested in acquiring Neath RFC and Neath Rugby Limited (‘NRL’) was incorporated on 9 May 2003 for that purpose. However Mr Cuddy wished to focus his attention on the Ospreys and sought a partner to undertake the daily management of NRL. He found Mr Hawkes, a local businessman, and together they agreed to become the 50/50 owners of NRL.