The long reach of section 216 (prohibited names) Technical Bulletin No: 136 Case Hawkes v Cuddy [2007] EWHC 1789 (also known as Re Neath Rugby Ltd, Cuddy v Hawkes) Synopsis The decision relates to the ownership and management by two successive companies which ran “Neath”, a leading rugby club in Wales: (a) Gowerpark Ltd, which had been known as Neath RFC (Old Neath); and (b) Neath Rugby Ltd, also known as Neath RFC or Neath Rugby (New Neath). C had been a director of Old Neath. Upon the liquidation of Old Neath, the name “Neath” became a prohibited name under s.216(3) in relation to C – i.e. it prevented him from becoming a director of New Neath - and so he installed his wife as his nominee. The other director/shareholder was Mr Hawkes (H). An unfair prejudice (i.e. contributory’s) petition was presented under s.459 CA 1985 by H against C and Mrs C in respect of the affairs of: (i) New Neath; and (ii) Neath-Swansea Ospreys Ltd (Ospreys), a company managing the Welsh regional side now known as the Ospreys (of which New Neath owns 50%). Topics covered: Phoenix provisions The Facts The facts arose in the context of the re-organisation of Welsh rugby. In 1995/6, when Welsh rugby turned professional, the Welsh Rugby Union (“WRU”) established Old Neath to run Neath RFC and appointed C as one of its directors. Although the team performed well on the field, Old Neath ran into financial difficulties. The WRU then re-organised 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 Ospreys, a new joint venture company which would own and manage the regional side to be known as Neath-Swansea Ospreys which later became known as simply “the Ospreys”. C was interested in acquiring Neath RFC and New Neath was formed for that purpose, but he wished to focus his attention on the Ospreys and so he needed somebody to conduct the daily management of New Neath. He found H, a local businessman, and together they agreed to become 50/50 owners of New Neath which acquired the assets of Old Neath from the WRU. Because of the prohibition imposed on C by s.216, C used his wife, Mrs C, to hold one of the two shares in New Neath and to be his nominee director. C took advice about whether he could act as a director of New Neath and it was as a result of that advice that he appointed Mrs C as his nominee. C and H then fell out and eventually H presented a petition under s.459 alleging, amongst other things, that C had managed New Neath unlawfully through his wife as his nominee in breach of s.216, and that the affairs of New Neath had been conducted in a manner which unfairly prejudiced H as a member of New Neath. There was no real issue about whether “Neath” was a prohibited name. Old Neath had traded as Neath RFC. In relation to s.216, there were two main issues on the summary judgment application: (i) whether the fact that New Neath had been in existence and running Neath RFC before Old Neath went into liquidation made any difference; and (ii) whether s.217 could be invoked (a) by a shareholder, not a creditor, and (b) in the context of a live company, by a shareholder as grounds for relief under s.459. Law Debenture sponsor of the Insolvency Lawyers’ Association 1 The Decision The judge decided that, whilst s.217 is primarily invoked by creditors, it is not so limited. It imposes a personal liability on a director or manager who was formerly a director of a liquidating company. S.217 is linked to s.216 because contravention of the prohibition in s.216 is a necessary and sufficient condition of personal liability under s.217: but that is the limit of the connection. S.216 creates a free-standing criminal offence. It concerns the management of companies and is designed to protect persons who deal with companies from those who act as directors of liquidating companies and then seek to carry on business through another vehicle bearing the same or a similar name. Although the principal target of s.216 is the phoenix company, it is not limited to phoenix companies. Was C in contravention of s.216 when it was in fact his wife who was a director of New Neath? He was not a de jure director. He was stated to have appointed his wife as his proxy. He was held to have had no prospect of denying at trial that all Mrs C’s acts and omissions as a director were to be treated as his own acts and omissions and that he was a de facto director. De facto directors fall within the definition of director in the Insolvency Act (see s.251) and the court made a finding that C, in contravention of s.216, had been concerned in the management of New Neath by performing acts of a director in the name of Mrs C and using Mrs C’s name to conceal the fact that he was a de facto director of New Neath. The judge granted summary judgment in respect of these findings. Comment 1. Ss. 216 and 217 can be invoked in the context of a petition under s.459. Although finding a contravention of s.216 necessarily involves finding that a criminal offence has been committed, there is no bar to a civil court making a declaration to that effect. 2. If a person is prohibited by s.216 from being a director himself, it does not help to install his wife, or indeed anyone else. 3. The third excepted case under r. 4.230 IR 1986 depends on the successor company having been known by the prohibited name for the whole of the 12 months ending on the day before the liquidating company went into liquidation. In this case Old Neath went into liquidation on 16 October 2003 but New Neath was not incorporated until 9 May 2003 (i.e. just over five months earlier) and so C could not rely the third excepted case. 4. Nor would the new (i.e. amended) rule 4.228 (which came into force on 6 August 2007) have been of assistance in this case because New Neath bought the assets not from an insolvency office holder but from the WRU. 2.