Timely incorporation saves “phoenix” directors

In Maxima Creditor Resolutions Ltd v Fealy [2024] EWHC 2694 (Ch), just one week proved vital in distinguishing a pre-existing business from a phoenix company, protecting its directors from personal liability for insolvent company debts.

The claimant brought an action seeking that the directors of McFee Interiors Limited (MIL), which had entered liquidation, be held personally liable for the company’s debts by virtue of S 217 of the Insolvency Act 1986.

The basis of the action was that the directors had established a new “phoenix company” and had commenced trading under the name McFee Limited, which it was argued was a prohibited name in contravention of S 216 of the Insolvency Act 1986. 

The defendant’s accepted that the McFee Limited was operating under a prohibited name as per the definition set out in S 216 but argued that McFee Limited was not in fact a phoenix company, having been incorporated prior to MIL’s liquidation. Also, that their circumstances fell within the exception provided by R22.7 of the Insolvency (England and Wales) Rules 2016, as McFee Limited had been trading (and non-dormant) for the entirety of the 12-month period prior to the liquidation of MIL.

On the facts, McFee Limited had been incorporated and began trading one year and six days prior to MIL’s liquidation. As such, the court concluded that McFee Limited was not a phoenix company, but rather a previously established and active business. 

The claimant’s action was unsuccessful and the directors were not personally liable for MIL’s debts.

Had McFee Limited been unincorporated (or dormant) at any point within the 12 months prior to MIL’s liquidation, the R22.7 exception would not have been available to the defendants.

In reference to Maxima Creditor Resolutions Ltd v Fealy [2024] EWHC 2694 (Ch).

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