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Directors Beware: Ignorance Can Be Costly

Business NameA case that went to appeal at the Supreme Court has left a director of a business personally liable for more than a million pounds in compensation because he wasn’t aware of the legislation. This recent case is not only a timely reminder that directors must comply with all relevant legislation, but it has reinforced just how strict the courts will be in upholding it.

As laid out in section 216 of the Insolvency Act 1986, there are restrictions on re-using a company name after liquidation. If you decide after the liquidation to open a new business, the name of it cannot be the same or similar to that of the failed company. You can read all about this in our Guidance & Resources section. There may be many directors out there who are completely unaware of this, but as shown in a recent law case, that’s not an excuse.

The ruling in the Court of Appeal case of PSV 1982 Limited v Langdon [2022] EWCA Civ 1319, that was made last year, determined that, if in breach of section 216, a director will have personal liability for all the relevant debts incurred during the period of the breach under section 217 IA 1986.

The decision here is significant and could affect countless more directors moving forward, including those who may have made an error in judgement rather than having any particular agenda.

In the case in question, the Deputy High Court Judge considered the risk of injustice to directors in breach of section 216 being held responsible for liabilities incurred in proceedings to which they were not a party against the risk to creditors who, in obtaining a judgment, could then be forced to incur further time, expense and risk establishing their claim again in separate proceedings against the director. The Deputy High Court Judge ultimately concluded that Parliament had intended for sections 216 and 217 to protect creditors and penalise defaulting directors.

The Case

In this particular case, the company called “Discovery Yachts Limited” went into administration in October 2017. Despite the fact that this meant the company name “Discovery Yachts” was effectively now restricted, the director proceeded to open “Discovery Yachts Group Limited”.

In 2017, a couple bought a 58-foot Discovery sailing yacht for £1.5 million, but then subsequently sued the company when one of the cabins flooded just three days after delivery.

Following a Supreme Court trial in December 2019, the Judge upheld the claim against both companies and awarded the couple £1.2 million in compensation and costs. Despite the fact that the business owner appealed this finding, it was not successful. The court upheld the rules which automatically hold executives liable for their company’s debts, meaning the director is now personally liable for the compensation.

Had the director started again with a company that was completely separate in every way, then the ruling might have been different. But with the name Discovery being present in both companies, they were linked and the director was left with personal liability. It being presumed that the director did not take steps to utilise one of the three dispensations that enable a similar name to be used for a successor business.

For any directors who are considering opening up a new business after going through the liquidation process, we urge them to get the right advice and to ensure they follow the law. Whereas a limited company may protect directors financially in some respects, those who fall foul of the strict legislation will find themselves personally exposed. And, as shown in the case of PSV 1982 Limited v Langdon [2022] EWCA Civ 1319, that could be very costly indeed.

If you would like some advice or guidance, please don’t hesitate to contact one of the team at BLB Advisory.