Key Takeaways
- Maxima Creditor Resolutions Ltd v Fealy shows the existing company exception may protect directors who prove their company qualified.
- Directors who reuse a prohibited company name without an exception risk personal liability under section 217 of the Insolvency Act 1986 for the company’s debts.
- Rule 22.7 requires a company to remain non-dormant throughout the qualifying 12-month period before liquidation.
- Annual accounts describing a company as non-dormant do not alone prove continuous qualifying activity.
- Directors should retain accounting records that demonstrate continuous non-dormancy and significant accounting transactions before liquidation.
- Creditors and debt assignees should examine company records when assessing whether directors can establish the existing company exception.
- Our solicitors can assess the evidence, personal liability risks and potential claims arising from prohibited company name disputes.
- Go Legal is rated Excellent with over 300 five-star reviews and 5/5 on Trustpilot and Google, placing our solicitors among the best-reviewed litigation lawyers in England and Wales.
When Can the Existing Company Exception Protect Directors After Liquidation?
The existing company exception protects directors where the second company was known by the prohibited name for the whole 12 months before the earlier company’s liquidation and was never dormant during that period. In Maxima Creditor Resolutions Limited v John Thomas Fealy & Anor [2024] EWHC 2694 (Ch), the High Court explained exactly what directors must prove to rely on it.
Under section 216 of the Insolvency Act 1986, a director or shadow director of a company that enters insolvent liquidation cannot, for five years, act in relation to another company known by the same or a sufficiently similar prohibited name. The restriction does not apply if the court grants permission or prescribed circumstances apply. Breach can lead to criminal liability.
Under section 217, a person who breaches section 216 can become personally responsible for the relevant debts incurred while they were involved in managing the later company. That liability is joint and several with the company and anyone else who is liable.
Rule 22.1 of the Insolvency (England and Wales) Rules 2016 identifies the excepted cases where permission is not needed. The third excepted case, in rule 22.7, is often called the existing company exception. It applies where the later company:
- Was known by the prohibited name for the whole of the 12 months ending the day before the earlier company entered liquidation.
- Was not dormant at any time during those 12 months.
The rule was formerly rule 4.230 of the Insolvency Rules 1986. Maxima confirms that this is not a test of whether the company traded at some point during the year. The evidence must show non-dormancy throughout the precise qualifying period.
What Was the Background to the Existing Company Exception Decision?
How Did the Dispute Arise Between the Creditor, the Insolvent Company and Its Directors?
The claim concerned two related companies run by cousins, John Thomas Fealy and Thomas Joseph Barrett, who were directors of both.
The two companies
- McFee Interiors Limited (“Interiors”) was incorporated on 22 April 2009 and worked as an internal finishing company.
- McFee Limited (“ML”) was set up to carry out external works and energy-efficient upgrades to existing properties.
How ML started trading
- In early October 2012, the directors decided to set up an external works business that would register as a Green Deal External Render Installer.
- A tender for ML’s first project at 9 Morson Road, Enfield, was submitted to J Murphy & Sons Limited, referred to as Murphy Construction, on 29 October 2012.
- The contract was confirmed in the week commencing 5 November 2012. The directors’ accountants, Mirza and Co, then arranged ML’s incorporation.
- A method statement and risk assessments were prepared on 9 November 2012. These included a mobile tower for plastering, which ML had to pay for and put in place before work began.
- ML was incorporated on 14 November 2012.
- Physical work began on Friday 16 November 2012. HMRC allocated ML a unique taxpayer reference on the same day.
- ML worked continuously on Morson Road until 21 June 2013.
- It then carried out a second project at 86 to 88 Delancey Street, Camden Town, from 3 June 2013 to 9 December 2013.
The liquidations
- Interiors entered creditors’ voluntary liquidation on 20 November 2013. The directors said ML had traded for 53 weeks and one day before that date.
- ML entered creditors’ voluntary liquidation on 14 February 2017.
The debts and the assignment
ML owed Distributor Limited £226,991.35 and Compton and Casburn Limited £11,924.40. After credit for VAT reclaimed by the creditors, the total outstanding was £191,143.31. Statutory interest was also claimed under the Late Payment of Commercial Debts (Interest) Act 1998.
The creditors assigned their debts to Maxima Creditor Resolutions Limited on 2 February and 9 November 2022. Distributor Limited received £5,000 and Compton and Casburn Limited received £596.22. The original creditors appeared to have no right to share in any recovery.
Maxima’s business model is to take assignments of debts owed by companies in insolvent situations. Most of its claims are brought under sections 216 and 217.
The claim was first raised with the directors on 9 June 2022, more than nine and a half years after ML’s incorporation. The claim form was issued on 27 January 2023.
His Honour Judge Hodge KC, sitting as a High Court judge in the Business and Property Courts in Manchester, heard a one-day trial on 26 September 2024. Judgment was handed down on 1 November 2024.
Why Did the Directors Rely on the Existing Company Exception?
By trial, it was the directors’ only remaining defence. They accepted that:
- They had been directors of both companies at all material times.
- “McFee” was a prohibited name.
- They had acted for ML without the court’s permission.
- The debts were valid and had been validly assigned.
Limitation had also been conceded by the start of the trial. The defence would fail unless ML satisfied the non-dormancy requirement in rule 22.7.
Proving this was difficult. Company records had been destroyed in line with government guidance to keep them for six years from the company’s last financial year. The directors asked ML’s liquidator, former accountants and bank for documents without success. They recovered some records from a self-employed estimator and quantity surveyor who had worked for ML.
What Issues Did the Court Have to Decide About Non-Dormancy and Director Liability?
Does Occasional Trading or Non-Dormant Annual Accounts Prove the Exception?
The court had to decide whether it was enough for ML to have been non-dormant at some point during the relevant period.
The directors’ primary case was that non-dormancy at some point during the qualifying period or financial year was sufficient. They pointed to ML’s first abbreviated accounts, signed by Mr Fealy on 12 September 2014, which covered the year ending 30 November 2013 and treated ML as a trading small company.
Maxima argued that ML needed transactions which section 386 of the Companies Act 2006 required to be recorded throughout the whole 12 months ending on 19 November 2013. Those transactions had to begin before 20 November 2012.
Must a Company Have a Significant Accounting Transaction Every Day?
The directors argued that requiring proof of transactions 24 hours a day, seven days a week, would be practically impossible and make the exception unworkable. Maxima argued that there had to be a significant accounting transaction at the start of the period, followed by continuing non-dormancy.
Was ML Non-Dormant From the Start of the Qualifying Period?
Maxima argued that there was insufficient documentary evidence of qualifying transactions before 20 November 2012. It said tendering, preparing to trade or providing services was not enough without an actual receipt, expenditure, asset or liability requiring an accounting entry.
The directors relied on work beginning on 16 November 2012, the labour, materials and equipment used, and the payment liabilities and reimbursement rights that work created.
Can a Debt Purchaser Bring a Personal Liability Claim Against Directors?
Although no longer disputed at trial, the court addressed whether a debt purchaser that had never traded with ML could pursue the directors after buying the debts post-liquidation.
How Did the Court Decide Whether the Company Was Non-Dormant?
The court found that ML was non-dormant throughout the required period, so the directors could rely on the third excepted case and the claim was dismissed.
Why Was a Simple Trading History Not Enough?
The court rejected the directors’ primary argument:
“It is not sufficient for the defendants simply to demonstrate trading at some point in time during the 12 months qualifying period.”
The judge read the two limbs of rule 22.7 together:
- Rule 22.7(a) refers to “the whole of the period of 12 months”.
- Rule 22.7(b) requires that the company “has not at any time in those 12 months been dormant”.
The directors had conflated two different regimes. A single significant transaction can end a company’s dormant status for accounting and audit purposes. Rule 22.7 asks whether the company was non-dormant throughout its own 12-month period. Accounting commentary on dormancy could not simply be transferred to the insolvency exception.
This reading supports the purpose of the rule: protecting established, active businesses. As the judge put it, the requirement is there to stop a company being kept “on the shelf” with a prohibited name, ready for use when an earlier company enters liquidation.
Why Did Unpaid Labour, Materials and Equipment Matter?
The court rejected any need to prove a transaction every day. It applied this test:
“Once a company has commenced undertaking significant accounting transactions, it is to be considered as non-dormant unless and until it ceases trading.”
Directors therefore need at least one significant accounting transaction at the very start of the qualifying period and continuing non-dormancy after it. Tendering or preparing to trade does not count unless it generates a transaction that must be entered in the accounting records.
Two provisions of the Companies Act 2006 set the test:
- Section 1169(1) to (3)(a) treats a company as dormant during any period in which it has no significant accounting transaction. A significant accounting transaction is one that section 386 requires to be entered in the accounting records, excluding certain formation transactions.
- Section 386 requires adequate accounting records, including day-to-day entries of money received and spent and records of assets and liabilities.
Contemporaneous daywork sheets recorded two plasterers each working nine hours at Morson Road on 16 November 2012. ML needed personnel, materials and equipment, including the mobile tower. Whether or not it had paid for them, it had incurred liabilities to do so. It also had a right to be reimbursed by Murphy Construction for materials, with the agreed mark-up, and labour. The court held that these were significant accounting transactions.
Mr Barrett had told ML’s creditors’ meeting that trading began on 19 November 2012. The judge accepted this was a genuine one-working-day error, settled by the documents, and found both directors honest and careful witnesses.
Why Did the Directors Succeed on the Existing Company Exception?
ML’s qualifying transactions began by 16 November 2012, before the qualifying period started, and continued beyond 19 November 2013. The judge also found that:
- The date of Interiors’ liquidation had not been chosen to meet the exception, and the directors’ motives would not change how the provisions applied in any event.
- Because breach can lead to criminal penalties and substantial civil liability, the principle against doubtful penalisation applied.
- The drafting of the non-dormancy requirement was opaque and tortuous, because rule 22.7 must be read through section 1169 and then section 386.
On the assignment point, the court applied First Independent Factors & Finance Limited v Mountford [2008] EWHC 835 (Ch), [2008] BCC 598. An assignee stands in the assignor’s shoes and can bring any claim the assignor could have brought, even where the assignment follows liquidation. The judge described debt factoring as legitimate.
Costs were left to be agreed or decided on written submissions, and time for appealing was extended to 4.00 pm on Friday 13 December 2024.
What Did the Court Say About Limitation?
The limitation conclusions were obiter, meaning they were not necessary to the decision, because the defence had been conceded. They remain useful guidance:
- Time ran from when each underlying debt became payable by ML. This applied whether the claim was treated as a simple contract claim under Limitation Act 1980, section 5, or as a claim for a sum recoverable by statute under section 9.
- The judge did not accept that section 217 was merely procedural, because it creates a personal liability that did not previously exist.
- ML’s debts were all incurred no later than November 2016, so the original limitation periods expired no later than November 2022. The claim issued on 27 January 2023 would have been out of time without a later acknowledgment.
Under section 29(5)(a), a right of action to recover a debt or other liquidated sum is treated as accruing on the date it is acknowledged. Under section 30, the acknowledgment must be in writing, signed by the person making it and made to the person whose claim it acknowledges. It can be made through an agent.
Directors of a company entering creditors’ voluntary liquidation must prepare a statement of affairs under section 99 of the Insolvency Act 1986, verified by a statement of truth and sent to creditors. Adopting the approach in Re Overmark Smith Warden Limited [1982] 1 WLR 1195, the court held that such a statement can be an acknowledgment even though it is produced under a statutory duty. Mr Barrett verified ML’s statement of affairs, which listed the debts and was sent to the creditors. That restarted the six-year period. Section 29(5)(a) applied even under section 9, because the claim remained one to recover a “debt or other liquidated pecuniary claim”.
What Does the Decision Mean for Directors, Creditors and Insolvency Practitioners?
What Does It Mean for Directors Reusing a Company Name After Liquidation?
An associated company can be protected if it was genuinely established and active for the whole qualifying period. Honesty alone will not protect a director. The court drew on three authorities:
- Ricketts v Ad Valorem Factors Limited [2003] EWCA Civ 1706, [2004] BCC 164: the restrictions apply whenever a name falls within the natural and ordinary meaning of section 216(2), including outside a conventional phoenix case.
- Thorne v Silverleaf [1994] BCC 109: the provisions do not distinguish between honest and unscrupulous traders.
- Penrose v Official Receiver [1996] 1 WLR 482: the third excepted case is aimed at an established company where the phoenix mischief is absent.
Timing is critical. Directors who incorporate a second company in the months before an associated company fails should expect close scrutiny of the dates, and early trading needs documentary support.
What Does It Mean for Trade Creditors and Debt Purchasers?
Proving that a prohibited name was reused is not enough. Directors may still establish continuous non-dormancy, and an assignee takes the claim subject to that defence.
Debt purchasers also face costs risk. The judge described Maxima’s claim as “opportunistic”, noting that it was bought at a substantial discount and pursued as part of a business model. He also noted that success on non-dormancy alone defeated the entire claim. Both points were left to be weighed when costs were decided.
What Does It Mean for Insolvency Practitioners, Accountants and Record Keepers?
Statements of affairs can have limitation consequences beyond insolvency. Records should show when each statement was signed and sent to creditors.
Accounting records should show when a liability was first incurred, not just when an invoice was paid. An incurred liability can itself be a significant accounting transaction.
What Practical Steps Should Directors and Creditors Take After a Prohibited Name Dispute?
How Should Directors Build Evidence for the Existing Company Exception?
Directors should build a date-led evidence file before records are lost. In Maxima, records had already been destroyed when the claim arrived.
- Work out the exact 12-month qualifying period. It ends the day before the earlier company entered liquidation.
- Find the earliest significant accounting transaction at or before the start of that period. This could be a liability, payment, receipt, asset or right to be paid.
- Build a chronology showing that the business continued trading throughout the period.
- Request records from accountants, banks, suppliers, project managers, former staff, freelancers and the liquidator.
- Keep original documents, emails, metadata and accounting data, including job sheets, supplier orders, equipment hire records and payment applications.
Incorporation documents and annual accounts can support the defence, but Maxima shows they will not prove it on their own.
What Should Creditors and Debt Purchasers Investigate Before Bringing a Claim?
Creditors should test the existing company exception before assuming that directors are personally liable. Useful evidence includes:
- The incorporation date of the later company.
- Tenders, contracts and payment applications.
- Job sheets and labour records.
- Supplier invoices, purchase orders and equipment hire documents.
- Ledgers, bank records and annual accounts.
- Statements of affairs, including when they were signed and sent.
If you need to test the evidence on either side of a prohibited name claim, our solicitors can review your documents and advise on the strength of the exception. Book a free consultation or call 0207 459 4037.
Frequently Asked Questions
Get Advice on the Existing Company Exception Today
Maxima shows that directors must prove more than occasional trading or non-dormant accounts. They need reliable evidence that significant accounting activity began by the start of the precise 12-month period and continued throughout it. Lost records or a delayed response can leave directors unable to prove the defence and exposed to personal liability for the later company’s debts.
We are a London-based commercial litigation law firm acting for individuals, directors, professionals and businesses across England & Wales. Our solicitors can help with:
- Assessing whether a name is prohibited and whether an exception may apply.
- Preparing an evidence chronology focused on when non-dormant activity started and how it continued.
- Responding to threatened or issued personal liability claims under sections 216 and 217.
- Assessing the merits, limitation position and costs risk of a proposed creditor or debt-purchaser claim.
- Reviewing statements of affairs, debt assignments, accounting records and project documents.
- Negotiating settlements and representing clients in contested proceedings where settlement is not achievable.
To discuss a prohibited name allegation, an assigned debt claim or a director liability issue, book a free consultation with one of our qualified lawyers or call 0207 459 4037.
