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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Glasgow City Council v. Craig & Anor [2008] ScotCS CSOH_171 (11 December 2008) URL: http://www.bailii.org/scot/cases/ScotCS/2008/CSOH_171.html Cite as: 2009 SLT 212, [2009] RA 61, [2009] 1 BCLC 742, [2008] CSOH 171, 2009 GWD 5-75, [2008] ScotCS CSOH_171 |
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OUTER HOUSE, COURT OF SESSION [2008] CSOH 171 |
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CA43/08 |
OPINION OF LORD GLENNIE in the cause Pursuer; against GORDON CRAIG First Defender: and ARISTIDE MOCCIA Second Defender: ________________ |
Pursuers: Dalgleish,
First Defender: McShane, Brodies LLP
Second Defender: In person
[2] The defenders were formerly directors of
Arigo Limited. Arigo Limited
was incorporated on
[3] Until just before its liquidation, Arigo Limited
was the lessee of premises at
[4] The defenders were also directors of
Degreefresh Limited ("Degreefresh"). Degreefresh was incorporated on
[5] In or about February 2003
Degreefresh opened a wine bar, under the name "Bar Vino", at
[6] In December 2004 Degreefresh took
an assignment from Arigo Limited of the lease of
[7] The pursuers are the rating authority
for the City of
[8] It is necessary to set out those
sections in full. S.216, which imposes
criminal sanction for use of a prohibited name, provides as follows:
"216. (1) This section applies to a person where a company ("the
liquidating company ") has gone into insolvent liquidation on or after the
appointed day and he was a director or shadow director of the company at any
time in the period of 12 months ending with the day before it went into
liquidation.
(2) For the purposes of this
section, a name is a prohibited name in relation to such a person if:
(a) it is a name by which the
liquidating company was known at any time in that period of 12 months, or
(b) it is a name which is so
similar to a name falling within paragraph (a) as to suggest an
association with that company.
(3) Except with leave of the
court or in such circumstances as may be prescribed, a person to whom this
section applies shall not at any time in the period of 5 years beginning with
the day on which the liquidating company went into liquidation:
(a) be a director of any
other company that is known by a prohibited name, or
(b) in any way, whether
directly or indirectly, be concerned or take part in the promotion, formation
or management of any such company, or
(c) in any way, whether
directly or indirectly, be concerned or take part in the carrying on of a
business carried on (otherwise than by a company) under a prohibited name.
(4) If a person acts in
contravention of this section, be is liable to imprisonment or a line, or both.
(5) In subsection (3)
"the court" means any court having jurisdiction to wind up companies;
and on an application for leave under that subsection, the Secretary of State
or the official receiver may appear and call the attention of the court to any
matters which seem to him to be relevant.
(6) References in this
section, in relation to any time, to a name by which a company is known are to
the name of the company at that time or to any name under which the company
carries on business at that time.
(7) For the purposes of this
section a company goes into insolvent liquidation if it goes into liquidation
at a time when its assets are insufficient for the payment of its debts and
other liabilities and the expenses of the winding up.
(8) In this section
"company" includes a company which may be wound up under Part V
of this Act.
S.217
imposes civil liability for use of a prohibited name when there has been a
contravention of s.216. It is in the
following terms:
217. (1) A person is personally responsible for all the relevant debts
of a company if at any time:
(a) in contravention of
section 216, he is involved in the management of the company, or
(b) as a person who is
involved in the management of the company, he acts or is willing to act on
instructions given (without the leave of the court) by a person whom he knows
at that time to be in contravention in relation to the company.
(2) Where a person is
personally responsible under this section for the relevant debts of a company,
he is jointly and severally liable in respect of those debts with the company
and any other person who, whether under this section or otherwise, is so
liable.
(3) For the purposes of this
section the relevant debts of a company are:
(a) in relation to a person
who is personally responsible under paragraph (a) of subsection (1),
such debts and other liabilities of the company as are incurred at a time when
that person was involved in the management of the company, and
(b) in relation to a person
who is personally responsible under paragraph (b) of that subsection, such
debts and other liabilities of the company as are incurred at a time when that
person was acting or was willing to act on instructions given as mentioned in
that paragraph.
(4) For the purposes of this
section, a person is involved in the management of a company if he is a
director of the company or if he is concerned, whether directly or indirectly,
or takes part, in the management of the company.
(5) For the purposes of this
section a person who, as a person involved in the management of a company, has
at any time acted on instructions given (without the leave of the court) by a
person whom he knew at that time to be in contravention in relation to the
company of section 216 is presumed, unless the contrary is shown, to have
been willing at any time thereafter to act on any instructions given by that
person.
(6) In this section 'company'
includes a company which may be wound up under Part V."
It can be seen that s.216 imposes a restriction on
those who were, until its liquidation, directors of the liquidating company. The restriction is that, for a period of 5 years
after the liquidating company has gone into insolvent liquidation, they are not
allowed, except with the leave of the court or in the three excepted cases in
Rules 4.80 to 4.82 of the Insolvency (Scotland) Rules 1986, to be
directors of or otherwise concerned in the management of a company which has or
carries on business under a prohibited name.
A prohibited name is a name by which the liquidating company was known
or which is so similar as to suggest an association with it. S.216 renders those who contravene that
restriction subject to criminal sanctions.
S.217, on the other hand, is not concerned with criminal sanctions. It makes such persons personally liable for
the debts of the company which is known by the prohibited name.
[9] The pursuers' case is
straightforward. They say that, in
relation to the defenders, who had been at the material time directors of Arigo Limited,
the name "Arigo" is a prohibited name.
Accordingly, for a period of 5 years after Arigo Limited went
into insolvent liquidation the defenders are not permitted to be directors of
any other company that is known by the name "Arigo". From November or December 2004 until it
went into liquidation in 2007, the defenders were directors of Degreefresh which
was known by that prohibited name, in that it carried on the restaurant
business at
[10] The defenders do not dispute that, in
relation to them, the name "Arigo" is a prohibited name; and that during the
period from January 2005 to September 2007, in contravention of
s.216, they were directors of a company (Degreefresh) which carried on the
restaurant business at
[11] The defenders' first submission, that they
have no liability at all for the sums sued for, was based in part on a pleading
point and in part on evidence from the first defender, which was not
challenged, that the income from the Arigo restaurant business accounted for
less than 50% of the total income of Degreefresh. The pleading point was that the pursuers had
periled their case on an averment that the defenders had used the name "Arigo"
as the trading name of Degreefresh, rather than as one of its
trading names. I reject this
argument. The relevant facts (as opposed
to the proper interpretation to be given to them) were not seriously in
dispute, and evidence was led by the first defender (without objection) to the
effect that Arigo was only part of the business of Degreefresh. In the preliminary and procedural hearings
before the proof, both parties approached the matter on the basis that the main
issue was whether the defenders' liability should be restricted to a liability
for the rates attributable to
[12] The defenders' alternative submission,
that if they are liable at all they are liable only for the rates levied on
[13] The lease of
[14] In terms of carrying on the two
businesses, although Arigo Limited and Degreefresh were legally separate
entities, this was not reflected in their accounting processes. Until Arigo Limited was put into
liquidation, or at least until the lease of
[15] Looking at the matter in the round, it
seems to me that, despite the informal and somewhat loose accounting practices
which pre-existed Arigo's liquidation, and which continued thereafter, the two
premises were run and continued to be run throughout as separate
businesses. Both when Arigo Limited
was a going concern and after its liquidation, the restaurant and the wine bar
offered themselves to the public as separate entities. This is important, having regard to the
mischief at which ss.216 and 217 were aimed, to which I refer below. The risk of confusion to members of the
public arose only in relation to 67. In
respect of those premises, the public would probably have considered that the
business of Arigo at
[16] It is well recognized that the mischief
aimed at by ss.216 and 217 was the eradication of the "phoenix syndrome", the
ease with which a person trading through the medium of one or more companies
could allow such companies to become insolvent, form a new company using a
similar name, and carry on trading much as before, often having bought up the
assets of the first company at an undervalue either before its insolvency or
from its liquidator afterwards: see Thorne v Silverleaf [1994] BCC 109, per Peter Gibson LJ
at 113E-G, Ricketts v Ad Valorem Factors Ltd [2004] 1 BCLC 1,
per Mummery LJ at para [15].
In Penrose v
Secretary of State for Trade and Industry [1996] 1 WLR 482
at 489, in a passage cited with approval in ESS Production
v Sully, Chadwick J (as he
then was) said this:
"The purposes for which section 216 was enacted can
be gleaned - in part at least - from the excepted cases
under the rules. Rule 4.228 permits
a director of an insolvent company to act as director of a new company with a
prohibited name provided that the business of the insolvent company has been
acquired under arrangements made by an insolvency practitioner and notice has
been given to the creditors of the insolvent company. That rule identifies, and meets, two elements
of mischief: first, the danger that the business of the old insolvent company
has been acquired at an undervalue - or is otherwise to be
expropriated - to the detriment of its creditors; and, secondly, the
danger that creditors of the old company may be misled into the belief that
there has been no change in the corporate vehicle. The "phoenix" must be disclosed as such. The third excepted case in rule 4.230
shows that the mischief is not thought to exist in a case where the company
having a prohibited name has been established and trading under that name for a
period of not less than 12 months before the liquidating company went into
liquidation. The former director of the
liquidating company can join, or can remain a member of, the board of such a
company without restriction. That must
be because the mischief is not perceived to exist when the company having a
prohibited name is not a "phoenix".
Rules 4.228
and 4.230 of the Insolvency Rules 1986 are in identical terms to Rules 4.80
and 4.82 of the Insolvency (
[17] Two points of importance emerge from the cases to which I was
referred. The first is that, although it
is important to have regard to the mischief at which the sections are aimed, a
purposive approach to construction does not necessarily provide the correct
answer to their applicability. Thus, in Thorne v Silverleaf, Peter Gibson LJ accepted that while it was
"somewhat surprising" that the sections should apply to impose both a civil and
a criminal liability on a person in the position on Mr Thorne, since he
was not attempting to exploit the goodwill of the company by misleading others,
it was clear that in the absence of an application for leave under s.216(3) the
court was left with no discretion but to apply such liability: see p. 113E-H. In Ricketts
v Ad Valorem Factors Mummery LJ
at paras.[17] and [18] indicated that although he appreciated the significance
of a purposive interpretation, the legal position was that, if a prohibited
name was used, then the case was caught by the restriction in s.216 even if it
was not a "phoenix syndrome" case and even though the imposition of criminal
sanctions seemed harsh. The second point,
however, is that since s.216 imposes criminal liability (and s.217 applies the
same definitions to impose a potentially Draconian civil liability) "the court
should strive to avoid adopting a construction which penalises someone where
the legislator's intention to do so is doubtful, or penalises him in a way
which is not made clear": see per Simon Brown LJ in Ricketts v Ad Valorem Factors at para [30]. The same point is made by Arden LJ in ESS Production v Sully at paras [71], [72] and [78]
under reference to the "principle of doubtful penalisation".
[18] I turn
to the construction of s.216. There is no
doubt that the name "Arigo" is a prohibited name within the meaning of s.216(2)
in relation to these defenders.
Accordingly, they are prohibited in terms of s.216(3)(a) for a period of
5 years from being directors of, or being concerned in the management of,
another company known by that name. A
company is "known by" that name at any particular time if it carries on
business under that name at that time: s.216(6). The defenders were, during the relevant
period, directors of Degreefresh and Degreefresh carried on business at
[19] Civil
liability is imposed by s.217. Under
s.217(1) a person who, at any time, is involved in the management of the
company in contravention of s.216 is personally liable for all the relevant
debts of the company. The company in
this case is Degreefresh. The relevant
debts are defined by s.217(3). So far as
concerns the present case, where the civil liability is imposed by s.217(1)(a),
the relevant debts of the company are "such debts and other liabilities of the
company as are incurred at a time when that person was involved in the
management of the company".
[20] Does
that mean that the defenders, as directors of Degreefresh and in contravention
of s.216, are liable for all the debts and liabilities of Degreefresh, however
incurred, or only for those incurred by Degreefresh whilst carrying on business
under the name "Arigo"? It seems to me
that Parliament cannot have intended the liability of the defenders in such a
case to extend beyond the debts and other liabilities incurred by Degreefresh
while carrying on business under the prohibited name. The situations in which the defenders are
subject to criminal liability under s.216 are co-extensive with those which
attract civil liability under s.217. This
is made clear by s.217(1). Take,
therefore, the case of criminal liability under s.216 which attaches "if a
person acts in contravention of this section", i.e. by being a director of, or
being involved in the management of, a company carrying on business under a
prohibited name. Insofar as Degreefresh
runs the wine bar (Bar Vino) or tapas bar (Olé) at
[21] The
same result, in my view, must apply to the question of civil liability under
s.217. If one takes the same examples,
and asks in each case whether Parliament intended that the defenders should be
held personally liable for all the debts and liabilities of X Ltd for a
period of 5 years after the date of the liquidation of Arigo Limited,
again I would have thought it clear that the answer must be: No. A further example was suggested of a former
director of Arigo Ltd who, perhaps four years after Arigo Limited
went into liquidation, joined the board of a large hotel and restaurant chain
(Y plc). If Y plc purchased
the Arigo restaurant sometime during that five year period, and ran it as such
as one of its numerous outlets, the former director of Arigo might, almost
inadvertently, find himself in contravention of s.216; but is he be held
personally liable - and it must be borne in mind that it is a primary
liability, not merely secondary - for the whole debts and liabilities
of the hotel and restaurant chain which he has joined? Again, the answer must be: No. As a matter of construction of s.217(3), in
my opinion relevant debts, in relation to a person who is personally
responsible under s.217(1)(a), are "such debts and other liabilities of the
company as are incurred [by the company
while carrying on business under a prohibited name] at a time when that
person was involved in the management of the company." The inserted words pick up on the extended
definition of "known by" in s.216(6).
They do not, in my opinion, alter the intended scope of s.217(3).
[22] This
approach is consistent with the analysis by Arden LJ in ESS Production v Sully.
That case raised a different issue, namely whether the defender against
whom personal liability was alleged could bring himself within the third
excepted case, that being a case where the prohibited name company had been
known by the prohibited name for the whole of the 12 month period ("the
qualifying period") preceding the liquidation of the liquidating company. It is not necessary to go into the details of
the argument. The county court judge
held that the prohibited name was not one under which the company had carried
on the whole of its business during the qualifying period, and that therefore
the third excepted case did not apply.
The appeal was allowed. In giving
the first judgment in the Court of Appeal, a judgment with which both Chadwick
and Auld LJJ agreed, Arden LJ emphasised (at para [61]) the need
to interpret ss.216 and 217 and the Rules consistently with each other, so as
to create a "coherent and rational scheme".
At para [65], in considering the arguments before the court, she
set out a number of possibilities. The
fourth was that:
"(d) throughout the qualifying
period the company's registered name is a non-prohibited name but the company
carries on each of the separate parts of its business under a different name. One of those names is a prohibited name."
Having
then considered the other (earlier) possibilities, she raised the following
question at para [73]:
"That brings me to an important
argument in favour of the judge's interpretation of section 216(6). If the judge is wrong, a person can incur
criminal or personal liability merely by virtue of the fact that the company
carried on some of its trading activities under a prohibited name. Moreover, there is the question of personal
liability. Does the director then
become liable for all the debts which the company incurs at any time when it is
carrying on a part of its business under a prohibited name, i.e. even those
debts which are incurred under a name which is a not a prohibited name? If that is the effect of sections 216 and
217 it would be a factor which might well lead to the conclusion that the judge
was right. I consider this argument in paragraphs 74 to 78 below." [underlining added]
Arden LJ
then set out the terms of s.217(1) and (3) and said this, at para [75]:
"Read literally, the effect of
section 217(3)(a) is that, once a company has a prohibited name, a
director becomes personally liable for all its debts incurred while he was a
director. So, if a director holds office
from 1 January 2000 to 31 December 2005, and the company
trades under a prohibited name for the calendar year 2003, he would, if
section 217(3)(a) is read literally, be liable for all the debts which the
company incurs between 1 January 2000 and 31 December 2005,
not just for those incurred in 2003.
... It is unlikely that Parliament
intended liability under section 217(1)(a) and (3)(a) to extend to debts
incurred when there was no contravention and accordingly in my judgment section 217(3)(a)
must be read as restricted to the time during which there is a contravention of
section 216."
Thus far the discussion is about time, i.e. a case where the
contravention is for only a part of the 5 year period after the insolvent
liquidation of the liquidating company.
Arden LJ in that passage suggests that Parliament cannot have
intended the director to be liable for all the debts and liabilities of the
company during the whole of the 5 years if the contravention is for a
shorter period. She continued, in the
same paragraph:
"I now return to section 216 to
see precisely what constitutes a contravention of that section. It is to be a director of a company that is
known by a prohibited name. So if a
company carried on 50% of its business under a name which was not prohibited,
the director would not by virtue of that corporate activity commit an
offence."
"In order that the (implicit)
requirement for a contravention of section 216 is satisfied, there must in
my judgment be read into that paragraph a requirement that the company should
be known by a prohibited name. Section 217(3)(a)
would then read:
'(3) For the purposes of this
section the relevant debts of a company are - (a) in relation to a person who is personally
responsible under paragraph (a) of subsection (1), such debts and
other liabilities of the company as are incurred at a time when that person was
involved in the
management of the company and the company was known by a prohibited name...'.
In para [78], referring
to the principle against doubtful penalisation, she says:
"Applying
that principle, the court would in my judgment reach the conclusion that the
director was personally liable only for debts incurred in the course of
carrying on business under the prohibited name. In my judgment, section 217(3)(b) would
be similarly construed so as not to impose wider liability than section
217(3)(a). Accordingly the measure of
liability under section 217(3)(b) would not extend beyond the amount of the
debts incurred under the prohibited name.
A
similar comment is made at the end of para [81]:
It is not clear to me whether
those comments are still dealing with the case of the use of the prohibited
name being for a shorter period than the 5 years; as opposed to a case
where the company throughout the whole period conducted some of its business
under a prohibited name and the rest under a non-prohibited name. But it does not matter. Arden LJ is clearly interpreting the
liability under s.217(3) as being limited to debts and liabilities incurred in
carrying on business under the prohibited name.
Even if she is only dealing with the question of period, the same
principle must, so it seems to me, apply in the case of prohibited and
non-prohibited names being used contemporaneously. Arden LJ does not appear to draw a
distinction between the two cases, and neither would I. In light of the particular issue in that
case, the comments about the extent of the liability of a director of a company
which carried on only a part of its business under a prohibited name is
properly to be regarded as obiter;
but it is highly persuasive and provides support for the conclusion to which I
have come.
[23] I conclude therefore that the defenders are not liable for the
whole sum claimed but only for such amount as is attributable to the rates for