Wrongdoing in insolvency: part 6

The application for leave must be made to any court which has jurisdiction to wind up companies. The application does not just involve the applicant (namely the director or shadow director who wants leave to act as a director etc of the company with a prohibited name). If an application is made on behalf of such person to the court then the Secretary of State or the Official Receiver may appear. If they do, then they can call the court's attention to any matters which they think are relevant. Each case will be decided on its own facts and in particular the court will decide whether there is any risk to creditors of the new company. This application for leave is to be contrasted with the application for leave to act as a director under section 17 of the Company Directors' Disqualification Act 1986 notwithstanding a disqualification under that Act (which is based upon a director having been proved unfit to act as such). Under that Act the starting point for deciding whether leave should be granted to act as director of a particular company is the starting point of unfitness, which of course under that Act has already been proved. Therefore under an application under section 17, the court has to be satisfied that it is appropriate to grant leave notwithstanding the important finding of unfitness. That is not the starting point under sections 216 and 217. However if the evidence shows that the applicant was unfit because of conduct relating to the liquidating company then the approach will be the same as under section 17 of the Company Directors' Disqualification Act 1986 .

One factor that the court is likely to consider in deciding whether to grant leave is whether the person applying for leave was responsible or at any fault for the failure of the liquidating company. Similarly under the Insolvency Rules 1986 rule 4.2 to 7 it is provided that "when considering an application for leave under section 216, the court may call on the liquidator, or any former liquidator, of the liquidating company for a report on the circumstances in which that company became insolvent, and the extent (if any) of the applicant's apparent responsibility for its doing so.".

It is also important to bear in mind that unless leave is granted, the prohibition does not merely extend to carrying on business through a limited company. Section 216 (3) (c) prohibits a person to whom this section applies in the following fashion to "in any way, whether directly or indirectly, be concerned or take part in the carrying on of the business carried on (otherwise than by company) under a prohibited name.". Thus if you use a prohibited name and you are a person who is banned from doing so, carrying on business under the prohibited name as a sole trader or in partnership will be a breach of the section.

The offence is a strict liability offence which means that what is known as "mens rea" (a guilty mind) need not be proved. If you are a prohibited person who carries on business under a prohibited name without leave then you are guilty even if you did not realise you were doing so.

The criminal penalties are imprisonment for a period of up to two years or a fine or both where the offender is prosecuted on indictment in the Crown Court, and in the magistrates six months with a potential fine of £5000.

However the most serious consequences from the point of view of someone found guilty of breach of section 216 other personal liabilities imposed under section 217. We will look at those next week.