Companies and insolvency update

COMPANIES ACT 2006

The Minister for Industry and the Regions has announced a 'commencement timetable' for the Companies Act 2006 (the 2006 Act). Parts of the 2006 Act had been brought into force on Royal Assent last November; other provisions were implemented in January, and still others from 6 April. Now we know which parts of the remainder of the Act will come into force and when: on 1 October 2007, 6 April 2008 and 1 October 2008 respectively (see ministerial statement of 28 February).

In addition, a second commencement order was laid before Parliament on 8 February, made on 29 March and published on 4 April, adding to the 6 April changes.

What's in, from 6 April?

• Takeover regulation

Part 28 of the 2006 Act (Takeovers, etc.) came into effect. That said, many companies have been subject to broadly equivalent provisions since last May, by dint of the Takeovers Directive (Interim Implementation) Regulations 2006.

By way of reminder, these provisions govern four major areas:

(a) they confirm the new status of the Panel on Takeovers and Mergers. The Panel continues to be an unincorporated body, independent of government and responsible for enforcing the City Code, but now it operates on a wholly statutory footing and with enhanced powers;

(b) they implement those parts of the European Directive on Takeover Bids which can serve to override steps taken prior to a bid for a company which might frustrate it (the so-called 'breakthrough provisions'). Note that these relate only to companies with voting shares admitted to trading on a regulated market (including the main list, but excluding AIM and PLUS);

(c) they replace the existing compulsory acquisition provisions of the Companies Act 1985 (CA 1985); and

(d) in respect of financial years beginning on or after 20 May last year, they introduce new disclosure requirements for certain companies' directors' reports. The companies affected are those, and only those, voting securities of which were at the end of the relevant financial year traded on a regulated market.

The main changes are as follows:

(i) other than to a limited extent (e.g. compulsory acquisition provisions applicable to takeover offers made before 6 April 2007), we say goodbye to both the interim takeover regulations of last May and sections 428-430F CA 1985;

(ii) save as mentioned at (b) and (d) above (and in respect of the criminal offences imposed on companies/directors who knowingly or recklessly publish offer/defence documents which do not comply with certain Panel rules), Part 28 applies to takeovers of all City Code-governed companies '“ not merely those traded on a regulated market; and

(iii) the Panel is able to make and amend rules even in so far as they relate to matters contained in the Takeovers Directive.

• Amendments to Enterprise Act 2002

Section 1281 of the 2006 Act also came into effect on 6 April, amending that part of the Enterprise Act which governs the release of certain consumer and competition information. It paved the way for a public authority, in certain circumstances, to disclose prescribed information '“ specifically excluding that obtained in connection with competition functions '“ for use in civil proceedings or otherwise for the purpose of establishing, enforcing or defending legal rights. The basic idea is to put brand owners, IP rights holders and consumers in a better position to seek redress from counterfeiters, pirates and those who have flouted trading standards.

What's out, from 6 April?

• Section 41 CA 1985

This section of CA 1985, as amended by the Companies Act 1989, provided that a document requiring authentication was deemed sufficiently authenticated by the signature of a director, secretary or other authorised officer of the company concerned.

It was repealed with effect from 6 April '“ not because it has ceased to be a sensible provision, but on the basis that 'it is no longer needed'.

• Sections 293-4 CA 1985

These provisions enshrined a historic legal principle, subject to exceptions, under which individuals were not capable of being appointed directors of a public company, or of a private company in its group, if at the time of appointment they were aged 70 or older.

The law changed on 6 April, at least as a matter of statute. Sections 293 and 294, the latter of which imposed a duty on directors to disclose their ages, were also 'no longer regarded as necessary'.

Care needs to be taken nevertheless, since articles of association may repeat (rather than override) the prohibition in such a way that the general principle survives. Listed companies will also need to be alert to any sensitivity on the part of their shareholders or representative groups as to the appointment or re-election of directors who have reached a certain age. This has been identified in the past by organisations such as Manifest, Morley and PIRC as a 'corporate governance issue'.

• Section 311 CA 1985

This provision made it unlawful for a company to pay a director remuneration which was either free of income tax or otherwise calculated by reference to or varying with any amount or rate of income tax. It has been repealed, with effect from 6 April.

• Sections 323 and 327 CA 1985

Sections 323 and 327 made it a criminal offence for directors of a company and certain of their family members to deal in options in respect of its (or another group company's) listed shares or debentures.

These sections expired on 6 April and are not being replaced.

• Sections 324-326 and 328-9 (and Parts 2-4 of Schedule 13) CA 1985

Many readers will recognise these sections, which imposed basic company law obligations:

(a) on directors, to disclose any interests they or certain of their family members had in their company's (or another group company's) shares or debentures, as well as any changes in such interests;

(b) on companies, to keep a register of those interests; and

(c) on a listed company, to notify the stock exchange accordingly.

These offences, which were criminal in nature, also ceased to exist on 6 April, as did the corresponding disclosure requirements applicable to directors' reports approved on or after that date.

Listed companies of course remain subject to the Financial Services Authority's Disclosure and Transparency Rules. DTR3 deals with reporting transactions in a company's securities by so-called PDMRs ('persons discharging managerial responsibilities', including directors). AIM companies are subject to rules (re-issued on 20 February) which require them (a) to notify deals by directors 'without delay' (Rule 17) and (b) to ensure that each of their directors discloses 'without delay' all information which the company needs in order to comply with Rule 17 (Rule 31).

INSOLVENCY

According to figures recently published by the Insolvency Service, nearly 300 people every day in England and Wales declared themselves insolvent in 2006. This represents a total of 107,288 personal bankruptcies, insolvencies or Individual Voluntary Arrangements (IVAs), an increase of some 59 per cent from 2005.

Although bankruptcy remains the most common alternative and the number of bankruptcies continue to rise steadily, some 12,741 people entered into IVAs in the last quarter of 2006. This represents an increase of 3.9 per cent on the third quarter of 2006 and an increase of 81.9 per cent from the corresponding quarter of 2005. This has fuelled warnings by experts that many individuals are being pressured into accepting IVAs when they are not suitable in the circumstances, through clever marketing tools and an undesirable perception that IVAs are a consequence-free alternative.

The overall number of company liquidations in England and Wales dropped slightly in the fourth quarter of 2006 to 3,194 (on a seasonally adjusted basis). However, the shift from creditors' voluntary liquidations to compulsory liquidations continues (the latter showing an increase of 9.7 per cent on the same quarter of the previous year), and indicates that an increasing number of companies are being wound up in a less than amicable fashion.

Phoenix Companies and Section 216

The Court of Appeal recently ruled on section 216 of the Insolvency Act 1986 in the case of Churchill and another v First Independent Factors and Finance Ltd [2006] EWCA Civ 1623. This has had a severe impact on corporate insolvency and recovery lawyers and practitioners where re-use of company names is involved.

Section 216 provides that, where a company goes into insolvent liquidation, a person who was a director of it at any time in the 12 months preceding liquidation shall not, for a period of five years, act as a director of a company known by a 'prohibited name'. 'Prohibited name' is defined as a name sufficiently similar as to suggest an association with the liquidated company. This section was introduced to protect creditors in situations where directors form a 'phoenix' company '“ a company which is given a name that is (or will be upon liquidation of the insolvent company) a name prohibited by section 216, to which the business and assets (though not the liabilities) of a failing company are transferred. This company would then carry on the business of the failing company free from all debt.

Following the Churchill ruling, as well as being a criminal offence for a director to set up a 'phoenix' company, directors will be personally liable for the debts of the new company trading under the prohibited name if the new company becomes insolvent.

There are however, three ways in which a name can be re-used. Firstly, a company which has used a similar name for at least 12 months before the liquidation can continue to do so. If there is no such vehicle available to the acquiring management, notice can be served on creditors of the old company under Rule 4.228 of the Insolvency Rules 1986, or alternatively directors can apply to the court for permission to be involved in the management of the new company. Applications to the court have, at least until now, been rare, and it is the service of notice on creditors that the Court of Appeal was recently asked to rule on in this case.

Prior to the judgment given in Churchill it was widely believed that the Rule 4.228 notice would be effective if sent out within 28 days after the acquisition by the new company of the otherwise prohibited name. However, the Court of Appeal in Churchill decided that this long-accepted approach does not avoid the problems of section 216. They ruled that the purpose of Rule 4.228 is to alert creditors of the insolvent company to the fact that a person involved in the management of the failed company will also be involved in the management of the new company. Accordingly, notice has to be sent before a director of the insolvent company becomes involved in the management of the new company for that purpose to be achieved. The ruling has given lawyers the unenviable task of contacting clients and explaining how they might face personal liability as directors for the debts of their company despite believing they has followed the rules to avoid this.

Consequently, solicitors who have in the past acted for purchasers acquiring a business from an insolvent company with which buyers were also involved as directors would be well advised to look carefully at the issues surrounding section 216. It is intended that Rule 4.228 will now be amended so as to 'reinstate' the rules as previously understood. However, the new role is unlikely to have any retrospective offset.

Are Administrators liable to pay rates?

In the case of Exeter City Council v Bairstow, Martin And Trident Fashions plc [2007] EWHC 400 (Ch), the local authority sought a declaration that non-domestic rates relating to retail premises occupied by a company whilst in administration were payable as an expense of the administration. Mr Justice Richards held that rates were not expenses properly incurred by an administrator in performing their function pursuant to Rule 2.67(a) but that in view of the fact that Rule 2.67 is set out in the same terms as Rule 4.218, the same words should be given the same meaning. Thus, rates would be necessary disbursements under Rule 2.67(f).

Therefore rates, if payable, will be a necessary disbursement of the administration and thus payable prior to the remuneration of the administrator. Rates will be payable if the company continues occupation of the premises after the appointment of the administrator(s) and also if the premises become unoccupied for a period of more than three months. Occupation must be actual, exclusive, with a degree of permanence and for the benefit of the company. Therefore, ceasing to trade but continuing to store unsold stock at the premises will probably constitute occupation for the purpose of business rates.

The Court does have the power to alter the priority of any expenses in the administration under Rule 2.67(3) where the assets are insufficient to satisfy liabilities and it may be wise to consider such an application where the ongoing trade of the company is necessary to realise book debts and achieve some form of rescue of the business.