Phoenix Companies – Leeds United: did Ken Bates break the law?

How do the anti-phoenix provisions of s216 Insolvency Act 1986 work in real life?

Ken Bates was a director of the old Leeds United Football Club Limited (company number 05334247) (“Oldco”) from 17 January 2005 until 7 March 2006. Oldco went into compulsory liquidation on 6 March 2006.

He was also a director of The Leeds United Association Football Club Limited (“AFC”) from 20 January 2005 until 4 May 2007. AFC went into administration on 4 May 2007.

Since 21 January 2005 he has been a director of:

• Leeds United Stadium Limited (“Stadium”);
• Leeds United Retail Limited (“Retail”); and
• Leeds United Investments Limited (“Investments”)

Stadium and Retail went into compulsory liquidation on 27 June 2007.

So far, so good:

• When Oldco went into liquidation Mr Bates had been a director of the other Leeds United companies for more than 12 months.
• Under the “third exception” in r4.230 Insolvency Rules 1986 he therefore did not have to apply to court for permission to continue to Act as a director of those companies.

But:

• Investments was dormant at some time during the 12-month period before Oldco’s liquidation. It filed dormant company accounts for the years ended 30 June 2005 and 30 June 2006.
• The third exception does not apply to a company that has been dormant at any time during the 12-month period.

So:

• Unless Mr Bates applied by 13 March 2006 for leave to act as a director of Investments, and was given leave before 17 April 2006, making use of the “second exception” in r4.229, he was in breach of s216.
• He could therefore be subject to criminal penalties. Although Investments may be dormant he could also be liable personally for any debts it may incurs during the 5 years to 6 March 2011.

Chapter 2 – Summer 2007

Shortly before AFC went into administration on 4 May 2007, Mr Bates became a director of Leeds United 2007 Limited (1 May 2007) and Leeds United Football Club Limited (company number 05765697) (“Newco”) (3 May 2007).

The Guardian reports here that:

• KPMG, AFC’s administrators, think an application to court was made;
• HM Revenue & Customs, a creditor challenging the Company Voluntary Arrangement proposed by AFC’s administrators, thinks that Mr Bates does not have the court’s permission to act as a director of Newco;
• the Insolvency Service has no notice of any such application; and
• Mr Bates made no comment.

Unless Mr Bates obtained leave of the court to act as a director of the two companies before he began to act, he would be in breach of s216.

The “first exception” under r4.228, notifying creditors when a new company acquires the business from an administrator or other appointed insolvency practitioner, could not apply in this case as Mr Bates was already a director of Newco. This difficulty is explained in our previous post here.

The law may be changing to overcome that difficulty (from 6 August 2007, as explained in previous posts, here and here), but that change will not be retrospective and will not help in this case.

A real challenge for Mr Bates is that if he did not have permission, it is too late, he is in breach and may well be liable for Newco’s debts up to 6 March 2011.

As an aside, Mark Taylor, Mr Bates’ solicitor, became a director of Newco on 4 April 2006, two months before Oldco went into liquidation. He was also a director of Olcdco and was caught in the trap highlighted in our previous post, arising from the decision in Churchill & Anor v First Independent Factors & Finance Ltd [2006] EWCA Civ 1623 (30 November 2006). He cannot have applied to court successfully unless the court took the highly unusual step of granting retrospective permission.

What went wrong?

They used the wrong company to buy the business (and may have failed to make an application).

Leaving aside the 2006 problem of Investments, Messrs Bates and Taylor should have obtained permission from the court before becoming directors of the company they used to buy the business from the administrators. There was plenty of time to have done so between 1 May 2007 (if not before) and 10 July 2007 when Newco bought AFC’s business from the administrators.

So did Ken Bates break the law?

I don’t know, but he has to have made some timely and successful court applications to have avoided breaching s216!