The case of Maxima Creditor Resolutions LTD v Fealy & Anor (2024) addresses important principles in UK insolvency law. The case focuses on the “non-dormancy” concept and the restrictions related to the re-use of company names after liquidation.

This case is valuable for insolvency practitioners as it can help them when advising clients on structuring business activities to avoid restrictions on re-using company names post-liquidation.

Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we can assist clients by helping them secure funding and insurance for insolvency cases.

Maxima Creditor Resolutions LTD v Fealy & Anor 2024

In Maxima Creditor Resolutions LTD v Fealy & Anor (2024), the case centred around the specific conditions under which a company may be classified as “non-dormant” in regard to Section 216 of the Insolvency Act 1986. This Act imposes restrictions on the re-use of company names by directors following liquidation in England and Wales.

Section 216 of the Insolvency Act 1986 restricts directors of a company that enters insolvent liquidation from managing another company with a similar name for five years. Breaching this law could lead to personal liability for company debts (under Section 217) and even criminal charges. There are three exceptions:

1. If the new company’s name is acquired from the liquidator;
2. With court permission;
3. If the new company has been using the name for the entire year leading up to the liquidation, without being dormant (inactive).

Judge Hodge KC considered what it means for a company to be “non-dormant” in the year before liquidation. The defendants, Mr Fealy and Mr Barrett, were the directors of two companies, McFee Interiors Limited and McFee Limited (ML).

The directors of McFee Limited (ML) argued they were eligible for the third exception since ML had traded throughout this period. However, Maxima claimed ML needed continuous qualifying transactions over the year, which they believed ML didn’t demonstrate.

The judge clarified:

• These laws target “phoenix” companies—new companies using the old company’s assets and goodwill to continue business while leaving creditors unpaid.
• For the third exception to apply, a company must show activity throughout the entire year leading up to liquidation.

The court clarified that a company is considered non-dormant if it has conducted significant accounting transactions throughout the 12-month qualifying period before liquidation. This classification does not require continuous daily transactions but does necessitate evidence of ongoing business activity. This includes incurring liabilities for materials or services that must be recorded in financial statements.

The defendants successfully demonstrated that the company had engaged in regular business transactions, thus qualifying them for the non-dormancy exemption. This ruling has implications for insolvency practitioners and directors of insolvent companies. It provides guidance on the standards needed to invoke non-dormancy as a defence in similar cases.

This interpretation of “non-dormancy” reinforces that minimal or sporadic transactions are insufficient to meet exemption criteria. Instead, consistent, significant transactions must be documented over time to support such a defence​.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following funding methods:

• After-the-event (ATE) legal insurance – ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.
• Third party litigation funding – In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.
• Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger claim disputes.

How can Annecto Legal assist?

When handling insolvency matters, insolvency practitioners are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners who are involved in dealing with insolvency and non-dormancy matters. If you are in the process of bringing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.