Summary

The judge had carried out the necessary balancing exercise when refusing a petition under the Insolvency Act 1986 s.124A to wind up a company on public interest grounds. Having regard to a new business model formulated by the company and undertakings offered as to its conduct, the judge's decision had been justified.

Facts

The appellant secretary of state appealed against a decision ((2008) EWHC 1054 (Ch), (2008) BCC 713) refusing a petition under the Insolvency Act 1986 s.124A to wind up the respondent company (X). X was part of an international group which operated a multi-level direct-selling business in personal and home-care products. The selling was carried out by members of the public, described as independent business operators, who in turn recruited other independent business operators. The judge found that X had failed to supervise and control the representations and promotional material used by its independent business operators when they recruited other operators and that, had the matter ended there, winding up in the public interest would have been justified. However, the judge also had regard to a new business model formulated by X and to undertakings which it had offered as to its conduct. He concluded that winding up would in the circumstances be disproportionate and refused the petition. The secretary of state argued that the judge had fundamentally misunderstood his jurisdiction. If he considered, as he did, that the old business model was commercially unacceptable, then he had no effective option other than to wind up X. To refuse to do so because of changes to the business model which were reactive to the secretary of state's interest in X was wrong in principle.

Held

A review of the authorities showed that the secretary of state's submission was not well founded. The judge's approach in fact fully accorded with the authorities. He had approached his fact-finding assessment and the necessary balancing exercise with shrewdness and fairness. This was an unusual case and quite unlike the typical example of a newly incorporated business whose reason for existence was to defraud the public and the dishonesty of whose controlling and often sole director was carried forward into the investigation and trial. Here the business was of long standing and was currently being operated on a model which represented the industry standard. Its fault, serious as it undoubtedly was, was essentially a failure to control rather than deliberate wrongdoing or dishonesty. X had admitted its fault, while resisting winding up. Its management had engaged with the secretary of state in seeking solutions to the problem. It had not been discouraged in doing so, and the judge found that its proposals for change met the test which the secretary of state had imposed on it. The judge described the revisions as amounting to material and radical changes and X's evidence about them as "fully formulated, comprehensive, open and transparent". Even though the new business model was in large part a reaction to the secretary of state's interest, it was not entirely so, for X had begun to look to its responsibilities even before it was investigated. Further, the judge accepted that X's senior management could be trusted in the operation of the new business model. The undertakings given concerned not simply X's future conduct but also the continuation of its existing reformed conduct. Where exceptionally a judge considered that undertakings could perform a useful role, there was nothing in past jurisprudence to prevent him from accepting them, even if the secretary of state did not consent or would not have consented but for the court's intervention.

Appeal dismissed