England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		23/04/2004

The Hon. Mr. Justice Evans-Lombe :

1. These are appeals from the orders of Mrs Registrar Derrett made on the 17^th December 2003 whereby she made winding up orders against Rodencroft Ltd ("Rodencroft"), W. G. Birch Developments Limited ("Birch Developments") and H-M Birch Limited ("HM Birch") on petitions presented by the Secretary of State for Trade and Industry under section 124A of the Insolvency Act 1986 on the ground that it was expedient in the public interest that they should be wound up. I will refer to the companies against whom those orders were made together as "the Companies". On the 3^rd November, on the application of the Secretary of State, Provisional Liquidators were appointed over each of the Companies.
2. On the 3^rd November 2003 petitions under section 124A against the Companies were presented to the court and subsequently served. Winding up orders were sought on the public interest and just and equitable grounds. The burden of the allegations contained in the petitions is that the Companies were used by a Mr Simon Allso ("Mr Allso") as vehicles for fraud, namely, the extraction of assets from companies in financial distress before they entered formal insolvent administration. Thus it is alleged that, having discovered an appropriate target company, Mr Allso would procure the acquisition of a controlling interest in its shares by one of the Companies. Having obtained control, the trading of the target company would be continued for a brief period during which assets would be abstracted, typically, as substantial "management fees", after which the target company would be left to be wound up by its creditors. The petitions make serious allegations about the conduct of Mr Allso. It is accepted that on the 2^nd November 1995 he was sentenced to a total of four years imprisonment for two offences of fraud and two offences under section 11 of the Company Directors Disqualification Act 1986. He was also disqualified from acting as a director under section 2 of that Act for 10 years. On the 22^nd October 2003 a maximum period disqualification of 15 years was imposed on Mr Allso as a result of his operations with relation to another failed company, In–A–Flap Envelope Company Limited.
3. For the purposes of this appeal it is not necessary to set out a detailed description of the transactions entered into by the Companies. Suffice it to say that, at the time the matter came before the registrar, of the five target companies "acquired" by the Companies two were in liquidation and two in administration, all with substantial deficiencies against ordinary creditors. The fifth company H-M Shopfitting Limited was continuing to trade and was apparently solvent although substantial sums had been abstracted from it. The Secretary of State's petitions against the Companies do not allege insolvency as an alternative ground for winding up.
4. At all material times Mr Allso has been disqualified from acting as a director of companies. The board of directors of the Companies have consisted of associates or nominees of Mr Allso. Mr Allso is the controlling shareholder of Rodencroft. The issued shares in Birch Developments have at all material times been held by two associates of Mr Allso. The only issued share of H-M Birch is held by company formation agents. It is Mr Allso's case, not challenged, that Rodencroft is the beneficial owner of the issued shares in Birch Developments and H-M Birch.
5. It is accepted that the holdings of shares in the target companies are the Companies' only assets. Since the winding up orders it has emerged that the fifth target company, H-M Shopfitting Limited, has also passed into administration showing a deficiency of £908,406.
6. When the petitions came before the registrar none of the Companies appeared to oppose them. Mr Allso appeared by solicitors and counsel to oppose the petitions claiming to do so through his interest in the Companies by way of his controlling shareholding in Rodencroft. At the hearing he sought leave to put in evidence to traverse the allegations contained in the petitions and in the evidence in support of those petitions adduced by the Secretary of State. After a very short hearing of which Mr Allso's solicitors' notes were before the court, the registrar made winding up orders in respect of all three Companies. She did so accepting the Secretary of State's submission that Mr Allso had no locus standi to oppose them.
7. The case for the Secretary of State presented to the registrar was that Mr Allso was disqualified from being a director of any of the Companies and so could not procure them to oppose the petitions. Whereas he was a shareholder of Rodencroft he was not a shareholder of Birch Developments or of H-M Birch. In those circumstances it was unarguable that he had locus standi to oppose the petitions against those two companies. As to Rodencroft, although Mr Allso was the controlling shareholder of it, that company was valueless and his shareholding conferred on him no interest justifying the costs to be incurred in fighting a defended petition. It seems that when the possibility was adumbrated that winding up orders be made against Birch Developments and H-M Birch leaving the petition against Rodencroft to continue to a hearing, counsel for Mr Allso submitted that the Companies should stand or fall together. In the result the registrar made winding up orders against all three Companies without admitting evidence sought to be adduced by Mr Allso.
8. Before me Mr Lord who appeared for Mr Allso, accepted at the outset that the petitions were not demurrable. Mr Lord submitted and I accept, that the registrar was only entitled to make winding up orders without hearing Mr Allso's evidence, if her conclusion that he had no locus standi to oppose the petitions was correct.
9. Although Mr Lord initially submitted that anyone having any interest in a company, the subject matter of a petition under section 124A, was entitled to appear on the petition to oppose it and file evidence, he did not persevere with that broad submission and the point for decision on the appeal was confined to whether, in the absence of opposition from the company itself, a shareholder – a contributory – is entitled to oppose such a petition on his own and if so, whether he can do so notwithstanding that he is unable to demonstrate by evidence that his shares are, in fact, of any value.
10. It was Mr Lord's submission that Mr Allso's shareholding in Rodencroft entitled him to appear to oppose the petition against that company and, because Rodencroft was beneficially entitled to the whole of the issued shares of Birch Developments and H-M Birch, that entitled him to appear to oppose the petitions against those two companies. He pointed out that the petitions contained no allegations of insolvency against any of the Companies and that the Secretary of State's own evidence before the registrar established that H-M Birch, through its shareholding in H-M Shopfitters Limited, a company then apparently solvent and trading, had value. Accordingly he submitted that the registrar ought to have permitted the petitions to continue to a full hearing so giving Mr Allso an opportunity to file evidence to traverse the Secretary of State's case. The continued existence of the Companies, without winding up orders having been made against them, constituted no threat to the public because they would remain under the control of the provisional liquidator pending the hearing of the petitions on their merits.
11. Counsel for the parties were unable to point to any reported case where a contributory had been permitted by the court to appear to oppose a petition under section 124A, let alone to oppose such a petition where the company itself was not opposing it. In Re Camburn Petroleum Products Ltd [1979] 3 All ER 297 Mr Justice Slade was hearing a creditors petition in respect of a company each of whose two issued shares were held by each of its two directors. Those directors had fallen out with the result that a contributory's petition for winding up the company alleging deadlock in the management had been presented in the Manchester District Registry and was proceeding, albeit slowly. In his judgment at page 90 of the report Mr Justice Slade described the events leading up to the application before him in this way:-

"On April 30^th 1979 Chevron's [the petitioner in the creditor's petition] petition came before me for first hearing. I was then told of the petition pending in the Manchester District Registry, but was told that for practical purposes proceedings under that petition were frozen…Counsel for Chevron asked for an order under section 231 of the Companies Act 1948 giving leave to Chevron, so far as leave might be necessary to proceed with its petition, and also for an appropriate adjournment for the purpose of dealing with evidence. Counsel for Mr Cooper [one of the director shareholders] asked for leave to be added to the list out of time on the usual undertaking and opposed the making of any order under section 231.

After hearing argument I decided, contrary to the submissions made on behalf of Mr Cooper, that there was a sufficient allegation of insolvency in the petition, and that in all the circumstances it was right that Chevron's petition should be allowed to continue. I therefore made the order sought under section 231and gave certain further directions to which I need not refer."

12. The judge then set out the evidence and submissions as to the assets and liabilities of the company, some of it emanating from Mr Cooper. He concluded that discussion at page 92 where he says:-

"In my judgment, on the facts which I have summarised, the company was at the date of presentation of Chevron's petition and is at the present date manifestly unable to pay its debts within the meaning of section 222(e) and section 223(d) [of the 1948 Act] in as much as it did not and does not have assets available for the discharge of all its current liabilities.

Miss Arden on behalf of Chevron, and Mr Cone, on behalf of Mr Kreike [the other director shareholder] who supports Chevron's petition, thus affirm and rely on the present inability of the company to pay its debts. Mr Mann, who opposes the petition on behalf of Mr Cooper does not dispute such inability… ."

13. It was thus submitted for the petitioning creditors that they were entitled to a winding up order. Counsel for the company supported by Mr Cooper in his capacity as a contributory sought an adjournment of the petition over the hearing of the contributory's petition in Manchester. He referred to the provisions of section 346(1) of the 1948 Act containing the following terms:-

"346(1) the court may, as to all matters relating to the winding up of a company, have regard to the wishes of the creditors or contributories of the company, as proved to it by any sufficient evidence…."

14. Those words have been re-enacted in section 195(1)(a) of the Insolvency Act 1986.
15. At page 93 of the report Mr Justice Slade, having referred to earlier authority continued:-

"Thus I think the Brighton Hotel Company decision throws light on the attitude which the court should generally adopt if faced with a request to make a winding up order in respect of a company shown to be unable to pay its debts, when that request is made by an undisputed unpaid creditor but opposing contributories seek an adjournment. Though there are a number of authorities which give guidance as to the attitude of the court where some creditors support the making of an immediate winding up order and other creditors oppose it, counsel have been unable to find any authority which gives guidance as to such attitude where the contest is between a petitioning creditor on the one hand and contributories on the other hand.

I do not however feel much doubt in principle as to what that attitude should be. In the case of a creditor's petition not opposed by other creditors, the general approach of the court was expressed by Lord Cranworth in Bows v Hope Life Insurance and Guarantee Co [1865] 11 HLCas 389,402:

"I agree with what has been said, that it is not a discretionary matter with the court when a debt is established, and not satisfied, to say whether the company should be wound up or not; that is to say if there be a valid debt established, valid both at law and in equity. One does not like to say positively that no case could occur in which it would be right to refuse it; but, ordinarily speaking, it is the duty of the court to direct the winding up."

In other words a creditor in the circumstances mentioned is prima facie entitled to his order and is prima facie not bound to give time to enable the debtor to pay. In my judgment, subject to the discretion given to it by sections 225 and 346 of the Companies Act 1948, to which I have already referred, the attitude of the court should be, and is, essentially unchanged today. While I recognise that it would have the right under those two sections to pay regard to the wishes of contributories, in deciding whether or not to make a winding up order on a creditors petition, or to adjourn the hearing, in my judgment it can, and should ordinarily attach little weight to the wishes of contributories, in comparison with the weight it attaches to the wishes of any creditor, who proves both that he is unpaid and that the company is "unable to pay its debts"….

For these reasons while I accept that the court would have jurisdiction to adjourn Chevron's petition, as asked for by Mr Mann, I think it should only do so if it were satisfied that there were exceptional circumstances that justified this course."

16. Apart from section 195(1)(a) of the Insolvency Act 1986, to the provisions of which I have already referred, that Act is silent about those who are entitled to appear upon a petition to wind up a company once presented. Chapter 3 of part 4 of the Insolvency Rules 1986, by reason of the heading to the chapter, must be taken as applying to petitions under section 124A.
17. Rule 4.13 under the heading "persons entitled to copy of the petition" provides:-

"Every director, contributory or creditor of the company is entitled to be furnished by the solicitor for the petitioner (or by the petitioner himself, if acting in person) with a copy of the petition within two days after requiring it, on payment of the appropriate fee."

Rules 4.16 dealing with notice of appearance, and 4.17 dealing with list of appearances, do not appear to be drafted with the idea that a contributory might seek to appear on either a creditor's or a Secretary of State's petition in mind. A contributory would be unable to provide particulars of "the amount and nature of his debt" as required by rules 4.16(2)(c) and 4.17(4). Rule 4.18 provides for service of evidence in opposition to the petition by the company but there are no separate provisions for the service of evidence by contributories or by opposing creditors for that matter. However it is not possible to say that the rules are so inconsistent with the appearance of a contributory as to rule out that happening. Indeed in the Camburn Petroleum Products Ltd case Mr Justice Slade found no difficulty in giving leave to a contributory to appear on a creditor's petition and be added to the list of those opposing the making of a winding up order pursuant to what is now rule 4.16(5). Indeed statutory form 4.9 giving notice of intention to appear on a petition under rule 4.16 or form 4.10, the list of those intending to appear make provision for the inclusion of contributories.

18. It must be accepted that petitions of the Secretary of State under section 124A are in a special category in that they can only be presented by one entity, an organ of government. An ordinary individual or company cannot be substituted as petitioner on a Secretary of State's petition see re Xyllyx PLC (No1) [1992] BCLC page 376. It is of note, however, that Mr Justice Harman, who decided that case, did not give as a reason for refusing substitution that a contributory was excluded from appearing on a Secretary of State's petition. The application in that case was that two contributories be added to the list for the purpose of obtaining a 7 day adjournment of the hearing of the petition so as to give them time to consider whether they wished to ask for substitution.
19. The function of the court on a petition under section 124A is summarised in the judgment of Lord Justice Nicholls in Re Walter L Jacob Ltd [1989] BCLC 345 at page 353 in this way:-

"The court's task, in the case of so called "public interest" petitions, as in the case of all other petitions invoking the courts winding up jurisdiction under section 122(1)(g), is to carry out the balancing exercise described above, having regard to all the circumstances as disclosed by the totality of the evidence before the court. In respect of all such petitions, whoever may be the petitioner, the court has to weigh the factors which point to the conclusion that it would be just and equitable to wind up the company against those which point to the opposite conclusion. It is to the court that Parliament has entrusted this task in all cases. Thus where the reasons put forward by the petitioner are founded on considerations of public interest, the court, if it is to discharge its obligation to carry out the balancing exercise, must itself evaluate those reasons to the extent necessary for it to form a view on whether they do afford sufficient reason for making a winding up order in the particular case.

In the case of "public interest" petitions, the court will, of course, carry out that evaluation with the assistance of evidence and submissions from the Secretary of State and from other parties. When doing so the court will take note that the source of the submissions that the company should be wound up is a government department charged by Parliament with wide ranging responsibilities in relation to the affairs of companies. The department has considerable expertise in these matters and can be expected to act with the proper sense of responsibility when seeking a winding up order. But the cogency of the submissions made on behalf of the Secretary of State will fall to be considered and tested in the same way as any other submissions. His submissions are not ipso facto endowed with such weight that those resisting a winding up petition presented by him will find the scales loaded against them."

20. That being the function of the court on a Secretary of State's petition there does not, in my judgment, appear to be any reason why a contributory, having an interest to oppose the petition, should not be permitted by the court to appear on the petition and file evidence in opposition as Mr Cooper did as a contributory to the company in the Camburn Petroleum Products Ltd case in respect of a creditor's petition. There does not seem to me to be any logical reason why that right to appear as a contributory on a Secretary of State's petition should be confined to circumstances where the company also appears to oppose the petition. Where the company does not appear to oppose, the court will be astute to enquire why that is the case. One can, however, imagine circumstances where a company, having a perfectly genuine defence to a Secretary of State's petition, might not be put in motion by its board of directors to oppose such petition. There might be division and disagreement amongst the board members, insoluble at least in the short term, which results in such inaction. Such a board disagreement was present in the Camburn Petroleum Products Ltd case and there are some indications that there are board disagreements in the present case.
21. In Re Rica Gold Washing Co 1879 11ChD page 36 it was decided that a contributory, when petitioning for the winding up of a company, must plead in his petition and prove by evidence that, if a winding up order is made, there is a contingent surplus of assets in the winding up which will be available for distribution to him. It is not a surprise that there are few examples of cases where contributories have sought to appear on creditor's petitions. They will generally have no interest to do so where they accept that their company is insolvent. Where the company is solvent but a creditor has presented a petition, the company will either pay the debt or contest the petition on the ground that there is a bona fide dispute as to the existence of the petitioning debt. In the Camburn Petroleum Products Ltd case it was Mr Cooper's contention that the company was solvent. A contributory's petition to wind up the company presupposes that the company is solvent since the petition could not have been brought without that being established. There seems to me no reason why the rule in the Rica Gold Washing Co case should not extend to contributories seeking to appear on Secretary of State's petitions under section 124A and also on creditors petitions. Thus the petitioner in either of those two classes of petitions should not be put to the cost of a contested petition where the only opposition is from a contributory who cannot demonstrate that the company is solvent.
22. Applying those conclusions to the facts of the present appeal it seems to me that the appeals against the winding up orders in respect of Birch Developments and H-M Birch fall to be dismissed. Mr Allso is not a contributory of either of those companies nor is he a creditor of them. His majority shareholding in Rodencroft would enable him to reorganise the board of that company with new directors who might be prepared through Rodencroft's control of the boards of those two companies to put those companies in motion to defend the Secretary of State's petition. To date Mr Allso has not done so and there is no sign that those companies' boards are themselves going to defend the petitions. In any event that cannot affect the present position which is that, in my judgment, Mr Allso had no locus standi to appear to oppose the petitions against Birch Developments and H-M Birch before the registrar and has no locus standi to appeal to this court against the winding up orders that she made in respect of those companies.
23. The position in relation to Rodencroft seems to me to be different. Mr Allso as a contributory had a prima facie right to appear on the petition and file evidence in opposition provided that he could demonstrate that Rodencroft was solvent. The registrar made a winding up order without giving Mr Allso an opportunity to file any evidence, including evidence of the solvency of Rodencroft. I have reluctantly come to the conclusion that the registrar was wrong to do so and that the appeal against the winding up order against Rodencroft must be allowed. However the petition should not be dismissed but should now proceed to a hearing. Those appearing for the Secretary of State should give consideration to whether they should ask permission for the petition to be amended to allege the insolvency of Rodencroft as an alternative ground for a winding up order.
24. I will give directions for the filing of evidence. In the event that the Secretary of State takes the view that the evidence filed by Mr Allso does not show that Rodencroft is solvent, steps will no doubt be taken to return the matter before the registrar to consider whether a winding up order should be remade. In the event, which on the evidence presently available seems unlikely, that Mr Allso succeeds in his opposition to the Secretary of State's petition, it will be open to him then to apply to stay the winding up of Birch Developments or H-M Birch if either of those companies can be demonstrated to be solvent.
25. I will invite submissions as to the costs of the appeal and of the hearing before the registrar but, as at present advised, I would order those costs to be in the case of the Rodencroft petition.