An agreement with a company has gone into
arrears. The vehicles may or may not have been sold. The company
has placed itself into voluntary liquidation. Can the finance
company take steps to protect itself if it suspects there has been
mismanagement or misappropriation of funds within the company? Yes,
it can.
Where ‘prejudice’ will be suffered by a
creditor, the court can order a compulsory liquidation, where the
activities of the company will be more vigorously examined than
might otherwise be the case with a voluntary liquidation.
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This was the scenario in the matter of
Internet Investment Corporation Limited, where the petitioner, who
contributed £100,000 to the company and was a minor shareholder,
sought to have the company compulsorily wound up.
Despite reasonable inquiry by the
petitioner, the company’s only director (and major shareholder) had
continually refused to provide any information as to the use of the
petitioner’s investment, save for vague assurances that all was
well.
The relationship between the director and
the petitioner broke down. The petitioner suspected this investment
had been misappropriated or a fraud had been committed upon him,
rather than the investment merely having been lost in a bona fide,
but unsuccessful, business.
The director opposed the petition seeking
instead to place the company into members’ voluntary liquidation.
The petitioner argued that the company should be wound up
compulsorily on the basis that if the company went into voluntary
liquidation, the director would choose the liquidator and such a
liquidator would be less likely to investigate what had become of
his investment.
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By GlobalDataBy contrast, a liquidator in a compulsory
liquidation would almost certainly investigate in some detail how
the company had used those funds.
The court held that in considering
whether to order a compulsory, as opposed to a voluntary,
liquidation, a reasonable requirement that the company’s affairs
should be scrutinised by the process that followed a compulsory
order could weigh strongly in favour of a compulsory
liquidation.
Here, what the director had done with the
investment needed to be investigated as it was apparent there had
been a breach of the investment agreement and the director was in
breach of his fiduciary duties to the company.
The petitioner had to demonstrate its
rights would be prejudiced by a voluntary winding-up. On the
evidence available, the court held that the proposed voluntary
liquidation by the majority shareholder was prejudicial to the
petitioner and ordered it was just and equitable the company enter
compulsory liquidation.
A thorough investigation was required
into what had happened to the investment.
Things to consider
If, despite reasonable enquiry of the
controlling minds of a company proposing voluntary liquidation, a
creditor does not receive satisfactory explanations, consideration
should be given to petitioning for compulsory liquidation. If that
threat alone does not bring forward some answers, an investigation
from a wholly independent liquidator should.
Greg Standing
The author is a partner in Wragge
& Co LLP’s Finance, Insolvency, Recoveries and Sales
team
