Question of what is in the best commercial interests for a company being wound up where there is an allegedly misfeasant director

17/01/2007

M and W, were shareholders in a company, M holding 73.75% of the shares, and W holding 25%. The relationship between the respondents broke down, and M put the company into members' voluntary liquidation and made a declaration of solvency.

A liquidator, C, was appointed. On C's application, a court order was made which, [i]inter alia, sanctioned the appointment of accountants to produce a report as to (a) the remuneration and benefits in kind drawn by M from the company and whether these were justified and (b) whether there had been any diversion by M of business opportunities to the detriment of the company. The accountants made an interim report in which they stated that they had 'identified a number of situations which give rise to possible misfeasance claims ... and a number of possible contractual claims'. However, they refused to sign off their report until their fees had been paid. C concluded that the company was unable to pay its debts in full and called a creditors' meeting. It was resolved to place the company in creditors' winding up, and the applicant (the liquidator) was appointed as liquidator.

C invited offers from M and W for the assignment of the debts and rights of action belonging to the company, and received offers from both of them. He concluded that the offer from M was the most commercially realistic offer but was conscious that to do so would effectively stifle the company's potential claims against M. C sought directions, under s 112 of the Insolvency Act 1986, that he might accept M's offer. The judge took the view that the application, although expressed to be under s 112, should be treated as an application for sanction under s 165(2)(b). He adjourned the application to enable M and W to reconsider their offers in the light of the accountants' report, which had only just been made available to them. Both M and W made further offers. The matter came back before the judge, and he made an order sanctioning C's decision to accept M's revised offer. W appealed.

The Court of Appeal was asked: (i) whether the compromise with M for which C had sought sanction was in the best commercial interests of the company; and (ii) whether, if it was in the best commercial interests of the company, sanction of the compromise should nevertheless be excluded by the public interest in the pursuit of claims against an allegedly misfeasant director.

The appeal was dismissed. The trial judge and C had been correct in their assessment of where the best interests of the post-liquidation creditors lay.

(1) The judge had been right to hold that, in relation to the post-liquidation expense creditors, M's offer was to be preferred on grounds of certainty and finality. He had also been right to take the view that W should not be enabled to pursue M for his own benefit as a pre-liquidation creditor at the expense and risk of the post-liquidation creditors.

(2) In the context of the recovery for the benefit of a company's pre-liquidation creditors of funds or commercial opportunities said to have been misappropriated or misdirected by the actions of a director, the relevant question was whether the public interest in the imposition of civil sanctions should lead to the conclusion that litigation to achieve that end should be pursued at the expense and risk of the post-liquidation creditors whose interests would be best served by a compromise with the alleged wrongdoer.

(see Wilson v.Whitehouse and Anor [2006] EWCA Civ 1688)

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