Revenue and Customs Commissioners v Winnington Networks Ltd and another – provisional liquidators

Technical Bulletin No: 563 Case: Revenue and Customs Commissioners v Winnington Networks Ltd and another [2014] EWHC 1259 (Ch), Norris J, 14 March 2014

Synopsis: The High Court has provided a useful summary of the principles to be applied when considering applications to appoint provisional liquidators where notice has not been given to the relevant company.

Topics covered: Applications without notice to appoint provisional liquidators; provisional

The Facts

Winnington Networks Ltd (Winnington) sold electrical white goods and electrical goods, and traded in voice over internet protocol units. These transactions together allowed it to collect large amounts of VAT and generate large unpaid VAT liabilities.

HMRC made applications without notice to appoint provisional liquidators to Winnington and another related company (Bartel) based on their unpaid VAT liabilities.

The Law The court stated that the following principles were to be applied when considering an application to appoint provisional liquidators without notice:

1. The appointment of a provisional is a most serious step and should be the subject of most anxious consideration.

2. Applications without notice need to be justified by exceptional circumstances. A court should not entertain an application of which no notice has been given unless either giving notice would enable the defendant to take steps to defeat the purpose of the remedy, or there has been literally no time to give notice.

3. A hearing regarding the appointment of a provisional liquidator is not a trial of the relevant winding-up petition itself and accordingly, the court is proceeding upon a provisional and interim basis.

4. It is for the petitioner to show that they are likely to obtain a winding up order on the hearing of the petition. This involves demonstrating that the petitioner is entitled to present the petition and that a material part of the petition debt is not capable of serious dispute.

5. On a without notice application for a provisional liquidator, that assessment falls to be made without the company having had the chance to demonstrate that it does have a good arguable case in support of a dispute as to the debt. The court must therefore be assured that it has a fair picture of the circumstances in which the

1 petition is presented and in that regard, that the petitioner has given full and frank disclosure. The court can take into account the company's engagement with and response to any prior investigatory steps which would have been undertaken by the , in the expectation that if the company has a serious case to advance, it will have advanced it in the course of that engagement and will not have kept it up its sleeve.

6. The court must be satisfied that the appointment of a provisional liquidator is the right course to take in all the circumstances.

7. Material to a consideration of those circumstances is the need to protect the assets of the company and in that context, "assets" is to be given a fairly broad interpretation. In cases where there are real questions as to the integrity of a company's management and the quality of its accounting and record-keeping functions, it will be an important factor to ensure that an incoming liquidator obtains control of all of those records so that the necessary investigations can be undertaken. These investigations may well include bringing claims against the management and whether there ought to be a report to the Secretary of State possibly leading to disqualification proceedings. These causes of action and possible steps are to be regarded as part of the assets of the company for the purposes of assessment.

8. In cases where the appointment of a provisional liquidator is sought by a public body discharging a public function and for the public good, a cross-undertaking in damages is not generally to be required.

The Decision Norris J granted the application and appointed provisional liquidators in respect of Winnington and Bartel.

The court considered the factors set out above and held that:

• The application was made properly without notice. It was essential, having regard to the apparent lack of integrity of the management of Winnington and Bartel, that records were preserved, meaning that there was a paper trail and digital records, so that the liquidators had all of the material in their possession before it could be tampered with. A without notice application was justified having regard to the ease with which Winnington and Bartel could move funds offshore, using their existing banking arrangements (which were based in the Seychelles).

• HMRC was likely to obtain a winding-up order at the hearing of each of Winnington's and Bartel's petitions. Both companies were demonstrably insolvent and the petition debts were not capable of serious dispute, notwithstanding the appeals against them.

• The appointment of provisional liquidators was the right course to take. Only Winnington undertook any legitimate activity and even that was only a vehicle for generating the collection of VAT. The advantage of making the appointment was the elimination (as far as could be done) of the risk to the books and records of the

2 companies and the elimination of the risk of the dissipation of their assets (again so far as could be done).

In the light of the above the court held that it had no real alternative but to appoint provisional liquidators. The court did not require HMRC to give a cross-undertaking for damages.

Comment The case does not make any new law. However the case provides a useful summary of the principles applicable to the appointment of a provisional liquidator without notice, particularly in circumstances where there are questions about the past and future conduct of the company's management.

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