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“Winding-up in the public interest.” When will it happen and what are the consequences for the Director and the Company?

Our Insolvency and Commercial Litigation Solicitors, looks at two cases.

Section 124a of the Insolvency Act, 1986 gives the Secretary of State the ability to seek an order that a company is wound-up ‘in the public interest’.* While this could be perceived to be ‘the nuclear option’ by company directors, how useful is this tool to the Secretary of State and the Insolvency Service, how often is it used and how often is it actually successful? In this article, Ben Chase, one of our Insolvency and Commercial Litigation Solicitors, looks at the case of Sentor Solutions Commercial Ltd, which was wound-up in the public interest. He compares it to another similar case – Portfolios of Distinction Ltd and Turning Point Seminars Ltd – in which the Judge decided not wind-up the companies and explains why. The conclusion is that ‘the nuclear option’ is not used very often.

(*The Act states: 124A Petition for winding up on grounds of public interest.

  • Where it appears to the Secretary of State from-
  • any report made or information obtained under Part XIV (except section 448A) of the Companies Act 1985,
  • any report made by inspections under-
  • section 167, 168, 169 or 284 of the Financial Services and Markets Act 200, or
  • where the company is an open-ended investment company (within the meaning of that Act), regulations made as a result of section 262(2)(k) of that Act;

      (bb) any information or documents obtained under section 165, 171, 172, 173 or 175 of that Act.

  • any information obtained under section 2 of the Criminal Justice Act 1987 or section 28 of the Criminal Law (Consolidation) (Scotland) Act 1995 (fraud investigations), or
  • any information obtained under section 83 of the Companies Act 1989 (powers exercisable for purpose of assisting overseas regulatory authorities),

That it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up if the court thinks it just and equitable for it to be so.

  • This section does not apply if the company is already being wound up by the court.) 

A recent investment fraud case – Sentor Commercial Solutions Ltd [2022] EWHC 2734 (Ch)

The recent case of Secretary of State for Business Energy and Industrial Strategy -v- Sentor Solutions Commercial Ltd et al highlighted what it takes for the Secretary of State (SOS) to obtain a winding up order in the public interest when this piece of legislation is used.

In the circumstances it was the SOS’s case that Sentor and the associated group of companies had been involved in an investment fraud scheme where members of the public were induced into making investments in a group of companies that promised to purchase or develop commercial and residential properties in return for a share of the rental income generated by them. The idea was that the rental income would be dispersed to investors like the interest on a usual investment product, with the promise of higher returns on investment than was otherwise available from banks and other financial institutions.

The Sentor Group also represented to investors and potential investors that the investments were protected by the Financial Services Compensation Scheme and also protected by one of the other companies in the group as a security trustee, by way of various charges held over the assets of the companies within the group.

In reality, assets owned by the companies within The Sentor Group, which were consistently stated to be around the £100m – £140m mark, were entirely fictitious, meaning the various charges held by the companies in the group were in fact a security of nothing over assets that were worth nothing. Further, the investments made in the companies were not used to purchase or develop any properties at all. There was no evidence found that any of The Sentor Group owned any properties at all. What The Sentor Group would do is make a few monthly interest payments to an investor in the beginning and then simply go silent on the investor leaving them significantly out of pocket.

The Judge Decided to wind-up the company in the public interest

ICC Judge Barber, sitting in the High Court of Justice decided that, amongst other things, as The Sentor Group had acted without the authorisation of the FCA, breached regulatory requirements and the purpose of the businesses was solely to induce members of the public into an investment fraud scheme, that The Sentor Group should be wound up pursuant to Section 124a of the Insolvency Act.

However, in another case, the Judge decided not to wind-up the companies involved

It is not always the case that the Judge will decide to wind-up the companies involved on application by the SOS. In 2005, Mr J M Jarvis KC (then QC) sitting as a Deputy High Court Judge in the matter of Portfolios of Distinction Ltd and Turning Point Seminars Ltd [2006] EWHC 782 (Ch) decided not to wind-up the companies that the SOS sought to wind-up pursuant to s. 124a.

On the face of it these were two separate and distinct companies, one offering seminars specialising in helping members of the public make savvy property investments – Turning Point Seminars Ltd (TPS) – and one offering investors the chance to potentially acquire a £1m property portfolio in one year in return for a £50k annual membership fee – Portfolios of Distinction Ltd (POD). It was alleged by the Secretary of State that not one member of POD or TPS achieved a £1m property portfolio after one year. Further, the properties were offered to members by a different company altogether, Quicksell Ltd and the market value of the properties offered were said to be overestimated and many failed to return the rental income that had been assured.

Why was Sentor Commercial Solutions Ltd wound-up, but no such orders were made in the case of Portfolios of Distinction Ltd and Turning Point Seminars Ltd?

The key difference between these two cases was that the judge in this case did not believe the directors of POD or TPS had set out to deliberately mislead the public in relation to the assurances they offered, the judge believed TPS and POD were offering a service to their clients that, crucially, could result in a £1m property portfolio rather than it being a guarantee that they would. This made POD and TPS different from guaranteed investment schemes.

The judge also decided there was no evidence of any type of mis-selling on the part of either POD or TPS. The judge also found that rather than the companies operating a sham business, that while they had their flaws there was the potential for members to achieve a £1m property portfolio. The judge also found that the Directors had attempted to change the working practices of POD and TPS and even employed new members of staff who were specialists, in order to attempt to reach the goal of offering each of their members a £1m property portfolio and overall, their systems and practices had improved substantially prior to the winding up petition that had been sought by the Secretary of State.

All these factors contributed to the decision not to wind the companies up pursuant to s. 124a. Even the fact of POD and TPS being associated with a company that was wound up in the public interest – CM2 Services Ltd – did not influence the decision.

Our Commentary

These two cases are the highest profile examples of the use of s. 124a in recent times and show that this ’nuclear option’ is not often taken by the Secretary of State and when it is, it appears the burden of proof rests squarely with the Secretary of State to prove the necessary ‘lack of commercial probity’.

If Directors can take anything from these differing judgments it is that judges appear to have to be convinced that companies have engaged in dishonest, misleading or fraudulent, but not necessarily illegal conduct in order to wind-up a company ‘in the public interest’. Merely not delivering on promises and assurances made will not always result in the necessary finding of ‘lack of commercial probity’ that is required for the court to make the winding up order.

Our significant experience of representing companies and their directors faced with a Section 124a Petition tells us that every case will turn on its own facts and that there is much that can be done to protect the company position.

Such petitions are often preceded by an Investigation into the company, conducted by Companies Act Inspectors who have wide ranging powers available to them. We are well used to advising in such circumstances.

The winding up of a company in the Public Interest can and often does have serious consequences for the director personally, to include the prospect of:

  • Financial recovery action from the liquidator of the company.
  • Wider regulatory investigation from other Agencies, both in a civil law and criminal law context.

Talk to our Insolvency and Commercial Litigation Solicitors

If you are a Director who finds themselves on the wrong end of proceedings to wind your company up “in the public interest” you can rest assured that the specialist insolvency and commercial litigation solicitors at Neil Davies & Partners will be able to provide you with the best advice in the circumstances. Contact us for an initial chat.

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