Summary

In order to obtain the appointment of a provisional liquidator in the case of a creditor's winding-up petition, the petitioner had to show as a threshold test that he was likely to obtain a winding-up order on the hearing of the petition.

Facts

The appellant commissioners appealed against a decision discharging the appointment of a provisional liquidator of the respondent company (R). The commissioners, claiming to be creditors of R, presented a petition for its compulsory winding up on the grounds of its insolvency. On the same day, the commissioners made a without notice application for the appointment of a provisional liquidator. The basis of the application was that there was a prima facie case for the winding up of R and, unless a provisional liquidator was appointed, there was a risk pending the making of a winding-up order of jeopardy to R's assets and to its effective and efficient winding up. R's business was wholesale trading in alcoholic drinks. The commissioners' case was that R had been run for the purpose of facilitating and undertaking the fraudulent evasion of VAT. They asserted that R had falsely claimed input tax on invoices for supplies by six traders, five of whom they described as "missing traders" and one as a "buffer trader". They disputed the making of supplies by those traders and, therefore, the genuineness of the invoices; R was said to have inflated its input tax claims by using the same invoices repeatedly and to have suppressed the output tax due on its sales. The provisional liquidator was appointed and the following day the commissioners served on R a VAT assessment for over £2 million. R applied successfully to discharge the provisional liquidator's appointment. The judge held that the risk of dissipation of assets was not sufficiently great and that, although the commissioners had an arguable case of fraud and forgery, the right place for that to be tried was in the tax tribunal on an appeal against the VAT assessment. He concluded that, because the debts appeared to be disputed, it had not been shown that the commissioners were likely to obtain a winding-up order on the petition and that although there was an undisputed sum owing to the commissioners there was a substantial counterclaim exceeding that amount.

Held

(1) The appointment of a provisional liquidator to a trading company was a most serious step for the court to take, since it was likely in many cases to have a terminal effect on the company's trading life. Given the potential seriousness of the appointment of a provisional liquidator, in the case of a creditor's petition, the petitioner had to show as a threshold test that he was likely to obtain a winding-up order on the hearing of the petition, Union Accident Insurance Co, Re (1972) 1 All ER 1105 Ch D considered. If that was shown, it was then necessary to consider whether the appointment should be made as a matter of discretion (see paras 76-77 of judgment). (2) If he had directed himself correctly, the judge should have found that the commissioners were likely to obtain a winding-up order on the hearing of the petition. It was not open to R to challenge and defeat the petition merely on the basis that it had a statutory right of appeal against the assessment before another forum. The existence of a right of appeal said nothing about whether any appeal would have merit; and it was open to the commissioners, as they did, to present their petition against R on the basis that their claimed debt, or at least a material part of it, was not capable of serious dispute and so could properly found the basis for a winding-up order. The commissioners' evidence raised serious questions as to the genuineness of the invoices. If R was to challenge the basis of the petition, and therefore the appointment of the provisional liquidator, the burden was upon it to show that it at least had a good arguable case that its claimed trade with the disputed traders was genuine. R's evidence that that trade was genuine was lamentably inadequate. The judge should have held that the court hearing the petition would hold that at least a very material part of the disputed supplies had not taken place. There was also an undisputed debt of at least about £340,000. R had failed to make good any case that it had a counterclaim exceeding that admitted debt. The judge should also have concluded that R was insolvent or was likely to be shown to be insolvent on the hearing of the petition (paras 83-96). (3) The circumstances justifying the appointment of a provisional liquidator were not confined to jeopardy to the company's assets before the winding-up order was made. In the instant case, there were ample grounds for the provisional liquidator's appointment and it would be restored. R's corporate governance was inadequate and it had failed to keep statutory books and records. The commissioners were in the nature of involuntary creditors and had an interest in the early investigation of R's affairs. R was loss-making, probably insolvent and said to be liable for very large sums of unpaid VAT, not having paid any VAT at all throughout its period of trading (paras 99-102).

Appeal allowed