Summary

Where a company which the secretary of state sought to wind up in the public interest had revised its business model and gave undertakings as to its future conduct a winding-up order was disproportionate.

Facts

The petitioner secretary of state presented a petition for the winding-up of the respondent company (C) in the public interest. C had conducted business in the United Kingdom for some 30 years. It used the same basic business model in about 80 countries worldwide. It was involved in direct selling. It sold over £10 million of products in the UK each year. It marketed its own and third party products directly to consumers through a network of independent sellers known as independent business owners. The structure adopted for the direct selling network was known as multilevel marketing. Such a structure encouraged existing owners to recruit additional sellers whose sales, and the further sales of those whom such additional sellers in turn recruited, benefited the original owner through a bonus structure. Senior owners also promoted business support material to the lower levels of owners through entities not connected with C. The secretary of state investigated C's business and concluded that it was in the public interest that C should be wound up on the grounds that its business was inherently objectionable, an unlawful lottery and/or an unlawful trading scheme. Following the secretary of state's investigation and presentation of the petition C revised its business model. The secretary of state submitted that (1) the reality of C's business was that the nature and rewards of becoming an owner and participating in the business were such that only a very small number of owners made any significant money from their participation and the substantial majority made no money and indeed, by reason of their payment of a registration fee and annual renewal fees, lost money from their participation; (2) the bonus payments made by C to owners were to a substantial extent dependent upon chance, because they were influenced only to a very small degree by the owner's own purchases from C and to a very substantial extent by the product purchases of owners whom the recipient of the bonus had recruited or whom those owners had in turn recruited, and thereby constituted an unlawful lottery; (3) the business was an unlawful trading scheme because the independent business owners were induced to make registration or renewal payments by the prospect of receiving payments or other benefits in respect of the introduction of other persons.

Held

The statistical evidence was that the vast majority of independent business owners earned little or no commission and the small minority who made substantial commission tended to be those who had been owners for longest. It would not be accurate to describe the business opportunity as illusory in the sense that no opportunity actually existed. However, the evidence suggested that the opportunity might well have been oversold, because owners were sold a dream which in reality they had no genuine prospect of attaining. The material produced by C itself could not be categorised as containing misrepresentations of that type of such seriousness as to justify winding-up. However substantial misrepresentations were made to prospective owners by existing owners in business support material and at meetings. It would have been just and equitable to wind C up on the basis of the misrepresentations made in the course of the recruitment process. However the new business model made radical changes, bringing into greater prominence the retail nature of the business, eliminating the attraction of recruiting self-consumers, asserting proper control over what was said, providing a mechanism for correcting any misstatements and not requiring any initial financial commitment. As a result of undertakings offered by C a winding-up order was disproportionate. The petition would be dismissed if C gave those undertakings. (2) C's revised business model did not amount to an unlawful lottery contrary to the Lotteries and Amusements Act 1976 s.1 because a lottery was dependent upon the making of a payment in order to obtain the chance and under the revised scheme no payment was required for any initial business starter pack, nor was any annual renewal fee payable. Taking a commonsense view and avoiding an over analytical approach C's marketing plan involved not the distribution of money by the equivalent of drawing lots but the allocation of a bonus to those who must themselves have effected sales of product, Senator Hanseatische Verwaltungsgesellschaft mbH, Re (1997) 1 WLR 515 CA (Civ Div) applied. (3) C was not in breach of the Fair Trading Act 1973 Pt XI because a prospective owner was not induced to make a payment to C for the business starter pack by the prospect of receiving payments or other benefits in respect of the introduction of other persons who became participants in the scheme. It followed that it would not be just and equitable to wind C up on that ground.

Judgment accordingly