Core VCT plc, Core VCT IV plc and Core VCT V plc were investment companies. The investments were managed by Core Capital LLP and later by Core Capital Partners LLP. A Mr Fakhry and a Mr Edwards were partners in the LLPs.
On 16 April 2015 the companies went into members’ voluntary liquidation. They were dissolved in November 2016.
In July 2018, on a without notice application by minority shareholders, Fancourt J restored the companies to the register, ordered the appointment of new liquidators and directed that notice of the order be given to the former liquidators. Those orders were made on the basis that affairs of the companies and the conduct of the liquidations needed to be investigated.
Mr Fakhry and Mr Fry, one of the former liquidators, applied for orders setting aside the restoration order, alternatively for an order under s. 108(2) Insolvency Act 1986 removing the new liquidators and substituting Mr Fry, and in the further alternative for an order pursuant to s. 171(3)(b) Insolvency Act directing that a meeting of the members of the companies be held to consider whether the members’ voluntary liquidations should continue and if so who the liquidators should be. That application was heard by Jeremy Cousins QC, sitting as a deputy High Court judge, who dismissed it ([2019] EWHC 540 (Ch), [2019] BCC 845).
An appeal was brought, permission having been granted by Patten LJ, and judgment was recently given by the Court of Appeal: see Fakhry v Pagden & Anor [2020] EWCA Civ 1207.
The appellants submitted that neither Mr Fakhry nor Mr Fry had locus standi to appear on the restoration application or to seek orders on the set-aside application. Counsel for the appellants later conceded that a member (which Mr Fakhry was) did have locus, provided that the grounds for applying went to his status as a member. David Richards LJ rejected a submission that the former liquidators had no locus as they had ceased to hold office, relying on Practice Note: Claims for an Order Restoring the Name of a Company to the Register ([2012] BCC 880) as to joining a former liquidator to an application to restore a company which had been dissolved following liquidation. A further submission that a member or former liquidator lacked standing if the purpose of their application was to prevent investigation of their conduct also failed: “This appears to me to confuse standing with the submissions which the court will permit a person to advance”.
David Richards LJ described the appellants’ “overarching submissions” as follows:
- That decision-making in relation to a solvent company was vested in the members. “[A] minority shareholder should not be permitted to achieve by application to the court the very result he failed to achieve at a general meeting.”
- That was the more so where that result was achieved without notice to the other members or the former liquidators and where the shareholder had raised concerns before and at the general meeting which passed the resolutions leading to the companies’ dissolution.
- That position was stronger where remedies were available to the minority shareholder during the liquidation, but he did not invoke them.
The judge thus started from the premise that the role of members and the degree of control given to them by the legislation in a members’ voluntary liquidation was a central issue, although he also said that that should not be overstated.
Three points going to the control of liquidators and directors, the judge went on, were relevant to the foregoing considerations:
- While members by a simple majority could remove a director or, in a members’ voluntary liquidation, the liquidator, s. 108 Insolvency Act enabled the court to remove a liquidator, on cause shown, on the application of any person whom the court considers proper, including a member. (No similar power existed as to the removal of a director.)
- The court also had the power to appoint a liquidator under s. 108, either to fill a vacancy or in place of a liquidator. (Again, no similar power existed as regards a director.) A liquidator appointed in that way could be removed by the members only by the mechanism set out in s. 171(3).
- The members did not have the power to control the actions of liquidators. While the articles of association usually enabled members to exert control over directors, the members enjoyed no such powers over the liquidator even in a members’ voluntary liquidation. The most they could do, short of taking steps to remove the liquidator, was to apply to the court for directions under s. 112 of the Act.
But, “While remedies existed, the real issue is whether it can be said that Mr Grattan [a shareholder] should, in the particular circumstances of the case, have pursued them. Was his neglect to do so such that the court should not have acceded to the restoration applications?”
“In my judgment,” David Richards LJ said, considering the judgment under appeal, “it was essential for the court to have considered whether and, if so, how the members should be consulted. The failure to do so was a failure to have regard to a material consideration which should have been central to the court’s decision”. In his view the wishes of the companies’ members should have been ascertained before the court reached a final decision on the restoration application: “This is a case in which one member, with a very small shareholding in each of the Companies, supported by a member with a very small shareholding in just one of the Companies, was inviting the court to reverse the effect of the resolutions by which the members as a body had approved the dissolution and released the former liquidators and to appoint liquidators to pursue extensive investigations with a view to substantial civil proceedings. In my judgment, it is manifest that the members as a whole should be consulted before embarking on such a course, apparently for their benefit”. He drew an analogy with a derivative action proposed by a minority shareholder where the members are almost invariably consulted before proceedings are permitted “because it is they as the general body of shareholders who have the economic interest in whether proceedings are brought: see, for example, Prudential Assurance v Newman Industries Ltd (No 2) [1982] Ch 204”.
He then asked what should happen next. “Given that it is still not known whether the members of the Companies wish them to continue in existence and whether they want the present liquidators to continue their investigations, it would not in my view be right to set aside the orders made by Fancourt J and dismiss the restoration applications. […] Nor do I think it would be right to remove the present liquidators. The Companies are currently in existence and they need to have liquidators in office while that remains the case”.
The proper course, he decided, was “to do now what should have been done at the beginning, that is, to convene meetings of members of each Company to consider resolutions addressed to whether that Company is to remain restored to the register for the purpose of investigating the conduct of management and the former liquidators and whether the present liquidators should remain in office. These should be ordinary resolutions decided on a simple majority of votes. Once the meetings have been held, the court would decide whether to confirm or set aside the orders made by Fancourt J. In the absence of exceptional circumstances and subject to the next paragraph, it is to be expected that the court would give effect to the resolutions”.
The ”subject to” point was the need to consider the position of members who would be the subject of the proposed investigations and others associated with them such that their decision could be influenced by personal interests. “This problem,” he noted, “has been considered in the context of derivative actions and resolved by having regard only to the votes of shareholders independent of the proposed defendants: see Smith v Croft (No 2) [1988] Ch 114”.
That left a number of practical but important issues to be decided (the contents of circular(s) to members, the length of notice of the meetings, the mechanics of giving notice and so on). Allowing the appeal, he remitted the applications to the Chief Insolvency and Companies Court Judge for directions for convening the meetings.
Practitioners might also care to note the judge’s reminder about the role of liquidators in applications of this kind which he said “should have been confined to providing information to the court. On applications of this sort, liquidators are expected to adopt a neutral position: see, for example, in the context of a petition to wind up a company already in voluntary liquidation, Re Roselmar Properties Ltd (No 2) (1986) 2 BCC 96,157,” although he conceded that they were entitled to deal with matters impugning their conduct.
