Wragge Lawrence Graham & Co's dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.
1. The Registrar of Companies owes a duty of care when it comes to registering a winding up petition
The High Court has held that the Registrar of Companies (the Registrar) owes a common law duty of care to companies when entering details of a winding up order on the Register.
In the case of Serby v Companies House (1) The Registrar of Companies (2) the court confirmed that the Registrar owes a duty to ensure a winding up order is not registered against the wrong company. The duty does not extend to checking information supplied by third parties - only to ensuring that information supplied is entered accurately on the Register.
On 28 January 2009 the High Court issued a winding up order (the Order) against Taylor & Son Limited (Taylor & Son). The Order, which did not include a company number, was sent to Companies House for registration. On 20 February details of the Order were entered on the Register against Taylor & Sons Limited (the Company), an entirely different company to Taylor & Son.
When the Order was made Mr Sebry (the managing director of the Company) was contacted by the Official Receiver's office and informed that he was 'now in liquidation'. He protested and the Company's solicitor resolved the issue, with the Official Receiver subsequently agreeing to pay the Company's fees incurred in dealing with the mistake.
Notwithstanding the mistake, the Official Receiver sent the Order on to Companies House without a Notice to Companies House (NOTCH) form and without a covering letter - both of which should have confirmed the company number for Taylor & Son and have made it quite clear the company in respect of which the Order had been made.
Procedures were in place at Companies House which, if followed, would have required the Order to be rejected because no company number had been provided. Instead, a search was undertaken to establish the company number, which it was acknowledged was common practice at the time. The search identified two companies with very similar names and the order was unfortunately registered against the Company instead of against Taylor & Son.
On 23 February the Company's accountant discovered that the Company was showing as being in liquidation. Companies House was contacted, the Register was amended and all references to the Order were removed from the Registrar's online systems by mid-afternoon. The correction was also made before details of the Order were submitted to the London Gazette for publication.
Unfortunately, however, correcting the Register at that stage did not deal with the issue adequately. An unknown number of people had already accessed the Register while details of the Company's liquidation were showing. Furthermore, information supplied through Companies House subscription services was supplied to customers (including a number of credit checking agencies) on 21 February, before the Register was amended.
Word quickly spread that the Company was in financial trouble and as a result the credit the Company had relied upon from its bank and suppliers quickly dried up. Suppliers started to refuse to supply goods and services without payment in full for all past supplies and without payment up front for all present and future supplies. Without supplies the Company could not fulfil its contracts and could not earn income. The Company subsequently went into administration on 9 April 2009. By then it had run out of money and its bank refused to lend any more.
The claimant (having been assigned the cause of action by the Administrators) brought a claim for negligence and breach of statutory duty against Companies House and the Registrar. The court was asked to determine three preliminary issues:
- Whether the defendants owed the Company a duty of care under statute or common law not to enter incorrect information on the Register and not to record information on the Register that related to a different company;
- If so, whether they had breached that duty; and
- If so, whether the breach caused the Company to enter administration.
The court was not satisfied that the defendants owed the Company a statutory duty. However, it did hold that a common law duty was owed.
The court held that by undertaking to alter the status of a company on the Register which it is his duty to keep, the Registrar does assume a responsibility to that company. The duty does not extend to verifying information supplied by third parties, such as Insolvency Practitioners, but rather only to ensuring the information is accurately recorded.
A special relationship between the Company and the Registrar arose because it was foreseeable that a company will suffer serious harm if it is wrongly stated on the Register that it is in liquidation. In this case the foreseeability of harm was obvious.
The duty was owed to one individual company whose identity was readily discoverable. The Company was therefore sufficiently close to the Registrar to be owed that duty and it was fair, just and reasonable to impose a duty to avoid foreseeable harm to a sufficiently proximate victim.
The Registrar owed a duty when entering a winding up order on the Register to take reasonable care to ensure that the order is not registered against the wrong company. The duty is owed to any company which is not in liquidation but is wrongly recorded on the Register as having been wound up by the court.
On causation, the court was satisfied that the claimant had proved the reason the Company went into administration was the error made by the defendants. The rumour that the Company was in financial difficulties caused the Company to lose its lines of credit and enter into administration as a consequence. There was no evidence of any other precipitating factor.
Things to consider
This case arose as a result of a simple but unprecedented administrative error. It clearly illustrates the importance of ensuring company numbers are included on any insolvency documents to avoid any potentially costly confusion. Companies House will no doubt also be more vigilant in light of this decision and going forwards is likely to reject forms that do not contain a company number.
2. HMRC is required to give an undertaking in damages on a provisional liquidation application
In Abbey Forwarding Limited (in liquidation) v HMRC  Abbey applied to the companies court for an inquiry as to damages on an undertaking given by HMRC on the appointment of a provisional liquidator in February 2009.
Abbey was a freight forwarding and warehousing business which HMRC investigated in relation to fraudulent evasion of excise duty on alcoholic goods in 2008 and early 2009. HMRC assessments confirmed duty in excess of £5 million was due. HMRC subsequently presented a winding up petition and applied, without notice, for the appointment of a provisional liquidator, principally on the ground that Abbey's business was involved in fraudulent conduct.
The provisional liquidator then secured a worldwide freezing order in respect of Abbey's directors and undertook to issue misfeasance proceedings against them. Abbey (acting by its provisional liquidator) gave an undertaking in damages and HMRC provided an indemnity in respect of both the undertaking in damages and any adverse order for costs in the proceedings.
The business of Abbey was closed down very soon after the appointment of the provisional liquidator. No application was made to discharge the appointment of the provisional liquidator and the winding up petition was not opposed. Accordingly a winding up order was made and the provisional liquidator became the liquidator.
The misfeasance proceedings were subsequently dismissed, as the court found that there had been no evasion of excise duty. Notwithstanding this decision, HMRC refused to withdraw the tax assessments and the liquidator refused to seek permission to appeal the assessments. The directors were subsequently given permission to and did appeal the assessments, which HMRC withdrew only two days before the appeal hearing. HMRC were ordered to pay the costs of the appeal and to make an interim payment of £250,000.
Abbey applied to the court for an inquiry as to damages on the undertaking given by HMRC. HMRC opposed the application, arguing:
- The undertaking should have terminated when the winding up order was made;
- Abbey had delayed in making the application;
- No application had been made to set aside the appointment of the provisional liquidator or oppose the winding up petition;
- They would suffer prejudice if an inquiry was ordered; and
- Public policy should exempt HMRC from enforcement in any event.
The court rejected the arguments raised by HMRC and ordered an inquiry. The court held:
- An undertaking given on the appointment of a provisional liquidator does not automatically terminate on the making of a winding up order and the court therefore has jurisdiction to enforce an undertaking by ordering an inquiry as to damages;
- The absence of an application to discharge the appointment of a provisional liquidator and failing to oppose the winding up petition could not be an automatic bar to a subsequent enforcement of the undertaking in damages.
- An application for an inquiry as to damages must be made promptly, but that is not a mandatory condition. The delay in this case did not amount to unreasonable delay to the extent that, of itself, the delay would debar an inquiry from taking place.
- There would be no real prejudice to HMRC (the court did not accept prejudice arose because HMRC thought the undertaking had come to an end when the winding up order was made, most of the personnel involved at the time of the investigations into Abbey had left and their records had been deleted or that the passage of time and the liquidation of Abbey will have degraded the available evidence relating to the company's position).
- Recent case law had not changed the position that HMRC was required to give an undertaking in damages on an application to appoint a provisional liquidator. Any exemption that may arise in respect of a public body engaged in public law enforcement did not apply to HMRC as a creditor. The court made it clear that there was a strong public interest in the enforcement of undertakings freely given in court - all the more so when they were given by a public body.
The provisional liquidator would not have been appointed if it had been known the allegations of fraud against Abbey would not be made out and the assessments upon which the winding up petition was founded were not valid. This was therefore an appropriate case in which to order an inquiry as to damages on the undertakings given by HMRC.
Things to consider
This case makes it clear that, as a general rule, HMRC should be required to give an undertaking in damages when making an application for a provisional liquidator and, simply because of its status as a public body it will not be exempt from doing so. If it transpires that the basis of the application was wrong and damages flow as a result, HMRC should also expect the undertaking to be enforced.
3. A company's centre of main interest is the state of its registered office - although the presumption can be rebutted if there is sufficient evidence
The case of re: Northsea Base Investment Limited  involved an application on behalf of the administrators of a number of companies, seeking a declaration that each company's centre of main interests (COMI) is England and Wales. The application was made under paragraph 68(2) of Schedule B1 of the Insolvency Act 1986.
The companies court confirmed the legislation - Recital 13 and Article 3 of the EC Regulation on Insolvency Proceedings 2000 - was clear. The law presumes that the COMI is the member state in which the registered office is situated but that presumption may be rebutted by evidence.
The third to eighth applicant companies were special purpose vehicles, each owning a single ship in a fleet (the 'Ship Companies'). They were 100% owned by the second applicant (Baltic Tankers), which in turn was 100% owned by the first applicant (Northsea Base Investments Limited - NBIL). The sole shareholder in NBIL was a company incorporated in Nevis, owned by three Nevis family trusts whose settlors were directors of a shipping agent incorporated in the UK and whose registered office was in London (the Shipping Agent).
All eight companies were incorporated in Cyprus and shared the same company registered office in Cyprus. The operation and management of the Ship Companies had been devolved to the Shipping Agent under a framework agreement entered into in March 2006. The evidence was clear that more services, operations and management were undertaken by the Shipping Agent, who in turn contracted the commercial operational and technical management to another group of companies.
The evidence before the court showed that payments to trade creditors of the Ship Companies were made in England, charterparties were dealt with in the UK and, in many cases, external queries were addressed to London. Trade creditors would understand they were dealing with the Ship Companies in London.
The banks were the largest creditors of all of the companies in the group. The largest creditors were lenders under two loan facilities, both of which were governed by English law and contained exclusive English jurisdiction clauses. Interest payments were made through the Shipping Agent in London and the Shipping Agent was listed as the agent for service of proceedings under the loan agreements. Furthermore the individuals with whom the bank dealt mostly in relation to the loan facilities were directors of the Shipping Agent based in London.
The companies court found that while the legislation makes it clear that the presumption is that the COMI of the company will be the state of its registered office, Cyprus in this case, there was sufficient evidence relating to the administration of the ship companies to rebut that presumption and establish that the COMI of the Ship Companies as England and Wales.
The position was not as clear cut in respect of NSBI and Baltic Tankers, as there were not the same links between the Shipping Agent and London and there was not the same position relating to third party trading. However, as NSBI and Baltic Tankers had no real operational function, the only relevant COMI factors were those relating to the banks. On that evidence, the court accepted the COMI of NSBI and Baltic Tankers was also England and Wales.
Things to consider
Although the law does presume the COMI of a company will be the state of its registered office, that presumption can be rebutted if there is sufficient evidence to show that the COMI should be an alternative state. If there is more than one possible COMI and advantage would be gained from shifting the COMI to a state other than the one where its registered office is based, this should be considered.
The Times Law Reports have confirmed that a judge in recent bankruptcy proceedings has given permission to receivers to notify a debtor on his Facebook page that he must appear in court. The receiver and trustee alleges that the debtor is continuing to sell second-hand vehicles and is failing to co-operate in the bankruptcy proceedings.
Is this a sign that the courts are willing to consider alternative methods of communication - including Facebook and other forms of social media - where such an alternative method is more likely to result in the communication reaching the intended recipient? Further examples are likely to follow - watch this space...