Secretary of State for Business, Enterprise and Regulatory Reform v Amway (UK) Limited

The appeal concerned a petition under section 124A of the Insolvency Act 1986 to wind up Amway (UK) Ltd in the public interest. The judge at first instance (Norris J) found serious failings in the company’s old business model, in particular a failure to supervise independent business operators (IBOs) which led to misleading recruitment representations and a significant disparity between the expectations sold and the likely reality of earnings.

Despite those findings, the judge refused the petition because the company had implemented a materially revised business model and offered undertakings (including abolition of initial and renewal fees, controls on business support material, an orientation programme and publication of earnings data) which, in his view, addressed the public interest concerns. The Court of Appeal dismissed the Secretary of State’s appeal, holding that the judge had lawfully exercised his discretion under section 124A in weighing the changed circumstances, the adequacy of the new model, the undertakings and the consequences of winding up.

Background and nature of the application:

• The Secretary of State presented a public interest petition under section 124A of the Insolvency Act 1986 seeking a winding-up order against Amway (UK) Ltd, an established direct-selling multi-level business, on grounds including alleged misrepresentations by its IBOs and, originally, that the business was an unlawful lottery or unlawful trading scheme under the Lotteries and Amusements Act 1976 and the Fair Trading Act 1973.

Procedural posture: The petition was heard in the High Court (Chancery Division, Companies Court: Norris J [2008] EWHC (Ch) 1054). The Secretary of State appealed to the Court of Appeal; the appeal raised, among other things, whether the judge had misapplied his s 124A discretion by refusing to wind up the company in reliance on post-petition reforms and undertakings.

Facts:

• Amway UK had traded for about thirty years and operated via IBOs who recruited further IBOs and earned bonuses from downline sales. Statistical evidence showed the great majority of IBOs earned no bonus and that a very small minority earned the bulk of bonus payments.
• The trial judge concluded that, under the old model, Amway had failed adequately to control and supervise IBO promotional material and recruitment representations; some third-party business support material and IBO presentations contained misleading statements about ease of earning and likely rewards.

Key issues before the court:

1. Whether, having found serious defects in the old business model, the judge was bound as a matter of law to wind up the company notwithstanding material reforms implemented before trial.
2. Whether the judge was entitled to accept undertakings and to make dismissal conditional on them even though the Secretary of State opposed reliance on such undertakings.
3. Whether there were procedural unfairnesses (for example exclusion of certain evidence and lack of cross-examination) that rendered the judge’s conclusions unsafe.

Court’s reasoning and conclusions:

• The Court of Appeal reviewed authorities (including Re Walter L Jacob, Re Bamford Publishers, Re Supporting Link and Secretary of State v Bell Davies) and reiterated that the s 124A jurisdiction is discretionary and requires a balancing exercise having regard to circumstances at the hearing.
• The judge had properly assessed the evidence of the new business model and found it made radical changes (abolition of fees, redefined roles, control of business support material, mandatory training/certification for recruiters, orientation and earnings disclosure). The company’s evidence about those reforms was unchallenged in cross-examination.
• The judge was entitled to conclude that the new model and undertakings reduced the public risk and that winding up would be disproportionate given the company’s continuing lawful trading, the effect on creditors and participants, and the remedial steps taken. Acceptance of undertakings, while unusual if opposed by the Secretary of State, was within the court’s discretion in this exceptional case.

Other findings: The court also addressed costs and upheld the judge’s split order on costs, concluding the petition was determined on the basis of the new business model and that the judge had not erred in timing the split.

The Court of Appeal dismissed the Secretary of State’s appeal. It held that under section 124A the judge had a discretion to refuse to wind up a company in the public interest after conducting a balancing exercise based on the totality of evidence at the hearing. The judge lawfully concluded that Amway’s materially revised business model and the undertakings offered addressed the public interest concerns so as to make a winding-up order disproportionate.

Appeal from High Court, Chancery Division, Companies Court (Norris J) [2008] EWHC (Ch) 1054 to the Court of Appeal, reported as [2009] EWCA Civ 32. Permission to appeal was granted by the trial judge and the Court of Appeal heard the matter and dismissed the appeal.