Secretary of State for Business, Enterprise & Regulatory Reform v Amway (UK) Ltd

Under section 124A of the Insolvency Act 1986, the court must decide at the hearing whether winding up is just and equitable, considering the totality of the evidence and circumstances as they then exist.

Past misconduct does not create an automatic obligation to wind up where the offending features have been remedied by a genuine and effective change of business model. The court must balance public protection, deterrence and commercial standards against present conduct, management, recurrence risk and the consequences of winding up. Undertakings may exceptionally be accepted despite opposition from the Secretary of State.

The Secretary of State petitioned under section 124A of the Insolvency Act 1986 for the winding up of Amway (UK) Ltd in the public interest. The petition alleged that Amway’s former multi-level direct-selling model permitted misleading recruitment representations and was unlawful under the Lotteries and Amusements Act 1976 and the Fair Trading Act 1973.

Mr Justice Norris found serious defects in the former model but concluded that Amway’s revised model had remedied them. He refused the petition, accepting undertakings as a condition. The Secretary of State appealed, challenging the relevance of the reforms, the acceptance of undertakings and several procedural findings. The central issue was whether the former misconduct made winding up mandatory despite the changed circumstances.

The appeal on the merits and both parties’ appeals on costs were dismissed. Rix LJ gave the leading judgment. Toulson LJ and Rimer LJ agreed; Toulson LJ added a separate observation on costs.

1. Section 124A confers a discretion. The court must conduct its own assessment at the hearing, considering the totality of the evidence and all circumstances as they then exist. Public protection, deterrence, acceptable standards of commercial conduct and judicial disapproval are important, but they do not displace the statutory balancing exercise. Re Walter L Jacob & Co Ltd [1989] BCLC 345 (CA) was materially different: it concerned a dishonest securities dealer whose business had ceased and whose continued existence had no corresponding value.
2. The judge was entitled to conclude that Amway’s revised model made radical changes, gave greater prominence to genuine retail sales, controlled promotional material, corrected unrealistic expectations and removed registration and renewal fees. The former defect was a failure of supervision and control, rather than deliberate dishonesty. In the circumstances, winding up an established and lawfully trading company would have been disproportionate. The Secretary of State had not subjected the revised model to a detailed critique, and the relevant witnesses had not been cross-examined. The judge was entitled to rely on their unchallenged evidence and to find that the management could be trusted, although the submission to the contrary was technically open.
3. The court has power to accept undertakings concerning future conduct and to make them a condition of dismissing a petition. It should be very slow to do so where the Secretary of State objects, because of the policing burden, but there is no absolute rule against it. The guidance in Re Bamford Publishers Ltd and Re Supporting Link Alliance Ltd [2004] EWHC 523 (Ch) had to be read in its factual context. Secretary of State for Trade and Industry v Bell Davies Trading Ltd [2004] EWCA Civ 1066 confirmed that acceptance despite opposition could be proper in an unusual case. Here the revised model, rather than the undertakings alone, determined the result, although the undertakings usefully recorded the reforms.
4. The Secretary of State had no specially favourable costs regime. The ordinary rule in CPR 44.3 applied, and a split costs order was appropriate because the petition had been properly brought but ultimately failed after a material change in circumstances. Toulson LJ stated that the court had heard no argument on whether a different costs approach applicable to other regulators should be extended to the Secretary of State.

• Court of Appeal (Civil Division): Dismissed the Secretary of State’s appeal on the merits and both parties’ appeals on costs. The order of the High Court stood.
• High Court, Chancery Division (Companies Court): Norris J refused the public-interest winding-up petition and made dismissal conditional on undertakings: [2008] EWHC (Ch) 1054.