HMRC v Rochdale Drinks Distributors Ltd

The Court of Appeal allowed HMRC's appeal and restored the appointment of a provisional liquidator. The court held that, applying the correct approach to provisional liquidator applications under section 135 of the Insolvency Act 1986, the judge below erred in his assessment of the evidence. HMRC had demonstrated that they were likely to obtain a winding-up order: there was an admitted unsecured debt of about £340,000 and substantial, unrefuted evidence that RDD was loss-making and likely insolvent. Given the poor state of RDD's books and records, the apparent chaotic corporate governance, and the risk that records and assets might not be preserved pending the petition, the appointment of a provisional liquidator was justified to secure assets and records and enable early investigations.

Background and procedural posture: HMRC presented a creditor's winding-up petition against Rochdale Drinks Distributors Limited (RDD) and applied without notice for the appointment of a provisional liquidator. Peter Smith J granted the appointment. RDD applied to discharge that appointment and Floyd J discharged it on 5 April 2011. HMRC obtained permission to appeal to the Court of Appeal.

Nature of the application: HMRC sought the provisional appointment of a liquidator under section 135 of the Insolvency Act 1986 pending a winding-up petition based on alleged VAT liabilities following HMRC investigations. RDD sought discharge of the appointment, alleging material non-disclosure, insufficient risk of dissipation of assets, and a substantial dispute to the debt (including an asserted counterclaim).

Issues framed:

• Whether HMRC had shown they were likely to obtain a winding-up order on the petition (i.e. whether the claimed debt was not the subject of a substantial dispute and whether RDD was insolvent).
• If that threshold was met, whether appointment of a provisional liquidator was justified as a proportionate response (in particular whether there was a sufficient risk of dissipation of assets or other reasons to justify intervention, such as preservation of records and securing assets for creditors).
• Whether any material non-disclosure to the without-notice judge or an arguable counterclaim should have led to discharge of the provisional liquidator.

Court's reasoning: The Court of Appeal concluded that Floyd J misdirected himself by treating the dispute as primarily one where HMRC bore the full burden of proving fraud or forgery on the papers and by placing undue emphasis on the need for trial-style proof of fraud. The correct approach required testing whether HMRC were likely to obtain a winding-up order on the petition; HMRC had at least an admitted unsecured sum of about £340,000 and evidence that RDD was loss-making and dependent on director funding, and the counterclaim relied upon by RDD was not made out on the material before the judge. Even if likelihood of a winding-up order alone does not automatically justify a provisional liquidator, the chaotic accounting, lack of proper books and records, repeated unexplained director changes, cash trading and payments (including preferential payments after the petition), and the need to secure records and investigate management conduct meant that maintaining a provisional liquidator was proportionate. The Court therefore restored the provisional liquidator's appointment and rejected the judge's discharge order.

Wider context: The judgment reiterates that appointment of a provisional liquidator is an intrusive interim remedy requiring anxious consideration; the threshold in creditor petitions is that the petitioner should be likely to obtain a winding-up order and, if so, there must then be justification for provisional intervention (risk to assets, preservation of records, need to investigate management or protect creditors).

Appeal allowed. The Court of Appeal held that the judge below erred in his approach to the disputed VAT claims and the need to assess whether HMRC were likely to obtain a winding-up order. HMRC had shown they were likely to obtain a winding-up order in respect of at least a material part of their claim and there were compelling reasons (poor books and records, risk to assets, need to secure records and to permit investigations) to maintain the provisional liquidator. The appointment of the provisional liquidator was therefore restored.

This is an appeal to the Court of Appeal from the High Court of Justice, Chancery Division (Floyd J) ([2011] EWHC 988 (Ch)). Permission to appeal was granted by Patten LJ who directed expedition. The Court of Appeal allowed HMRC's appeal and restored the appointment of the provisional liquidator.