Revenue and Customs v Rochdale Drinks Distributors Ltd

On a creditor’s winding-up petition, a provisional liquidator should be appointed only where the creditor is likely to obtain a winding-up order and the circumstances justify immediate intervention. Insolvency and a likely winding-up order are insufficient by themselves.

The additional justification may include a serious risk that assets will become unavailable, inadequate corporate records, concerns about management integrity, or a need to secure records and investigate transactions. A disputed debt cannot ordinarily support winding up where the company demonstrates a genuine and substantial dispute. A statutory right to appeal a tax assessment does not itself establish such a dispute. Given the intrusive and potentially terminal effect of provisional liquidation, the court must consider the risk of irremediable prejudice with particular care.

HMRC presented a creditor’s petition to wind up Rochdale Drinks Distributors Ltd on insolvency grounds. It alleged substantial unpaid VAT arising principally from disputed input-tax claims. Peter Smith J appointed a provisional liquidator without notice.

Floyd J subsequently discharged that appointment in [2011] EWHC 988 (Ch). He considered that much of HMRC’s debt was substantially disputed, that an admitted balance might be exceeded by a counterclaim, and that the risk to the company’s assets did not justify provisional liquidation.

HMRC appealed. The central questions were whether HMRC was likely to obtain a winding-up order and whether the company’s assets, records, governance and continuing conduct justified restoring the provisional liquidator pending determination of the petition.

1. Appeal allowed. HMRC was likely to obtain a winding-up order. The immediate appointment of Mr Ian Defty as provisional liquidator was restored.

2. On a creditor’s petition, the petitioner must demonstrate that it is likely to obtain a winding-up order. The former expression “good prima facie case” was too elusive for a remedy as serious as provisional liquidation. A wholly disputed debt cannot ordinarily support winding up where the dispute is shown to be substantial. The company must identify and substantiate the dispute; a cloud of objections is insufficient.

3. The judge had mischaracterised the evidential issue. HMRC’s investigations raised a sufficient case concerning the disputed invoices to require the company to demonstrate at least a good arguable case that the trades were genuine. The company’s statutory right to appeal the VAT assessments did not itself prevent those assessments from supporting a winding-up petition. Its evidence and accounting records did not provide an adequate answer to a material part of HMRC’s claim.

4. There was also an admitted debt of about £340,000. The alleged counterclaim had not been shown to be genuine and serious or substantial. The evidence instead indicated that the claimed repayment had already been accounted for when calculating the admitted net debt. The company was insolvent, or was likely to be shown to be insolvent, and there was no evidence of continuing financial support from its directors.

5. A likely winding-up order does not alone justify provisional liquidation under section 135 of the Insolvency Act 1986. Something more is required. Relevant circumstances include a serious risk that assets will cease to be available, even without deliberate dissipation; defective governance and accounting; the need to secure books and records; and the need to investigate transactions or possible claims against management.

6. Those circumstances were established. The company’s record-keeping and governance were seriously deficient. After discharge of the appointment, it disposed of stock and paid creditors, including a substantial pre-petition payment to one creditor, without obtaining a validation order under section 127. That conduct demonstrated that its affairs were not in safe hands.

7. Lewison LJ added that provisional liquidation is among the most intrusive interim remedies. The court should choose the course likely to cause the least irremediable prejudice. A without-notice application requires exceptional circumstances, although that omission had ceased to be material by the inter partes hearing. Rimer and Pill LJJ agreed that the appeal should be allowed.

1. Court of Appeal (Civil Division): In [2011] EWCA Civ 1116, allowed HMRC’s appeal and ordered the immediate restoration of the provisional liquidator.
2. High Court, Chancery Division: In [2011] EWHC 988 (Ch), Floyd J discharged Peter Smith J’s earlier without-notice appointment of the provisional liquidator.
3. High Court, Chancery Division: Peter Smith J had appointed the provisional liquidator without notice following presentation of HMRC’s winding-up petition.