Caledonian Ltd & Anor, Re

The Secretary of State presented public interest winding up petitions under section 124A of the Insolvency Act 1986 following investigators appointed under sections 447(3) and 453A of the Companies Act 1985. The court carried out the statutory balancing exercise required of public interest petitions and concluded it was just and equitable to wind up both companies.

The judge found widespread mis-selling and inadequate due diligence in respect of three categories of investments marketed to retail clients: voluntary carbon credits (VERs), rare earth metals and coloured diamonds. The Companies accepted that those products were objectionable. The court also found that communications and account documentation relating to precious metals were seriously misleading, that there was a material shortfall between client bullion entitlements and actual holdings, and that accounting records were inadequate.

Because the companies' affairs were intertwined, because the Companies were insolvent, and because there was a real risk of further public loss as well as a need to investigate the companies' affairs, the court ordered Caledonian Ltd to be wound up and ordered Caledonian Commodities Ltd restored to the register and wound up.

Background and parties. The Secretary of State for Business, Innovation and Skills presented two public interest petitions seeking the winding up of Caledonian Ltd and Caledonian Commodities Ltd. Investigators were authorised under sections 447(3) and 453A of the Companies Act 1985 to inspect the companies' affairs. The sole director of both companies was Mr Ozden Hassan; Mr Roy Seeballuck, Caledonian’s sales manager, opposed the petitions and represented the companies as a litigant in person.

Nature of the application. The petitions sought winding up orders on public interest grounds under section 124A Insolvency Act 1986. The Secretary of State relied on investigators' reports and witness statements from investors alleging that the companies marketed and sold unsuitable products to retail customers, used misleading marketing and charged excessive mark-ups.

Issues for decision. The court framed and decided whether, on the totality of the evidence and after the balancing exercise required on a public interest petition, it was just and equitable to wind up the companies. Relevant factual issues included the nature of the products sold (VERs, rare earth metals, coloured diamonds, precious metals, storage pods), whether adequate due diligence had been performed, whether marketing and documentation were misleading, the existence and extent of any shortfall in precious metals held, the state of books and records, the relationship between Caledonian and Commodities, and the adequacy of attempts at remediation such as offers to creditors.

Findings and reasoning.

• The court found that VERs, rare earth metals and coloured diamonds were marketed and sold as investments to retail clients despite being unsuitable; the companies accepted that those products were objectionable and the judge concluded they had been mis-sold.
• Due diligence before marketing these speculative products was held to be wholly inadequate: reliance on supplier registration or limited marketing materials did not suffice for the companies' responsibilities to understand and accurately present complex, illiquid products.
• In relation to precious metals the court found the companies' marketing, terms and correspondence gave investors the impression they would acquire and have an interest in physical bullion. In practice there was a growing shortfall between client entitlements and actual holdings, the companies treated client positions as unsecured liabilities and documentation was inconsistent and misleading. The shortfall in gold and silver was material (current holdings at a valuation materially below investor positions).
• Accounting records did not adequately explain material transactions, including director loan entries. The affairs of Caledonian and Commodities were intermingled and Commodities had an independent presence (website, contracts), so restoration for investigation was appropriate.
• An informal offer to creditors by Caledonian was considered unsatisfactory because it mischaracterised the companies' prior conduct, ignored other likely claims, failed to disclose potential remedies against directors or others, and would, if acted on, prevent proper investigation by the Official Receiver or a liquidator.
• Balancing the factors, the court determined there was both a need to protect the public from further loss and to investigate and punish past misconduct; the companies were insolvent and the conduct failed accepted minimum standards of commercial behaviour.

Outcome. The court ordered the winding up of Caledonian Ltd, directed restoration of Caledonian Commodities Ltd to the register, and ordered its winding up. The judge reserved consequential matters for further hearing.

This is a first-instance decision. The court made winding up orders against both Caledonian Ltd and Caledonian Commodities Ltd (Commodities was first restored to the register). The rationale was that the companies had conducted their business in a manner failing to meet minimum standards of commercial behaviour: they mis-sold unsuitable and illiquid products, performed inadequate due diligence, provided misleading communications about precious metals while holding a material shortfall, maintained inadequate books and records, and presented a realistic risk of further public loss. Given insolvency, intertwined affairs and the need for investigation and public protection, winding up was just and equitable.