The Secretary of State for Business Enterprise and Regulatory Reform v Amway (Uk) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Toulson,Lord Justice Rimer |
| Judgment Date | 29 January 2009 |
| Neutral Citation | [2009] EWCA Civ 32 |
| Docket Number | Case No: A2/2008/1525 |
| Court | Court of Appeal (Civil Division) |
| Date | 29 January 2009 |
[2009] EWCA Civ 32
Lord Justice Rix
Lord Justice Toulson and
Lord Justice Rimer
Case No: A2/2008/1525
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT, CHANCERY DIVISION, COMPANIES COURT
MR JUSTICE NORRIS
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Mark Cunningham QC and Mr Andrew Westwood (instructed by Treasury Solicitors) for the Appellant / Claimant
Mr David Chivers QC and Mr Philip Gillyon (instructed by Messrs Eversheds) for the Respondent / Defendant
Hearing dates: Monday 8 th, Tuesday 9 th and Wednesday 10 th December
The trial judge, Norris J, exercising his jurisdiction under section 124A of the Insolvency Act 1986 to wind up a company in the public interest if he thinks it just and equitable to do so, refused the petition of the Secretary of State for Business, Enterprise and Regulatory Reform (the “Secretary of State”) to wind up Amway (UK) Limited (“the company”). He did so because he considered that the company's new business model, which was already (in large part) in operation at the time of trial, eliminated the defects of the old business model; and also in the light of undertakings which the company offered, the Secretary of State had declined, but the judge accepted as a condition of his order. There is a dispute which this court will have to resolve as to the importance of the role of these undertakings for the judge's ultimate decision to refuse the petition to wind up. On the way to that ultimate decision the judge had made some strong findings about the old business model, albeit on a relatively narrow basis. He said that if the matter had stopped there, he would have wound up the company.
The factual position in a nutshell, necessarily over-condensed at this stage, is this. The company is part of an international group which operates a multi-level direct selling business in personal and home care products. At the time when the petition was sought the company had been turning over some £13 million per year, albeit unprofitably. Amway's business in the United Kingdom had been in existence for some thirty years. The selling was carried out by members of the public, so called independent business operators or IBOs, who in turn recruited other IBOs, although new IBOs could also be recruited directly via the company's website. Recruits earned bonus or commission on both their own sales and also the sales of all recruits in their downline (ie their recruits, or recruits of their recruits, and so on), but it was difficult for large sums to be earned by IBOs without long-term success in recruiting a motivated downline. The majority of IBOs merely self-purchased and earned nothing at all. Only a very small minority earned large sums by way of bonus. A new recruit paid £28 on recruitment (the cost to the company of a starting-up kit comprising brochures, order forms, price lists and the like) and thereafter a renewal fee of £18 per year. An IBO could leave at any time (on 30 days notice) and recover the purchase price of any products (less a handling charge of 7.5%) if returned in good condition.
The fault which the judge found against the company was essentially that it had failed to supervise and control the representations and promotional material used by its own IBOs in their own recruitment. The judge acquitted the company itself of any misrepresentation (by what he called a fine margin) but he criticised it severely for its failure to control its IBOs. Their misrepresentations (which the judge described at one point as false and deceptive) related to the recruitment process and consisted in the suggestion that it was easier to prosper as an IBO than was in fact the case. Some IBOs misrepresented their own income from bonuses. They were selling a dream, whereas the reality was different. The judge inferred that people bought into that dream and were thus deceived.
The Secretary of State had originally put his case on a much wider basis. It was alleged that the company's business was an unlawful lottery contrary to section 1 of the Lotteries and Amusements Act 1976 and/or an unlawful trading scheme contrary to section 120 of the Fair Trading Act 1973. It became common ground shortly before trial, however, that the new business model could not be so criticised on either score, if only because of the absence under the new model of any initial or annual renewal fee for an IBO. The judge found that the old business model was not an unlawful trading scheme, and that the new business model was not an unlawful lottery, but did not feel it necessary to deal in terms with whether the old business model was a lottery. It might be said that the judge's logic in dealing with the lottery issue (see paras 68/69) compelled a finding that the old business model could also be acquitted of the charge, especially as the judge had no need to make findings in respect of the new business model. That that was the judge's essential view is also suggested by his remark (at para 62) in asking himself how he should dispose of the petition “assuming the “lottery” and “fair trading” grounds are also not made out”. But be that as it may, on this appeal the Secretary of State, by his respondent's notice, sought to raise again the allegations that the old business model was an unlawful lottery and/or unlawful trading scheme, and persevered in those submissions in his skeleton argument for this appeal. It was submitted that, even though it continued to be accepted that the new business model could not be attacked on either of these grounds, the unlawfulness of the old model would support the Secretary of State's broader case that the company should have been wound up. However, the Secretary of State did not persevere in those grounds at the hearing. Thus, there is no longer any allegation that the company's business is or has been unlawful under the 1973 or 1976 Acts.
On this appeal, the Secretary of State submits that the judge has fundamentally misunderstood his jurisdiction. If he considered, as he did, that the old business model was commercially unacceptable (or “inherently objectionable” to use a jurisprudential gloss which has been adopted as a form of label), then he had no effective option other than to wind up the company. To refuse to do so because of changes to the business model which were reactive to the Secretary of State's interest in the company was wrong in principle. It was also wrong in principle to accept any undertakings as a condition of the refusal of the petition in circumstances where the Secretary of State was not content with the acceptance of such undertakings. The decision in this case was “aberrant”.
In response, the company submits that the judge acted within his jurisdiction and that the rest was an exercise of discretion which cannot be faulted. The judge was entitled to refuse the petition despite the finding that the company would have been wound up if it were still pursuing its old business model. The judge had to decide whether it was just and equitable at the time of trial for the company to be wound up. The judge was entitled to accept undertakings from the company, even if historically such orders were unusual in the absence of the Secretary of State's consent. In any event, the judge did not refuse the petition because he was willing to accept the company's undertakings, but rather he accepted the undertakings because he was willing to refuse the petition.
The high point of the Secretary of State's case on the authorities consists in two extracts from respectively Re Walter L Jacob & Co Ltd [1989] BCLC 345 (CA) and Re Bamford Publishers Ltd ( 2 June 1977, unreported, Brightman J, cited with approval by Sir Andrew Morritt V-C in Re Supporting Link Alliance Ltd [2004] 2 BCLC 486).
In Re Walter L Jacob this court was dealing with a dishonest dealer in securities which had ceased business. Nicholls LJ said (at 360f/h):
“Having regard to all these matters, I would have had no doubt, if the company had still been dealing in securities, that it was just and equitable that it should be wound up. Does the fact that the company ceased to carry on that business immediately before the petition was presented make a crucial difference? In my view it does not. It is, of course, an important factor to be taken into account. The investing public is no longer at risk from any future activities of the company. The company is no longer a member of FIMBRA. But it would offend ordinary notions of what is just and equitable that, by ceasing to trade on becoming aware that the net is closing around it, a company which has misconducted itself on the securities market can thereby enable itself to remain in being despite its previous history. The wishes of those who control such a company, that it should remain extant for other purposes will, normally, carry little weight in the balancing exercise. On the other hand, by winding up such a company, the court will be expressing, in a meaningful way, its disapproval of such misconduct. Moreover, in addition to being a fitting outcome for the company itself, such a course has the further benefit of spelling out to others that the court will not hesitate to wind up companies whose standards of dealing with the investing public are unacceptable.”
In Re Bamford, dealing with the acceptance of undertakings, Brightman J said this (as set out in Re Supporting Link at 504b-g):
“Quite clearly the company has been...
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