Opinion
Jessica Walker and Philip Gilliland 19 Dec 2018 04:03pm

Wine and insolvency

While the world of insolvency may often appear murky, in reality very few insolvencies result directly from fraudulent or criminal behaviour by the directors or managers of the company in question

That said, every so often, a case appears that creates cause for concern and one such case has recently emerged in the form of Intercontinental Wines Limited, which was wound up by the court on 23 November 2018. The Insolvency Service has reported that, following assorted complaints by customers of Intercontinental Wines Limited, an investigation by them revealed a number of discrepancies between customers' expectations and reality.

Intercontinental Wines was in business as a fine wine merchant, also providing storage facilities for customers' investment wine in bonded warehouses. However, the Insolvency Service's investigation appears to have shown that, despite a large number of customer investment orders, the company only made purchases for a small percentage of its customers on an ad hoc basis and customers' funds were instead used for other purposes. Despite what customers were promised, it is reported that only 10% of them had cases of wine stored in bonded warehouses under personal accounts and the company's bank records showed that the wine actually bought by the company was worth only a fraction of the value of the sales to customers. It was also reported that the company failed to disclose to customers and to the Registrar of Companies that it had vacated its premises in March 2018. As a result of these discrepancies, the court granted the Insolvency Service's petition to wind up Intercontinental Wines and the liquidator will now be tasked with investigating the company and the conduct of its sole director.

If, when a company enters into liquidation, it appears that the directors have acted improperly and the company's creditors have suffered losses as a result, the liquidator may pursue the directors to recover funds. If the reports about Intercontinental Wines are correct then there appear to be a number of bases on which the sole director of Intercontinental Wines may be required to pay money to the company for the benefit of its creditors. For example, the alleged use of customers' money on personal expenditure may result in liability for misfeasance and if the director knew that the company could not avoid insolvent liquidation then an action for wrongful trading may be brought. Further, if the company's business involved dishonesty, the director and possible knowing third parties may become liable for trading fraudulently. Each of these causes of action against the director may result in him being required to contribute to the company's assets.

The liquidator can also challenge certain transactions entered into by the company within the two years before it was wound up. For example, meeting the contractual requirements of some creditors in preference to others or transferring assets at less than their true value, whether or not the company intended to put those assets out of reach of creditors, may result in a transaction being unwound.

Given the various ways in which a director of a company may be required to compensate creditors for losses and the potential scope for reviewing transactions entered into by the company prior to insolvency, who sees the benefit of these recoveries? Even if, as in Intercontinental Wines' case, the company's customers may have suffered the greatest losses, it is not necessarily the case that they will receive the greatest share of recoveries. The recoveries from the liquidator's actions against directors and review of transactions will go into the general pool of assets to be distributed in accordance with a statutory order of priority. A creditor with security will normally get paid first, subject to limited deductions for costs of the liquidation, and employees. Often, the only return to unsecured creditors, a group which will normally include customers, will come from the prescribed part, which is a pot of up to £600,000 deducted from returns to holders of floating charges. This often means that the only parties to benefit from recoveries made by a liquidator will be the secured creditors.

So is there any way that unsecured creditors can elevate their right of recovery? Unless there is an agreement to that effect between creditors, the answer is usually no. However, if a creditor can establish that they were induced to transfer property or make a payment as a result of a deceitful representation then they may be able to assert a priority claim over those assets or funds – if they can be identified. However, this is not an easy claim to establish and pursuing directors generally is an expensive, time-consuming activity with no guarantee of recovery – as it depends on the ability of the director to pay. Accordingly, most creditors will prefer to leave any action to the liquidator.

Arguably more useful as a deterrent is the threat of criminal sanction for fraudulent action or disqualification of acting as a director – an action that, if successful, may also result in the director being required to pay a contribution to the insolvent estate. However, these actions cannot be brought by a liquidator so they are potentially less likely to result in a recovery for creditors at least in the short term.

There is therefore no instant recourse for creditors in a situation like that of Intercontinental Wines and creditors will need to wait and see if the liquidator can recover amounts to go some way towards providing compensation.

Jessica Walker, partner, and Philip Gilliland, trainee solicitor; Restructuring, Bankruptcy & Insolvency; at Mayer Brown International

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