What is a Public Interest winding up petition?
In the context of the English legal system, a public interest winding-up petition is a specific type of winding-up petition brought by an official government body or a regulatory authority rather than a private creditor.
It is used when there is a public interest in winding up a company due to its harmful or unlawful activities that affect the public or the economy.
Public interest winding-up petitions are designed to protect the broader interests of society and prevent companies from engaging in activities that are detrimental to the public.
Our expert team regularly defend public interest winding up petitions and can help get them dismissed from court. If a company has been wound up in the public interest, our team can help defend any director disqualification proceedings which will inevitably follow. Let our team help you avoid the worst consequences of a public interest petition.
On what basis will a court grant a public interest winding up petition?
It will be up to the court to decide whether or not to make a winding up order following the presentation of a winding up petition, and the burden of proof is with the Secretary of State to persuade the court that it is just and equitable for the company to be wound up.
Grounds for a Public Interest Winding-up Petition:
Section 124A of the Insolvency Act 1986 provides the grounds for obtaining a public interest winding-up order at court. These grounds include:
- Unlawful trading. The company is engaging in unlawful trading activities or operating in contravention of the law.
- Fraudulent trading. The company is carrying out business with the intent to defraud creditors or other stakeholders.
- Mismanagement. The company is being mismanaged, and this mismanagement is prejudicial to the interests of its creditors or members.
- Public Safety Concerns. The company’s activities pose a risk to public safety or health.
- Investor Protection. There is a need to protect investors and the public from financial harm caused by the company’s operations.
So, in order to get the winding up order following the issuing of a public interest winding up petition, the Secretary of State must be able to satisfy the court that
- the public needs to be protected from the company concerned; and
- that, as a result, it is “just and equitable” (ie fair) that it be wound up and a winding up order made.
The Secretary of State does not have to prove or demonstrate that there was criminal or unlawful activity, although if it is possible to show that then the public interest winding up petition will succeed. It also does not matter, in a public interest winding up, if the company concerned is solvent or not.
So the central and important question is whether the company’s conduct is “inherently objectionable” which was established in Re Portfolios of Distinction Limited [2006] EWHC 782 Ch. This will effectively mean that the behaviour of the directors and the company will demonstrate a “lack of commercial probity”.
In terms of what this means, it can usually mean that
- the company is carrying out business that preys on the public; and
- will often induce individual members of the public to participate in a transaction that will have no benefit to them;
- in addition, it can also involve the company being involved in a scheme that will prejudice the public generally.
The majority of petitions that are bought by the Secretary of State tend to target companies that are set up solely to carry out activities that go against the public interest. In those cases, the company may well be unable to either file evidence to contradict the evidence that has been established through extensive investigations by the Insolvency Service or to be able to revise its business model.
It is also true that public policy (which underpins a large section of all work done by the Insolvency Service teams and departments) requires that examples be made of wrongdoing companies on the basis that this will then, when publicised, be held up to provide a deterrent to others.
What is the public interest?
The term – public interest – is of particular importance in certain winding up situations. If a company is acting against “the public interest”, there are grounds for that company to be wound up. Our team can help advise you if you face this situation.
The Secretary of State for Business, Energy and Industrial Strategy has the power to present a winding up petition against a company if they believe that the activities of that company are against the public interest.
“Public Interest” is not defined anywhere and the term has been considered by many academics over the years.
- broadly it could be said to be anything affecting the rights, health, welfare, well-being or finances of the public at large;
- as there is no set definition as to what is the public interest and in cases where winding up petitions are presented in the public interest by the Secretary of State, it will be up to the court to decide if the Secretary of State has provided enough evidence for the court to make a winding up order against that company.
The court has to consider if it is just and equitable in all the circumstances for that company to be wound up as its activities are contrary to the public interest.
Public interest and director disqualification
Overview
Where a company has been wound-up on grounds it has been trading contrary to the public interest then almost certainly the director’s conduct will be investigated once the company has been wound-up.
Before a public interest petition is issued companies investigation, a department within government, will have conducted comprehensive enquiries into the company’s affairs, its management structure, the business model and who is controlling it.
The enquiries by companies investigation and the investigations after the company has been wound-up will together form the basis of any decision to seek director disqualification.
Director disqualification
Director disqualification proceedings are brought to protect the public interest. There is no need for any malicious or fraudulent behaviour on the part of the director, the purpose is to protect the public not punish the director (although this is a consequence).
However, where a company has been wound-up in the public interest, it is almost certainly the case that there will be allegations that the appointed director(s) have committed some negligent or deliberate wrongdoing and may be targeted for director disqualification.
Shadow and de facto directors
Companies house includes a register of the directors who the company state are the appointed directors of the company. These individuals will usually be the ones who are investigated and targeted for disqualification by the Secretary of State.
However, not all directors of a company are listed at companies house (a register which is required to be maintained by directors) and so other third parties may also be targeted for disqualification on the basis that they are either a shadow director or a De Facto director.
Shadow directors
Shadow directors are defined under Section 251 of both the Insolvency Act 1986 and the Companies Act 2006 have identical definitions of a shadow director as follows:
“a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”
a shadow director cannot be someone who provides advice to directors in a professional capacity;
however, a shadow director is often easily identifiable, often being an individual who historically ran the company (and may have since been disqualified or have retired) or, which is more concerning, an individual who is accustomed to ensuring directors do what they are told without ever having any such official title.
De facto director
There is no statutory definition of a de facto director, but this is an interpretation which has evolved through company case law referring to an individual who acts as a director, regardless of their title.
The individual may often attend board meetings, execute key contracts with suppliers and act equally to all other appointed directors. They are often very visible to customers, sign off documents as a director and have key roles in the company’s business. They are a director “of fact”, i.e. in all but name.
Defending a director disqualification claim
Defending a director disqualification claim is not straightforward – often the information available is minimal, it requires witnesses to come forward and all of the circumstances referred to happened some time ago.
The added burden of a public interest disqualification claim makes this more difficult, because the company has been wound-up in the public interest, but not impossible.
where a director has not been involved in the alleged wrongdoings, or was misguided by advisors or third parties, this will not always be sufficient to deal with a disqualification claim;
this is because the claim is brought to protect the public, and therefore even individuals who passively allowed such conduct are a threat to the public interest (although their misconduct is a matter for dispute in proceedings).
As an alternative, a director does not have to defend a director disqualification claim but can offer a disqualification undertaking. However, this presents the risk that they could then become liable for a compensation order as a result of the undertaking provided.
The Rules in full
The full text of Section 124A of the Insolvency Act 1986 reads as follows:
“124 A Petition for winding up on grounds of public interest.
- Where it appears to the Secretary of State from—
- (a) any report made or information obtained under Part XIV of the Companies Act 1985 (company investigations, &c.),
- (b) any report made by inspectors under—
- (i) section 167, 168, 169 or 284 of the Financial Services and Markets Act 2000, or
- (ii) where the company is an open-ended investment company (within the meaning of that Act), regulations made as a result of section 262(2)(k) of that Act;
- (bb) any information or documents obtained under section 165, 171, 172, 173 or 175 of that Act,
- (c) any information obtained under section 2 of the Criminal Justice Act 1987 or section 28 of the Criminal Law (Consolidation) (Scotland) Act 1995 (fraud investigations), or
- (d) any information obtained under section 83 of the Companies Act 1989 (powers exercisable for purpose of assisting overseas regulatory authorities), that it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up if the court thinks it just and equitable for it to be so.
- This section does not apply if the company is already being wound up by the court
