Court stresses the importance of shareholder democracy in MVLs

The decision overturns a previous High Court ruling that had opened the possibility of MVLs being conducted without the support of the majority of shareholders, allowing liquidators to rely on their powers under the Insolvency Act to undertake expensive investigations in relation to potential claims. However, the Court of Appeal reversed this decision, reinforcing the importance of shareholder democracy in MVLs in the process.

• The Court of Appeal has overturned the decision of the High Court concerning shareholder democracy in the context of members' voluntary liquidations.
• The High Court decision set a precedent that could potentially have disrupted the venture capital trust industry, adversely affecting fund managers' ability to close a fund through a members' voluntary liquidation process.
• The Court of Appeal has overturned that decision and has stressed that insolvency practitioners must not ignore shareholders and should only undertake investigations with shareholder approval.
• Fakhry v Pagden & Anor [2020] EWCA Civ 1207

The Court of Appeal's decision is of significance to practitioners taking appointments in members' voluntary liquidations (MVLs). It highlights that although liquidators in a MVL may technically have the same or similar powers to liquidators of insolvent companies, liquidators in a MVL remain under the ultimate control of the general body of members.

The case concerned three venture capital trust companies (VCTs). Core Capital Partners LLP managed the VCTs and raised approximately £66 million from hundreds of individual investors through the issue of listed shares. After a decade of the VCTs being in existence, in 2015 the shareholders of the VCTs decided to place the VCTs into MVL and they appointed Begbies Traynor as liquidators. On the instruction of the shareholders given in general meeting, Begbies Traynor realised all the assets of the VCTs, made final distributions to shareholders in 2016 and dissolved the VCTs shortly thereafter.

In 2018, certain dissentient minority shareholders of the VCTs applied to court, without notice to any other shareholders or to Begbies Traynor as former liquidators, for the restoration of the VCTs and for their own liquidators to be appointed. Their nominated liquidators, Menzies, were appointed by the court.

The new liquidators subsequently sought to compel the production of documents and information from Core Capital and Begbies Traynor, seeking to rely on their investigative powers under the Insolvency Act. The newly appointed liquidators were seeking to investigate and formulate claims in relation to the management of the VCTs and the conduct of the MVLs of the VCTs in 2015-2016.

These investigations were opposed by certain shareholders on the grounds that the newly appointed liquidators did not have the support of the general body of shareholders and that the shareholders needed to decide whether they actually wanted Menzies to conduct expensive investigations.

In the High Court, the newly appointed liquidators were successful as the High Court found that they had been validly appointed by the court and they were entitled to conduct investigations and seek to formulate claims without needing the support of the general body of shareholders. This decision was appealed by certain shareholders on the main ground that MVLs are fundamentally still a process involving a solvent company and therefore shareholder democracy and control still applies, meaning that liquidators must have the support of shareholders in general meeting.

The Court of Appeal allowed the appeal, overturning the decision of the High Court. The Court of Appeal directed that a members' meeting take place. In doing so, the Court of Appeal made clear that members retain control over an MVL and the newly appointed liquidators should not have embarked on investigating claims without first seeking the approval of the members in a general meeting, regardless of whether they were appointed by the court and regardless of their support by a minority of members.

The decision is noteworthy because of the lack of case law regarding solvent liquidations as these are very rarely litigated. Generally, insolvency practitioners and lawyers seem to agree that MVLs are a fundamentally different process to an insolvent liquidation. Conversely, the drafting of the Insolvency Act, by essentially giving liquidators in an MVL the same powers as other 'insolvent company liquidators', means that an argument did exist for Menzies to conduct their investigations without members' support. However, the Court of Appeal's decision has reinforced what the market seemed to intuitively know about MVLs: they are ultimately controlled by shareholders in general meeting.

The decision also provides a note of caution for insolvency practitioners that the courts will expect insolvency practitioners to remain neutral if there is a contest between stakeholders in a liquidation, as there was between shareholders in this case.

It is yet to be determined whether the Court of Appeal's decision will be appealed to the Supreme Court.

Steven Cottee and Sebastian Jensen are restructuring experts at Pinsent Masons, the law firm behind Out-Law. Pinsent Masons acted for the appellant in this case.