Fakhry V Pagden & Anor: Court of Appeal Confirms That Members’ Voluntary Liquidations Are Controlled by the Shareholders

On 15 September 2020, the Court of Appeal overturned a High Court decision, which threatened the corporate autonomy of majority shareholder decision making by ordering the restoration of three venture capital trust companies (the “Companies”) which had been dissolved following the completion of a members' voluntary liquidation (“MVL”), finding that the Companies’ members should retain control over a MVL.

Background

On 16 April 2015, the Companies were placed into MVL, following member resolutions approving each MVL, and the appointment of liquidators, which had been passed by overwhelming majority.

Prior to, and during, the MVLs, some small minority shareholders voiced concerns regarding the management of the Companies, such concerns were raised at a number of general meetings and with the liquidators directly. The liquidators did not take any action to address the concerns raised and, on 10 August 2016, the final general meetings of the Companies were held, at which point the liquidators were released from their duties and the Companies subsequently dissolved.

In June 2018, certain of the dissenting shareholders applied to court, without notice to the other members of the Companies or the liquidators, seeking to (i) restore each of the Companies to the Register and (ii) appoint new liquidators to investigate both the previous management of the Companies and the conduct of the previous liquidators. In July 2018, on hearing the applications, Mr Justice Fancourt ordered the restoration of each Company to the Register and the appointment of the new liquidators. The newly appointed liquidators began their investigations without delay.

On 11 September 2018, Mr Walid Fakhry, a shareholder, together with one of the former liquidators, Mr Mark Fry, applied to set aside the restoration orders on the basis that the new liquidators had not been appointed by the general body of shareholders, nor had they approved the (expensive) investigations being undertaken. The High Court found that the new liquidators had been validly appointed and were entitled to carry out their investigations.  The decision of the High Court was appealed by Mr Fakhry.

The Court of Appeal allowed the appeal and overturned the High Court decision. The appeal judges found that the members' rights regarding the MVLs had not been mentioned in the restoration application; it was essential for the lower courts to have considered whether and, if so, how the members were consulted, and failure of the lower court to do so was a failure to have regard to a material consideration central to the court’s decision. The appeal judges also held that Mr Justice Fancourt should have ascertained the wishes of the members before deciding whether to restore the Companies as the application had been brought by members who had only very small shareholdings in the companies.

In a case in which two members, each with a very small shareholding in some or each of the Companies, are “inviting the court to reverse the effect of the resolutions by which the members as a body had approved… and to appoint liquidators to pursue extensive investigations with a view to substantial and costly civil proceedings, it is manifest that the members as a whole should be consulted before embarking on such a course, apparently for their benefit. They are entitled to decide, or at least be consulted on, what is for their benefit.” (emphasis added)

The Court of Appeal directed that a shareholder meeting take place to ascertain whether the members actually wanted the companies to remain restored and the new liquidators to carry on with their investigations. The appeal judges considered that it would not be right for the Court to dismiss the restoration orders or remove the liquidators, but that it was for the members to decide what to do in this regard.

What does this mean?

The Court of Appeal's decision is significant as there is very little case law around solvent liquidations, and this is the first of its kind to be reported. The decision makes it clear that:

• in a MVL, the members’ democracy reigns supreme;
• liquidator and shareholder decisions cannot be overthrown solely by a disgruntled minority shareholder seeking to disrupt the rights and decisions of the member group as a whole;
• liquidators would be wise to consider seeking shareholder approval when undertaking investigations during an MVL, the cost of which may detrimentally affect any return to members.

It is yet to be seen if the case will be appealed to the Supreme Court.