Given the insolvency regime’s focus on creditor interests and that distributions to members in that context are limited, judicial analysis of shareholders' interests in insolvency processes are rare. However, the Court of Appeal decision in Fakhry v Pagden & Anor  EWCA Civ 1207 (Re Core VCT) has shed light not only on the correct way to restore a company (formerly in liquidation), but also the interaction between corporate governance, majority shareholder principles and insolvency processes where shareholders have economic and statutory interests. While many commentators rightly fix the decision to the process of members’ voluntary liquidations, there may be scope for considering certain principles more widely in any insolvency process in which shareholder interests become engaged.
The facts of Core VCT are complex, but essentially concern the conduct of a members’ voluntary liquidation to its conclusion, after which the company was dissolved with the approval of the majority of its shareholders. On the application of a dissentient minority of shareholders (desiring an investigation into the conduct of former management and the former liquidators), it was restored and new liquidators were appointed. Incorrectly, the restoration application was made without notice to the former liquidators, a deliberate omission made on the basis they were the subject matter of the proposed investigation. At first instance, the judge was persuaded by probity of such conduct when there was evidence before the Court to justify such an investigation - despite this creating an injustice and a denial of rights to the former liquidators in not allowing them the opportunity to appear and make representations.
In the face of a seemingly irregular decision of the Court, the former liquidators and their legal advisers must take credit for persevering with a successful appeal.
Court of Appeal decision
In upholding the former liquidators’ appeal, the Court of Appeal gave significant weight:
- to the views of majority shareholders;
- the deliberate decision not to serve the application on the former liquidators; and
- the minority shareholders’ representations to the Court that the Registrar of Companies had consented to the application (when any such consent had been premised on evidence of service on the former liquidators).
It was the Court of Appeal's view, outlined in Lord Justice David Richards’ leading judgment, that it was essential to "have considered whether and, if so, how the members should be consulted", and as to the new liquidators’ investigations it was "manifest that the members as a whole should be consulted before embarking on such a course, apparently for their benefit".
Considerations of wider application
The really interesting and wider reaching conundrum for the Court and insolvency officeholders is found at paragraph 95 of the judgment, in which the Court of Appeal juxtaposes wider member interests with the "position of those members who would be the subject of the proposed investigations and other members so closely associated with them that they would be likely to be influenced by regard for the personal interests of those subjects".
So interested was the Court of Appeal in this question, it invited written submissions from the parties on 'the treatment of the votes of members with particular interests in the outcome of the meetings.' In addition, further directions were to be set down with the Chief Insolvency and Companies Court Judge addressing (i) circular(s) to be sent to members, which must fairly present the facts and issues; (ii) the length of notice of the meetings; (iii) the mechanics of giving notice, the date, time and venue of the meetings; and (iv) the person to chair each meeting.
As highlighted in the Court of Appeal decision, analysis of the position in an insolvency context can be informed by principles of corporate governance in derivative shareholder actions. The decision of Smith v Croft (No 2)  Ch 114 appears to be authority to resolving potential conflicts by having regard only to the votes of shareholders independent of the proposed defendants. Proper outcomes are achieved either by not permitting such members to vote at the meeting, or by noting their votes and the court deciding whether to disregard them.
It is possible to see wider application of these self-interest prohibitions on voting in a variety of insolvency processes where, for one reason or another, both creditors and members are asked to vote on an outcome. For example, and distinct from Core VCT, in the realm of small private companies there are instances that majority shareholders have historically treated the Company as their own by misappropriating assets, whilst minority shareholders have powerlessly looked on, without the wherewithal or funding to bring a derivative action. If such companies enter into a process (say for reasons of cash flow insolvency) but the available assets mean it is balance sheet solvent, should such majority shareholder be permitted to vote, particularly in circumstances the where the officeholders have formulated claims against it?
If such majority shareholders were permitted to vote to (say) remove or replace an officeholder with one that was sympathetic to their wishes, it could result in manifest injustice and the stifling of a legitimate claim to the detriment of minority shareholders. On this point alone the outcome of the voting mechanics in Core VCT should remain of interest to all and if the evidence is sufficient it can only be correct that self-interested shareholders are prevented from voting.
For further information relating to this article, please contact a member of our Restructuring & Insolvency Team.