An agreement with a company has gone into arrears. The vehicles may or may not have been sold. The company has placed itself into voluntary liquidation. Can the finance company take steps to protect itself if it suspects that there has been mismanagement or misappropriation of funds within the company? Yes. Where "prejudice" will be suffered by a creditor, the court can order a compulsory liquidation, where the activities of the company will be more vigorously examined than might otherwise be the case with a voluntary liquidation.

This was the scenario in In the matter of Internet Investment Corporation Limited, where the petitioner, who contributed £100,000 to the company and was a minor shareholder, sought to have the company compulsorily wound up. Despite reasonable inquiry by the petitioner, the company's only director (and major shareholder) had continually refused to provide any information as to the use of the petitioner's investment, save for vague assurances that all was well. The relationship between the director and the petitioner broke down. The petitioner suspected that his investment had been misappropriated or that a fraud had been committed upon him, rather than the investment merely having been lost in a bona fide, but unsuccessful, business.

The director opposed the petition seeking instead to place the company into members' voluntary liquidation. The petitioner argued that the company should be compulsorily wound up on the basis that if the company went into voluntary liquidation, the director would choose the liquidator and such a liquidator would be less likely to investigate what had become of his investment. By contrast, a liquidator in a compulsory liquidation would almost certainly investigate in some detail how the company had used those funds.

The court held that in considering whether to order a compulsory, as opposed to a voluntary, liquidation, a reasonable requirement that the company's affairs should be scrutinised by the process that followed a compulsory order could weigh strongly in favour of a compulsory liquidation. Here, what the director had done with the investment needed to be investigated as it was apparent that there had been a breach of the investment agreement and that the director was in breach of his fiduciary duties to the company.

The petitioner had to demonstrate that its rights would be prejudiced by a voluntary winding-up. On the evidence available, the court held that the proposed voluntary liquidation by the majority shareholder was prejudicial to the petitioner and ordered that it was just and equitable that the company enter compulsory liquidation. A thorough investigation was required into what had happened to the investment.

Things to consider

 If, despite reasonable enquiry of the controlling minds of a company proposing voluntary liquidation, a creditor does not receive satisfactory explanations, consideration should be given to petitioning for compulsory liquidation. If that threat alone does not bring forward some answers, an investigation from a wholly independent liquidator should.