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Secretary of State for Business Enterprise and Regulatory Reform v Amway (UK) Ltd

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Secretary of State for Business Enterprise and Regulatory Reform v Amway (UK) Ltd

Written by Calum Haswell

Friday, 30 January 2009

[2008] EWHC 1054 (Ch), [2008] All ER (D) 167 (May) COMPANIES - COMPULSORY WINDING UP – JUST AND EQUITABLE – PUBLIC INTEREST – PETITION BY SECRETARY OF STATE – SECRETARY OF STATE TAKING VIEW THAT EXPEDIENT IN PUBLIC INTEREST THAT COMPANY BE WOUND UP – COMPANY GIVING UNDERTAKINGS TO COURT – WHETHER UNDERTAKINGS SHOULD BE ACCEPTED – WHETHER COMPANY SHOULD BE WOUND UP – CONSIDERATION OF RELEVANT EVIDENCE

In January 2006, in exercise of the power conferred by s 447 of the Companies Act 1985, as amended, the Secretary of State and Industry authorised enquiries to be carried out into A (UK) Ltd (the company) and two other entities. The company sold over £10m of products in the UK each year, marketing its own and third party products directly to consumers through a network of independent sellers known as Independent Business Owners (IBOs). The company was involved in direct selling in the form of multilevel marketing. Such a structure encouraged existing IBOs to recruit additional sellers whose sales benefitted the original IBO through a bonus structure. The resulting business organisation might be expected to resemble a pyramid with very few people at the top whose earnings were generated by the layers of recruiters underneath them. At the base there were a large number of direct sellers whose income was derived solely from what they managed to sell. For each IBO there would be above them a 'sponsorship chain' who would benefit from sales made by the IBO thus to extend further the base of the pyramid. Such material was known as Business Support Material (BSM). From the s 447 report, it appeared to the Secretary of State that it was expedient in the public interest, as required by s 124A of the Insolvency Act 1986, that the company should be wound up. Accordingly, a petition was presented for the winding up of the company. The company prepared a business model which it put into effect in October 2007. The changes introduced by the revised business model included; (i) the recruitment of a senior management team with direct United Kingdom experience, (ii) the re-designation of existing IBO's as 'Amway Business Owners' (ABOs) with a tiered qualification system, (iii) a system of rigorously controlling retail and business consultants, with the effect that the scope and incentive for third parties to misrepresent the business opportunity would be significantly reduced, (iv) all new ABOs being required to undertake an orientation programme operated by the company, and (v) the publication of earnings information by the company prior to allowing the recruitment of new ABOs. The company gave undertakings to the court in which it undertook: (i) to maintain the present prohibition on the production, sale or promotion of BSM that was not authorised and distributed by the company, (ii) not to introduce a registration fee or a renewal fee, and (iii) not to recruit new ABOs until it had published earnings data in accordance with a stated income disclosure policy.
The Secretary of State submitted that the company should be wound up on the basis that the business with which it was concerned was: (i) inherently objectionable in respect of the way in which it operated, (ii) an unlawful lottery contrary to s 1 of the Lottery and Amusements Act 1976, and/or (iii) an unlawful trading scheme contrary to s 120 of the Fair Trading Act 1973.
Held – The petition would be dismissed. The presentation of a public interest petition was not the commencement of ordinary adversarial litigation. Parliament had charged the department with wide ranging responsibilities in relation to the affairs of companies including under, s 124A of the 1986 Act, their investigation and formation of the view that it would be expedient in the public interest that companies should be wound up. Once that view was formed, the Secretary of State was empowered to present a petition. When the petition was presented Parliament had entrusted the court with the task of deciding whether, having regard to all the circumstances as disclosed by the totality of the evidence before the court, it was just and equitable for the company to be wound up. Whatever convenient labels might be used in argument, a finding that it was 'just and equitable' was the necessary foundation for the winding up order. The court had a discretion whether or not to make a winding up order, a power to accept undertakings as to future conduct, and a discretion whether to make the giving of undertakings a condition of dismissing the petition.

Having considered the relevant evidence, in the instant case, it would not be just and equitable to wind the company up. On the evidence, there were people who wished to continue to participate in the company's business, and the business model itself was that now adopted by the majority of direct selling organisations. On balance, the need to punish the company for its past wrongs or the need to deter other multilevel companies from inducing the public to become purchasers and retailers of its products by misstatements required that serious consequences be visited on the company. As a result of the undertakings now offered by the company, a winding up order would be disproportionate. The Secretary of State's investigation and the presentation of the petition were a sufficient salutary warning to the company and a clear warning to its peers that if the risks inherent in the multi-level model were not rigorously followed then serious and expensive consequences would follow. In the instant case, the undertakings given by the company would be acceptable if they included an undertaking to maintain the induction programme for new ABOs, which was part of the company's new business model. Further, the company's revised business model did not amount to a lottery on the basis, inter alia, that a lottery was dependent upon the making of a payment in order to obtain a chance, whereas under the revised scheme no payment was required for any initial business starter pack, nor was any annual fee payable. Furthermore, the Secretary of State had failed to prove on the balance of probabilities that the company was conducting an unlawful trading scheme contrary to s 120 of the 1973 Act, even under the company's old business model.
The undertakings given by the company would be accepted.