Getting it right: how to make a successful application for the appointment of provisional liquidators

Arguably, the main job of a judge is to determine and uphold rights of property ownership, so applications to appoint provisional liquidators — which, if successful, deprive a debtor company of its assets before a detailed judicial examination of the creditor’s claims has taken place — tend to go against the judicial grain. This is particularly so where the debtor company is not present when the application is heard. Applications made by HMRC can be particularly sensitive because they are usually based upon assessments, which debtors often view (wrongly) as more of an opening point for discussions about the eventual level of debt than a crystallised liability. Judicial attitudes to these applications have probably also been influenced by a recent high-profile case where HMRC was successful in its application for the appointment of a provisional liquidator, but failed spectacularly at the eventual trial, which relied on the same allegations — all 300 of the alleged criminal acts were shown to have been completely legitimate, which led to stinging criticism of HMRC by the judge and subsequently in Parliament. In a typically clear judgment given recently in The Commissioners for Her Majesty’s Revenue & Customs v (1) Winnington Networks Ltd and another [2014] EWHC 1259 (Ch), Mr Justice Norris went back to first principles to explain what has to be shown if an application is to succeed.

Winnington Networks had two strands to its business: firstly, the purchase and sale of domestic electrical goods and electronic goods such as hard drives; and secondly, the trade in voiceover internet protocol (VoIP) units, the digital capacity that discount phone call providers use to keep prices down. The domestic and electrical goods business purchased stock from Samsung and LG as a zero-rate VAT supply, using an associated Irish company, Osmosis, for this purpose. The Irish company sold the same goods to a Czech company called Winnington Prague, which in turn ‘under-invoiced’ them to Winnington at cost or at below cost. Winnington then sold the same goods to a UK company named Impact UK, making a VATable supply, and Impact UK sold the goods to the public at less than their cost price. No profit was made anywhere in the sales chain and the goods were always under the control of Osmosis, which delivered them to Impact UK, which in turn delivered them to the end user: neither Winnington nor Winnington Prague ever had control or possession of the goods…

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