Are you winding me up?

July 17, 2017

Secretary of State for Business, Innovation and Skills v Diffraction Diamonds DMCC and IGL Labs UK Ltd [2017] EWHC 1368 (Ch)

In this case, the Secretary of State petitioned the Court to wind up two companies on public interest grounds. Both companies; Diffraction Diamonds DMCC (“Diffraction”) and IGL Labs UK Limited (“IGL”), were involved in the sale of “fancy coloured diamonds”. Diffraction was a foreign company registered in Dubai whilst IGL had its registered office in England. IGL provided Certificates to Diffraction who then sold the diamonds to various investors in the UK via broker companies.

Diffraction and IGL had been subject to an investigation by the Investigations and Enforcement branch of the Insolvency Service. The investigations and subsequent evidence provided to Court revealed that IGL had issued Certificates to Diffraction without having first inspected the diamonds. It appeared that the estimated retail values provided by IGL were solely based on the price paid by the investor, plus 20%. The petitions were issued on the basis that the companies were deemed to “lack commercial probity”.

The Court addressed two main issues:-

  1. Whether there was a sufficient connection between the UK and Diffraction to justify the Court exercising its powers under Section 221 of the Insolvency Act 1986 (“the Act”)’- Section 221 deals with the winding up of unregistered companies; and
  2. Whether the cases against Diffraction and IGL were met.

In both circumstances, the Court answered in the affirmative and on 8th June 2017, granted winding up Orders.

The Court’s short judgment sets out the 4 main grounds upon which the Court determined that there was a sufficient nexus between the UK and Diffraction to enable the Court to exercise its jurisdiction under Section 221 namely:-

  1. Diffraction’s business had been carried out from the UK;
  2. The purchasers buying the gems from Diffraction were based in the UK;
  3. The brokers retained by Diffraction to market and sell the gems were registered in England; and
  4. Diffraction stored gems on behalf of UK investors.

The Court concluded that it was “not significant” that Diffraction’s shareholder had no connection with the UK.

This case is a good reminder to companies that trade in the UK but do not have a registered office here, that their non-registration will not automatically be a barrier to a UK Court exercising its jurisdiction under Section 221 of the Act or its equivalent Article 185 in NI.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency Team at Cleaver Fulton Rankin for further advice or information.