Vitality Group, a health and beauty wholesaler, blames Unilever for "pushing it to the edge" by taking legal action against it after using private detectives to buy grey market goods from its cash & carry.
Unilever issued proceedings in the High Court requesting an injunction to stop Vitality selling products from outside the EU and claiming hundreds of thousands of pounds of compensation for infringement of trademark laws.
Vitality agreed to stop selling Unilever products obtained on the grey market, but disputed the amount of compensation .
The two parties were in the process of settling out of court when Vitality went into administration.
When rumours about the lawsuit spread, suppliers refused credit, trade credit insurance was withdrawn and potential investors were scared away, according to former director Nicky Edden, who was made redundant by administrator MCR last week.
The Grocer understands that Unilever has also written to about 150 of Vitality's customers, the majority of which are small retailers, threatening legal action and demanding a contribution towards legal costs of £500 to £2,000.
"I put my hands up - we did sell some goods from outside the EU," said Edden. "But why should we buy Dove for £2 when we can buy the same product made in South Africa for 50p? Unilever went on a witch hunt. At the end of the day it's the consumer who loses out."
Gary Lux, Vitality's lawyer, said: "Unilever came down very heavily on them. They took the litigation as far as they could. It seems to me that the brand owners had already made their money by selling their goods in the first place."
But Unilever insisted its response was justified. "In 2008, we issued proceedings against Vitality Group after our investigations found they had reneged on their promise to stop selling grey Unilever personal care products in the UK, said a spokesman.
"Grey products do not necessarily meet the required EU packaging and labelling regulations, which are designed to protect the health and safety of consumers.
"We will take all necessary means to protect our consumers and our brands, and will use the law where necessary to do this. As a result, we are also in the process of seeking legal undertakings from the customers of Vitality Group, who we know have also purchased these products."
Under EU law, only products placed on the market by the brand owner can be sold here, unless the brand owner agrees that imports can be sold.