[2005]JRC073
royal court
(Samedi Division)
2nd June 2005
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Before:
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M. C. St. J. Birt, Esq., Deputy Bailiff with
Jurats Georgelin and Newcombe.
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In the matter of
the application of Robert William Bridgen to declare Ports Trading Limited en
désastre, Kevin Ronald Leech intervening
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Advocate P. Sinel for Robert William Bridgen
Advocate M. Preston for Mr Kevin Ronald Leech
judgment
deputy bailiff:
1.
On 6th May 2005 the
Court dismissed the application of Mr Bridgen to declare Ports Trading Limited
(“Trading”) en désastre. We now give our reasons.
Events leading up to
the first hearing on 28th
January 2004
2.
Poundworld
(Jersey) Limited is a company incorporated in Jersey. It
has a number of retail outlets in Jersey and Guernsey which trade as Poundworld. At the time of the application on 28th
January, Poundworld was owned as to 40% by Trading and the balance was owned
equally by Mr Bridgen and a Mr Cottier.
3.
The issued
share capital of Trading is £10,000 of which, until January 2005, 7858
shares were owned by Mr Leech, 1071 by Mr Bridgen and 1071 by Mr Cottier. Mr Leech was declared en désastre
on 9th October
2002 but the Viscount did not attempt to dispose of Mr Leech’s
interest in Trading. Mr Leech was
discharged from his désastre on 12th February 2005. The directors of Trading at all material
times were Mr Bridgen, Mr Cottier and a Mr R J Smith, who is an accountant who
acted for Mr Leech. Trading has
carried on no activity other than the holding of its 40% interest in
Poundworld.
4.
On 21st December 2004
the board of directors of Trading decided to convene the necessary shareholders
meeting with a view to proposing a creditors winding up. That meeting and the necessary
creditors’ meeting were subsequently convened for 15th January 2005.
5.
On 29th December 2004
at a further meeting of the board, it was considered that the issued share
capital of Trading had never been paid for. The board resolved to call for payment
of the nominal amount of the shares within 14 days. Demand was duly made. Mr Cottier and Mr Bridgen tendered
cheques for their shares but neither Mr Leech nor the Viscount offered payment
in respect of Mr Leech’s shares.
Accordingly on 12th
January 2005, a further meeting of the board was held at which the
directors purported to exercise Trading’s lien over Mr Leech’s 7858
shares, which were sold in equal proportions to Mr Bridgen and Mr Cottier. It followed that, from that moment, Mr
Bridgen and Mr Cottier were equal 50% shareholders in Trading and Mr Leech no
longer held any shares. He would
not therefore have been entitled to attend the shareholders meeting fixed for
15th January.
6.
Mr Leech
did not accept the validity of these actions as he considered that his shares
were fully paid. Accordingly on 14th January 2005
he issued an order of justice (“the shareholder action”) seeking a
declaration that the exercise of the lien over his shares was of no
effect. The Bailiff granted an
interim injunction restraining Trading from holding the necessary
shareholders’ and creditors’ meetings.
7.
Faced with
an inability to proceed by way of a creditors’ winding up, Mr Bridgen
applied to declare Trading en désastre. This came before the Court in the
ordinary way on the afternoon of Friday 28th January. The affidavit in support disclosed that
Mr Bridgen and Mr Cottier were each owed £15,000 by Trading, which sum
had not been paid upon demand.
These two sums arose out of the fact that Mr Bridgen and Mr Cottier had
guaranteed certain borrowings of Trading from the Royal Bank of Scotland
International Limited (“RBS”).
Those guarantees had been called in, in view of Trading’s failure
to pay RBS, and had been settled by way of a payment by each of Mr Bridgen and
Mr Cottier of £15,000 to RBS.
Their claim against Trading was therefore a claim by way of indemnity
for what they had paid as guarantors.
Mr Bridgen’s affidavit disclosed one or two other minor creditors
but the only other major creditor of Trading disclosed at that time was Mr
Leech himself who, it was said, was owed £3,801,355. The sole asset of Trading was its 40%
shareholding in Poundworld. However
this was said not to have a market value.
8.
At the
hearing on 28th January, Mr Leech appeared through counsel and was
given leave to intervene. Counsel
referred to the fact that Mr Leech was shortly to be discharged from his
bankruptcy and his application was therefore to defer consideration of Mr
Bridgen’s application for désastre. He referred to the fact that Mr Leech
considered himself still to be the controlling majority shareholder of Trading
and did not accept that Trading’s 40% interest in Poundworld was
necessarily worthless. He needed
time following his discharge from bankruptcy to assess the position and, in
order to do this, he needed access to financial information concerning
Poundworld.
9.
The Court
was concerned that there should not be academic litigation about who owned a
wholly insolvent company. As
against that, it felt that it would not be right to declare Trading en
désastre without giving Mr Leech an opportunity to see if he wished to
inject funds or otherwise deal with the insolvency of the company. The Court therefore adjourned the application
and made it clear that, once he had been provided with all the necessary
information about Poundworld, Mr Leech would have to decide whether to inject
funds into Trading or allow it to be declared en désastre. In relation to the shareholder action,
the Court ordered that this be treated as a cause
de brièveté and ordered discovery.
10. Various further directions hearings in the
shareholder action took place thereafter before Commissioner Le Cras but the
application for désastre came back before this Court on 6th
May.
The factual background as presently before the Court
11. The Court has now received further information
by way of affidavit. It appears
that Mr Bridgen and Mr Cottier originally owned Poundworld in equal shares and
managed the business themselves. In
1990 Mr Leech became involved as an investor. He acquired shares and also injected
considerable sums by way of a loan with a view to expanding Poundworld’s
business. It would seem that the
expansion was not successful and did not lead to profits. In about 2001 it was decided to bring in
a further investor, a Mr Marsh. He
ran a business in the UK
called Bubbles. He wished to invest
in a company without debts and therefore there was a substantial corporate
re-organisation at the time of his investment.
12. According to the affidavit of Mr Smith, the
re-organisation was achieved as follows.
Mr Marsh acquired a 60% shareholding in Poundworld. Mr Leech, Mr Bridgen and Mr Cottier
acquired a dormant company, Trading.
Trading acquired 40% of Poundworld and in turn issued its shares to Mr
Leech, Mr Bridgen and Mr Cottier as described above in the proportions 78.58%,
10.71% and 10.71%. Furthermore, at
the time of the transaction, Poundworld was indebted to Mr Leech and/or various
of his companies in the total sum of £3,809.212.87. Because of the requirement that
Poundworld should be free of debt, responsibility for these debts was assumed
by Trading in place of Poundworld.
Thus, before the transaction, Poundworld was indebted to Mr Leech in
this sum whereas after the transaction, Poundworld was free of debt. Trading had acquired 40% of the shares
in Poundworld but had, in effect, paid a price of £3,809.212.87 by taking
over responsibility for the loans previously owed by Poundworld to Mr Leech.
13. According to Mr Smith, Mr Leech paid for his
7,858 shares in Trading by way of a reduction of his loan account, which had
the effect of reducing the sum owed to him by Trading from £3,809,213 to
£3,801,355. Mr Smith relies
upon the following in support of this assertion:-
(i)
This was
his understanding at the time, as he was responsible for carrying out the
re-organisation.
(ii) His understanding is supported by the recent
discovery in March 2005 of a document which was in the possession of Mr Ogden,
the accountant to Mr Bridgen and Mr Cottier. That document was, says Mr Smith,
prepared by him at the time of the re-organisation. It lists the original loans to
Poundworld; it then shows the proposed share structure of Trading and finally
includes the opening balance sheet of Trading immediately following the
re-organisation. The figures in the
document are consistent with those described above.
(iii) Mr Leech, Mr Bridgen and Mr Cottier entered
into a shareholder agreement in 2002 in relation to Trading. The agreement records that the shares in
Trading are fully paid (see recital B) and also records that Trading is
indebted to Mr Leech in the sum of £3,801.355, which is consistent with
Mr Smith’s evidence.
(iv) The Annual Return of shareholders filed by Mr
Cottier on behalf of Trading records the shares as being fully paid.
14. The document referred to also states that,
immediately prior to the re-organisation, Mr Bridgen was indebted to Poundworld
in the sum of £86,086 and Mr Cottier was indebted in the sum of
£121,754. Mr Smith asserts
that, as part of the re-organisation, the benefit of those debts was
transferred from Poundworld to Trading and the opening balance sheet of Trading
shows Mr Bridgen and Mr Cottier as debtors of Trading in these two respective
sums. It follows, says Mr Smith,
that these sums have to be offset against the £15,000 which Trading owes
to each of Mr Bridgen and Mr Cottier with the result that they are both net
debtors rather than creditors of Trading.
15. One other significant event has taken place
since the hearing before the Court on 28th January. Back in September 2004 Mr Bridgen and Mr
Cottier purchased Mr Marsh’s 60% interest in Poundworld. They were therefore the majority
shareholders in Poundworld at the time of the application for the
désastre on 28th
January 2005. On 31st
January, Mr Bridgen and Mr Cottier, as directors of Poundworld, determined that
none of the issued shares (including Trading’s 40% shareholding) had been
paid for. They therefore followed
the same procedure as they had followed in relation to Trading itself. The board resolved to call for payment
for the shares within 14 days. At a
further board meeting on 17th February, it was noted that Trading
had not paid the call. The board
therefore resolved to exercise the company’s lien over Trading’s
shares and they were sold to Mr Bridgen and Mr Cottier in equal
proportions. The result is that, if
these transactions are valid, Trading no longer has any shares in Poundworld
which is now owned equally by Mr Bridgen and Mr Cottier. We should add that no mention of this
possible course of action or of Trading’s contingent liability to pay for
its 40% shareholding in Poundworld was mentioned by Mr Bridgen in his affidavit
at the time of the application for the désastre.
16. In passing we should also note that, at the
board meeting of Poundworld on 31st January, Mr Bridgen and Mr
Cottier resolved to issue the remaining 37,500 un-issued shares in the
company. The shares were issued at
their par value of £1 and paid for by reduction of the loan accounts owed
by Poundworld to Mr Bridgen and Mr Cottier respectively. If this was a valid issue of shares, it
had the effect of reducing Trading’s interest (if it still existed) from
40% to 10%. Whether that share
issue was liable to attack would presumably depend upon whether the issue price
was a fair price or whether it improperly diluted Trading’s interest in
Poundworld.
Decision
(i) Can
Mr Bridgen apply for a désastre?
17. The Court was referred to Re Baltic Partners
Limited (18th
April 1996) Jersey Unreported [1996/75] where the Court of Appeal
reiterated the preconditions for a declaration of désastre. Southwell J A said at page 10:-
“At common law the
preconditions for such déclaration were that (1) the creditor had a
valid liquidated claim against the debtor; (2) the debtor to the best of the
creditor’s knowledge and belief was insolvent, but had realisable assets,
and (3) the creditor verified these matters by affidavit (see page 3 of my
judgment in the Minories case).
Article 3 of the 1990 Law provides (inter alia) that an application for
a déclaration may be made by a creditor of the debtor with a claim
against the debtor of not less than such liquidated sum as shall be
prescribed. The creditor’s
claim will usually have been established by a judgment of a competent court,
often a summary judgment. A
judgment is not a precondition. But
if the creditor does not have a judgment in his favour, there must nevertheless
be a liquidated sum undoubtedly due and payable by the debtor. The indebtedness must be certain, and
not the subject of genuine dispute and arguable defence, set off or
counterclaim. The indebtedness must
be such as could form the basis of an immediate summary judgment.”
18. Mr Preston argued that the Court could not
possibly be satisfied that Mr Bridgen was definitely a creditor. He submitted that, on the contrary,
there was strong evidence from the contemporaneous opening balance sheet
prepared by Mr Smith that Mr Bridgen was a net debtor of Trading because his
undoubted claim of £15,000 was more than offset by his debt of
£86,806.
19. Mr Sinel, on the other hand, argued that the
document relied upon by Mr Smith proved nothing. It was simply something which he had
prepared. There was no evidence that
it had been approved by the company or by any of the parties. It did not prove that the debt, if owed
by Mr Bridgen to Poundworld, had been assigned to Trading. There was no document of assignment or
written notice to Mr Bridgen.
20. We are quite satisfied that, on the evidence
presented to us, it cannot be said that Mr Bridgen’s status as a creditor
of Trading is certain. On the
contrary, the evidence produced by Mr Smith is sufficient to make the position
uncertain. There is clearly an
arguable defence which could only be resolved after a full hearing of an action
by Mr Bridgen against Trading. In
the circumstances, Mr Bridgen has failed to show that the suggested set-off is
spurious and it would therefore be quite inappropriate for the Court to exercise
the draconian power to declare Trading en désastre on the application of
Mr Bridgen.
(ii) Exercise
of discretion
21. In case it is of assistance, we go on to
consider what we would have decided even if we had concluded that Mr Bridgen
was undoubtedly a creditor in the sum of £15,000.
22. Mr Preston submitted that there were strong
grounds for suspecting that Mr Bridgen and Mr Cottier had engaged upon a course
of conduct designed to deprive Mr Leech of his interest in Poundworld and
assume this for themselves. There
was, he said, very compelling evidence that Mr Leech had paid for his shares in
Trading at the time of the re-organisation by way of reduction of his loan
account. Indeed, he contended, it
would extraordinary if, despite being owed over £3.8 million by Trading,
and having transferred his shares in Poundworld to Trading as part of the
re-organisation, Mr Leech had agreed to incur a further liability for payment
of the shares in Trading whilst leaving his loan account unaffected. There were therefore, he submitted, very
strong grounds for believing that the shareholder action would succeed and that
Mr Leech was in truth still a 78.58% shareholder in Trading.
23. He further submitted that the actions of Mr
Bridgen and Mr Cottier (immediately following the Court’s decision on 28th
January) in relation to Trading’s 40% shareholding in Poundworld
confirmed the suspicion that this was all part of a plan to ease Mr Leech out
of the picture. Trading’s 40%
shareholding in Poundworld had been issued in exchange for an assumption by
Trading of a debt of over £3.8million then owed by Poundworld to Mr
Leech. Poundworld was therefore
over £3.8 million better off as a result. Was it seriously to be argued that
Trading had therefore not given value and paid for its shares? On the contrary, it had paid over
£3.8 million for its shares in Poundworld. They were therefore fully paid. It followed, he said, that there were
strong grounds for believing that the actions of the directors of Poundworld in
depriving Trading of its shareholding in Poundworld were equally susceptible to
being set aside.
24. He also queried whether Poundworld had no value
as submitted by Mr Bridgen in his désastre application. If it had no value, why were Mr Bridgen
and Mr Cottier taking such steps to obtain control of it? Furthermore the information supplied
since the hearing on 28th January showed that, at the lowest, Mr
Bridgen and Mr Cottier had each drawn some £60,000 per annum from Poundworld. It ran several shops and it was highly
unlikely that it had no value.
25. Mr Sinel, on the other hand, submitted that
there was no evidence that the shares in either Trading or Poundworld had been
paid for. The document prepared by
Mr Smith proved nothing. It was
just the jottings of a single person but had never been approved or adopted by
the board of either company. In any
event, the question of ownership was irrelevant. It did not really matter who owned
Trading as it was hopelessly insolvent.
Not only did it owe his clients a total of £30,000 but it also
owed Mr Leech over £3.8 million and, since the hearing on 28th
January, it had been discovered that it owed RBS some £308,000. There was therefore no point in keeping
Trading alive. It no longer owned
any assets (because its shareholding in Poundworld had been extinguished). Even if it did still have that
shareholding, the asset, on the evidence before the Court, was wholly
insufficient to cure the company’s insolvency and the best course would
therefore be for the Viscount to obtain what he could for such assets as
Trading still had. Furthermore the
Court should maintain the approach which it had taken on 28th
January, which was to require Mr Leech to put up sufficient money to cure
Trading’s insolvency if he wished to avoid a désastre; otherwise
the Court would indeed be permitting litigation to take place over the
ownership of a worthless asset.
26. It is clear that, even where the Court is
satisfied that the applicant is undoubtedly a creditor and that the debtor is
insolvent, there is a discretion in the Court as to whether to grant a
declaration of désastre.
Although in the ordinary case the Court is likely to exercise its
discretion in favour of granting a declaration where the necessary
pre-conditions are met, it retains a discretion not to do so.
27. We are satisfied that, even if we had concluded
that Mr Bridgen achieved the necessary degree of certainty as a creditor, we
would not have granted a declaration of désastre in this case. Our reasons are as follows:-
(i)
This is
not a straightforward situation where a third party creditor seeks to achieve
the pro-rata distribution of an insolvent debtor’s assets. Mr Leech contends that the actions of Mr
Bridgen and Mr Cottier are part of a plan designed to deprive him of his
indirect interest in Poundworld. We of course are not in a position to make any
finding upon that allegation but we are satisfied that it would be quite wrong
to reject it out of hand. Mr Leech
has an arguable case on this point.
(ii) To declare a désastre would make it more
difficult for Mr Leech to pursue any remedy he may have if this allegation is
correct. The Viscount would have to
decide whether to institute an action on behalf of Trading against Poundworld
with a view to setting aside the cancellation of Trading’s 40% interest
in Poundworld. Trading has no other
assets and he would therefore need funding. It would be difficult for Mr Leech to
decide to put up the necessary funds at a time when he did not know whether he
continued to own 78.85% of Trading.
That will only become known once the shareholder action has been
resolved. A declaration of
désastre would therefore in practice make it much more difficult for
Trading to take the necessary action to protect its alleged 40% interest in
Poundworld.
(iii) Although, on the assumption that Mr Bridgen and
Mr Cottier are indeed creditors of Trading, the company is insolvent, it is
only those two creditors who are pressing for payment. On the information currently before the
Court, none of the other creditors are.
For the reasons put forward by Mr Preston, it is not impossible that Mr
Bridgen and Mr Cottier have motives of their own for seeking to declare a
désastre.
(iv) We do not agree that ownership of Trading is
irrelevant. If Mr Leech is
successful in the shareholder action and is ultimately found to be the
controlling shareholder, he can, if so advised, take such steps as are
necessary to procure that Trading takes action to protect its alleged 40%
interest if Poundworld. On the
information before us, we have considerable doubt as to whether Poundworld is
indeed of no value as Mr Bridgen contended in his affidavit.
(v) We accept that our decision marks a change of
course compared with that which we proposed on 28th January. However that was a decision reached
after a short hearing at the end of the usual Friday afternoon sitting and
events have moved on since then.
Furthermore the Court is in possession of much more information than it
had at that time. Most significantly,
the actions of Mr Bridgen and Mr Cottier in seeking to forfeit Trading’s
interest in Poundworld on the grounds that it had not paid for its shares in
Poundworld lend some support to Mr Preston’s contention that the
application to declare Trading en désastre was all part of a scheme to
make it as difficult as possible for Mr Leech to retain and/or assert his
indirect interest in Poundworld.
(vi) We do not think that any prejudice will be
caused to Mr Bridgen and Mr Cottier by refusing the désastre. Mr Sinel asserted that it would make the
management of Poundworld more difficult.
We do not agree. Trading has
held its 40% interest in Poundworld throughout the period of Mr Leech’s
désastre and Mr Cottier and Mr Bridgen have not been inhibited from managing
Poundworld’s business during this period. If indeed, as Mr Sinel contends, Mr
Leech no longer has any shares in Trading and if, as he further contends,
Trading no longer has any shareholding in Poundworld, we cannot see that the
continued existence of Trading can cause any difficulty in relation to carrying
on the business of Poundworld.
Furthermore, because Trading has no asset other than its alleged
interest in Poundworld, a refusal of a désastre will not in practice
cause any prejudice to Mr Bridgen and Mr Cottier in their position as
creditors. They will, on their
case, get nothing in a désastre.
(vii) Thus, no prejudice is suffered by Mr Bridgen
and Mr Cottier if a désastre is declared whereas, if Mr Leech is in
truth a majority shareholder in trading and if Trading has been wrongly
deprived of its interest in Poundworld, a declaration of désastre may
materially prejudice Mr Leech if Poundworld has some value.
28. For these reasons we concluded that, in our
discretion, we would dismiss the application for a declaration of
désastre even if we were satisfied as to Mr Bridgen’s status as a
creditor.
Costs
29. At the conclusion of the hearing Mr Preston
asked for an award of costs in favour of Mr Leech. His client had been successful but I
took the view at the time that the overall justice of the case could best be
met by making no order as to costs.
I particularly had in mind that the evidence suggested that, at the time
of this application, Mr Bridgen had not been aware of the existence of the
document prepared by Mr Smith which suggested that Mr Bridgen owed money to
Trading and was therefore not a net creditor. I was also informed that he had not
personally been responsible for keeping the accounts of Trading and considered
therefore that he might not have been aware of the suggestion that he might owe
money to Trading as a result of the corporate re-organisation. Nevertheless, bearing in mind that an
award of costs is final unless leave to appeal is given, I considered that Mr
Leech should be given the opportunity of challenging my decision should he
think fit and I therefore granted leave to appeal against my costs order.
Authorities
Re Baltic Partners Limited (18th April, 1996)
Jersey Unreported [1996/75].