Companies - just and equitable winding up.
[2020]JRC103
Royal Court
(Samedi)
3 June 2020
Before :
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R. J. MacRae, Esq., Deputy Bailiff, and
Jurats Ramsden and Ronge
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IN THE MATTER OF THE REPRESENTATION OF
LUKE BRYAN AND DENNIS VERNON EDMONDS
AND IN THE MATTER OF DRAGANFLY
INVESTMENTS LIMITED
Advocate H. B. Mistry for the Representor.
judgment
the deputy bailiff:
1.
We heard
argument in this matter on 20th April 2020, and made orders that
various additional documentation needed to be provided to us prior to reaching
a decision.
Background
2.
Draganfly
Investments Limited (“the Company”) is a Jersey company
incorporated on 7th April 2005 as a public company. This is an application to wind the
Company up under Article 155 of the Companies (Jersey) Law 1991
(“the Law”). The
Applicants are the two directors of the Company, Mr Bryan and Mr Edmonds. Mr Edmonds appeared by video link when
the Representation was heard and was required to give evidence in support of
the Representation.
3.
The
Company was, as a public limited liability company, originally listed on AIM
(Alternative Investment Market) and had, and continues to have, approximately
100 shareholders. The Company was
established in order to make investments in other companies and its market capitalisation
was initially £3m.
4.
The
Company ceased trading in investments in 2016 and there have been two attempts
to raise additional working capital, both of which have been unsuccessful. As the Company no longer met the capital
requirements for listing on AIM, its listing was cancelled and it reverted to
becoming a private limited company on 24th September 2018. The last attempt, in 2018, to raise
funds led to the Company raising £1.8m but that was insufficient to meet
AIM’s requirement of £2.5m for re-listing.
5.
Accordingly,
in July 2019 the Company’s board decided to call an Extraordinary General
Meeting. Unfortunately, and Mr
Vernon accepted with the benefit of hindsight this was a mistake, the directors
of the Company did not explain to the shareholders in correspondence prior to
the meeting why it was that the Company was inviting the members to pass the
resolutions that were considered at the EGM on 26th July 2019.
6.
The first
two resolutions are not material to the exercise of the Court’s discretion
today as they were defeated and their purpose was to increase the share capital
of the company to 500 million shares so as to, inter alia, permit the conversion of two loan notes totalling
£80,000 into shares in the Company.
7.
The third
resolution was a proposal that the Company be wound up on the just and
equitable basis pursuant to Article 157 of the Law.
8.
All three
resolutions were special resolutions requiring two thirds of those members
voting to vote in favour. Very few
members voted – approximately 10%.
All three resolutions were emphatically rejected by shareholders, none
garnering the support of as many as 10% of the members. Questions from the Court revealed that
the minutes of the EGM were incorrect in that they showed the wrong percentage
(1.05%) of shareholders supported the third resolution and they were
inconsistent with other documents exhibited to the affidavit. This was one of the reasons that we
directed Mr Edmonds to file a further and third affidavit. This affidavit showed that in fact 100%
of the shareholders voted against the third resolution.
9.
At the
date of the EGM the Company’s assets were approximately £80,000 and
substantially outweighed by the Company’s debts. The substratum of the Company had gone
i.e. investment in other companies, and there is no prospect of the Company
trading again.
10. The total creditors were said to amount to
£392,500 less those who have agreed to waive their claims against the
Company, leaving a deficit of £295,608.26. Mr Edmonds third affidavit indicates
that the total debt of the company including legal fees incurred in the
liquidation is £268,592.76 which once the cash held is applied leaves a
final deficit of £188,716.15.
11. As to the heavy vote against the special
resolutions, Mr Edmonds was unable to explain in evidence why the resolutions
were defeated so substantially by the five shareholders who voted by proxy as
he had never troubled to ask them why they voted against the resolutions.
12. The Applicants’ advocate said that his
clients were “not aware”
of the reason that the special resolutions were rejected and said “had the members had an alternative plan, one
would have expected them to have made contact with the Company’s board,
either before or after the EGM.”
13. It seems to the Court that that was really the
wrong approach. If the directors
had a proposal to make to members they should have explained it to them in
correspondence. It is for the directors
to explain to the shareholders the options available to the Company and had
that occurred then this application may have been unnecessary as a creditors
winding up could have occurred under the provisions of the Law.
14. On any view, the Company is cash flow insolvent
and balance sheet insolvent. It is
said that the Company should be wound up on the just and equitable basis
because:
(i)
It has
lost its substratum;
(ii) The directors and the members of the Company
are in deadlock and it would be in the interests of the creditors to wind the
Company up.
The convening hearing
15. The Applicants issued their Representation on
20th February 2020 and on 21st February 2020, at the
convening hearing, the Royal Court ordered:
(i)
That no
proceedings shall be commenced or continued with or as against the Company
without leave of this Court pending determination of the said Representation
pursuant to Article 155 of the Law or such other provision or inherent
jurisdiction as may be applicable which proceedings shall be deemed to include,
for the avoidance of any doubt, the registering of any promissory note or charge
with respect of the Company or the Property;
(ii) That any parties given notice of this
application shall be bound to keep the same confidential and not to discuss the
same with any other persons (save with and as between the directors of the
Company and their legal advisers) until further order of this Court;
(iii) That the following parties shall be served,
either by ordinary post or by courier or by hand delivery, or by email, with a
copy of the said Representation and the affidavit dated 19th
February, 2019, of Mr Dennis Vernon Edmonds and be notified of the date of the
adjourned hearing hereof being the 20th April, 2020, at 10:00 a.m.;
(a) The Company through its director Mr Edmonds as
its registered office;
(b) The Viscount.
(iv) The members of the Company shall be notified of
the date of the adjourned application for Just and Equitable Winding Up through
the Gazette (Jersey Evening Post) no later than seven days before the final
hearing of this application.
(v) That there shall be no change to the
composition of the Board of the Company, save by reason of any voluntary
resignation which resignation shall not be procured by the members or directors
of the Company, without leave of the Court;
(vi) The convened parties shall attend the Royal
Court on the said 20th April, 2020, at 10:00a.m. to confirm the
Interim Orders made by the Royal Court this day and to fix, if necessary, a
further date for the hearing of the Representation and considerations of the
granting of the Final Orders.
16. These orders were complied with. As to the order at (iv) above no
response has been received from any members of the Company. Further, the Viscount suggested, in view
of the fact that many of the shareholders lived in the United Kingdom, there
should also be notification of members through the London Gazette. This occurred, and again there has been
no response.
Correspondence with the Viscount
17. The Viscount was not represented but we were
grateful to her for the correspondence that she has had with the Applicants
prior to the hearing.
18. The Viscount expressed her disappointment that
she was not asked to comment on the application before it was presented to the
Court. It is good practice for all
applicants for insolvency relief to correspond with the Viscount before making
an application to Court. The
Viscount correctly notes in her correspondence (see her email of 7th
April 2020), that a just and equitable winding up is generally only an option
to be considered when other remedies are not available, such as désastre or creditors winding up
(which is not possible without the members passing the special
resolution). She observed that it
would be very helpful if the Applicants had explained why the shareholders
rejected the proposal so overwhelmingly.
The Viscount said that the £80,000 cash was available for
liquidation, was a realisable asset and that in her view the désastre route “had not been explored adequately”.
19. She also made comments on the form of relief
that was sought in the Representation and said that the powers sought for the
liquidator were too wide and unnecessary as there was no business to be
conducted by the Company.
20. As to désastre,
the advocate for the Applicants told the Viscount and the Courts that the
Company had lost its substratum and this was the ground for a just and
equitable winding up; that this is a deadlock situation as between the
Company’s members and that the directors and that the proposed liquidator
had been heavily involved in the Company since 2019 and was fully aware of its
affairs.
21. The Viscount observed that the
Applicant’s advocate ought to explain to the Court that désastre is another option which
should have been explored at an earlier stage. She went on to say that the Court should
be given an estimate of the proposed liquidators fees and costs as a matter of
good practice to allow the Court to have comfort this is going to be a cost
effective process with the creditors.
22. The advocate for the Applicants informed us
that the total costs of the winding up were expected to be no more than
£20,000.
The relevant principles
23. In recent years there have been several
occasions upon which the Royal Court has ordered that a company be wound up on
the just and equitable basis. We
have ben assisted by the relevant authorities.
24. In Poundworld (Jersey) Limited [2009]
JRC 042 the Royal Court, Birt, Deputy Bailiff presiding observed at paragraph
15:
“We are of the view that the
Court should be cautious before ordering a winding up under Article 155 in the
ordinary case of an insolvent company. The Law provides for the
appropriate procedure and this is the one which should normally be
followed. However, as referred to earlier, the Court's jurisdiction to
order a winding up under Article 155 is a wide one and we are persuaded that,
in the particular circumstances of this case, it would be right to exercise
that jurisdiction.”
25. In that case the Royal Court went on to order
at paragraph 17 to say:
“ … We were conscious
however that we were making this order in the absence of any of the
creditors. Accordingly we directed that notice of the order be given
forthwith to all the creditors and that any creditor should have liberty to apply
to the Court with a view to seeking to set aside the Court's order, so that the
process would revert to that necessary for a creditors' winding
up.”
26. The comparative advantages and disadvantages of
the available remedies were considered in the matter of the Representation
of Huelin-Renouf Shipping Limited [2013] JRC 164 the Royal Court, W J
Bailhache, Deputy Bailhache presiding said at paragraph 5:
“5. In the case of In the
matter of the Representation of Belgravia Financial Services Group Limited
[2008] JRC 161, there were a number of particular advantages and disadvantages
relating to that company which were canvassed in the application for an order
under Article 155, but what is particularly apparent is the statement in the
decision of the Court in that case that the Court should look at the
alternative orders that might be made before making an order under Article
155. After all it is part of our customary law that the Court may grant a
declaration of désastre either applied for by the company or applied for
by creditors, so that is a route that creditors can take for suing company
assets realised and distributed amongst the creditors in an orderly way.
Furthermore, the statute, the Law, which does provide for the Article 155
application also provides for a creditors’ winding up where the
shareholders convene a meeting and the company passes the resolution at a
general meeting and then there is a creditors’ committee usually which
operates conjunctively with the liquidator.
6. We have considered both of those
alternatives to the application under Article 155 and we think that neither is
appropriate. In the case of the creditors’ winding up there are a
number of objections. The first is that it is quite apparent that the
shareholder is not going to assist by arranging for the Company to pass the
relevant resolution in general meeting; but secondly, the timing constraints
provided for in the Law do make it plain that there would not be the ability
for the liquidators to take steps quickly in relation to the assets of this
particular company….
7. So for those reason we are satisfied
that the creditors’ winding up is not appropriate, if we did not take
such a step today the Company would be left in deadlock with a lack of
shareholder participation with the Board and therefore that option is not
available.
8. As to the declaration of
désastre, we have heard from Mrs Allo for the Viscount that there is no
view from that Department that a désastre would be more appropriate.
Advocate Williams submits that the Viscount would be in no better
position than a liquidator under Article 155 and indeed it would probably just
add to costs because not only would there be the Viscount’s costs of
administering the désastre but there would also be the costs of experts
who would be doing a similar job to the liquidators and who would be assisting
the Viscount. We accept that in the circumstances of this particular case
that is a fair criticism to make.”
27. We are in a similar position. A creditor’s winding up is not
possible at this stage owing to the failure to pass the special resolution in
2019, and there is no express view from the Viscount to the effect that a
désastre would be more appropriate, merely that the Court should (as it
must) consider it.
28. In Huelin Renouf the Court made a
similar order to the one made in the Poundworld case (at paragraph 12)
of the judgment:
“The Court orders that notice
of this judgment today should be given to all creditors and without prejudice
to what is paragraph 10 of the draft order, any creditor shall have liberty to
apply to the Court with a view to seeking to set aside the Court’s order
so that the process could revert to a creditors’ winding up or an
application for a désastre.”
29. As shown by the authorities, the Court has a
wide discretion when considering whether or not to order that a company is
wound up on the just and equitable basis.
We note that in the case of Horizon Investments Limited [2012]
JRC 039 the Court in exercising its discretion under Article 155 took into
account the fact that an Article 155 appointment of a liquidator may be
preferable to a creditor’s winding up given the greater flexibility
allowed for, and the overriding duty to the Court, especially given the
potential for conflicts to arise between shareholders and creditors. There is perhaps such conflict in this
case where shareholders have voted so heavily against a just and equitable
winding up.
30. In In the matter of Myfuel Limited
[2013] JRC 169A, the Royal Court said:
“15. … It is frequently
and rightly said that one of the grounds for an order under Article 155 is that
the substratum for the company must have gone and that certainly seems to be
the position, on the information we now have, in relation to Myfuel.
There is no immediate prospect of it or its subsidiary companies recommencing
investment business, as far as one can tell …”
31. The purpose for which this Company was
incorporated has gone and accordingly so has its substratum.
32. As to the submission that this is a case of
“deadlock”, there is
clear authority to the effect that “deadlock”
is a ground for just and equitable winding up. There was a deadlock in Bisson
–v- Barker [2008] JRC 193, where the representor and the two
respondents were shareholders and the representor and one of the respondents were
directors. They had fallen out to
the extent that it was impossible for them to work together and manage the
business.
33. It seems to the Court that this is not a case
of “deadlock”. The directors have no idea why the
shareholders voted against the special resolutions in 2019 as they have not
attempted to find out. Accordingly
we cannot find evidence of “deadlock”
as a ground for just and equitable winding up.
Our decision
34. Nonetheless this is plainly a case where the
substratum for the Company has gone.
The Company is insolvent and cannot trade, and the proposed liquidator
is fully aware of the affairs of the Company. Accordingly, accepting the helpful
modifications proposed by the Viscount, we grant the prayer to the
Representation and order:
(i)
The
Company be wound up pursuant to Article 155 of the Law;
(ii) Mr Adrian Rabet and Mr Darren Reeds of Messrs
CVR Global or such other persons as the Court may think fit, be and are hereby
appointed as Joint Liquidators of the Company, with all powers as set out in
Chapter 4 of Part 21 of the Law and the following specific powers:
(a) To call meetings of creditors;
(b) To publish such notices as the Liquidator deems
necessary or expedient with a view to inviting claims, such claims to be filed
in respect of the period up to the date hereof and any liabilities subsequently
incurred to be registered as expenses in the liquidation;
(c) To require the current and former officers and
directors of the Company to make statements as to the affairs of the Company
and to verify them on affidavit;
(d) To exercise any of the powers of the Company as
may be required for its beneficial winding up, having regard to the creditors
including (without limitation) making payments, assigning rights and interests;
(e) To carry on the business of the Company in
order to enable an orderly winding up of the Company;
(f)
The power
to apply to the Royal Court for a revision or extension of any of his powers
and for sanctioning or ratification of any of his acts of omissions;
(iii) After the commencement of the winding up no
action shall be taken or proceeded with against the Company except by leave of
the Court and subject to such terms as the Court may impose;
(iv) That the costs of and incidental to these
proceedings be paid by the liquidator as an expense of the liquidation (such
costs excluding the additional work required to be done by the advocate for the
Representor and the liquidator for the purpose of complying with the order made
by the Court on 20th February 2020 by way of the adducing of further
evidence);
(v) Notice of this judgment should be given to all
creditors and members, with creditors having liberty to apply to the Court if
so advised in order to seek to set aside the Court’s order if they think
fit.
(vi) That there be liberty to apply to all parties
affected by this order.
Authorities
Companies (Jersey) Law 1991.
Poundworld
(Jersey) Limited [2009] JRC 042.
Representation
of Huelin-Renouf Shipping Limited [2013] JRC
164.
Horizon
Investments Limited [2012] JRC 039.
In
the matter of Myfuel Limited [2013] JRC 169A.
Bisson
–v- Barker [2008] JRC 193