Collas Crill guiding you through...Winding up a Jersey company on just and equitable grounds
07 November 2019
Jersey is a popular place to establish an asset holding company because the Companies Law is modern, flexible and modelled on English companies legislation.
But what happens when things go wrong?
This guide looks at the key things you need to know about winding up a company on just and equitable grounds.
Words in bold text are defined at the end of this guide.
What is a winding up on just and equitable grounds?
A winding up on just and equitable grounds is a procedure that is used to end the life of a company when, for some reason, other procedures to wind up or liquidate the company cannot be used, or are not appropriate in the circumstances.
While an application is technically not an insolvency procedure, in the circumstances discussed below, it can be used to wind up an insolvent company.
Background to the remedy
This remedy has existed in English legislation since the nineteenth century.
It is a remedy of last resort and is intended to provide a flexible procedure to wind up a company and protect the interests of, or give a result that is most advantageous to, its stakeholders.
The provisions in the Companies Law are based on section 122 of the UK Insolvency Act 1986. Consequently, the Court has said that it will have regard to English cases when interpreting the meaning of the words 'just and equitable'.
Interestingly, this is an area where there is a growing body of Jersey case law and the Court and has been prepared to give the words just and equitable a wider interpretation than the English courts.
Unlike the position in England and elsewhere, the Court does not have a statutory duty to consider whether:
- another remedy is available; or
- the shareholder is acting unreasonably in making an application rather than pursuing another remedy.
An application may only be made if a declaration has not been made in relation to the company under the Bankruptcy Law.
Who may make an application?
An application may be made by the company, a director, a shareholder, the Chief Minister, the Jersey Financial Services Commission (JFSC) or a supervisory body.
As is the case for a creditors' winding up, a creditor of a company is unable to make an application.
An application will set out the factual background in pleading called a representation, is similar to a petition. The representation is supported by an affidavit, which is similar to a witness statement, sworn before a qualified lawyer or notary public.
The Court is likely to require other interested parties, including the Viscount, to appear at the hearing.
The Companies Law empowers the Court to order that a company be wound up if it considers that it is just and equitable to do so.
Before it will make an order, the Court must be satisfied that there is a valid reason for the company to be wound up by way of just and equitable winding up, rather than a summary winding up, creditors' winding up or désastre proceedings.
An application may be made together with an unfair prejudice claim, because behaviour which is unfairly prejudicial will frequently constitute grounds for winding up on just and equitable grounds.
However, since this is a discretionary remedy, even if an applicant shows good reasons why an order should be made, the Court is not bound to make an order.
If the Court orders that a company be wound up on just and equitable grounds, it may:
- appoint a liquidator;
- direct the way in which the winding up is to be carried out; and
- make any order it thinks fit to ensure the winding up is carried out in a orderly way.
A copy of the order must be delivered to the registrar of companies within 14 days of being made.
Traditional grounds on which order made
The Court has said that the words just and equitable must be given a wide and flexible interpretation; therefore it is not possible to give an exhaustive list of circumstances in which it will order a company be wound up on these grounds.
The traditional grounds on which successful applications have been brought, include:
- the purposes for which the company was created have been achieved in full or it has become impossible to achieve them (this is frequently referred to as a loss of the company's substratum);
- a deadlock arising in the management of the company as a result of which decisions cannot be made regarding the company's business;
- a justifiable loss of confidence in the management of a company due to fraud, dishonesty or serious mismanagement of the company's business by the directors or majority shareholders;
- a breach of an agreement in the company's articles of association and/or shareholders' agreement; or
- a breakdown in mutual trust and confidence between the shareholders where the company is properly characterised as a partnership, called a quasi partnership, despite its corporate form excluding a shareholder from participating in the company's management.
Although the Court has said that an insolvent company should normally be liquidated using a creditors' winding up or désastre proceedings, it has recognised that there are situations where a just and equitable winding up is appropriate.
The Court has ordered that an insolvent company be wound up on just and equitable grounds in the following situations.
Achieve a better outcome for stakeholders
The Court has ordered that an insolvent company be wound up on a just and equitable grounds where it would achieve a better outcome for its creditors or other stakeholders than other insolvency procedures. Examples include where:
- the company was a licensed trust company which needed to continue trading after the start of its winding up to be able to transfer its clients to another trust company because (among other things) a creditors' winding up would not allow the liquidator to:
- continue carry on trading to allow its client transfers to take place; or
- take into account the interests of its clients;
- the company was a retailer which needed to take steps to quickly sell its remaining stock, its only material asset, because:
- some of its creditors were threatening to exercise Jersey customary law rights which would have resulted in the stock being sold at its wholesale value;
- it was likely those creditors would exercise their Jersey customary law rights before the company could be placed into a creditors' winding up and a liquidator appointed;
- the company could be placed into a just and equitable winding up and a liquidator appointed more quickly; and
- it was likely that those creditors would enter into an arrangement with a court appointed liquidator to allow the company to continue to trade and sell its stock at its retail value which would have benefited all of the company's creditors; and
- a just and equitable winding up facilitated a pre packaged sale of the company's business and assets to a new vehicle set up by one of the company's directors, who was not a shareholder of the company, because the sale would:
- allow the company's business to continue operating;
- result in a payment being made to the creditors where no payment was likely if the company were placed into a creditors' winding up or a declaration made; and
- save the jobs of the company's employees.
Therefore, although Jersey does not yet have any formal rescue or administration process, a just and equitable winding up can be used to achieve a similar outcome to an administration.
Investigate the affairs of the company
The Court has ordered that an insolvent company be wound up on a just and equitable grounds where it is necessary to appoint a liquidator to investigate potential wrongdoing in connection with the company, such as misappropriation of assets and breaches of fiduciary duties.
The Court has shown a particular willingness to do so where the company carries on a regulated business stating that:
- it is in the interests of stakeholders to have the liquidation process, including the investigation of potential claims of wrongdoing, carried out by a liquidator directly accountable to it; and
- its appointment of an independent and adequately resourced liquidator can increase stakeholder confidence in the winding up process and avoid any suggestion of a conflict of interest.
The Court has ordered that an insolvent company be wound up on a just and equitable grounds where it is necessary to appoint a liquidator to take steps quickly to protect the interests of stakeholders. Examples include the need to quickly take action to:
- preserve and gather in the company's assets located in jurisdictions considered to be high risk;
- protect investors' funds;
- sell a company's remaining stock at its retail value for the benefit of the company's creditors; and
- investigate possible misappropriation of assets and breach of fiduciary duties.
Only option available
A creditors' winding up may only be started by the company's shareholders passing a special resolution to place the company into a creditors' winding up. It may not be possible for the shareholders to pass a special resolution (eg where the company has no shareholders because they have been dissolved or struck off or they cannot be located), so a creditors' winding up will not be possible.
Although the directors of an insolvent company may apply for a declaration, which does not require a special resolution, there may be circumstances where a declaration is not appropriate for example if the company does not have realisable assets.
The Viscount would need to employ external advisers to assist carrying out the désastre proceedings at additional expense or a liquidator with specific experience or expertise would be better placed to wind down the company's business or to liquidate it.
The Court has said that, in the case of a company that carries on a regulated business, simply allowing it to be struck off the register of companies is inappropriate. In addition, failing to file annual returns, would make the company guilty of an offence under the Companies Law.
Consequently, there are circumstances where a just and equitable winding up is the only option or only viable option available.
application means an application to have a company wound up on just and equitable grounds.
Bankruptcy Law means the Bankruptcy (Désastre) (Jersey) Law 1990.
Companies Law means the Companies (Jersey) Law 1991.
Court means the Royal Court of Jersey.
declaration means the declaration by the Court that the assets of a company are en désastre.
insolvent means that a company is unable to pay its debts as they fall due.
special resolution means a resolution that is required to be passed as a special resolution by a majority of two thirds (or any higher majority specified in the company's articles of association) of shareholders who (being entitled to do so) vote at a meeting of the company of which not less than 14 days' notice has been given.
supervisory body means the JFSC or a body designated as a supervisory body by the Chief Minister under the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008.
Viscount means the head of the executive arm of the courts of Jersey.
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About this guide
This guide gives a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic, please get in touch with one of the authors or your usual Collas Crill contacts.