News and Insights

Case briefing - A curious confusion of what was wanted & why it was deserved.

The limited liability company is to joint ventures what marriage is to relationships: it provides the standard legal context in which such arrangements most often operate.

So just as marriage can end in a divorce, companies can end in a winding up. Whilst the summary and the creditors’ windings up are premised on shareholder consensus, the Royal Court of Jersey has made creative use of the winding up “on the just and equitable ground” to offer a corporate equivalent for a full-on, contested, domestic bust up.

Law students are introduced to the winding up of companies on the just and equitable ground by an examination of the case of Ebrahimi v Westbourne Galleries Ltd, decided in 1973. This memorable case involved two colourful Levantine traders at loggerheads over how to run their oriental carpet company, whose shares they held 50:50. Memorable as they are, such cases can oversimplify the area of law they illustrate, as we were reminded in August 2016 by the Royal Court’s subtle decision in the case of Monarch Investments Ltd.

Case background

The company belongs to two brothers, Kenneth and Robert and, besides a modest investment in an African mining business, its real income comes from rent earned as the landlord of two properties in the retail heart of St Helier occupied by a shop and a café.

Monarch’s shares were inherited from the brothers’ parents equally, but Kenneth agreed to an adjustment from 50:50 to 35:65 in Robert’s favour in exchange for the right to become the sole owner of their late mother’s flat at Marina Court. Although both brothers were directors, things went wrong. The court reviewed a letter from the company’s accountant listing 12 examples of Robert’s alleged misconduct, felt to involve effectively treating Monarch as his personal piggy bank to be dipped into at will, rather than as a separate entity in which Kenneth had an interest to be respected.

Frustrated by Robert’s behaviour, Kenneth wanted out. He considered his options. As a minority shareholder he would struggle to secure resolutions to challenge Robert’s behaviour as a director or to secure a summary winding up. Enter the chosen remedy: seek a winding up on the just and equitable ground, but with a twist.

Now for the technical bit

Art 155 of the Companies Law creates the possibility of a just and equitable winding up but it is the case law that explains when and how this may be done. The case law to consider can be English or Jersey because the English Companies Act contains a provision in similar terms. The cases have listed five broad categories of circumstance when such a winding up may be sought, but the court has been at pains to underline that this list is not closed, observing that “justice and equity cannot be confined within the four corners of specific circumstances”. (This is typical of the British way of justice. Use legislation and elaborate upon it by case law, but avoid a comprehensive codification which offers greater certainty but can restrict your options when confronting novel problems).

So what are the five categories under which a winding up may be sought?

• The company’s “substratum” has gone (meaning it is no longer possible to accomplish the purpose it was meant to achieve)
• It is both insolvent and an investigation into its affairs is needed.
• There is shareholder or director deadlock.
• The company is in truth a quasi-partnership (e.g. all shareholders expect to be involved in management and are closely associated) and their relationship has broken down.
• This would be better for the creditors than the other options on insolvency.

Kenneth asked the court simply to rule that Monarch’s substratum had gone. He specifically did not ask the court to make an order for a winding up on the just and equitable ground. Perhaps he felt that would be a more ambitious, and so a more costly or risky, request. If he could just get the court to make the requested ruling about Monarch’s substratum he would get Robert back to the negotiating table, but now would be holding all the best cards.

Alas for Kenneth his strategy did not work. The court’s subtle ruling was that whilst on the facts it “may very well” have granted an order for a just and equitable winding up it could not find that Monarch’s purpose, receiving the income from its investments, had been lost.

What are the lessons to be learned from this?

Cases of this sort are invariably the outcome of earlier strategic decisions taken by the litigants. Here Kenneth could have asserted that he was the victim of unfair prejudice, an action allowed to shareholders under Art 141 of the Companies Law or tried to bring an action for breach of Robert’s duties towards him as a director of Monarch under Art 74 of the Law.

However he did not just want the court to find Robert had misbehaved, he wanted to end his relationship with his fellow shareholder altogether.

Generally costs follow the event. The winning party usually receives about 60p in the £ but can receive indemnity costs where the losing party has handled the dispute very badly.

However the courts do not always paint with so broad a brush. Even successful litigants can see their costs reduced if they overcomplicate their case or pursue irrelevant issues.

Was that perhaps why Kenneth held back from seeking an outright order for a just and equitable winding up, and confined himself to seeking a ruling that Monarch had lost its substratum?

Whatever the reason for it this approach did not work for him. He might have got the order he needed by asserting grounds 3. or 4. above, but they were not on his agenda.

Consequently in deciding whether a company’s substratum has failed a rigorous analysis is needed. Here Monarch’s substratum was held not to be the provision of an amicably run joint venture vehicle for its shareholders, but merely the provision of a means to hold title to investments. Irrespective of its shareholders’ disagreements, the court found Monarch remained able to receive its rental and dividend income and therefore its substratum was intact.

Put another way, when identifying a company’s substratum ask yourself “what does the company do?” rather than “why does it do it?”