Representation of Pringle, Fleming and Burnett – yet another nail in the coffin for désastre?

Representation of Pringle, Fleming and Burnett[1] – yet another nail in the coffin for désastre?

A recent judgment of the Royal Court has reinforced the wide nature of the court’s jurisdiction to order a just and equitable winding up of an insolvent company whilst underlining the court’s apparent distaste for désastre in the context of corporate insolvency.

The case concerned a Jersey incorporated company, RPSA Limited, which had become cash flow insolvent as it was unable to pay the salaries of its employees as they fell due.

The court noted that the usual procedure was a creditor’s winding up (under Article 159, Companies (Jersey) Law 1991). On the facts, this was not available as it required the passing of a special resolution of the shareholders, and the company had no shareholders.

The court then turned to the procedure under Article 155 of the Companies (Jersey) Law 1991, the just and equitable winding up. The court described its jurisdiction as a wide one and noted the flexible interpretation given to the words ‘just and equitable’ which permitted the court to have regard to a number of diverse interests.

In the case of RPSA, the court was motivated to order a just and equitable winding up not only by the absence of any alternative corporate insolvency procedure but also the presence of two broader factors. Firstly the need to investigate the circumstances in which the company found itself without a shareholder. Secondly, the need to protect the employees of the insolvent company and consequently the public interest in protecting the reputation and integrity of Jersey in commercial and financial matters.  It is the presence of this second factor which has informed the majority of the court’s decisions to use the just and equitable jurisdiction in this manner.[2]

The Royal Court has previously expressed a desire that désastre be used in preference to the procedures provided for under the Companies (Jersey) Law 1991 (namely just and equitable winding up, summary winding up and creditor’s winding up)[3][4].

In this case the court made only cursory reference to the availability of the en désastre procedure, noting that whilst it was available, the Viscount was in no better position to deal with the winding up of the company than the court appointed professional liquidators. This shortcoming has previously been highlighted by the court, particularly where there is a complex corporate structure or a need for a liquidator with experience in the relevant business or industry [5].  As a corporate insolvency procedure, désastre has for many years been criticised for being expensive, inflexible and entirely liquidation focussed. Désastre does not permit a corporate debtor to continue trading and automatically results in corporate dissolution.

Although the court noted that a creditor’s winding up was usually the appropriate procedure it is by no means ideal particularly as the prescriptive regime does not permit a company to continue trading (of utmost important where there is existing stock[6] or client interests[7]) and does not permit consideration of broader factors such as those in play here[8].

In this case the directors of RPSA made the application for a just and equitable winding up. Had they refused or been unable to apply, the employees as unsecured creditors would been left without a remedy under any of the corporate insolvency procedures. An application for just and equitable winding may only be made by the company, its directors or its members, and paradoxically, a creditor’s winding up, cannot be initiated by creditors.  When coupled with the limitations placed on those creditors who may apply for a désastre (under the Bankruptcy (Désastre) (Jersey) Law 1990), the employees would have been left with no recourse to the assets of the insolvent company.  This lacuna in the law is unacceptable and a modern procedure which encompasses the diverse interests raised when a company becomes insolvent is long overdue in Jersey.

This judgment highlights the court’s willingness to look for a practical solution in the context of corporate insolvency. The lack of a suitable insolvency procedure has led to the just and equitable procedure being stretched far beyond its original purpose. In England, the jurisdiction is not an insolvency procedure and is almost entirely used in circumstances where a company’s purpose or substratum has gone[9] or there has been a breakdown in the management of a quasi-partnership type company[10].  The procedure allowing the return of capital even though this means the destruction of the business.

In Jersey, just and equitable winding up continues to plug the gap left by the absence of a sophisticated corporate insolvency regime, particularly where the directors of insolvent companies need to consider diverse factors such as ongoing client relations, the interests of employees and the need to continue to trade.

 

[1] [2017] JRC 178

[2] See for example Re Horizon Investments (Jersey) Limited [2012] JRC 039, In re Centurion Management Services [2009] JRC 227, Re Collections Group [2013] JRC 039

[3] subject to the rule in Hotel Beau Rivage v Co Ltd v Careves Investments Ltd 1095-86 JLR 70

[4] see for example Re Reva Holdings Ltd [2014] JRC 026. See also Harbour Fund II LP v Orb [2016] JRC 171 in the context of an unsuccessful application to place a Jersey company into English law administration under the so-called passporting procedure within the court’s inherent jurisdiction

[5] See for example In re Centurion Management Services [2009] JRC 227

[6] Re Poundworld (Jersey) Limited, 2009 JLR Note 12

[7] Re Horizon Investments (Jersey) Limited [2012] JRC 039

[8] see also In re Centurion Management Services [2009] JRC 227

[9] Re German Date Coffee (1882) 20 CH D 169

[10] Ebrahimi v Westbourne Galleries [1972] 2 All ER 501

 

Dilly Wright, Associate

dillywright@bakerandpartners.com