The jurisdiction to wind up a company under the provisions of article 155 of the Companies (Jersey) Law 1991 is extremely useful precisely because it is so flexible. It allows a company to be wound up in an orderly fashion, by nominated liquidators, without the stigma of the company passing through a bankruptcy process such as désastre. This is particularly important for group or subsidiary companies, or companies with a name associated with a parent company.
In the wake of recent financial and personal turbulence following the pandemic, where investment priorities change, or where financial irregularities have been exposed or financial pressures mean that directors aren’t able to commit time to projects as anticipated, it is not surprising that there have been a recent number of applications made under this jurisdiction. We anticipate that there will be more to come.
Qualifying Features and Test
The entry requirements for an application are admirably simple in that any company may be subject to an application to be wound up, as long as it is not subject to a declaration that it is en désastre. The test applied by the Court is also straightforward in that the company shall be wound up if it is “just and equitable”, or “expedient in the public interest” to do so. There is no settled definition of what is “just and equitable”, but a useful interpretation might be that ‘it is appropriate in all the circumstances’.
An application might be made by a shareholder, or a director of the company, or the company itself. There are provisions for an application to be made on behalf of the government of Jersey. As a result, an application can still be made even when directors disappear, or when there is deadlock between the shareholders, and as a result the administration of the company has ground to a halt.
Turning to the orders available to be made by the Court, again there is a wide discretion to suit the circumstances of the case. The Court may appoint a liquidator, it may direct the manner in which the winding up may be conducted so that the relief may be tailor made to the circumstances of the particular company, or “make such orders as it sees fit to ensure winding up is conducted in an orderly manner”. Each case will therefore be assessed on its own merits, taking into account all the evidence submitted to the Court in support of the application.
The Court however expects that any applicant seeking exercise of an equitable jurisdiction should come with ‘clean hands’ meaning that all relevant information should be submitted to the Court, including any information which may be disadvantageous to the applicant. It would not therefore be appropriate for the applicant to make the application for an ulterior purpose: the winding up, i.e. termination of the company, must be the genuine relief sought by the applicant. Furthermore, because a successful application will result in the dissolution of the company, any application should be a last resort. Finally, due to the equitable nature of the remedy, the Court retains a discretion as to whether to grant the order even where there are appropriate grounds.
Types of situations where an application has been made
The Court has endorsed the underlying message that there should be flexibility in relation to applications made under this statutory provision, noting that it would be “potentially misleading to adopt a rigidly category-based approach” to the types of applications made. The Court continued: “nevertheless, some themes emerge and some useful guidance can be derived from the decided cases which serve to illuminate the kind of situations in which the court has in the past been satisfied that a winding-up order is just and equitable” – 2021 JCA 176.
The following are widely accepted to be the themes indicated by the Court, but again, due to their generality, the themes in and of themselves cater for a wide range of circumstances, and there is overlap between them: loss of substratum (meaning that the underlying purpose of or reasons for the company no longer exists); the company is insolvent and the circumstances require investigation; there is deadlock between shareholders (typically where there shareholding is equal); and where there has been a justifiable loss of confidence and particularly as regards a director’s probity.
Theme One: Loss of substratum
It has been suggested that there will be fewer cases falling into this theme now that modern drafting of articles of association are less prescriptive. This is particularly so where previous judgments have indicated that an order will only be given where it is impossible for the company to continue.
Theme Two: Insolvent company and there is a need to investigate the affairs of the company
Applications made under this theme typically include circumstances where the company has suddenly become insolvent in unexpected circumstances, such as when payments have been made to parties connected to directors. There can be overlap with the theme four here, where the directors have subsequently disappeared having made suspicious payments. Those considering making an application might consider whether to apply instead for a declaration of en desastre, but a bankruptcy procedure may not be a desirable outcome to those making the application, or the company may not meet the criteria for a desastre application.
In such circumstances it is useful to have the appointment of independent liquidators who are able to investigate matters and, if necessary instigate recovery proceedings. It is however necessary to fund the liquidators, so the applicant will have to be willing to commit to that funding.
Depending on the extent and nature of the insolvency, the company may attract the interest of regulatory bodies and law enforcement agencies. In such circumstances, the appointment of independent liquidators will add credibility to those who have brought the application for a winding up.
Courts have noted that it is unusual to grant an order to wind up a solvent company.
Theme Three: Deadlock between members
Under this theme, applications are usually made when there has been a company formed on the basis of an understanding (either expressly or implied) that there would be a continuing mutual involvement between members as to the administration or conduct of the business, and that agreement has subsequently broken down. Applications might also be made in circumstances where there is a restriction on the ability of members to transfer their interest, and therefore resolve the breakdown in relations. There is sometimes a perception that this theme overlaps with unfair prejudice claims, but whereas unfair prejudice claims are often resolved by way of a valuation and sale of shares and a buy-out, allowing the company to continue, the relief under this jurisdiction is to terminate the company by winding up.
Theme Four: Justifiable loss of confidence in the directors
It is typically the members who make applications under this theme when they have lost confidence in the probity of the management of the company, and it is appropriate in the circumstances for the company to be wound up. By way of example, applications have been made when the controlling director has treated the business as his own. In cases which fall into this theme, judgments have concluded that probity embraces both the honesty and decency of the directors. As a result, the conduct complained of does not have to be unlawful in order for an order to be made to wind up the company.
The jurisdiction under article 155 of the Companies (Jersey) Law is flexible enough to apply to the myriad of circumstances which may befall a company which needs to come to the end of its existence.
As indicated above, times of upheaval always seem to prompt applications to wind up a company as relationships and circumstances change. While applications under this jurisdiction do not have to be long or complicated, the circumstances which require an order for the court to wind up a company are usually somewhat convoluted which means that time must be spent carefully preparing the evidence. Baker and Partners have assisted many clients in preparing or partaking in such applications. Please contact Lynne Gregory or Amy Benest for further information.