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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> An Unregistered Company, Re [2023] EWHC 114 (Ch) (02 February 2023) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2023/114.html Cite as: [2023] EWHC 114 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF AN UNREGISTERED COMPANY
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Rolls Building, London, EC4A 2NL |
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B e f o r e :
____________________
Daniel Lewis (instructed by Spector Constant & Williams) for the Respondent
Hearing date: 28 April 2022
____________________
Crown Copyright ©
Insolvency and Companies Court Judge Burton :
Background
"The Company is one single entity; however, the rights of investors and creditors regarding a Dedicated Fund or raised by the constitution, operation or liquidation of a Dedicated Fund are limited to the assets of this Dedicated Fund, and the assets of a Dedicated Fund will be answerable exclusively for the rights of the Shareholders relating to this Dedicated Fund and for those of the creditors whose claim arose in relation to the constitution, operation or liquidation of this Dedicated Fund. In the relations between the Company's shareholders, each Dedicated Fund is treated as a separate entity…"
i) the Sub Fund is not an unregistered company and consequently the Court does not have jurisdiction to make a winding-up order whether under section 221 of the Insolvency Act 1986 (the "Act") or otherwise;
ii) the Respondent is not a creditor of the Sub Fund and does not have standing to present or prosecute the petition; and
iii) the Sub Fund no longer exists, no longer has any assets and no longer has a connection to England and Wales.
Relevant legal principles
Service out of the jurisdiction
"6.36. In any proceedings to which rule 6.32 or 6.33 does not apply, the claimant may serve a claim form out of the jurisdiction with the permission of the court, if any of the grounds set out in paragraph 3.1 of Practice Direction 6B apply.
6.37
(1) An application for permission under rule 6.36 must set out –
(a) which ground in paragraph 3.1 of Practice Direction 6B is relied on;
(b) that the claimant believes that the claim has a reasonable prospect of success; and
(c) the defendant's address or, if not known, in what place the defendant is, or is likely, to be found.
… (3) The court will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim."
"(2) A claim is made: (a) under an enactment which allows proceedings to be brought and those proceedings are not covered by any of the other grounds referred to in this paragraph".
The duty of disclosure on an ex parte application to serve out of the jurisdiction
"23. The starting point is that an applicant for an order on a without notice application must make full and frank disclosure of all material facts, that is, facts known to the applicant which might reasonably be taken into account by the judge in deciding whether to grant the application: R v Kensington Income Tax Commissioners ex parte Princess Edmund De Polignac [1917] 1 KB 486, 514 (Scrutton LJ); Siporex Trade SA v Comdel Commodities Limited [1986] 2 Lloyd's Rep 428, 437 (Bingham J); Brink's Mat Limited v Elcombe [1988] 1 WLR 1350, 1356 (Ralph Gibson LJ).
24. It is for the court to determine what is material according to its own judgment and not the assessment of the applicant: Brink's Mat Limited v Elcombe. This means that if the court considers there to have been material non-disclosure, it is not an answer that the applicant in good faith took a different view, although that may affect the court's exercise of its discretion in deciding what to do in the light of the non-disclosure. It does not mean that an applicant is under a duty to disclose facts which could not reasonably have a bearing on the decision which the judge has to make.
25. Materiality therefore depends in every case on the nature of the application and the matters relevant to be known by the judge when hearing it. I was referred to a number of statements on the duty of disclosure in the context of applications for freezing injunctions. In such cases the court is being asked to make an order of an exceptional kind, prohibiting or restricting a defendant's use of its own assets before any adjudication has been made against it. Because of its draconian nature, it is a jurisdiction which requires great caution and a wide range of factors may have a bearing on the court's decision.
26. An application for permission to serve out of the jurisdiction is of a very different nature. The general principles about disclosure on without notice applications still apply, but the context is different. The focus of the inquiry is on whether the court should assume jurisdiction over a dispute. The court needs to be satisfied that there is a dispute properly to be heard (i.e. that there is a serious issue to be tried); that there is a good arguable case that the court has jurisdiction to hear it; and that England is clearly the appropriate forum. Beyond that, the court is not concerned with the merits of the case.
27. Authority supports this approach. In BP Exploration Co (Libya) Limited v Hunt [1976] 3 AER 879 (which concerned an application for leave to serve out of the jurisdiction) Kerr J said at 893:
In my view, a failure to refer to arguments on the merits which the defendant may seek to raise in answer to the plaintiff's claim at the trial should not generally be characterised as a failure to make a full and fair disclosure, unless they are of such weight that their omission may mislead the court in exercising its jurisdiction under the rule and its discretion whether or not to grant leave.
28. In The Electric Furnace Co v Selas Corporation of America [1987] RPC 23, 29 Slade LJ said that where there was no deliberate intention to mislead the court he agreed with those observations of Kerr J. Mr Gruder sought to rely on Slade LJ's words as cutting down what Kerr J had said. Slade LJ was recognising that simple non-disclosure is to be differentiated from a deliberate intention to mislead a court by a combination of things said and left unsaid. In the present case there is no reason to doubt the truthfulness of MRG's evidence in support of its application for permission to serve out of the jurisdiction that it believed that it had a reasonable prospect of success in respect of its claims. As I have remarked, it is not in dispute that it has indeed a reasonable prospect of success within the meaning of the rules. The question at issue is whether MRG had a duty to disclose facts tending to show that Engelhard had or might have a reasonable prospect of success in defending the claims.
29. If MRG was aware of matters which might reasonably have caused the judge to have any doubt whether he should grant permission to serve out of the jurisdiction, those would have been relevant matters and therefore ought to have been disclosed. This must be so in principle, and it is implicit in the authorities to which I have referred."
Winding up an unregistered company
"220 Meaning of "unregistered company"
(1) For the purposes of this Part, "unregistered company" includes any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom."
"Subject to the provisions of this Part, any unregistered company may be wound up under this Act; and all the provisions of this Act about winding up apply to an unregistered company with the exceptions and additions mentioned in the following subsections."
"(5) The circumstances in which an unregistered company may be wound up are as follows—
(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
(b) if the company is unable to pay its debts;
(c) if the court is of opinion that it is just and equitable that the company should be wound up."
Permission to serve a winding-up petition out of the jurisdiction
"… it is clear that there are two separate questions on an application such as this, first whether jurisdiction to wind up Primera has been established to the criterion that there is a good arguable case, and secondly whether there is a serious issue to be tried as to whether the jurisdiction to wind up Primera ought, in the court's discretion, to be exercised."
(i) Has jurisdiction to wind up the Sub Fund been established to the criterion that there is a good arguable case?
Expert evidence
"(1) Is the Dedicated Fund a legal entity as a matter of Luxembourg law?
(2) Can the Dedicated Fund be wound up under Luxembourg law other than by the board of directors of the Fund under article 16 of the Fund's articles of incorporation?
(3) Can the Dedicated Fund be wound up under the law of Luxembourg by court order?
(4) If the answer to question (2) is "yes" on what grounds or in what circumstances can the Dedicated Fund be wound up by the court?
(5) By what other means can the Dedicated Fund be wound up (other than by the board of directors of the Fund or court order)?"
i) a dedicated sub-fund does not have its own legal personality and cannot be sued in its own name but is to be sued in the name of the fund of which it forms part (the "Fund");
ii) where a dedicated sub-fund is sued as a defendant (through the Fund), it "benefits from/takes" the legal personality of the Fund. A dedicated sub-fund can be liquidated, voluntarily or judicially in its own name, independently from the liquidation of the Fund;
iii) an investor in a dedicated sub-fund is primarily a shareholder in the Fund, but, during the life of the Fund/dedicated sub-fund (including the time when it is in liquidation) may, at certain times, also acquire the status of creditor of the Fund, such as when dividends have been approved and declared payable or when, upon redeeming their shares and having received a confirmation of such redemption, they are entitled to receive payment of the redemption proceeds;
iv) shareholders that have invested in a dedicated sub-fund can be distributed the net assets of the dedicated sub-fund pro-rata their shareholding in the assets of the dedicated sub-fund only once all creditors' claims linked to the dedicated sub-fund have been settled. If there are no assets in the dedicated sub-fund to distribute to shareholders, the shareholders remain shareholders but, lacking any assets, the right to claim any proceeds cannot be exercised in respect of the dedicated sub-fund.
" … a compartment has no legal personality, and, as such, no agreement may be signed by, nor can any action be brought against a compartment in isolation. A compartment consists only of a pool of assets part of an umbrella structure. An umbrella fund is a collective investment vehicle that exists as a single legal entity but has several distinct compartments or sub-funds.
…Under Luxembourg law, three procedures can be used to wind up and realise the assets of a Luxembourg company - bankruptcy governed by art. 437 ff of the Luxembourg Commercial Code (the "Commercial Code"), voluntary liquidation governed by title XI of The Law of 1915 or judicial (or involuntary) liquidation governed by title XII of the Law of 1915.
Bankruptcy is the only procedure used exclusively to wind up insolvent companies under Luxembourg law.
… The insolvent compartment of an umbrella structure, which has no legal personality (see 5.1 above) cannot be subject to bankruptcy. As such, the only procedures available for an orderly liquidation of the compartment would be a voluntary liquidation (as described below) or a judicial liquidation (as described below).
Voluntary liquidation
Voluntary liquidation is, in principle, used to wind up solvent companies for various reasons (e.g. to distribute assets to shareholders, upon expiry of the company's term of existence).
Voluntary liquidation of a compartment is permitted under Article 71(6) of the 2007 Law which provides: "Each compartment of a specialised investment fund may be liquidated separately without that separate liquidation resulting in the liquidation of another compartment [. .. ].
Voluntary liquidation is decided by the board of directors of the specialised investment fund in accordance with its articles and the investment fund documentation (prospectus, subscription documents, etc)."
"Luxembourg tax authorities formally expressed the view that compartments constitute separate economic units gathered into a single legal entity and only this single entity may be registered as a taxpayer."
Winding up the Sub Fund as an unregistered company
"(1) Investors were offered shares and treated as shareholders of [the Sub Fund]:
a) Various classes of shares were offered in the [Sub Fund] (Offering Document).
b) At various times notices were given by Board of Directors to 'Shareholders of [the Sub Fund]';
c) 'In the relations between the Fund's Shareholders, each Dedicated Fund is treated as a separate entity' (Offering Document);
d) The assets of the [Sub Fund] were ring-fenced and 'the assets of a Dedicated Fund will be answerable exclusively for the rights of the Shareholders relating to this Dedicated Fund and for those of the creditors whose claim arose in relation to the constitution, operation or liquidation of this Dedicated Fund' (Offering Document);
(2) Although the [Sub Fund] did not have its own legal personality, this is of little practical difference where, (experts' joint statement):
a) it could be sued as a defendant (through the Fund) for which purpose it 'benefits from/takes the legal personality of the Fund'; and
b) it 'can be liquidated, voluntarily or judicially in its own name, independently from the liquidation of the Fund'.
(3) The [Sub Fund] produced annual reports and audited financial statement in the same way as a company with its assets and liabilities separately accounted for.
(4) The [Sub Fund] owned 100% of the shares of its subsidiaries and had 'intercompany loans' to those same subsidiaries.
(5) The [Sub Fund] could be liquidated voluntarily:
a) Under Article 76(1) of the 2007 Law.
b) It could be placed into liquidation by the general meeting of shareholders (Offering Document).
c) The liquidation of the [Sub Fund] would be carried out by one or several liquidators appointed by the shareholders in general meeting (Offering Document).
(6) The [Sub Fund] could be liquidated judicially under article 47(1) of the Law of 2007.
(7) On the conclusion of a director-led liquidation the sub-fund is considered as no longer existing, i.e. dissolved.
"However, "separate entity" does not mean a separate "legal entity". Indeed the fact that each compartment will be treated as a separate entity does not mean that a compartment is a "legal entity by itself." A "legal entity" is commonly defined as an individual, company, or organisation that has legal rights and obligations. A legal entity has legal existence and the capacity to act independently through its own statutory bodies. A legal person holds rights which allow it to carry out its activities.
On the contrary, a compartment has no legal personality, and, as such, no agreement may be signed by, nor can any action be brought against a compartment in isolation. A compartment consists only of a pool of assets part of an umbrella structure…"
"Accordingly, these financial statements are, in all material respects, an extract of those sections of the audited annual report of [the Applicant] that relate to [the Sub Fund]."
Is there a serious issue to be tried as to whether the jurisdiction to wind up the Sub Fund ought, in the court's discretion, to be exercised?
a) Sufficient connection with this jurisdiction
i) Whilst the Respondent states that the Sub Fund was marketed to investors in this jurisdiction and that it proposed to invest in assets in England and Wales, it is clear from the Respondent's own expert that it could not enter into contracts in its own right. As such, in my judgment and even applying the very low threshold test, the Respondent does not have a reasonable prospect of persuading the Court that the Sub Fund, which does not exist as an entity separate from the Applicant company, has a sufficient connection with this jurisdiction to merit a winding-up order being made;
b) Reasonable possibility of benefit to the petitioner
i) The Respondent would like an English insolvency practitioner to be appointed who could investigate what happened to the very large amounts of money that it and other investors paid the Applicant for investment in the Sub Fund. No returns have materialised and the reasons do not appear, yet, to have been satisfactorily explained.
ii) The loss of such enormous sums of money certainly appears to merit investigation. However, the Respondent chose to invest in a compartmentalised sub-fund, a protective-cell-type entity beneath an umbrella fund, formed and operated under the laws of Luxembourg and subject to the jurisdiction of the courts of Luxembourg. In doing so, it declared itself to be a sophisticated investor.
iii) Assuming jurisdiction over a foreign entity was once described as "exorbitant". Whilst it is now more common for this Court to wind up overseas companies as unregistered companies and that term appears no longer to be applied, it demonstrates how carefully the Court must consider extending its jurisdiction beyond its own borders. The Applicant's own regulator did not take steps to wind up the Sub Fund in the courts of Luxembourg, and according to the Respondent's expert, it is too late for it now to endeavour to do so.
iv) Whilst the Respondent may wish this Court to appoint a liquidator to investigate what happened to the money they invested in the Applicant in respect of the Sub Fund, and no doubt consider they would benefit from such an investigation, in my judgment that alone cannot justify the Court exercising jurisdiction in respect of just part of an overseas company as if it were a separate legal entity when it is not, or, in other words, exercising jurisdiction which I consider would indeed be exorbitant.
c) Persons subject to the court's jurisdiction The third requirement from Latreefers is that one or more persons interested in the distribution of the company's assets must be persons over whom the court can exercise jurisdiction.
I accept that the Respondent is a party subject to this court's jurisdiction. However (i) it appears to have invested in shares in the Applicant and not be creditors of the entity it is seeking to wind up; (ii) it is now said that there are no remaining assets; and (iii) in any event, and for the same reasons that I consider Latreefers can and should be distinguished, that alone would not, in my judgment, justify the court taking the exceptional step of making an order to wind up the Sub Fund which is just part of an overseas company.
Is the Respondent a creditor of the Sub Fund?
"The grounds relied upon by the petitioning creditor for the purposes of the coronavirus test are as follows: the Company entered liquidation in Luxembourg and declared itself insolvent before the coronavirus." (My emphasis.)
"the Sub-Fund in unable to pay its debts, being the sums due to its investors, the Petitioner included.
… The Petitioner and all of the other supporting creditors are under the jurisdiction of the Court."
"the Sub-Fund no longer exists in any meaningful sense and it no longer has any assets".
Should the Permission order be set aside?
i) The Sub Fund is not a company. It should not have been described on the face of the petition as "the Company". For the purposes of section 220 of the Act, the petition is not in respect of a company, nor any association of the type hitherto considered by the Court. Having chosen so to describe it, the Respondent failed in its duty by omitting to draw to the Court's attention, in both the petition and the Permission application, that, unlike a company, the Sub Fund is not a separate legal entity.
ii) Instead, in my judgment, Mr Spector's witness statement in support of the Permission Application creates the impression that the Sub Fund is a separate legal entity. His witness statement switched, without explanation, from referring to the "Sub-Fund" to the "Fund", the latter not being separately defined. It describes the intention for the Fund "to be structured so that operating subsidiaries would be established to hold the land assets". This appears to be a reference to the Applicant establishing subsidiaries which would hold assets dedicated to the Sub Fund. But that is not clear from the evidence. Two paragraphs later he describes the issue, conversion and redemption of shares in "the Fund" as having been suspended in June 2016 and, in the next paragraph to "the Fund" having been placed into liquidation in February 2019. These two references appear now to be using the term "the Fund" to refer not to the Applicant but to the Sub Fund. They are followed immediately by a statement that: "According to the notice the board of directors of the Sub-Fund resolved 'to conduct a liquidation of all shares of the Sub-Fund". Despite having switched back to using the term "Sub-Fund", and thus apparently intending to refer to the Sub Fund, this last statement erroneously suggests that the Sub Fund has its own directors, once again, creating the impression that it is a an overseas company/separate legal entity.
iii) An order to wind up just part of an overseas company as an unregistered company is at the very least unusual, perhaps even unique.
iv) Whilst for the purposes of section 221(5) of the Act, the Sub Fund has been dissolved, it is not a company nor an entity with separate legal personality.
v) There is no explanation of how, having invested funds in respect of the Sub Fund, the Respondent and all other investors referred to in Mr Spector's witness statement in support of the Permission application, thereby became creditors entitled to petition to wind up the Sub Fund. The witness statement states that for the purposes of section 221(5) of the Act, "the Sub-Fund is unable to pay its debts, being the sums due to its investors, the Petitioner included". This creates the impression that the sums due to the Sub Fund's investors somehow comprise debts capable of founding a petition. However, as Ms Allsop states in her skeleton argument: "A shareholder does not become a creditor of a company by reason of the shareholder's investment. If that were correct, the company would be perpetually insolvent". The Respondent failed to identify the material facts which pointed against it being a creditor entitled to present a petition, namely that it had not made a redemption request.
Summary and conclusion
i) the petition does not have a realistic prospect of success; and
ii) when presenting its ex parte application to Court for Permission, the Respondent failed in its duty to draw to the Court's attention each and every one of the omissions which I have highlighted, key among which is that the Sub Fund is not a company in its own right, does not have its own legal personality and does not, as stated on the face of the petition, have a registered office.