Jersey Unreported Judgments

[2005]JRC073

royal court

(Samedi Division)

2^nd June 2005

 

Advocate P. Sinel for Robert William Bridgen

Advocate M. Preston for Mr Kevin Ronald Leech

judgment

deputy bailiff:

1.        On 6^th May 2005 the Court dismissed the application of Mr Bridgen to declare Ports Trading Limited ("Trading") en désastre.  We now give our reasons.

Events leading up to the first hearing on 28^th January 2004

2.        Poundworld (Jersey) Limited is a company incorporated in Jersey.  It has a number of retail outlets in Jersey and Guernsey which trade as Poundworld.  At the time of the application on 28^th January, Poundworld was owned as to 40% by Trading and the balance was owned equally by Mr Bridgen and a Mr Cottier. 

3.        The issued share capital of Trading is £10,000 of which, until January 2005, 7858 shares were owned by Mr Leech, 1071 by Mr Bridgen and 1071 by Mr Cottier.  Mr Leech was declared en désastre on 9^th October 2002 but the Viscount did not attempt to dispose of Mr Leech's interest in Trading.  Mr Leech was discharged from his désastre on 12^th February 2005.  The directors of Trading at all material times were Mr Bridgen, Mr Cottier and a Mr R J Smith, who is an accountant who acted for Mr Leech.  Trading has carried on no activity other than the holding of its 40% interest in Poundworld.

4.        On 21^st December 2004 the board of directors of Trading decided to convene the necessary shareholders meeting with a view to proposing a creditors winding up.  That meeting and the necessary creditors' meeting were subsequently convened for 15^th January 2005. 

5.        On 29^th December 2004 at a further meeting of the board, it was considered that the issued share capital of Trading had never been paid for.  The board resolved to call for payment of the nominal amount of the shares within 14 days.  Demand was duly made.  Mr Cottier and Mr Bridgen tendered cheques for their shares but neither Mr Leech nor the Viscount offered payment in respect of Mr Leech's shares.  Accordingly on 12^th January 2005, a further meeting of the board was held at which the directors purported to exercise Trading's lien over Mr Leech's 7858 shares, which were sold in equal proportions to Mr Bridgen and Mr Cottier.  It followed that, from that moment, Mr Bridgen and Mr Cottier were equal 50% shareholders in Trading and Mr Leech no longer held any shares.  He would not therefore have been entitled to attend the shareholders meeting fixed for 15^th January.

6.        Mr Leech did not accept the validity of these actions as he considered that his shares were fully paid.  Accordingly on 14^th January 2005 he issued an order of justice ("the shareholder action") seeking a declaration that the exercise of the lien over his shares was of no effect.  The Bailiff granted an interim injunction restraining Trading from holding the necessary shareholders' and creditors' meetings. 

7.        Faced with an inability to proceed by way of a creditors' winding up, Mr Bridgen applied to declare Trading en désastre.  This came before the Court in the ordinary way on the afternoon of Friday 28^th January.  The affidavit in support disclosed that Mr Bridgen and Mr Cottier were each owed £15,000 by Trading, which sum had not been paid upon demand.  These two sums arose out of the fact that Mr Bridgen and Mr Cottier had guaranteed certain borrowings of Trading from the Royal Bank of Scotland International Limited ("RBS").  Those guarantees had been called in, in view of Trading's failure to pay RBS, and had been settled by way of a payment by each of Mr Bridgen and Mr Cottier of £15,000 to RBS.  Their claim against Trading was therefore a claim by way of indemnity for what they had paid as guarantors.  Mr Bridgen's affidavit disclosed one or two other minor creditors but the only other major creditor of Trading disclosed at that time was Mr Leech himself who, it was said, was owed £3,801,355.  The sole asset of Trading was its 40% shareholding in Poundworld.  However this was said not to have a market value. 

8.        At the hearing on 28^th January, Mr Leech appeared through counsel and was given leave to intervene.  Counsel referred to the fact that Mr Leech was shortly to be discharged from his bankruptcy and his application was therefore to defer consideration of Mr Bridgen's application for désastre.  He referred to the fact that Mr Leech considered himself still to be the controlling majority shareholder of Trading and did not accept that Trading's 40% interest in Poundworld was necessarily worthless.  He needed time following his discharge from bankruptcy to assess the position and, in order to do this, he needed access to financial information concerning Poundworld. 

9.        The Court was concerned that there should not be academic litigation about who owned a wholly insolvent company.  As against that, it felt that it would not be right to declare Trading en désastre without giving Mr Leech an opportunity to see if he wished to inject funds or otherwise deal with the insolvency of the company.  The Court therefore adjourned the application and made it clear that, once he had been provided with all the necessary information about Poundworld, Mr Leech would have to decide whether to inject funds into Trading or allow it to be declared en désastre.  In relation to the shareholder action, the Court ordered that this be treated as a cause de brièveté and ordered discovery. 

10.      Various further directions hearings in the shareholder action took place thereafter before Commissioner Le Cras but the application for désastre came back before this Court on 6^th May. 

The factual background as presently before the Court

11.      The Court has now received further information by way of affidavit.  It appears that Mr Bridgen and Mr Cottier originally owned Poundworld in equal shares and managed the business themselves.  In 1990 Mr Leech became involved as an investor.  He acquired shares and also injected considerable sums by way of a loan with a view to expanding Poundworld's business.  It would seem that the expansion was not successful and did not lead to profits.  In about 2001 it was decided to bring in a further investor, a Mr Marsh.  He ran a business in the UK called Bubbles.  He wished to invest in a company without debts and therefore there was a substantial corporate re-organisation at the time of his investment. 

12.      According to the affidavit of Mr Smith, the re-organisation was achieved as follows.  Mr Marsh acquired a 60% shareholding in Poundworld.  Mr Leech, Mr Bridgen and Mr Cottier acquired a dormant company, Trading.  Trading acquired 40% of Poundworld and in turn issued its shares to Mr Leech, Mr Bridgen and Mr Cottier as described above in the proportions 78.58%, 10.71% and 10.71%.  Furthermore, at the time of the transaction, Poundworld was indebted to Mr Leech and/or various of his companies in the total sum of £3,809.212.87.  Because of the requirement that Poundworld should be free of debt, responsibility for these debts was assumed by Trading in place of Poundworld.  Thus, before the transaction, Poundworld was indebted to Mr Leech in this sum whereas after the transaction, Poundworld was free of debt.  Trading had acquired 40% of the shares in Poundworld but had, in effect, paid a price of £3,809.212.87 by taking over responsibility for the loans previously owed by Poundworld to Mr Leech. 

13.      According to Mr Smith, Mr Leech paid for his 7,858 shares in Trading by way of a reduction of his loan account, which had the effect of reducing the sum owed to him by Trading from £3,809,213 to £3,801,355.  Mr Smith relies upon the following in support of this assertion:-

(i)        This was his understanding at the time, as he was responsible for carrying out the re-organisation. 

(ii)       His understanding is supported by the recent discovery in March 2005 of a document which was in the possession of Mr Ogden, the accountant to Mr Bridgen and Mr Cottier.  That document was, says Mr Smith, prepared by him at the time of the re-organisation.  It lists the original loans to Poundworld; it then shows the proposed share structure of Trading and finally includes the opening balance sheet of Trading immediately following the re-organisation.  The figures in the document are consistent with those described above. 

(iii)      Mr Leech, Mr Bridgen and Mr Cottier entered into a shareholder agreement in 2002 in relation to Trading.  The agreement records that the shares in Trading are fully paid (see recital B) and also records that Trading is indebted to Mr Leech in the sum of £3,801.355, which is consistent with Mr Smith's evidence. 

(iv)      The Annual Return of shareholders filed by Mr Cottier on behalf of Trading records the shares as being fully paid. 

14.      The document referred to also states that, immediately prior to the re-organisation, Mr Bridgen was indebted to Poundworld in the sum of £86,086 and Mr Cottier was indebted in the sum of £121,754.  Mr Smith asserts that, as part of the re-organisation, the benefit of those debts was transferred from Poundworld to Trading and the opening balance sheet of Trading shows Mr Bridgen and Mr Cottier as debtors of Trading in these two respective sums.  It follows, says Mr Smith, that these sums have to be offset against the £15,000 which Trading owes to each of Mr Bridgen and Mr Cottier with the result that they are both net debtors rather than creditors of Trading. 

15.      One other significant event has taken place since the hearing before the Court on 28^th January.  Back in September 2004 Mr Bridgen and Mr Cottier purchased Mr Marsh's 60% interest in Poundworld.  They were therefore the majority shareholders in Poundworld at the time of the application for the désastre on 28^th January 2005.  On 31^st January, Mr Bridgen and Mr Cottier, as directors of Poundworld, determined that none of the issued shares (including Trading's 40% shareholding) had been paid for.  They therefore followed the same procedure as they had followed in relation to Trading itself.  The board resolved to call for payment for the shares within 14 days.  At a further board meeting on 17^th February, it was noted that Trading had not paid the call.  The board therefore resolved to exercise the company's lien over Trading's shares and they were sold to Mr Bridgen and Mr Cottier in equal proportions.  The result is that, if these transactions are valid, Trading no longer has any shares in Poundworld which is now owned equally by Mr Bridgen and Mr Cottier.  We should add that no mention of this possible course of action or of Trading's contingent liability to pay for its 40% shareholding in Poundworld was mentioned by Mr Bridgen in his affidavit at the time of the application for the désastre. 

16.      In passing we should also note that, at the board meeting of Poundworld on 31^st January, Mr Bridgen and Mr Cottier resolved to issue the remaining 37,500 un-issued shares in the company.  The shares were issued at their par value of £1 and paid for by reduction of the loan accounts owed by Poundworld to Mr Bridgen and Mr Cottier respectively.  If this was a valid issue of shares, it had the effect of reducing Trading's interest (if it still existed) from 40% to 10%.  Whether that share issue was liable to attack would presumably depend upon whether the issue price was a fair price or whether it improperly diluted Trading's interest in Poundworld. 

Decision

(i)         Can Mr Bridgen apply for a désastre?

17.      The Court was referred to Re Baltic Partners Limited (18^th April 1996) Jersey Unreported [1996/75] where the Court of Appeal reiterated the preconditions for a declaration of désastre.  Southwell J A said at page 10:-

"At common law the preconditions for such déclaration were that (1) the creditor had a valid liquidated claim against the debtor; (2) the debtor to the best of the creditor's knowledge and belief was insolvent, but had realisable assets, and (3) the creditor verified these matters by affidavit (see page 3 of my judgment in the Minories case).  Article 3 of the 1990 Law provides (inter alia) that an application for a déclaration may be made by a creditor of the debtor with a claim against the debtor of not less than such liquidated sum as shall be prescribed.  The creditor's claim will usually have been established by a judgment of a competent court, often a summary judgment.  A judgment is not a precondition.  But if the creditor does not have a judgment in his favour, there must nevertheless be a liquidated sum undoubtedly due and payable by the debtor.  The indebtedness must be certain, and not the subject of genuine dispute and arguable defence, set off or counterclaim.  The indebtedness must be such as could form the basis of an immediate summary judgment."

18.      Mr Preston argued that the Court could not possibly be satisfied that Mr Bridgen was definitely a creditor.  He submitted that, on the contrary, there was strong evidence from the contemporaneous opening balance sheet prepared by Mr Smith that Mr Bridgen was a net debtor of Trading because his undoubted claim of £15,000 was more than offset by his debt of £86,806.

19.      Mr Sinel, on the other hand, argued that the document relied upon by Mr Smith proved nothing.  It was simply something which he had prepared.  There was no evidence that it had been approved by the company or by any of the parties.  It did not prove that the debt, if owed by Mr Bridgen to Poundworld, had been assigned to Trading.  There was no document of assignment or written notice to Mr Bridgen. 

20.      We are quite satisfied that, on the evidence presented to us, it cannot be said that Mr Bridgen's status as a creditor of Trading is certain.  On the contrary, the evidence produced by Mr Smith is sufficient to make the position uncertain.  There is clearly an arguable defence which could only be resolved after a full hearing of an action by Mr Bridgen against Trading.  In the circumstances, Mr Bridgen has failed to show that the suggested set-off is spurious and it would therefore be quite inappropriate for the Court to exercise the draconian power to declare Trading en désastre on the application of Mr Bridgen. 

(ii)        Exercise of discretion

21.      In case it is of assistance, we go on to consider what we would have decided even if we had concluded that Mr Bridgen was undoubtedly a creditor in the sum of £15,000.

22.      Mr Preston submitted that there were strong grounds for suspecting that Mr Bridgen and Mr Cottier had engaged upon a course of conduct designed to deprive Mr Leech of his interest in Poundworld and assume this for themselves.  There was, he said, very compelling evidence that Mr Leech had paid for his shares in Trading at the time of the re-organisation by way of reduction of his loan account.  Indeed, he contended, it would extraordinary if, despite being owed over £3.8 million by Trading, and having transferred his shares in Poundworld to Trading as part of the re-organisation, Mr Leech had agreed to incur a further liability for payment of the shares in Trading whilst leaving his loan account unaffected.  There were therefore, he submitted, very strong grounds for believing that the shareholder action would succeed and that Mr Leech was in truth still a 78.58% shareholder in Trading. 

23.      He further submitted that the actions of Mr Bridgen and Mr Cottier (immediately following the Court's decision on 28^th January) in relation to Trading's 40% shareholding in Poundworld confirmed the suspicion that this was all part of a plan to ease Mr Leech out of the picture.  Trading's 40% shareholding in Poundworld had been issued in exchange for an assumption by Trading of a debt of over £3.8million then owed by Poundworld to Mr Leech.  Poundworld was therefore over £3.8 million better off as a result.  Was it seriously to be argued that Trading had therefore not given value and paid for its shares?  On the contrary, it had paid over £3.8 million for its shares in Poundworld.  They were therefore fully paid.  It followed, he said, that there were strong grounds for believing that the actions of the directors of Poundworld in depriving Trading of its shareholding in Poundworld were equally susceptible to being set aside. 

24.      He also queried whether Poundworld had no value as submitted by Mr Bridgen in his désastre application.  If it had no value, why were Mr Bridgen and Mr Cottier taking such steps to obtain control of it?  Furthermore the information supplied since the hearing on 28^th January showed that, at the lowest, Mr Bridgen and Mr Cottier had each drawn some £60,000 per annum from  Poundworld.  It ran several shops and it was highly unlikely that it had no value. 

25.      Mr Sinel, on the other hand, submitted that there was no evidence that the shares in either Trading or Poundworld had been paid for.  The document prepared by Mr Smith proved nothing.  It was just the jottings of a single person but had never been approved or adopted by the board of either company.  In any event, the question of ownership was irrelevant.  It did not really matter who owned Trading as it was hopelessly insolvent.  Not only did it owe his clients a total of £30,000 but it also owed Mr Leech over £3.8 million and, since the hearing on 28^th January, it had been discovered that it owed RBS some £308,000.  There was therefore no point in keeping Trading alive.  It no longer owned any assets (because its shareholding in Poundworld had been extinguished).  Even if it did still have that shareholding, the asset, on the evidence before the Court, was wholly insufficient to cure the company's insolvency and the best course would therefore be for the Viscount to obtain what he could for such assets as Trading still had.  Furthermore the Court should maintain the approach which it had taken on 28^th January, which was to require Mr Leech to put up sufficient money to cure Trading's insolvency if he wished to avoid a désastre; otherwise the Court would indeed be permitting litigation to take place over the ownership of a worthless asset.

26.      It is clear that, even where the Court is satisfied that the applicant is undoubtedly a creditor and that the debtor is insolvent, there is a discretion in the Court as to whether to grant a declaration of désastre.  Although in the ordinary case the Court is likely to exercise its discretion in favour of granting a declaration where the necessary pre-conditions are met, it retains a discretion not to do so. 

27.      We are satisfied that, even if we had concluded that Mr Bridgen achieved the necessary degree of certainty as a creditor, we would not have granted a declaration of désastre in this case.  Our reasons are as follows:-

(i)        This is not a straightforward situation where a third party creditor seeks to achieve the pro-rata distribution of an insolvent debtor's assets.  Mr Leech contends that the actions of Mr Bridgen and Mr Cottier are part of a plan designed to deprive him of his indirect interest in Poundworld. We of course are not in a position to make any finding upon that allegation but we are satisfied that it would be quite wrong to reject it out of hand.  Mr Leech has an arguable case on this point.

(ii)       To declare a désastre would make it more difficult for Mr Leech to pursue any remedy he may have if this allegation is correct.  The Viscount would have to decide whether to institute an action on behalf of Trading against Poundworld with a view to setting aside the cancellation of Trading's 40% interest in Poundworld.  Trading has no other assets and he would therefore need funding.  It would be difficult for Mr Leech to decide to put up the necessary funds at a time when he did not know whether he continued to own 78.85% of Trading.  That will only become known once the shareholder action has been resolved.  A declaration of désastre would therefore in practice make it much more difficult for Trading to take the necessary action to protect its alleged 40% interest in Poundworld. 

(iii)      Although, on the assumption that Mr Bridgen and Mr Cottier are indeed creditors of Trading, the company is insolvent, it is only those two creditors who are pressing for payment.  On the information currently before the Court, none of the other creditors are.  For the reasons put forward by Mr Preston, it is not impossible that Mr Bridgen and Mr Cottier have motives of their own for seeking to declare a désastre. 

(iv)      We do not agree that ownership of Trading is irrelevant.  If Mr Leech is successful in the shareholder action and is ultimately found to be the controlling shareholder, he can, if so advised, take such steps as are necessary to procure that Trading takes action to protect its alleged 40% interest if Poundworld.  On the information before us, we have considerable doubt as to whether Poundworld is indeed of no value as Mr Bridgen contended in his affidavit. 

(v)       We accept that our decision marks a change of course compared with that which we proposed on 28^th January.  However that was a decision reached after a short hearing at the end of the usual Friday afternoon sitting and events have moved on since then.  Furthermore the Court is in possession of much more information than it had at that time.  Most significantly, the actions of Mr Bridgen and Mr Cottier in seeking to forfeit Trading's interest in Poundworld on the grounds that it had not paid for its shares in Poundworld lend some support to Mr Preston's contention that the application to declare Trading en désastre was all part of a scheme to make it as difficult as possible for Mr Leech to retain and/or assert his indirect interest in Poundworld. 

(vi)      We do not think that any prejudice will be caused to Mr Bridgen and Mr Cottier by refusing the désastre.  Mr Sinel asserted that it would make the management of Poundworld more difficult.  We do not agree.  Trading has held its 40% interest in Poundworld throughout the period of Mr Leech's désastre and Mr Cottier and Mr Bridgen have not been inhibited from managing Poundworld's business during this period.  If indeed, as Mr Sinel contends, Mr Leech no longer has any shares in Trading and if, as he further contends, Trading no longer has any shareholding in Poundworld, we cannot see that the continued existence of Trading can cause any difficulty in relation to carrying on the business of Poundworld.  Furthermore, because Trading has no asset other than its alleged interest in Poundworld, a refusal of a désastre will not in practice cause any prejudice to Mr Bridgen and Mr Cottier in their position as creditors.  They will, on their case, get nothing in a désastre. 

(vii)     Thus, no prejudice is suffered by Mr Bridgen and Mr Cottier if a désastre is declared whereas, if Mr Leech is in truth a majority shareholder in trading and if Trading has been wrongly deprived of its interest in Poundworld, a declaration of désastre may materially prejudice Mr Leech if Poundworld has some value. 

28.      For these reasons we concluded that, in our discretion, we would dismiss the application for a declaration of désastre even if we were satisfied as to Mr Bridgen's status as a creditor. 

Costs

29.      At the conclusion of the hearing Mr Preston asked for an award of costs in favour of Mr Leech.  His client had been successful but I took the view at the time that the overall justice of the case could best be met by making no order as to costs.  I particularly had in mind that the evidence suggested that, at the time of this application, Mr Bridgen had not been aware of the existence of the document prepared by Mr Smith which suggested that Mr Bridgen owed money to Trading and was therefore not a net creditor.  I was also informed that he had not personally been responsible for keeping the accounts of Trading and considered therefore that he might not have been aware of the suggestion that he might owe money to Trading as a result of the corporate re-organisation.  Nevertheless, bearing in mind that an award of costs is final unless leave to appeal is given, I considered that Mr Leech should be given the opportunity of challenging my decision should he think fit and I therefore granted leave to appeal against my costs order. 

Authorities

Re Baltic Partners Limited (18^th April, 1996) Jersey Unreported [1996/75].