Jersey Unreported Judgments

[2007]JRC015

royal court

(Samedi Division)

23^rd January 2007

In the matter of the Representation of Henderson Far East Income Limited.

And in the matter of an application pursuant to Article 62 and 63 of the Companies (Jersey) Law 1991.

Advocate J.D. Kelleher for the Representor.

judgment

the deputy bailiff:

1.        This is an application by Henderson Far East Income Limited ("the Company") to reduce its share capital pursuant to Articles 62 and 63 of the Companies (Jersey) Law 1991.  The background is that the Company was incorporated on 6^th November 2006.  It is a closed ended collective investment fund and holds a permit under the Collective Investment Funds (Jersey) Law 1988.

2.        The Company was formed to take over the activities of a company incorporated in England called Henderson Far East Income Trust Plc (the 'English Company').  The English Company was a quoted investment trust investing in the Far East.  Under a scheme of arrangement under section 110 of the Insolvency Act 1986 the English Company is being wound up and its net assets have been transferred to the Company in specie.  Shareholders in the English Company have received one share in the Company for every share which they held in the English Company.  The shares in the Company were listed on the London Stock Exchange on 18^th December 2006. 

3.        The Company is entitled to issue an unlimited number of no par value shares.  On incorporation it issued 2 no par value ordinary shares to the subscribers which were then transferred to the English Company.  As a result of the scheme just referred to, a further 77,622,619 no par value ordinary shares were issued to those who were previously shareholders in the English Company.  Given the value of the assets transferred to the Company from the English Company in exchange for the issue of shares, the share capital in respect of the 77,622,619 shares amounts to £180,482,933. 

4.        On 13^th November 2006, in anticipation of the issue of the shares following the transfer of the English Company's assets to the Company, the English Company, as the holder of all the issued share capital in the Company at that time, passed a special resolution reducing the Company's capital account by an amount equivalent to the net proceeds of the issue of the 77,622,619 shares by transferring that amount to the credit of the distributable reserves of the Company so as to be available for distribution to members as distributable profits of the Company.

5.        The reduction was conditional upon the 77,622,619 shares being listed on the London Stock Exchange but that condition has been met.  The fact that the resolution had been passed and would take effect following submission of the shares to the Stock Exchange was disclosed in the prospectus issued by the Company and sent to the shareholders of the English Company. 

6.        The purpose of the reduction is two fold.  In the first place the prospectus states that the Company will pay a quarterly dividend.  It wishes to ensure that such dividend can be paid even if capital or other losses are accrued in the future which would otherwise prevent payment of a dividend for any given quarter.  We have to say we found the explanation of this aspect in the prospectus less than wholly satisfactory.  We adjourned the original hearing for further clarification on that matter but are now satisfied.

7.        Secondly, it is well known that shares in a closed ended investment company can sometimes trade at quite a discount to their net asset value.  The Company wishes to ensure, should that occur in the future, that it could effect a buy-back of its shares from time to time in order to ameliorate the discount position.  Such buy-backs would have to be funded out of distributable profits.

8.        This is the third case in recent months in which the Court has been asked to make an order for reduction of capital in broadly similar circumstances.  In other words the issue of no par value shares followed by an immediate reduction of capital to enable distributions to be made followed by an issue of shares to the public.  In each case the reduction has been of virtually all the share capital.

9.        On the first occasion when such an application came before the Court, the Court refused to make the order initially and adjourned the application for the provision of a proper amount of information.  In the present case too we adjourned it because we felt that the information provided to us was insufficient and not entirely consistent. 

10.      We will not hesitate to adjourn again in the future if the underlying purpose of the reduction is not properly explained in the papers before us.  A reduction of capital is not to be taken as a formality.  However, in this case, the matter having been adjourned, we are now satisfied that the matter is set out fully and counsel has submitted a helpful skeleton argument referring to certain English authorities.  From these we draw the following conclusions.

11.      The Court has a discretion as to whether to approve a reduction of capital approved by the shareholders by special resolution.  In considering its decision the Court must consider the interests of both the shareholders and the creditors of the company.  In relation to the former the Court will need to satisfy itself that (a) the shareholders, particularly if there are different classes, have been treated equitably, (b) that the proposals for reduction have been properly explained to the shareholders and (c) that the reduction has a discernable purpose, see Re Thorn EMI [1989] BCLC612.  In this case there is only one class of shareholders who were all treated in the same matter.  There is a discernable purpose as described above and we are satisfied that the prospectus explained the matter adequately, although, as we shall mention in a moment, we are only just satisfied on this last point.

12.      The references in the prospectus to the issue are fairly dry and technical, are not very prominent and in addition have certain internal inconsistencies.  In particular there is no statement of what the capital of the company will be following the reduction. 

13.      We think that on future occasions, any applicant company would be well advised to explain the arrangement more prominently and in more detail in any prospectus, and in particular should explain in simple lay terms why the reduction is thought to be a good idea for shareholders.  The unusual feature of cases such as this is that the resolution is passed by the founder shareholders but will only take effect once the investors have become shareholders.  We accept that the resolution in most cases is likely to be for the benefit of the investors but nevertheless they need to be fully informed in the prospectus, as this is the only document which explains matters to them.  They rely on the prospectus when deciding to invest.

14.      As to creditors, Article 62 (3) provides that where the reduction involves a diminution of liability in respect of amounts unpaid on shares or the payment to a shareholder of any paid up capital and, in any other case, if the court so directs, creditors are to be circulated with the proposal and asked to say whether they consent to the reduction.  However Article 62 (6) provides that the Court may dispense with this requirement if, having regard to any special circumstances, it thinks it proper to do so.  This reflects the importance the Court attaches to the position of creditors where there is a reduction of capital.  The position is conveniently summarised by Buckley J in Re Luciana Temperance Billiard Halls Ltd [1966] Ch 98 where he said:

"The court will not in the absence of special provisions give any direction under section 67 (3) [of the Companies Act 1948] but it will do so if it is satisfied that having regard to the value of the company's liquid assets, or for any other reason, no creditor who might otherwise be entitled to object to the reduction will be prejudiced by it.  Thus, if it is established that the company has cash and trustee securities of a sufficient value to cover all the provable liabilities as well as any amount proposed to be returned to the shareholders with a reasonable margin of safety to cover oversights or contingencies, this will usually be regarded by the court as a special circumstance justifying exemption under section 67 (3).  Or if the discharge of all of the company's provable debts is guaranteed to the court's satisfaction, this may be regarded as a sufficient special circumstance," .

15.      According to Tolley's Company Law at s.1020, it is unusual for the equivalent provisions under the English statute to be applied and for creditors to be convened because the proposed reduction is usually structured in such a way as not to be adverse to creditors.  Examples of the methods used to protect creditors are given in Tolley.

16.      In this case the creditors at the material time totalled just under £500,000 and all arose in connection with the incorporation of the Company and the initial offering of shares.  The Company has undertaken to retain the sum of £550,000 and not to distribute that sum until the creditors are paid in full.  In view of the current assets of the company (over £180 million) we are satisfied that this gives adequate protection for the creditors and accordingly we direct that sub-paragraphs (3) to (5) of Article 62 do not apply.

17.      As the English authorities make clear the Court is slow to interfere with the internal management of a company and is slow to decide it knows better than the shareholders what is best for the company.  However, the Court must satisfy itself of the matters we have referred to above.  In this case, having considered the submissions of counsel, we are satisfied that we should approve the reduction.

Authorities

Companies (Jersey) Law 1991. 

Collective Investment Funds (Jersey) Law 1988.

Re Thorn EMI [1989] BCLC612.

Re Luciana Temperance Billiard Halls Ltd [1966] Ch 98.

Tolley's Company Law s.1020.