Jersey Unreported Judgments

[2009]JRC042

royal court

(Samedi Division)

6^th March 2009

IN THE MATTER OF REPRESENTATION OF THE DIRECTORS SEEKING A JUST AND EQUITABLE WINDING UP

Advocate M. L. A. Pallot for the Representors

judgment

the deputy bailiff:

1.        On 5^th February, the Court ordered that Poundworld (Jersey) Limited ("Poundworld" or "the Company") be wound up pursuant to Article 155 of the Companies (Jersey) Law 1991 ("the Law") on the ground that it was just and equitable to do so.  The Court now gives its reasons for that decision.

Background

2.        Poundworld is a Jersey company which was incorporated in 1982.  It is in the retail business and trades from four outlets in Jersey where it sells all items for one pound.  Unfortunately, it has run into financial difficulties.  The Court has received affidavits from Mr Martin Cottier, a director and shareholder of the Company, and from Mr Adrian Rabet of Begbies Traynor, who is a chartered accountant specialising in insolvency matters.  They also both gave oral evidence as the Court wished to explore in more detail certain matters referred to in the affidavits.  The Court is satisfied from their evidence that Poundworld is insolvent in that it cannot pay its debts as they fall due.  The Court is also satisfied that there is no prospect of the Company trading its way out of its difficulties. 

3.        In view of the insolvency of the Company, the directors sought advice from Begbies Traynor.  It was concluded that, in view of the Company's insolvency, a winding up was inevitable and that the appropriate course would be a creditors' winding up under Chapter 4 of the Law.  To this end, in accordance with the requirements of Article 160 of the Law, notice was given of the necessary meetings of shareholders and creditors, which were to be held on 16^th February.  However, in the light of further developments, the directors changed their mind and decided that it would be more beneficial for the Company's creditors if a just and equitable winding up were ordered rather than a creditors' winding up.  Accordingly, it was that application which came before us on 5^th February. 

The Law

4.        Article 155(1) of the Law is in the following terms:-

"(1)    A company, not being a company in respect of which a declaration has been made (and not recalled) under the Désastre Law, may be wound up by the court if the court is of the opinion that - (a) it is just and equitable to do so; or (b) ......" 

5.        The Court has had to consider the provisions of Article 155 on a number of occasions.  In Re Leveraged Income Fund Limited 2002/209 31^st October, 2002, the Court said this at paragraph 10 of its judgment:-

"Article 155 is based upon a similar provision of the Companies Act of the United Kingdom.  English authorities are therefore of assistance.  Although the English courts have developed certain categories of cases where the court will exercise its power under the just and equitable jurisdiction the court is not confined to such categories.  The words 'just and equitable' are general words.  As Palmer Company Law Vol 3 para 15.219 puts it:-

"It has sometimes been suggested that there is an exhaustive list of situations that may fall within the scope of the 'just and equitable' clause, but it now seems that although such classification may be convenient for purposes of presentation, the words 'just and equitable' require a more flexible interpretation.  In the words of Lord Wilberforce: 'Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances'"."

6.        The width of the jurisdiction was emphasised by Bailhache, Bailiff in the case of Jean v Murfitt (Jersey Unreported 11^th December 1996) at page 8 of the judgment where he said this:-

"We conclude by observing that the words 'just and equitable' in Article 155 of the 1991 Law should be given a flexible interpretation.  Justice and equity cannot be confined within the four corners of specific instances."

The application

7.        Mr Pallot argued that there were special circumstances in this case which made it appropriate for the Court to order a winding up under Article 155 rather than leave it to the shareholders and creditors to proceed by way of a creditors' winding up.  This was because time was critical and any delay in the liquidators being able to act until after the meetings on 16^th February, would be very damaging to the interests of the creditors.   He referred to the existence of two particular matters. 

8.        The first related to stock held by the shipper.  Under the arrangements which Poundworld has with its shipper, much of its stock is stored free of charge in the shipper's warehouse.   At present there is approximately £100,000 worth of stock (at cost price) in the warehouse.  Poundworld owes the shipper £28,000 in respect of shipping charges and the shipper is threatening to exercise a lien over the stock and sell it in order to recover the outstanding shipping charges.  Poundworld does not accept that the shipper has a valid lien but, short of legal action, it has no way of gaining access to the stock without paying the outstanding shipping costs, which it is unable to do. 

9.        The evidence from both Mr Rabet and Mr Cottier is that, if the stock were to be sold by the shipper on the wholesale market, it would probably not even realise enough to clear the shipping charges and would be highly unlikely to provide any surplus for other creditors.  Conversely, if the stock could be released and sold at retail value from Poundworld's shops, the proceeds could amount at best to £200,000 and on a conservative estimate to £150,000. 

10.      Given the Company's track record, it is thought unlikely that the shipper would be willing to come to any arrangement for the release of the stock with the directors, whereas it probably would be willing to come to an appropriate agreement with the liquidators who would be seen as independent and subject to the control of the Court. 

11.      The second aspect relates to the Company's remaining stock which is situated in its four retail outlets.  These are all rented properties and the rental in respect of three of them is overdue.  One landlord is threatening to exercise his 'droit de gage' over the stock and the others are likely to do the same.  Again, if a landlord were to exercise such a right, the stock would probably be sold on the wholesale market and it would probably only realise something in the region of 10% of the cost price.   Conversely, if it could be sold at the retail price from the outlets over a reasonable period, the uplift would probably be between 50% and 100% of the cost price.  The total value of stock held in the four locations is in the region of £80,000 (at cost price).  Again, it is believed that the landlords would not be willing to come to any arrangement with the directors but that they would probably be willing to do so with the liquidators. 

12.      The firm view of Mr Rabet (shared by Mr Cottier) was that the best interests of the creditors would be served by the current stock held in the shipper's warehouse and on the four retail premises to be sold at retail prices from the Company's outlets over a six-week period.  The stock is the Company's only material asset.  If sold at retail value, there is a reasonable prospect of the preferred creditors being paid in full and the ordinary creditors receiving a modest dividend.  If the stock were sold in bulk at wholesale prices, there would be minimal recovery by anyone other than the landlords and, perhaps, the shipper. 

13.      The evidence of Mr Rabet and Mr Cottier satisfies us that, if matters are delayed until the creditors' meeting, there is a substantial risk that the interests of the creditors will be seriously adversely affected.  The directors would not feel able to continue to trade because of the insolvency of the Company and there is high probability of the shipper and/or the landlords exercising their respective rights to the prejudice of the remaining creditors.  Even if the shipper's lien could be challenged, delay and costs would be incurred in doing so and the opportunity to sell the stock at retail value would be lost.  What is required, said Mr Rabet, was for the liquidators to be able to enter immediate negotiations with the shipper and the landlords with a view to securing the release of the remaining stock for sale at retail values over the next four to six weeks.  This would ensure the maximum return for creditors, although there was no possibility of a full return because the debts owed by the Company greatly exceeded any possible recovery from the stock even on the most optimistic basis. 

Decision

14.      The Court put it to Mr Pallot during the hearing that he was asking for an unusual order.  The Law provides a specific procedure for the winding up of an insolvent company and this is by way of a creditors' winding up.  This gives the creditors a voice in choosing the liquidator and in supervising the conduct of the liquidation through a liquidation committee appointed under Article 162.  This is clearly appropriate because, in the case of an insolvent company, the creditors are the persons with the financial interest in the liquidation; in most cases the shareholders will not recover anything in such a case.  Is it right therefore for the Court to order a winding up on just and equitable grounds when the Law provides a procedure for insolvent companies?

15.      We are of the view that the Court should be cautious before ordering a winding up under Article 155 in the ordinary case of an insolvent company.  The Law provides for the appropriate procedure and this is the one which should normally be followed.  However, as referred to earlier, the Court's jurisdiction to order a winding up under Article 155 is a wide one and we are persuaded that, in the particular circumstances of this case, it would be right to exercise that jurisdiction. 

16.      We are satisfied that the best interests of the creditors would undoubtedly be served by Poundworld being able to sell its remaining stock at retail value from its outlets by means of the Company continuing to trade for the limited period necessary to achieve this.  Conversely, if the stock were to be sold at wholesale values, the recovery for creditors, other than the landlords and the shipper, would be minimal.  We are also satisfied that if the Court does not order an immediate winding up, there is a substantial risk that the shipper and/or the landlords will exercise their rights prior to the shareholders' and creditors' meetings required for a creditors' winding up and this would be to the prejudice of the creditors as a body.   Delay in the commencement of a liquidation until 16^th February, would therefore be damaging to the creditors. 

17.      It was for these reasons that the Court concluded that it was clearly in the best interests of the creditors as a whole for a just and equitable winding up to be ordered and for the liquidators to be authorised to seek to secure the stock and to continue to trade as necessary to dispose of the stock on a retail basis.  We were conscious however that we were making this order in the absence of any of the creditors.  Accordingly we directed that notice of the order be given forthwith to all the creditors and that any creditor should have liberty to apply to the Court with a view to seeking to set aside the Court's order, so that the process would revert to that necessary for a creditors' winding up. 

18.      As a final point we should record that the Viscount was given notice of the application and the Principal Administrator of the Désastre Section was present at the hearing.  The Viscount was concerned to ensure that the arguments concerning whether it was appropriate to order a just and equitable winding up rather than allowing a creditors' winding up to proceed were put fully before the Court; and that has occurred.  The Viscount did not seek to argue that a désastre was the appropriate route to follow. 

Authorities

Companies (Jersey) Law 1991.

Re Leveraged Income Fund Limited 2002/209.

Jean v Murfitt (Jersey Unreported 11th December 1996).