Jersey Unreported Judgments

Désastre - application for a declaration of désastre.

[2011]JRC239

Royal Court

(Samedi)

22 December 2011

IN THE MATTER OF AN APPLICATION BY S O FINANCE AG FOR A DECLARATION OF DESASTRE IN RESPECT OF CDS3 LIMITED

Advocate A. D. Hoy for the Applicant.

judgment

the deputy bailiff:

1.        On 3^rd June, the Applicant applied for a declaration of désastre in respect of the property of CDS3 Limited (the "Company").  The application was supported by the affidavit of Mr Reto Suter, a director of the Applicant, which is incorporated in Switzerland.  The Company is a private limited company incorporated in Jersey with a registered office in St Helier.  The application to declare the Company en désastre was refused, and we indicated that reasons would be given later.  This judgment reflects those reasons. 

2.        The evidence put before the Court was that by a sale and purchase agreement dated June/July 2007, the Applicant sold its shareholding of 3,100,000 registered shares in a company called Capital Dynamics Holding AG ("CDH") to a private limited company called Capital Dynamics Employee Participation Limited ("CDE") for a price of US$25 million.  The purchaser was required to make payment for the shares in two instalments of US$12,500,000 each, the payments falling due on 1^st December 2007 and 30^th June 2010. Payment of the second tranche was ostensibly secured by a pledge of a similar number of shares as those sold by the Applicant, the pledge being given by Mr Thomas Kubr, a majority shareholder of CDH.  The affidavit discloses that the pledged shares were deposited with a pledge holder in accordance with Swiss law.  Subsequently, on 30^th November 2007, the Applicant, Mr Kubr and CDE entered into an amendment agreement whereby it was agreed inter alia that the Company, which was a direct or indirect subsidiary of CDH, would assume the rights and obligations of CDE under the amended agreement.  CDE was accordingly released from its obligations under the first agreement and the shareholders of CDH amended the company shareholder agreement pursuant to the amended agreement. 

3.        The Applicant received payment of the first instalment due in accordance with the amended agreement in the sum of US$12,500,000, but has not received payment of the second instalment, which was due on 30^th June 2010.  The Applicant claims that as a result of the failure of the Company to make payment of that second instalment, the Applicant is entitled to interest at a rate of 8% per annum until complete repayment in accordance with Clause 1.2 of the agreement.  The validity of the pledge is disputed and we are told there is ongoing litigation in Switzerland.  On 23^rd June 2010 the Applicant received written confirmation from the Company that it was unable to make payment of the second instalment and was unable to confirm when it would be in a position to make the payment.  On that basis, the Applicant applies for a declaration of désastre.  Mr Suter's affidavit expresses his belief that the Company is insolvent but has realisable assets.  The realisable assets are said to be the 3,100,000 shares in CDH, the Applicant having no knowledge of any other movable or immovable assets.   

4.        It is believed by the Applicant that it may be the only creditor of the Company.  There is certainly no evidence of other creditors. 

5.        It is clear that if the Court were to make a declaration of désastre, the Viscount would be charged with realising the assets of the Company in order to account to the creditor(s).  As there are no liquid assets, he would need to secure funding from the Applicant for whose benefit his actions would be taken.  That funding, we are told, is available for the time being and up to £25,000 would be provided to fortify the undertaking.  It is, understandably from the perspective of the Applicant, not an indefinite commitment. 

6.        In his presentation of the application, when asked what factors should go to the exercise of the Court's discretion, Advocate Hoy contended that the Applicant, as a creditor of the Company was entitled to the benefits of Jersey bankruptcy law.  He further contended that as the debtor was a Jersey company, the involvement of the Viscount at some point was inevitable.   

7.        The Applicant gave notice to the Viscount of its intention to apply for a declaration of désastre.  The Viscount's position was that the decision as to whether to accede to an application for a declaration was one entirely for the Court, but that if a désastre were to be declared, the Viscount would need to engage his own independent advice and agents and would therefore need the undertaking against expenses and disbursements which might be incurred.  In addition, the Viscount considered that the application should be on notice to the Company.  The Court noted that the Company had received notice of the application, and indeed had written to confirm that it would not oppose the declaration sought and would not be providing a representative to attend the hearing on 3^rd June. 

8.        The application for a declaration is made pursuant to Article 3 of the Bankruptcy (Désastre)(Jersey) Law 1990 (the "Law").  It is supported by affidavit in accordance with the terms of that law.  The application is made in accordance with the rules, and the Applicant has met the procedural requirements which are laid down. 

9.        Article 6 contains the governing provisions insofar as this application is concerned.  By Article 6(1):-

"Subject to paragraph (2), the Court, after considering an application and the affidavit required by Article 3(3) to accompany it, may make a declaration."

10.      Paragraph (2) of Article 6 concerns an application for a declaration made by the Jersey Financial Services Commission.  The paragraph makes it plain that the Court may make a declaration in relation to an application under this Article if it considers it just and equitable to do so.  At first glance, this is surprising language.  One would have anticipated that the Court would not make a declaration in relation to any application unless it considered it were just and equitable to do so and it might be asserted that on the principle that inclusio unius exclusio alterius, justice and equity played no part in other applications.  We would reject such an assertion.  First of all, such a construction is inimical to the use of the permissive "may" in Article 6(1).  Secondly, it seems to us that the answer to the conundrum lies in the recital to the Law, which describes it as:-

"A law to amend and extend the law relating to the declaring of the property of a person to be en désastre; to make provision for the disqualification and personal liability of persons involved in the management  of companies; to abolish certain customary law concepts; and for connected purposes." 

11.      Article 1(3) provides that the law is in addition to and not in derogation of a number of statutes, and, at sub-paragraph (e) "any other law relating to bankruptcy, except insofar as the provisions contained therein are inconsistent with the provisions of this Law". 

12.      Accordingly, the Law is not a stand-alone codified statement of bankruptcy law in Jersey.  The law amends and extends the existing law, and, subject to anything which is contained in the Law, the existing law continues in force.  At customary law, the Jersey Financial Services Commission, unless a creditor, would not have locus standi to apply for a désastre.  The Law confers that right and therefore has to set out the basis upon which the Court should adjudicate on an application brought pursuant to it. 

13.      As has been said, it is apparent that Article 6(1) provides that the Court has a discretion as to whether it should or should not make a declaration.  When Advocate Hoy contends that the Applicant, as a creditor of the company, was entitled to the benefits of Jersey Bankruptcy Law, one could not disagree with him - but to the extent that he meant that the creditor is entitled as a matter of law to a declaration, if the debtor were insolvent, then we do not accept that to be the position.  When pressed on the matter, although Advocate Hoy did not have the authority immediately in front of him, he indicated that there was a case before the Royal Court where the Court had said that the applicant was entitled to a declaration.  That case was, we think, in Re Rosedale (J. W.) Investments Limited [1995] JLR 123.  The debtor borrowed from the applicant in order to provide funds to buy certain companies from the applicant.  The loan carried a number of terms, including interest, and when the debtor defaulted on the interest payments, notwithstanding the businesses were operating successfully, the applicant made the application for a declaration of désastre.  It submitted that it was entitled to the order sought because although it was the only creditor and was owed only a single debt, the debtor was nevertheless insolvent because it was unable to pay its debts as they fell due.  The debtor submitted in reply that the applicant should instead have sued the debtor for judgment and sought execution of that judgment at a later stage rather than adopt the procedure which would do unnecessary and irreparable harm to the trading ability of the companies.  It was also contended that the purpose of the law was to prioritise the debts of multiple creditors whereas here there was only one.  A number of other arguments were put forward but these are not germane to the issue in the present case. 

14.      At page 131 and following, Hamon, Deputy Bailiff, referred to the historical origins of a désastre only in the context of considering the narrow point as to whether a declaration of désastre could be made if there was only one creditor.  He concluded that it could, and as a matter of jurisdiction, we consider that conclusion to be correct.  The Court then went on to consider the issue as to whether a balance sheet or cash flow test ought to be applied to the issue as to whether the debtor were in fact insolvent, and then at page 134, line 10 goes on to consider the issue of discretion in these terms: 

"The discretion point.

Article 6 of the Law reads: 

(1) The Court, after considering an application and the affidavit required by paragraph 3 of Article 3 to accompany it, may make a declaration. 

(2) The Court may at any time adjourn the hearing for an application for such time as it thinks fit and may require the applicant to furnish such further information as it requires. "

If we are to exercise a discretion we must exercise it judicially.  It seems to us that (a) we could grant an adjournment on the basis that technicalities had not been observed; or (b) we could grant an adjournment if the debtor could show to our satisfaction that the debt could be paid in full; or (c) we could grant an adjournment on a matter of dispute to allow evidence to be called so that the Court has the fullest picture before it.  On that basis ground (a) does not apply, nor does ground (c), which is linked to Art 6(2) which amplifies it." 

15.      The learned Deputy Bailiff then went on to say that in the exercise of the judicial discretion, the opposition to the application fell within the ambit of ground (b) - an adjournment if the debtor could show that the debt could be paid in full - but having considered the facts of the matter, decided that it would not grant the adjournment requested, and the application for a désastre was therefore granted. 

16.      First of all it is to be noted that the decision of the Royal Court in Re Rosedale Investments Limited was a decision on whether or not to grant an adjournment, and was not a decision on whether or not to grant a declaration.  It is not directly in point therefore in relation to the issue which is now before us which relates to the exercise of a discretion as to whether to grant an application at all.  That seems to us to be an important point of distinction.  Secondly, if the creditor is entitled to a declaration if the debtor is insolvent, it is hard to see what the purpose of the adjournment under ground (c) would be.  We think this supports the view that the references to the exercise of discretion in the passage quoted all refer to Article 6(2) (now Article 6(3) of the Law) rather than to the exercise of discretion under Article 6(1).  Thirdly Re Rosedale Investments Limited at its core concerned a claim by a Jersey creditor against a Jersey debtor where what was at stake were loans governed by Jersey law and secured against Jersey collateral.  However, to the extent that the Royal Court in Re Rosedale Investments Limited was deciding that an application, as opposed to an adjournment, could not be refused if the debtor had realisable assets and was insolvent, then we would respectfully not agree with the decision for the reasons which are given below. 

17.      As C S Le Gros indicates in the chapter entitled "Du Désastre" in his Traité du Droit Coutumier de L'lle de Jersey, the désastre procedure was introduced with the aim of establishing equality between creditors of an insolvent debtor in the distribution of his movable assets after payment of preferred debts.  It originated in an Act of the Court of 4^th May 1811.  A number of judgments followed in the course of which the procedure became more fully established.  In an action brought in 1858 to nullify the action begun by Mr Jean Le Couteur against Jean William Godfray, Dénonciateur and Sergent de Justice, the Court noted that the Viscount was charged in a declaration of désastre to proceed with a sale of movables and perishable effects, and as the executive officer of the Court, was required to have charge of the movable assets for the common advantage of all parties interested.  The Court noted also that if a creditor obtained a judgment in the 10 days preceding the declaration of désastre, the désastre would suspend the effect of that judgment and accordingly would suspend the preference which obtaining a judgment would otherwise give to the creditor. 

18.      The discretion of the Court to refuse a declaration of désastre is well established.  Le Gros refers to the case of William Jennings, against whom Messrs Butt, Vosper & Co, creditors based in Plymouth were refused a declaration because they were not legally represented in the Island and had not appointed any attorneys through whom they might act. 

19.      The importance of having more than one creditor in principle was emphasised by the procedure adopted in the 19^th century, and continuing in a modified form in the 20^th century for "la passation des causes".  In effect, the formula which the Court adopted when permitting a creditor to declare a debtor en désastre was to defer the actions which any creditors had instituted until such time as the declaration of désastre had been advertised in order that creditors could submit their claims for adjudication at the future date - la passation des causes. 

20.      Immediately preceding the Law being adopted by the States, the case law which had developed covered a multiplicity of situations, but there were administrative powers which remained unclear, there was no clear provision for dealing with transactions at an undervalue or, arguably, the disclaimer of real estate in the form of contract leases, and indeed the law generally did not extend to real estate.  There was no clearly articulated statement as to the obligations of the debtor or the powers of the Viscount.  The Law tackled all those points, and more, but always against the background that the Law was an amending and extending law, and not introducing a new codified system of bankruptcy. 

21.      In our view there are some principles that can be derived or extrapolated from the practice of the Courts prior to 1990, and which carry forward into the application of the Law.  First of all, the Court has a discretion as to whether or not to grant the declaration.  That was the established practice, and Article 6(1) of the Law confirms the discretion still exists. 

22.      Secondly, where there is only one creditor, the Court still has jurisdiction to grant the declaration, but should recognise that there should be some reason for the grant of the declaration.  There is no obviously convincing reason for a declaration of désastre where other methods of execution of a judgment debt are available to the creditor, perhaps at less administrative expense to the public purse.  Where it is clear that there is no evidence of more than one creditor, in our judgment it is necessary for the creditor to establish good reason for the declaration, and merely establishing the insolvency and the fact that he is a creditor is not good enough.

23.      It may be that there are circumstances where to refuse an application for désastre would cause an injustice to the applicant, perhaps because he did not have open to him the enforcement powers, or the powers to obtain information which the Viscount is conferred by statute.  It is, however, necessary to establish what that injustice might be if it is to go to the exercise of the Court's discretion.

24.      At the end of the day, in this case, on the facts, the evidence before the Court is that if a declaration were ordered, the Viscount would be required to spend a good deal of administrative time and resource, coupled with external expense in the retention of experts, in order to bring proceedings in a foreign country and enforce any judgment obtained against assets situated in that jurisdiction, essentially for the benefit of the one creditor.  In our judgment the presumption ought to be that the creditor should take such proceedings himself, rather than rely upon the Viscount to do it for him.  Once the désastre is declared, assuming it is not recalled, the Viscount has conferred upon him numbers of duties and rights which may extend beyond the position of the creditor who has sought the declaration in the first instance.  The engagement of Jersey's public resources in order to chase up private debt is not the obvious answer to this particular problem.  The Viscount is engaged in the désastre procedure because he is the Executive Officer of the Royal Court concerned with the enforcement of judgments of the Royal Court.  He has a wider statutory power as a result of the Law, but he is not at the beck and call of any creditor wheresoever resident or domiciled who may have claims in another jurisdiction against a debtor who happens to be incorporated in Jersey.  We consider the Court has a discretion in these cases both the Law and public policy requires that consideration be given as to its exercise.  It will not always be exercised to refuse the application for a désastre in these circumstances, but the application must be justified and nothing we have heard on the facts of this case suggests any reason for granting the application - indeed the reverse.  There is certainly no assurance that simply because an undertaking is given to fund the Viscount's expenses in the short-term, that that undertaking will be renewed.  It is almost certainly right that the funding will not extend to the internal resources of the Viscount which will be committed to the bankruptcy if it is declared. 

25.      For completeness, we refer to one other issue which has arisen, which does not turn on argument as to whether the désastre is generally a collective form of procedure for multiple creditors and should only be utilised exceptionally where there is a sole creditor.  This is the question whether, given the exclusive forum provisions in the various agreements, it is open to the applicant to apply for a declaration of désastre in Jersey.  The forum clause is in these terms:-

"Subject to the right of appeal to the Swiss Federal Court exclusive jurisdiction for any disputes arising out of or in connection with this Sale and Purchase Agreement shall be with the ordinary courts of the canton of Zug, Switzerland, venue being the city of Zug."

26.      The Applicant referred us to the judgment of Lord Hoffman in Cambridge Gas Transport Corporation -v- Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508 in support of the proposition that bankruptcy proceedings were not about determining or establishing the existence of rights or obligations as between the parties, and indeed in this case those rights and obligations were established.  Accordingly, the Applicant was not stymied by the exclusive forum clause. 

We accept that proposition but in our view it does not take the Applicant far because, as Lord Hoffman said at paragraph 15 of the Privy Council judgment:-

"... The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them" (emphasis added).

Indeed there are many other parts of the judgment where the underlying assumption is that there is more than one creditor. 

This case was on appeal from the Isle of Man.  We cannot be sure that Manx or even English law is the same as our own law of désastre in this respect; but if anything, this case would seem to support the view that the Court should not lend its assistance to a sole creditor through a bankruptcy proceeding unless there is some compelling reason in justice and equity to do so.   

27.      For these reasons, we exercised our discretion against a grant of the declaration of désastre in this case. 

Authorities

Bankruptcy (Désastre)(Jersey) Law 1990.

Re Rosedale (J. W.) Investments Limited [1995] JLR 123.

Traité du Droit Coutumier de L'lle de Jersey Le Gros.

Cambridge Gas Transport Corporation -v- Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508.