Jersey Unreported Judgments

Companies - further matters relating to the winding up of the defendant under Article 155 of the Companies (Jersey) Law 1991.

[2013]JRC004

Royal Court

(Samedi)

8 January 2013

Before     :

J. A. Clyde-Smith, Commissioner, and Jurats Marett-Crosby and Nicolle.

 

Advocate N. M. Sanders for the Plaintiff.

Advocate M. H. D. Taylor for the Defendant.

Advocate K. M. Purkiss for the Party cited.

judgment

the commissioner:

1.        On 1^st August, 2012, the Court adjourned the application of the plaintiff ("EVIC") to have the defendant ("the Fund") wound up under Article 155 of the Companies (Jersey) Law 1991 as amended ("the Companies Law") or for alternative remedies under Articles 141 and 143 (Unfair Prejudice) of the Companies Law for the reasons set out in the judgment of the Court handed down on that date ([2012] JRC 146).  We adopt the same definitions as in that judgment, which must be read in conjunction with this judgment, save that we will refer to the holders of participating shares as the "participating shareholders". 

2.        The key issue determined by the Court was that the Redemption in Kind proposal put forward by the Fund and approved by the majority of the participating shareholders at an EGM held on 26^th July, 2011, was in breach of the terms of the Articles and the Prospectus. 

3.        The Court went on to find that the substratum of the Fund had been lost as a consequence of the expiration of the Wind-Down Period on 29^th June, 2012, and that the Fund must now be formally wound up.  It was not clear to the Court whether the other shareholders had fully appreciated the possibility of liquidators being appointed by the Court in place of the directors and it ordered that their views should be ascertained. 

4.        That exercise has been undertaken and a further hearing took placed on 29^th and 30^th November, 2012, at the end of which the Court reserved its decision.  On 4^th December, 2012, the Court ordered the winding up of the Fund under Article 155 of the Companies Law and appointed Mr Andrew Isham and Mr Gregory Branch of Deloitte LLP as joint liquidators.  We now set out our reasons. 

5.        We should first summarise the steps taken following the hearing on 1^st August, 2012. 

6.        On 31^st August, 2012, $39M was distributed by the Fund to the participating shareholders, leaving the Fund with approximately $5M in cash and investments with joint venture partners in three real estate development projects in Russia described by the directors as extremely complex assets ("the real estate assets"). 

7.        The July 2012 monthly report of the Investment Advisor WAM, which was circulated on 6^th September, 2012, disclosed to investors that the Fund's net asset value ("NAV") for July 2012 was written down by 15.01% from the NAV for June 2012, explained by Bedell Cristin in its email of 28^th September, 2012, as being attributable in part to a revaluation of the forced sale value of the real estate assets by Knight Frank and in part to the application by the directors of a 60% discount to the real estate assets to reflect the business risk. 

8.        A circular and questionnaire dated 7^th September, 2012, were sent out to the participating shareholders on 12^th September, 2012.  Attached to it was a copy of the full judgment of 1^st August, 2012, a position paper from EVIC, a proposal for the winding up by the directors of the Fund and a PowerPoint presentation from Deloitte containing its proposals for winding up.  The questionnaire asked shareholders to tick a box indicating who they would prefer to conduct the winding up:-the directors, Deloitte or no preference. 

9.        The circular pointed out that the Court had not yet made an order upon the appropriate relief to grant in this case and had indicated (albeit only in broad terms) that a purchase of EVIC's shares may present a solution.  The shareholders were told that they could seek to reach an agreement directly with EVIC but that any such sale should be conducted directly between the parties and would be outside matters set out in the circular. 

10.      The shareholders were informed that they may also be represented at the adjourned hearing fixed for 29^th November, 2012, on condition that they gave written notice to the legal advisers of EVIC and the Fund by 28^th September, 2012. 

11.      In its position paper, EVIC said that an independent liquidator appointed by the Court would be able to approach the liquidation objectively and professionally, free of any preconceptions and free of animosities that taint any litigation.  It did not consider that the liquidation of the Fund could be entrusted to the directors supported by WAM because of, in summary:-

(i)        The flawed nature of the redemption in kind proposal and the directors' and WAM's refusal to reconsider it; and

(ii)       The directors and WAM continuing to promote positions that were not reflective of the reality of what the Court had held. 

12.      Only an independent liquidator, EVIC said, could properly carry out the task of liquidating the Fund which would necessarily need to include a review and assessment of whether action should be taken in respect of advice that the directors had relied upon and their position in so doing.  

13.      In its PowerPoint presentation Deloitte explained how it would achieve control of the Fund and its underlying assets and its approach to the valuation and sale of the real estate assets.  As to valuation, it said its preferred approach would initially be to work consensually with the incumbent advisers supported by WAM, in due course supplementing that with input from other advisers who would add value to the disposal process. It could not at this stage accurately forecast a definitive time scale for the assignment, but indicated that with appropriate co-operation and availability of records it could take one year to eighteen months; that could be delayed particularly if there was litigation.  

14.      Deloitte's fees were based primarily on a time and expenses incurred basis.  They proposed that their fees for services in any one year period would be capped at £500,000.  Those incurred with other professionals in a number of relevant jurisdictions would be agreed separately on a cost effective basis, including appropriate incentives to deliver best value for stakeholders. 

15.      The directors in their paper pointed out the complexity of the real estate assets.  They would work with WAM as well as their property agents with a view to concluding a sale of the real estate assets by way of auction within twelve months, followed by a distribution in specie of those assets that did not realise the minimum/preserved prices or attract any bid at all.  The directors stressed the importance of WAM, which reports to them and is the only party which has worked with the board throughout with the detailed knowledge and relationships required to prepare for the realisation of the real estate assets.  A fee of $750,000 per annum had been negotiated for WAM plus an exit fee of 5% of assets realised, which should be seen as a back-loaded management fee.  

16.      It would be reasonable for the Court to assume that the directors' proposals would have been formulated in conjunction with WAM.  In a conference call made by WAM to the shareholders on 24^th September, 2012, Mr Wermuth actually talked about the competitive advantage of WAM as a liquidator.  In that conference call, Mr Wermuth reiterated the view held by WAM that it would not be possible to sell the real estate assets over the next twelve to eighteen months at anywhere near fair value:-

"Projects still need significant development.  They are not standing assets.  There are still plans to be made, utilities to be put in place, contracts to be built with sales agents' and co-investors' relations to be maintained."

17.      In its July 2012 monthly report (circulated on 6^th September, 2012,) WAM said this:-

"In each case, the most likely buyers of the Fund's stakes would of course be the project partners.  They might hope for "fair value" to be achieved one day.  These partners, however, would have no incentive to present themselves in a favourable light or to support due diligence on the projects, the partnership and themselves.  They would rather have incentives to sabotage any due diligence efforts, hoping to buy the Fund's stakes at a rock bottom price.  The worse they came across, the better for them.  In Russian law and given its enforcement, one has to assume that access to a site could be denied to potential buyers for months.  The actual "realistic liquidation value" could thus be a fraction of the "liquidation value" estimates."

18.      The completed questionnaires returned by the participating shareholders showed that 65.3% preferred the directors to conduct the winding up of the Fund and 32.6% by insolvency practitioners at Deloitte as Court appointed liquidators. 

19.      In his skeleton argument, Mr Sanders pointed out that one of the participating shareholders, referred to as Taler, had initially submitted the questionnaire preferring a Deloitte-led liquidation but changed its mind.  That shareholding, together with another, referred to as Luma, representing together 17.86% of the Fund, was subsequently acquired by Green Shoots Limited ("Green Shoots") a Cypriot company wholly owned by Mr Wermuth, bringing Mr Wermuth's interest in the Fund through Green Shoots up from 11.79% to 29.6%.  According to Mr Sanders, EVIC had been in discussion with Luma and it was its understanding that Luma was seriously considering supporting a Deloitte-led liquidation.  He submitted that if both Taler and Luma had expressed a preference for a Deloitte-led liquidation, then those expressing a preference for a director-led liquidation would have been reduced to 47.4%. 

20.      Sharing WAM's view that the only option for a "successful" exit of the real estate assets is to take a longer term view, where the assets are built out as development projects prior to sale, the directors wrote separately to the participating shareholders on 23^rd September ,2012, to ascertain their views on the following options:-

(i)        As an alternative to a straightforward liquidation of the Fund, the unsold assets of the Fund being distributed pro rata between the shareholders as a redemption in specie.  58.5% of the shareholders expressed a preference for this option, while 33.0% were against.  3.5% abstained or did not submit the questionnaire form. 

(ii)       If EVIC's shares were purchased (whether by shareholders, the company or a third party) the extension of the Fund.  34.7% expressed a preference for an extension and 15.4% were against.  46.5% abstained or did not submit the questionnaire form. 

(iii)      The re-purchase by the Fund of EVIC's shares at a price determined on the basis of an appropriate discount (decided upon by the directors in their absolute discretion after taking advice from Knight Frank and WAM) as to the value of the real estate assets.  31.8% of the shareholders expressed a preference to support a re-purchase of the EVIC shares on this basis, 15.3% were against re-purchase of the EVIC shares on this basis.  30.5% of the shareholders were not ready to support the re-purchase at any price.  19% abstained or did not submit the questionnaire form. 

(iv)      The Fund applying to the Court for an order for the re-purchase of EVIC shares by the Fund at a fair value to be determined by the Court.  35.8% of the shareholders expressed a preference for this option, 47.1% were against such a submission.  27% abstained or did not submit the questionnaire form. 

(v)       The shareholders acquiring or collaborating with other shareholders to acquire either EVIC's shareholding and/or the real estate assets as part of a sales process.  27.2% of shareholders expressed an interest in acquiring or collaborating with other shareholders to acquire EVIC's shares.  24.5% expressed an interest in acquiring or collaborating with other shareholders to acquire the real estate assets as part of the sale process.  46.2% said they would not be interested in acquiring or collaborating with other shareholders to acquire either EVIC's share or the real estate assets.  2.02% abstained or did not submit the questionnaire form. 

21.      On 23^rd November, 2012, Collas Crill wrote to Ogier giving notice that it intended to appear on behalf of Green Shoots at the adjourned hearing fixed for 29^th November, 2012, notwithstanding that no notice had been given prior to 28^th September, 2012, as required by the circular to the participating shareholders.  In that letter Green Shoots made an open offer to acquire EVIC's remaining shareholding of 12,629.89 participating shares at a fixed price of US$ 3.68M.  That offer, it said, represented an uplift of 52% on NAV and did not preclude EVIC from seeking to recover its costs from the Fund.  That offer was not accepted. 

22.      Miss Purkis filed a skeleton argument on behalf of Green Shoots on 28^th November, 2012, together with affidavits from Mr Wermuth, Nikita Yarushnikov, head of real estate development in the Moscow real estate team of WAM, and Marina Shestakova, a partner in WAM based in Moscow, all dated 28^th November, 2012.  Mr Wermuth is one of the owners and founding partners of WAM and holds the role of Chief Investment Officer.  He said in his affidavit that he was making statements both on behalf of Green Shoots and on behalf of WAM. 

23.      Mr Sanders opposed the application of Green Shoots to be heard.  He submitted that Mr Wermuth had been intimately involved in the process through his position in WAM and there was no excuse for the failure of Green Shoots to give appropriate notice, as required by the circular (for which Miss Purkis apologised on behalf of Green Shoots) and to make what he described as an attempt to hijack the proceedings.  The Court took the view that notwithstanding these objections, justice was best served by allowing Green Shoots to be heard as a party on such terms as to costs as the Court might in due course consider appropriate. 

Submissions in summary

EVIC

24.      The Court having found that the Fund was now to be formally wound up, the issue before the Court, submitted Mr Sanders, was whether the winding up should be conducted by Court appointed liquidators or by the directors, what orders should be made to ensure that it is conducted in an orderly manner and whether any further relief should be granted to EVIC in respect of the unfairly prejudicial conduct of the Fund as held by the Court.  There was insufficient support for the special resolution that would be required for a summary winding up led by the directors and EVIC's case therefore was that an independent liquidator should be appointed by the Court and that the Fund should be wound up on a just and equitable basis. 

25.      What was not before the Court, Mr Sanders submitted, was an application for a share purchase order.  This had not been advanced by the Fund as a possible form of relief.  Only 31.8% of shareholders were supportive of a repurchase of EVIC's shares at a price to be determined by the directors and only 25.8% at a price determined by the Court. 

26.      EVIC summarised its position as follows:-

(i)        A winding up by an independent liquidator is provided for by the Companies Law, and is the ordinary way of proceeding.  The Court retains control and can protect the interests of shareholders. 

(ii)       By contrast, to exercise the jurisdiction of the Court to wind up the Fund on the just and equitable basis, but to have that process undertaken by the directors would represent a departure from the clear words of the statute.  This, EVIC submitted, would be inappropriate. 

(iii)      A winding up at the direction of the Court but without a liquidator is uncharted territory.  Procedures would need to be devised to ensure that investors did not lose the protection which a Court appointed liquidation would give them.  The fact that procedures would need to be devised indicates that a winding up by the directors is undesirable. 

(iv)      The Court has held (paragraph 85 of the judgment) that the Prospectus envisaged that the Fund would be would up by the directors; however, they refused to do so and the time when they should have done so has passed; accordingly, even if a timely (i.e. within the Wind-Down Period) winding up by the directors would have been part of the Fund's business, the substratum of the Fund is lost, such that a winding up order should be made. 

(v)       Further or alternatively a winding up order should be made on the basis of unfair prejudice as found by the Court in the judgment. 

(vi)      In any event, and without prejudice to the submission at (iv) above, if the Court determined that the liquidation is not to be conducted on the just and equitable basis, because the Court determines that under the terms of the Prospectus the liquidation forms the last part of the Fund's business (such that substratum is not completely lost), then that liquidation must take place in a manner which is consistent with the Prospectus.  The Prospectus makes clear that the Fund may be wound up "at any time" by "Special Resolution of the Shareholders passed at a general meeting".  The Fund does not have that support, meaning that there is deadlock. 

(vii)     There have been further unfairly prejudicial acts by the directors since the trial in June 2012. 

(viii)    While the majority of the investors in the Fund apparently voted in favour of the winding up being carried out by the directors, this should carry little weight in view of:-

(a)       the loss of substratum;

(b)       the fact that EVIC is much the largest shareholder in the Fund (other than Green Shoots following its recent acquisitions) and has most to lose if the winding up is carried out unfairly or incompetently - for many investors the decision is of little moment;

(c)       the fact that EVIC has been unfairly treated by the directors; and

(d)       the fact that WAM has been buying out other shareholders and probably influenced the voting. 

(ix)      The directors propose to engage WAM and indeed WAM have provided a presentation to investors which refers to the liquidation being conducted by WAM.  For a variety of reasons WAM ought not to be involved in the winding up (save to the extent that its role in relation to a liquidation to be carried out by the proposed independent liquidators (for example in relation to the provision of information) would be a matter for those liquidators to determine);

(x)       If the directors were independent liquidators their appointment would be undesirable by reason of conflict of interest.  A fortiori where they are not professional liquidators they ought not to continue to act. 

The Fund

27.      Mr Taylor submitted that the Court ought to make an order providing for the directors to have conduct of the winding up of the Fund for the following reasons:-

(i)        As found by the Court at trial, the Prospectus provides for the directors to conduct the winding up.  The Fund was set up as a closed end fund for a limited duration and set out by whom it should be liquidated at the end of its pre-determined life;

(ii)       The liquidation of the Fund is part of its business, and in that respect its substratum has not been lost;

(iii)      There has been no loss of confidence in the directors and certainly none such as would justify their removal from the task which they were expected to perform and the draconian remedy of a compulsory winding up order at the hands of a court - appointed professional liquidator;

(iv)      On the contrary, an overwhelming majority of the shareholders other than EVIC (some 88%) wish the directors to conduct the winding up and oppose a compulsory winding up by Deloitte.  This amounts to votes in excess of 65% in opposition to the relief sought by EVIC and only 32.6% in support thereof (of which EVIC is 26.2%).  The views of this majority should carry very considerable weight;

(v)       The directors, with the assistance of WAM, are able to realise the real estate assets in a more cost effective manner than Court appointed liquidators;

(vi)      The directors are familiar with the projects and the personnel (in particular those at the real estate team of WAM) and are best placed and best qualified to achieve maximum return from their realisation;

(vii)     The appropriate relief for EVIC is simply an order preventing the Fund from implementing the Redemption in Kind proposal.  That was the only unfairness to EVIC which it established and such unfairness is eradicated by such an order;

(viii)    Although EVIC may have been entitled to vote its own way to oppose the extension of the Fund (and the Redemption in Kind proposal), looking only to its own interests, it is not entitled to impose the appointment of Deloitte on the overwhelming majority of the remaining shareholders in the circumstances of the present case and the Court ought not to make such an order; and

(ix)      EVIC's position is particularly unattractive since it has (since trial at least) refused to countenance a financial remedy in the form of the purchase of its shares by the Fund.  In its response to the second questionnaire it did not simply oppose the purchase of its shares by the Fund at a discount, but it opposed such a purchase "at any price" and opposed the Fund making any submissions in support of a purchase by the Fund of its shares at a fair value (all this even though it had sought an order providing terms for the purchase of its shares in its skeleton argument dated 8/6/12 and complained that the Fund had not made any proposal for the purchase of its shares).  

28.      Mr Taylor submitted that giving effect to the wishes of the majority that the directors should conduct the winding up could be achieved either:-

(i)        By the Court ordering the winding up of the Fund under Article 155(1) of the Companies Law but not appointing liquidators under Article 155(4) which is permissive - "If the Court orders a company to be wound up under this Article it may ..... appoint a liquidator" (our emphasis).  By not appointing liquidators the directors would be left in control but their conduct could be regulated by appropriate orders made under Article 155(4)(b) which enables the Court to direct the manner in which the winding up is to be conducted; or

(ii)       By the Court not ordering the winding up of the Fund under Article 155(1) but making orders under Article 143(2)(a) regulating the conduct of the Fund's affairs in the future; in essence giving the directors time in which to effect the realisation of the real estate assets before proceeding with a formal winding up. 

Green Shoots

29.      Whilst accepting that the Fund was a closed end fund and that an extension to the Wind-Down Period had not been approved by the requisite majority of 75%, Miss Purkis submitted that the constitutional documents (the Articles and the Prospectus) did not provide for automatic liquidation as there could have been under Articles 3H, 144 and 144A of the Companies Law (a so called "drop dead" provision).  There were no grounds for implying any term that the formal liquidation of the Fund should immediately follow the expiry of the Wind-Down Period with no "scintilla temporis" between: such would be impracticable.  Furthermore there is no positive provision in the Prospectus that time for Investment or Wind Down is of the essence or otherwise time critical.  By contrast, under part 3 of the Prospectus under the provision "Subscription, redemption and performance fee rules" it is provided that the manager shall "over the Wind-Down Period look to realise the underlying investments of the Fund on the most favourable terms and effect distributions to shareholders prior to formally winding up the Fund".  On this basis Miss Purkis submitted that it could be fairly concluded that the constitutional documents envisage a twilight zone between the automatic expiry of the Wind-Down Period, if not extended, and the commencement of a formal winding up.  In this case, we were still technically in the twilight period.  The Fund has continued, for example, to make cash distributions (as requested by EVIC).  Until winding up, the directors may make distributions in cash at their discretion and distributions in specie on an ordinary resolution, whereas on a winding up a special resolution was required for distributions in specie.  

30.      In a case where the Fund is not insolvent and there has been no special resolution for a members' winding up, Miss Purkis submitted that the only live jurisdiction to wind up the Fund is that of the Court in Article 155(1)(a) of the Companies Law (the just and equitable basis) as invoked by EVIC.  Green Shoots' primary submission was that whilst the just and equitable ground may be invoked on the widest factual grounds, they must be serious.  It is a serious business to order the winding up of a solvent company.  It is principally appropriate in circumstances where the company is seeking to undertake a course of action contrary to its constitution and no other remedy is possible (e.g. an injunction).  However, in this case, the "mischief" that the Fund wished to embark upon, namely the payment out of the shares in a new company that holds substantial invested assets (the $10M) has been dealt with by the grant of injunctive relief under Article 143(2)(b) and the Fund has not continued with this proposal. 

31.      The Court should be very slow, she said, to make an order for a just and equitable winding up on the basis that there was once a mischief and likewise slow to order that there continues to be unfair prejudice on the basis that there was once a mischief for which relief has been given. 

32.      The principal ground advanced by EVIC for winding up under Article 155 was that there had been a loss of substratum.  Loss of substratum, she said, would only arise from the up-ending effect on the Fund of a defeated vote for extension of the Wind-Down Period and a concomitant refusal to progress to a formal winding up; a sort of deadlock.  The express effect of paragraph 114 of the judgment was to render the finding of loss of substratum contingent on there being no shareholder offering to buy out EVIC's shares, in recognition of the possible impact that this would have on a vote for an extension. 

33.      Green Shoots therefore sought an adjournment so that an order could be made under Article 143(2)(d) of the Companies Law that Green Shoots purchases EVIC's shares on the basis of the recent open offer (or that EVIC purchases Green Shoots' shares on the same basis).  In the alternative the Court could adjourn the proceedings to enable the valuation of EVIC's shares to be determined on a fair basis. 

34.      Miss Purkis further submitted that a redemption in specie allowed for the quickest method of realising assets of the Fund, which avoided both the delay and cost arising from a liquidation.  The evidence of Mr Yarushnikov showed that the projects had reached different stages and each had particular issues so that a "one fits all" solution was unlikely to be appropriate.  An EGM could be ordered in which project business plan information could be presented by the directors on a case by case basis, allowing the participating shareholders to vote on whether having regard to what they heard about each project they do or do not want a redemption in specie of the shares in the assets which hold the real estate.  There were two possible methods.  For each redemption in specie it would be possible to have available a new Jersey holdco into which those shares could be bundled.  It would be good corporate governance and retain the Jersey Court's jurisdiction if this holdco could be included within the redemption in specie so that the holdco shares are the asset that is distributed in specie.  Alternatively, each holdco could be established outside the Fund structure.  In the case of a structure established outside the Fund, it is anticipated that redeemed shareholders would collaborate voluntarily and this would be part of the resolution put to them.  Even for those who elected not to participate, a sale of their shareholding to those who wanted to remain in or enter the venture would be possible and as good or a better monetary prospect than an uncertain liquidation. 

35.      Leaving aside the buy-out option, she said the Fund is in the twilight period of its life and if there are no grounds for a court-ordered liquidation, this would merely put an additional onus on the directors to rush the process of redemption of participating shares and follow it with a members' voluntary liquidation initiated by the ordinary shareholders after the rights of the holders of participating shares had been fully satisfied.  It would be unfair to the body of participating shareholders who have expressed their preference to be paid in specie to order a winding up in these circumstances.  The Fund is entitled to redeem the participating shares of its members and is proposing to do this in accordance with the constitution.  There has been some delay given the proceedings and the directors' determination to await the outcome of the litigation, but the Fund now wishes to rush this to completion and Green Shoots supported that process.  It is prejudicial to participating shareholders to interfere with this process by ordering a liquidation and potentially appointing a liquidator which will have the effect of delaying rather than accelerating the realisation of assets.  

36.      It is of note that these applications were not supported by the directors who felt bound to stand behind the proposals they had put to the participating shareholders with the circular.  

Decision

37.      The Court was very cognisant of the fact that 65.3% of the shareholders had expressed a preference for the directors to conduct the winding up of the Fund.  As Bannister J said in Citco Global Custody NV-v-Y2K Finance Inc BVI HCV [2009/002 A]:-

"[30]   Nevertheless, it seems clear from the old 'substratum' cases which were cited to me that, regardless whether a winding up is already in progress, the views of the majority as to whether or not the company should remain alive carry very considerable weight: see In re City and County Bank [(1874-75) LR 10 Ch App 470] and In re Middlesborough Assembly Rooms Company [(1880) LR 14 ChD 104]." 

That case concerned an open-ended fund named Y2K which was fully encashed with no creditors.  Its NAV having been suspended it was accepted that it could not resume the business of an active fund and should therefore go into liquidation.  Y2K proposed that before the winding up be put in train, the suspension of the NAV should end and the shares of all requesting investors redeemed.  That would leave the Fund with insufficient cash to pursue claims against the directors arising out of earlier redemptions which investors who had not requested redemptions wanted pursued.  Bannister J held that this was not a distribution by way of an ad hoc liquidation of the sort which Scott J so deplored in Perfectair Holdings Limited [1990] BCLC 423, saying at paragraph 24:-

"It is a carrying on, albeit for the last time, of the business of Y2K in accordance with the contractual rights of members under Y2K's Articles of Association.  If, after that has been done, there remain investors who do not wish to be redeemed, then liquidation must follow, since the surplus cannot lawfully be distributed in those circumstances except in accordance with the statutory scheme.  But while Y2K is solvent (that fact is not challenged), it seems to me that there is nothing in the authorities which suggests that it would be a proper exercise of discretion for the Court to step in and shut the company down while it remains in a position to carry out the last of its commercial functions for the benefit of those of its investors who have requested that it should do exactly that."

38.      In the case before us, Miss Purkis argued that the substratum of the Fund included what she described as the Wind-Down process which was still very much in train.  The significance of the ending of the Wind-Down Period was simply to put the onus on the directors to rush the process of redemption and it would only be after that had been concluded when there would be no participating shares in existence that a members' voluntary liquidation would proceed by the holders of the ordinary shares.  The Fund was therefore in a twilight period of its life where the directors were carrying on with the Wind-Down process in accordance with the contractual rights of the participating shareholders under the Articles and Prospectus.  Furthermore, it was the wish of a majority of the participating shareholders that they should continue to do so. 

39.      We do not accept this analysis.  In contrast to an open-ended fund, such as Y2K, we are concerned here with a closed end fund, in which the participating shareholders have no right to redeem their shares.  They are therefore locked in for the life of the fund and it seems to us that the provisions in the Prospectus dealing with the duration of the Fund and its possible extension are of fundamental importance.  In this case, the Prospectus provides for a life of the Fund of five years, comprising an initial Investment Period of three years to be "immediately" followed by a two year Wind-Down Period "during which investments will be realised and distributions made to the holders of Participating Shares (see definition of "Wind-Down Period" in Part II of the Prospectus). 

40.      That Wind-Down Period can only be extended with the approval of 75% of the participating shareholders.  That approval has not been forthcoming. The Fund has therefore come to the end of its life and must now, as the Prospectus makes clear, be wound up. 

41.      There is no place, in our view, for a twilight zone during which the directors can, notwithstanding the fact that the life of the Fund has not been extended, continue a Wind-Down process until all the participating shares have been redeemed.  To permit that is to extend the Wind-Down Period against the express provisions of the Prospectus, making a nonsense of the requirement that it can only be extended with the approval of 75% of the participating shareholders.  To allow the directors to continue in this way is, in our view, to permit an ad hoc liquidation by the directors so deplored by Scott J in Perfectair, where at page 437 he said this:-

"The Companies Acts provide two alternative means for the liquidation and winding up of companies.  One is by way of voluntary liquidation following the passage of a special resolution, which requires the 75% majority.  The other is by liquidation imposed by the court by compulsory winding-up order.  If either of those two means is invoked, a structure regulating the conduct of the liquidation is provided.  Prima facie, in my judgment, a member of a company which has decided to liquidate and has decided not to carry on any of the principal objects for which it was incorporated and for the pursuit of which the incorporator entrusted his money to the company, is entitled to have the liquidation of the company carried out in accordance with one or other of the legislative frameworks that have been provided by statute.

I tend to think, but I suppose I need not go so far for the purposes of the present case, that if ever a case comes before the court on a winding-up petition in which it is shown that the members have all manifested an intention that the company should cease to carry on any of its principal objects and should liquidate but where the liquidation is being conducted not by means of voluntary liquidation or compulsory liquidation but simply by management from the board of directors, that it would be just and equitable for the  purposes of s 122(1)(g) of the Insolvency Act 1986 for the company to be wound up.

I do not need in the present case to go that far, because there are, as it seems to me, additional features.  I ask myself what answer there can be to the justifiable requirement of a shareholder that a company being liquidated should be liquidated in accordance with the statutory framework ....."

42.      Perfectair manufactured air-conditioning equipment (through a subsidiary) and was a quasi-partnership joint venture between three families who were in dispute and which dispute was resolved by an agreement that inter alia Perfectair would be put into liquidation.  At the time of the hearing the assets of Perfectair consisted of cash but Perfectair argued that a cause of action against what was now a former subsidiary justified its continued existence. 

43.      By way of contrast, ours is not a case where the participating shareholders have manifested an intention that the Fund cease to carry on its principal objects but where the constitutional documents themselves provide that it has come to the end of its life.  It must therefore be wound up and EVIC is entitled to have that winding up carried out in accordance with the legislative framework provided by the Companies Law, namely either by way of a summary winding up under Chapter 2 of the Companies Law or a winding up on just and equitable grounds under Chapter 3 of the Companies Law. 

44.      The procedure for a summary winding up requires firstly that the directors make a statement of solvency and secondly that the company passes within 28 days after the statement of solvency has been signed by the directors a special resolution that the company be wound up summarily.  The requirement for a special resolution is reflected in Part XIII, point 3 of the Prospectus which states that the Fund "may be wound up by Special Resolution of the Shareholders passed at a general meeting at any time in accordance with the provisions of the Companies Law". 

45.      The number of participating shareholders expressing a preference for a director-led summary winding up is insufficient to meet this hurdle and none of the parties suggested that this was now a viable option. 

46.      That being the case, and the Court maintaining its finding, having taken into account the submissions of Green Shoots, that the Fund must now be wound up, determined that it should order the winding up of the Fund under Article 155(1) on just and equitable grounds.  

47.      Re Wyser-Pratte Eurovalue Fund Ltd (FSD 167/2010, unreported, 26 October 2010) concerned another open-ended fund in which redemptions had been suspended and the directors, without consulting the shareholders, had put in place a "Wind Down Plan".  It was agreed by all concerned that the fund must be liquidated and ultimately dissolved; the issue was how, when and under whose supervision that was to be done. Jones J said at page 17:-

"If the Company is going to be liquidated, I see no basis for denying the shareholders' the right to have it done in accordance with the provisions of the Companies Law".

48.      A voluntary liquidation was not a practical alternative to a winding up by the Court but no immediate winding up was ordered because in that case the petition had been overtaken by events, in that the projected end date of the fund has been accelerated to within two months or so of the hearing; so close that the appointment of official liquidators would have served little purpose. 

49.      We are not concerned in this case with an end date for the Wind-Down process, which is so close that the appointment of liquidators would serve no useful purpose.  The Fund finds itself, having gone beyond the duration of its life, left with complex assets which may take a year to eighteen months to realise.  There is every purpose, in our view, for the appointment of liquidators. 

50.      Having made the determination to wind up the Fund under Article 155(1), the Court was not prepared, notwithstanding the views of the majority of participating shareholders, to leave the directors in place to conduct that winding up for the following reasons:-

(i)        Where the Court exercises its own power to order the winding up of a company it invariably appoints a liquidator to conduct that winding up who is independent and who as an officer of the Court is under its control.  This is expressed in the statutory provisions, which refer to the appointment of a liquidator as opposed to anyone else.  Mr Taylor was unable to cite any example of any court in this or any analogous jurisdiction proceeding otherwise. 

(ii)       As Scott J observed in Perfectair at page 437, liquidation is ordinarily the function of a liquidator not that of the directors.  It is of course open to the requisite majority of the shareholders in a company to proceed by way of a summary winding up led by the directors, but if the Court exercises its power to order the winding up of a company on just and equitable grounds then it seemed desirable to us (certainly in the case of an investment fund) that the winding up should be conducted by a liquidator qualified and trained for that task in the manner set out in Article 7 of the Companies (General Provisions)(Jersey) Order 2002, albeit that this Article only requires the appointment of a qualified liquidator for the winding up of a public company or in a creditors' winding up.  The liquidators we have appointed are so qualified.  We took note of the fact that under English law all liquidators have to be licensed insolvency practitioners (see Loose on Liquidators, 7^th Edition at paragraph 1.15).  

(iii)      Whilst we do not wish to imply any wrongdoing on the part of the directors, it is the case that very substantial losses (some $200 million) have been incurred in the Fund.  Of its investment of $66 million EVIC has realised losses to date of $43 million.  One of the benefits of the appointment of liquidators is that they would be in a position to independently and impartially investigate the affairs of the Fund.  At one point in discussion, Mr Taylor seemed to imply that the liquidators put forward by EVIC would in some way be beholden to it.  That is not the case.  They have been appointed by the Court, not by EVIC, and they are independent of all parties interested in the Fund.  We have no doubt that the liquidators we have appointed are well aware of their position in this respect.  

(iv)      The directors were committed to working with WAM which for perfectly understandable commercial reasons was highly resistant to the loss of the potential value it saw in the real estate assets if they were not given time to be developed through.  The manner of Mr Wermuth's last minute intervention through his investment vehicle Green Shoots putting forward proposals which did not have the support of the directors and the way WAM saw itself as carrying out the liquidation did not in our view assist the case put forward by the directors.  

51.      We considered Green Shoots' application for an adjournment so that an order might be made under Article 143(2)(d) for the purchase of EVIC's shares and an EGM ordered to consider proposals for a redemption in specie of the real estate assets. 

52.      When making the comment in paragraph 114 of the judgment of 1^st August, 2012, that a solution might still be for EVIC's blocking shareholding to be purchased so that the wind down period could be extended assuming that was still possible and bearing in mind that it has now expired, the Court had in mind a voluntary transaction for the acquisition of EVIC's shares and that has not taken place.  We concluded that it would not be appropriate for the Court to exercise its powers under Article 143(2)(d) for the following reasons:-

(i)        As made clear in the House of Lords decision in the case of Re a Company (No 00709 of 1992) O'Neill and another v Phillips and others [1999] 2 All ER 961, ordinarily the Court is concerned with ordering a majority shareholder in a company with an on-going business to purchase the shares of a minority shareholder, where that minority shareholder has been excluded from the business without an offer to buy his or her shares or some other fair arrangement.  This is reflected in the language of the statute which refers to "the purchase of the rights of any members of the company by other members" which assumes a willing seller.  It does not refer to ordering a member to sell the member's rights against that member's will, although we accept such an order might come within the very broad terms of Article 143(1). 

(ii)       EVIC is not locked into a company with an ongoing business from which it has been excluded.  It is an investor in a fund which has come to the end of its life and which now stands to be wound up, with all of the participating shareholders receiving whatever can be realised from the real estate assets pro rata.  It seemed inappropriate to us for the Court to be ordering the sale of members' rights in that context. 

(iii)      Even if it was appropriate to consider ordering such a sale, we felt there would be very difficult issues over valuing EVIC's shares when the proposed purchaser is the investment vehicle of a principal behind the investment adviser WAM on whose advice the NAV is set, and which has a much more detailed knowledge of these complex assets.  Attempting to resolve those issues, if that could be done fairly, would involve yet further and in our view substantial delay.  

53.      As for the redemption in specie proposal, it seemed to the Court that to adjourn the application to enable necessarily complex proposals to be put to the shareholders presumably by the Fund at an EGM would be to extend the Wind-Down Period against the provisions of the Prospectus.  Such proposals can be considered by the joint liquidators appointed by the Court. 

54.      For all these reasons, we ordered the winding up of the Fund under Article 155 of the Companies Law and appointed joint liquidators to conduct that winding up. 

Authorities

Companies (Jersey) Law 1991.

EVIC-v-Greater Europe [2012] JRC 146.

Citco Global Custody NV-v-Y2K Finance Inc BVI HCV [2009/002 A].

Perfectair Holdings Limited [1990] BCLC 423.

Re Wyser-Pratte Eurovalue Fund Ltd (FSD 167/2010, unreported, 26 October 2010).

Companies (General Provisions)(Jersey) Order 2002.

Loose on Liquidators, 7th Edition at paragraph 1.15.

Re a Company (No 00709 of 1992) O'Neill and another v Phillips and others [1999] 2 All ER 961.