Jersey Unreported Judgments

Companies - application in relation to a summary winding-up.

[2013]JRC178

Royal Court

(Samedi)

10 September 2013

IN THE MATTER OF THE REPRESENTATION OF ASPIS JERSEY LIMITED (IN LIQUIDATION)

Advocate N. M. Sanders for the Representors.

Advocate B. R. Lincoln for T Bank SA.

judgment

the bailiff:

1.        This is an application by Andrew Dann, Samantha Keen and Patrick Brazzill, all of Ernst & Young LLP as joint liquidators ("the Liquidators") of Aspis Jersey Limited ("the Company") for determination of a question in the summary winding up of the company pursuant to Article 186A of the Companies (Jersey) Law 1991 ("the Law").  The point at issue is how the surplus assets of the company, after payment of all its creditors, should be distributed as between the different classes of its shareholders. 

2.        The Court announced its decision at the conclusion of the hearing and now gives its reasons. 

Factual background

3.        The company was incorporated in Jersey on 23rd March 2007.  It was formed to act as a special purpose vehicle to raise capital for the holder of its ordinary shares, T Bank SA (then called Aspis Bank SA) ("T Bank"), which was at all times a bank registered and carrying on business in Greece.  The ordinary shares of the company were owned by T Bank and the finance was to be raised by the issue of preferred shares (although both they and the ordinary shares are referred to in the Articles of Association of the company as "securities").  Thus Article 2 of the Articles of Association provided as follows:-

"At the date of adoption of these Articles the authorised share capital of the Company is €10,800 divided into 500 Floating Rate Non-cumulative Guaranteed Non-voting Non Step-up Preferred Securities with a par value of €1.00 each and to be issued at a premium of €49, 999 (the "Series A Preferred Securities") and 300 Floating Rate Non-cumulative Guaranteed Non-voting Step-up Preferred Securities with a par value of €1.00 each and to be issued at premium of €49,999 (the "Series B Preferred Securities") and 10,000 Ordinary Securities of €1.00 each."

4.        The Series A and Series B Preferred Securities ("the Preferred Securities") were all subscribed (through a private placement) by Merrill Lynch International (now Bank of America Merrill Lynch) ("BAML").  At the same time, the company issued €50,250,000 Subordinated Floating Rate Guaranteed Callable Step-up Notes due 2017 ("the Subordinated Notes").  These were also subscribed by BAML. 

5.        The company used the proceeds of the issue of the Preferred Securities to subscribe for Series A and Series B Subordinated Floating Rate Guaranteed Callable Step-up Bond Notes ("the A and B Bond Notes") issued by T Bank.  It used the proceeds of the Subordinated Notes to subscribe for C Bond Notes also issued by T Bank. 

6.        In August 2009 the C Bond Notes were redeemed by T Bank and the company then redeemed the Subordinated Notes with the proceeds of the C Bond Notes.  The redemption of the Subordinated Notes cost less than the company had received for the C Bond Notes and, in the events which have happened, there is now a surplus in the company (after payment of all its liabilities) of some €7.8 million. 

7.        The rights of the company pursuant to the A and B Bond Notes are subordinated in the event of the dissolution or liquidation of T Bank, so that amounts due and payable in respect of the A and B Bond Notes are payable by T Bank only after the prior ranking creditors of T Bank would have been reimbursed or paid in full. 

8.        On 17th December, 2011, T Bank was placed in insolvent liquidation and Mr Ioannis Galanopoulos was appointed as special liquidator of T Bank.  The A and B Bond Notes are worthless.  As a consequence of the liquidation of T Bank, the company no longer served a purpose, nor was it able to meet any on-going financial obligations since it was significantly reliant on the cash flow from T Bank to do so.  Accordingly, on 15th August, 2012, the ordinary shareholders of the company passed the requisite special resolution to wind up the company summarily.  The representors (being a partner of Ernst & Young in Jersey and two partners of Ernst & Young London) were appointed as joint liquidators. 

The issue for determination

9.        Given that BAML has invested some €40 million in acquiring the Preferred Securities, none of which has been recovered, one might have expected that the surplus assets of the company would be applied first in partial repayment of BAML as holder of the Preferred Securities.  However, the Articles of Association contain some unusual provisions concerning the rights of the Preferred Securities on a winding up.  Article 16(A) provides as follows:-

"Liquidation Distributions - Preferred Securities

16. (A) Series A Preferred Securities

(a) In the event of any winding up, liquidation or dissolution of the Company, the holders of Series A Preferred Securities at the time outstanding shall, in respect of each Series A Preferred Security held, be entitled to receive the Series A Liquidation Distribution out of the assets of the Company available for distribution to shareholders. 

(b) Such entitlement shall arise before any distribution of assets is made to holders of Ordinary Securities or any other class of shares of the Company ranking junior as regards participation in assets to the Series A Preferred Securities, but such entitlement shall rank equally with the entitlement of the holders of any other preferred securities or preference shares or similar securities, if any, of the Company ranking pari passu with the Series A Preferred Securities as regards participation in the assets of the Company. 

(c) Notwithstanding the availability of sufficient assets of the Company to pay any Series A Liquidation Distribution to the holders of the Series A Preferred Securities, if, at the time such Series A Liquidation Distribution is to be paid, proceedings are pending or have been commenced for the liquidation, dissolution or winding-up of the Bank, the Series A Liquidation Distribution per Series A Preferred Security paid to holders of the Series A Preferred Securities, and the liquidation distribution paid to the holders of the Liquidation Parity Obligations, shall not exceed the amount that would have been paid as the liquidation distribution from the assets of the Bank (after payment in full in accordance with the (sic) Greek law of Senior Creditors) had the Series A Preferred Securities and all such Liquidation Parity Obligations been issued by the Bank and ranked (x) junior to all liabilities of the Bank (other than any liability expressed to rank pari passu with or junior to the Series A Guarantee), (y) pari passu with the Liquidation Parity Obligations and (z) senior to all Junior Obligations. 

(d) If the Series A Liquidation Distribution and any other such liquidation distributions cannot be made in full by reason of the limitation described above, such amounts shall be payable pro rata in the proportion that the amount available for payment bears to the full amount that would have been payable but for such limitation.  After payment of the Series A Liquidation Distribution, as adjusted if applicable, the holders of the Series A Preferred Securities shall have no right or claim to any of the remaining assets of the Company or the Bank. 

(e) In the event of the liquidation, dissolution or winding-up of the Bank, the Directors shall convene an extraordinary general meeting of the Company for the purpose of proposing a Special Resolution to put the Company into winding-up and the amount per share to which the holders of the Series A Preferred Securities shall be entitled as a Series A Liquidation Distribution shall be set out above."

10.      There is an identical provision in relation to the Series B Preferred Securities.  The Bank referred to in the Articles of Association is T Bank. 

11.      As can be seen therefore, in the event of a winding-up, liquidation or dissolution of the company, the holders of the Preferred Securities are entitled to receive a Liquidation Distribution in respect of each Preferred Security.  The Liquidation Distribution for each Preferred Security broadly means the amount invested of €50,000 per share plus other sums such as accrued but unpaid preferred dividends.  An entitlement to a Liquidation Distribution to holders of the Preferred Securities arises before any distribution of assets is made to the ordinary shareholder. 

12.      However, as provided in Article 16(A)(c), notwithstanding the availability of sufficient assets of the company to pay a Liquidation Distribution to the holders of the Preferred Securities, if the Bank is in liquidation at the material time, the Liquidation Distribution shall not exceed the amount that would have been paid as the liquidation distribution from the assets of the Bank (after payment in full in accordance with Greek law of senior creditors (as defined) of the Bank), had the Preferred Securities been issued by the Bank and ranked junior to all liabilities of the Bank(subject to certain prescribed exceptions).  This reflects the fact that the investors who acquired the Preferred Securities were, to their knowledge, providing funds (through the company) for use by T Bank. 

13.      In the light of these provisions, the Liquidators have taken legal advice from Jersey lawyers and Greek lawyers.  The advice from the Jersey lawyers is that, pursuant to Article 16, the amount payable to the holders of the Preferred Securities as a Liquidation Distribution must be considered by reference to what the Preferred Securities holders would have received if they were Preferred Securities holders in the T Bank liquidation proceedings. 

14.      Advice was therefore obtained from Greek lawyers.  The Greek lawyers have advised that, under Greek law, any Preferred Securities holders within the liquidation of T Bank would only be entitled to the distribution of funds to the extent that all T Bank creditors' claims had been fully satisfied.  The evidence is clear that T Bank does not have sufficient funds to discharge its preferential or unsecured creditors and accordingly, the holders of the Preferred Securities would receive nothing on the liquidation of T Bank, had the securities been held in T Bank. 

15.      The Liquidators are therefore of the view that BAML, as holder of the Preferred Securities, is not entitled to any Liquidation Distribution in respect of the Preferred Securities notwithstanding the existence of the surplus funds. 

16.      The Liquidators have notified BAML and the liquidator of T Bank of their view.  The liquidator of T Bank has indicated that he does not wish to accept the distribution of the surplus funds to T Bank as the ordinary shareholder unless it is clear that he is beyond reproach in doing so.  Accordingly he wishes to have the sanction of the Court in relation of the proposed distribution to T Bank. 

17.      BAML has not consented to the proposed distribution of the surplus funds to T Bank and has indicated that it would prefer the Court to rule whether the approach of the Liquidators is correct.  Nevertheless it has indicated that it does not wish to be formally convened as a party, although it has been provided with a copy of the representation and the affidavit in support of Mr Brazzill, one of the liquidators.  In effect it rests on the wisdom of the Court. 

18.      T Bank did in fact appear in the proceedings and was represented by Advocate Lincoln. 

Decision

19.      In our judgment the advice which the Liquidators have received is correct and the surplus funds should be distributed to T Bank in its capacity as ordinary shareholder. 

20.      The clear meaning of Article 16 is that, where T Bank has entered into insolvency proceedings, the Liquidation Distribution to the Preferred Securities holders of the company cannot exceed what they would have received if they were Preferred Securities holders in the T Bank liquidation proceedings.  As already mentioned, this is not surprising as it was understood at all times that all monies subscribed for the Preferred Securities were to be lent on to T Bank by the company in order to provide T Bank with capital. 

21.      It is clear from the evidence that, if the Preferred Securities were held in T Bank, there would be no distribution.  T Bank is hopelessly insolvent and has insufficient assets to discharge its preferential or unsecured creditors. 

22.      Given that that is the situation, Article 16 therefore provides that there is to be no distribution on a winding up of the company to the holders of the Preferred Securities.  It follows that any surplus assets in the company are payable to the holder of the ordinary shares in the company, namely T Bank.  When those monies are received by T Bank, they will be available to the general body of creditors of T Bank. 

23.      It was for these reasons that, at the conclusion of the hearing, the Court ordered that the Liquidators should distribute the remaining assets of the company (after payment of any creditors and the costs of its winding up) to T Bank as the sole ordinary shareholder in the company.  The Court also ordered that the costs of this application (including legal costs and the Liquidators remuneration) should be paid out of the company's assets prior to the distribution to be made to its ordinary shareholder. 

Authorities

Companies (Jersey) Law 1991.