Jersey Unreported Judgments

Companies - order sought in terms of para 5a of the prayer of the representation.

[2016]JRC140

Royal Court

(Samedi)

15 August 2016

Before     :		T. J. Le Cocq, Esq., Deputy Bailiff, and Jurats Olsen and Ramsden
Between	Kenneth Frank Gibbons		Representor
And	Monarch Investments Limited		First Respondent
And	Robert Alan Gibbons		Second Respondent

IN THE MATTER OF MONARCH INVESTMENTS LIMITED

AND IN THE MATTER OF THE COMPANIES (JERSEY) LAW 1991

Advocate J. M. G. Renouf for the Representor.

The Second Respondent appeared in person.

judgment

the deputy bailiff:

1.        This matter comes before the Court by way of a representation brought by Kenneth Frank Gibbons ("the Representor" or "Kenneth").  The representation is brought against Monarch Investments Limited ("Monarch") and the Representor's brother, Robert Alan Gibbons ("Robert"). 

2.        Amongst other things, the representation seeks an order for just and equitable winding up of Monarch pursuant to Article 155 of the Companies (Jersey) Law 1991 ("the 1991 Law") but that is not the relief sought in the hearing before us.  Instead, as a preliminary point, Kenneth seeks an order in the terms of paragraph 5a of the prayer of the representation (in effect a declaration from the Court) that the substratum of Monarch has been lost.  Kenneth hopes, if the Court makes the declaration that he seeks, that an agreement can then be reached with Robert which will make a formal just and equitable winding up unnecessary.  In effect therefore, the Representor is seeking a declaration from the Court that one of the bases upon which the Court could order a just and equitable winding up exists but the question of whether or not there should be a just and equitable winding up on that basis is left over for another day. 

Background

3.        Monarch is a Jersey Limited Liability Company incorporated on 5^th April, 1971.  The Memorandum and Articles of Association of Monarch set out the objects of the company, the main ones of which are to carry on the business of an investment trust company and to hold investment in shares etc., and to acquire any estate or interest in any land or buildings. 

4.        There are two shareholders of the company.  Kenneth holds 35.5% of the shares and the remaining 64.5% of the shares is held by Robert.  The reason for this inequality of shareholding is referred to later in this judgment. 

5.        Robert is a director of Monarch.  Kenneth also claims that he is a director but Monarch has purported to remove him as such, although he asserts that this removal was invalid. 

6.        Monarch was incorporated to hold two items of immovable property ("the Properties") namely:-

(i)        24 Halkett Street, St Helier (this is occupied as a shop and generates an annual rental of approximately £30,000); and

(ii)       8 Market Street, St Helier (this is occupied as a café and generates an annual rental of approximately £36,000). 

7.        The Properties, save for some shares in a South African mining company worth a relatively modest sum, comprise the entirety of Monarch's assets. 

8.        It is believed that Monarch was incorporated to hold the Properties by Kenneth's and Robert's parents (who had come to Jersey from the United Kingdom as residents under Regulation 1(1)K of the old housing regulations) in order to conform to the housing requirements at the time. 

9.        It is Kenneth's case that the substratum of Monarch has been lost and accordingly there is a basis on which the Court could order a just and equitable winding up.  The substratum is lost, so he argues, because it is impossible for Kenneth and Robert to remain as co-owners and for the Properties to be managed for their mutual benefit as intended.  This is, so Kenneth alleges, because of the mismanagement by Robert of Monarch. 

10.      There was no live evidence before the Court.  The Court was asked to proceed on the basis of affidavits before it untested by cross-examination. 

11.      Because the evidence was untested, we are unable to make any findings where the evidence in one affidavit is contradicted or qualified by the evidence in another. 

12.      The evidence presented on behalf of Kenneth comprised three affidavits sworn by him, together with exhibits.  We do not need to go into the detail of what these affidavits say but, in summary, the important parts of the evidence in Kenneth's main affidavit appears to us to be as follows:-

(i)        The background is as set out in paragraphs 3 to 7 above;

(ii)       The purpose of Monarch was, in the view of Kenneth, to provide the "most efficient and expeditious vehicle to hold the property for its ultimate beneficial owners". 

(iii)      There was very substantial dysfunction in the operating of Monarch caused by the actions or inactions of Robert.  Those are summarised in a letter from the company's accountants Clive Tomes & Co. of 12^th April, 2012.  The main allegations were as follows:-

(a)       Over a number of years Robert has received rents due to Monarch personally and has not paid them into Monarch's bank accounts;

(b)       The property insurance paid by Monarch was extended to include Robert's private residence which resulted in increased premiums;

(c)       Robert personally employed a secretary but used Monarch's funds to pay the costs without refunding Monarch;

(d)       Robert arranged for Monarch to advance a number of significant loans (stated in the letter to be £78,935 according to Monarch's draft 2007 accounts) to a company called Hong Kong Foods Limited without any supporting loan agreement or documentation or any specified terms or security.  Hong Kong Foods Limited was a company in which Monarch had no interest and, it was understood, was owned by Robert personally.  The company went into liquidation shortly after the loan arrangements had been made and the capital of the loan had to be written off. 

(e)       Many of Robert's personal expenses had been paid using Monarch's funds including personal Barclaycard payments, telephone bills and legal fees;

(f)        Robert had not obtained refunds from the lessees or tenants of the properties for insurance premiums paid;

(g)       As a result of many of the matters set out above Monarch has from time to time been unable to settle its liabilities;

(h)       Robert has failed to submit Monarch's 2010 and 2011 annual returns on time and has therefore incurred late payment penalties;

(i)        Robert has failed to pay Monarch's 2007 and 2009 income tax within the required time limits and as a result a judgment was taken out against Monarch;

(j)        Robert failed to sign and return Monarch's 2010 income tax return, again causing a penalty to be incurred;

(k)       Robert has failed to provide information required to complete the financial statements;

(l)        Robert has failed to provide copies of the rental agreement or leases to enable the completeness and accuracy of Monarch's income to be considered for financial statements. 

(iv)      Further issues with Monarch's bankers, Barclays, ended with the bank refusing to operate Monarch's bank account and closing it and Robert paid some £12,000 of Monarch's money into his own account.  There have been significant difficulties with the opening of a bank account for Monarch since. 

(v)       Robert sought to appoint someone unknown to Kenneth as a director of the company in 2014 and similarly attempted or purported to remove Kenneth as a director. 

(vi)      Numerous cheques have not been signed in accordance with the mandate. 

(vii)     The dysfunctional manner in which the company had been run had caused unnecessary charges to be incurred with Clive Tomes & Co. 

13.      Kenneth's other affidavits insofar as are relevant to the matters before us today elaborate on many of the matters set out in the letter from Clive Tomes & Co. 

14.      Robert filed one affidavit the main features of which were as follows:-

(i)        He describes the background to the unequal shareholding between himself and Kenneth as relating to the ownership of the property 62 Marina Court, which was Kenneth's and Robert's mother's home and formed part of her estate when she died in 2007.  It had been left to them jointly as were a number of shares in Monarch.  As Kenneth had wished to have sole ownership of that property, a valuation of it was conducted and to balance that valuation, Robert received extra shares in Monarch of what was understood to be an equivalent value of the interest that he was surrendering to Kenneth in 62 Marina Court. 

(ii)       In the remainder of the affidavit Robert gave his explanations in connection with the difficulties with Monarch's bank account and matters relating to Clive Tomes & Co.'s fees.  He also explains his reasons for seeking the appointment of a third party as a director of Monarch and to a very considerable extent attributes the dysfunction in the operation of Monarch to Kenneth in seeking to write cheques which Monarch had not authorised.  He also commented and gave explanations for a number of the other matters raised involving Kenneth's affidavits.  He concludes his affidavit by indicating that he does not accept that Monarch is wholly dysfunctional or that its substratum has been lost. 

15.      We do not need to, and indeed could not, make a determination as to these issues or the rights and wrongs of the various concerns raised in the letter from Clive Tomes & Co.  Suffice to say that Robert's affidavit does not suggest that the matters raised by Clive Tomes & Co did not happen but rather that there were good reasons for them happening or alternatively the problems were caused to a great extent by Kenneth himself.  In fact the Court had earlier ordered the establishment of a bank account for Monarch which was now in place. 

16.      It is clear to us that there have been major difficulties which are continuing in connection with the orderly operation and running of Monarch.  No matter who is to blame for these difficulties, it seems clear that the relationship between Kenneth and Robert has effectively broken down and Monarch has not been run in a way which either benefits it or ultimately its shareholders.  In fact the contrary is true. 

17.      One of the items of particular concern, given that one of Monarch's primary functions is to hold the Properties and to turn them to account for the benefit of the company and ultimately its shareholders, is the failure by Robert to ensure that the company had leases with its tenants for the properties.  The explanation given in submissions to us by Robert as to the reasons why he had not ensured that leases were in place were to our mind incomprehensible and incredible. 

18.      We have no hesitation in saying on the evidence we have seen that the company is currently dysfunctional in its operation and has not been administered and run appropriately and in its interests. 

19.      What then is the consequence of our assessment?  We are not asked for an order for a just and equitable winding up but rather to make a declaration that the substratum of Monarch has been lost. 

The Law

Just and Equitable Winding Up

20.      Article 155 of the Companies Law provides as follows:-

"155    Power for court to wind up

(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)       it is expedient in the public interest to do so.

... "

The basis for a just and equitable winding up

21.      There is some case law in Jersey relating to just and equitable winding up although the case law is not extensive.  The provisions in the 1991 Law referred to above are however based upon similar provisions in English legislation and therefore the Court has looked to English case law in this area as being of assistance. 

22.      In the Jersey case of Jean v Murfitt 1996/237 the Court was asked to order a just and equitable winding up and some of the allegations made in the course of that case are not dissimilar to the allegations made by Kenneth against Robert.  At page 8 of the judgment (line 35 et seq) the Court said:-

"In our judgment it is impossible for the Representor to place confidence in Mr Murfitt.  There has been a complete breakdown of the relationship between the parties brought about, on the evidence which we have heard, by the personality and conduct of Mr Murfitt.  It is just and equitable on this ground too that an order be made under Article 155 of the 1991 Law or for the winding up of Merco. 

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.  Having considered all the evidence we have no doubt that it was just and equitable to order the winding up of Merco."

23.      Kenneth relies upon this judgment in pointing to the conclusion that a just and equitable winding up could be ordered by the Court where the relationship between the shareholders had completely broken down.  The difficulty with this submission, so it seems to us, is that Jean v Murfitt was not a case about "substratum" but was rather a case about the total failure of what was, in corporate form, a business partnership.  It may be that Jean v Murfitt points to the consequences that follow from the breaking down in relationships of shareholders in a company which was, in reality, the vehicle through which a partnership was conducted, but it says nothing about the issue that Kenneth asks us to decide, namely the question of whether or not the substratum of Monarch has been lost. 

24.      In In the matter of the Representation of Green Equity Limited [2013] JRC 169A Bailhache, Deputy Bailiff (as he then was) considered an application under Article 155 of the Companies Law for the winding up of a company.  At paragraph 9 et seq of the judgment the Court said:-

"9.      The jurisdiction to make an order under Article 155 of the Law has been considered by this Court on a number of occasions.  In the case of Jean-v-Murfitt [1996] JLR N8b there was a dispute between the beneficial owners of a quasi-partnership company.  The personal relationship had broken down and the situation was such that the company was effectively paralysed.  No accounts could be prepared, debts could not be paid and shares should not be transferred.

10.      The Court held that it was appropriate to exercise its powers under Article 155.  Bailhache, Bailiff, said that the phrase "just and equitable" had to be given a flexible interpretation.  It would be wrong to define fully the circumstances in which it would be just and equitable to wind a company up; it would depend on the circumstances of each individual case.

...

15.      Of course a just and equitable winding-up is carried out in accordance with the provisions of the Law, but it seems to us that while this is a flexible remedy and one where the Court has a wide discretion, there should be, in the case of a company other than a company of limited duration, some valid reason for liquidation to take place other than as a summary winding-up or pursuant to a creditors' winding-up.  It is frequently and rightly said that one of the grounds for an order under Article 155 is that the substratum for the company must have gone and that certainly seems to be the position, on the information we now have, in relation to Myfuel."

25.      In Ebrahimi v Westbourne Galleries Limited and Others [1973] AC 360, a decision of the House of Lords, in considering the jurisdiction of the court to make an order for a "just and equitable" winding up, Lord Wilberforce said, at page 379:-

"My Lords, in my opinion, these authorities represent a sound and rational development of the law which should be endorsed.  The foundation of it all lies in the words "just and equitable" and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force.  The words are a recognition of the fact that a limited company is more than a mere legal entity, with the personality and law of its own; but there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.  That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound.  In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small.  The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it.  It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. 

It would be impossible, and wholly undesirable to define the circumstances in which these considerations may arise.  Certainly the fact that a company is a small one, or a private company, is not enough.  There are very many of these where the association is a purely commercial one, of which it can be safely be said that the basis of association is adequately and exhaustively laid down in the articles.  The superimposition of equitable considerations requires something more, which typically may include one or probably more of the following elements:-

i)              an association formed or continued on the basis of personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;

ii)            an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business;

iii        restriction upon the transfer of the members' interest in the company - so that if confidence was lost, or one member is removed from management, he cannot take out his stake and go elsewhere. 

It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves.  To refer, as so many of the cases do, to "quasi partnerships" or "in substance partnerships" may be convenient but may also be confusing.  It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once the factors as I have mentioned are found to exist:  the words "just and equitable" sum these up in the law of partnership itself.  And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure.  But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations.  A company, however small, however domestic, is a company not a partnership or even and quasi partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in."

Substratum

26.      The loss of the substratum of a company was considered in the case of Symington v Symington's Quarries Limited [1905] 8F 121 in which the Court of Session considered the question of an order for a just and equitable winding up where the substratum has been lost.  At page 129 of the judgment the Court said:-

"I think I am not wrong in saying that what the decisions have come to is this that if the court finds that the real substratum of the company has gone, or if the company has come to a deadlock, they will consider themselves justified in acting under that sub-section.  On the other hand, they certainly will not allow the aid of that section where all that has happened is merely what you may call a domestic quarrel between two sets of shareholders.  The company itself is the proper forum for the settlement of domestic differences, according to the powers of the majority under the constitution of the company."

27.      Jowitt's Dictionary of English Law defines "substratum" as:-"Bottom or basis.  It is a ground for winding up a company that its substratum has gone, i.e. where it has become impossible to carry on the basic activity for which the company was formed."

28.      In In the matter of Leveraged Income Fund Limited [2002] JRC 209 Birt, Deputy Bailiff said, at paragraph 10:-

"10.    Article 155 is based upon a similar provision of the Companies Act in 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. ...

11.      Nevertheless, one of the categories which has developed in English jurisprudence is where the substratum of the company has gone, i.e. where the main object for which the company was formed has become impracticable (see In re Suburban Hotel Company (1867) Ch App 737).  Pennington on Company Law puts it as follows at page 860: 

"A company's substratum is the purpose or group of purposes which it was formed to achieve, in other words, its main objects.  If the company has abandoned all of these main objects and not merely some of them, or if it cannot achieve any of its main objects, its substratum has gone, and it will be wound up."

..."

29.      In that case the Court found that the substratum of the company had been lost because the company had been formed to provide an investment vehicle for shareholders and in the events that had occurred all of the funds had been lost. 

30.      There is no doubt that the jurisdiction of the court to order a just and equitable winding up is a wide one that should be applied with some flexibility.  A number of bases have been established by the Courts of England and Wales on which those courts would be prepared to exercise that jurisdiction.  Those bases are not exclusive and they are examples of situations which may make it appropriate to exercise that jurisdiction, but every case must be considered on its individual merits.  Among the bases on which the court may order a just and equitable winding up is where the substratum of the company has been lost.  There are other bases, including where the company is deadlocked or where it may be considered as a failed quasi-partnership. 

Conclusion

31.      As we have said, we are not asked to make an order for a just and equitable winding up.  Had we been asked to do so, on the facts identified above, it may very well have been that the Court would have made such an order.  Because of the way that the case was put to us, however, we have not heard full argument or evidence on it and are not in a position to make any final determination. 

32.      We are simply asked to consider whether or not the substratum of Monarch has been lost. 

33.      What then is the substratum of Monarch?  As we have said, Kenneth seeks to argue that the substratum of the company is that it was a vehicle designed to hold assets for the two brothers to be managed for their mutual benefit in accordance with their respective shareholdings, and from which each would derive an income stream and be entitled to a proportion of the value of the assets should they be sold. 

34.      Robert, on the other hand, argues that the substratum of the company is quite simply that of an investment vehicle in which the company was set up to hold immovable estate, which it does, and to manage that real estate to receive rental income for the ultimate benefit of its shareholders.  This, so Robert argues, it still does and is quite capable of doing and therefore the substratum of the company has not been lost. 

35.      In our view, Monarch was set up to hold the Properties, to manage the Properties, to receive the rent from the Properties and to deal with the net income for the benefit of the shareholders.  It may not be doing some of these things in fact, or others well or efficiently.  Its real objectives are, however, capable of being achieved and could not be said to be impossible.  It does hold the Properties, and it does receive income and it is capable of managing the business and dealing with the net revenues of the company in a way which is of benefit to the shareholders even if it is not in fact doing so.  In our view, therefore, it is not possible to say that the substratum of Monarch has been lost. 

36.      Accordingly we are not able to make the declaration sought by the Representor. 

Authorities

Companies (Jersey) Law 1991.

Jean v Murfitt 1996/237.

In the matter of the Representation of Green Equity Limited [2013] JRC 169A.

Ebrahimi v Westbourne Galleries Limited and Others [1973] AC 360.

Symington v Symington's Quarries Limited [1905] 8F 121.

Jowitt's Dictionary of English Law.

In the matter of Leveraged Income Fund Limited 2002/209.