Jersey Unreported Judgments

Companies - just and equitable winding up.

[2020]JRC207

Royal Court

(Samedi)

9 October 2020

Before     :

R. J. MacRae, Esq., Deputy Bailiff, and Jurats Crill and Blampied

IN THE MATTER OF REPRESENTATION OF LYDIAN INTERNATIONAL LIMITED

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

AND IN THE MATTER OF A LETTER OF REQUEST FROM THE ONTARIO SUPERIOR COURT OF JUSTICE

Advocate S. J. Alexander for the Representor.

judgment

the deputy bailiff:

Introduction

1.        On 11^th September, 2020, we granted the Representation of Lydian International Limited ("the Company") that the Company shall be wound up pursuant to Article 155 of the Companies (Jersey) Law 1991 ("the Law"). 

Background

2.        On 25^th February, 2020, the Court made various orders in response to a Letter of Request dated 23^rd December, 2019, addressed to the Royal Court and transmitted to it pursuant to an Order made by Chief Justice Morawetz of the Ontario Superior Court of Justice ("the Ontario Court") dated 23^rdJanuary, 2020. 

3.        Pursuant to those orders, the Royal Court appointed an insolvency practitioner in Canada as a Monitor of the Company and made various other orders so as to permit, if possible, the Company to be restructured in insolvency proceedings under a Canadian federal statue known as the Companies Creditors Arrangement Act ("the CCAA").  

4.        In its judgment, reported at Representation of Lydian International Limited [2020] JRC 049, the Court described the relevant corporate structure and background to the application as follows: 

"3. Lydian International Limited ("Lydian International") is a Jersey company.  It is the ultimate holding company for the wider Lydian Group.  It is not necessary to set out the identity of all the companies in the Lydian Group.  But Lydian International holds 100% of the shares in Lydian Canada Ventures Corporation, a company registered in British Columbia.  Lydian Canada Ventures Corporation in turn owns 100% of the shares in Lydian UK Corporation Limited, a United Kingdom company.    

4. Ultimately, through two companies registered in the British Virgin Islands, the companies that we have described wholly own an Armenian company which holds the principal asset of the group, a gold mine in Armenia.

...

7. The financial difficulties which the Lydian group companies are currently encountering are a consequence of difficulties in completing the construction of the gold mine which are said to have been caused by arbitrary measures taken by the government of Armenia.  It is not necessary to describe further the difficulties this has caused to the Lydian Group."

5.        The relief granted in February also provided that no creditor action should be commenced against the Company in Jersey whilst the CCAA proceedings were afoot and that the Company would remain in possession of its business and affairs for the duration of the insolvency process.  This had the effect of "holding the ring" in Jersey by ensuring that no enforcement action could be initiated in this jurisdiction to the detriment of the restructuring being attempted in Canada. 

6.        The parties who had sought relief under the CCAA - the Company and its two directly held subsidiaries Lydian Canada Ventures Corporation ("Lydian Canada") and Lydian UK Corporation Limited ("Lydian UK") continued their efforts to rescue the Lydian Group under the supervision of the Ontario Court. 

7.        Such efforts have necessitated negotiating with the Government of Armenia, commencing legal proceedings in Armenia to remove what is described as an "illegal blockade" of the gold mine, and attempts to re-finance or sell the Lydian Group.  All these efforts have failed.  The detail of the efforts and their respective failures to bear fruit are set out in detail in the affidavit sworn on behalf of the Company by its now sole director Victor Flores.  For reasons that will be explored in this judgment, the Company is now effectively without assets.  Its only funding comes from the three principal lenders to the Company - Orion Mine Finance, Resource Capital Funds and Osisko Gold Royalties Limited, which are together known as the "Senior Lenders". 

8.        The other principal financiers are companies who provided equipment for the gold mine.  The Equipment Financiers, as they are known, are Ameriabank Closed Joint Stock Company, Caterpillar Financial Services (UK) Limited and ING Bank NV. 

9.        The Senior Lenders had a first ranking and senior lien on all the assets of the Lydian Group, including the shares that the Company held in Lydian Canada. 

10.      As to the Equipment Financiers, they had contractual relationships with underlying companies operating in Armenia but those obligations were guaranteed by the Company.  During the course of the CCAA process, the liabilities owed by the Company to the Senior Lenders directly and to the Equipment Financiers as guarantor increased and, ultimately, by the end of the first quarter of 2020 the Company owed a total of $375.4million, the majority of which was owed directly by the Company to the Senior Lenders and the residue ($90.6million) to the Equipment Financiers as guarantors.  It is of note that two of the three Senior Lenders together held 43.7% of the shares in the Company.  Since the commencement of the blockade of the gold mine in 2018, the CCAA applicant companies have incurred over $137million in expenses, and interest continues to accrue on the sums owed to the Senior Lenders and Equipment Financiers at the rate of $35million - $40million per annum, with an additional $10million - $15million of annual deferred financing cost yielding a total annual increase in costs of between $44million - $45million. 

11.      The Company is described, and plainly is "hopelessly insolvent".  The Senior Lenders indicated in April 2020 that they were no longer prepared to support the Company or the restructuring efforts through the CCAA process.  The funding provided by the Senior Lenders is now limited to financing provided for particular purposes connected with concluding the CCAA process.  In consequence, the Company's directors insurance expired on 30^th June, 2020, resulting in the resignation of all but one of the directors of the Company.  The Company was listed on the Toronto Stock Exchange but now, owing to its failure to make statutory filings, received a "cease trade order" dated 9^th June, 2020. 

12.      The Secured Lenders are, either within or without the CCAA process, entitled to realise their security by way of enforcement against the shares and other assets held by the Company.  A Plan of Arrangement ("the Plan") has been developed by the Company, the wider Lydian Group and the Senior Lenders, with the support of the Monitor, and approved by the Ontario Court. 

The Plan

13.      The Plan was approved by the Ontario Court on 29^th June, 2020. 

14.      The purpose of the Plan was to implement a corporate and financial restructuring of the three applicant companies - the Company, Lydian Canada and Lydian UK; provide for the assignment or settlement of all intercompany debts owing to the three companies and provide for the equivalent of an assignment of substantially all of the assets of the Company to an entity owned and controlled by the Senior Lenders through an amalgamation of Lydian Canada with a new company resulting in the creation of a new company called "Restructured Lydian" and, finally, to provide a release of all of the existing indebtedness and obligations owed by the Company to the Senior Lenders. 

15.      As noted by the Ontario Court "the Plan will result in the privatisation of the Lydian Group to continue as the Restructured Lydian Group".  

16.      Accordingly a central feature of the Plan is that the Senior Lenders release their debt held in the Company in return for control of the underlying companies which ultimately hold the gold mine in Armenia.  The Plan was presented for approval only to the Senior Lenders, who were the only secured creditors of the three applicant companies.  At a meeting of creditors ordered by the Ontario Court, (which subsequently considered whether or not to sanction the Plan) the Plan was voted on by the Senior Lenders as a single class.  The Senior Lenders voted in favour of the Plan by the required majority, namely two thirds by value and a majority of those voting.  The value of the claims of Orion and Osisko, who voted in favour of the Plan, comprised 77.8% of the total value of the creditors present at voting.  Resource Capital Funds, a secured lender and the 32% shareholder (the largest shareholder) did not vote in favour of the Plan.  Resource Capital Funds stated that it did not intend to propose or fund an alternative to the Plan and said that in the absence of such an alternative it expected that the Court would have no choice but to issue the "sanction and implementation order."

17.      Secured and unsecured creditors with claims at or below "Restructured Lydian" (formerly Lydian Canada) will continue to maintain their claims against the companies in the Restructured Lydian Group, including the companies in Armenia, with the same priority as they previously had but ranking behind the Senior Lenders. 

18.      The Ontario Court noted in its judgment dated 10^th July, 2020 (hearing 29^th June, 2020) that it needed to be satisfied for the purpose of approving the Plan, which was "a compromise and arrangement under the CCAA" that there had been strict compliance with statutory requirements; that all procedures had been carried out as authorised under the CCAA process and that the Plan "must be fair and reasonable". 

19.      As to whether or not the plan was "fair and reasonable and should be sanctioned", Chief Justice Morawetz noted at paragraphs 29 and 30 of the judgment that:

"The Applicants' submit that when considering whether a plan of compromise and arrangement is fair and reasonable, the court should consider the relative degree of prejudice that would flow from granting or refusing to grant the relief sought.  Courts should also consider whether the proposed plan represents a reasonable and fair balancing of interests, in light of the other commercial alternatives available."  

...

"The CCAA permits the filing of a Plan by an Applicant to its secured creditors.  The Applicants' submit the fact that unsecured creditors may receive no recovery under a proposed plan of arrangement does not, of itself, negate the fairness and reasonableness of a plan of arrangement."   

20.      Certain persons were convened to the hearing of the application to the Ontario Court.  The Court noted that the Monitor supported the Plan.  The Monitor said that the "Plan represents a better path forward than any other alternative that is available to the Applicants and is fair and reasonable". 

21.      The Court noted that concerns had been raised with respect to the fairness of the Plan by numerous shareholders of the Company and that oral submissions were made by four shareholders, including Atilla Bozkaya, who also attended and made submissions directly to this Court by video link. 

22.      Morawetz CJ said:

"44. The concerns of the shareholders included criminal complaints of activities in Armenia, the content of certain press releases and the impact of the COVID-19 pandemic.  Some shareholders requested a delay of three months in these proceedings. 

45. As previously noted, equity claims and unsecured claims against Lydian International will not be assumed by Restructured Lydian as part of the Plan.  Simply put, the shareholders of Lydian International will not receive any compensation for their shareholdings.  This is a reflection of the insolvency of the Applicants and the priority afforded to shareholders by the CCAA. 

46. I recognise that the shareholders' monetary loss will be crystalized if the Plan is sanctioned.  However, a monetary loss resulting from the ownership, purchase or sale of their equity interest is an "equity claim" as defined in s. 2(1) of the CCAA.  This definition is significant as s. 6(8) of the CCAA provides:

6(8) Payment - equity claims - No compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid.

47. The Plan does not provide for payment in full of claims that are not equity claims.  [We think that the word 'not' may be an error]  Consequently, equity claimants are not in the position to receive any compensation. 

48. The economic reality facing the shareholders existed prior to the COVID-19 pandemic.  The Applicants were insolvent when they filed these proceedings on December 23, 2019.  The financial situation facing the Applicants has not improved since the filing.  In fact, it has declined.  The mine is not operating with the obvious result that it is not generating revenues and interest continues to accrue on the secured debt. The fact that shareholders will receive no compensation is unfortunate but is a reflection of reality which does not preclude a finding that the Plan is fair and reasonable for the purposes of this motion.

49. The Senior Lenders have voted in sufficient numbers in favour of the Plan.  I am satisfied that there are no viable alternatives, and, in my view, it is not feasible to further delay these proceedings."

23.      The Ontario Court went on to approve the Plan and terminate the CCAA proceedings with respect to Lydian Canada (now Restructured Lydian) and Lydian UK, such that the Company would be the only remaining Applicant to the CCAA proceedings.  The purpose of the Company retaining CCAA protection was to permit the Company to apply to this Court for the winding up on the just and equitable basis pursuant to Article 155 of the Law. 

24.      The Ontario Court accepted that the Plan was fair and reasonable in the circumstances and went on, inter alia, to sanction the Plan and issue a letter of request to this Court. 

The Letter of Request  

25.      The Letter of Request dated 10^th July, 2020, from the Ontario Court is entitled "Letter of Request (Comity Application)".  The letter requests the assistance of the Royal Court to provide assistance to the Ontario Court and assures this Court of "reciprocal assistance in appropriate circumstances". 

26.      The recital to the request sets out the history of this matter including reference to the Act of Court dated 25^th February, 2020, pursuant to which this Court recognised various orders made in the CCAA proceedings.  The Letter of Request sets out the purpose of the Plan and its principal aspects and says that these purposes include to "wind up Lydian International in Jersey on just and equitable grounds pursuant to the laws of Jersey, and effect an orderly disposition and winding up of certain other subsidiaries of the Lydian Group". 

27.      The Letter recites that the Plan has been approved by the Ontario Court in the exercise of its discretion and requests, having confirmed that "as a matter of international comity, the courts of the provinces and territories of Canada will consider giving effect to orders made by the Royal Court of Jersey relating to the bankruptcy of an individual or company (save for the purpose of enforcing the fiscal laws of Jersey)" the assistance of the Royal Court, pursuant to its inherent jurisdiction, to assist in the implementation of the Plan and in particular to "consider the application to wind up Lydian International on just and equitable grounds pursuant to the laws of Jersey, by granting such further or other relief as it thinks fit in aid of the winding up of Lydian International Limited...  For the avoidance of any doubt, this appeal for assistance is not intended to fetter or in any way impinge on the discretion of the Royal Court of Jersey to make orders regarding the winding up of Lydian International.  On the contrary, it is an appeal to the Royal Court of Jersey for it to consider the application of Lydian International in the full context of the CCAA proceedings."    

The Application to this Court

28.      This application first came before the Court at a convening hearing on 14^th August, 2020.  On that day the Court made various orders which had the purpose of ensuring that creditors and shareholders of the Company were provided with a copy of the Representation and the affidavit evidence filed in support so that they had the opportunity of being heard at the hearing on 11^th September 2020, either in person or by Jersey counsel, or by letter to the Royal Court sent via the advocates for the Company. 

29.      Various orders were made to ensure that the matter came to the attention of the substantial number of shareholders and creditors of the Representor including publication of the information required to be served on the website of the Monitor, by way of press release and by way of correspondence containing, inter alia, a link to the Monitor's website to be sent to the Senior Lenders, the Equipment Financiers and the shareholders. 

30.      In fact, when the Representation was heard on 11^th September, 2020, the Court was concerned to note that although the material filed in support had been made available to shareholders on, inter alia, the Monitor's website and by way of press release, the number of shareholders that had been served directly by letter drawing their attention to this matter was limited and that in fact it appeared that something over a thousand additional shareholders whose shares were held via an intermediary namely the Canadian Depository for Securities in such a way as to indicate that they did not object to disclosure of information regarding the identity of the beneficial owner of shares in the Company had not in fact been served as envisaged by the Court at the convening hearing.  There shareholders ought to have been convened as ordered.  Owing to this failure to comply with the convening order, the Court specifically ordered, when granting the relief that it did, that there be liberty to apply to any such shareholders in respect of any of the orders made.  

31.      At the hearing the Court was provided with a structure chart which illustrated the difference between the Lydian Group prior and post to restructuring.  In short, the Company was formerly the top company of the Lydian Group with approximately a dozen companies incorporated in various jurisdictions including Canada, United Kingdom and the British Virgin Islands sitting below.  Now, post restructuring the Company only owns shares in two companies, one registered in Colorado and one in Armenia.  Both, we are told and we accept, own no assets and are being wound up in Colorado and Armenia respectively. 

32.      We received extensive written and oral submissions from counsel for the Company to the effect, inter alia, that the Company had lost its substratum.  The principal operating asset of the Lydian Group was now inaccessible to the Company.  It had no prospect of becoming operational and had no prospect of carrying out its objective to develop the gold mine.  More importantly, it seemed to the Court, since 6^th July 2020 as a consequence of the decision of the Ontario Court approving the Plan, the Company now has no ownership of the gold mine either.  Even if trading conditions were to improve and access to the gold mine being restored, the Company would not benefit as it no longer owned the shares in Lydian Canada (now Restructured Lydian).  The Court was referred to previous decisions where it had ordered the just and equitable winding up of a company on the footing that it had lost its substratum, including Leveraged Income Fund Limited [2002] JRC 209, and the matter of Myfuel Limited [2013] JRC 169A.  The Court recently granted similar relief in the case of Draganfly Investments Limited [2020] JRC 103. 

33.      It is clear from authority that the Court should be cautious before ordering a winding up Article 155 in the ordinary case of an insolvent company and should examine whether there are other avenues which are more appropriate in the circumstances, particularly, in the context of this case, a Creditors Winding Up under Article 157 of the Law and placing the Company en désastre. 

34.      As to a creditors winding up, this would require the consent of two thirds of the shareholders of the Company pursuant to Article 90(1)(A) of the Law.  It is said that this is not a realistic option as the costs of holding a meeting of shareholders would be substantial and even if such a meeting were held it was said that "it would be incredibly unlikely" that a special resolution would be approved by the requisite number of shareholders.  This was because the shareholders did not benefit from the Plan and their residual economic interest is nil. 

35.      It was said on behalf of the Company that the effect of the absence of shareholders' support is to leave the Company in a state of "de facto deadlock" with respect to the passing of the Creditors Winding Up. 

36.      The Court was not convinced that it could be said that a state of "deadlock" existed in circumstances where the shareholders had not been consulted because they had not met.  On the authorities "deadlock" only arises where there was evidence of such a state of affairs as opposed to an assumption that such a state of affairs might exist.  Nonetheless the Court accepted that there were various difficulties in the way of a creditors winding up in this case. 

37.      As to désastre, we heard evidence that there had been liaison between the Company's advocate and the Viscount.  The Viscount had no observations that she wished to make to the Court having seen the Representation and a draft of the Company's advocate's skeleton argument.  It was accepted that in the circumstances of this case, where the liquidators will be required to consult extensively with persons based in Canada, then the Viscount would be in no better position than the liquidators to wind up the Company and there would likely be no advantage in terms of realising any assets.  The proposed joint liquidators were familiar with the matter and in view of the minimal assets of the Company and the unlikelihood of distribution to creditors, there may be cost advantages in the liquidators identified being appointed to wind up the Company. 

38.      The Court considered correspondence received by the Company's advocate from various disappointed and concerned shareholders who opposed this application.  We also heard submissions directly from Mr Bozkaya who although resident in Turkey gave evidence from the United Kingdom via video link with the assistance of a friend who was fluent in the English language. 

39.      He, and many others had expended their life savings in purchasing shares in the Company. 

40.      In his case he had purchased approximately 600,000 shares over a three year period costing him approximately $80,000.  He had been attracted by the fact that the Company was run by respected institutions registered in the United Kingdom and Canada and that he and many others had decided to invest because the management team that were operating the gold mine in Armenia had previously managed a successful similar project (a gold mine) in Turkey.  He told us that he and others had tried to instruct Canadian lawyers to represent them and had incurred significant expense in doing so prior to the lawyer finding that he had a conflict of interest and then returning the funds deposited with him, leaving it too late for them to have their own legal representation.  They could not obtain visas to go to Canada, but had been heard by video link the Ontario Court, as noted in the judgment.  He said that he and the other 63 shareholders who were opposed held shares totalling 5.4% of the equity in the Company. 

41.      He said that the mine was now a hive of activity which it had not been until recently, and that he and the other shareholders with the same interest as him thought that it was only right and fair for their shares to be transferred to a holding in the company which now owned the gold mine.  He described the Jersey Court as being their "last chance".   

The Court's jurisdiction

42.      There is no statutory basis enabling us to assist the Ontario Court.

43.      Article 49 of the Bankruptcy (Désastre) (Jersey) Law 1990 provides that:

"(1)     The court may, to the extent it thinks fit, assist the courts of a relevant country or territory in all matters relating to the insolvency of a person, and when doing so may have regard to the extent it considers appropriate to the provisions for the time being of any model law on cross border insolvency prepared by the United Nations Commission on International Trade Law.

...

(4)       In this Article "relevant country or territory" means a country or territory prescribed by the Minister." 

44.      However, the provisions of the order made by the Minister under Article 49, as contained in the Bankruptcy (Désastre) Jersey Order 2006, list a number of countries and territories which do not include Canada. 

45.      We were assisted by various Jersey cases cited to us in the course of argument in which the Royal Court, in the exercise of its discretion and having regard to the principles of comity, has decided to grant relief having the effect of implementing orders made by foreign courts in respect of bankruptcies in those jurisdictions. 

46.      In this case, we accept that the winding up of the Company is a necessary and final part of the execution of the Plan approved by the Ontario Court. 

The exercise of our jurisdiction 

47.      The Court noted that the just and equitable winding up of the company was an element of the Plan approved by the Senior Lenders, the principal creditors of the Company. 

48.      There are no secured or unsecured creditors in Jersey so no Jersey creditors would be prejudiced by any order that this Court might make, with the exception of the Company's Jersey lawyers who anticipate being funded to the extent required as a cost of the winding up of the Company. 

49.      We accept that the effect of the execution of the Plan and the associated reorganisation involving restructuring of the Lydian Group means that the Company no longer has any assets.  Its substratum and its raison d'être has ceased to exist. 

50.      There is no purpose in keeping the Company going.  It has no prospect of having assets again.  It is appropriate in the circumstances for there to be a winding up under the supervision of liquidators.  The Company will be funded by the Secured Lenders for this purpose.  

51.      We have every sympathy with the position of the shareholders.  Nonetheless we were satisfied in the exercise of our discretion that we should order that the Company be wound up on the just and equitable basis and we granted certain of the ancillary orders sought by counsel for the Company.

Authorities

Companies (Jersey) Law 1991.

Representation of Lydian International Limited [2020] JRC 049.

Leveraged Income Fund Limited [2002] JRC 209.

In the matter of Myfuel Limited [2013] JRC 169A. 

Draganfly Investments Limited [2020] JRC 103. 

Bankruptcy (Désastre) (Jersey) Law 1990