Jersey Unreported Judgments

Companies - reasons for granting the prayer to the representation.

[2020]JRC103

Royal Court

(Samedi)

3 June 2020

Before     :

R. J. MacRae, Esq., Deputy Bailiff, and Jurats Ramsden and Ronge

 

IN THE MATTER OF THE REPRESENTATION OF LUKE BRYAN AND DENNIS VERNON EDMONDS

AND IN THE MATTER OF DRAGANFLY INVESTMENTS LIMITED

Advocate H. B. Mistry for the Representor.

judgment

the deputy bailiff:

1.        We heard argument in this matter on 20^th April 2020, and made orders that various additional documentation needed to be provided to us prior to reaching a decision. 

Background

2.        Draganfly Investments Limited ("the Company") is a Jersey company incorporated on 7^th April 2005 as a public company.  This is an application to wind the Company up under Article 155 of the Companies (Jersey) Law 1991 ("the Law").  The Applicants are the two directors of the Company, Mr Bryan and Mr Edmonds.  Mr Edmonds appeared by video link when the Representation was heard and was required to give evidence in support of the Representation. 

3.        The Company was, as a public limited liability company, originally listed on AIM (Alternative Investment Market) and had, and continues to have, approximately 100 shareholders.  The Company was established in order to make investments in other companies and its market capitalisation was initially £3m. 

4.        The Company ceased trading in investments in 2016 and there have been two attempts to raise additional working capital, both of which have been unsuccessful.  As the Company no longer met the capital requirements for listing on AIM, its listing was cancelled and it reverted to becoming a private limited company on 24^th September 2018.  The last attempt, in 2018, to raise funds led to the Company raising £1.8m but that was insufficient to meet AIM's requirement of £2.5m for re-listing.  

5.        Accordingly, in July 2019 the Company's board decided to call an Extraordinary General Meeting.  Unfortunately, and Mr Vernon accepted with the benefit of hindsight this was a mistake, the directors of the Company did not explain to the shareholders in correspondence prior to the meeting why it was that the Company was inviting the members to pass the resolutions that were considered at the EGM on 26^th July 2019. 

6.        The first two resolutions are not material to the exercise of the Court's discretion today as they were defeated and their purpose was to increase the share capital of the company to 500 million shares so as to, inter alia, permit the conversion of two loan notes totalling £80,000 into shares in the Company. 

7.        The third resolution was a proposal that the Company be wound up on the just and equitable basis pursuant to Article 157 of the Law. 

8.        All three resolutions were special resolutions requiring two thirds of those members voting to vote in favour.  Very few members voted - approximately 10%.  All three resolutions were emphatically rejected by shareholders, none garnering the support of as many as 10% of the members.  Questions from the Court revealed that the minutes of the EGM were incorrect in that they showed the wrong percentage (1.05%) of shareholders supported the third resolution and they were inconsistent with other documents exhibited to the affidavit.  This was one of the reasons that we directed Mr Edmonds to file a further and third affidavit.  This affidavit showed that in fact 100% of the shareholders voted against the third resolution. 

9.        At the date of the EGM the Company's assets were approximately £80,000 and substantially outweighed by the Company's debts.  The substratum of the Company had gone i.e. investment in other companies, and there is no prospect of the Company trading again. 

10.      The total creditors were said to amount to £392,500 less those who have agreed to waive their claims against the Company, leaving a deficit of £295,608.26.  Mr Edmonds third affidavit indicates that the total debt of the company including legal fees incurred in the liquidation is £268,592.76 which once the cash held is applied leaves a final deficit of £188,716.15.  

11.      As to the heavy vote against the special resolutions, Mr Edmonds was unable to explain in evidence why the resolutions were defeated so substantially by the five shareholders who voted by proxy as he had never troubled to ask them why they voted against the resolutions. 

12.      The Applicants' advocate said that his clients were "not aware" of the reason that the special resolutions were rejected and said "had the members had an alternative plan, one would have expected them to have made contact with the Company's board, either before or after the EGM." 

13.      It seems to the Court that that was really the wrong approach.  If the directors had a proposal to make to members they should have explained it to them in correspondence.  It is for the directors to explain to the shareholders the options available to the Company and had that occurred then this application may have been unnecessary as a creditors winding up could have occurred under the provisions of the Law.

14.      On any view, the Company is cash flow insolvent and balance sheet insolvent.  It is said that the Company should be wound up on the just and equitable basis because: 

(i)        It has lost its substratum;

(ii)       The directors and the members of the Company are in deadlock and it would be in the interests of the creditors to wind the Company up.  

The convening hearing

15.      The Applicants issued their Representation on 20^th February 2020 and on 21^st February 2020, at the convening hearing, the Royal Court ordered:

(i)        That no proceedings shall be commenced or continued with or as against the Company without leave of this Court pending determination of the said Representation pursuant to Article 155 of the Law or such other provision or inherent jurisdiction as may be applicable which proceedings shall be deemed to include, for the avoidance of any doubt, the registering of any promissory note or charge with respect of the Company or the Property;

(ii)       That any parties given notice of this application shall be bound to keep the same confidential and not to discuss the same with any other persons (save with and as between the directors of the Company and their legal advisers) until further order of this Court;

(iii)      That the following parties shall be served, either by ordinary post or by courier or by hand delivery, or by email, with a copy of the said Representation and the affidavit dated 19^th February, 2019, of Mr Dennis Vernon Edmonds and be notified of the date of the adjourned hearing hereof being the 20^th April, 2020, at 10:00 a.m.;

(a)       The Company through its director Mr Edmonds as its registered office;

(b)       The Viscount.   

(iv)      The members of the Company shall be notified of the date of the adjourned application for Just and Equitable Winding Up through the Gazette (Jersey Evening Post) no later than seven days before the final hearing of this application.  

(v)       That there shall be no change to the composition of the Board of the Company, save by reason of any voluntary resignation which resignation shall not be procured by the members or directors of the Company, without leave of the Court;

(vi)      The convened parties shall attend the Royal Court on the said 20^th April, 2020, at 10:00a.m. to confirm the Interim Orders made by the Royal Court this day and to fix, if necessary, a further date for the hearing of the Representation and considerations of the granting of the Final Orders.  

16.      These orders were complied with.  As to the order at (iv) above no response has been received from any members of the Company.  Further, the Viscount suggested, in view of the fact that many of the shareholders lived in the United Kingdom, there should also be notification of members through the London Gazette.  This occurred, and again there has been no response.  

Correspondence with the Viscount

17.      The Viscount was not represented but we were grateful to her for the correspondence that she has had with the Applicants prior to the hearing. 

18.      The Viscount expressed her disappointment that she was not asked to comment on the application before it was presented to the Court.  It is good practice for all applicants for insolvency relief to correspond with the Viscount before making an application to Court.  The Viscount correctly notes in her correspondence (see her email of 7^th April 2020), that a just and equitable winding up is generally only an option to be considered when other remedies are not available, such as désastre or creditors winding up (which is not possible without the members passing the special resolution).  She observed that it would be very helpful if the Applicants had explained why the shareholders rejected the proposal so overwhelmingly.  The Viscount said that the £80,000 cash was available for liquidation, was a realisable asset and that in her view the désastre route "had not been explored adequately". 

19.      She also made comments on the form of relief that was sought in the Representation and said that the powers sought for the liquidator were too wide and unnecessary as there was no business to be conducted by the Company. 

20.      As to désastre, the advocate for the Applicants told the Viscount and the Courts that the Company had lost its substratum and this was the ground for a just and equitable winding up; that this is a deadlock situation as between the Company's members and that the directors and that the proposed liquidator had been heavily involved in the Company since 2019 and was fully aware of its affairs.   

21.      The Viscount observed that the Applicant's advocate ought to explain to the Court that désastre is another option which should have been explored at an earlier stage.  She went on to say that the Court should be given an estimate of the proposed liquidators fees and costs as a matter of good practice to allow the Court to have comfort this is going to be a cost effective process with the creditors. 

22.      The advocate for the Applicants informed us that the total costs of the winding up were expected to be no more than £20,000.

The relevant principles

23.      In recent years there have been several occasions upon which the Royal Court has ordered that a company be wound up on the just and equitable basis.  We have ben assisted by the relevant authorities. 

24.      In Poundworld (Jersey) Limited [2009] JRC 042 the Royal Court, Birt, Deputy Bailiff presiding observed at paragraph 15:

"We are of the view that the Court should be cautious before ordering a winding up under Article 155 in the ordinary case of an insolvent company.  The Law provides for the appropriate procedure and this is the one which should normally be followed.  However, as referred to earlier, the Court's jurisdiction to order a winding up under Article 155 is a wide one and we are persuaded that, in the particular circumstances of this case, it would be right to exercise that jurisdiction." 

25.      In that case the Royal Court went on to order at paragraph 17 to say: 

" ... We were conscious however that we were making this order in the absence of any of the creditors.  Accordingly we directed that notice of the order be given forthwith to all the creditors and that any creditor should have liberty to apply to the Court with a view to seeking to set aside the Court's order, so that the process would revert to that necessary for a creditors' winding up." 

26.      The comparative advantages and disadvantages of the available remedies were considered in the matter of the Representation of Huelin-Renouf Shipping Limited [2013] JRC 164 the Royal Court, W J Bailhache, Deputy Bailhache presiding said at paragraph 5:

"5. In the case of In the matter of the Representation of Belgravia Financial Services Group Limited [2008] JRC 161, there were a number of particular advantages and disadvantages relating to that company which were canvassed in the application for an order under Article 155, but what is particularly apparent is the statement in the decision of the Court in that case that the Court should look at the alternative orders that might be made before making an order under Article 155.  After all it is part of our customary law that the Court may grant a declaration of désastre either applied for by the company or applied for by creditors, so that is a route that creditors can take for suing company assets realised and distributed amongst the creditors in an orderly way.  Furthermore, the statute, the Law, which does provide for the Article 155 application also provides for a creditors' winding up where the shareholders convene a meeting and the company passes the resolution at a general meeting and then there is a creditors' committee usually which operates conjunctively with the liquidator. 

6. We have considered both of those alternatives to the application under Article 155 and we think that neither is appropriate.  In the case of the creditors' winding up there are a number of objections.  The first is that it is quite apparent that the shareholder is not going to assist by arranging for the Company to pass the relevant resolution in general meeting; but secondly, the timing constraints provided for in the Law do make it plain that there would not be the ability for the liquidators to take steps quickly in relation to the assets of this particular company....

7.  So for those reason we are satisfied that the creditors' winding up is not appropriate, if we did not take such a step today the Company would be left in deadlock with a lack of shareholder participation with the Board and therefore that option is not available. 

8. As to the declaration of désastre, we have heard from Mrs Allo for the Viscount that there is no view from that Department that a désastre would be more appropriate.  Advocate Williams submits that the Viscount would be in no better position than a liquidator under Article 155 and indeed it would probably just add to costs because not only would there be the Viscount's costs of administering the désastre but there would also be the costs of experts who would be doing a similar job to the liquidators and who would be assisting the Viscount.  We accept that in the circumstances of this particular case that is a fair criticism to make." 

27.      We are in a similar position.  A creditor's winding up is not possible at this stage owing to the failure to pass the special resolution in 2019, and there is no express view from the Viscount to the effect that a désastre would be more appropriate, merely that the Court should (as it must) consider it. 

28.      In Huelin Renouf the Court made a similar order to the one made in the Poundworld case (at paragraph 12) of the judgment:

"The Court orders that notice of this judgment today should be given to all creditors and without prejudice to what is paragraph 10 of the draft order, any creditor shall have liberty to apply to the Court with a view to seeking to set aside the Court's order so that the process could revert to a creditors' winding up or an application for a désastre." 

29.      As shown by the authorities, the Court has a wide discretion when considering whether or not to order that a company is wound up on the just and equitable basis.  We note that in the case of Horizon Investments Limited [2012] JRC 039 the Court in exercising its discretion under Article 155 took into account the fact that an Article 155 appointment of a liquidator may be preferable to a creditor's winding up given the greater flexibility allowed for, and the overriding duty to the Court, especially given the potential for conflicts to arise between shareholders and creditors.  There is perhaps such conflict in this case where shareholders have voted so heavily against a just and equitable winding up. 

30.      In In the matter of Myfuel Limited [2013] JRC 169A, the Royal Court said:

"15. ... 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.  There is no immediate prospect of it or its subsidiary companies recommencing investment business, as far as one can tell ..." 

31.      The purpose for which this Company was incorporated has gone and accordingly so has its substratum. 

32.      As to the submission that this is a case of "deadlock", there is clear authority to the effect that "deadlock" is a ground for just and equitable winding up.  There was a deadlock in Bisson -v- Barker [2008] JRC 193, where the representor and the two respondents were shareholders and the representor and one of the respondents were directors.  They had fallen out to the extent that it was impossible for them to work together and manage the business. 

33.      It seems to the Court that this is not a case of "deadlock".  The directors have no idea why the shareholders voted against the special resolutions in 2019 as they have not attempted to find out.  Accordingly we cannot find evidence of "deadlock" as a ground for just and equitable winding up. 

Our decision  

34.      Nonetheless this is plainly a case where the substratum for the Company has gone.  The Company is insolvent and cannot trade, and the proposed liquidator is fully aware of the affairs of the Company.  Accordingly, accepting the helpful modifications proposed by the Viscount, we grant the prayer to the Representation and order:

(i)        The Company be wound up pursuant to Article 155 of the Law;

(ii)       Mr Adrian Rabet and Mr Darren Reeds of Messrs CVR Global or such other persons as the Court may think fit, be and are hereby appointed as Joint Liquidators of the Company, with all powers as set out in Chapter 4 of Part 21 of the Law and the following specific powers: 

(a)       To call meetings of creditors;

(b)       To publish such notices as the Liquidator deems necessary or expedient with a view to inviting claims, such claims to be filed in respect of the period up to the date hereof and any liabilities subsequently incurred to be registered as expenses in the liquidation;

(c)       To require the current and former officers and directors of the Company to make statements as to the affairs of the Company and to verify them on affidavit;

(d)       To exercise any of the powers of the Company as may be required for its beneficial winding up, having regard to the creditors including (without limitation) making payments, assigning rights and interests;

(e)       To carry on the business of the Company in order to enable an orderly winding up of the Company;

(f)        The power to apply to the Royal Court for a revision or extension of any of his powers and for sanctioning or ratification of any of his acts of omissions;

(iii)      After the commencement of the winding up no action shall be taken or proceeded with against the Company except by leave of the Court and subject to such terms as the Court may impose;

(iv)      That the costs of and incidental to these proceedings be paid by the liquidator as an expense of the liquidation (such costs excluding the additional work required to be done by the advocate for the Representor and the liquidator for the purpose of complying with the order made by the Court on 20^th February 2020 by way of the adducing of further evidence);

(v)       Notice of this judgment should be given to all creditors and members, with creditors having liberty to apply to the Court if so advised in order to seek to set aside the Court's order if they think fit.  

(vi)      That there be liberty to apply to all parties affected by this order. 

Authorities

Companies (Jersey) Law 1991. 

Poundworld (Jersey) Limited [2009] JRC 042. 

Representation of Huelin-Renouf Shipping Limited [2013] JRC 164. 

Horizon Investments Limited [2012] JRC 039. 

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

Bisson -v- Barker [2008] JRC 193