Winding up and Re Greyhound Electromechanical Limited [2021] JRC 249

Eleanor Davies considers the situation where shares are gone upon winding up

What can you do if you think the sole director of the company you have a shareholding in has given away all its assets? Is a just and equitable winding up justifiable where there is uncertainty as to a liquidator’s claims and the company’s assets? Can all breaches of director’s duties be ratified?

The recent Jersey Royal Court judgment in Re Greyhound Electromechanical Limited [2021] JRC 249 explores all these questions, and more, in a case involving director misbehaviour and shareholder acquiescence.

The facts were simple. They involved an investment through a Jersey company in a Qatari steel business, jointly owned with a Qatari local business partner. The key transaction was the giving away of the Jersey company’s shareholding in the Qatari company to the local partner, and the writing off of loans owed to the local partner, in 2013. This was orchestrated by the Jersey company’s sole director and majority shareholder.

The minority shareholder in the Jersey company brought a just and equitable winding up claim in Jersey. He was, the court found, kept in the dark about the transaction and misled over the intervening years into believing he still had an interest in the company. When he found out about the transaction, in 2019, the other shareholders, at the instigation of the sole director, purported to ratify it under Jersey’s “whitewash” shareholder ratification provisions.

Somewhat surprisingly, no contemporaneous documentation of the transaction existed. The court had to make its decision based on witness evidence, including cross-examination of the minority shareholder, the sole director, and the Qatari company’s former CEO, who was also a shareholder and a business partner of the sole director. The court emphasised the importance of cross-examination, adjourning the substantive hearing so that witnesses could be examined.

The result was a series of findings by the court which undermined the credibility of the sole director and the CEO. The court built on recent judgments of the Jersey Royal Court and Court of Appeal in ETFS Securities Limited ([2021] JRC 025 and [2021] JCA 176 respectively). The Court of Appeal emphasised three relevant points about the justifiable loss of confidence and partiality basis for a just and equitable winding up order, based on the English case law:

1. That it is based on the principle that any shareholder in a company is entitled to expect its affairs to be managed with probity and in accordance with the basic principles of fair dealing.

2. That probity and impartiality go beyond cases of director dishonesty or actionable breaches of directors’ duties: they are linked to concepts of honest and decency.

3. That whether conduct is sufficient to justify a winding up order is always context-specific: there is no enforceable legal right where there has been a justifiable loss of confidence in the probity or impartiality of a company’s management, but that will be a factor in the court’s decision on whether to order a just and equitable winding up.

Bearing those principles in mind, the court in this case posed three questions:

1.  Had the minority shareholder lost confidence in the probity and impartiality of the sole director to manage the company?

2. Was that loss of confidence justifiable?

3. Was it sufficient to prompt a just and equitable winding up?

It had little difficulty in finding that the answer to the first two was yes. Confidence had been lost even before the transaction in question, and this was justifiable given the steps taken to conceal it from the minority shareholder.

The third was more difficult to answer. The underlying Qatari company’s financial position was uncertain, and there was competing evidence as to whether it had any value before the transaction. The company itself opposed the granting of a just and equitable winding up on the basis there was no value in the Qatari company’s shares in 2013 and therefore no real point in investigating what had happened. The court considered carefully whether it was worth appointing a liquidator, given uncertainty both as to the financial position and any claims which might be pursued. Ultimately it rejected the company’s evidence, given its findings about the credibility of its witnesses.

The other issue relevant to the third question was ratification by the company’s shareholders in 2019. Although not fully explored at the hearing, the minority shareholder suggested the ratification may not have been effective. English case law suggests that not all breaches of directors’ duties are capable of ratification – for example, where shareholders have expropriated the company’s property – and the Jersey statutory framework arguably only applies to breaches of the directors’ duties set out in the Jersey Companies Law. These are not exhaustive, as the court noted, and directors owe other duties both at customary law and in equity. This point is an interesting one, given the frequent use of the Jersey ‘whitewash’ mechanism in corporate transactions, and perhaps could be explored further in another case.

In the meantime, however, Re Greyhound Electromechanical Limited offers several salutary lessons for directors and shareholders of companies in difficulty. It is clear that the court favours the investigation of dubious conduct on the part of directors, even where the majority of a company’s shareholders acquiesce in that conduct, and shareholder ratification may not be the ‘cure all’ it appears to be.

Eleanor Davies is a solicitor qualified in England & Wales, and an Associate at Baker & Partners, a specialist independent offshore litigation and dispute resolution law firm based in Jersey: bakerandpartners.com