CourtRoyal Court
JudgeClyde-Smith, Commr. and Jurats Le Breton and Crill
Judgment Date01 August 2012
Date01 August 2012
Clyde-Smith, Commr. and Jurats Le Breton and Crill

N.M. Sanders for the plaintiff;

M.H.D. Taylor for the defendant.

Cases cited:

(1) Allen v. Gold Reefs of W. Africa Ltd., [1900] 1 Ch. 656, referred to.

(2) Amalgamated Syndicate, In re, [1897] 2 Ch. 600, considered.

(3) Aris Multi-Strategy Lending Fund Ltd. v. Quantek Opportunity Fund Ltd., Eastern Caribbean Supreme Ct. (BVI High Ct.), Case No. BVIHCOM 2010/0129, December 15th, 2010, unreported, considered.

(4) Astec (BSR) plc., Re, [1998] 2 B.C.L.C. 556; [1999] BCC 59, referred to.

(5) Baily v. British Equitable Assur. Co., [1904] 1 Ch. 374; on appeal, [1906] A.C. 35, referred to.

(6) Belmont Asset Based Lending Ltd., In re, 2010 (1) CILR 83, considered.

(7) Bird Precision Bellows Ltd., In re, [1986] Ch. 658; [1986] 2 W.L.R. 158; [1985] 3 All E.R. 523; 1986 PCC 25, referred to.

(8) Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] 1 A.C. 1101; [2009] 3 W.L.R. 267; [2009] 4 All E.R. 677; [2009] Bus. L.R. 1200, considered.

(9) Citco Global Custody NV v. Y2K Fin. Inc., Eastern Caribbean Supreme Ct. (BVI High Ct.), Claim No. BVIHCV 2009/0020A, November 25th, 2009, unreported, considered.

(10) Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., [2010] UKPC 33; 2010 (2) CILR 364, referred to.

(11) FIA Leveraged Fund, In re, 2012 (1) CILR 248, referred to.

(12) Freerider Ltd., In re, 2010 (1) CILR 486, considered.

(13) German Date Coffee Co., In re (1882), 20 Ch. D. 169; [1881-5] All E.R. Rep. 372, considered.

(14) Grace v. Biagioli, [2006] 2 B.C.L.C. 70; [2006] BCC 85; [2005] EWCA Civ 1222, considered.

(15) Grove v. Baker, 2005 JLR 348, dicta of Bailhache, Bailiff applied.

(16) Haven Gold Mining Co., In re (1881), 20 Ch. D. 151; [1881-5] All E.R. Rep. 585, considered.

(17) Heriot African Trade Fin. Fund Ltd., In re, 2011 (1) CILR 1, dicta of Jones, J. considered.

(18) Jacobs v. Batavia & Gen. Plantations Trust Ltd., [1924] 2 Ch. 329, referred to.

(19) Leveraged Income Fund Ltd., In re, Royal Ct., October 31st, 2002, UJ 2002/209, unreported, referred to.

(20) Liverpool C.C. v. Irwin, [1977] A.C. 239; [1976] 2 W.L.R. 562; [1976] 2 All E.R. 39, referred to.

(21) O'Neill v. Phillips, [1999] 1 W.L.R. 1092; [1999] 2 All E.R. 961; [1999] 2 B.C.L.C. 1; [1999] BCC 600, dicta of Lord Hoffmann considered.

(22) Prestigic (Wisley) Nominees Ltd. v. JTC Management Ltd., 2012 (2) JLR 1, considered.

(23) Sibley (née Pavey) v. Berry (née Du Feu), 1992 JLR N-4, referred to.

(24) Stewardship Credit Arbitrage Fund Ltd., In re (2008), 73 WIR 136, considered.

(25) Wyser-Pratte Eurovalue Fund Ltd., In re, 2010 (2) CILR 194, considered.

Legislation construed:

Companies (Jersey) Law 1991 (Revised Edition, ch.13.125, 2012 ed.), art. 141(1):

"A member of a company may apply to the court for an order under Article 143 on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least the member) or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."

art. 143(1): "If the court is satisfied that an application under [art. 141] is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of."

art. 155(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 .?.?."

Companies—minority shareholders—unfair prejudice—proposal by fixed-term investment fund, in breach of its offering document, to create new fund to hold assets of existing fund (to enable realization after expiry of fixed term) is unfair prejudice under Companies (Jersey) Law 1991, art. 141—company ordered under art. 143 not to proceed with proposal

Companies—winding up—"just and equitable"—loss of substratum is ground for "just and equitable" winding up under Companies (Jersey) Law 1991, art. 155—substratum of fixed-term investment fund lost after expiry of term—if offering document provides for winding up by directors, court to adjourn minority shareholder's application for appointment of liquidators to ascertain views of other shareholders

The plaintiff sought the winding up of the defendant fund under art. 155 of the Companies (Jersey) Law 1991, or orders under art. 143 of the Law.

The plaintiff held 27% of the shares in the defendant, a closed-end investment fund incorporated in Jersey. The fund had been launched in June 2007 for the purpose of investing primarily in Russia and former Soviet Union related countries. Its prospectus provided that it would exist for five years, comprising a three-year investment period followed by a two-year wind-down period, after which it would be formally wound up (i.e. by June 30th, 2012). During the investment period, assets of the fund would be invested and reinvested at the manager's discretion. During the wind-down period, the manager was to realize the investments and make distributions to the shareholders (in cash, although distributions in specie were permitted with shareholder approval). An extension of the wind-down period required the approval of at least 75% of the shareholders.

Although initially successful, the fund was hit by the global economic downturn in 2008. It became apparent that the price for which the investments could be realized within the wind-down period was far less than could be achieved if they were sold as a going concern after the wind-down period, with certain follow-on investments. The plaintiff refused to consent to, and thus blocked, a proposed extension of the wind-down period.

The directors of the fund therefore proposed a second option, redemption in kind, whereby a new fund ("Phoenix") would be established to hold the unsold real estate assets and cash of US$10m. from the existing fund. Phoenix would be a wholly-owned subsidiary of the existing fund, with the same management, investment adviser and fee structure, and with a lifetime of four years, extendable to six. During the wind-down period of the existing fund, whenever the fund proposed a redemption of shares for cash, it would also propose a redemption of shares to be settled in kind by way of a transfer of shares to Phoenix. The shareholders could choose whether to receive cash or shares in Phoenix, but if more than two-thirds chose to receive cash, they would be required to accept shares and would thus be locked in as investors for up to a further six years. It was considered that the redemption in kind proposal required only an ordinary resolution, not the 75% required for an extension of the wind-down period. The proposal was in fact approved by 62.74% of the shareholders.

The plaintiff brought the present proceedings, submitting inter alia that (a) the redemption in kind proposal was in breach of the fund's articles and prospectus; and (b) the following were implied terms of the prospectus: (i) that the fund would not take any step with the object or effect of prolonging the winding down of the fund beyond the wind-down period, unless it had the approval of at least 75% of the shareholders; and (ii) that the fund would not take any step that would make the realization of its underlying assets within the wind-down period impossible or substantially more difficult. The plaintiff sought an order for the just and equitable winding up of the fund under art. 155 of the Companies (Jersey) Law 1991, on the basis of loss of substratum because it was not possible for the fund to carry on the business of a five-year fund and there was insufficient approval for extension. It sought the appointment of a liquidator by the court. Alternatively, the plaintiff applied under art. 141 for orders under art. 143 of the Law. It submitted that the fund's affairs were being conducted in a manner that was unfairly prejudicial to the interests of part of its members, including the plaintiff, who did not support the redemption in kind proposal; and that the proposal would involve both the transfer of assets into Phoenix and the omission to realize the underlying investments which would be unfairly prejudicial to the plaintiff and others.

The fund submitted in reply that (a) the redemption in kind proposal was permitted and contemplated by the articles and prospectus, under which assets (e.g. shares in a holding company) could be distributed in specie; and (b) it was not the same as extending the life of the existing fund.

Held, ordering as follows:

(1) The redemption in kind proposal was in breach of the fund's articles of association and prospectus. The fund was contractually obliged not to make any new investments during the wind-down period. The court made no comment on the individual follow-on investments that had been made, as the directors were required (under art. 74(1) of the Companies (Jersey) Law 1991) to act in the interests of the fund (i.e. of the general body of shareholders) and had flexibility during the wind-down period to act in the interests of the shareholders to preserve, protect and enhance (for the purposes of realization) the value of existing investments. The creation of the Phoenix fund was not, however, a follow-on investment because it was not made with a view to realization within the wind-down period. On the contrary, it was a new investment to hold the real estate assets and the investment in it of US$10m. from the existing fund, with a view to a profitable return several years after the expiry of the wind-down period. As such, it was not permissible under the prospectus. The directors had reached a perfectly reasonable conclusion, following active steps to realize the real estate assets, that it would be in the best interests...

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