In the matter of Fuerta Limited, High Court, 22 January 2014
Judge: Mr. Justice Charleton
A recent decision of the High Court has highlighted the interesting area of law that applies when an application is made to wind up a company on the grounds that it is "just and equitable" to do so.
In this case, Bank of Scotland plc (the Bank) sought to wind up Fuerta Limited (the Company) under the "just and equitable" ground which is set out in Section 213 (f) of the Companies Act 1963. This provision is rarely invoked as it requires the court to form a view that on the facts, which are often unrelated to insolvency, it would be a preferable outcome for the company in question to be wound up. In this case, the Bank, having failed to enforce its security through strike-off and subsequent restoration of the Company, sought to do so through a liquidator being appointed to dispose of the Company's assets.
The Company was incorporated in 2006 and its objects included the power to buy and deal in land. The primary purpose for establishing the company was to own and manage a nursing home in Dublin.
The Bank entered into a €15 million loan agreement with the Company to finance the project, with the Company holding a 61% stake in the investment, and a number of individual investors holding the balance of 39%.
The issue which triggered this application was the persistent failure by the directors to file annual returns in the Companies Registration Office (CRO). As a result, the Company faced being struck off by the Companies Registrar. The Company had been struck off previously, and in June 2010, an application was successfully made to the CRO to restore it to the Register, to enable the Company's creditors to enforce their security. The restoration had been conditional on the directors filing all outstanding orders and paying certain taxes etc. However, no annual returns had in fact been filed. There was also evidence that the directors had failed to engage in efforts to regularise the situation and they did not attend the court hearing.
The Bank made numerous efforts to enforce its security but, as Mr. Justice Charleton noted, the stasis that had gripped the Company meant that any attempt to sell the facility through engaging with the Company had proved impossible. The judge noted that the advantage of proceeding with a winding-up, was that the liquidator could "step into the shoes" of the Company and assume its corporate personality with the ultimate aim of disposing of the Company's assets.
The "just and equitable" ground
The grounds upon which an application under Section 213 (f) can be made are very wide and the most common grounds which have been relied upon in the Irish courts in recent years are:
- "Quasi-partnership" – a "quasi-partnership" exists where the relationship between the shareholders of the company is akin to a partnership, and the company is being used simply as a mechanism to secure limited liability. The key Irish case in this area is Re Murph’s Restaurants1 in which the High Court approved the seminal UK case of Ebrahimi v Westbourne Galleries2;
- Deadlock in corporate management - this situation may arise when the voting power in a company is evenly divided between two diametrically opposed camps, and winding up the company is the only way to resolve the deadlock. The key Irish cases in this area are Irish Tourist Promotions3, Re: Vehicle Buildings and Insulations4, Bluzwed Metals Ltd. v Transworld Metals SA5 and the recent case in 2013 of Dublin Cinema Group Ltd6; and
- Failure of substratum – this occurs when the purpose for which a company was formed is no longer being pursued or where the company pursues a different venture to that originally envisaged. It is necessary in these applications for the applicant to show that the real purpose for which the company was formed has been lost. The abandonment of the main objects of the company must be total. The key Irish case on this ground of application is Garvey v Metafile Limited7;
In addition, under Section 12 of the Companies Act 1990, the Director of Corporate Enforcement can, on foot of a report of an inspector appointed by the High Court to investigate a company, bring a petition to have a company wound up in the public interest, on just and equitable grounds.
Mr. Justice Charleton examined these and other cases to establish the parameters of Section 213 (f) orders. He made the following comment about the issues that are often at the heart of these applications:
"…the elaborate regulation of companies through legislation, the privilege that incorporation confers on the shareholders, the seriousness of infringing positive obligations and negative prohibitions in that code – often breaches are classified as criminal – and the entitlement of the public to have resort to the Companies Registration Office as a source of reliable information on what otherwise is an opaque structure, all indicate that compliance with law is central to obtaining and maintaining corporate personality. Such privilege can be lost by neglect and such neglect can in extreme circumstances be so serious as to enable the High Court to wind up a company on the just and equitable ground".
Mr. Justice Charlton commented that in the economic climate in which Ireland currently finds itself, a failure to make annual returns is "particularly grave". He went on to say that resorting to this provision of the Companies Act is not to be undertaken lightly and it should only be engaged in the most "intractable" of situations.
He went on to say that since winding up is the ultimate step in company law, where other avenues are available, winding up on the just and equitable ground due to non-compliance with the Companies Acts should not be invoked. He said that only the most serious incidents of non-compliance, coupled with an absence of reasonably alternative steps and a context of existing or impending prejudice should justify the application of this particular jurisdiction.
Mr. Justice Charleton said that these elements were present, and that there was a record of half-promises and deadlines that had not been met. He said that every step that could have been taken before resorting to this extreme step had been pursued. He concluded that it was both just and equitable to wind up the Company.
This case is a rare example of the High Court exercising its powers under the Companies Acts to wind up a company for reasons other than the insolvency of the entity.
Mr. Justice Charlton emphasises in his judgment that incorporation confers a privilege on the shareholders, and that compliance with the law is central to obtaining and maintaining corporate personality. This privilege can be lost, he says, through neglect, and although winding up a company is an action of last resort, extreme circumstances such as those present in this case, can result in this step being taken by the High Court on the "just and equitable" ground.
This is an unusual case where an absence of cooperation by the directors led to the ultimate step of the dissolution of the Company, in order to enable the creditors to enforce their security.