Re Diffraction Diamonds DMCC  EWHC 1368 (Ch)
This case deals with the English Court’s jurisdiction to wind up foreign companies, on the grounds of public interest. While it does not create new law, it is a helpful review of the authorities, particularly Re Titan International Inc  1 BVLC 102 (“Titan”).
The Secretary of State for Business, Innovation and Skills (“SoS”) brought proceedings for the winding up of Diffraction Diamonds DMCC (“Diffraction”) and IGL Labs UK Limited (“IGL”). These proceedings formed part of a group of public interest winding up petitions brought against companies involved in the sale of “fancy coloured diamonds” (“FCDs”). There were two previous petitions concerning CDX Worldwide Limited (“CDX”) and Heritage FA Limited (“Heritage”) and those had already resulted in winding up orders.
Diffraction was incorporated in Dubai, and IGL was incorporated in England and Wales.
The case against Diffraction was that it had traded with a lack of commercial probity because it provided FCDs to brokers who knew, or should have known, that they were selling them on to the public at such inflated prices that it was unlikely investors would be able to recover their outlays. Furthermore, it was also alleged that Diffraction facilitated contrived valuations from IGL to support the inflated prices charged.
The case against IGL was that it produced contrived valuations, performed without sight of the FCDs, inducing members of the public to purchase them.
The two main issues considered were the following:
- Whether there was sufficient connection between Diffraction and the United Kingdom, to justify the court exercising its powers under section 221 of the Insolvency Act 1986 (“IA”); and
- whether the cases against Diffraction and IGL were met.
High Court judgment
The SoS’ petition to wind up both Diffraction and IGL was granted by Philip Marshall QC (sitting as a Deputy Judge of the High Court). The Judge applied the test in Titan stating at paragraphs 106 and 107 of the judgment that “Section 221(1) of the Insolvency Act 1986 provides that the English court may wind up a foreign company not registered under the Companies Act if one or more of the circumstances set out in section 221(5) is or are satisfied”.
Under section 221(5) of the IA, these circumstances are:
- if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
- if the company is unable to pay its debts; or
- if the court is of opinion that it is just and equitable that the company should be wound up.
The judge in Titan also referred to the decision of Knox J in Re Real Estate Development Co  BCLC 210 in which it was held that three requirements had to be satisfied (although only the first condition applies for public interest petitions) :
- there must be sufficient connection with the jurisdiction;
- there must be a reasonable possibility that a winding-up order would benefit those applying for it; and
- the court must be able to exercise jurisdiction over one or more persons interested in the distribution to the Company’s assets.
The SoS relied on the following matters to demonstrate a sufficient connection with this jurisdiction:
- The administration of Diffraction's business had been carried out from the United Kingdom;
- Diffraction had supplied FCDs for marketing and sale by broker companies to members of the public in the United Kingdom;
- Diffraction had supplied its services to broker companies registered in England and Wales; and
- Diffraction stored FCDs on behalf of investors who are based in the United Kingdom.
The Judge held that the matters relied on by SoS did constitute a substantial connection with the United Kingdom and were enough to find jurisdiction.
Diffraction raised three points in disputing jurisdiction:
- That there was no evidence of a connection between Diffraction’s shareholder and the United Kingdom;
- that Diffraction had no assets in the United Kingdom; and
- that the activity complained of was no longer being carried out.
The Judge held that none of these matters were significant for the following reasons:
- The lack of connection of the shareholder in Diffraction with the United Kingdom is not significant;
- the location of Diffraction’s assets in the jurisdiction is not an essential requirement even in the case of a creditor’s winding up petition (Real Estate Development Co.  BCLC 210 and Stocznia Gdanska SA v Latreefers Inc (No.2)  2 BCLC 116); and
- it has been established law for some time that, in the case of a public interest winding up petition, the court will not be deprived of grounds for making a winding up order simply by virtue of the company concerned discontinuing the offending activity once it came under scrutiny.
The Judge found that Diffraction and IGL should both be wound up in the public interest.
Although there is little new guidance in this judgment, this case is a useful reminder of the principles applicable in public interest liquidations of foreign companies.