Jersey Unreported Judgments

[2010]JRC107

royal court

(Samedi Division)

8^th June 2010

Before     :

W. J. Bailhache, Q. C., Deputy Bailiff, and Jurats Morgan and Nicolle.

 

IN THE MATTER OF BELGRAVIA ASSET MANAGEMENT LIMITED

AND IN THE MATTER OF THE BELGRAVIA GOLD AND RESOURCES FUND L.P.

AND IN THE MATTER OF THE COMPANIES (JERSEY) LAW 1991

Advocate T. V. R. Hanson for the Representors.

Advocate D. M. Cadin for the Respondent.

judgment

the deputy bailiff:

1.        Belgravia Asset Management Limited ("BAM") is a Jersey registered company which with two other related companies was the subject of an Order of the Royal Court on 15^th September 2008, for a just and equitable winding up under Article 155 of the Companies (Jersey) Law 1991.  The affairs of the companies were placed in the hands of Deloitte & Touche LLP as professional liquidators. 

2.        On 10^th October, 2008, the Royal Court sat to consider an application by the joint liquidators.  Two of the Court's Orders on that day are material for present purposes:-

(i)        The Court order that Article 159(4) of the 1991 Law, which confirms that no action shall be taken or proceeded with against a company the subject of a creditors winding up, except by leave of the Court and subject to such terms as the Court may impose, should apply equally to the winding up of the companies in liquidation;

(ii)       Article 166 relating to the application of the law relating to désastre and Article 174 of the 1991 Law relating to unenforceability of liens was also ordered by the Royal Court to apply to the winding up of the companies in liquidation. 

3.        The Representors make their present application by which they seek leave to bring proceedings against BAM substantially in the form of the draft Order of Justice which was presented to the Royal Court.  Following the hearing, we gave leave to the Representors to bring proceedings against BAM substantially in the form of the draft Order of Justice attached but subject to the following conditions:

(i)        No judgment should be taken against BAM until claims against Mr Mitchell, the other named defendant in the draft proceedings had been finally determined. 

(ii)       No judgment should be enforced against BAM without further leave of the Royal Court. 

(iii)      The Representors, as plaintiff's in the draft proceedings should join Volaw Funds GP Limited to the proceedings on such terms as they were so advised, but the proceedings should assert against Volaw Funds GP Limited either the substantive claim that that company had acquired the liability of BAM, if any, or the claim that Volaw should indemnify BAM against its liability, if any, to the Representors, in each case pursuant to the Novation Agreement made on 3^rd December, 2008, between BAM and Volaw Funds GP Limited among others.

4.        By this judgment we now give reasons for that decision.

5.        It is unnecessary to go into great detail in this judgment in respect of the claims which the Representors seek to bring by their Order of Justice, but the material allegations are that in consequence of representations which the Representors allege were made by both Mr Mitchell and BAM, the Representors invested large sums of money in a limited partnership under the name of Belgravia Gold and Resources Fund LP.  The Representors anticipated, so the claim goes, that the general partner, BAM, and Mr Mitchell as a director of the general partner would invest the assets of the limited partnership, from which the limited partners anticipated that they would generate some profit.  The nature of the claim is that the representations alleged to have been made were in fact misrepresentations of one kind or another, and that there was a breach of fiduciary obligations on the part of both BAM and Mr Mitchell.  As a consequence the Representors sought to claim against the defendants an order for restitution and/or equitable compensation for breach of fiduciary duty, damages, interest and costs.

6.        Article 159(4) of the Companies (Jersey) Law 1991 provides as follows:-

"(4)     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".

7.        Article 166 of the same law provides:-

"(1) Subject to this Article and Article 165, in a creditors' winding up the same rules prevail with regard to the respective prospective rights of secured and unsecured creditors, to debts provable, to the time and manner of proving debts, to the admission and rejection of proofs of debts, to the order of payment of debts and to setting off debts as are in force for the time being with respect to persons against whom a declaration has been made under the Désastre Law with the substitution of references to the winding up for references to the désastre and references to the liquidator for references to the Viscount".

8.        By the Act of the Royal Court of 10^th October, 2008, these provisions apply to BAM, notwithstanding that it is subject to a just and equitable winding up rather than a creditors winding up.

9.        It is not difficult to understand why these provisions exist.  The purpose of these arrangements in relation to a creditors winding up is to ensure that there is an orderly and methodical winding up of the company.  The Viscount in the case of the désastre, or the liquidators in the case of a creditors winding up are given the responsibility of an orderly administration.  As a consequence therefore, Article 29 of the Bankruptcy (Désastre)(Jersey) Law 1990 provides a structure for the lodging with the Viscount in the case of the désastre, or the joint liquidators in the case of a creditors winding up, of all debts and liabilities, present or future or contingent to which the debtor is subject at the time of the declaration or to which the debtor becomes subject before payment of the final dividend by reason of an obligation incurred before the time of the declaration of désastre.  All these debts are provable in the désastre, or in the creditors winding up as the case may be.  The starting point, therefore, is that the Court generally would not expect to give leave for fresh proceedings to be brought against the Viscount or the liquidators in a creditors winding up because the administrative rules, which apply to the désastre or to the winding up as the case may be, are intended to provide for those situations.

10.      As to the principles which should be applied by this Court in considering an application of this kind for leave, we were referred to Bristol & West Building Society the trustee of the property of Back and another [1998] 1 BCLC 485, which contains some helpful guidance.  The language of Article 159(4) of the Companies (Jersey) Law 1991 is in very similar terms to section 130(2) of the Insolvency Act 1986, which itself was similar to the language to be found in section 231 of the Companies Act 1948.  That language has been found in Re Aro Co Limited [1980] 1 All ER 1067 at page 1075, in the judgment of Brightman L J, as he then was, to give the Court a free hand to do what is right and fair according to the circumstances of the case.  There seems little doubt that there is a wide discretion which the Court has to exercise.

11.      In his judgment in the Bristol & West Building Society case, David Young QC., sitting as a Deputy Judge of the High Court referred to an extract of principles which originated in a judgment of Master Lee QC in Ex p Walker (1982) 6 ACLR 423 at page 426, approved in Re Coastal Construction Pty (1994) 13 ACSR 329 at pages 331-332.  Those principles may be summarised as follows:-

(i)        An application for leave may be given if good cause is shown on the merits.  By that, the Court had in mind that a serious question fell to be tried, similar to that required for interlocutory relief, rather than a prima facie case.  The Deputy High Court Judge in the Bristol & West Building Society case contrasted that approach with Re Bank of Credit and Commerce International SA (No. 4) [1994] 1BCLC 419, where it was held that it was not necessary for the Court to undertake any investigation into the merits of the allegations made in the proposed claim provided that, on the face of the matter there was an arguable claim.  If there was no such arguable claim clearly leave should be refused on the grounds that it would be a waste of time and expense.  This latter approach was adopted as opposed to the Commonwealth approach in relation to this point of an examination on the merits. 

In our view the approach taken by the Courts of England and Wales on this point is to be preferred to that of the Australian Courts.  We do not think that it is appropriate for the Court to investigate the merits of the proposed claim, unless it is clearly unsustainable.  Such an investigation would needlessly complicate the process for obtaining leave, would be expensive for the creditors of the company in liquidation, and in circumstances such as the present one, would require a potentially large investigative exercise by the liquidators of the insolvent company possibly to the significant detriment of the creditors. 

(ii)       There must be no prejudice to the creditors or to the orderly administration of the bankruptcy if the action is to proceed. 

(iii)      The claim must be of a type which should proceed by action rather than through the proofing procedure in bankruptcy. 

(iv)      Leave is more likely to be granted where there is an insurance company standing behind the respondent to pay any judgment debt the plaintiff might obtain.  If successful, such an action is unlikely to prejudice the creditors of the respondent.  The section is not designed to protect an insurer. 

(v)       A condition is often imposed that the plaintiff will not enforce any judgement against the respondent without the leave of the Court.  This ensures that the bankruptcy court retains ultimate control.

(vi)      Mere delay itself in applying for leave will not affect leave being granted.  Leave is not to be withheld simply and solely as a punishment. 

(vii)     Leave may be granted after the expiry of the relevant period of limitation to continue an action commenced within the limitation period without the leave of the Court. 

12.       This summary of principles seems to us very sensibly to flag up the need for the Court, in the exercise of its discretion, recognising the potential of an action against the estate of the insolvent company, to have regard to the best interests of the creditors of the insolvent company which class potentially includes the putative plaintiff.  It seems to us that the principles which we have set out do form a helpful framework in considering applications of the present kind. 

13.      Advocate Hanson on behalf of the Representors argued that there were a number of reasons why the Court should nonetheless depart from the starting position, and should in fact grant leave in its discretion so that the Representors could bring the proceedings against BAM.  Those reasons were in essence these:-

(i)        This was an un-liquidated claim and it would seem unlikely that the liquidators of BAM would accept such a claim in the bankruptcy - and even if the liquidators were not prepared to take any point under Article 29 of the Désastre Law, it was possible that one of the creditors of BAM might seek to assert that Article 29 did not cover un-liquidated claims.  This would be to the prejudice of the Representors.  With all deference to the various ingenious submissions made by Advocate Hanson in this respect, the Court does not feel that it is necessary to reach any conclusions on this argument.  It seems to us that this is a point better raised in proceedings between parties who are or would be adversely affected by the result rather than be determined in a subsidiary argument in relation to the present application.  We have not therefore taken this argument into account. 

(ii)       The fact that the Representors had claims of a very similar kind to bring against Mr Mitchell meant that if no leave were granted to bring the same claims against BAM, there would be a risk of inconsistent findings as to liability, and a multiplicity of proceedings.  Having looked at the draft Order of Justice, and listened to Advocate Cadin for the Representors, we think that there is such a substantial risk, and for that reason we are prepared to grant leave to the Representors to bring the proceedings against BAM. 

(iii)      The issue of resulting costs to the liquidators of BAM was not relevant because by the Novation Agreement which we have mentioned, there was a practical way by which the liquidators could not only minimise costs but also recover the costs which they might incur by activating the indemnities provided under the Novation Agreement. 

14.      For the liquidators of BAM, Advocate Cadin emphasised three points:-

(i)        He said that in fact the wrong defendants had been identified by the Representors.  As a result of the Novation Agreement, he thought that the right defendant was not BAM but Volaw Funds GP Limited.  That company, he contended, should be before the Court. 

(ii)       In any event, the liquidators would be able to deal with the claims which were made in the draft Order of Justice if the Representors filed a proof of their claims in the just and equitable winding up.  This would enable the Court to deal with the matter if the liquidators reached a conclusion with which either of the creditors or the Representors disagreed. 

(iii)      If notwithstanding those points leave were to be given, BAM should be protected on the costs of the litigation.  In that context, Advocate Cadin advised us that the liquidators were running an overdraft of some £45,000 in relation to BAM, and there were a few claims against the company.  In essence therefore the liquidators had no money and no appetite for legal proceedings. 

15.      Advocate Cadin put forward a number of other points but these were subordinate to the points which were raised and set out above. 

16.      As we have indicated, we think there is a significant risk of inconsistent findings being made in different sets of proceedings if leave is not given to the Representors.  However, it seems to us to be important to ensure as far as possible that any litigation which does take place has all the right parties before the Court, and is conducted in such a way as does not cause unnecessary prejudice to liquidators who have no significant assets within the just and equitable winding up which they are conducting.  Advocate Hanson frankly conceded that he thought Volaw Funds GP Limited would seek to intervene, not least because that company would arguably face claims against it under the indemnities contained in the Novation Agreement if such liabilities were found to exist.  It would of course be possible to require the liquidators of BAM to seek to join Volaw as a third party to the proceedings once they had been commenced.  However we do not think that is the right course, partly on the grounds of further expense in the liquidation, which is to be ill afforded, and partly because, if the Representors are to recover any of their alleged losses, they would only do so by means of a claim against Volaw Funds GP Limited under the Novation Agreement.  It is therefore in the interests of justice that Volaw be joined to the proceedings and in the circumstances we think it an appropriate condition to make that if they wish to bring proceedings against BAM, they must join Volaw on such terms as they are so advised.  We frame the condition in that way because we recognise that there may be scope for choice on the part of the Representors as to the nature of any proceedings against Volaw, and it is for the Representors to make that choice. 

17.      We have also added a condition that there should be no judgment against BAM until claims against Mr Mitchell have been finally determined in order to ensure that the liquidators of BAM can take a judgment on its merits as to the extent to which it is necessary for them to participate in the litigation, without fear that there would be a summary judgment application at an early stage.  Similar considerations go to the condition that no judgement is to be enforced against BAM without leave.  The latter is a not uncommon condition which is attached to any permission or leave which is given in circumstances such as this, and it enables the bankruptcy court to retain control over the administration of the bankruptcy, or in this case the just and equitable winding up. 

18.      It was contended by Advocate Cadin that BAM should be shielded from the full costs and expenses of the litigation by not being obliged to file pleadings and/or provide disclosure of documents and/or participate in any trial.  It was contended that Volaw holds or has access to all the relevant records in relation to the fund, given the Novation and assignment which has been referred to, and accordingly that in terms BAM could add nothing to the trial.  In our view it is too early to reach those conclusions.  We think that the liquidators will wish to consider the nature and extent of any answer they decide to file, perhaps indeed having regard to any answer which may be filed with Mr Mitchell and/or by Volaw.  Furthermore, it is not obvious to us at this stage that there will inevitably be no additional discovery which ought to be sought from the liquidators of BAM once pleadings have closed, and there is no necessary guarantee at this stage that Volaw will have all the relevant documents in relation to the claims which might be made.  However, we agree that it may be appropriate for the liquidators of BAM to seek some procedural shields in the litigation from time to time.  In the circumstances we add the condition that the liquidators may seek such procedural shields which the court dealing with the litigation will consider on their merits, no doubt having regard to the comments in this judgment; but subject therefore to any such orders, BAM will be treated as a full party to the litigation.   

19.      In relation to the costs of the hearing before us, we have noted that the Representors have obtained the leave which they have sought, which had been at least in part resisted by the liquidators of BAM; but also that the Court has substantially attached the conditions to the granting of such leave that the liquidators of BAM requested us to do, notwithstanding objections from the Representors.  In the circumstances, both sides before us have some of the points at issue, and accordingly we have resolved to make no order as to costs in relation to the present hearing. 

Authorities

Companies (Jersey) Law 1991.

Bankruptcy (Désastre) (Jersey) Law 1990.

Bristol & West Building Society the trustee of the property of Back and another [1998] 1 BCLC 485.

Insolvency Act 1986.

Companies Act 1948.

Re Aro Co Limited [1980] 1 All ER 1067.

Walker (1982) 6 ACLR 423.

Re Coastal Construction Pty (1994) 13 ACSR 329.