For the first time in England & Wales, a court has ordered the winding-up of a listed plc on the grounds of loss of substratum – the abandonment of the company's original main object and purpose. In Re Klimvest PLC  EWHC 596 (Ch), His Honour Judge Cawson QC allowed the winding-up on the application of a minority shareholder on the "just and equitable" ground under section 122(1)(g) of the Insolvency Act 1986.
Following the sale of the assets and business of the company in January 2019, the controlling shareholder (who was also one of the respondents), wished to use the sale proceeds to make investments in fledgling technology companies instead of distributing them to shareholders pursuant to a liquidation. The petitioner contended it was just and equitable to wind up the company since the purpose or substratum of the company had come to an end. The controlling shareholder defended the petition arguing that the company had become an investment holding company.
Just and equitable winding up
The English court has discretion under section 122(1)(g) of the 1986 Act to wind up a company if it finds that it is "just and equitable" to do so. Section 125(2) also requires that there be either no other remedy available to the petitioner or, if there is some other remedy available, the petitioner is not acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. An alternative remedy could be an offer to purchase the petitioner's shares.
While the list of categories under which a just and equitable winding up petition might be brought is not exhaustive, recognised grounds include loss of substratum, breakdown of trust and confidence within a quasi-partnership, situations where the petitioner has been removed as a director in breach of an implied agreement or understanding that he was entitled to a seat on the board, and where the petitioner, and respondent(s) entered into an agreement or understanding to wind up the company.
Loss of substratum
The court said the starting point in identifying the company's purpose was to consider the company's memorandum of association, but that it was also appropriate to look beyond this document.
The identification of the main or paramount object or purpose of public listed companies could be done by reference to materials available to all investors prior to investing, typically the offering circular, as in the present case, or the prospectus.
The judge also considered that in some circumstances it may be appropriate to look at materials that are only available subsequently to investors. He suggested that there may be materials showing certain changes or developments that were widely known to investors but which did not fundamentally change the main or paramount object or purpose. There may also be cases where materials show that there are changes or developments in the main purpose of the company, to which the investors can be seen to have agreed.
In the present case, the judge looked at an information memorandum dated November 2018, which was subsequent to both the memorandum of association, and offering circular of the company. He concluded that the company was trading through subsidiaries that it controlled and that the company was not merely an investment vehicle. These were key to the finding that as at November 2018 (shortly prior to the sale), the company's main purpose had not fundamentally changed.
The judge concluded from reviewing all these materials that the company's main object was to develop and distribute productivity software for training, support and translation of Enterprise Resource Planning (ERP) applications, and to deliver related consultancy services.
Impossible to pursue main object?
Several authorities had established that to succeed on the loss of substratum ground, it has to be impossible, at least in a practical sense for the company to carry on business within its main object. Mere discontinuance of business activities even for a lengthy period would not meet this requirement.
The judge considered the nature of the business and the sale of the company's assets and business in finding that it was impossible, or at least practically impossible for the company to pursue its main object or even to recreate a like business to pursue that main object. This therefore was justified, making a winding up order on the just and equitable ground.
Has the main object been clearly abandoned?
The judge held that even if it were still possible to pursue the company's main object, there was a clear abandonment of the pre-existing main or paramount object or purpose of the company. Ever since the sale, the business intention had changed at the controlling shareholder's direction, into operating as a private investment fund at the controlling shareholder's discretion.
The judge considered that the sale as well as the proposed investment in technology companies, together, represented a clear abandonment of the pre-existing main object of the company to develop and distribute productivity software and related consultancy services, such that it was just and equitable for the company to be wound up.
Course of conduct
It was held in Re Eastern Telegraph Co., Ltd.  2 All ER 104 that where the subject matter of a business for which a company was formed has substantially ceased to exist. Even if the large majority of shareholders wished to continue to carry on the company, the court will still make a winding up order. The rationale is that shareholders acquired shares of a company on the basis that the company as going to carry out some particular object, and shareholders cannot be forced against their will by other shareholders' votes to adventure their money on some different project and speculation.
The Australian Supreme Court of Victoria had similarly decided in Re Tivoli Freeholds Ltd  VR 445 that where directors of a company cause it to embark upon acts which are outside and different from what can fairly be regarded as within the members' general intention and common understanding. Even if the company could still pursue its original objects as set out in its memorandum of association, it may still be just and equitable to wind up the company.
HHJ Cawson QC cited the two cases above and held in the present case that the proposed investments of the company under the controlling shareholder's discretion was a fundamentally different activity to that carried on prior to the sale. The judge found that the company proposed to embark upon a course of conduct fundamentally outside or different from what could fairly be regarded as having been within the general intention or common understanding of the members.
The court dismissed the controlling shareholder’s argument that the petitioner had not come to court with clean hands, finding that allegations of share price manipulation had not been made out on the facts.
Application to Hong Kong
Section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) provides the Hong Kong court with the same discretion as that in the United Kingdom (UK) to wind up a company on the just and equitable ground.
Section 180(1A) of Cap. 32 is also largely similar to that under section 125(2) of the 1986 Act, which stipulates that the Hong Kong court should "not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy".
While there have been cases in the past involving the loss of substratum as a basis for winding up a company on the just and equitable ground, the present case is of significance as it was held that the main object of a company is lost not only when it becomes impossible or practically impossible for the company to carry that out, but also when the main object has been or will be clearly abandoned.
It remains to be seen whether Hong Kong courts would follow this decision or how actions similar to this will be addressed. If Hong Kong does follow this decision, it would most definitely be very welcome to minority shareholders who would have an additional option to retrieve their investment monies from companies that embark on a completely different path to that for which they initially signed up. It would however certainly require particular circumstances to be in play.
Authored by Byron Phillips, Nigel Sharman, and Chloe Wong.