For the first time in England and Wales, a court has ordered the winding up of a publicly listed limited company on the grounds of the loss of its substrate – the abandonment of the original primary object and purpose of the company . In About Klimvest PLC  EWHC 596 (Ch), His Honor Judge Cawson QC authorized liquidation at the request of a minority shareholder on the grounds of “just and equitable” under section 122(1)(g) of the 1986 Act on insolvency.
Following the sale of the company’s assets and business in January 2019, the controlling shareholder (who was also one of the respondents), wanted to use the proceeds of the sale to make investments in fledgling technology companies in instead of distributing them to shareholders pursuant to a liquidation. The petitioner argued that it was fair and equitable to liquidate the company since the object or the substratum of the company had come to an end. The majority shareholder defended the petition by arguing that the company had become an investment holding company.
Fair and equitable liquidation
The English court has the discretion under section 122(1)(g) of the 1986 Act to wind up a company if it finds that it is “just and fair” do this. Section 125(2) also requires that no other remedy be available to the claimant or, if there is another remedy available, that the claimant not act unreasonably in seeking to wind up the company instead to pursue this other remedy. An alternative remedy could be an offer to purchase the applicant’s shares.
Although the list of categories in which a petition for just and equitable liquidation may be brought is not exhaustive, recognized grounds include loss of substratum, breach of trust within a quasi-partnership, situations where the Petitioner was removed from office as a director in violation of an implied agreement or understanding that he was entitled to a seat on the board of directors, and where Petitioner and Defendant(s) entered into an agreement or an agreement to liquidate the company.
Loss of substrate
The court said that the starting point for identifying the company’s purpose was to consider the company’s memorandum, but it was also appropriate to look beyond that document.
The identification of the main or primary object or purpose of listed companies could be done by reference to documents made available to all investors before investing, usually the offering circular, as in the case present, or the prospectus.
The judge also considered that, in certain circumstances, it may be appropriate to review documents that are not available to investors until later. He suggested that there might be documents showing certain changes or developments that were widely known to investors but did not fundamentally change the primary or overriding object or purpose. There may also be instances where the documents show that there are changes or developments in the main objective of the company, to which the investors can be considered to have agreed.
In this case, the judge looked at an information memorandum dated November 2018, subsequent to both the memorandum and the company’s offering circular. He concluded that the company traded through subsidiaries it controlled and that the company was not simply an investment vehicle. These were essential to conclude that in November 2018 (shortly before the sale), the main objective of the company had not fundamentally changed.
The judge concluded from reviewing all of these documents that the primary purpose of the company was to develop and distribute productivity software for the training, support and translation of enterprise resource planning applications ( ERP), and to provide related consulting services.
Unable to continue main object?
Several authorities have established that to be successful in the field of bedrock loss, it must be impossible, at least in a practical sense, for the business to operate within its primary purpose. Mere cessation of commercial activities, even for a long period, would not satisfy this requirement.
The judge took into account the nature of the business and the sale of the company’s assets and business to conclude that it was impossible, or at least practically impossible, for the company to pursue its main object or even to recreate a similar company to pursue this main object. It was therefore justified, making a liquidation order on the ground just and fair.
Has the main object been clearly abandoned?
The judge held that while it was still possible to pursue the primary purpose of the corporation, there was a clear abandonment of the pre-existing principal or primary purpose or purpose of the corporation. Since the sale, the business intent had changed under the direction of the majority shareholder, to operate as a private investment fund at the discretion of the majority shareholder.
The judge considered that the sale as well as the proposed investment in technology companies, together, represented a clear abandonment of the company’s pre-existing primary purpose of developing and distributing productivity software and related consulting services, so that it was fair and just for the company to be dissolved.
It took place in Re Eastern Telegraph Co., Ltd.  2 All ER 104 only when the object of a business for which a company was incorporated has practically ceased to exist. Even if the vast majority of shareholders wanted to continue operating the company, the court would still issue a winding-up order. The reasoning is that shareholders have acquired shares of a corporation on the basis that the corporation will achieve a particular purpose, and shareholders cannot be forced against their will by the votes of other shareholders to venture their money on a different project and speculation.
The Australian Supreme Court in Victoria had also decided in Re Tivoli Freeholds Ltd  VR 445 only when the directors of a corporation cause it to undertake acts which are extraneous and different from what may reasonably be regarded as conforming to the general intention and common understanding of the members. Even if the corporation could continue to pursue its original objects as stated in its articles of association, it may still be fair and just to liquidate the corporation.
HHJ Cawson QC cited the two cases above and argued in this case that the company’s proposed investments at the discretion of the controlling shareholder constituted a fundamentally different activity than that carried on before the sale. The judge concluded that the company was proposing to engage in a course of conduct fundamentally outside or different from what could reasonably be considered to be consistent with the general intent or common understanding of the members.
The court rejected the majority shareholder’s argument that the plaintiff did not come to court with clean hands, finding that the allegations of share price manipulation had not been established on the basis of the facts .
Application in Hong Kong
Section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) gives the Hong Kong court the same discretion as in the United Kingdom (UK) to wind up a fair society and a fair ground.
Section 180(1A) of Cap. 32 is also broadly similar to section 125(2) of the 1986 Act, which provides that the court in Hong Kong shall “not to refuse to make a winding-up order on the sole ground that another remedy is available to the petitioners, unless he is also of the opinion that they are acting unreasonably in seeking to have the company liquidated instead of pursuing this other remedy”.
Although there have been cases in the past involving the loss of substrate as the basis for the liquidation of a company for just and equitable cause, the present case is significant because it has been held that the main object of a company is lost not only when it becomes impossible or practically impossible for the company to achieve it, but also when the main object has been or will be demonstrably abandoned.
It remains to be seen whether the Hong Kong courts would follow this ruling or how actions similar to this one would be handled. If Hong Kong follows this decision, it would most certainly be welcome for minority shareholders who would have an additional option to recover their investment funds from companies that are going down a completely different path from the one they initially went on. registered. However, it would certainly require special circumstances to be in play.