English high court winds up public listed company

The English High Court case Duneau v Klimt Invest SA & Ors [2022] EWHC 596 (Ch) is perhaps the first decision where a public listed company was wound up under section 122(1)(g) of the UK Insolvency Act 1986 on the just and equitable ground for loss of substratum. The case also considered whether a public listed company can be subject to equitable considerations and constraints such as those which apply in the context of quasi-partnership cases.

The case concerned a technology company, KlimInvest Plc (the Company), which was listed on the Afternext Stock Exchange in Paris. Around January 2019, the Company sold its business and assets to a Canadian private equity company. This resulted in the petitioner seeking to wind up the Company because the purpose of the Company had been abandoned following such sale.

Following a two-week trial, His Honour Judge Cawson QC directed that the Company be wound up on the just and equitable ground for loss of substratum. He held that:

• The first step is to identify the Company’s main or paramount object or purpose. For a publicly listed company, this is generally done by reference to material available to all investors. If there is some change or development that is widely known to investors that does not fundamentally change the main or paramount object or purpose, this material may be considered as well: at [230]

• The Company could no longer carry on the business that it was carrying on through its subsidiaries because that business was sold through the sale of the Company’s interest in its subsidiaries: at [240].

• Ultimately, it was impossible, or at least practically impossible, for the Company to pursue its main or paramount object or purpose after the sale of its business and assets. Even if it was practically possible, the Company has abandoned its pre-existing main or paramount object or purpose: at [245(i) and (ii)]. Even if this analysis were incorrect, the Company was embarking upon a course of conduct so fundamentally outside or different from what can fairly be regarded as having been within the general intention or common understanding of the members of the Company when they became members, that, subject to the existence of any alternative remedy and other discretionary considerations, it would be unjust and inequitable to require them, against their will, to continue to invest in the quite different and speculative venture that was proposed, and therefore just and equitable that the Company be wound up: at [245(iii)]

Three features of the case stand out

• First, in reaching its decision, the Court approved Jenkins J’s statement in Re Eastern Telegraph Co Ltd [1947] 2 All ER 104 that “if a shareholder has invested his money in the shares of the company on the footing that it is going to carry out some particular object, he cannot be forced against his will by the votes of his fellow shareholders to continue to adventure his money on some quite different project or speculation.”
  The company that was sought to be wound up in the Eastern Telegraph case after its physical assets were acquired by another company was a private one and Jenkins J in that case held that whether the company ceased to carry on its business depended on the true construction of the company’s memorandum of association: at 108. In Klimt Invest, the Judge extended the application of the principle set out above to publicly listed companies, albeit with the caveat that the company’s memorandum is only a starting point.
  Where a company seeks to raise capital from the public, one can easily see the force of the argument behind disincentivising that company from so readily pivoting from its original object or purpose. There must be accountability and, as Jenkins J held in Eastern Telegraph, this “is a matter on which the individual consent of every person who will be affected by the change of plan ought to be obtained.”
  The commercial reality of company dynamics may explain why in Eastern Telegraph, Jenkins J suggested that it would be premature to wind up the company on account of the foreign concessions the company still held: at 111. This suggests that the company may have been able to fulfil, revive or resume its purpose in the future. This argument was not available on the facts of Klimt Invest: the object or purpose of the Company fundamentally changed as it was going to embark upon acts which were outside and different from the general intention and common understanding of its members.

• Second, the Court affirmed the principle that the question whether a company can be wound up for failure of substratum is question of equity between a company and its shareholders. In this regard, Judge Cawson QC held that equitable considerations might arise as between shareholders in a public listed company, albeit it would be a rare event, and the concept of “legitimate expectation” ought to now correctly be considered in such terms: at [261] and [269].

• Third, the Court acknowledged the ongoing debate as to whether equitable considerations may arise in circumstances where there are other shareholders who are not parties to the agreement or understanding that is relied upon to support the existence of the equitable considerations. The Court did not decide this question but acknowledged that there were multiple views. On one view, it is doubtful such considerations may arise except perhaps where the third-party shareholders are in a small minority or closely connected to the parties to the agreement. On another wider view, such considerations may arise and may on the particular facts of the case constrain even the exercise of strict legal rights: at [276] to [280].