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Introduction
In Re Klimvest plc [2022] EWHC 596 (Ch), the High Court ordered a publicly listed company (plc) to be wound up pursuant to section 122(1)(g) of the Insolvency Act 1986 (the “Act”) using the Court’s discretionary powers to wind up on just and equitable grounds on the basis the company’s purpose had been lost.
Background
Klimvest plc (the “Company”) was a software publisher specialising in cloning software which publicly listed in 2006. Following an asset sale in January 2019 (“Asset Sale”), involving the sale of the Company’s entire business and assets, the Majority Shareholder (“MS”) intended to turn the Company into a private investment fund and not return the monies to the shareholders.
The Second Largest Shareholder (“SLS”) petitioned to wind up the Company on various grounds, including loss of substratum (meaning the company’s purpose and objects no longer existed). The SLS claimed that because the Company could no longer fulfil the purpose it was understood to have, it was just for its shareholders to require the Company to be wound up.
The Court’s Considerations
Before considering the various grounds upon which it was claimed the Company should be wound up, the Court considered the scope of the remedy being sought.
- Just and equitable winding up
Section 122(1)(g) of the Act confers upon the Courts discretionary powers to wind up a company if deemed ‘just and equitable to do so’. In addition, section 125(2) of the Act requires that to exercise these powers of discretion to wind up on just and equitable grounds, there must be no other remedy available to the petitioner, or if such other remedy exists, the petitioner’s conduct must not be unreasonable in seeking the winding up.
The MS argued that an alternative remedy was available to the SLS because an offer was made to buy out their shares. However, the Court held that the offer was not of ‘fair value’ and so it was not a realistic alternative remedy.
- Loss of substratum
In determining whether the company had lost its purpose, the court considered three principal questions
a. Can this purpose continue following the Asset Sale?
The Court determined that the Company’s Memorandum of Association is the starting point however, the Court can assess other evidence if it was made reasonably available to shareholders before investing. The Court concluded that the Company’s purpose prior to the Asset Sale was trading and not investment because the Company traded through subsidiaries it controlled. The purpose of the Company was to produce cloning software.
b. Can this purpose continue following the Asset Sale?
The Court concluded that following the Asset Sale it had become practically impossible for the company to continue its main purpose because of restrictions on the use of intellectual property in the purchase agreement.
c. Will this purpose be pursued or abandoned?
The Court concluded that the main purpose of the Company had been abandoned following the Asset Sale, because it was practically impossible to continue it due to the above intellectual property restrictions.
Conclusion
The Court ultimately found that it was just and equitable for the Company to be wound up at the Court’s discretion, because there had been a loss of “substratum” (i.e. the Company had lost its fundamental basis or foundation) and there was no realistic alternative remedy for the petitioner, the SLS.
It was clarified that identifying a loss of substratum is a matter of equity between a company and its shareholders which involves looking beyond simply the company’s constitutional documents, and that it applies to listed companies as well as private limited companies.
This judgment demonstrates the Court’s wide discretionary powers when considering a winding up petition and broadens the options for minority shareholders in a plc to require a return of their investment where the purpose of the company has fundamentally changed since the time of investment.
Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.
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