Royal Court Explores Shareholder Remedies, Just & Equitable Winding up, and Ratification of Breaches by Directors

The facts

The facts of the case were somewhat unusual and in part disputed between the parties. In brief, the shares in GEL were held by a number of investors, including our client. GEL held a 49% shareholding in a Qatari manufacturing company, BSI. The other shareholder in BSI, Detco, was a Qatari company. The investment was governed by a shareholders’ agreement entered into in 2006.

BSI encountered various financial difficulties over the years, with multiple funding rounds. However, the evidence over the extent of those financial difficulties was conflicting, and the uncertainty over the company’s value would become highly relevant to the decision to grant a just & equitable winding up.

By June 2013, there had been various attempts to sell GEL’s shares in BSI, and Mr Mirza had made at least one proposal to buy our client’s shares. As part of the discussions about the sale of GEL’s shares in BSI, a valuation was performed by Deloitte. Mr Mirza was by that time the majority shareholder of GEL as well as its sole director.

The heart of the dispute was what happened in mid-2013 (referred to as the Transaction), when Mr Mirza transferred GEL’s shareholding in BSI to Detco, at which point GEL’s loans to BSI and Detco were also written off or forgiven. Mr Mirza’s case was that our client had been told about the Transaction. Our client was clear that he had not been told.

GEL was struck off for non-payment of fees in October 2013. Our client had it restored to the register in May 2019, in the belief that GEL still owned shares in BSI. He found out that they had been given away only in September 2019.

Following GEL’s reinstatement, in 2020, Mr Mirza held an EGM in which the other shareholders (excluding Mr Mirza, who was conflicted, and our client who did not support ratification) purported to ratify the Transaction using the mechanism in Article 74(3) of the Law.

Astonishingly, as the Court noted, no contemporaneous documentation relating to the Transaction existed. The Court therefore had to base its findings of fact on witness evidence and exchanges of emails and messages between our client, Mr Mirza and Mr Rubie, in the years following the Transaction.

The Transaction, the Court found, was deliberately concealed from our client. Mr Mirza and Mr Rubie misled our client on a number of occasions over the intervening years and led him to believe, at least by implication, that he still had an interest in GEL and BSI. Our client’s account of his exclusion from GEL and his discussions with Mr Mirza and Mr Rubie in the years following the Transaction was found to be credible, while Mr Mirza and Mr Rubie’s evidence was found to be implausible, inconsistent, unconvincing and evasive.

The Court’s decision

Following the ETFS judgments, the Court identified three questions it needed to ask:

1. Had our client lost confidence in the probity and impartiality of Mr Mirza to manage GEL?
2. Was that loss of confidence justifiable?
3. Was it sufficient to prompt a just & equitable winding up of GEL?

The answers to questions one and two were clear. The Court found that our client had lost confidence in Mr Mirza’s probity and impartiality, even before the Transaction, and that this was justifiable bearing in mind the Transaction and the fact that it was concealed from our client.

The Court considered several factors in answering the third question. There was the issue of the 2020 ratification as evidence that the majority of shareholders opposed the investigation of the Transaction. The Court rejected this as being no answer to the application. It also rejected any assertion of delay, having found that our client did not find out about the Transaction until 2019.

What the Court struggled with was the proportionality of ordering a just & equitable winding up, in circumstances where GEL argued that the value of BSI in 2013 was minimal and the prospect of any recovery for our client in any claims to be brought by liquidators was uncertain. The Court ultimately decided that it was hard to place any reliance on assertions made in 2021 about the value of GEL and its investment in BSI in 2013 given the lack of credibility of Mr Mirza and Mr Rubie’s evidence. There was evidence, including expert evidence, from our client that BSI did have value in 2013. The fact that our client was prepared to fund the liquidator was also relevant.

Ratification

The Court’s observations on the Article 74 ratification mechanisms were interesting and are likely to have wider relevance.

The ratification mechanisms for breaches of directors’ duties in Article 74(2) and (3) of the Law are well-established and, in the case of Art 74(2), widely used. Ratification under Art 74(2) is routinely obtained during corporate transactions as a safeguard, for example when a subsidiary guarantees its parent company’s obligations. Art 74(3) is more unusual and allows for ratification by a majority of shareholders rather than unanimity.

The Court accepted our client’s submissions on the potential limits of Article 74 ratification. Directors’ duties in Jersey go beyond the basic statutory duties in Art 74(1), as noted by the Court of Appeal in ETFS, to include such duties as a director’s duty to exercise their powers for a proper purpose. The Court noted that one example where ratification may not be possible is where a majority of shareholders have misappropriated or expropriated company property.

It is important to note, although not explored in the Court’s judgment, that Articles 74(2) and (3) both explicitly only cover breaches of the directors’ duties set out in Art 74(1): to act honestly and in good faith with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Art 74(2) also appears to acknowledge that other rules of law permitting member ratification also exist, but again limits that to breaches of the duties set out in Article 74.

Given the limited statutory expression of directors’ duties in Jersey law, and the Court’s acknowledgment of the potential limits of ratification, exactly what is capable of being ratified remains to be seen. What is certain is that directors cannot simply rely on Article 74 to wash away their own misfeasance.

By Eleanor Davies, Associate