Jersey Unreported Judgments

[2011]JRC166

Royal Court

(Samedi)

25 August 2011

Before     :

M. C. St. J. Birt, Esq., Bailiff, and Jurats Fisher and Kerley.

 

REPRESENTATION OF ALAN ROBERTS AND JOHN PIROUET (AS JOINT LIQUIDATORS) IN THE MATTER OF COREBITS SERVICES LIMITED (IN LIQUIDATION) AND ZOOMBITS LIMITED (IN LIQUIDATION)

AND IN THE MATTER OF ARTICLES 170 AND 186A OF THE COMPANIES (JERSEY) LAW 1991.

Advocate A. J. Dessain for the Representors.

judgment

the bailiff:

1.        The application before us this morning is by the joint liquidators of two companies which are in a creditors' winding-up, namely Corebits Services Limited and Zoombits Limited.  The liquidators wish to pool the assets and liabilities of the two companies in order to treat the assets and liabilities as if the companies were a single entity, on the grounds that the way the companies were traded will make it disproportionately expensive to work out the assets and liabilities of each company individually. 

2.        The companies are both Jersey companies under common ownership.  They operated as fulfilment companies for computer, mobile phone, and other electronic and technology-related products.  Both companies traded historically under the trading name "Memorybits" and had a website under that name. 

3.        A significant part, possibly something in the region of 80%, of the companies' business related to sales of certain adapters and software which enabled users of Nintendo products to download unlawful copies of Nintendo games from the internet.  As a result of threatened litigation by Nintendo, Corebits agreed in February 2010 not to market such items, although we understand Zoombits was not actually a party to that agreement.  Nevertheless this agreement led to a dramatic downturn in the companies' business, with something in the region of one half of the workforce being laid off in July 2010 and ultimately the companies being placed in a creditors' winding-up on 29^th October, 2010. 

4.        The liquidators have been unable to ascertain a good business reason for the business to have traded through two companies; they operated from the same premises, with the same staff, and with one principal website.  There appears to have been a switch in emphasis at the end of July 2010 with most of the business thereafter being done by Zoombits. 

5.        Having now investigated the affairs of the companies, the liquidators have concluded that the statement of affairs filed at the time of the liquidation does not reflect the true financial position of the companies.  The figures which the liquidators have developed based upon that statement of affairs, suggested that the unsecured non-preferential creditors of Corebits might receive a 43% return whereas creditors of Zoombits might receive 100%.  There are some 66 claims against Corebits and 24 against Zoombits.  The total claims accepted by the liquidators at present come to £1,075,827.93 of which the vast majority - we have not been given the exact figure but it would appear to be something close to £1,000,000 - are against Corebits.  If all the assets and liabilities are pooled then creditors of each company will receive a dividend in the region of 56%. 

6.        The liquidators assert that the affairs of the companies have been seriously intermingled.  They point out certain specific aspects in the affidavit sworn by Mr John Pirouet, one of the joint liquidators:-

(i)        The main website was registered in the name of Zoombits.  However it was built up primarily by Corebits, which traded before Zoombits and therefore, if equity for creditors is to be achieved, a claim would have to be made by Corebits against Zoombits. 

(ii)       There is real doubt as to which company owns which items of stock.  In the absence of pooling, each item of stock would have to be traced in order to establish which company had paid for it and which company the supplier concerned had contracted with. 

(iii)      The statement of affairs contained a figure of £75,000 as representing a claim by Corebits against Zoombits for services provided or payments made by Corebits on behalf of Zoombits.  For reasons set out in the affidavit, the liquidators believe that this is a considerable understatement given the way costs such as rent, staff costs and utility costs were allocated between the two companies. 

(iv)      After July 2010 trading was undertaken primarily by Zoombits, as we have said, yet many creditors in respect of that period have claimed against Corebits rather than Zoombits because they had always previously done so.  The liquidators believe therefore that a number of the claims against Corebits should in fact be against Zoombits. 

(v)       Some of the stock sold by Zoombits in this latter period had in fact been paid for by Corebits, which would therefore mean that Corebits would have a claim against Zoombits. 

7.        All of these matters favour Corebits and would therefore result in a greater payment for creditors of Corebits than the figures discussed in the statement of affairs and a reduction in the dividend to creditors of Zoombits.  Mr Pirouet says that it is speculation at this stage as to what precise end result would be achieved if the liquidators attempted to establish the exact financial position of each company, but says that it is possible that the end result would provide a fairly similar return to the creditors of each company.  He points out that that would certainly be a fair result given the way the companies operated because, on that basis, there is no justifiable reason for one company being more solvent - or rather less insolvent - than the other. 

8.        It is estimated by the liquidators that the task of carrying out the detailed research work, which would be required to ascertain the true position, would cost between £100,000 and £200,000 and this would of course go to reduce the assets available to creditors. 

9.        It is the clear view of the liquidators that the affairs of the two companies are seriously co-mingled and that it would cost a material amount to disentangle the position.  It would have an uncertain result but would undoubtedly lead to a greater recovery by creditors of Corebits than envisaged in the statement of affairs and a lesser recovery by creditors of Zoombits.  In the circumstances the liquidators are firmly of the view that pooling is fair, speedy and appropriate.  They have written to all the creditors of both companies and we have seen the letter which was sent out.  We are satisfied that it sets out the position very clearly and also very fairly.  We shall return in due course to the responses to that letter. 

10.      The next point which we have to consider is whether there is jurisdiction to make the order requested if we believe it to be the right course to follow, and that is because this is the first occasion on which such an order has been sought by liquidators in a winding-up under the Companies (Jersey) Law 1991 rather than by the Viscount in a désastre. 

11.      Although there is a dearth of reported judgments, there are many previous examples of the Court having authorised pooling in désastres.  These are summarised at paragraph 5.27.2 of Jersey Insolvency and Asset Tracking by Dessain and Wilkins 3^rd edition and we would quote the passage briefly as follows:-

"The Royal Court has authorised a "pooling" (general consolidation) in connected insolvencies where this has been demonstrated to be in the best interests of creditors (such as where there has been an inextricable intermingling of funds). 

Accordingly, where it is impossible, impracticable and disproportionately expensive to identify individual rights the pooling of assets and/or liabilities represents a practical solution warranted on just and equitable grounds."

The text then goes on to refer to many cases in which this has been done. 

12.      The only reasoned judgment in relation to such orders is that of Bailhache, Deputy Bailiff, in Re Royco Investment Company Limited [1994] JLR 236.  In that case the Viscount in a désastre applied for permission to remit the funds of the company to the English liquidator of other companies in the group in order to allow the English liquidator to pay creditors on the basis of a pooled arrangement sanctioned by the High Court in England.  At page 239 Bailhache, Deputy Bailiff said this:-

"In any désastre, it is the interests of the creditors which must be borne primarily in mind.  There is no sense in employing funds which would otherwise be paid to the creditors in pursuing lines of enquiry with only a remote prospect of recovering further assets.  That is particularly important, in our judgment, where the affairs of the debtor company are inextricably intermingled with other entities, the affairs of which are being administered in another jurisdiction.  Furthermore, we have been invited, quite rightly, to have regard to the principles of comity.  The High Court in England had reached the conclusion that the compromise put forward was in the interests of the general body of creditors not only of Royco Jersey, but of the other associated companies.  We can see no good reason for reaching a different conclusion.  Like Millett, J. we were entirely satisfied that the scheme of distribution proposed was the fairest both to the creditors and to the investors." 

13.      As we say, those cases all related to a désastre whereas this is a creditors' winding-up under the 1991 Law.  In England and Wales it has been held that there is jurisdiction for the court to approve a pooling arrangement in such cases.  In Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 the Court of Appeal held that power to do so is to be found in the statutory powers of liquidators to compromise claims as set out in paragraphs 2 and 3, Part 1, Schedule 4 of the Insolvency Act 1986 which are in the following terms:-

"2. Power to make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company, or whereby the company may be rendered liable.

3. Power to compromise, on such terms as may be agreed -

(a) all calls and liabilities to calls, all debts and liabilities capable of resulting in debts, and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and

(b) all questions in any way relating to or affecting the assets or the winding up of the company".

14.      The Court of Appeal said that it was not appropriate to insist on proceeding under a scheme of arrangement under the Companies Act because everything was so mixed up in that case.  The Court of Appeal therefore endorsed the decision of Nicholls V-C in the High Court in Re Bank of Credit and Commerce International SA (No 3) (1993) BCLC 106 where he had said at 111:-

"The pooling agreements are not conditional upon acceptance by creditors.  Despite this, I am in no doubt that the agreements are so plainly for the benefit of the creditors that I should approve them without further ado.  I am satisfied that the affairs of BCCI SA and BCCI Overseas are so hopelessly intertwined that a pooling of their assets, with a distribution enabling the like dividend to be paid to both companies' creditors, is the only sensible way to proceed.  It would make no sense to spend vast sums of money and much time in trying to disentangle and unravel."

15.      Advocate Dessain has referred us to Article 170 of the 1991 Law, the relevant part of which is in the following terms:-

"(1) The liquidator in a creditors' winding up may, with the sanction of the court or the liquidation committee (or, if there is no such committee, a meeting of the creditors) -

(a) pay a class of creditors in full;

(b) compromise any claim by or against the company.

(2) The liquidator may, without sanction, exercise any other power of the company as may be required for its beneficial winding up."

16.      One has to say that Article 170 is in somewhat narrower terms than the equivalent English statute which was relied upon in the BCCI case.  But, the matter is put beyond doubt by Article 186A of the 1991 Law which reads as follows:-

"(1) The following persons, namely -

(a) the company, in a summary winding up;

(b) the liquidator or a contributory or creditor of the company, in a creditors' winding up,

may apply to the court for the determination of a question arising in the winding up, or for the court to exercise any of its powers in relation to the winding up.

...

(3) The court may exercise all or any of the powers that would have been exercisable by it or by the Viscount if a declaration had been made in relation to the company under the Désastre Law and may make an order terminating the winding up."

17.      It is clear from that provision that, in a creditors' winding up, the Court may on application make any order which it could have made in relation to a désastre.  It is also clear from what we have said earlier that there is ample precedent for the Court in a désastre making a pooling order and therefore we are quite satisfied that there is jurisdiction for the Court to do so in relation to a creditors' winding up. 

18.      So we return to the question of whether we should approve the application to pool the assets and liabilities in this case so that all the creditors of both companies will be treated in like manner.  We are entirely satisfied for the reasons set out by the liquidators that it is appropriate to do so.    The observations of Bailhache, P.B, in Royco and Nicholls V-C in BCCI referred to earlier are equally applicable to the facts of this case.  The costs involved in ascertaining the strict position would be disproportionate and would prejudice the creditors as a body.  Furthermore it is clear from the evidence that if that exercise were done, it would favour the creditors of Corebits as against the creditors of Zoombits, which would bring the situation to or closer to the parity which will be achieved by the order which we are asked to make. 

19.      The only question we have had to consider carefully is whether the creditors should be convened or whether we should order that a creditors' meeting be held.  However, as we have already pointed out, the liquidators wrote to all the creditors of both companies setting out the position very clearly, setting out the consequences of pooling in the way we have described above, and telling creditors of today's hearing, thereby giving them an opportunity of attending should they wish.  The letter also invited creditors to contact the liquidators if they had any concerns.  Only two creditors have done so.  One raised the question of whether the Zoombits creditors should not retain their 100% benefit but it turns out he is in fact a creditor of Corebits; following a reply from the liquidator he has not taken the matter further other than to ask for an update as to progress.  The other creditor simply asked for an update as to progress.  Accordingly there have been no objections from any of the creditors and in particular none from any of the creditors of Zoombits who, on the face of it, might be thought to be adversely affected by the order we are making. 

20.      For the reasons we have given, we are satisfied the creditors have had ample opportunity to express their views in this matter and we are also satisfied that what is proposed is clearly in the interests of creditors as a whole, as it will avoid the considerable expense of undertaking a detailed exercise which may or may not be productive in the long term in any event. 

21.      We therefore approve the application. 

Authorities

Jersey Insolvency and Asset Tracking by Dessain and Wilkins 3rd edition.

Re Royco Investment Company Limited [1994] JLR 236.

Companies (Jersey) Law 1991.

Re Bank of Credit and Commerce International SA (No 3) (1993) BCLC 1490.

Insolvency Act 1986.

Re Bank of Credit and Commerce International SA (No 3) (1993) BCLC 106.