Minority shareholders invoke loss of substratum ground to wind up PLC

In Re Klimvest plc [2022] EWHC 596 (Ch), the petitioner Eric Duneau sought to have the plc wound up on the basis that the substratum (or purpose) of the company had ended following the sale of the assets and business in 2019.

Following the asset sale, the controlling shareholder sought for the company to utilise the proceeds to make new investments rather than distribute the proceeds of sale to the shareholders under a liquidation.

The petitioner sought to have the company wound up to return their investments to them. The controlling shareholder defended the petition on various grounds, including that making investments fell within the scope of the company’s purpose and, therefore, the purpose had not come to an end.

Loss of substratum 

Following the trial in February 2022, His Honour Judge Cawson QC (sitting as a High Court Judge) handed down a 70-page judgment on 17 March 2022. 

The judge considered that particular insight in the circumstances of the present case is provided by the reasoning as to why loss of substratum or purpose might prove a basis for winding up on the just and equitable ground as explained by Jenkins J (later Lord Jenkins) in Re Eastern Telegraph Co., Ltd. [1947] 2 All ER 104. At 109F, he quoted with approval the first paragraph of the headnote to the report of the judgment of the Court of Appeal in Re Haven Gold Mining Company (1882), 20 ChD 151, namely:

“Where the court is satisfied that the subject-matter of the business for which a company was formed has substantially ceased to exist, it will make an order for winding up the company, although the large majority of the shareholders desire to continue to carry on the company.

Jenkins J then continued:

“That, I take it, means 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.”

In the present case, the judge decided that, following the sale, the company had indeed lost its substratum. The judge pointed to three reasons for reaching this conclusion:

• It had become impossible, or at least practically impossible, for the company to pursue its paramount object or purpose, given the sale of the company’s assets and the particular nature of the business of the company.
   
• Even if it could, the sale of the company’s assets and the proposal to invest in promising technology companies were a very different venture from that proposed initially. They represented a “clear abandonment” of the pre-existing purpose of the company.
   
• The majority shareholder effectively proposed turning it into their own private investment vehicle. This was fundamentally different from what could reasonably be regarded as within the original common understanding of the company’s shareholders when they became members.

The judge, therefore, made the order to wind the company up.

Implications

This judgment broadens the options available to minority shareholders who oppose attempts by those in control of the company to change its business fundamentally. 

This judgment helps to clarify that in identifying the main object or purpose for which shareholders are taken to have invested their money, the court may consider any material available to all investors before investing.

Companies and majority shareholders should be aware that they may not be free to abandon their previous activities and pursue a fundamentally different business model - even in a company with broad or unrestricted objects in its memorandum and articles of association.

Please follow this link to access the judgment. Re Klimvest plc [2022] EWHC 596 (Ch)

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