Vol 2 (2005) - Issue 5

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Was This a UK or US Company, and Who Would Decide?

In September 1997, I was approached through a solicitor by two individuals who advised me that they were shareholders and creditors of a company against which a winding-up petition had been presented at their request. I little thought at the time that the assignment would become a highly complex case involving legal proceedings in the UK and in the US.
Before going into detail, a little background is necessary. The individuals had been suppliers to a company carrying out a contract in Russia backed by the Export Credits Guarantee Department (ECGD). Unfortunately (but as is common in this part of the world) the contract had become disputed by various parties and had stalled.
The individuals - my clients as they became - had been advised that it would be necessary to raise additional funding to allow the contract to proceed. They had therefore agreed to provide that funding by acquiring part of the equity of the primary supplier. This had been achieved by setting up a shell company (D) into which they invested an initial sum of USD 1 million.
These funds were used to assist the purchase of shares in the supplier company with my clients having approximately 59%. The shares were held on trust for the investors by the directors of the supplier company.
Unfortunately for the investors, they had then become aware that the directors of D had made an application to the Registrar of Companies that the company be struck off pursuant to the provisions of Section 652 of the Companies Act 1985.
As they had invested a million dollars and believed they were shareholders in D, they were clearly concerned. They received no satisfactory explanations from the directors, and had sought legal advice. That advice eventually culminated in a winding-up petition being presented against D, which was heard in the High Court some months later. A winding-up order was made, and at this point I was appointed to act as liquidator to the company.
The first priority was to establish the status of the company’s assets, which were principally the investment in the contracting company (S), which had been acquired by D. Our staff were immediately sent to the registered office of S to ascertain who the shareholders were, as listed in the Register of Members. This revealed that the shares had been transferred from S to S2, a company incorporated in Delaware, USA.
This was obviously an even more worrying situation, and a meeting was held with my clients and their solicitors to consider ways of exercising control over S and its business. A possible remedy was injunctive proceedings, which would have the effect of initially freezing and then passing control of the relevant shares back to the UK shareholder (now the liquidator) and allow for the Board of Directors of S to be controlled.
It was decided to seek advice from counsel about the appropriateness of this course, and a conference was arranged at short notice. The principal issues which counsel was asked to consider were as follows:

1. Was the liquidator in fact still the holder of the shares in the company, and/or could they be seized pursuant to the provisions of Section 234 of the Insolvency Act 1986?

2. Was the US Company the same entity as the UK Company now in liquidation?

3. Would injunctive proceedings be required by the liquidator to seize the shares in S?

4. Would the Registrar of Companies in Delaware recognize the appointment of a UK liquidator, or would it be necessary to go to Federal Court in the US to have the appointment recognized?

The conference took place and the following advice was given:

1. Shares do not fall within the definition of property as defined in Section 234(4) of the Insolvency Act 1986, and it was therefore not possible for the liquidator to exercise a lien over these, or to seize them as property of the company.

2. In order to seek an injunction in the UK Courts in respect of the shares, it would be necessary to provide for at least one day in court together with cost indemnities and an undertaking in damages. Given that the directors were not co-operating in providing information, my clients felt it would be too dangerous to give an open-ended indemnity and other routes should be considered.