In a very recent judgment handed down last Thursday (17 March 2022), the English High Court ordered the winding up of a public company on a relatively uncommon ground – loss of substratum.
The judgment (Re Klimvest plc  EWHC 596 (Ch)) contains a detailed exposition of the rationale and principles relating to the loss of substratum ground, a ground often considered of ancillary importance in just and equitable winding up petitions because of its relatively high threshold.
On the facts:
• Klimvest Plc (the “Company”) sold its business and assets in January 2019, following which its sole significant asset is cash reserves (§4(ii)).
• The Petitioner contended that it is just and equitable to wind up the Company for a number of reasons, one of which being that the purpose or substratum of the Company had come to an end (§5).
• On the other hand, the 1st Respondent, being the largest shareholder of the Company, wished to invest the Company’s cash reserves in promising technology companies. It opposed the Petition on the grounds that, inter alia, the Company had in essence become an investment holding company, and its purpose could still be achieved through such investment.
The discussion on the loss of substratum ground, including an analysis of earlier authorities on the topic, can be found at §§200-246 of the judgment. Some key points are summarised below.
Rationale of the loss of substratum ground
At the outset (§§226-227), the Court emphasised that the question of why loss of substratum ought to provide a basis for a contributory to seek to wind up a company is fundamentally one of equity between the company and its shareholders. The principle can be explained by the following passage by Jenkins J (as Lord Jenkins then was) in Re Eastern Telegraph Co., Ltd.  2 All ER 104 at 109F:
“… 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.”
As will be seen below, this principle continues to feature in the Court’s substantive analysis of the loss of substratum ground.
What is the Company’s main or paramount object or purpose?
In determining whether the loss of substratum ground is made out, the first step is to identify the Company’s main or paramount object or purpose (§229).
To ascertain a company’s purpose, the following materials were held to be potentially relevant:
• The Company’s Memorandum of Association, being the starting point (§204).
• Materials available to all investors prior to investing (§§215, 230), particularly in the case of public listed companies, such as the prospectuses and offering circulars.
• Subsequent materials (§§215, 230) may also be relevant. For example, there may be some change or development that is widely known to investors that does not fundamentally change the main or paramount object or purpose, or there may be circumstances in which by reference to materials subsequently produced one can conclude that those who have invested have agreed to a more fundamental change in the main or paramount object or purpose, or are to be taken to have acquiesced therein.
On the facts, aside from the Memorandum of Association and an offering circular, the Court also took into account an Information Memorandum prepared subsequent to the Company’s listing (in 2006) on 29 November 2018. The Court concluded that rather than becoming an investment vehicle holding shares in its subsidiaries, the Company’s main or paramount object or purpose had not fundamentally changed, with a significant part thereof still being based upon the original cloning technology, and the other significant part thereof having at least some connection therewith, and being a complimentary development of the Company’s business, as operated through subsidiary companies that it controlled (§§235, 236).
It is also of note that aside from documentary materials, the Court also found evidence from the following witnesses helpful in the above exercise:
• Small shareholders who had no direct connection to the Petitioner, who gave evidence that, inter alia, what the Company now proposed represented “a new and different story”. The Court was of the view that the approach these small shareholders took illustrated the principle in Re Eastern Telegraph “from an objective point of view” (§242).
• Employees of subsidiaries of the Company, who were able to “provide helpful evidence as to the scope of the Company’s business, and the purpose for which it carried on business” (§26).
Is the loss of substratum ground made out?
Having identified the Company’s main or paramount object or purpose, the Court went on to hold that the loss of substratum ground was made out (subject to questions of alternative remedy and discretion) for three alternative reasons (§245).
First, applying the test in existing authorities, it was impossible or at least practically impossible for the Company to pursue its main or paramount object or purpose. Having regard to the nature of the Company’s business, the fact of the sale, as well as the Petitioner’s exclusion and the 1st Respondent’s control of the Company, it would be practically impossible to recreate a like business so as to pursue the main or paramount object or purpose previously pursued.
Second, even if the pursuit of the Company’s main or paramount object or purpose was still practically possible, given the sale and the very different nature of the venture that is now proposed, there is a clear abandonment of the pre-existing or paramount object or purpose of the Company such that it is just and equitable that the Company be wound up.
Third, in any event, following from the principle in Re Eastern Telegraph (§228), the course of conduct the Company proposes to embark upon is so fundamentally outside or different from what can fairly be regarded as having been within the general intention or common understanding of the members of the Company when they became members that it would be unjust and inequitable to require them, against their will, to continue to invest in the quite different and speculative venture that is proposed, and therefore just and equitable that the Company be wound up.
The judgment in Re Klimvest provides a helpful analysis on when a company may be wound up on the ground that its substratum has been lost. There are not many Hong Kong authorities considering the loss of substratum ground in detail, and it remains to be seen whether the Hong Kong Courts would follow this approach.