In the recent case of Lombard Manx Limited v The Spirit of
Montpelier Limited (CHP 2014/23), the Isle of Man High Court
considered the law in respect of when a creditor will be entitled
to a winding up order "virtually as of right" against a
defaulting debtor.
Stephen Dougherty from leading Isle of Man law firm Dougherty Quinn
("DQ") acted for Lombard Manx Limited in
the case.
Facts
The Claimant sought a winding-up order against the Defendant
company on the basis that the Defendant was unable to pay its
debts. Some weeks prior to the hearing, the Claimant had served a
statutory demand upon the Defendant (the
"Debt"). The Debt represented the sum
outstanding pursuant to a loan agreement between the parties. As
security for the Debt, the Claimant obtained a ship mortgage over a
yacht owned by the Defendant, a personal guarantee from the
Defendant's ultimate beneficial owner and a second charge over
the ultimate beneficial owner's principal residence.
Legal Issues
In deciding whether or not to make a winding-up order, the Court
considered section 163 of the Isle of Man Companies Act 1931, and
in particular the wording in section 163(1)(1) which states that a
company shall be deemed unable to pay its debts if it has failed to
secure or compound the debt to the reasonable satisfaction of the
creditor.
The Defendant submitted that the Debt was secured to the
creditor's reasonable satisfaction, because of the ship
mortgage, the personal guarantee and the second charge over the
property. The Claimant submitted that, as an undisputed creditor,
case law established that it was entitled to a winding-up order
"virtually as of right" and argued that in any event it
was not satisfactorily secured, because:-
1. the yacht had fallen considerably in value since the ship
mortgage was executed; and
2. it would be extremely costly and time-consuming to take
possession of the yacht and/or enforce the second charge over the
property.
Decision
The Court held that the Claimant had reasonable concerns regarding
the reduced value of the yacht, as although the Claimant had
security over the yacht, its value was less than the Debt. The
Court also noted that the Claimant would have difficulty enforcing
its security in the absence of the appointment of a liquidator, and
recognised the difficulties associated with enforcing the personal
guarantee as the guarantor (the ultimate beneficial owner of the
Defendant) did not appear to be ready and able to discharge the
Debt.
The Court considered the judgment of Neuberger J in Re
Demaglass Holdings Limited ([2001] BCLC 633), in which
Neuberger J held that "at least in the absence of a good
reason, a creditor of a company who has not been paid is entitled
to a winding up order virtually as of right."
The Court also referred to the judgment of Deemster Kerruish in
Lehman Brothers Inc v Navigator Gas Management Limited
(2005) in which Deemster Kerruish followed the decision in Re
Demaglass and stated that the courts will have greater regard to
the views of independent creditors as opposed to creditors who are
connected to the debtor company. It was also stated that the
creditor need only establish that some sort of benefit will accrue
if a winding-up order is made, but the test is a low one and the
creditor need only show a reasonable possibility of some
advantage.
The Court held that the Claimant was entitled to a winding-up order
and that there were no grounds for refusing to grant the order. The
Defendant was an undisputed debtor of the Claimant and the Claimant
had not paid the Debt, which was due and owing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.