Introduction

In a recent English decision of Re Diffraction Diamonds DMCC [2017] EWHC 1368 (Ch), a company incorporated in Dubai, which was involved in a network of businesses producing contrived fancy colour diamond valuations in England was wound up by English court on the ground of public interest.

Background

The Secretary of State for Business, Innovation and Skills (the “Secretary of State”) brought proceedings for the winding up of Diffraction Diamonds DMCC (“Diffraction”). The proceedings are based on the contention that, contrary to the public interest, Diffraction has been trading with a lack of commercial probity by participating in and/or benefiting from a wider scheme involving the sale of fancy coloured diamonds to members of the public as an investment opportunity.

Diffraction was incorporated in Dubai on 21 April 2013. It operated an internet based trading platform for fancy coloured diamonds. The trading platform was operated under a licence granted by a Cambridge based information technology and services company called Itransact Limited (“Itransact”). Diffraction’s servers are located in Itransact’s offices and Itransact liaised for Diffraction with various broker companies.

Jurisdiction to Wind-up Foreign Companies

Diffraction contended that although the court has power to wind up unregistered foreign companies under section 221 of the Insolvency Act 1986 (equivalent to section 327 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32)), there is insufficient connection between Diffraction and the United Kingdom to justify the exercise of this jurisdiction.

Section 221(1) of the Insolvency Act 1986 provides that the English court may wind up a foreign company if one or more of the circumstances set out in section 221(5) is or are satisfied. One of those circumstances is if the court is of the opinion that it is just and equitable that the company should be wound up. But it is clear from the decision of Knox J in Re Real Estate Development Co [1991] BCLC 210 that three requirements have to be met before the English court will assume jurisdiction over foreign companies.

The three so-called core requirements are:

1.       there must be sufficient connection with England;

2.       there must be a reasonable possibility that a winding-up order would benefit those applying for it; and

3.       the court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.

 

However, the Court took the view, citing the Court of Appeal decision in Re Titan International Inc. [1998] 1 BCLC 102, that in the case of a public interest petition, the court need only be satisfied that the company against which the petition has been presented has a real or sufficient connection with England so as to make it just and equitable that the company be wound up if the material before the court justifies that conclusion. The 2^nd and 3^rd core requirements do not apply in public interest winding-ups. Put it alternatively, the requirement for public interest petitions corresponding to the 2^nd requirement of Knox J would be that there must be a reasonable prospect that the public interest would be promoted by a winding-up order.

The Secretary of State relied on four matters as providing a sufficient connection to warrant the exercise of jurisdiction, namely:-

1.       First, the administration of Diffraction’s business has been carried out from the United Kingdom.

2.       Secondly, Diffraction has supplied fancy coloured diamonds for marketing and sale by broker companies to members of the public in the United Kingdom.

3.       Thirdly, Diffraction has supplied its services to broker companies registered in England and Wales.

4.       Fourthly, Diffraction stores the fancy coloured diamonds on behalf of investors who are based in the United Kingdom.

 

The Court considered that the matters relied on by the Secretary of State do provide a substantial connection with the United Kingdom and are ample to found jurisdiction. In particular, the Court regarded the role performed by Itransact, in setting up the trading platform and ensuring the smooth operation of the business thereafter through liaison with brokers as central to the internet based trading model adopted by Diffraction.

In response, Diffraction emphasised that by February 2016, it had severed its relationship with Itransact and had ceased supply of fancy coloured diamonds to brokers in the United Kingdom. Diffraction further contended that although there may have been connections with England previously, these connections had much reduced by March 2015 and have now been severed following the Secretary of State bringing the proceedings.

Such contention was firmly rejected by the Court. The Court noted that it has been established law for some time that, in the case of a public interest winding up petition, the court will not be deprived of grounds for making a winding up order simply by virtue of the company concerned discontinuing the offending activity once it came under scrutiny: Re Walter L Jacob & Co [1989] BCLC 345. Because to do so would offend ordinary notions of what is just and equitable. On the contrary, by winding up such a company, the court will be expressing, in a meaningful way, its disapproval of such misconduct, and spelling out to others that the court will not hesitate to wind up companies whose standards of dealing with the investing public are unacceptable.

Conclusion

Based on the materials before it, the Court was satisfied that Diffraction had been trading with a lack of commercial probity, benefiting from and/or participating in a wider scheme involving the sale of fancy coloured diamonds to members of the public as a form of investment when Diffraction knew or ought to have known that the sales were at such inflated prices that it was unlikely that an investor would be able to recover his or her outlay. Such activity, in the view of the Court, could properly be categorized as against the public interest and could potentially justify an order to wind up. In conclusion, the Court ordered Diffraction be wound up in the public interest.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017