Re First Virginia Reinsurance Ltd

• Jurisdiction: Bermuda
• Judgment Date: 23 October 2003
• Date: 23 October 2003
• Docket Number: Civil Jurisdiction 2003 No. 411
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley, J

Civil Jurisdiction 2003 No. 411

BETWEEN:

Re First Virginia Reinsurance Ltd.

Mr. N Hargun and Mrs R Mayor for the Applicant/Petitioner

The following cases were referred to in the judgment:

Re Emmadart Ltd.UNK [1979] 1 All ER 599

Smith v Duke of ManchesterELR (1883) 24 ChD 611

Re Galway and Salthill Tramways Co.IR [1918] 1 IR 62

In re Equiticorp International plcWLR [1989] 1 WLR 1010

In re Inkerman Grazing Pty LtdUNK [1972] 1 ACLR 102

Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477

Re New England Agricultural Corp LtdUNK (1982) 7 ACLR 231

In re Standard Bank of Australia Ltd (1898) 24 VLR 304

In re Birmaclay Products Pty Ltd [1943] VLR 29

R v Lord Chancellor, ex parte Witham [1987] 3 LRC 349

Raymond v HoneyELR [1983] AC 1

Re Deep Vein Thrombosis and Air Group LitigationUNK [2003] 1 All ER 935

Companies Act 1981, s. 163(1), 97(1)

Bermuda Constitution Order, s. 6

Subjects

Whether directors are competent to authorize the presentation of a petition by a company without shareholder approval where the bye-laws do not explicitly confer this power — Winding up — Construction of company's bye-laws — Statutory interpretation — Right of access to the Court

JUDGMENT of Kawaley, J

Background

By Petition dated October 10, 2003, the Company applied for its own winding-up on the grounds of insolvency. By an Ex Parte Summons supported by the First Affidavit of Richard Witkowski of the same date, the Applicant sought an Order appointing Mr. Malcolm Butterfield and Mr. Michael Morrison of KPMG as joint provisional liquidators of the Company.

This application was heard on October 13, 2003 when I saw fit to grant the order sought.

Counsel raised an important locus standi issue which was carefully argued and supported by written submissions on a point that has seemingly not been the subject of a considered judgment by the Bermudian courts. The question is whether directors are competent to authorize the presentation of a petition by a company without shareholder approval in circumstances where the bye-laws do not explicitly confer this power.

The English High Court have ruled (strictly obiter), construing bye-laws substantially similar to those of the Applicant, that a general power to manage a company does not give directors authority to take the radical step of bringing the life of a company to an end: Re Emmadart Ltd. [1979] 1 All ER 599. The opposite view is taken by a line of Australian cases, and this aspect of Re Emmadart has been repealed by statute in England.

I considered Mr. Hargun's submissions, in support of the proposition that the Company's Board of Directors were competent to authorize the presentation of the petition without shareholder approval, to be sufficiently meritorious for me to readily accept in the context of an interlocutory application to appoint provisional liquidators. In addition, it was clear that even if Mr. Hargun's position on locus was wrong, remedial action could be taken, if necessary, before a winding-up order was sought. Such action could include adding a creditor or contributory as co-petitioner and / or dismissing the Petition altogether.

I indicated that I would hand down a written ruling for guidance in future cases as this question, with which I am not unfamiliar, does seem to be a recurring one.

The relevant facts

It is apparent from evidence filed in support of the application, that the Company is insolvent in terms of its ability to meet its obligations as they fall due. This flows from the fact that its principal creditors (who may well be shareholders as well) include affiliates recently placed into receivership in Virginia, the allegedly improper drawing down of a trust fund established to secure its reinsurance obligations and the filing against the Company of two Alabama class action suits.

In addition to cash or commercial insolvency, independent actuarial reviews (which the Company does not necessarily accept) indicate that on a balance-sheet basis, the company has a deficit of between roughly $79 million and $111 million.

Not surprisingly, the directors resolved at a meeting on October 1, 2003 to authorize Messrs. Conyers Dill & Pearman to apply immediately for the appointment of provisional liquidators.

For reasons that were not explicitly spelt out but which are, to my mind, unimportant, seeking prior shareholder approval was not practicable for the Board of Directors in the present case.

The Bye-laws

Counsel submitted that that the Company's bye-laws are in standard form, based on what is set out in Table A to the Companies Act 1948 of the United Kingdom.

The Company submits that its directors are empowered by Bye-law 3 to petition for winding-up. Bye-law 3 (‘Management of the Company’) provides in salient part as follows:

‘(1) In managing the business of the Company, the Board may exercise all such powers of the Company as are not, by statute or by these Bye-laws, required to be exercised by the Company in general meeting subject, nevertheless, to these bye-laws, the provisions of any statute and to such regulations as may be prescribed by the Company in general meeting.’

Is the power to petition for the Company's winding-up ‘required to be exercised by the Company in general meeting’ by either statute or the Bye-laws themselves?

Neither the Bye-laws nor the Companies Act expressly require the shareholders to approve an application to the Court for the Company's winding-up. Can this requirement be read into either instrument by way of necessary implication?

Re Emmadart

In Re Emmadart, Brightman, J. raised from the Bench the question of whether a company under the control of a receiver could petition for its winding-up. He held that the receiver, as a matter of construction of the debenture appointing him, did in fact have the power to petition and granted a winding-up order. In reaching this conclusion, however, he observed that the directors could not have authorized the petition and the longstanding practice to the contrary was wrong.

Despite older authority relied upon by the Court to the contrary, Buckley on the Companies Acts had since 1957, according to Brightman J., stated that ‘orders have been made on the petition of a company presented by the agency of its directors without the authority of a general meeting.’ He also cited the 1976 edition of Palmer's Company Law as stating: ‘It has been held in Ireland that the directors cannot present a petition in the name of the company without the sanction of a general meeting, but there seems to be no justification for this ruling in the words of the Act, and it has not been followed in English cases’. By the time of Emmadart, therefore, the practice of the English Courts for at least 20 years appears to have been to construe a statutory or bye-law general management power conferred on directors as incorporating the power to authorize the presentation of a winding-up petition without shareholder approval. On what basis was this well settled practice said to be wrong? Brightman, J. relied on one English case, one Irish case and two Australian cases.

The English case, Smith v Duke of ManchesterELR(1883) 24 Ch D 611, was followed by the Supreme Court of Victoria in Re Standard Bank of Australia Ltd. (1898) 24 VLR 304

The Smith case was also referred to in argument in Re Galway and Salthill Tramways CoIR[1918] 1 IR 62, while all three cases were apparently followed in another Victoria case, Re Birmacley Pty Ltd. [1942] ALR 276. The Salthill case was seemingly considered to reflect the English law position by Halsbury's Laws, Vol 6 (3^rd edition) at paragraph 1036, Buckley's views to the contrary notwithstanding.

Brightman,J. considered all of these judicial authorities to be merely persuasive, but deserving of being followed. However, in accepting the principles they enunciated, he did not apply the result by dismissing the petition before him. Rather, he distinguished the powers of a receiver from directors under article 80 of Table A to the 1948 Act, and concluded the petitioner before him had locus standi to petition. His comparatively brief ruling on the director authority point is therefore clearly obiter, as it does not form part of the ratio decidendi of his decision. For this reason alone, less weight may be given to the analysis.

The key passage in Emmadart (at pages 604g–605a) reads as follows:

‘It would be theoretically possible for the articles of association of a company to be drawn in terms which confer power on the board of directors to present a winding-up petition. But an article on the lines of art 80 of Table A is not so drawn. The board of directors can resolve to present a petition in the name of the company but such action by the board must be authorized or ratified by the company in general meeting …. I have been told that over the years a winding-up order has often been made on a petition presented by an insolvent company pursuant to a resolution of the board of directors and without reference to the shareholders. That would seem to be so … Despite the defect in the petition, any order so made will be fully valid and effective unless and until it is recalled … The practice which seems to have grown up, under which a board of directors of an...