Loss of substratum

Authorities relating to loss of substratum are few and far between. Those relating to that in the context of a listed company rarer still, but HHJ Cawson has held that a public company may be wound up on just and equitable grounds for a loss of substratum.

The company concerned (Klimvest, a technology company) was listed on a Paris based stock exchange in 2006. In 2019, the company sold its entire business and assets. Rather than distributing the sale proceeds back to shareholders, the majority shareholder sought to cause the company to reinvest those funds in other companies. The minority shareholder presented a winding up petition on just and equitable grounds arguing, amongst other matters, that following the sale, there had been a loss of substratum. The court agreed.

An exercise needed to be carried out to identify the company’s main or paramount object and that could take into account an agreement or understanding between the members as to the purpose (even in a listed company). Particular weight was given to the descriptions given in the offer circular and accounts in determining that the company’s principal activity was to develop and distribute software. That purpose was, to all intents and purposes, now impossible to achieve and the company was seeking to embark on something entirely different from what could be fairly regarded as having been within the general intention and common understanding of the members when they became members. 

This engaged the principle first explained in Re Eastern Telegraph Co that if a shareholder invested on the footing that the company was going to carry out some particular object, it cannot be “forced against his will by the votes of fellow shareholders to continue to adventure his money on some quite different project and speculation”.

The case is interesting as it is the first time this principle has been applied to a listed company in England.

Duneau v Klimt Invest SA & Ors [2022] EWHC 596  [2022] EWHC 596 (Ch)

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