Yorkshire Council v KMG

KMG SICAV-SIF-GB Strategic Land Fund (referred to in the judgment as “the sub-fund”), was a so-called “dedicated fund” of a specialised investment company called KMG SICAV-SIF-SA, which had been incorporated as a Luxembourg public limited company in 2008. That company offered investments in one or more of its “dedicated funds” to institutional investors. The “dedicated funds” were not separate legal entities, but separate portfolios of assets owned and managed by the company in accordance with a specific set of investment objectives. Investors investing in a dedicated fund received shares in the company of a specific class corresponding to the relevant fund. Their rights as shareholders were limited to the assets of the corresponding dedicated fund. As between and among the company’s shareholders, each dedicated fund was treated as a separate entity. The sub-fund was launched in 2010.  In August 2014, the East Riding Council invested £20 million by subscribing for shares in it.

The sub-fund’s investments failed, and the sub-fund itself was put into liquidation by its directors.  On 3 May 2021 the Council presented a winding up petition on the ground that the sub-fund had ceased to carry on business, or was carrying on business only for the purpose of winding up its affairs (see s 221(5)(a) Insolvency Act 1986).

At first instance, Deputy ICC Judge Kyriakides held that the fund was not an unregistered company capable of being wound up under the Insolvency Act and dismissed the petition. Her decision was upheld on appeal by Richard Smith J. Dismissing a second appeal, Snowden LJ, with whom Nicola Davies and King LLJ agreed, upheld both decisions, holding that the fund was not an unregistered company.

Section 220 Insolvency Act provides that the term “unregistered company” “includes any association and any company, with the exception of a company registered under the Companies Act 2006 in any part of the United Kingdom.”

Snowden LJ held that the sub-fund was not an “unregistered company” within the meaning of the section: it was not “a body whose existence was founded on some contractual obligations undertaken by any members between themselves. [It] was simply a collection of assets owned by the Company which was managed and dealt with by the Company, separately from its other Dedicated Funds.” Nor was it an association which Parliament could have intended should be susceptible of being wound up:

“Although I accept that, as a matter of language, the word ‘association’ is a very general one, capable of covering a wide variety of bodies, it has been given a narrower meaning in the context of the winding up legislation. That much is readily apparent from the old case of St. James’ Club” (an 1852 authority, although Snowden LJ also relied on more recent case law in the form of  In Re International Tin Council). “[T]o fall within section 220(1), an association must be comprised of persons who have some substantive legal relationship with each other, rather than persons who are connected for purely social or personal reasons or who merely share a common interest,” he said.

A further problem he identified lay in the nature of the winding up process:

“Given the essential nature of the winding up process is a means of collective enforcement of debts, it is also axiomatic that in the case of an association, the property that is subject to the process must be property which belongs to the association or to which the association is entitled; the creditors to whom the proceeds of realisation are to be distributed must be creditors of the association; and that any persons to whom a surplus may be distributed must be persons who have such entitlement as against the association.”

The ability to wind up a foreign entity as an unregistered company has traditionally been widely interpreted. The growth in new kinds of legal entity, such as the one under consideration in this case, does not detract from the generality of that proposition but does show that there may be cases where the nature or structure of the target entity means it falls outside the scope of the statutory definition.

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