Council as pensions administrating authority fails in bid to wind up Luxembourg-based property fund

East Riding of Yorkshire Council has been told by the High Court that it cannot apply to wind up a property fund based in Luxembourg in which it had invested £20m.

The council brought the case as administrating authority of the East Riding Pension Fund to wind up KMG SICAV-SIF-GB Strategic Land Fund, a sub fund of KMG.

Daniel Lightman KC of Serle Court Chambers and Oliver Caplan, of 18 St John Street Chambers, who acted for the respondent, said the case concerned Section 221(1) of the Insolvency Act 1986, which provides: “any unregistered company may be wound up under this Act”.  By section 220, ‘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.

This left the novel question whether the word ‘includes’ meant that entities other than associations and companies can be wound up under section 221(1). 

Mr Justice Richard Smith decided that section 220 is not capable of encompassing entities that are neither companies nor associations. 

He rejected East Riding’s contention that it would be anomalous if no effective remedy were available in England against foreign cellular structures offering investments in UK assets to UK investors, and held that the sub-fund was not an entity that Parliament reasonably intended to be wound up as an unregistered company.

Richard Smith J was told the sub-fund was a ‘dedicated fund’ of investment company KMG SICAVSIF-SA (Fund), incorporated in Luxembourg.

The fund offered investments to those considered ‘well-informed investors’ under Luxembourg law, such as the council.

East Riding invested £20m in the sub-fund, and although other investors eventually took the total there to £80m, the fund rapidly lost value.

In June 2016, it notified investors it had suspended until further notice the calculation of the net asset value as it “had suffered a significant exposure on an option to acquire land which, in the opinion of the board, meant that the sub-fund could not be adequately valued”.

In February 2019, the fund said continued economic uncertainty since the Brexit referendum and political uncertainty meant that the board had decided to liquidate the fund and a year later said it had zero value.

East Yorkshire said the English court should make a winding-up order even if the investors would not be able to establish their creditor status under Luxembourg law, or they would be without effective remedy.

“Despite the appellant’s concerns about the conduct of the liquidation of the sub-fund, I also found this argument unpersuasive,” the judge said.

“There was scant evidence before me (or the [earlier] judge) concerning the adequacy or otherwise of available remedies to the appellant, for example, as to the regulatory action that might have been pursued locally by the appellant or steps that could be taken against the fund itself and, therefore, no sound basis for me to say that such exceptional circumstances were present in this case.”

Mark Smulian