A case of two companies, one incorporated in Dubai and the other in England, involved in a network of businesses producing contrived fancy colour diamond valuations were eventually wound up by English courts on the grounds of public interest.
Diffraction Diamonds DMCC and IGL Labs UK Limited were two companies involved in the sale of fancy coloured diamonds ("FCD"). Diffraction was a company registered in Dubai, providing an online platform for the business to business diamond trade. They also provided additional information on investing in diamonds. IGL was a company registered in England, and was a diamond grading laboratory conducting FCD valuations.
The Secretary of State for Business, Innovation and Skills ("SoS") brought proceedings to wind up the companies based on a purported lack of commercial probity.
The companies involved in the network of contrived valuations had a history of SoS investigations, including two companies that had been wound up in the public interest prior to these winding up proceedings being brought. Diffraction had failed to provide all requested documents, including those relating to their accounts. The sole director of Diffraction had also agreed to a 14 year disqualification undertaking in relation to a related company.
The SoS therefore petitioned the UK courts to wind up Diffraction. In order for a foreign company to be wound up in the UK, the requirements set out in Re Real Estate Development Co must be met, namely -
- There must be sufficient connection with the UK.
- There must be a reasonable possibility that a winding-up order would benefit those applying for it.
- The Court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company's assets.
However, following the decision in Re Titan International Inc., for a public interest petition there needed only to be a sufficient connection, such that it was just and equitable for the foreign company to be wound up in the UK.
In order to satisfy the sufficient connection test, the SoS relied on Diffraction's administration being carried out from the UK, their customers and investors primarily being from the UK, the significant number of Diffraction's brokers incorporated in the UK and Diffraction's storage of UK investors' FCDs.
Diffraction argued that the business carried out by them in the UK was purely administrative, that management decisions were taken in Dubai and that they had ceased connection with UK brokers. Diffraction also submitted that storage took place in Dubai, there were no assets in the UK, trading was worldwide and the sole shareholder had no connection with the UK. Finally Diffraction submitted that although there may have been connections with the UK, they had stopped since the presentation of the petition.
The Judge agreed that the factors relied on by the SoS had provided a sufficient connection to determine UK jurisdiction. He also ruled that the lack of assets in the UK was not a factor that was relevant to the exercise of determining jurisdiction, and the shareholder's lack of connection to the UK was not significant. He also indicated the fact that the asset and liability position of Diffraction was unclear and required investigation, meant that a winding up order would be beneficial.
The Judge also confirmed that it was irrelevant that the connection had now stopped given this was a public interest petition, citing the decision in Re Walter L Jacob & Co. which is authority for the proposition that the Court is not deprived of grounds for making an order if the company concerned discontinues the offending activity.
Diffraction was ultimately found to lack commercial probity based on their involvement in a network selling FCDs to investors under the false pretence of returns they knew would never materialise due to the diamonds' inflated mark up; an activity quite obviously not in the public interest. The decision was further affirmed by Diffraction's failure to provide the requested documents following the original SoS investigation, as well as inconsistencies between their invoices and ledgers.
IGL, a UK entity, was also wound up on public interest grounds, on the basis that they were producing contrived valuations designed to support a price at which FCDs could be sold to investors. They provided a false assurance that the price to be paid had an independent professional valuation to support it. This, the Judge concluded, meant IGL's business lacked probity and also should be wound up on the grounds of public interest.