Khan (Née Osman) and Al Harthy v Leisure Enterprises (Jersey) Ltd, Dart and Richardson

• Jurisdiction: Jersey
• Court: Royal Court
• Judge: Bailhache, Bailiff:
• Judgment Date: 18 December 1997
• Date: 18 December 1997

ROYAL COURT

Bailhache, Bailiff:

M. St.J. O'Connell for the applicants;

M.J. Thompson for the respondents.

Cases cited:

(1) Burland v. Earle, [1902] A.C. 83 ([1901] UKPC 49); (1901), 85 L.T. 553; 18 T.L.R. 41; 71 L.J.P.C. 1; 9 Mans. 17; 50 W.R. 241, dicta of Lord Davey applied.

(2) Company, Re a (No. 001761 of 1986), [1987] BCLC 141, considered.

(3) Daniels v. Daniels, [1978] Ch. 406; [1978] 2 All E.R. 89; (1977), 121 Sol. Jo. 605, applied.

(4) Foss v. Harbottle (1843), 2 Hare 461; 67 E.R. 189, applied.

(5) Metropolitan Bank Ltd. v. Pooley (1885), 10 App. Cas. 210; [1881-5] All E.R. Rep. 949; 53 L.T. 163; 54 L.J.Q.B. 449; 49 J.P. Jo. 756; 33 W.R. 709.

(6) Pavlides v. Jensen, [1956] Ch. 565; [1956] 2 All E.R. 518; (1956), 100 Sol. Jo. 452, considered.

(7) Scottish Co-op. Wholesale Socy. Ltd. v. Meyer, [1959] A.C. 324; [1958] 3 All E.R. 66; (1958), 102 Sol. Jo. 617; sub nom. Meyer v. Scottish Co-op. Wholesale Socy. Ltd., 1958 S.C. (H.L.) 40, considered.

Additional cases cited by counsel:

Abdel Rahman v. Chase Bank (C.I.) Trust Co. Ltd., 1994 JLR 186.

Associated Leisure Ltd. v. Associated Newspapers Ltd., [1970] 2 Q.B. 450.

Baker (G.L.) Ltd. v. Medway Bldg. & Supplies Ltd., [1958] 3 All E.R. 540.

Bishopsgate Invs. Management Ltd. v. Maxwell (No. 2), [1993] BCLC 814.

Duomatic Ltd., In re, [1969] 2 Ch. 365.

Eves v. St. Brelades Bay Hotel Ltd., 1995 JLR N-8.

Hipgrave v. Case, (1885) 28 Ch. D. 356.

Lazard Brothers & Co. (Jersey) Ltd. v. Bois & Bois, Perrier & Labesse, 1987-88 JLR 639.

Pacific Invs. Ltd. v. Christensen, 1995 JLR 250.

Poole (née O'Rourke) v. Poole, 1987-88 JLR N-5.

Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204.

Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 3 All E.R. 97.

Smith v. Croft (No. 2), [1987] 3 All E.R. 909.

Wallingford v. Mutual Socy. Directos, &c. (1880), 5 App. Cas. 685.

Legislation construed:

Companies (Jersey) Law 1991, art. 141(1): The relevant terms of this paragraph are set out at page 323, lines 39-43.

art. 143(1): "If the court is satisfied that an application under Article 141 or 142 is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of."

Text cited:

Palmer's Company Law, 25th ed., vol. 2, para. 8.813, at 8186 (1992).

Companies—legal proceedings—action in respect of corporate wrong—rule in Foss v. Harbottle—company only proper plaintiff in action to redress corporate wrong unless defendants control company—minority shareholders bringing derivative action may only obtain relief available to company itself—may not complain of acts authorized by majority shareholders unless fraudulent or beyond power of company

Companies—legal proceedings—action in respect of corporate wrong—negligent defaults of defendants to derivative action not sufficient per se to bring action within "fraud on minority" exception to rule in Foss v. Harbottle—exception requires fraud on company, not on minority shareholders—"fraud" is equitable fraud, not merely common law deceit

Companies—minority shareholders—unfair prejudice—alleged prejudice caused by lawyers acting on authority properly given with consent of majority shareholders not "unfair prejudice" caused by directors within Companies (Jersey) Law 1991, art. 141(1)

The plaintiff-respondents brought proceedings against the defendant-applicants for a wrong allegedly done to a company.

The plaintiff-respondents were the minority shareholders in a company of which the second and third defendants, the present applicants, were directors. All the shareholders gave the applicants a mandate to act in accordance with the directions of the majority of shareholders. They also agreed to certain arrangements regarding a Spanish company, in which their company had a shareholding. Apparently in pursuance of that agreement, Spanish lawyers requested from the applicants power of attorney to sell that shareholding to a named party on such terms as they saw fit. Having obtained the consent of the majority shareholders, the applicants executed the power of attorney as requested.

The Spanish lawyers transferred the Spanish company to the named party for no consideration. However, it was alleged that it owned property worth £14m. and on failing to obtain from the applicants an adequate explanation of the transaction, the respondents issued an Order of Justice in which they claimed damages for negligence and/or breach of trust and/or breach of duty on the part of the applicants. They also claimed that the transaction only benefited the majority shareholders and that the applicants had conducted the affairs of the company in such a manner as to cause them unfair prejudice under art. 141(1) of the Companies (Jersey) Law 1991.

The applicants then made the present application for the proceedings to be struck out as against them on the ground that they disclosed no cause of action and were an abuse of the process of the court. They submitted, inter alia, that (a) the action was barred by the rule in Foss v. Harbottle, which was part of Jersey law and which precluded any action being brought to redress a wrong allegedly done to a company except by the company itself; in particular, (b) the respondents' action did not fall within the "fraud on the minority" exception to that rule, by which a derivative action could be brought by a minority shareholder if those in control of the company were guilty of fraud and would not permit an action to be brought in the name of the company itself; in the present case, the applicants had not acted improperly in any way but had merely followed the instructions of the majority shareholders; and (c) there had been no "unfair prejudice" to the respondents under art. 141(1) of the 1991 Law such as to justify the court in making an order to redress it under art. 143 and, in any case, any prejudicial acts there might have been had been done by the Spanish lawyers and not the applicants.

The respondents submitted in reply that (a) their action was a properly founded derivative action brought by the minority shareholders on the ground that the persons against whom relief was sought controlled the company; furthermore, a fraud had clearly been perpetrated on them in that only the majority shareholders had benefited from the transaction complained of; and (c) the actions of the Spanish lawyers had improperly been permitted by the applicants, who could therefore also be said to have caused them unfair prejudice within the meaning of the 1991 Law.

Held, granting the application:

(1) It was a rule of Jersey law that an action to redress a wrong done to a company should be brought by the company itself. An exception was made to this rule if the defendants held and controlled the majority of the shares and would not permit an action to be brought in the company's name. In such a case, the minority shareholders could bring an action in their own names but could have no greater right to relief than would be available to the company itself. They could not complain of acts which had been or could be approved by the majority of the shareholders, unless those acts were fraudulent in nature or beyond the powers of the company (page 320, line 15 - page 321, line 4).

(2) The court would not make a finding on whether the applicants had been negligent, in breach of trust or in breach of duty. Although it was arguable that they had, that was in itself insufficient to bring the present proceedings within the scope of the "fraud on the minority" exception as described above. It was clear that the applicants had not acted "fraudulently," in...