CourtRoyal Court
JudgeClyde-Smith, Commr. and Jurats Fisher and Milner
Judgment Date14 May 2012
Date14 May 2012
Clyde-Smith, Commr. and Jurats Fisher and Milner

S.J. Young for the representor;

J.D. Kelleher for the second respondent.

Cases cited:

(1) Charnley Davies Ltd., Re, [1990] BCLC 760; [1990] BCC 605, dicta of Millett, J. applied.

(2) Chime Corp. Ltd., Re (2004), 7 HKCFAR 546, applied.

(3) Cook v. Deeks, [1916] 1 A.C. 554, considered.

(4) Edge v. Pensions Ombudsman, [1998] Ch. 512; [1998] 3 W.L.R. 466; [1998] 2 All E.R. 547; [1998] Pens. L.R. 15, considered.

(5) Foss v. Harbottle (1834), 2 Hare 461; 67 E.R. 189, applied.

(6) Gamlestaden Fastigheter AB v. Baltic Partners Ltd., 2007 JLR 393, distinguished.

(7) Grace v. Biagioli, [2006] 2 BCLC 70; [2006] BCC 85; [2005] EWCA Civ 1222, considered.

(8) Khan (née Osman) v. Leisure Enterprises (Jersey) Ltd., 1997 JLR 313, referred to.

(9) MacDougall v. Gardiner (1875), 1 Ch. D. 13, dicta of Mellish, L.J. considered.

(10) O'Neill v. Phillips, [1999] 1 W.L.R. 1092; [1999] 2 All E.R. 961; [1999] 2 BCLC 1, referred to.

(11) Pacific Invs. Ltd. v. Christensen, 1995 JLR 250, considered.

(12) Saul D. Harrison & Sons plc., Re, [1995] 1 BCLC 14; [1994] BCC 475, considered.

(13) Waddington Ltd. v. Chan Chun Hoo (2008), 11 HKCFAR 370, dicta of Lord Millett applied.

Legislation construed:

Companies (Jersey) Law 1991 (Revised Edition, ch.13.125, 2012 ed.), art. 17(1): The relevant terms of this paragraph are set out at para. 62.

art. 113(1): The relevant terms of this paragraph are set out at para. 60.

art. 141(1): The relevant terms of this paragraph are set out at para. 8.

art. 143: The relevant terms of this article are set out at para. 20.

Text cited:

Hollington, Shareholders' Rights, 6th ed., para. 7-10, at 182 (2010).

Companies—legal proceedings—action in respect of corporate wrong—if relief sought for alleged mismanagement of company's affairs, unfair prejudice application may be made under Companies (Jersey) Law 1991, art. 141(1) seeking authorization under art. 143(2)(c) to bring representative proceedings—if relief sought for alleged misconduct, applicant to bring derivative action (subject to rule in Foss v. Harbottle)—abuse of process to attempt to circumvent rule in Foss v. Harbottle by application under art. 141(1)

The representor applied under art. 141 of the Companies (Jersey) Law 1991 for an order under art. 143(2)(c) authorizing it to bring civil proceedings against the first respondent on behalf of the second respondent.

The representor held 2.84% of the shares in the second respondent, a Jersey company which had been incorporated as an investment vehicle for a substantial property development project in England. The first respondent ("JTC"), which carried on a trust company business in Jersey, provided directors, a company secretary and company administration services to the second respondent. In January 2007, the second respondent entered into a property management services agreement with an English company ("Wharf Land"), which provided that Wharf Land would act as property adviser to the company and would be entitled to 50% of the profits of the company, net of certain expenses.

Between February 2007 and September 2008, the directors of the second respondent authorized payments to a number of entities totalling £1,522,050, for which there was no apparent justification beyond the invoices. The directors claimed that the payments had been made in good faith and in reliance on Wharf Land's implicit representations that they were bona fides and properly due. Wharf Land had declined to explain the payments.

The representor applied under art. 141 of the Companies (Jersey) Law 1991 for an order under art. 143(2)(c) authorizing it to bring civil proceedings against JTC on behalf of the second respondent seeking inter alia an inquiry as to what sums had been lost by the second respondent by reason of breaches of duty owed by the directors in authorizing the payments. Article 141(1) provided that a member of a company could apply to the court for an order under art. 143 on the ground that the company's affairs were being or had been conducted in a manner which was unfairly prejudicial to the interests of its members generally or of some part of its members. Under art. 143(2)(c), the court could authorize civil proceedings to be brought in the name and on behalf of the company.

Following the representor's application, an EGM of the second respondent was convened at which over 80% of the shareholders passed resolutions inter alia opposing the representor's application and approving and ratifying the payments.

The representor submitted that the application had been properly brought under art. 141 because it concerned ongoing mismanagement of the company's affairs. It conceded that the application would not come within any of the exceptions to the rule in Foss v. Harbottle.

The second respondent submitted that the representor was in fact seeking relief for alleged past misconduct, which should be sought by way of a common law derivative action, not an unfair prejudice application under art. 141.

Held, dismissing the application:

The application would be dismissed because the representor was seeking relief for alleged misconduct by the directors, not for alleged mismanagement of the company. An action on behalf of a company seeking relief for alleged mismanagement of the affairs of the company could properly be brought by means of an unfair prejudice application under art. 141 of the Companies Law. An action seeking relief for alleged misconduct, on the other hand, should be brought by way of a common law derivative action, to which the rule in Foss v. Harbottle applied (namely that, subject to certain exceptions, only a company could sue for loss it suffered as a result of a wrong committed against it, and that an individual shareholder had no standing to do so). The representor conceded that the application did not fall within any of the exceptions to the rule. It would have been required to establish that it came within the fraud on the minority exception, i.e. that (i) there was a prima facie case of equitable fraud on the part of JTC; and (ii) the directors were in control of the company and improperly preventing it from bringing proceedings. In respect of (i), whether or not the directors had acted negligently or in breach of their duties, it was not alleged that they had acted fraudulently. In respect of (ii), the directors were in control of the company but they were not improperly preventing it from bringing proceedings against JTC; the issue had been properly put before the shareholders (who were all sophisticated investors), who had resolved overwhelmingly to oppose the representor's application. It was an abuse of process for the representor to have attempted to circumvent the rule in Foss v. Harbottle by making an unfair prejudice application under art. 141. Furthermore, a derivative action could not be brought where the wrong complained of was one that had been, or was capable of being, ratified by a simple majority of shareholders. In the present case, the making of the payments had been ratified by most of the shareholders. It was not unfair for the representor and the other minority shareholders, who had accepted the principle of majority rule when they became shareholders, to be bound by the decision of the overwhelming majority of shareholders, exercising their commercial judgment, that it was not in the interests of the company to bring an action against JTC. Although the court had jurisdiction, in the strict sense, to entertain the representor's application, because the representor sought relief for misconduct, that was not enough; it was necessary for the representor to show that the claim for the remedy in question was one that, as a matter of proper practice, the court should grant if the allegations were proved. The representor had failed to do so and the application would therefore be dismissed ( paras. 39-58).

1.CLYDE-SMITH, COMMISSIONER: On February 6th, 2012, the court dismissed the representor's application under art. 141 of the Companies (Jersey) Law 1991 ("the Companies Law") for an order under art. 143 and we now give our reasons.

2.The second respondent, Wharf Land Investments (Jersey) Ltd. ("the company") was incorporated in Jersey on September 7th, 2006 as an investment vehicle to acquire the freehold interest in a substantial site in England for the purposes of development. The company was owned initially by an English incorporated company, Wharf Land Investments Ltd. ("Wharf Land"), which was in turn owned by Douglas John Maggs ("Mr. Maggs"), a well-known property investor.

3.Funds to purchase the site were raised from a number of investors, one of whom was the representor ("Prestigic"). Investors acquired a minimum of four units of £25,000 each, comprising one issued share in the company and 24,999 loan notes of £1 each. Prestigic holds 2.84% of the shares in the company and associated loan notes. The remaining shareholders in the company have been convened to these proceedings but, their views having been canvassed at an EGM of the company held on October 11th, 2011, they did not participate in the hearing.

4.The site was acquired by the company for £23,158,144 (including stamp duty and legal professional fees) on December 11th, 2006, using a combination of shareholder equity and bank financing.

5.The project to develop the site is complex, not assisted by the advent of the recession in England, and is still in the planning phase. The company had a banking facility of some £9.9m., which had been extended to February 2012, and negotiations for its further extension were in progress at the time of the hearing. The company had a bank balance of some £397,000. The application therefore came at a critical time for the company.

6.The first respondent, JTC Management Ltd. ("JTC"), carries on a trust company business in Jersey and provides...

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    • Royal Court
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