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High Court of Fiji |
IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction
CIVIL ACTION NO. 0052 OF 1994
Between:
1. FRANK SEBESY SKERLEC
2. FRANK SEBESY SKERLEC as shareholder
of UNION MANUFACTURING AND MARKETING
COMPANY LIMITED
3. FRANK SEBESY SKERLEC as shareholder of SOMOSOMO DEVELOPMENTS LIMITED
Plaintiffs
- and -
1. CHARLES DWIGHT TOMPKINS
2. BARCLAY (PACIFIC) LIMITED
Defendants
Mr. D. Sharma for the Plaintiffs
Dr. M.S. Sahukhan for the Defendants
Introduction
The Parties:
This action concerns the circumstances surrounding the transfer and acquisition of the shares in the plaintiff companies namely, Union Manufacturing and Marketing Company Limited ('Union') and Somosomo Developments Limited ('Somosomo') and is brought by Frank Sebesy Skerlec a retired businessman who also claims to be the majority shareholder of the plaintiff companies.
The plaintiffs at trial were, Frank Sebesy Skerlec ('Skerlec') a Hungarian by birth, who is described in the pleadings as 'a foreign investor with substantial business interests in Fiji'; 'Union' a private limited company incorporated in Fiji on the 5th of May, 1972 having as its main business object the designing, building and marketing of low-cost housing and the sale of building materials therefor and which had as its original shareholders Skerlec (199,998 shares), his wife Irene Skerlec (1 share), and a Frank B. Zienti (1 share). Union's directors were Skerlec and his son Andrew Skerlec; 'Somosomo' also a private limited company incorporated in 1969 which owned an 89 acres beach frontage freehold property comprised in C.T.2395 and of which the shareholders in October 1988 were Skerlec (14099 shares) and Godfrey Scoullar (1 share). As with 'Union' the directors of 'Somosomo' were Skerlec and his son Andrew.
The defendants were, Charles Dwight Tompkins ('Tompkins') a retired engineer who is also described as 'a foreign investor in Fiji' and Barclay (Pacific) Limited ('Barclay') a private limited company which was incorporated in December 1988 and was formerly known as Twilight Happenings Limited ('Twilight'). At all relevant times its shareholders were Millsides Company Limited (98 shares); and Vishnu Prasad (1 share) and Gardiner Whiteside (1 share) both principals in a firm of accountants called Vishnu Prasad & Co., Touche Ross. Its directors were Peter Stinson, Tompkins and Vishnu Prasad (See: Exhibit 'P19').
At the outset since much of this case turns on the credibility of Skerlec and Tompkins, I should record my considered view that having seen and heard both parties in the witness box I can categorically say that I accept and prefer Skerlec's evidence wherever there has been a conflict with Tompkin's evidence.
Given the lack of accounting records, the nine (9) years that have passed and his speech impediment, I nevertheless found Skerlec to be an honest and truthful witness. Tompkins on the other hand struck me as being artful and evasive and not forthcoming in his answers.
The Pleadings:
The claim as originally constituted in 1994 had the Official Receiver suing as trustee of the plaintiffs and had no less than seven (7) defendants but, by the time the matter came to trial the Official Receiver had been replaced by the plaintiffs and the defendants had been reduced to two.
Unfortunately the Statement of Claim has not been similarly reduced despite having been amended. Be that as it may the specific allegations against the defendants may be found in paras. 62 and 63 of the amended Statement of Claim as follows:
"62. THAT Tompkins was motivated by fraud in his dealings with Skerlec and Union and other third parties associated with these dealings right from the time he offered, through Stinson, to be introduced to Skerlec as a genuine prospective purchaser of Union business and assets and Skerlec's interests therein.
(1) that Tompkins failed to honour and evidently never intended to honour the terms and conditions of the Hawaii Agreement;
(2) that Tompkins conspired with Stinson to replace the Hawaii Agreement, instead Tompkins and Stinson arranged for a replacement Agreement to be executed in Fiji on 26th November 1988 in the absence of Skerlec but in the presence of Skerlec's son;
(3) that Tompkins fraudulently omitted from the Fiji Agreement the reference to the farm in New Zealand and replaced it with what purported to be a hand-written promise signed by him alone in which he predicated the transfer of its ownership to Skerlec on successful completion of the Fiji Agreement, whereas the farm was an integral part of the consideration or purchase price itself in the Hawaii Agreement;
(4) that after the execution of the Fiji Agreement, Tompkins and Stinson persuaded Skerlec and his son to pass on to them the Directorships and, therefore, management control of Union although Tompkins had not paid any part of the purchase price to Skerlec.
(5) that Tompkins persuaded the Skerlecs to approve a plan under which Union's business could be expanded through a loan to Union from Tompkins through Barclays in early 1989 and such loan to be secured by second mortgages over Union assets in favour of Barclays.
(7) that despite his full knowledge that the Reserve Bank of Fiji had granted its approval in principle on 14th July 1989, Tompkins continued until Skerlec found out in October, 1990, to falsely advise Skerlec that Tompkins could not pay the purchase price under the Fiji Agreement because the Reserve Bank of Fiji had not yet given its approval;
(8) that Tompkins deliberately and fraudulently directed Stinson not to discuss with Skerlec the payment of the purchase price under the Fiji Agreement;
(9) that in his fraudulent scheme to avoid paying Skerlec the purchase price under the Fiji Agreement, Tompkins persuaded Skerlec to continue to wait for the Reserve Bank of Fiji approval by offering Skerlec a marketing consultancy for Union for a monthly fee of Canadian $10,000;
(10) that in Lautoka Civil Action No. 265 of 1990, Tompkins stated on oath that the moneys he was sending to Skerlec in Canada was not for Skerlec but in full payment of the purchase price of the motor vessel "DALMA";
(11) that Tompkins was motivated by fraud when he directed Stinson to "cook the books" in the accounts of Union to show that Skerlec ultimately owed Tompkins about $64,000 when Tompkins actually still owed Skerlec no less than $790,000;
(12) that Tompkins fraudulent motives have been illustrated by the stark contradiction between his statement in paragraph 19 of his Affidavit sworn on 3rd January, 1991 in Civil Action 400 of 1990 that "(Skerlec) has received the full consideration for the transfer of (Union) shares ..." and the effect of an agreement he entered into with Skerlec on 19th September, 1991 in which he accepted that he needed to pay Skerlec no less than $593,000 as the balance of the purchase price for the same Union shares.
(13) that to the extent that the Defendants claim that this "agreement" of 19th September, 1991 amounts to a compromise of Civil Action No. 400 of 1990, the Plaintiffs claim that such purported compromise is null and void, unenforceable and of no effect and it ought to be set aside; furthermore, the Plaintiffs claim that the Defendants and Tompkins in particular cannot be permitted in law to enter into such a compromise when they well knew that there was no defence to the claim for the purchase price being put forward by the Plaintiffs.
The plaintiffs also generally alleged in paras. 108 to 115 that Tompkins 'owed (them) contractual obligations and/or fiduciary responsibilities and/or a general duty of care not to do or omit to do anything which was likely to affect adversely their interests' on various matters outlined in the above paragraphs, including, a loan by the defendants to Union in early February 1989 in respect of which the plaintiffs alleged the following breaches and 'fraud' was committed:
"(1) that Tompkins agreed in the provisions of the Fiji Agreement to purchase the shares and, therefore, the ownership of Union as at the date of the Fiji Agreement, being 26th November 1988, and there was no requirement for improvements to the business of Union before Tompkins was obliged to pay over the purchase price to Skerlec;
(2) that Tompkins suggestion to lend funds to Union as and when he did was improper and motivated by fraud because he should have paid Skerlec first in accordance with the Fiji Agreement and then worry about improvements to Unions business later when Union became his property; otherwise, Tompkins would eventually be paying the same price for a business more valuable than at the time he agreed to buy it;
(3) that Tompkin's suggestion ultimately meant that he would end up with a more valuable business altogether at Skerlec's expense for the same price agreed to prior to improvements;
(4) that in the end Tompkin's and Barclay's loan to Union allowed them to acquire security in their favour from the assets of Union which they managed to the exclusion of Skerlec; which assets Tompkins later used to extract from Skerlec, through fraud and/or undue influence, an agreement to assign Skerlec's interests and rights in Union and Somosomo to Tompkins and/or Barclays on the pretext by Tompkins that this assignment was either necessary to speed up the processing of the approval by the Reserve Bank of Fiji so that Skerlec could be paid quickly or to prevent Tompkins from demanding or calling up the loan to Union.
As a result of such breaches and/or 'fraud' the plaintiffs claim to have lost numerous personal and company assets and/or suffered a reduction in the value of assets and a loss of business and the incurring of unnecessary expenditure. The plaintiffs therefore seek damages for the above losses and/or reinstatement and the nullification and/or rescission of a sale and purchase agreement; share transfers; and mortgages granted to 'Barclays' over the plaintiff companies real estate assets.
Previous Litigation
In this regard it is common ground that in December 1990 Skerlec issued out of the High Court, Suva, Civil Action No. 400 of 1990 against the present defendants and one other. It is also common ground that the above Civil Action was settled between Skerlec and the present defendants under Terms of Settlement executed by the parties and their respective solicitors on the 19th of September 1991 (Exhibit P36).
As to this matter defence counsel submits that the plaintiff's earlier claim in Civil Action 400 of 1990 'is precisely the same as in this action' and '... by signing the Deed of Settlement (Exhibit P36) the plaintiff is now estopped from bringing this action'.
Plaintiff's counsel for his part points to the vagueness and uncertainty of the Terms of Settlement and the fact that it has never been sanctioned by a Court order nor has a court ruled on its validity, and counsel writes:
'Westpac, the receiver and Stinson were not parties to this agreement (which had) no date for implementation.'
and later:
'There was no consideration for the 1991 agreement since Tompkins was not paying Skerlec any monies under his previous obligations under the Fijian or Hawaii Agreements. Skerlec could only be paid from the sale of Union's assets. The 1991 Settlement was based on Tompkins denial (sic) that he did not owe any monies to Skerlec under the Fijian and Hawaiian Agreements.'
In an earlier interlocutory ruling delivered on 15th December, 1994 rejecting defence counsel's submissions, this Court said (at p.4):
'At the outset I observe that there has never been a trial on the merits of the plaintiff's claim in any court ... Furthermore ... the Terms of Settlement has not been made the subject of a court order nor does it in terms provide for the future disposal of the action such as by its dismissal, discontinuance, or by the entry of a consent judgment, a stay of proceedings or withdrawal of the record.'
and later in dealing in greater detail with defence Counsel's submission, the Court said (at p.9):
"Halsbury's 'Laws of England' (4 edn) Vol. 37 clearly sets out the law in relation to the nature and effect of a 'settlement or compromise' in para. 391 which reads:
'Where the parties settle or compromise pending proceedings, whether before, at or during the trial, the settlement or compromise constitutes a new and independent agreement between them made for good consideration. Its effects are (1) to put an end to the proceedings, for they are thereby spent and exhausted; (2) to preclude the parties from taking any further steps in the action, except where they have provided for liberty to apply to enforce the agreed terms and (3) to supersede the original cause of action altogether.'
and later in the same paragraph may be found the following:
'An agreement for a compromise may be enforced or set aside on the same grounds and in the same way as any other contract and in certain cases also by the summary intervention of the court.'
More particularly, Slade J. in Green v. Rozen (1955) 1 W.L.R. 741 in dealing with a compromise which had not been made the subject matter of a court order as in the present case, said at p. 746:
'The Court has made no order of any kind whatever, and having considered such authorities as I have been able to find, I arrive at the conclusion that in those circumstances the Court has no further jurisdiction in respect of the original cause of action, because it has been superseded by the new agreement between the parties to the action, and if the terms of the new agreement are not complied with the injured party must seek his remedy upon the new agreement.'
In that case however the learned judge was not dealing with an action which in part sought to impeach the compromise but rather with one seeking the Court's intervention to enforce it and which the Court declined to do in the circumstances.
In my view the case of Callisher v. Bischoffsheim (1870) 5 L.R.Q.B. 449 is more closely related to the present and in which it was held:
'The compromise of a disputed claim made bona fide is a good consideration for a promise even although it ultimately appears that the claim was wholly unfounded.'
More relevant however, for present purposes, is the observation of Cockburn C.J. at p. 452 where he said:
'It would be another matter if a person made a claim which he knew to be unfounded, and, by a compromise, derived an advantage under it: in that case his conduct would be fraudulent.'
Furthermore in Wade v. Simeon (1846) 69 R.R. 523 in rejecting the plaintiff's claim on a compromise of a monetary claim for which he (the plaintiff) knew he had no 'cause of action' and in discussing the question of 'valuable consideration' as it applies in a compromise, Tindal C.J. said at p.527:
'It is almost contra bonos mores, and certainly contrary to all the principles of natural justice, that a man should institute proceedings against another, when he is conscious that he has no good cause of action. In order to constitute a binding promise, the plaintiff must show a good consideration, something beneficial to the defendant, or detrimental to the plaintiff. Detrimental to the plaintiff it cannot be if he has no cause of action; and beneficial to the defendant it cannot be; for, in contemplation of law, the defence upon such an admitted state of facts must be successful and the defendant will recover costs, which must be assumed to be a full compensation for all the legal damage he may sustain.'
I am mindful that in the above passages the learned Chief Justice was referring to the plaintiff but that does not mean in my view, that the same cannot apply equally to a defendant who enters into a compromise knowing full well that he has no defence to the claim being put forward by the plaintiff.
Now it seems to me that that is very similar to what the plaintiffs are saying in this case i.e. that there was a want of good faith on the part of the defendants in the maintenance of their denial of liability in Civil Action No. 400/90 or in their positive assertion of having paid the full purchase price for the plaintiff's shares in Union, and, this absence of good faith or honest belief in their defence in Civil Action No. 400/90, is 'conclusively demonstrated', the plaintiff claims, by the defendants execution of the 'Terms of Settlement' in which they acknowledge that more than $1/2 million of the 'purchase price' was still outstanding."
Having regard to the evidence in this case I am satisfied that the plaintiffs are not estopped from proceeding with this action. Indeed having regard to this Court's view of the Deeds of Assignment (Exs.P25 & P29) and the NIL PAYMENT list (Exs.40A & 40B) and the admitted fact that no actual payment was ever made by Tompkins to Skerlec for the purchase of his shares in Union and Somosomo, I have no hesitation in setting aside the Terms of Settlement (Ex. P36) for want of consideration in so far as it is based on 'a claim (by Tompkins) which he knew to be unfounded'.
It is also convenient at this stage to deal with a preliminary issue raised in defence counsel's submission where he writes:
'as to the locus of the Plaintiffs in this matter. Skerlec is suing in his personal capacity as vendor of the shares. Then he is claiming in his capacity as a shareholder in Union and SDL.'
and later:
'... in any sale and purchase agreement, after the agreement it is the vendor who becomes a trustee for the purchaser and not vica versa. Therefore the question of any fiduciary duty ... (flowing) from the purchaser to the vendor does not arise.'
furthermore:
'... if there was any claim for any breach of Tompkin's duty as a director then it were the two companies Union and SDL which could bring an action (did not) and not Skerlec.'
In this latter regard the Court said in its ruling delivered on 15th December 1994 (op.cit at p. 12):
"I turn next to the 'Foss v. Harbottle' argument which is a reference to a famous rule that: "a company must sue and be sued in its own name." The classic definition of the rule was enunciated in the judgment of Jenkins L.J. in Edwards v. Halliwell (1950) 2 ALL E.R. 1064 at pp. 1066-1069 and which the Court of Appeal later summarised in Prudential Assurance v. Newman Industries (1982) 1 ALL E.R. 354 at 357, 358 into the following relevant propositions (for present purposes):
'(1) The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is prima facie the corporation;
(2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of the matter because, if the majority confirms the transaction, cadit quaestio; or, if the majority challenges the transaction, there is no valid reason why the company should not sue;
(3) There is no room for the operation of the rule if the alleged wrong is ultra vires the corporation because the majority of members cannot confirm the transaction;
(5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority who are allowed to bring a minority shareholders action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance would never reach the court because the wrong-doers themselves, being in control, would not allow the company to sue.'
Furthermore in Burland v. Earle [1901] UKLawRpAC 43; (1902) A.C. 83 Lord Davey in discussing what he meant by 'fraud' in that case said at p.93:
'... acts of fraudulent character, familiar examples are when the majority are endeavouring directly or directly to appropriate to themselves money, property or advantage which belong to the company or in which the other shareholders are entitled to participate.'
In this case the plaintiffs allege fraud in several respects - against Skerlec, in the purported illegal and fraudulent transfer of his shares in Union to the defendants and, against Union, in the loss and misappropriation of its property and assets (including Skerlec's shares) by the defendants and their agents.
In particular, it is claimed that the signed transfer of shares and the share certificates were deposited in 'escrow' (and were) unlawfully and improperly released to the 1st and 2nd defendants.
In this instance Skerlec maintains not only that he has not been paid the full purchase price for his shares in Union but also, Reserve Bank of Fiji approval had not been given for the transfer of the shares to the 1st defendant, a foreign resident, and as such at least two vital 'conditions' had not been performed by the defendants and therefore the shares legally remained Skerlec's. This is clearly a question of fact that needs to be determined on oral evidence as with the various allegations of 'fraud' regarding the same.
(Needless to say) ... if the plaintiff should be able to establish his allegations against the defendants then there is little doubt in my mind that that would amount to 'fraudulent conduct' within a recognised exception to the rule in 'Foss v. Harbottle', as discussed by Sir Robert Megarry V.C. in Estmanco Ltd. v. G.L.C. (1982) 1 W.L.R. 2 when he said at p.12:
'It does not seem to have yet become very clear exactly what the word 'fraud' means in this context; but I think it is plainly wider than fraud at common law, in the sense of Derry v. Peek (1889) 14 A.C. 337 ... Apart from the benefit to themselves at the company's expense, the essence of the matter seems to be an abuse or misuse of power. 'Fraud' in the phrase 'fraud on a minority' seems to be being used as comprising not only fraud at common law but also fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power.'
Finally, as to the particular form of the present proceedings I derive some support from the case of Fargro Ltd. v. Godfroy (1986) 1 W.L.R. 1134 where a minority shareholder sought to bring a derivative action alleging 'fraud' on the part of other directors in diverting company assets to their own use and where the company went into liquidation after the issuance of the writ.
Walton J. in allowing the reconstruction of the action in the liquidators name:
'Held: ... that had the company not been in liquidation a minority shareholders action would have been appropriate as the only possible method of proceedings; but that once the company was in liquidation the proper plaintiff was the liquidator, who should if willing sue in the name of the company ... or, if unwilling, the aggrieved shareholder should sue in the name of the company subject to the approval of the Court and satisfactory indemnity for costs ...'
I am of course mindful of the existence of the 'receivers' of the company but the appointment of a receiver does not inevitably preclude an action being taken on behalf of the company. Moreso where part of the complaint is that the receivers themselves have been negligent or fraudulent in their conduct of the receivership (See: Newhart Development Ltd. v. Co-op Commercial Bank Ltd. (1978) 2 ALL E.R. 896 and Paramount Acceptance Co. Ltd. v. Souster (1981) 2 N.Z.L.R. 38 at 42, 43.)"
In the present case having considered the foregoing in the context of the evidence and the various findings of the Court as to the defendant's fraudulent conduct, I am satisfied that there is no merit in this 'locus argument' which is accordingly dismissed.
Mention should also be made of an existing injunction first granted ex-parte by the Court on 16th February 1994 and later extended inter-partes on 16th March 1994:
"... restraining the defendants either jointly or severally by themselves or their servants or their agents or otherwise howsoever from transferring, dealing with or disposing of or in any manner howsoever interfering in any of the assets, be they real or personal, owned by 'Union' and 'Somosomo' and in particular the properties contained in the following title documents registered with the Registrar of Titles:
(1) C.T. 2395 (the Somosomo land)
(2) C.T. 15186 (the Pacific Harbour block)
(3) State Lease Nos. 4609, 4658 and 4663 (the Nausori properties)
be continued until further order of the Court."
Statement of Agreed Facts:
Having regard to the wide-ranging nature of the evidence led in this trial and in order to obviate any need for the Court to make any findings in that regard the following are the facts agreed by counsels for the parties at a pre-trial conference held on 24th April 1997:
"1. In October 1988 the shareholders of Union Manufacturing and Marketing Company Limited ("Union") were:
Frank Sebesy Skerlec 199998 $1.00 shares
Irene Skerlec 1 ordinary $1.00 share
Frank B Zienti 1 ordinary $1.00 share
Frank Sebesy Skerlec
Andrew Skerlec
As at 17th February 1989 the directors and secretary of Union were:
Peter Stinson
Charles Dwight Tompkins
Vishnu Prasad
Gardiner Whiteside (Secretary)
Frank Sebesy Skerlec 140,099 ordinary $1.00 shares
Godfrey Scoular 1 ordinary $1.00 share
Frank Sebesy Skerlec
Andrew Skerlec
As at 17th February 1989 the directors and secretary of Somosomo were:
Peter Stinson
Charles Dwight Tompkins
Vishnu Prasad
Gardiner Whitewide (Secretary)
Vishnu Prasad 1 ordinary $1.00 share
Gardiner Whiteside 1 ordinary $1.00 share
Millsides Company Limited 98 ordinary $1.00 shares
Peter Stinson
Charles Dwight Tompkins
Vishnu Prasad
Gardiner Whiteside (Secretary)
Background:
Skerlec first visited Fiji in 1968 on holiday. He returned a year later and purchased a sawmilling business in Serua which he operated until 1971 when he sold it. A year later he incorporated 'Union' and it began operations out of a leased factory premises situated at Nausori, making parquet floor tiles and fabricating and supplying components for the construction of pre-fabricated low cost timber structures.
The business was reasonably successful moreso after a devastating hurricane struck Fiji in 1971 and a million dollar order for 500 houses was placed by the EEC with Union as part of its aid towards hurricane rehabilitation work being undertaken by the then Prime Minister's Hurricane Relief Committee. 'Union' was a major contractor to the Committee and later in the eighties, to the Department of Relief and Rehabilitation and Rural Housing supplying pre-fab hurricane-proof school buildings and houses and other building materials out of its rented premises in Nausori. Union's business expanded and Skerlec invested in more machinery.
Then in the late seventies and early eighties Union began to acquire real estate. Firstly, by acquiring the Crown Leasehold of the rented premises out of which it carried on its business and two other adjoining leaseholds in the same industrial subdivision in Nausori (Exhibits P'3'; P'4' & P'5') for a total consideration of $250,000. Secondly, in 1983 Union purchased for $600,000 a thirteen (13) acre freehold block of vacant land in Pacific Harbour, Deuba which was earmarked for 'hotel development'. The final piece of real estate which Union acquired was comprised of ten (10) vacant lots in a residential subdivision in Lady Narain Drive, Tamavua for $100,000. Skerlec also lived in a house at Muicolo Road, Tamavua which was also owned by 'Union' and was purchased for $60,000 in 1970.
In summary, besides stock, industrial machinery and vehicles, between 1979 and 1985 Union acquired at the listed prices (which are not seriously disputed), the following real estate properties:
(1) House and land at Muicolo
Road Tamavua (1970) - $60,000
(2) Three (3) Crown Leases at
Manoca, Nausori (1979/81) - $250,000
(3) A 13 acre freehold block at
Pacific Harbour, Deuba (1983) - $600,000
(4) 10 vacant lots at Lady Narain
Drive, Tamavua (1985) - $100,000
----------
$1,010,000
Items (2) & (3) were mortgaged however to Westpac (See: Exhibits P3'M', P4'M', P5'M' and P6'M') by way of security for a substantial over draft facility (about $1.2 million) granted to 'Union' and within which it successfully operated its business during the 1980s whilst Skerlec was managing the operations of the company up till his departure overseas in February 1988.
Skerlec also testified that he personally purchased the freehold title (Exhibit P'7') to an 89 acre block of beach front property ('Somosomo land') for $700,000 by purchasing the shares of 'Somosomo' which owned the land. He was adamant that he had used his own money out of his bank account to purchase the shares and that 'Somosomo' and its land was his own personal property and never formed part of Union's real estate holdings nor was 'Union' ever registered as a shareholder of 'Somosomo'.
As to this 'Somosomo land' Skerlec was firm in his evidence that after acquiring the land and while he was in Fiji he had neither mortgaged the land to Westpac nor had he been requested by Westpac to grant one in order to better secure 'Unions' liabilities. It was for all intents and purposes an entirely unencumbered freehold and might be considered the most valuable of the real estate properties involved in this case.
The 'Somosomo land' which Skerlec described 'as nice land with a very nice beach' was situated near to an existing tourist resort. Skerlec also testified that he had an interested buyer who wanted to build a hotel on the land and was offering 'one million two hundred' for it. This prompted him to visit the United States in February 1988.
Unfortunately events took an unexpected turn when Skerlec, who had stopped over in Hawaii on transit, suffered a heart attack. He underwent emergency heart surgery and was hospitalised in Hawaii, for a month. As a consequence of his illness, Skerlec cut short his planned trip to the United States and returned to Fiji instead.
Upon his return to Fiji and given his uncertain health condition, Skerlec withdrew 'from all direct involvement in the direction and operation of 'Union'' in favour of a Mr. W.J. Steel who was appointed a director of Union on 16th May 1988.
In the MEMO of 13th May 1988 (Exhibit D'11A') notifying Union staff of Mr. Steel's appointment Skerlec acknowledged: "... that (Union) business has suffered a sharp decline and Mr. Steel has been charged with the difficult task of returning the Company to profitability".
Owing to a 'recurrence of chest pain suggestive of cardiac ischaemia' (Exhibit P'10') Skerlec left Fiji in July 1988 to undergo further medical treatment in Canada. Before doing so however he appointed Peter Stinson ('Stinson'), who had been employed as a consultant to 'Union' since January 1988, 'the Manager of Union and Somosomo' to act as his personal representative 'in the day to day running of the companies' and '... in the orderly winding-up and disposal of all the companies assets in order to repay all liabilities to the companies Bankers and creditors ...'
In this latter regard by a letter dated 17th August 1988 (annexure 'R' to Exhibit D'8') Union's bankers Westpac wrote confirming the continuation of existing banking facilities 'on a monthly basis' and requiring the production of various accounts including 'a mortgage being executed and registered over Somosomo property ... by 26.8.88 ...'. The letter also noted that '... these requirements come about as a result of our perception of the Companies perilous situation ...' and further, '... the current economic downturn, Mr. Skerlec's illness and other problems before us have all the danger sign of impending major financial disaster'.
By letter dated 22nd August 1988 (annexure 'S' in Exhibit D'8') Stinson replied that: 'the company agrees to the bank executing a registered mortgage over the Somosomo property'. This contrasts quite graphically with Skerlec's evidence to the effect that after acquiring the 'Somosomo land' he had neither mortgaged it to Westpac, nor been required to do so by Westpac, nor had he ever approved or executed any such mortgage whilst he was in Fiji.
The emphasis must be 'whilst he was in Fiji' because on or about the 1st of September 1988 at Honolulu, Skerlec signed in the presence of Stinson a mortgage No: 264453 over the Somosomo land in favour of Westpac and further securing Union's indebtedness (annexure 'P' to Exhibit D'8'). This mortgage Skerlec claimed in evidence was granted on the advice of his trusted friend and then bank manager who feared that, with the change in Union's management, the land might be sold. In Skerlec's own words the mortgage was given to enable the bank 'to save my asset' (whatever that may mean). The mortgage itself speaks otherwise.
Mortgage 264453 was subsequently discharged on 1st February 1989 pursuant to a discharge No: 268369 lodged by Westpac (annexure 'W' to Exhibit D'8'). Little is known about why? given the so-called purpose of this mortgage, Westpac should exactly five (5) months to the day, unilaterally discharge it although it was subsequently replaced by a similar mortgage No: 271845 dated the 28th of April 1989 (Exhibit P'23' or a fuller copy as annexure 'X' in Exhibit D'8') which replacement mortgage Skerlec claims was unbeknown to him and was, amongst other things, fraudulent.
In Canada, Skerlec underwent a second heart operation. Stinson in the meantime was reporting regularly to him about Union's affairs and Skerlec asked him to find a buyer for Union's Nausori operations.
In this regard Stinson advised Skerlec that he had found a buyer Tompkins and a meeting was arranged to be held in Hawaii. Stinson and Tompkins travelled from Fiji and Skerlec came from Canada. The parties met over several days culminating in the execution of a document entitled: Heads of Agreement (the 'Hawaii Agreement') dated the 13th of October, 1988 (Exhibit P11).
In the Hawaii Agreement Tompkins agreed to purchase from Skerlec:
'... One hundred percent of the shares of Union for the sum of $F1.00 ... provided that Union's total liabilities as at the 13th of October 1988 did not exceed $F1,730,000.' (Clause 3); and
'... 100% of the shares in Somosomo ... for the sum of $F850,000 (plus) a property in New Zealand of 740 acres located at Matauri Bay in the North Island of New Zealand." (Clause 5).
In terms of Clause 8 of the Hawaii Agreement, Skerlec agreed:
'to immediately resign from all positions held with 'Union' and 'Somosomo' and appoint Mr. P.J.B. Stinson to replace him.'
It is not entirely clear why the 'Hawaii Agreement' was considered deficient but, in any event, a month later on 26th November 1988 a further document entitled: Sale and Purchase Agreement (the 'Fiji Agreement') was executed by Andrew Skerlec as attorney for 'Skerlec' (the vendor) and Tompkins (the purchaser). In it Tompkins agreed to:
'... purchase 100% of the shares in Union inclusive of its subsidiaries Somosomo (100%) and Grantham Pacific (50%).'
The purchase price for the shares was F$900,000 payable in two (2) instalments.
It is noteworthy that, unlike in the 'Hawaii Agreement' 'Somosomo', was being treated as a wholly owned 'subsidiary' of 'Union' in the 'Fiji Agreement'.
Furthermore no mention was made of the New Zealand land in the 'Fiji Agreement' instead it was dealt with by way of a separate handwritten note given by Tompkins and dated 26th November 1988 (Exhibit 'P13').
By Clause 4(a) of the Fiji Agreement:
'The Vendor (Skerlec) warrants that the liabilities of Union as at the 23rd day of November 1988 do not exceed $F1,730,000 any excess shall be deducted from outstanding purchase monies.'
In this latter regard, on the same day Andrew Skerlec signed a letter (Exhibit 'P14') acknowledging that the creditor's figure in the 'Fiji Agreement' was 'understated by $F175,000', and Tompkins was duly authorised 'to deduct (the same) from the balance of purchase monies owed under the said agreement'.
On 16th December 1988 'Twilight' was incorporated with 'Stinson', 'Tompkins' and Vishnu Prasad as directors.
The shareholders of Twilight on incorporation were Vishnu Prasad and Gardiner Whiteside and from 1st February 1989, an overseas company principally controlled by Tompkins, namely Millsides Company Limited ('Millsides') was allotted 98 shares. On the same day 'Twilight' changed its name to 'Barclay'.
Barely a week later by letter dated 22nd December 1988 (Exhibit 'P43') Vishnu Prasad & Co. on behalf of 'Tompkins' sought exchange control approval for the following five (5) transactions:
(a) The acquisition by Millsides of all of Twilight's shares;
(b) The acquisition by Twilight of all of Union's shares;
(c) A loan of $F900,000 by Tompkins to Twilight to facilitate the purchase of Union's shares;
(d) The transfer by Skerlec to Union of 140,099 Somosomo shares; and
(e) The transfer by Scoullar to Union of one (1) Somosomo share held by him;
These latter share transfers were said to be required 'to rectify past error and regularise the position with Union' as agreed by Skerlec and Scoullar.
In this latter regard Skerlec was adamant in his evidence that he never authorised or signed any transfer of his Somosomo shares to Union. He was never shown any share transfer although he was extensively cross-examined on the matter.
A signed transfer does exist however and forms an annexure to Exhibit 'P50'. It purports to transfer Skerlec's 140,099 shares in Somosomo to Union for $1.00 consideration and purports to be signed once by Skerlec and three (3) times by Andrew Skerlec and is dated the 26th of November 1988.
In somewhat similar vein Skerlec was adamant that his son Andrew was never a shareholder of Union nor, in particular, had Skerlec's wife Irene Skerlec or Frank B. Zienti ever transferred their two (2) shares in Union to Andrew. Yet such signed transfers do exist and forms part of the annexures to Exhibit 'P48' and are dated June 1987 and January 1989 respectively.
If I may say so it is unfortunate that the circumstances surrounding the creation and execution of these particular share transfers were not alluded to by any of the witnesses called in the case and, doubly unfortunate, having regard to Skerlec's evidence, that they were neither produced to him nor was he cross-examined on them. Indeed no one has verified the signatures on them as being authentic although undoubtedly they were accepted and treated as genuine by the Reserve Bank of Fiji ('RBF') when it eventually gave its approval 'in principle to the sale of shares owned by Mr. Frank Sebesy Skerlec in ('Union'; 'Somosomo' and 'Grantham (Pacific) Limited') to Mr. Charles Tompkins for the total consideration of $900,000' (Exhibit P'51').
Be that as it may and before approval had been given for the sale of Skerlec's shares to Tompkins, Vishnu Prasad & Co. wrote to the RBF seeking its approval to a loan of $760,000 from Tompkins to Union through 'Twilight' in order to avoid 'the very real danger of (Union's) immediate collapse' (Exhibit P'45'). By its letter of 14th February 1989 the RBF granted 'permission under the Exchange Control Act ... to Union to borrow through Twilight Holdings Ltd. $760,000 at 8% p.a. reviewable annually'.
As for this loan Skerlec testified in chief that after the signing of the 'Fiji Agreement' Tompkins phoned him in early 1989 in Canada and told him he wanted to put money into Union 'to make company bigger' in order that (Tompkins) might 'earn more money'. He denied any knowledge or being advised that Union was then in 'financial problems'. He was 'not interested to put more money into the company' but nevertheless sent his son Andrew with a Power of Attorney to finalise 'the deal' with Tompkins.
In cross-examination Skerlec agreed that he knew that Tompkins wanted to lend money to Union and although he was 'not too much happy' with it, he did not object to it or oppose it. He understood that 'the loan (to Union) was quite separate from the purchase price that was to be paid' to him.
Tompkins the lender for his part said that in January '89 he heard from Stinson 'that the company (Union) was in desperate need of cash and he wanted to know ... if (Tompkins) would consider advancing a loan' to Union in order 'to try and bale out the cash position of the company and to reduce the overdraft, pay vendors, and put capital into the company so that it could operate'.
Stinson who was effectively managing Union at the relevant time testified that after the signing of the Fiji Agreement, and pending RBF approval, Union 'desperately needed money to survive' and its bankers and other creditors were threatening to put it under receivership or wind it up. He reported these developments to both parties who agreed to Tompkins injecting the necessary funds into Union through Barclay's (the 'Tompkins loan'). Stinson also confirmed that the loan was needed to:
'(a) bring Union's bank overdraft down to its agreed limit; and
(b) to pay off pressing creditors who were issuing (winding-up notices).'
No demand letters or 'Section 221 Companies Act' notices were produced however and this evidence remains in that unsatisfactory state.
The relevant loan agreement Exhibit 'P20' is undated and was executed by Andrew Skerlec for Union (the borrower) and by Peter Stinson and Gardiner Whiteside for Twilight (the lender). It was for the sum of F$769,759.00 and was secured by a second debenture over Union's undertaking and a second mortgage over various listed real estate properties including 'the Somosomo land' (Exhibits P21, P22, P23 and P24).
Regarding, this loan, Skerlec's counsel writes:
'the objective of the 'loan' was to gain control of the management of Union and more importantly to secure Tompkins and Barclay's position as secured creditors over Unions assets.'
As for the Somosomo mortgage, counsel writes:
'Was void prima facie for three reasons, i.e. FIRSTLY for lack of consideration SECONDLY, the manner in which the ownership of Somosomo was transferred by way of a resolution was illegal and THIRDLY it was unconscionable on the part of Tompkins and his agents to take a mortgage over Somosomo in order to gain control and become a secured creditor in the circumstances. No company records were produced to show that Somosomo benefited in any way from the alleged loan.'
and counsel asks:
'The mortgages that were taken over Union and Somosomo's assets were signed by Stinson and Whiteside on behalf of the two companies. There was no independant legal solicitors acting for Union and Barclays in preparing and finalising the mortgages. Why were independant solicitors not requested to act for Barclay and Union in view of the possible conflict of interest? All mortgages were prepared and lodged internally by the management of Union.'
Defence counsel for his part without distinguishing between the original 'Tompkins loan' and the subsequent 'Stinson loan', writes that:
'The loan from defendants was obtained with the approval of Skerlec his own agent, son and Director had signed Minutes confirming that the loan would be made.'
and later,
'The loan was legitimate and was an emergency loan required to save the Company. It was not a ruse.' and 'to require a mortgage as security for the loan in the circumstances is normal and commercial. What is fraudulent about it.'
Both parties agree however that the loans had nothing to do with the purchase price payable to Skerlec under either the Hawaii or Fiji Agreements.
On 17th February '89 Skerlec and Andrew Skerlec resigned their directorships in both Union and Somosomo (Exhibits P17 & P18) and were replaced by Stinson, Tompkins, and Vishnu Prasad as directors, and Gardiner Whiteside as secretary, of both companies (Exhibits D12 & P16). Undated transfers of Skerlec's and Andrew Skerlec's shares in Union were also executed in favour of Twilight and held in escrow pending RBF approval (Exhibits P32A & P32B). On the same day Twilight transferred $769,000 into Union's account with Westpac, Suva pursuant to the loan agreement (See: the last two annexures to Exhibit P'53').
I digress here to deal with a subsequent upstamping of the Barclay mortgage (Ex.P.21) increasing the principal sum secured from $769,759 to $1,269,759 (See: Ex.P39B) i.e. by a further sum of $500,000 which it is claimed was lent by Mrs. Marleene Stinson to Barclays and on - lent to Union (the 'Stinson loan').
Unlike with the original 'Tompkins loan' of $769,759 the 'Stinson loan' was not evidenced by any written agreement between Barclays and Union or Somosomo although there was admittedly an agreement between Mrs. Stinson and Barclays; no company resolutions or bank deposit slips were produced verifying or ratifying the same nor is it even known when? and by how many? instalments the 'Stinson loan' was allegedly dispersed to Union albeit that the upstamping entry is dated 19th July 1989 and the relevant Registrar of Company's
certificate (Ex.P39B) is dated 26th September 1989.
Defence counsel in his written submissions sought however to identify three (3) dates when it is claimed the 'Stinson loan' was 'deposited directly into (Union's) overdraft account' namely, 'on 3 August 1989, 21 August 1989 and October 20, 1989'. No actual amounts are identified but a perusal of Union's bank statements (Ex.P.56) on those dates reveals the following deposits (in date order) namely, $3,578.88, $400,170.00 and $64,270.13 which together adds up to just slightly over $468,000 which is still $32,000 short of the principal sum allegedly lent.
As for the 'Stinson loan' of $500,000, Skerlec testified that he knew nothing about it nor had he authorised or agreed to the upstamping of Union's mortgage. He had also never authorised Somosomo to grant a mortgage to Barclay as collateral security for Union's borrowings nor was he personally aware of the existence of such a mortgage which is not surprising since, according to Stinson, who was managing Union's affairs at the time, '... once the loan funds went in and the share transfers were signed I reported to Tompkins. I stopped reporting to Skerlec once the share transfers were signed.' Indeed between February 1989 and September 1990 Stinson stated that he never spoke to Skerlec.
Tompkins for his part whilst accepting that the loan agreement was strictly between Barclay (as borrower) and Mrs. Stinson (as lender) nevertheless maintained that the agreement somehow involves Union and since Barclays already had a mortgage over Union's assets it was, 'much simpler and efficient' to upstamp Barclay's existing mortgage rather than create a whole new set of documents and incur 'more expense' to achieve the same objective.
Stinson for his part confirmed that his wife was the source of the funds the subject matter of the upstamping. As to when the $500,000 was injected into 'Union' he said:
'It was too or three months after Mr. Tompkins running. Because again it was short of money but we felt that with a further injection and I was satisfied he was the onwer that we could get rid of Union and that the property would realise value in future and that we could possibly make a profit.'
The following additional answers of Stinson in re-examination plainly reveals that he had a 'pecuniary interest' in the lending of the $500,000 to Union and more particularly in the security offered over the Somosomo land.
Stinson said in re-examination:
'... the security offered (i.e. first mortgage over the Somosomo land and other properties) was gilt-edged and the return of the investment was 8% and not 1% or getting in the bank. I still consider it a safe investment.'
and later:
'I was investing in Barclays Pacific which I knew needed to put more money into Union, however I was satisfied with the mortgage security over Somosomo. Bearing in mind my family had owned that property for some fifty years before it was sold to Mr. Skerlec, so I knew what the property was and I had faith in it.
I have carefully considered the evidence relating to the upstamping of Union's mortgage and in particular the undisputed fact that Mrs. Stinson was the ultimate source of the funds reflected in the upstamping, and am constrained to say that the upstamping of Union's mortgage was not an 'arms-length' deal.
It is noteworthy that at the relevant time (i.e. July to October 1989) Stinson and Tompkins were directors of Union, Somosomo and Barclays. Furthermore by then the transfers of Skerlec and Andrew Skerlec's shares in Union to Barclays had been signed and dated and stamp duty paid on them i.e. the lending company (Barclays) beneficially owned the borrowing company (Union).
Indeed I am firmly of the opinion that both Stinson and Tompkins being directors of Union (additionally Tompkins being a shareholder of Barclays) had a disqualifying personal conflict of interest in the upstamping of Union's mortgage as to amount to a breach of their fiduciary duties towards Union.
There can be no doubting that as a director of Union Stinson owed a fiduciary duty to Union not to enter into any engagement in which he had or could have a personal interest conflicting with the interests of Union which he was bound to protect.
The 'locus classicus' of this equitable rule is to be found in the judgment of Lord Cranworth L.C. in the leading case of Aberdeen Railway Co. v. Blaikie Brothers (1954) 149 R.R. 32 when he said at p.39:
'The directors are a body to whom is delegated the duty of managing the general affairs of the Company.
A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal (1). And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.
So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.
It obviously is, or may be impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain.
It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, - they may even at the time have been better.
But still so inflexible is the rule that no inquiry on that subject is permitted. The English authorities on this head are numerous and uniform.
The principle was acted on by Lord King in Keech v. Sandford (2) , and by Lord Hardwicke in Whelpdale v. Cookson (3), and the whole subject was considered by Lord Eldon on a great variety of occasions. It is sufficient to refer to what fell from that very learned and able judge in Ex parte James.
It is true that the questions have generally arisen on agreements for purchases or leases of land, and not, as here, on a contract of a mercantile character. But this can make no difference in principle. The inability to contract depends not on the subject-matter of the agreement, but on the fiduciary character of the contracting party, and I cannot entertain a doubt of its being applicable to the case of a party who is acting as manager of a mercantile or trading business for the benefit of others, no less than to that of an agent or trustee employed in selling or letting land.'
Whatsmore the upstamping of Union's mortgage was not something that was required by Barclays (as lender to Union) but by Mrs. Stinson (as lender to Barclays). It is not difficult to imagine how she became aware of Barclay's relationship to Union and Somosomo and is this not an instance of 'insider-dealing'?
In Hamilton v. Wright [1842] EngR 934; (1842) 9 Cl & F 111 Lord Brougham said of the use by a trustee of confidential information acquired in that capacity at p.124:
'The knowledge which he acquires as trustee is of itself sufficient ground of disqualification and of requiring that such knowledge would not be capable of being used for his own benefit to injure the trust. The ground of disqualification is not merely because such knowledge may enable him actually to obtain an undue advantage over others.'
It has been said in this case that the 'Stinson loan' was necessary to prevent Union from going under and also beneficial in providing some much needed 'working capital' for Union to continue operating.
But as was said by Lord Russell of Killowen in Regal (Hastings) Ltd. v. Gulliver (1967) 2 A.C. 134 at pp. 144/145:
'The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud or absence of bona fides; or upon such considerations as to, ... whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however, honest and well-intentional, cannot escape the risk of being called upon to account.'
In this case 'Stinson' as a director of both Union and Barclays owed a 'fiduciary duty' to Union which in my opinion, was irreconcilable with his personal pecuniary interest in the loan arising from his relationship with Mrs. Stinson as his wife and the ultimate source of the funds the subject-matter of the upstamping which were lent to Union through Barclays and which he would have been concerned to secure as fully and as completely as possible over a valuable property that once belonged to his family.
In such a situation Swinfen-Eady L.J. said in Transvaal Land Company v. New Belgium (Transvaal) Land and Development Company (1914) 2 Ch.D. 488 at p.503:
'Where a director of a company has an interest as shareholder in another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others. He is bound to do as well for his cetuis que trust as he would do for himself.'
In a not dissimilar case to the present in Gaslight Improvement Co. v. Terrell [1870] UKLawRpEq 134; (1870) L.R. 10 Eq. 168, Lord Romilly M.R. in setting aside the security granted by the directors in their favour as creditors of the company in that case said at p. 175:
'It is to be observed that the directors of every company who are also creditors fill two distinct and antagonistic characters. In the first place, they are trustees for the benefits of the company, and are trustees for the creditors to this extent, that they are bound to apply all the assets for the benefit of the creditors as far as they will extend. They themselves are also creditors, and have an interest to have their own debts paid. Now, if they had passed a resolution ... to pay ... a stranger to the company, nobody ... would be found to assert that that was not a fraudulent preference, the creditor having done nothing, having made no application for payment. Is the case altered by the fact that the creditor is one of the directors? So far from that being the case, in my opinion it only adds a breach of trust to the fraudulent preference. It is distinctly an improper act on the part of the director to direct the money to be paid to a stranger, but to direct it to be paid to himself for his own benefit is still worse: there is a taint of fraud which is introduced in it, while in the other case it is only a matter of undue preference. Suppose that the director had been a partner of a creditor who required to be paid, and he got the benefit of payment through his partner, would anybody doubt that there was a tincture of fraud in his getting this benefit by means of undue preference? It is the directors who make the order for payment. I am of opinion that this fact only makes the case worse, and compels this court to direct the whole transaction to be set aside.'
A fortiori in this case where the creditor concerned is the wife of the director who obtained the upstamping of the mortgage. The upstamping of Union's mortgage (Ex. P21) and other consequential entries relating to Somosomo's collateral mortgage (Ex. P39B) are accordingly ordered to be set aside.
It is common ground that Skerlec was not in Fiji on 17th February 1989 and had not personally participated in any discussions or signed any company resolution, share certificate, share transfer or resignation letter. He accepted however, in cross-examination, that an effect of the loan was that 'as at February 1989 the liability of Union, increased by that amount namely, $769,759'.
The relevant company resolutions evidencing and ratifying the above matters (excluding the 'Stinson loan') are contained in Exhibits D12 and P16 and were signed by Andrew Skerlec in his personal capacity as a director of both Union and Somosomo and also 'as attorney for and on behalf of Frank Skerlec' under a Power of Attorney which although not produced in evidence was accepted by all parties.
The ten (10) resolutions contained in the above-mentioned Exhibits were each put to Skerlec in chief, and he consistently denied any personal knowledge of them in February '89 nor had he agreed to or authorised their making or indeed the particular matters referred to therein.
In cross-examination Skerlec denied that as part of the Hawaii agreement he was required to resign his directorships in Union and Somosomo before any monies were paid to him. Clause 8 of the 'Hawaii Agreement' is too clear to allow any room for argument on that score. The position under the 'Fiji Agreement' however, namely Clause 6, is not so clear, and perhaps, more accurately reflects Skerlec's understanding of this particular matter to the effect that he was only obliged to resign 'after certain monies come to me'. He accepted however that he had agreed to sign undated share transfers to be held in escrow.
Be that as it may in October 1990, Skerlec deposed in an affidavit (Exhibit D'1') that he had agreed to resign his directorships in both Union and Somosomo 'so that new officers of these companies could be appointed'. This, defence counsel forcefully submits, contrasts quite starkly and even categorically contradicts the assertion by Skerlec in his evidence in court (in 1998) that he had never agreed to resign his directorships.
I do not accept that by this failure or omission in his affidavit of October 1990 to deny the accompanying share transfers, resignation letters or company resolutions, Skerlec's oral testimony in court must be considered either discredited or of negligible value. Needless to say by this time (i.e. October '90) Skerlec had begun proceedings to recover his shares in 'Union' and 'Somosomo' and in fact Peter Stinson, Vishnu Prasad and Gardiner Whiteside had already resigned from their respective positions in Union.
Indeed I am satisfied and so find that in February '89, other than the original loan from Tompkins (through Barclay) to Union, Skerlec was entirely unaware of most of what his son Andrew Skerlec agreed to, transacted and signed as his attorney. In particular that his shareholding in Somosomo had been 'corrected' and he had resigned his directorships in both Union and Somosomo, and also the numerous other company resolutions that are contained in Exhibits D12 and P16.
Be that as it may on 17th February 1989 with the passing of the above-mentioned resolutions the directors of 'Union', 'Somosomo' and 'Twilight' (name changed to Barclay Pacific (Fiji) Ltd. from 1.2.89) became Peter Stinson, Tompkins, and Vishnu Prasad. In similar vein Gardiner Whiteside was appointed secretary of all three companies.
On the same day (17.2.98) and unbeknown to Skerlec, Peter Stinson and Gardiner Whiteside as the newly appointed director and secretary respectively of Somosomo executed a collateral mortgage (Exhibit P22) over the'Somosomo' land in favour of Barclays to secure loan monies advanced to Union.
It is noteworthy that the consideration for the grant of this collateral mortgage is expressed to be:
'Barclays ... ('the Mortgagee') at the request of each of the persons undersigned ... (namely, Stinson and Gardiner for Somosomo and Union) ... forbearing to sue forthwith in respect of advances or accommodation already granted or afforded or presently granting or affording advances or accommodation or at any time or from time to time hereafter granting or affording advances or accommodation ... to Union ... ('the Debtor').'
I say 'noteworthy' because at this time no loan had yet been made by 'Barclay' to 'Union' much less had there been a demand or default on the part of Union in respect of the repayment of the loan.
Barely six (6) weeks later in April 1989 Skerlec testified that Tompkins rang and advised him that 'government had not approved the deal' and it was necessary for Skerlec to sign a document in order 'to help him get government approval' to the sale of his 'Union' and 'Somosomo' shares under the 'Fiji Agreement'. Skerlec signed two (2) such documents because he believed and trusted Tompkins as 'my friend'.
The first document is Exhibit 'P25' and is dated 28th April 1989 i.e. the same day that the Somosomo collateral mortgage was signed. It recites that in consideration of Barclays and Tompkins 'not making formal demand ... for repayment of a 1989 loan of Fiji $769,759.00 made to Union', Skerlec 'voluntarily and irrevocably agreed to assign, transfer and surrender and transfer (his interest and shareholdings in 'Union' and 'Somosomo') to Tompkins'.
By its letter of 16th June 1998 (Exhibit 'P49') the Reserve Bank of Fiji (RBF) granted 'permission in principle ... under the Exchange Control Act to Frank Sebesy Skerlec to sell all his shares in ('Union', 'Somosomo' and 'Grantham Pacific') to Charles Tompkins of New Zealand, for a consideration of F$900,000' on the condition that 'settlement for the sale of shares is to be done in Fiji'.
The second slightly longer and equally curious document Exhibit 'P29', is dated 6th July 1989 and is in almost identical terms to Exhibit P25 except for the following additional cryptic paragraph which reads:
'THE PARTIES HERETO ACKNOWLEDGE that the assignment of the shareholding referred to herein is made in lieu of a facility for the loan and shall not be re-assignable notwithstanding repayment of the said loan.'
In cross-examination Skerlec admitted that he had signed the assignments despite receiving legal advice not to do so and despite knowing their 'contents was not correct'. He was however unaware at the time of signing Exhibit P29 that RBF had already granted approval 'in principle' to the Fiji Agreement.
Tompkins for his part sought to explain the purpose of the first Deed of Assignment (Ex. P25) in rather vague terms when he said in cross-examination:
'The purpose of the Deed was just the consequence of the discussion as to the state of the company and an acknowledgement by Frank Skerlec of the result of those discussions that would call for us to carry on with the agreement and not trying to remove ourselves from it.'
and later:
'He (Skerlec) was acknowledging that there was no money due to Frank and that he was transferring his shares so that we would carry on with the company.'
As for the second Deed (Exhibit P29) Tompkins explained with equal vagueness that it was obtained as a result of a requirement of his New Zealand solicitors. 'It was some sort of extension or tidy up or something' (whatever that may mean).
To the suggestion that the Deeds were void for lack of consideration in so far as Skerlec had 'nothing to gain from this document', Tompkins said:
'That is absolutely not the case. He (Skerlec) had signed a personal guarantee in his company. He had various tax liabilities. He had an interest in the company and quite a bit to lose.'
To the question 'How does Skerlec figure in your demand of the Union loan?' Tompkins replied:
'He was at this time, still a shareholder. His agents were Touche Ross and Peter Stinson. He had certainly had the right to replace them or direct them as to what to do. And he still have a vested (?) interest in the company. The shares were in escrow, they were not my shares. They were Frank Skerlec's shares handed to his trusted accountancy firm which I think is a relatively normal process and were held ... (until) transfers would take place some date subsequent.'
Counsel for the plaintiffs in dealing with these Assignments writes inter alia:
'The question is, where was the consideration to Skerlec? Skerlec did not receive the benefit of the loan. Skerlec had no control over the disbursement or management of the loan. In any event, was any demand made on Union? Was the loan in default? Why was the loan in default? Did the loan agreement specify when and how instalments were to be made? It is extremely suspicious that Tompkins allegedly lent $769,000.00 to Union in February 1989 whilst having full control of the said company and then 8 week later threatened to call the loan up. The timing of the loan, the purported threat to call up the loan and the assignments which resulted from the threats to call up the loan show a clear pattern that the true intention of the alleged loan was not to help Union but it was to secure the transfer of Skerlec's shares indirectly.'
As for the fax (Ex.'P28') which accompanied the second Assignment (Ex.'P29') Counsel writes:
'Once again he (Tompkins) had sent the assignment with an accompanying fax which talks about going to the Federal/Reserve Bank to sort matters out. What was there to sort out on 4th July 1989? Reserve Bank had granted its approval subject to Tompkins bringing $900,000 into Fiji.'
Defence counsel on the other hand writes:
'5. The Assignments were neither sham documents, nor were they used at an inappropriate time.
Because of the dismal state of the Companies, as discovered by the defendant between the Fiji Agreement (November 1988 and April 1989 the defendant wanted to recover the loan of $769,000 made to the Company. At this stage, the fact is that the Defendant did not owe any money to the Plaintiff for the purchase price of the shares as it had been established that the purchase price was reduced to Nil. The business of SDL and Union was in fact and in Law at this stage rightfully owned by the Defendant but he had a business decision to make - i.e. call up the loan or battle on with the business. If he wanted to carry on with the business he was obliged to require that the shares be transferred into his name. In deciding to carry on with the business he stipulated that he would not call up the loan. The Assignment of April 28 simply records these different facts.'
As for the question of 'unconscionability' defence counsel writes:
'The issue of unconscionability does not arise.'
I cannot agree in the context of the Deeds of Assignment.
In Morrison v. Coast Finance Ltd. (1965) 55 DLR (2d) 710 Davey J.A. said at p. 713:
'... a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of ignorance, need or distress of the weaker, which left him in the power of the stronger. On proof of those circumstances it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair just and reasonable.'
In the High Court of Australia in The Commercial Bank of Australia v. Amadio [1983] HCA 14; (1983) 57 A.L.J.R. 358 Deane J. said at p.369:
"The jurisdiction of courts of equity to relieve against unconscionable dealing developed from the jurisdiction which the Court of Chancery assumed, at a very early period, to set aside transactions in which expectant heirs had dealt with their expectations without being adequately protected against the pressure put upon them by their proverty (see O'Rorke v. Bolingbroke (1877) 2 A.C. 814 at p.822). The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) the disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable."
and later in discussing the circumstances that could give rise to a 'special disability' his honour said:
"Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogued. In Blomley v. Ryan [1956] HCA 81; (1956) 99 C.L.R. 362 at p.405, Fullager J. listed some examples of such disability: 'poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary'. As Fullagar J. remarked, the common characteristic of such adverse circumstances 'seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other."
and finally on the question of 'consideration', he said:
"Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may be unfair, unreasonable and unjust from the view point of the party under the disability. An obvious instance of circumstances in which that may be so is the case where the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction."
As for the principles applicable to an 'abuse of confidence' reference needs only to be made to the well-known dicta of Lord Chelmsford L.C. in Tate v. Williamson [1866] UKLawRpCh 107; (1866) L.R. 2 Ch. App. 55 at p.61 when the learned Lord Chancellor said:
'Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of this position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed.'
(See also: The judgments in Tufton v. Sperni (1952) 2 T.L.R. 516)
In this case I am satisfied from the evidence, assuming that the Deeds are genuine documents, that Skerlec at the time of signing the Deeds was under a 'special disability' and that Tompkins well knew of Skerlec's disability and took advantage of the confidence and trust reposed in him to obtain the execution of the Deeds of Assignment.
The findings that leads me to this conclusion include the following:
(1) Skerlec was seriously handicapped as an absentee vendor/owner of failing health with limited knowledge who was plainly concerned to secure as soon as possible the successful completion of the sale of his shares to Tompkins;
(2) Skerlec had been intentionally misled by Tompkins before signing the first Assignment, into believing that the RBF had refused its approval to the sale and transfer of his shares under the 'Fiji Agreement';
(3) Before the signing of the second Assignment there had been an intentional concealment from Skerlec of material facts viz: RBF's approval of the sale of Skerlec's shares to Tompkins and the fact that the share transfers held in escrow had been transferred;
(4) Skerlec relied upon and trusted Tompkins, both as 'a friend' and as his only contact point regarding the sale of his shares under the 'Fiji Agreement' and Skerlec honestly believed that the Deeds were to be used solely to facilitate the grant of RBF's consent;
(5) Tompkins was not only the purchaser of Skerlec's shares in Union and Somosomo of which he was by then (April 1989) a director, in addition through his majority interest in Barclays, he had become a secured lender to Union;
(6) The accompanying faxes from Tompkins, namely Exhibits 'P27' and 'P28' not only minimised the true nature of the document to be signed but also put considerable pressure on Skerlec to act in haste viz 'within the next 18 hours' and 'fax copies back ... immediately';
In respect of both Deeds of Assignment having carefully considered the evidence as to the circumstances surrounding their creation and execution, I am satisfied that they are both 'unconscionable bargains' resulting from an 'abuse of confidence' by Tompkin's and which have not been shown to be 'fair just and reasonable'. They are accordingly unenforceable.
It is convenient at this juncture to deal with what might be conveniently called the 'NIL PAYMENT list' (Exhibits P40A & 'P40B'). This list, it is common ground, was prepared by Peter Stinson for Tompkins in about June '89 to use, subject to audit, in an argument to prove 'nil payment' in accordance with Clause 4(a) of the 'Fiji Agreement' which provides:
'The Vendor warrants that the liabilities of (Union) as at the 23rd day of November 1988 do not exceed $F1,730,000. Any excess shall be deducted from outstanding purchase monies.'
The list which was never audited is plainly 'relied upon' by both defendants 'to justify making a nil payment to Mr. Skerlec' under the 'Fiji Agreement'. Indeed Defence Counsel writes:
'In the course of the preparation of documentation to verify the liabilities (of Union) it was found that the liabilities exceeded the represented amount (viz $1.73 million) by an amount in excess of the purchase price (viz $900,000). In fact the companies were found to be insolvent.'
and later counsel claims that:
'The defendants in terms of the agreement set-off against the purchase price the amount by which the liabilities were understated.'
Counsel for the plaintiffs observes however that, unlike the letter of 26th November 1988 (Exhibit P14) which was written by Andrew Skerlec as Skerlec's duly appointed attorney, Exhibit 40A:
'... did not set out the date on which the alleged liabilities were owing; ... was not provided for in a proper balance sheet; ... was not properly audited; ... and there was no evidence or receipts to confirm the validity of the debts specified in the list; ...'
The list was also seriously deficient in:
'... that the liabilities of a company can only be ascertained after looking at both the creditors and debtors ... (and) is not ascertained purely from a list of creditors'.
Furthermore at the relevant time Counsel writes:
'Stinson was a director of both Union and Barclay, he had a pecuniary interest in Barclay since his wife was an investor in Barclay. Stinson was not a proper person to prepare a List of Liabilities. Stinson was not even qualified to prepare a balance sheet. He is a gentleman farmer by profession.'
Skerlec for his part (and I accept his evidence in this regard) denied any knowledge of the 'NIL PAYMENTS list' until he returned to Fiji in Oct '90. He had no part in its preparation; had not authorised it; had not been consulted about it; nor had he agreed to it.
Indeed Skerlec was taken through the 'NIL PAYMENTS list' item by item and was able to provide a satisfactory explanation for most items. In summary, Skerlec's evidence which I accept, was to the effect that the 'NIL PAYMENTS list' was a 'falsely fabricated list' which contained settled, non-existent and disputed debts and incorrectly inflated entries unsupported by any primary accounting records or properly audited accounts. Certainly none were produced to the court by the defendants who sought to rely upon the 'NIL PAYMENT list'.
In so far as it is necessary for me to find I have no hesitation in saying that from the evidence I am satisfied that the 'NIL PAYMENTS' list was and is a largely inaccurate and unreliable document in almost all its entries and was prepared with the clear intention to defraud Skerlec.
It cannot possibly justify the unilateral reduction, let alone the complete extinguishment, of the purchase price due under the 'Fiji Agreement' nor in my considered opinion, having regards to the circumstances of its creation and its authorship, can it bind Skerlec even vicariously in terms of Clause 4(a) of the 'Fiji Agreement' (op.cit at p. 36).
Quite simply the 'NIL PAYMENT list' is neither a 'warranty' nor is it an informed admission by Skerlec sufficient to enable Tompkins to invoke the provisions of Clause 4(a) of the 'Fiji Agreement'. In crude terms it is not worth the paper it is written on.
Be that as it may on the 30th of June 1989 the transfers of Union shares to Twilight Happenings which had been previously signed by Andrew Skerlec and were held in escrow by Vishnu Prasad & Co. were dated and stamp duty duly paid. The transfer of Union's shares was accordingly effected without any actual payment being made to Skerlec under either the Hawaii or Fiji Agreements.
Exactly thirteen (13) months later on 31st July 1990, Barclays and Westpac acting under their respective debentures appointed almost simultaneously, separate receivers of Union. Barclays appointed David Ashby and Westpac appointed Nalin Patel. The Union premises was initially given over to Ashby and was only handed over to Nalin Patel on or about the 5th of November 1990 (approximately 3 months after his appointment) and only after the institution of court proceedings.
Nalin Patel testified that after gaining possession of Union's premises and despite written requests to Ashby and to the directors and accountants of Union for Union's accounting and statutory records '... no documents came through. In fact no books of (accounting) records or statutory records ever came through and to date we have not got those'. Indeed his written requests went unanswered.
Despite this obvious handicap Nalin Patel prepared an inventory of Union's remaining machinery, stock, and vehicles and obtained valuations of its real estate properties. He was also able to compile a list of unsecured creditors which '(was) estimated to be around $278,527' and '... preferred creditors was estimated to be under $30,000'. Similarly a list of Union's debtors as at 31st December 1989 revealed a value of 'just about a million dollars or under a million dollars'.
In compiling the list of unsecured creditors he denied that he had received a claim anywhere near $241,000 from Pacific Harbour which 'at that stage was about $23,041.94', neither had he received any claim from a Tommy Han; Fiji Forest Industries (FFI); the Estate of Ratu David Toganivalu or Mohammed Ali Woodcraft all of which names figure prominently in Stinson's so-called NIL PAYMENTS list (op.cit).
He also testified that:
'No formal claim (was made by Tompkins) except there is a debt owing based by Twilight Happenings which changed its name to Barclays Pacific. I think the debt owing was $769,759 at 8%.'
In August 1989 Skerlec travelled to New Zealand to see Tompkins after having been advised that RBF approval had been given to the sale of Union's shares. The day after his arrival in New Zealand Tompkins advised him however that 'government changed its mind' and approval was not forthcoming. Skerlec threatened to return to Fiji and cancel the deal. Tompkins managed however to persuade him to return instead to Canada as a paid sales representative for Union products whilst he (Tompkins) would endeavour to get the RBF to change its mind.
The evidence is somewhat vague and disjointed as to what took place at Union's Nausori premises between February 1989 till May/June 1990 after the directors had changed and Stinson had ceased reporting to Skerlec. Beyond what has already been outlined in the preceding pages several matters are clear however. These include what plaintiff's counsel describes as:
(1) the disappearance of $2.1 million from Union's bank account;
(2) the removal and sabotage of Union's assets and machinery; and
(3) the disappearance of Union's company records and books of accounts.
In response defence counsel writes:
As to (1):
'The cheques (totalling $2.1 million) were written as part of the ongoing business of the Company ... The suggestion that $2.1 million was falsely removed is with respect absurd and an insult to any businessman. The very fact that cheques have been paid out in any business account does not show they were false payments';
I confess that in the absence of the relevant cheques or butts and given the progressive decline in Union's business and financial affairs over the period in question necessitating a further injection of loan funds, I am not at all satisfied that Union's business could be described as an 'ongoing business'. Indeed the totality of the evidence suggests quite the contrary.
As to (2), defence counsel writes:
'An accusation unsupported by evidence and contrary to the interests of the defendants who were owed $760,000 plus interest. All ... assets sold have been properly accounted for with deposits of the proceeds to the (Company's) Bank Account.'
In this regard bearing in mind that Tompkins was primarily interested in the real estate holdings of Union (which includes the Somosomo land) and the fact that the 'Tompkin's loan' to Union is secured by mortgages over Union's and Somosomo's real estate holdings and bearing in mind the evidence of Shalendra Singh and Subh Narayan as to the sale and removal of vehicles, machinery and timber from Union's premises including to Tompkin's Nadi premises (which I accept as truthful), and given the absence of any Union records as to the identity of the assets that were sold and are undoubtedly missing and the whereabouts of the proceeds of such sales, during the period when Union was under the direct control and management of Tompkins, I reject this submission.
and As to (3):
'No evidence was destroyed. All books, accounts and records have been with Vishnu Prasad or Ashby (and) 'Prasad was the auditor. He has the records. He won't produce them unless he gets paid.'
In the absence of the evidence of either Ashby or Vishnu Prasad this response is largely speculative. Indeed I am satisfied that in seeking to minimise the availability of, and in distancing themselves from, Union's accounting and company records both Stinson and Tompkins were less than truthful. Needless to say I do not accept that a director's statutory duties under the Companies Act can be so easily avoided by merely absenting oneself from any direct involvement with the 'day-to-day' running of the company nor is it an acceptable excuse to say 'there were no records'.
Be that as it may in May 1990 Tompkins rang and spoke to Skerlec in Canada for the last time. In Skerlec's words:
'Tompkins phoned me from Nadi one night and told me company is finished, bankrupt, I can't give you anymore money. I asked him what happened to my money? He said you have to wait until I go to Fiji and sue the bank.'
As a result Skerlec suffered a stroke and was hospitalised for at least 4 months before being discharged to recuperate at home.
In October 1990 having sufficiently recovered, Skerlec returned to Fiji and learnt and was shown for the first time, the RBF approval letter of 14th July 1989 (Ex.'P51'). The RBF upon learning of Union's liquidation wrote to Vishnu Prasad & Co (Ex.'P52') seeking confirmation that overseas 'funds totalling F$760,000 (had) been brought into the country and paid to its respective beneficiaries'. Skerlec to whom the query had been referred, responded in a letter dated 16th October 1990 (Ex.P31) in the following terms:
'I confirm and categorically state that I have not received here in Fiji or anywhere else in the world in any form or manner consideration that was payable to me under the terms of (the 'Fiji agreement').'
During this time Skerlec made several attempts with Westpac and its receiver to salvage what was left of Union's business and assets but his pleas and suggestions were all turned down because in Skerlec's words: 'they told me I am not the owner' or in Michael Ram's words: 'the Bank did not want to look at the proposal because there was a dispute regarding the shareholding of the company'.
Eventually in December 1990 Skerlec issued proceedings against the defendants to recover control and ownership of Union.
In light of the Court's earlier determinations, the NIL PAYMENTS list (Exs.P40A & B); the Deeds of Assignments (Exs.P25 & P29); and the Terms of Settlement (Ex.P35) are, individually and collectively, incapable of being relied upon to justify or support the first defendant's claim that settlement has been fully and properly effected under the 'Fiji Agreement'. Furthermore given that the plaintiff's shares in Union and Somosomo have been transferred to the second defendant company and given the undeniable fact that no monies were ever paid to Skerlec (as the vendor) under the 'Fiji Agreement', I conclude that Skerlec is entitled to an award of damages for breach of contract calculated as follows:
Purchase Price under the 'Fiji Agreement' (Ex.P12): $900,000.00
less Agreed understatement of liabilities
as per Exhibit P14: $175,000.00
-----------
$725,000.00
less Payment under the Terms of Settlement (Ex.P36): 25,000.00
----------------
$700,000.00
=========
There will also be an award of interest on the damages figure calculated at 4% p.a. from the date of the original Writ in Civil Action 400 of 1990 until the date of this judgment i.e. 8 1/2 years amounting to $(700,000 x 4% x 8.5 yrs) = $238,000 making a total award of $(700,000 + 238,000) = $938,000.
Judgment is accordingly entered in favour of the first plaintiff in the sum of $938,000.00 with costs to be taxed if not agreed.
For the sake of completeness the defendants counter-claim is rejected and disallowed in toto however the injunction of the 16th March 1994 is hereby dissolved.
(D.V. Fatiaki)
JUDGE
At Suva,
19th May, 1999.
HBC0052J.94S
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