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Ali v Chaudhary [2004] FJHC 532; HBC0061.2001L (22 March 2004)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

CIVIL ACTION NO. HBC00061 OF 2001L

ABBAS ALI AND Others

V

CHAUDHARY and Others

Gates J

Mr. S. Maharaj for the 1st and 2nd Plaintiffs
Mr. H. Ram for the Defendants

26 April, 16 July, 16 April 2002
22 March 2004

RULING

[Companies Law; share ownership; transfers; determinative evidence to be considered; proper instrument of transfer section 79 Companies Act; unessential matters not impeding registration; not compliant with Articles; elapse of time and actions of claimant; an unconditional and absolute right to be registered; duties of transferor; the register of members; Notices of Refusal to register s.60; denial of pre-emptive rights; power of court to rectify s.120; prior duty of Directors to make timely correction; register and share certificates not conclusive]

Introduction

[1] The issue for determination here is whether 10,000 shares of the Fantasy Company of Fiji Ltd [2nd Plaintiff, the company] were held by one of the 1st named Plaintiffs or by one of the Defendants. On this finding hangs the question of majority control of the company. A secondary issue for determination, but also of importance, is the exact shareholdings of the members of the company.

[2] The 2nd Plaintiff is a land sales company. It holds prime State leasehold land adjoining the Nadi beach. Its business is to develop infrastructure and to sell lots from the sub-division. Some lots have already been sold and substantial residential properties have been built on them. Unfortunately, the shareholders of the company have quarrelled. The Defendants make allegations of abuse of office against the Managing Director [1st named 1st Plaintiff] and say his style of management was dictatorial.

[3] After an interim injunction was obtained by the Plaintiffs to prevent the Defendants from dealing with the company’s assets or from operating the bank account other than with counter-signatures from the Plaintiffs’ faction, the parties agreed, at least for a while, to go forward under the terms of a consent order. This compromise did not last. Things went from bad to worse. Matters in this action were fought tooth and nail, the parties taking out between them some 31 summonses or motions including 6 for contempt. Eventually counsel for the parties asked me to rule at this stage on the crucial issue of share ownership, hence this ruling. The Defendants in their submissions urged me not to hear oral evidence saying it would be unjust, inexpedient and uneconomical to do so. It was agreed that the issue of majority shareholdings was a legal issue and not a factual issue.

[4] The proceedings began with an originating summons dated 14 February 2001. Two affidavits in support were sworn and filed by Abbas Ali for the Plaintiffs [14 February, 28 February 2001] and one in opposition by Umendra Jit Chaudhary for the Defendants [sworn 22 February 2001]. However other affidavits filed in other summons in this action have also been referred to and are relevant to this ruling. 12 affidavits in all have been considered. Counsel have provided two written submissions each to add to the voluminous affidavits filed. The submissions were detailed, relevant and helpful.

[5] Initially Abbas Ali said the shareholders were as follows:

[6] That allocation and subscription gave the 1st Plaintiffs 176,115 shares as against 161,660 for the Defendants (supported by Richard Urwin and the Mataqali Votuburu). The annual return for 10 March 1999, filed by the company’s accountants HLB Crosbie and Underhill, had Jai Prasad [2nd named Defendant] and Masatoshi Kayano [3rd named 1st Plaintiff] listed as holding 32,450 shares each [not 21,125 for Prasad or 42,775 for Kayano]. The Defendants therefore claim to have the majority holding with support of 171,985 shares as against the Plaintiffs’ group with 165,790. Chaudhary was Chairman, Abbas Ali Managing Director and Jai Prasad was a Director as well as from 1997 onwards, company secretary. The registered office was at Abbas Ali’s property, the ground floor flat, Waqadra, Nadi, where all the company records were kept.

[7] Mr. Chaudhary claims no changes to share membership have occurred since 8 January 1996, when Richard Urwin became a member. The annual return for 1999 also gives that date, in the column headed “Date of registration of member”, for all of the shareholdings. Mosese Seniwakula took over as Trustee for the Mataqali Votuburu from Apakuki Tuitavua in 1998.

[8] The company was formed on 15th October 1991. There were two subscribing members. They were Abbas Ali and his brother Saiyad Hussein, the 1st and 2nd named 1st Plaintiffs. Each subscribed to take up 50,000 shares. The share capital at incorporation was $250,000 in $1 shares. At a meeting of shareholders on 12 January 1993 it was resolved that each of the subscribers would reduce their holdings by 10,000 shares to 40,000 shares. It was also resolved that new members were to be recruited. Eventually 8 new members joined.

[9] Of the 10 shareholders in this private company none of them could be said to have a thorough appreciation of a company’s share structure, share transfers procedure, share premiums, or company record keeping. This was not a large corporation having a separate company secretary’s Department with in-house accountants and lawyers to carry out, or to advise on how to handle, such matters. Small companies throughout the world invariably have to manage without such expertise. The courts appreciate these difficulties and are often therefore more concerned to ensure that there is substantial, rather than total compliance, with company Articles.
The new shareholders

[10] Abbas Ali proved payment to the company for his initial subscription, by exhibiting an ANZ Bank credit advice for $40,000 on 29.1.93 [his Affidavit sworn on 3.4.01]. This covered the taking up of 40,000 shares. His brother was to hold 40,000 also. The minutes of the meeting recorded allotment to the new shareholders as follows:

[11] It was agreed there would be allocation also to:

[12] Of the allocation of 30,000 shares to Jai Prasad it was agreed that 20,000 would be a new allocation and that 10,000 shares would be transferred by Abbas Ali from his original subscription holding of 50,000. Similarly, Masatoshi Kayano would increase his holding from 20,000 to 30,000 by taking 10,000 shares off Saiyad Hussein, the other original subscriber.

[13] At first Abbas Ali said that the two Canadian investors, Edward Henry Thompson and Richard James Urwin had paid a premium each for their shares, which in turn had added shares to the holdings of the existing shareholders. Urwin took up his shares in 1996. In his final affidavit [9.5.01] Ali admitted that though $1.25 had been paid per share by Thompson and Urwin, there was in fact no resultant increase in the other shareholders holdings by virtue of the premia paid. Each of the major shareholders therefore held 40,000 shares. This change of opinion followed an investigation by, and advice on the matter from, the company’s accountants Messrs HLB Crosbie and Associates. The premia paid might have increased the value of the original shareholders shares. They did not have the effect of adding extra shares. For that to have happened the procedure of Section 60 as to fully paid bonus shares would have to be followed. Mr Ali admitted he was earlier mistaken. Prior to the troubles which arose in 2001 it would appear the Defendants were content to accept the extent of the shareholdings then said to be held.

Jai Prasad’s shareholding

[14] Mr Jai Prasad raised $20,000 through the ANZ Bank to purchase his 20,000 shares in the company. His loan application was approved in a letter from the bank of 25.9.91. The same bank confirmed receipt of such funds into the account of the company by its letter of 19.5.93 [Masatoshi affidavit sworn on 7.3.01].

[15] Mr Ali said that Jai Prasad could not raise the balance $10,000 for the 10,000 shares which Ali had offered him. The bank would only advance Prasad $20,000, not $30,000. Ali said he gave Prasad more time till 12.1.93, and again till 24.5.93. He said Prasad was eventually unable to purchase his shares. Accordingly Ali sold them to Masatoshi Kayano on 30.11.93. A transfer form however had already been completed for Prasad to take Ali’s shares.

[16] Jai Prasad said that upon approval of his bank loan he paid the $20,000 to the company. The bank’s approval letter was dated 25.9.91. Prasad does not state exactly when he paid, but it was not till 16 months after the bank’s letter was issued that he was allocated the 20,000 shares in the company. It would be more likely for him to have paid for the shares following the allocation, rather than that he paid months in advance without the authority of an allocation.

[17] If $20,000 had to be provided to Prasad by the bank on loan, where was the source of the funds for the extra $10,000, the $10,000 which admittedly he could not raise in time for the meeting of 12.1.93? It did not come through the banking system. No documentary evidence has been tendered to prove source. In good faith, Ali was prepared to sign the transfer form and have the company issue a share certificate showing his 10,000 shares in Prasad’s name, though, and it is unchallenged, Prasad had not paid for them at that time.

[18] On his “Statement of financial position as at 5.4.98” addressed to the ANZ Bank Prasad had declared his total shareholding as valued at $20,000 not $30,000. It would appear that at that time in 1998 Prasad did not believe that he was then the owner of the additional 10,000 shares from Ali.

[19] Both Ali and Prasad accept that the Certificate of Transfer was signed by them on 12 January 1993 when no money had been paid over. Prasad said they had agreed to the transfer prior to that January meeting. Prasad does not say why, having agreed to pay for the shares by the January meeting, he was unable to do so on the day. Ali said Prasad could not raise the extra finance. He also said Mrs Prasad, signed the transfer form as a witness to her husband’s signature at the next meeting on 24.5.93. But no monies were forthcoming on that day either.

[20] Because Prasad was unable to come up with the $10,000, the shares were transferred by Jai Prasad to Masatoshi Kayano. On 30 November 1993 Prasad and Masatoshi signed a transfer document. This much is unchallenged. The document was witnessed by Ali though stamp duty was not paid till 26.2.01. Masatoshi paid for these shares on 12 October 1993. In his affidavit Masatoshi exhibited a handwritten notation which listed his and his wife’s shareholdings in the company and their loan to the company. This note listed the 10,000 shares from Saiyad Hussein and the 10,000 from Jai Prasad. Masatoshi exhibited details of his payment, a deposit to the company’s bank account on 12.10.93 for $8,000 and $2,000 in cash.

[21] From time to time the Directors of the company lent money to the company. Eventually a large bank loan was arranged, for it was obvious in the early stages of the land subdivision, roading and infrastructure created voracious needs for finance. Ali accepted that Prasad had also lent money. $12,000 was lent in 1995 of which $9,000 remains as the outstanding balance owed by the company to Prasad. Whilst Prasad may have had $12,000 to loan to the company in 1995, it does not follow that he had $10,000 to buy Ali’s shares in January or May 1993.

[22] Prasad’s evidence relied on the Annual Returns prepared by the company’s accountants in which the shareholdings were set out in the table as at paragraph 5 of this judgment. The information on these holdings appears to have been given to the accountants by Ali. The holdings as at January 1993 were different from those filed in 1997, the time of the scrip lien to the ANZ Bank. Share certificates issued in 1996 similarly reflected holdings as in the banking documents of 1997. These reflected the misunderstandings on share premia.

[23] Until the accountants looked into the matter precisely there appears to have been no professional consideration of the shareholdings. But no support can be gained by the Defendants from an FTIB letter of 12 January 2001 since this had merely reiterated the tabulated shareholding that the Board had been given by the company much earlier on.

[24] The answer lies in a careful retracing of events, the initial subscription, the 1993 allocations, the transfers and the later shareholders of Urwin and Chaudhary. This is what the accountants checked, albeit late on in the day. The result is set out in paragraphs 10 and 11 supra. Ali has frankly admitted he got it wrong. He put it to the accountants to look into, and they then examined the position and corrected the holdings.

[25] Prasad’s claim to have purchased, and therefore now to possess the extra 10,000 shares, relies on his statement that he did indeed pay Ali for them. No evidence is forthcoming in support of that payment. Second, Prasad admits signing the transfer form and says he transferred the 10,000 shares to Masatoshi so as to support Masatoshi’s application in late 1993 for FTIB approval. Prasad said Ali told him the purpose of this transaction and “that it was a feign document”. Masatoshi was attempting, on this account, to puff up the scale of his holding.

[26] Prasad asks the court to believe his assertion that he was not parting with ownership. In doing so he relies on his admission of his part in deceiving the FTIB as to the true shareholding of the applicant for approval, namely Masatoshi. On a balance of probabilities the accounts of Masatoshi and Ali are to be preferred here, which are also supported by the accountants. If all of this deception had been practised by Prasad in 1993 why was nothing done by him to re-assert his ownership of this block of shares until the troubles arose some 8 years later? After all he had become company secretary in 1997 and as an officer of the company was in a key position to put matters right. It was said by Sir Baliol Brett M R in Skinner v City of London Marine Insurance Corporation [1881-85] All ER 167 at p169 “that the seller should execute a valid transfer, and hand over the certificate to the transferee, and do all in his power to enable the transferee to insist on his right to have the transfer registered.” There is an implied duty and obligation from the transferor to do nothing to prevent the transferee being entered on the register so as to acquire the full benefits of the transfer Hooper v Herts [1906] Ch.D 253 at p260.

What determines share ownership?

[27] In addition to subscribers at registration, those who agree to become members and whose names are entered in its register of members are also members of a company [section 30 Companies Act Cap. 247]. After the memorandum and articles are registered both the company and the members become bound “to the same extent as if they respectively had been signed and sealed by each member to observe all the provisions” [section 24].

[28] No trusts of any sort are to be entered on the register [section 121]. The Register of Members constitutes prima facie evidence of its contents [section 122]: but the evidential effect of the register may be displaced by other relevant evidence: Shropshire Union Canal Co v Anderson (1849) 3 Ex 399 at 403; Metropolitan Milk Supply (Greater Brisbane) Ltd v Paulsen [1933] St. R. Qd 53 at p74. The court has power to rectify entries in the register [section 120]. In this case on 7.2.01 the register had been taken from the registered office of the company by the 3 Defendants [Chaudhary, Prasad, Thompson] on the pretext of a company meeting. The removal of company papers from the registered office has never been denied. Though secondary evidence was given of the entries on the register by Chaudhary, the register, or extracts from it, which was then in their custody were never exhibited by the Defendants. I shall return to this fact further on.

[29] By virtue of section 79 of the Act transfers of shares cannot be registered “unless a proper instrument of transfer has been delivered to the company.” Shares are stated to be “personal property transferable in manner provided by the articles of the company” [section 77]. In Nanney v Morgan [1887] UKLawRpCh 216; [1887] 37 Ch.D 346 at p354 Cotton L J said:

“I do not place any reliance on the transferee being entered on the register, because when a deed of transfer duly executed is left with the secretary, it becomes the duty of the company to register the transferee as entitled to the shares, and the mere neglect of the company to do that, will not in my opinion affect the right of the transferee to be treated as the legal owner of the shares.”

[30] On 30 November 1993 a Transfer of Shares form was completed by Prasad, signed by Masatoshi and Ali. It followed the form set out in the Articles [Art. 29] apart from omitting mention of the consideration. Of course no consideration had been paid by Masatoshi, the purchaser, to Prasad, because Prasad had not completed his own purchase of the shares from Ali. Prasad had not paid any money for them, though the shares may have been in his name on the register. Masatoshi meanwhile did pay for them which tends to suggest he made a genuine investment in the company and was not attempting to deceive the FTIB. The transfer forms used by all of the shareholders and Directors at the time of the bank loan application by the company in 1997 followed the same wording. From their own involvement it can be inferred that the Directors did not for any of these lodged transfers decide to refuse to register them as being in unacceptable form. Nor did they question the transfer from Prasad to Masatoshi. At the time the company secretary was the 3rd Defendant [Thompson]. Subsequently the company secretary was the 2nd Defendant [Prasad himself]. The omission of the consideration was an unessential matter, if it were worthy of mention at all in the circumstances of this transfer, and I find the transfer form Prasad to Masatoshi to have been a proper instrument sufficient for registration purposes: In re Paradise Motor Co Ltd [1968] 1 WLR 1125; Ansett v Guinea Airways Ltd and Potter [1945] SAStRp 14; [1945] SASR 94 where the court found the omission of details of occupation of member not to be fatal to valid registration.

[31] The original transfer from Ali to Prasad of 12 January 1993 was not strictly in the form as set out in the Articles. The Articles however do permit the transfer to be “in any usual or common form which the Directors shall approve” [Art. 29].
Indeed in Paradise Motor Co the Court of Appeal said (at p1141A):

“We do not, however, consider that a “proper instrument” necessarily means an instrument complying with the formalities prescribed by the articles;”

[32] There has been substantial compliance here. No shareholder from the remaining 8 had, prior to the transfers, made any objection and clearly all knew about, and were content with the transfers from Ali to Prasad and from Prasad to Masatoshi. The Directors “in their absolute and uncontrolled discretion” never refused to register these transfers of shares. The lapse of time and Prasad’s inaction have been such that he “cannot now be allowed to take advantage of his own failure to procure execution of the transfer” and the rectification of the register: Bargate v Shortridge [1855] VHLC 286; Paradise Motor Co (supra at p1140G) and (at p1140F) where the court commented:

“There is plenty of authority for the proposition that neglect of unessential matters on a transfer may not be fatal to the transfer’s validity, and may amount to mere irregularities; see Buckley on The Companies Acts, 13th ed. (1957), pp. 810-811, in the notes to article 22 of table “A.”

[33] If the company had decided to refuse to register Masatoshi as the new owner of Prasad’s shares, it should have issued to the transferee a notice of refusal within 60 days of lodgment [section 82]. This never occurred, and there is no reason to suppose any of the members wished to object to the registration at the time of lodgment. The omission to fulfil stamp duty requirements has been rectified, and that initial defect did not trigger any Notice of Refusal.

[34] As I have stated, the register of members has never been exhibited by the Defendants. I am not prepared to accept secondary evidence of its contents, not least since the register had been taken deceitfully by the Defendants from the registered office and no satisfactory reason has been produced to explain its lack of production now. If therefore registration had not been made following the lodgment of these transfers, I find that both Prasad and Masatoshi in turn, were entitled to be registered and would have succeeded had an application for rectification been made under section 120 of the Act. As against the other members of the company Masatoshi’s increased shareholding, the additional 10,000 shares, could not be denied : cf Roots v Williamson [1888] Ch.D 485, where the transfer was inchoate and the Defendants had not acquired “an absolute and unconditional right to be registered as shareholders: or Smith v The Wellington Woollen Manufacturing Company (Limited) [1888] Vol. VI SC 654 where there had been a failure to follow the court’s order to re-present the instrument of transfer to achieve rectification.

[35] It has also been submitted that the procedure for transfer of shares had not been followed, that is that there had been a denial of pre-emptive rights. Art. 28 provides:

28. Any shareholder may transfer his share or shares in the Company to any other person provided however such shareholder shall give a first option to the other shareholder of the Company to purchase the same at a price or on terms agreed between the parties. If no agreement is reached within three months of transferor’s offer, the matter shall be determined in accordance with the Arbitration Ordinance Cap. 30.” ....
    

[36] In this case when Prasad failed to come up with the money, the shares were offered to Masatoshi. Of the 3 Defendants, Prasad can hardly avail himself of such an argument because on his evidence he transferred his shares to Masatoshi also in breach of the pre-emptive rights of the other shareholders. Chaudhary did not hold shares at the time (1993) and so has not had his rights infringed by this transfer. Lastly, Thompson [3rd Defendant] who did not give evidence made no claim that he had wished to take up the shares or that he has been denied his rights thereby.

[37] Curtis v J.J. Curtis & Co Ltd [1984] 2 NZLR 267 to which Mr Ram referred me was a case in which there had not been substantial compliance with the procedure laid down in the Articles as to offers to members before a retiring member could be at liberty to sell. In that company it was provided that the Directors had 1 month in which to find “a member or members or person selected” willing to purchase the shares. There was a detailed procedure to be followed. No such procedure is laid down here by Art. 28 however.

[38] In the instant case the sale was to an existing member, and the transfer was not a typical transfer. It was more in the nature of a re-allocation after the 2 existing subscribers had decided to widen membership upon the operational start-up of the company. Ali parted with the shares to Prasad who could not take them up and the re-allocation went instead to Masatoshi. Since it was resolved at the meeting of shareholders of 12 January 1993 that each subscriber should shed 10,000 shares, the take up of shares by Prasad must have been known and approved by the meeting. In finding no other shareholder was denied rights of pre-emption, I note the time that had since elapsed in which the transfer had been accepted by the other shareholders and never disputed.

The Register

[39] For whatever reason the Defendants who have present custody of the register of members have failed to place it before the court. It was taken from the registered office by the Defendants in breach of section 114(2) of the Companies Act. The register of members is by virtue of section 122 of the Act to be accepted as prima facie evidence of matters “by this Act directed or authorized to be inserted therein”. A company has a duty to keep the register and to make certain entries in it [section 114]. Section 120 empowers a court upon application to rectify the register. In Reese River Silver Mining Co v Smith [1869] UKLawRpHL 5; [1869] LR 4 H.L. 64 Lord Hatherley LC said (at p75):

“The Legislature, therefore, having given the Court the power, it seems to me that it is perfectly competent to the Court to place this list in the condition in which it ought to have been. It ought to have been corrected by the directors without a suit.”

[40] Lord Cairns also observed (at p80):

“There are also cases, especially those pointed out in the 85th section, where there has been a default, in the performance, by the executive of the company, of its duty in removing names after the owners of those names have ceased to be shareholders: there again the register is not conclusive.”

In default of its production, the register cannot form part of the available evidence to decide this matter. Instead other relevant extrinsic evidence must be considered of the shareholding.

[41] A certificate under the common seal of the company which specifies the number of shares held by any member shall constitute prima facie evidence of the title of the member to such shares [section 85 and Shropshire Union Canal Co supra at p509]. However if mistakes are made in the register or share certificates are issued in error, particularly as between members of the company, the court will look for the true position, outside of and regardless of, the register or the certificate.

Shareholdings of Thompson and Chaudhary

[42] Chaudhary would today have held 40,000 shares. The Plaintiffs’ submission that he had failed to pay for all of his block and therefore could only be counted for his entitlement of 8,000 shares cannot be accepted. The procedure for forfeiture of shares pursuant to Articles 17-23 has not been shown to me as having been put into effect. His exclusion from the Return of Allotments is not decisive. I therefore hold Chaudhary’s shareholding to remain at 40,000 shares, until such time as that procedure is instituted. Thompson’s is a shareholding, as corrected, of 40,000 shares as also is Urwin’s.

[43] The shareholdings are as follows:

[44] I make the following orders:

(a) The shareholdings of the members of the Fantasy Company of Fiji Ltd are as follows

And I order further that

(b) With the exception of Richard Urwin and the Mataqali Votuburu, who are not before the court to present their cases, that the Register of Members is to be corrected for the remainder of the members who are before the court, to reflect those holdings now found, and that new share certificates are to be issued by the Company and the old certificates cancelled accordingly.

(c) The Register of Members is to be produced to the High Court at Suva within 7 days for correction.

A.H.C.T. GATES
JUDGE

Solicitors for the 1st and 2nd Plaintiffs: Messrs Suresh Maharaj
& Associates, Lautoka
Solicitors for the Defendants: Mr H. Ram, Nadi