Home | Databases | WorldLII | Search | Feedback High Court of Fiji

In re Candlenut Investments Ltd [2011] FJHC 198; HBF14.2006L (1 April 2011)

IN THE HIGH COURT OF FIJI
CIVIL JURISDICTION

Bankruptcy and Winding Up
Cause No. HBF 14 of 2006L

IN THE MATTER of
CANDLELENUT INVESTMENTS LIMITED
a limited liability company having its registered office at Pricewaterhouse Coopers, Chartered Accountants, 52 Narara Parade, Lautoka

AND IN THE MATTER of
section 212 of the Companies Act (Cap 247).

Before : Master Anare Tuilevuka

Counsel : F. Haniff - Munro Leys for the Petitioners
C.B Young - Young & Associates for the Respondents

Date of Hearing : Thursday 24th March 2011
Date of Ruling : Friday 01st April 2011

SUMMONS FOR DIRECTIONS

(Minority Shareholders' Petition. Whether other members should be joined in the proceedings?)

[1]. Ian McLeod and Brian Willis are minority shareholders of Candlenut Investments Limited ("CIL"). They are petitioning the Court pursuant to section 212 of the Companies Act (Cap 247) for various relief (see paragraph 14 below) on the ground that - as minority shareholders, they have suffered (and are suffering) oppression as a result of some unfair and prejudicial conduct of the Grays (respondents). The conduct alleged was done, purportedly, in the name of CIL.

[2]. The Grays are majority shareholders in CIL. The orders that the petitioners seek are to be in lieu of a winding up order. McLeod's and Willis' petition goes to great length in outlining CIL's shareholding since 1993. Their percentage of share-ownership in CIL has always been relatively small. In 1993, they held 7% and 14% of shares respectively in CIL. In 1995/1996, they held 4% and 12% respectively. In 1997, the percentage dropped even lower to 1.66% and 7.91% respectively.

[3]. Meanwhile, the Grays have always been the majority shareholders in CIL (except for a brief moment in 1995 when a Paul Jacobsen, the only other shareholder then in CIL held 46% shares). In 1993, they held 50% of the shares. In 1995, the figure dropped to 38%. But it picked up again in 1996 to 46.56%. There is some indication (according to a search at the Registrar of Companies by the petitioners shortly before they filed the petition) that the Grays currently hold 41.90 % shares in CIL.

[4]. The oppressive conduct that McLeod and Willis allege against the Grays are as follows.

[5]. In 1997, the Grays increased the authorized share capital of CIL without complying with the notice requirement under section 67[1] of the Companies Act (Cap 247) and in blatant disregard of CIL's Articles of Association and also the Companies Act (Cap 247). For example, no resolution[2] was ever passed to authorize the purported increase in CIL's authorized capital. Anyhow, having increased CIL's authorized share capital, the Grays then allotted some newly created shares to a Peter Gillespie in total disregard of the rights of pre-emption of existing members[3]. Then in 2004, the Grays allegedly sold some CIL-land to a third party without authority from CIL's shareholders. They also sold other portions of the same CIL-land to themselves, again – without authority from the shareholders. As if that was not enough, the Grays have not properly accounted for these sales to other shareholders.

[6]. At some point in time, McLeod and Willis introduced further capital sums (2 x NZ$10,000 by McLeod and NZ$50,000 and FJ$23,516 by Willis). They did this expecting to be issued some ordinary one dollar shares in CIL in return. The Grays however have refused point blank to issue the shares. Meanwhile, in May 2003, Jacobsen sold 5053 of his shares to the Grays despite opposition against it from McLeod and Willis. This sale was ultra vires Article 32 of CIL's Articles of Association which confers equal preemptive rights to all shareholders with regards to any proposed transfer of shares. McLeod and Willis allege that CIL's shareholding does not truly reflect their financial contributions. They submit that CIL's affairs are being conducted in a manner oppressive to them and other members. In lieu of a winding-up order, they seek the intervention of the court:

• (i) to declare the proper shareholding of the respective shareholders in the Company (sic).
  
• (ii) to fix the value of the petitioners' shares in the company (sic).
  
• (iii) to require the respondents to purchase the shares of the petitioners in the company (sic).
  
• (iv) to – as the court deems fit - reduce the company's capital and distribution of it (sic).
  
• (v) for a proper accounting of shareholder funds, and a distribution in accordance with those funds (sic).
  
• (vi) for payment to the petitioners of interest on any sum to be calculated from the date the cause of action arose up to the date of payment (sic).
  
• (vii) for costs
  
• (viii) such other orders as may be just in the circumstances.
  

[7]. The substantive matter is at summons for directions stage. What is at issue before me is whether or not other shareholders –Jacobsen and Gillespie - should be joined in the proceedings.

[8]. Certain affidavits of service filed for the petitioner confirm that Mr. Jacobsen and Mr. Gillespie have been served copies of the petition and are therefore aware of the proceedings. Mr. Hanif submits that under Rule 26 of the Companies (Winding Up) Rules – the petitioner's solicitors are only obliged to provide a copy of the petition to every contributory[4] of CIL. It is not required of the petitioner to join other shareholders as parties – although, they are free to join themselves if they wish.

[9]. Rule 26 states as follows:

Copy of petition to be furnished to creditor or contributory

26. Every contributory, or, in the case of a petition for the winding-up of a company, every creditor, of the company shall be entitled to be furnished by the barrister and solicitor of the petitioner with a copy of the petition within 24 hours on paying the prescribed charge for such copy.

[10]. Mr. Young cites the English Chancery Division case of Re a company (No. 007281 of 1986) [1987] BCLC 593 where - the issue was stated by Vinelott J at page 594 paragraph e as follows:

The case also raises a question of some general importance; the extent to which members of a company who are not alleged to have been concerned in the conduct which is said to have been unfairly prejudicial to the interests of the petitioner, or in any act or proposed act, which would be so prejudicial, and against whom no relief is directly sought, ought to be joined as respondents to and served with a petition under section 459. It has been the practice in the past to require all members of a company, to which a petition under section 459 relates, to be made respondents or to be served with the petition. The practice is now challenged.

[11]. In dealing with the above issue, Vinelott J observed that the petition did not allege any unfair and prejudicial conduct against the shareholder. Vinelott J also noted that no relief was being sought against the shareholder. His Lordship then specifically noted two competing arguments raised – firstly – the argument that a shareholder should not be joined unless it is necessary to do so to ensure that he can be bound by the order of the court, and secondly, the counter-argument that it was unnecessary to join such shareholder if the company is already a named respondent because any order binding the company binds its members. Vinelott J however dismissed the above arguments as irrelevant.

None of these matters, in my judgement, forms an adequate or, indeed, a proper ground for joining 3i as a respondent. But I think the alternative submission of counsel for the petitioner is well-founded.

[12]. His Lordship then makes an analogy between a section 459 (minority oppression) proceedings with an administration action.

A petition under s. 459 is not analogous to litigation in which the issues raised affect only those against whom allegations are made by the plaintiff. A closer analogy is an administration action, where all beneficiaries having an interest in the relief sought should be made parties or represented. The practice that has so far been followed in the Companies Court is to require that all members of the company whose interests would have been affected by the misconduct alleged or who would be affected by an order made by the court under the very wide powers conferred by s 461 are to be made respondents to a petition or served with it.

(my emphasis)

[13]. Having said that, Vinelott J still acknowledged that there will be occasions when it would be unnecessary to join other members as parties. In such cases, it would be enough simply to serve these other members with a copy of the petition.

In practice, this means that in the case of a small, private company every member ought to be joined. If, as is usually the case, the relief sought is the purchase of the petitioner 's shares by the respondents against whom allegations of unfairly prejudicial conduct are made, or the purchase of their shares by the petitioner, other shareholders would be overridden by the purchase, or if the preemption provisions which would be overridden by the purchase, or if the balance of the voting rights might be affected to the detriment of other members. If the relief sought is the purchase of the petitioner's shares, or of the shares of those members against

whom allegations of unfairly prejudicial conduct are made, by the company, the balance of voting rights would again, almost inevitably be affected. Clearly, if a winding up order is sought or an order regulating the conduct of the company's affairs in the future, those entitled to vote on a resolution for the winding up of the company or the appointment of directors, are entitled to be heard.

There may be occasions where it is unnecessary to join all the members of a company, for instance if the articles contain no pre-emption provisions and if some of the members are mere investors who have taken no part in the formation or management of the company, a situation which might arise for instance, in the case of public listed company, the affairs of which are under the de facto control of a small group of shareholders. It may be that in such a case it would be unnecessary to make all the members respondents, or to serve notice of the petition so that they may apply to be joined if they so wish. Under the Companies (Unfair Prejudice Application) Proceedings Rules 1986, S1 1986/2000, on the first hearing of a petition the Court is required to give directions as to the service of a petition on any person who has not been made a respondent. If there is any doubt as to whether a member or director ought to be made a respondent to, or served with a petition or given notice of the petition, that doubt can be resolved at an early stage.

Counsel, for 3i submitted that it would be unfair that 3i should be put in a position where it will either have to incur the costs of representation at the hearing, or be exposed to the risk that, if it is not represented, damaging allegations will be made concerning its conduct, or its relationship with Mr. S or that an order will be made adverse to its interests. I think the answer to this submission is that if 3i takes no part in the proceedings, and at a later stage is sought to amend the petition to raise an allegation against 3i, the amendment will not be allowed unless 3i is given an opportunity of considering the amendment and of taking part in the proceedings thereafter. Similarly, no order would be made, otherwise than for the purchase of the petitioner's shares by the respondents, which might adversely affect the interests of 3i, without giving 3i the opportunity of being heard. In my judgment, 3i is clearly affected by the relief sought in the petition which, amongst other things, would override its rights under the pre-emption provisions. 3i also has voting control over the company in general meeting, and would be directly concerned if any order were made regulating the future conduct of the company pending the acquisition of the petitioner's shares.

In these circumstances I think that 3i was properly made a respondent and should not be struck out. No doubt in the light of the circumstances of the company, 3i would not wish to raise any objection to any order for the purchase of the petitioner's shares. I understand that 3i have, in fact, written off this investment in its books. That is a name to be weighed by 3i in deciding whether or not to take any step in the petition. It is not, in my judgment, a ground for striking out 3i as a respondent to the petition.

[14]. The above case is widely referred to in the common law world as a leading authority on who should be joined in a minority-oppression petition. Mr. Haniff appears to say that, whilst that may be so, the application of the case in Fiji is curtailed by Rule 26 (see above). That submission does not quite sit well with me.

[15]. Rule 3(1) and (3) of the Companies (Winding Up) Rules state as follows:

Application

3.-(1) Subject to the provisions of this rule, these Rules shall apply to the proceedings in every winding up under the Act which commences on or after 1 January 1984, and to all proceedings under section 212 of the Act.

(2) ....................................

(3) Rules which from their nature and subject-matter, or which by the headings above the group in which they are contained or by their terms, are made applicable only to the proceedings in a winding up, whether by the court or voluntarily or subject to the supervision of the court, shall not apply to proceedings under section 212 of the Act.

(my emphasis)

[16]. In my view, Rule 26 is caught under Rule 3(3). This also is consistent with Mr. Young's submission that Rule 26 is a standalone.

[17]. In other words, Rule 26 must apply only to "proceedings in a winding up whether by the court or voluntarily" and not to a section 212 proceeding. I say that for the following reasons. Firstly – Rule 26 is concerned only with the contributory's and creditor's entitlement to a copy of the petition. I note the definition of "contributory" in section 215 and as further defined in section 214 to include both a past and present member in the circumstances stated therein. In my view, a "contributory" and a "creditor" would be more interested in a winding up proceeding under Part VI of the Companies Act (Cap 247) rather than in a minority-oppression proceeding under section 212 (Part V of the Act) which seeks remedies alternative to winding up.

[18]. Secondly, as stated, an application under section 212 is not a "winding up application" per se. Rather – it is an application for remedies alternative to winding up. True, section 212(5) states that section 345 shall apply to a section 212 petition as it applies in relation to a winding up petition, and section 345 is the section in the principal Act (i.e. Companies Act) pursuant to which the Companies (Winding Up) Rules were made, not all the Rules in the Companies (Winding Up) Rules will apply willy nillly vis a vis a section 212 application. This is evident from the wording of Rule 3(3) – as stated.

[19]. Thirdly, Order 216 is open ended. All it stipulates is that the petitioner's solicitors shall serve a contributory or creditor a copy of the petition within 24 hours of the contributory or creditor paying the prescribed charge for such copy. In other words, if they (contributor or creditor) wish to have a copy of the petition, they must pay the prescribed charge for the copy. Once paid, the petitioner's solicitor shall then serve them with a copy within 24 hours. If they do not pay, they do not get a copy.

[20]. In my view, Rule 26 is not meant to read that – in every section 212 application, it is not necessary to join the members of the company. Nor do I think that Rule 26 is meant to read that all that is incumbent of the petitioner's solicitors in a section 212 application is to serve a copy of the petition to the members.

[21]. Rule 26 has no relevance at all to the question: when is it appropriate to join members of a company in a section 212 proceeding? In my view, this is entirely a matter of discretion for the court. Since Order 26 is now out of the way, I now turn to consider whether or not to apply the principles in Re a company (No. 007281 of 1986) in this case.

[22]. It is not clear to me exactly what the English section 459 says. What is clear to me is that the issues in Re a company (No. 007281 of 1986) are similar to the ones that are now raised before me. The case espouses sound principles to guide the court in proper management of a section 212 application. And I see no reason why the same principles cannot be applied in directions given pursuant to section 212.

DIRECTIONS

(i) Candlenut Investments Limited is a small private company.

(ii) Gillespie's and Jacobsen's interests would be affected if the Court were to grant the orders sought by the petitioners.

(iii) The petitioners are hereby directed to amend their petition to add Gillespie and Jacobsen as respondents.

(iv) Leave is hereby granted to serve the petition outside jurisdiction – where appropriate.

(v) Whether or not Gillespie and Jacobsen choose not to participate in the proceedings after being served with the petition – is their prerogative.

(vi) This case is adjourned to 15th April 2011 for mention. Amended petition to be filed by 14th of April 2011.

........................................
Anare Tuilevuka
Master

At Lautoka
1st April 2011

^[1] 67.-(1) Where a company having a share capital, whether its shares have or have not been converted into stock, has increased its share capital beyond the registered capital, it shall, within 30 days after the passing of the resolution authorizing the increase, give to the registrar notice of the increase, and the registrar shall record the increase.
(2) The notice to be given as aforesaid shall include such particulars as may be prescribed with respect to the classes of shares affected and the conditions subject to which the new shares have been or are to be issued, and there shall be forwarded to the registrar, together with the notice, a printed copy of the resolution authorizing the increase.
(3) If default is made in complying with this section, the company and every officer of the company who is in default shall be liable to a default fine.
^[2] Whether a directors' resolution or an ordinary resolution by the shareholders at an annual or special general meeting.
^[3] Under Article 51 of CIL’s Articles of Association.
^[4] as defined in section 215 of the Companies Act (Cap 247).