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Guia v Arua [2016] PGNC 17; N6184 (16 February 2016)

N6184

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NO 148 OF 2013

BETWEEN

MARU GUIA for himself and on behalf of the Shareholders of Magarida Timbers Limited whose names appear on the Schedule to this Originating Summons
Plaintiffs

AND

INABI ARUA – Chairman of Magarida Timbers Limited
First Defendant

AND

Alex Tongayu – Registrar of Companies
Second Defendant

Waigani: Makail, J
2013: 09th December &
2016: 16th February

COMPANY LAW – Shareholders meeting – Calling of meeting – Duty of Board to call meeting – Special shareholders meeting – Grounds for calling of meeting – Failure by Board to call meeting – Interests of company – What constitutes interests of the company discussed – Companies Act, 1997 – Sections 101, 102 & 104.

No cases cited:

Counsel:
Mr. H. B. Wally, for Plaintiff
Mr. T. Tape, for First Defendant
Mr. M. Miningi, for Second Defendant

JUDGMENT

16th February, 2016

1. MAKAIL, J: By an originating summons filed on 22nd March 2013 the plaintiff representing himself and on behalf of the shareholders of Magarida Timbers Limited seeks the following orders:

"1. An order that pursuant to Section 104(1)(b) of the Companies Act 1997, the First Respondent and his Board shall call a special shareholders meeting in accordance with Section 102 and schedule 2 of the Companies Act within 14 days from the date of the Order."

2. The Second Respondent or his authorized officer shall attend the special shareholders meeting as per Order 1.

3. Costs of the proceedings"

Evidence

2. The plaintiff relied on the following affidavits which were tendered during the trial and was cross-examined by the defence counsel:

2.1. Affidavit in Support of Maru Guia sworn 04th March 2013 and filed 22nd March 2013 (exhibit "P1");

2.2. Affidavit in Support of Maru Guia sworn 25th September 2013 and filed 22nd October 2013 (exhibit "P2"); and

2.3. Affidavit in Reply of Maru Guia sworn and filed 06th December 2013 (exhibit "P3").

3. As for the defendants, the following affidavits were tendered without cross-examination of the deponents:

3.1. Affidavit in Support of Inabi Aruba sworn and filed 12th August 2013 (exhibit "D1");

3.2. Affidavit of Inabi Aruba sworn and filed 05th December 2013 (exhibit "D2"); and

3.3. Affidavit in Support of Inabi Aruba sworn and filed 10th May 2013 (exhibit "D3").

Undisputed Facts

4. From these affidavits, the undisputed facts are, Magarida Timbers Limited ("MTL") is a landowner company registered with the Investment Promotion Authority and holds a timber permit for logging operation within the Bonua-Magarida TRP area, Abau District in the Central Province. The company comprises of shareholders and directors and is managed by a Board of Directors chaired by the first defendant.

5. The Board resolved and engaged a contractor, Karanas Investment Limited ("KIL") to conduct logging operation under the timber permit. Later, the Board contracted Delta Timbers Limited ("DTL") who applied for a logging licence, and was granted a licence and commenced logging operation. The engagement of the DTL caused disagreement and division amongst the members of the Board.

6. On 12th December 2011 a special shareholders meeting was held in Alotau and resolved that DTL be reinstated as contractor and signed a Logging and Marketing Agreement ("LMA") with MTL. On 07th March 2012 a letter was sent to the Managing Director of National Forest Service informing him of the resolution of the shareholders. At the same time, informing him of the second defendant's query on the foreign certification of the developer despite the shareholder's resolution to engage DTL as the contractor and operator of the logging project.

7. On 26th March 2012 the second defendant requested the Board of Directors of MTL to confirm which company had been engaged as contractor and operator of the logging project and to attend before him. On 28th April 2012, MTL responded to the second defendant's request and suggested that it seeks the views of the shareholders first before attending before the second defendant.

8. On 12th April of that year, the second defendant requested the shareholders to appear before him on 26th April for an "interrogation exercise". The shareholders appeared before the second defendant on the appointed date and expressed their views. The second defendant considered that the engagement of a contractor and operator of the logging project was a matter for MTL to sort out.

9. On 15th November 2012 the PNG Forest Authority extended the logging licence to DTL. However, a faction of landowners led by the first defendant continued to deal with KIL. This delayed the granting of an operating licence (Foreign Enterprise Certificate) to DTL by the Investment Promotion Authority. The dispute over the contractor and operator of the logging project remained unsolved.

10. On numerous occasions, the shareholders of MTL requested the Board through the first defendant to call a special shareholders meeting to resolve the dispute but he failed. The latest request was on 21st January 2013. The purpose of the proposed meeting was two-fold:

10.1. Dissolve and re-appoint a new Board; and

10.2. Reaffirm the LMA with DTL.

Disputed Facts

11. Mr. Guia further deposed that there were cases of gross mismanagement and misuse of MTL's funds by the first defendant and the Board. Further, there were no financial reports on the disbursement of MTL funds. Furthermore, there were no Annual Returns for years 2010 to 2013 lodged with the Companies Office and no Annual General Meeting of Shareholders was held for years 2010, 2011 and 2012. A special shareholders meeting would pave the way for parties to meet and resolve these issues.

12. In his further evidence, Mr. Guia deposed that on 02nd August 2012 a "reconciliation meeting" was held at Magarida and amongst other things, it was resolved that the former Director Mr. Bunigi Ba'a be appointed as Chairman and the first defendant as Vice Chairman of the Board of MTL. Secondly, the records of MTL held by the Companies Office be changed to reflect the change in the membership of the Board. Despite this, the records were not changed.

13. The first defendant did not refute the evidence of Mr. Guia in relation to allegations of gross mismanagement and misuse of MTL's funds. Similarly, he did not refute Mr. Guia's evidence that there are no financial reports on the disbursement of MTL funds and no Annual Returns for years 2010 to 2013 lodged with the Companies Office.

14. However, he did refute Mr. Giua's claim in relation to failure to hold Annual General Meeting of Shareholders for years 2010, 2011 and 2012. The first defendant explained that there were no funds given by DTL as levies and premiums to MTL in order for it to fund shareholders meeting. This is because the shareholders who are landowners are scattered round the project area and MTL needed funds to bring them in to attend the shareholders meeting. There are no funds because they have been diverted by DTL to fund legal proceedings against him and MTL.

15. The first defendant further deposed that these proceedings were commenced by a faction who wanted to overthrow the current Board of MTL. The current Board was recognised by the National Court (Sakora J) in a consolidated proceeding OS No 323 of 2010 and OS No 47 of 2009. The Court also held that the faction led by Lawi Magini and Gorio Dobella was an illegal group. He produced a copy of the transcript of the National Court proceedings comprising of the Court's decision to verify this claim.

16. It was his further evidence that subsequently, there were other factions led by Paul Ogera and Boroa Mae, respectively. A Court proceeding was commenced in OS No 74 of 2011 challenging the validity of the forms submitted to the Companies Office for registration by Mr. Ogera. He produced a copy of the originating summons for OS No 74 of 2011 to verify this claim.

17. Finally, he deposed that further Court proceedings were commenced in CIA No 79 of 2011 to appeal against the refusal by the Registrar of Companies to change the names of the Board under his Chairmanship. Again, he produced a copy of the notice of appeal for these proceedings to verify the claim.

18. After these proceedings were commenced, on 08th August 2013 the plaintiff obtained a Court order against the defendants to convene a shareholders' meeting but it did not specify, amongst other things, the date, time and venue of the meeting. That Court order was subsequently set aside.

19. Mr. Guia was cross-examined by each defence counsel. On the other hand, the first defendant was not cross-examined, thus his evidence was not challenged. However, I did have the benefit of observing Mr. Guia respond to questions by each defence counsel. Counsel for the first defendant attacked him on a letter he co-signed with two others which was directed to DTL dated 29th August 2013. This letter may be found at annexure "E" to exhibit "D2". It was a notice to show cause to DTL as to why the contract should not be terminated.

20. It was the defence case that by co-signing this letter, Mr. Guia supported the decision to terminate DTL. By initiating these proceedings, he changed position, thus rendering his evidence unreliable and should be rejected. However, he stood by what he deposed to in his affidavits. He claimed he was forced to sign the letter. If he refused, he would be arrested by the police.

Findings of Fact

21. Mr. Guia's demeanour did not indicate to me that he was not genuine or was lying about why he changed positions. Overall, he stood by what he deposed to in his affidavits. I find that he is a witness of truth. On the other hand, the first defendant did not refute Mr. Guia's claim of gross mismanagement and misuse of MTL's funds. If the first defendant denied the allegations, then he must produce evidence of financial reports, Annual Returns for the years in question and records of shareholders meetings for the years in question. He failed to do that. Thus, there is no evidence to verify his claim that MTL is up to date with its records, especially where allegations are being made in relation to mismanagement and misuse of MTL's funds by him and the Board.

22. On this basis, I accept Mr. Guia's evidence that allegations have been made against the first defendant and Board of MTL that they mismanaged and misused MTL's funds. As to whether these allegations have any substance is a matter for another time. Further, I find that there were no financial reports on the disbursement of MTL funds. Furthermore, I find there were no Annual Returns for years 2010 to 2013 lodged with the Companies Office and no Annual General Meetings of Shareholders held for years 2010, 2011 and 2012.

23. However, as Mr. Guia did not refute the evidence of the first defendant in relation to these further matters, I find that the Board led by the first defendant was recognised by the National Court (Sakora J) in a consolidated proceeding under OS No 323 of 2010 and OS No 47 of 2009. The Court also held that the faction led by Lawi Magini and Gorio Dobella was an illegal group. Subsequently, there were other factions led by Paul Ogera and Boroa Mae, respectively. A Court proceeding was commenced under OS No 74 of 2011 to challenge the validity of the forms submitted to the Companies Office for registration by Mr. Ogera.

24. Next, I find further Court proceedings were commenced under CIA No 79 of 2011 to appeal against the refusal by the Registrar of Companies to change the names of the Board under the first defendant's chairmanship. However, there is no evidence that these proceedings other than the consolidated proceedings before Sakora J have been completed.

25. Nonetheless, I further find that after the current proceedings were commenced, on 08th August 2013 the plaintiff obtained a Court order against the defendants to convene a shareholders' meeting but it did not specify, amongst other things, the date, time and venue of the meeting. That Court order was subsequently set aside.

26. Finally, I find that Mr. Guia was coerced into signing the letter with two others to DTL dated 29th August 2013. It was a notice to show cause to DTL as to why the contract should not be terminated.

Parties' Submissions

27. The plaintiff relied on section 104(1) (b) (supra). He contended that the Board of MTL failed to call the meeting of shareholders. However, based on the failure by the first defendant and the Board to, amongst other things, provide financial reports on disbursement of MTL' funds and significantly allegations of mismanagement and misuse of funds, it is in the interests of MTL that a meeting of shareholders be held. Only a shareholder meeting can get these issues resolved. He further contended that as a shareholder pursuant to section 104(2) (supra), he is authorised to bring this action for a relief under section 104(1) (b) (supra).

28. The first defendant submitted that first, the plaintiff does not have standing to bring these action. Secondly, a shareholder meeting was held on 26th April 2012. Hence, there is no need to hold another one. Thirdly, the dispute in relation to the membership of the Board is pending in proceedings CIA No 39 of 2011. Finally, DTL is manipulating and using the landowners to call the shareholders meeting.

29. The second defendant submitted that the records of the Companies Office are consistent with the first defendant's claim that the first defendant is the Chairman of the Board of MTL. For this reason, there is no need to call a shareholder meeting.

The Law

30. Under section 101(1) of the Companies Act, 1997 it is the duty of the Board of a company to call an annual meeting of shareholders. In a case where the Board does not call an annual meeting of shareholders, under section 104 of the Companies Act, 1997 the Court can step in and order a meeting of shareholders.

31. Section 104 states:

"104. Court may call meeting of shareholders.

(1) Where the Court is satisfied that—

(a) it is impracticable to call or conduct a meeting of shareholders in the manner specified in this Act or the constitution; or

(b) it is in the interests of a company that a meeting of shareholders be held,

the Court may order a meeting of shareholders to be held or conducted in such manner as the Court directs.

(2) Application to the Court may be made by a director, or a shareholder, or a creditor of the company.

(3) The Court may make the order on such terms as to the costs of conducting the meeting and as to security for those costs as the Court thinks fit."

Application of Law to Facts

32. The directors of a Board of a company owe a statutory and fiduciary duty to the company and its shareholders. They have a duty to act in the best interests of the company. The decisions they make determine the success or failure of the company. Where a company is engaged in a business activity, it is important that the decisions of the directors are made for the success of the business.

33. In this case MTL is a landowner company and holds a timber permit. Based on this timber permit, it contracted DTL to harvest logs and sell and in return, receives monetary and other benefits for the landowners. In my view the kind of business activity MTL carries on places the directors of the Board of MTL in an unenvious position. They are required to make decisions that will benefit the large number of landowners whose resources are being exploited by the contractor. They must ensure that benefits, monetary or otherwise, must not only be fairly distributed but reach the landowners to improve their lives and wellbeing.

34. It is for these reasons that they must account to the landowners. To do that, amongst other things, they are required to provide financial reports on disbursement of funds. Another is holding of a shareholder meeting annually to keep shareholders informed of the state of affairs and progress of the company.

35. As I found, the first defendant and the Board of MTL failed to meet these requirements. Importantly, allegations of gross mismanagement and misuse of MTL funds have been raised against the first defendant and the Board. In my view it is time now for the shareholders to call the first defendant and the Board to account on the disbursement of funds and response to the allegations of mismanagement and misuse of MTL funds. In my view these matters established that it is in the interests of the company that an order should be made for a shareholders meeting to be held.

36. As to the first defendant's submission that Mr. Guia does not have standing to bring this action, I am satisfied that as a shareholder of MTL he falls within the class of persons under section 104(2) (supra) to bring an action of this nature. As to the submission that there is no need to hold a shareholder meeting because one was held on 26th April 2012, I am not satisfied that it was a shareholders meeting because as Mr. Guia stated, it was an "interrogation exercise" by the second defendant to resolve the membership of the Board of MTL and significantly, the issuance of a foreign enterprise certificate to DTL.

37. Similarly, I am not satisfied that the "reconciliation meeting" at Magarida was a shareholders meeting because by its very name, it was a reconciliation meeting. That may explain why the second defendant did not accept the resolutions of that meeting and effect changes to the records on the membership of the Board of MTL at the Companies Office.

38. Finally, I reject the first defendant's submission that DTL is manipulating and using the landowners to call for shareholders meeting because there is no evidence to support this submission and the first defendant's claim is unsupported by evidence.

39. Contrary to the second defendant's submission that records at the Companies Office confirmed that the first defendant and directors under his Chairmanship comprise the Board of MTL, the evidence established that there was continuous infighting amongst the landowners led by different spokesmen over the last three to four years prior to the commencement of these proceedings, over the Chairmanship and Directorship of the Board of MTL. As a result, the Board, amongst other things, failed to provide MTL's financial reports on the true state of MTL's financial position.

40. I should also add that it is not enough for the first defendant to say that MTL does not have any funds or is financially "broke". He must produce financial reports so that the shareholders will know exactly how the company's funds have been spent. Additionally, it was incumbent on the first defendant to produce MTL's bank statement to verify his claim of lack of funds. For, it must be reiterated that the monetary benefits that MTL receives from the logging project are for the landowners and not just for the company's operations.

41. In my view the continuous infighting amongst the landowners is detrimental to the sustainability of MTL and overall, the logging project. One of the contentious issues amongst the landowners is the appointment of either KIL or DTL as contractor and operator of the logging project. Unless they are local companies, a foreign owned company will require a foreign enterprise certificate from the Investment Promotion Authority to carry on business in PNG. If the landowners are not able to compromise on the selection of the contractor, it will be very difficult for MTL to facilitate the request for the contractor to obtain the required certificate from the Investment Promotion Authority.

42. Finally, I accept that the National Court decision in consolidated proceeding OS No 323 of 2010 and OS No 47 of 2009 affirmed that the first defendant and the directors under his Chairmanship are the legitimate Board. But that was three years ago and the issue in these proceedings is not about the legality of the Board but the calling of a shareholders meeting. In my view the appointment of directors of the Board including financial and management issues of the company are matters that should be best left to the shareholders to resolve. If they are resolved at that level, it will not be necessary for the parties to seek relief in relation to the question of membership of the Board of MTL in the pending proceedings OS No 74 of 2011 and CIA No 79 of 2011. In the end, those proceedings may be unnecessary.

43. For now, the issues are significant and their resolution can only happen if a shareholder meeting is held. None has been held since the one on 12th December 2011 in Alotau. I am satisfied it is in the interests of MTL that one must be held forthwith. Given the discretion under section 104(1) (b) and (3) (supra), and for logistical and costs reasons, I shall allow for 21 days for the convening of the meeting. The agenda shall be those that Mr. Guia seeks at [10] above and further, report on finances of Magarida Timbers Limited.

44. As to costs, as the plaintiff and the first defendant are landowners from the same project area and claim to represent the interests of MTL and the landowners, I will order each party to bear its own costs of these proceedings.

Order

45. The orders are:

1. Pursuant to section 104(1) (b) of the Companies Act, 1997 the first defendant and the Board of Magarida Timbers Limited shall call a special shareholders meeting in accordance with Section 102 and Schedule 2 of the Companies Act, 1997 within 21 days of this Order.

2. The date, time and venue shall be fixed by the first defendant and the Board of Magarida Timbers Limited.

3. The agenda shall be the dissolution and re-election of Chairman and Directors of Board of Magarida Timbers Limited, reaffirmation of Logging and Marketing Agreement with Delta Timbers Limited and report on finances of Magarida Timbers Limited.

4. The costs of conducting the meeting shall be met by Magarida Timbers Limited.

5. The second defendant or his authorized officer shall attend the special shareholders meeting as per Orders 1 and 2.

6. Each party shall bear its own costs of these proceedings.

_______________________________________________________________
H. B. Wally Lawyers: Lawyers for the Plaintiff
Japson & Associates Lawyers: Lawyers for the First Defendant
In-House Counsel: Lawyers for the Second Defendant