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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
OS (COMM) NO. 528 OF 2017
BETWEEN:
LING SENG CHUAN
Plaintiff/Cross-Defendant
V
ANDY KENAMU
First Defendant/Cross-Claimant
AND
OOI SAY HOOI
Second Defendant
AND
CHONG SAW LING
Third Defendant
Waigani: Anis J
2022: 4th July, 8th August
2023: 7th July
CLAIM IN CONTRACTS AND FRAUD – Agreement to surrender urban development lease for issuance of new state leases – consideration is K4,000,000 – payment made in full – urban development lease surrendered – new state leases issued as agreed – despite transfer of new leases as per the terms of the agreement, the leases were underdeveloped – alleged breach of contract – second agreement – sale of second urban development lease for K6,000,000 – transfer completed – balance of K1,350,000 remaining – sum not disputed – claim that the balance will be paid out of declared dividends – evidence of variation agreement adduced – whether civil fraud or fraudulent conduct by the defendants established – claim that directorship and shares were removed from the plaintiff by the first defendant contrary to law and to the terms and conditions of the head or joint venture agreement – whether fraud and fraudulent conduct established – relief – whether all the relief should be granted
Cases Cited:
Janet Roland Sios v. Philma Kelegai and Ors (2020) N8594
Esso Highlands Ltd v. Willie (2018) N7684
Gawan Kuyan v Andrew Sallel (2008) N3376
Ngu v. King Ngu (2020) N8422
Namo Aporo Land Owners Association Inc. v. Sakai (2020) N8178
Relyna Komet v. Angeline Komet (2018) N7404
Counsel:
L David, for the Plaintiff
L Yandeken, for the First Defendant
Nil appearances by the Second and Third Defendants
JUDGMENT
7th July, 2022
1. ANIS J: This matter was tried on liability and quantum between the plaintiff and the first defendant. The second and third defendants have not shown interest in the matter thus were not heard. I heard final submissions from the parties on 8 August 2022 before I reserved my decision to a date to be advised.
2. Parties have been notified so I now give my decision.
BACKGROUND
3. Claims are made by both the plaintiff/cross-defendant (plaintiff) and the first defendant/cross-claimant (first defendant). For the plaintiff, his claim is 2-fold. He refers to a written contract that was entered into between the first defendant, himself and the second defendant on 8 November 2010 (the 1st Agreement/head agreement). The parties herein admit to the existence of the 1st Agreement and its material terms and conditions. The Agreement was signed premised on a land that was owned by the first defendant. The land was an urban development lease described as State Lease, Volume 34, Folio 249, Portion 2494, Granville, National Capital District (1st UDL).
4. It was agreed that the first defendant would surrender his UDL and that new state leases would be created and issued to a company that would be created and owned by the plaintiff and the first defendant. It was also agreed that in consideration of the first defendant having to surrender the 1st UDL, the plaintiff would pay him K4,000,000. The company that was created for that purpose is called Hari Yupi Investment Ltd (HYI). Both the plaintiff and the first defendant were the directors and shareholders of the company at the time of its establishment. The plaintiff held the majority shares, that is, 64 whilst the first defendant held 34. As per the terms of the 1st Agreement, the 1st UDL was surrendered and in place of that individual state leases were created and issued to HYI. It is not disputed that the plaintiff, as agreed under the terms of the 1st Agreement, had paid the first defendant the full K4,000,000 over a period of time between 8 November 2010 and 7 February 2011.
5. On 23 January 2016, the first defendant and the other shareholder the second defendant, conducted a purported shareholders meeting at the Laguna Hotel in Port Moresby. They resolved to purportedly remove the plaintiff as a director and shareholder of HYI. They also purportedly resolved to transfer his 64% shares in HYI over to the first defendant. The plaintiff, in the second part of his claim, alleges fraud or fraudulent conduct against the first defendant, that is, he claims that the actions of the first defendant was fraudulent because he claims that (i), he was not aware of the shareholders meeting, (ii), he was not notified of it (iii), he did he give his consent for the transfer of his shares in HYI to the first respondent, and (iv), he did not give his consent for his removal as a director of HYI.
6. The first defendant has filed a crossclaim against the plaintiff. There he claims that he and the plaintiff also signed another written contract on 14 February 2011 (2nd Agreement) regarding his other land, that is, an urban development lease described as Allotment 53 Section 533, Portions 2645 & 814 Rem, Granville, National Capital District (2nd UDL). He claims that under the terms of the 2nd Agreement, the plaintiff shall pay him K6,000,000 to acquire the 2nd UDL or the leases that would be crated under it.
7. Again, the parties do not dispute the validity of the 2nd Agreement. The first defendant claims in the crossclaim that he was paid only K2,000,000 and that the plaintiff still owes him K4,000,000. In response, the plaintiff claims that he has already paid the first defendant a total of K4,650,000. The plaintiff has adduced evidence or receipts to support his defence. He claims, however, that he only owes the first defendant a balance of K1,350,000. He further states in his defence that he will pay the first defendant the K1,350,000 from dividends that are earned or to be earned by HYI as agreed to between the parties.
8. The first defendant’s counsel, however, and in his closing submission, stated that he had instructions to withdrew the full K4,000,000 claim sought in the crossclaim. This crossclaim is now abandoned. However, counsel submits that the first defendant agrees with the plaintiff’s defence or admission that only K1,350,000 was still owing from the K6,000,000 payment under the 2nd Agreement. As such, he submits that the plaintiff should pay him the said outstanding amount.
MANNER OF TRIAL/ EVIDENCE
9. The trial proceeded without any objections or cross-examinations of witnesses. The plaintiff tendered a total of 5 affidavits which were marked as Exhibits P1 to P5, and the defendants tendered a total of 3 affidavits, which were marked as Exhibits D1 to D3. I note that the first defendant had issues in regard to certain parts of Exhibit P5. I heard submissions, and in doing so, overruled the objection and allowed Exhibit P5 to be tendered. I would refer to my ruling in the transcript of the proceeding.
PRELIMINARY FINDINGS
10. I refer to the 1st Agreement. I must say that the agreement may also be described as head agreement or joint venture agreement between the parties. It is in this agreement that the parties have agreed to create HYI, and also, of who should own what number of shares and the directorship of the company. Under clause 2.2, it was agreed that (i), the plaintiff would own 64% of the shares, (ii), the first defendant would own 34% of the shares, and (iii) the second defendant would own 2% of the shares, in HYI.
11. Clause 2.2 (sic) also expressly states that HYI’s directors shall be the 3 shareholders, and the clause also gives (i), the plaintiff the right to appoint 2 more directors and (ii) the first defendant the right to appoint 1 more director.
12. Clause 3.1 obligates the first defendant to ensure to have his 1st UDL and the created state leases from the said UDL transferred to HYI. And clause 3.2 states that the plaintiff has agreed to pay the first defendant K4,000,000 subject to the first defendant complying with transferring all the state leases, which will have been created premised on his surrendered 1st UDL, over to HYI.
13. So, I observe in summary that the plaintiff was the one that had funded the business arrangement between the parties. He was the developer with the finance. I also observe that the first defendant was the person who was the registered proprietor of the land which was the 1st UDL at the material time who was able to negotiate with the plaintiff in relation to the business dealing or arrangement. The parties had intended to create a company and to go into the real estate business. I observe that since the plaintiff was going to pay for the purchase of the land that was the subject of the 1st UDL held by the first defendant, it was agreed that the plaintiff would have the majority shares in the company that is to be created, which is HYI. I observe that the plaintiff, from his own money, paid the first defendant K4,000,000 as per clause 3.2 of the 1st Agreement. The first defendant accepted the full payment and in so doing, surrendered his 1st UDL and also facilitated the creation and transfer of new state leases (which were created and issued over 1st UDL land area) over to HYI where the plaintiff was the majority shareholder. This was done as per clause 3.1 of the 1st Agreement.
14. I now come to the part where it gets interesting and perhaps confusing. Paragraphs 10, 11, 12, 13 and 14 of the SoC reads:
“10. Between 8 November 2010 and 7 February 2011, the Plaintiff paid the First Defendant the total sum of K4,000,000.00 for the issuance of new State Leases in the name of the Company.
(Underlining mine)
15. Premised on these express pleadings, the plaintiff is making the claim for breach of contract to recover K4,213,804.45, which consisted of costs that were paid by him on behalf of the Company or for the Company’s benefit, the company being HYI.
16. Therefore, it seems obvious that I should uphold the preliminary submissions of the first defendant. There is no basis for these pleadings that are made against the first defendant or the defendants in general. The plaintiff did not plead, if any, which clause(s) of the 1st Agreement that states that the defendants shall reimburse all the expenses that the plaintiff makes or incurs for or on behalf of HYI if the contract is terminated or breached.
17. The plaintiff’s position or claim is further diminished, in my view, because in summary and at [14] of the SoC, the plaintiff states, “In breach of the Agreement, the First and Second Defendants failed to secure the sale and/rent any house for the Company”. The immediate question that comes to my mind is this. “Where is the evidence of subrogation or a subrogated authority from HYI to the plaintiff to commence this proceeding in this manner?” The plaintiff cannot make a claim in this manner or without the authority of the principal or of the person that is affected or whom the plaintiff intends to make a claim for. I find that there is no such authority that is adduced in the evidence. I also find that the plaintiff lacks the capacity to make the claim in this manner. The person with such a capacity would have been HYI. However, HYI is not a party to this proceeding.
18. I therefore dismiss the claim by the plaintiff in this regard.
CHANGE OF SHAREHOLDINGS/ FRAUD
19. Let me now address the claim of fraud. Allegations of fraud are pleaded at [15] to [21] in the SoC.
20. The parties do not dispute that the first defendant had called up a special shareholders meeting on 23 January 2016, which was attended by himself and the second defendant who, at the time, were the minority shareholders of HYI. The parties also do not dispute that it was the said action by the first defendant that triggered the plaintiff, that is, soon after he had learnt of it, to file this originating summons.
21. The 1st Defendant admits that he was one that called up the purported special shareholders meeting. Despite that, I note that I had queried with his counsel whether the plaintiff had acted through HYI. Counsel was unable to assist in that regard. The first defendant said that he issued a letter to the registered postal address or location of the plaintiff advising him of the meeting. The first defendant claims that all the shareholders were notified of the date and time of the meeting. He said the plaintiff failed to turn up on the scheduled date and time, so the meeting proceeded in his absence whereby resolutions were passed to remove the plaintiff as a shareholder as well as to transfer the plaintiff’s shares over to him. It is also not denied that no payment or consideration for the value of the shares were paid to the plaintiff by the first defendant in acquiring the transferred shares.
22. The plaintiff’s claim that he was not notified of the shareholder’s meeting. He also says that he never gave his consent for him to be removed as a director or shareholder of HYI. Therefore, he claims that the first defendant committed fraud by his actions.
23. I note that time bar is not an issue here. The cause of action accrued on 23 January 2016 or sometime shortly after the plaintiff had learnt of the actions of the first defendant in regard to changes made in the ownership of shares in HYI.
24. Fraud in a civil or commercial sense usually takes either the form of making a false statement or the suppression or withholding of the truth, where there is a duty to disclose the truth. And there are three basic types of fraud: asset misappropriation, bribery and corruption, and financial statement fraud.
25. The essential elements of fraud in general, are
26. In Janet Roland Sios v. Philma Kelegai and Ors (2020) N8594, Hartshorn J referred to his earlier decision in Esso Highlands Ltd v. Willie (2018) N7684, where he stated, to which I adopt, as follows,
“9. For fraud to be proved, I refer to the classic statement of Lord Herschell in William Derry v. Sir Henry Peek [1889] UKHL 1; (1889) 14 A.C. 337 at 374:
“First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states.”
10. This statement has been reproduced and referred to with approval in Post PNG Ltd v. Hubert (2004) N2656 and In re O’Dwyer (2007) N3226.
11. In regard to the pleading of fraud, while noting Order 8 Rule 30 National Court Rules which requires amongst others, that particulars of any fraud be given, in William Maki v. Michael Pundia [1993] PNGLR 337 at 338, Woods J said:
“An allegation of fraud is a very serious allegation, and the courts have required strict adherence to requirements for pleadings in such cases. Courts have never allowed general allegations of fraud. Courts have required that a person pleading fraud should set out the facts, matters, and circumstances relied on to show that the party charged had or was actuated by a fraudulent intention. The acts alleged to be fraudulent must be stated fully and precisely with full particulars. It is not enough just to say that the person lied or swore a false affidavit. The facts, matters and circumstances which make such statements lies must be particularised.”
8. I also refer to the following passage from Open Bay Timber Ltd v. Lucas Dekana (2013) N5109 which was reproduced and approved by the Supreme Court in Nali Hole v. Allan Mana (2016) SC1536 at [22]:
“Allegations of actual fraud are better prosecuted by writ of summons and statement of claim. Indeed there is a strong argument to say that an allegation of actual fraud against a private individual or corporate body, even if it is to be agitated alongside conventional grounds of judicial review, must unless the leave of the Court is obtained to dispense with the requirements of the Rules be prosecuted by writ of summons. Order 4, Rule 2(1)(b) (where writ of summons required) of the National Court Rules states that "proceedings shall be commenced by writ of summons ... where a claim made by the plaintiff is based on fraud. Particulars of the alleged fraud would have to be pleaded under Order 8, Rule 30 (fraud etc).”
CONSIDERATION
27. When I consider the allegations and claim made by the plaintiff, I note the following. First, I draw my attention to the s.102 of the Companies Act 1997 (CA). It states:
“102. SPECIAL MEETINGS OF SHAREHOLDERS.
A special meeting of shareholders entitled to vote on an issue–
(a) may be called at any time by–
(i) the board; or
(ii) a person who is authorized by the constitution to call the meeting; and
(b) shall be called by the board on the written request of shareholders holding shares carrying together not less than 5% of the voting rights entitled to be exercised on the issue.”
28. The detailed process for such a meeting is set out under Schedule 2 of the CA. They are also highlighted in the case of Gawan Kuyan v Andrew Sallel (2008) N3376.
29. But I remind myself that the claim herein is made against the defendants and in particular against the first defendant personally premised on the terms and conditions of the 1st Agreement. The type of fraud of fraudulent allegation relates to asset misappropriation. The plaintiff is saying that without any regard to law or the terms and conditions of the agreement, and with the deliberate intention to defraud him of his majority shares that were held in HYI, the first defendant, by his conduct, had the shares transferred to himself. The plaintiff is pursuing to recover his personal property which is the shares that he had owned in HYI against the first defendant. See cases on share being a person property: Ngu v. King Ngu (2020) N8422, Namo Aporo Land Owners Association Inc. v. Sakai (2020) N8178 and Relyna Komet v. Angeline Komet (2018) N7404. The plaintiff is saying, “you removed me as a director of HYI; you have also transferred my majority shares of 64% in HYI to yourself without any consideration and in breach of the terms and conditions of the 1st Agreement, therefore, I want this Court to order you to return my shares and restore me to my position as agreed upon in the head agreement or the 1st Agreement.” (paraphrase)
30. Let this be clear. The plaintiff in the second leg of his claim is not suing or making a claim against HYI. Rather, he is making a claim directly against the first defendant which, in my view is properly pleaded, that is, allegations of fraud or fraudulent conduct that is made against the first defendant where he is alleging that the first defendant essentially took or stole his personal property which is his 64 shares in HYI without any valuable consideration amongst other reasons.
31. The damning revelation or admission by the first defendant is this. He has produced no evidence whatsoever to say how he validly acquired the 64 shares of the plaintiff. Given that HYI has valuable assets which consist of the various state leases that have been transferred to it, the 64 shares would have significant value at their market value. The first defendant has not produced a scintilla of evidence to show that he purchased them from the plaintiff; he did not produce an agreement such as a sale and purchase of shares agreement or explain how he has come to acquire these shares in a commercial sense or in accordance with the relevant provisions of the CA on acquisition of shares.
32. So now, the plaintiff is without a shareholding in HYI. He is also not a director of HYI. It is therefore obvious that he has suffered as a result of this.
33. My findings in regard to the second claim is this. I find that the defendants have breached the fundamental terms and conditions of the 1st Agreement. I find their actions to be deliberate and fraudulent, that is, in removing the plaintiff from his position as a director of HYI and of his right to his person property, which is his 64 shares in HYI.
34. The defendants breached clauses 2.1, 2.2 and 2.2 (sic) of the 1st Agreement when they removed the plaintiff as a director and major shareholder of HYI. The agreement is like a joint venture agreement that controls how the parties are to conduct themselves in the intended business venture. The defendants had no power to make the changes in HYI without the express authority of all the parties, or without first complying fully with the terms and conditions of the 1st Agreement or the joint venture agreement. Instead of seeking that variation or authority under the 1st Agreement, the first and second defendants took unilateral steps as they had done.
35. I also find under the second leg of the claim that the first defendant Andy Kenamu has committed and is liable for fraud or fraudulent conduct, that is, when he acquired the plaintiff’s personal property which consisted of his 64 shares in HYI without the plaintiff’s knowledge, consent and perhaps most concerning is the fact that he acquired them free of charge or without any valuable consideration. I find that the action of the first defendant constitutes a serious act for fraud in the civil sense.
36. But before I come to consider what relief I should award to the plaintiff in regard to the second claim, let me address the first defendant’s crossclaim.
CROSS-CLAIM
37. As stated earlier, the first defendant has abandoned his crossclaim of K4,000,000. Instead, he acknowledges that the outstanding sum that is owed to him under the 2nd Agreement is K1,350,000.
38. However, the plaintiff’s contention is that the K1,350,000 was subsequently agreed by the parties to be paid out of the dividends that are to be derived in HYI from its business sales.
39. Let me first begin with the agreement. Part B is relevant, and it reads:
“Lim shall pay Andy Kina Six Million (K6,000,000.00) only at the times and in the manner as follows:
Kina Six Million (K6,000,000.00) only shall be paid by Lim to Andy after Lim receives all the original land titles in respect of the New Land and provided that all the land titles are in the name of the Company, of 99-year lease, free from all encumbrances and with vacant possession.”
40. There is no dispute that the first defendant has complied on his part in regard to the 2nd Agreement, that is, in converting his 2nd UDL and transferring the state leases that were created under it over to the plaintiff’s company L & C Holding Ltd. So, when strictly considering the relevant terms of the 2nd Agreement, the plaintiff should pay the full K6,000,000 to the first defendant.
41. However, I note that the plaintiff has adduced evidence, which is not challenged, where it shows the parties agreeing to the effect that the K1,350,000 or K1.43 million shall be paid out of or from the dividend proceeds that is earned by HYI. Evidence of this agreement or variation made to the 2nd Agreement consists of a letter which is dated 28 October 2013 which was written and sent by the first defendant himself to the plaintiff. The letter is marked as Annexure LC-49 to Exhibit P4. It reads in part,
“I write this letter regarding the above.
I hereby confirm that to date I have been paid K4.49 million for the abovementioned land, also described as Allot 533, Portion 2645 & Portion 814 Rem, Granville, National Capital District as per our agreement dated 14th February 2011.
I agree that you pay me the balance land purchase price of K1.51 million in the following manner:-
Thank you”
42. The first defendant, as it is shown above herein, has agreed with the plaintiff to essentially vary the terms of the 2nd Agreement to the extent as contained in his letter. And the variation was accepted by the plaintiff at the material time.
43. There is therefore no basis for the first defendant to make this claim in this manner. As such, I refuse to grant the sum of K1,350,000 as requested by the first defendant, and in so doing, uphold the plaintiff’s cross-defence in that regard.
44. The crossclaim will be dismissed in its entirety.
SUMMARY
45. In summary, I note that I have dismissed the plaintiff’s claim for breach of the 1st Agreement. I have also dismissed the first defendant’s crossclaim which was premised on the 2nd Agreement.
46. The only cause of action I grant is the plaintiff’s second leg claim of fraud against the first defendant. I have found the first defendant liable for breach of the 1st Agreement and fraud or fraudulent dealings, that is, where he had facilitated and acquired the 64 shares of the plaintiff. I will therefore grant the alternative relief as sought in the SoC, thus, make orders for these shares to be transferred back to the plaintiff. I will also restore the plaintiff position as a director of HYI.
47. However, that said, I am not minded to grant relief 3(e) concerning sales that HYI may have made with third parties to be declared as null and void. Again, that is a relief that may be available to or may be sought by HYI. The plaintiff, however, by this proceeding, is asserting his rights as an individual who is primarily seeking damages or declaratory orders premised on his personal rights and interests. If HYI intends to take recovery action or assert its rights against the first defendant, then that may be subject to a separate cause of action perhaps under the provisions of the CA.
COST
48. A cost award herein is discretionary. I am minded to award cost to following the event, that is, in favour of the plaintiff on a party/party basis to be taxed if not agreed.
ORDERS OF THE COURT
49. I make the following orders:
(a) A declaration that the 64 shares acquired by the first defendant from the plaintiff in Hari Yupi Investment Ltd is null and void;
(b) A declaration that the 64 shares shall be restored back in the name of the plaintiff, that is, in Hari Yupi Investment Ltd;
(c) A declaration that the removal of the plaintiff as a director in Hari Yupi Investment Ltd is null and void;
(d) A declaration that the plaintiff shall be restored as a director of Hari Yupi Investment Ltd;
(e) An order that the Registrar of Companies shall immediately ensure that the company records of Hari Yupi Investment Ltd are rectified to reflect the Court’s declaratory orders as granted herein.
The Court orders accordingly
_______________________________________________________________
Pacific Legal Group: Lawyer for the Plaintiff
Yandeken: Lawyer for the First Defendant
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