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Jap Holdings Ltd v Naomane [2011] SBHC 132; HCSI-CC 52 of 2007 (31 October 2011)

IN THE HIGH COURT OF SOLOMON ISLANDS
(Mwanesalua J)

Civil Case No.52 of 2007

BETWEEN:

JAP HOLDINGS LIMITED
Claimant

AND:

ENOCH NAOMANE
Defendant

Date of Hearing: 13 April 2011
Date of Decision: 31 October 2011

G Fa'aitoa and A Keniapisia for Claimant
M Tagini for Defendant

JUDGMENT

Mwanesalua J:

1. Claimant. The Claimant, Jap Holdings Limited, is a private company, incorporated in Solomon Islands under the companies Act (Cap.175) on 6 March 1997. The claimant's business is mainly in IT technology, in particular, the selling and dealing in hardware and software, as well as offering training in the use of equipment and accessories. It's founding and initial members (subscribers and Shareholders) were Messrs Andrew Hanaria having 8,000 shares, James Keniasina having 8,000 shares and Peter Hauia having 4,000 shares. These founding and first shareholders were also the founding directors. The total of shares in the Claimant is 20,000 worth $1.00 each. So, it has a share capital of $20,000-00.
   
2. Defendant. The Defendant is Mr. Enoch Naomane. He has been an employee of the claimant for many years. The claimant filed a writ of summons and statement of claim against the Defendant in February 2007. These were subsequently amended in February 2008. The defendant contends that the claimant has no evidence to prove the claim filed against him.
   
3. Issues. The Claimant and the defendant have agreed the Issues to be decided in this proceeding. They are considered in this paragraph below.
   

3.1. Defendant a director, Joint owner and Manager of the Claimant.

The Defendant asserts that he became director, Co-owner and manager of the Claimant with Mr. Hanaria when the following events occurred. When ( I ): the Claimant Voluntarily closed down business due to huge Liabilities; (ii) the shares held by Messrs Keniasina and Hauia shares were paid off; and (iii) Hanaria declared in a meeting in 2003, that the Defendant himself would become a new Owner, director; and Manager of the Claimant.

3.2. Claimant voluntarily closed for business. The defendant did not produce any evidence that the Claimant closed its business in 2003 because of huge Liabilities. According to the evidence of Mr. Hauia, the Claimant never closed its business at all as claimed by the Defendant. The Court would accept the evidence of Mr. Hauia because from 2003 to 2005 the Claimant continued to operate and was earning profits.

3.3. Payments made to Messrs. Hauia and Keniasina. The Defendant did not prove that the payments made to Messrs Hauia and Keniasina were specifically to pay for their shares. He produced no receipts to confirm that, and gave no evidence regarding such receipts. On his part, Mr Hauia's evidence is that he regarded his payment as a dividend on his shares, as none was paid since the incorporation of the Claimant. The Court will accept the evidence of Mr Hauia because the returns on the directors of the Claimant were never changed since they were filed in 1997. Mr. Hauia proved this when he made a search at the Registrar of Companies office. There was therefore no evidence before the court that Messrs Hauia and keniasina's shares were either repurchased by the Claimant or were transmitted to a new owner or owners. In any case, Mr Hauia and keniasina would never be parties in this proceeding as directors if they ceased being directors, Shareholders and/or members of the Claimant.

3.4. Defendant Director of Jap Holdings Limited. Mr. Hauia's search at the Registrar of Companies office proved that Messrs Hanaria, Keniasina and Hauia still maintained their offices as directors of the claimant. The Defendant had never assumed the position as managing director as he might have claimed. This is because only serving directors are eligible to be appointed as Managing Director under Articles of Association (AOA) of the Claimant. The Defendant claims that he was a Director of the Claimant having being declared as such by Director Hanaria during a meeting of the Claimant in 2003. That was not a board meeting of directors. It was meeting of employees with director Hanaria. It was never arranged by the Secretary of the Claimant as required by the AOA of the Claimant. There are director, shareholder and member of the Claimant present during that meeting. It is the view of the court that an appointment of a director during a meeting lacking quorum of the board of directors is not capable of being validated later, by the endorsed of directors who were not absent during the meeting at which a purported director was appointed. There being no provision in the AOA of the Claimant supporting the appointment the Defendant, upon declaration as done by director Hanaria.

3.5. Defendant a Joint-owner of the Claimant. The Shareholders own a company. At the present time, the members who own the Claimant are Messrs. Hanaria, Keniasina and Hauia. That membership had remained the same since 16 March 1997. The Issued shares and the capital share of the Claimant have remained the same since incorporation. The issued shares are still held by the Messrs Hanaria, Keniasina and Hauia. The Claimant has not increased its share capital to enable the Defendant to purchase shares in the Claimant. There is no evidence that the Defendant entered his name in the registry of members of the Claimant. The Defendant is not a member and Co-owner of the Claimant at the present time.

3.6. Defendant manager of the Claimant. There seem to no dispute between the parties that the Defendant was the Manager of the Claimant from 2003 to about 2007. The Defendant admitted in paragraph 12 of his Defence that he is the manager of the Claimant. "12... The Plaintiff was managed solely by the Defendant. The Defendant was paid a monthly salary of $2,500-00 to reflect his responsibilities. The directors of the Claimant would have power to appoint the Defendant as Manager of the Claimant under the AOA of the Claimant.

3.7 whether the Defendant breached the terms of his engagement as General Manager of the Claimant when he failed to: (a) Provide the Claimant's directors for the time being with accurate and up to date statements of accounts; (b) Report to the directors for the time being; (c) Advice the Secretary for the time being to call meetings of the board of directors; and properly operate the accounts of the Claimant. The court is of the view that as Chief Executive Officer of the Claimant the Defendant needs to keep proper accounts and accounting records of the Claimant. In due course these would help the auditor to carry out his task in his financial reports.

3.8 In this case, the auditor found huge number of transfers made from the Claimants bank account into the Defendants personal account. There were instances where funds were expended with no supporting vouchers, cheque and receipts. And then the Defendant bought land at Ngosi and make renovations on that property with funds belonging to the Claimant.

3.9 The court is of the view that important that the audit reports of on how the Claimant's funds and assets were used would be seen by the directors and the officials of the Claimant.

3.10 1. Financial Report for Year 2006

The auditor said: We were unable to complete the financial report for the company for year ended 31 December 2006 due to the fact that numerous payments made during the year cannot be appropriately posted. [Refer item [c]]

2. Audit Investigation

[a ]. Cash & Bank

Bank balances were confirmed and reconciliation carried for year 2003, 2004, 2005 and 2006.

During the reconciliation process, we noted that there were substantial transfers of fund from Jap Holdings Limited – ANZ Account no. 80383 that were traced to the Manager's personal accounts with ANZ Bank – No. 143652 spread over the last four years.

Summaries of the transfers are as follows:

2003 Financial Year $ 20,000

2004 Financial Year $127,000

2005 Financial Year $789,220

2006 Financial Year $645,510

Total $1,581,730

Less: Transfers made by Enoch from

Personal Account No. 143652 to Jap

Holdings Limited Account 80383.

Financial Year 2005 $13,000

Financial Year 2006 $201,000

Total deposits $227,000

Net Advances $1,354,730

Recommendations

[i] We recommend that the Manager is given the opportunity to fully explain each transaction to the Directors.

[b]. Mr. Enoch Naomane's – ANZ Account No. 143652

Based on Mr. Naomane's bank statements for financial year 2003, 2004, 2005 and 2006 provided to us by him, we noted that there were a number of Telegraphic transfers (TT) made from Mr. Naomane's Account No. 143652.

Summaries of TT made are as follows:-

Year 2004 $114,200.00

Year 2005 $122,485.05

Year 2006 $447,276.77

Total TT payment $683,961.82

Recommendations

[i] The Manager to provide evidence on all TT paid out from Mr. E Naomane Account No. 143652 and to explain whether the payments related to purchases of stock for Jap Holdings Limited.

[ii] Manager to confirm with documents any additional withdrawal from his personal Accounts that expended for the purpose of the company or its directors.

[iii] Valid TT payments made on behalf of the company or directors to be offset against the Net Advance in item [1]

[c]. Suspense Accounts

Suspense Account stands at $687,007.18 as at 31 December 2006. These payments are transactions that we were unable to properly dissect and post to their correct expenditure item. Two problems identified are; no payment voucher raised or cheque butt not filled in and secondly payments made by cash with no details of what that cash payments are for.

2003 Financial Year $ 60,969.45

2004 Financial Year $196,945.96

2005 Financial Year $174,289.82

2006 Financial Year $254,801.95

Total $687,007.18

Recommendation

[i] Provide a printed list to the Manager to make available any documents relating to the payments or otherwise an explanation to verify each payment.

[ii] Take appropriate action to correctly post payments identified to their correct accounts.

[iii] The Board makes resolutions on those payments that the Manager is not able to explain.

[d]. Repairs & Maintenance – Property

The Manager bought a property at Ngossi, Parcel No. 191-008-73, registered in the name of Enoch Naomane. However, substantial company fund had been used to carry out repairs and maintenance on the property. These payments were made from Jap Holdings Limited ANZ Accounts No. 80383. Amount spent are as follows:

Financial Year 2005 $ 75,512.80

Financial Year 2006 $ 55,334.73

Total fund used for maintenance $130,847.53

Recommendation

[i] The Board to confirm whether authority was given to the Manager for the fund expended on repair and maintenance.

3. JAP HOLDING LIMITED ASSETS
   

According to the company's Fixed Asset Register, Jap Holding Limited have the following assets as at 31st December, 2005.

Stock

Jap Holding Limited stock taken over by EN Enterprises Limited cannot be determined since no stock take was carried by the Manager before the stock being transfer. We are therefore, unable to quantify the value of stock.

Recommendation

[i] The director to verify the existence and ownership of the fixed asserts.

[ii] The director immediately carries out a stock-take and reconciliation of Jap Holdings Limited stock taken over by EN Enterprises.

[iii] The director to make resolutions on the future of the assets.

Order: (1) Defendant (Mr. Enoch Naomane's) ANZ personal Account No. 143652 be frozen until further orders.

(2) Defendant & accounts for all the Claimant's sales and receipts since 2003.

(3) Damages for conversion limited to $500,000.00

(4) The Defendant to comply with all recommendations made by the Auditor on pages 5 to 8 of this judgment.

(5) Pay costs of Claimant's solicitors on indemnity basis.

(6) Vacate the Claimant's business office at National Provident Fund at Anthony Saru Building in Honiara if the Claimant decides to start business again.

(7) Return properties inclusive of Cheque Accounts belongs to the Claimant to the 3 directors of Claimant forthwith.

Order accordingly.

THE COURT