[2004]JRC131
royal court
(Samedi Division)
22nd July 2004
Before: |
Sir Philip Bailhache, Bailiff, sitting alone. |
Between |
Gamlestaden Fastigheter Ab |
Representor |
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And |
(1) Baltic Partners Limited |
Respondents |
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(2) David Paul Boleat |
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(3) Michael David De Figueiredo |
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(4) Peter Arthur Neil Bailey |
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Application to strike out a representation under Article 143 of the Companies (Jersey) Law 1991.
Advocate N.M. Santos Costa for the Representor;
Advocate T.J. Le Cocq and Advocate R. J. Macrae
for the 2nd, 3rd and 4th Respondents.
judgment
THE bailiff:
Background
1. This is an application by counsel for David Paul Boleat, Michael David de Figueiredo and Peter Arthur Neil Bailey (hereinafter collectively referred to as 'the directors') to strike out a representation made by Gamlestaden Fastigheter AB ('Gamlestaden') pursuant to article 143 of the Companies (Jersey) Law 1991 ('the Companies Law'), in relation to Baltic Partners Limited ('Baltic'). I have referred to the three directors of Baltic. Only one, Mr de Figueiredo, remains on the board; Mr Boleat died suddenly on 6th September 2000 and Mr Bailey resigned in 2003. In this judgment I shall for convenience use the term 'Gamlestaden' to describe both the representor Gamlestaden Fastigheter AB and the group of companies of which the representor forms part. The litigation surrounding the affairs of Baltic has a long and tangled history; this application is but a chapter in a saga which began in 1995.
2. For the purposes of this application the history of Baltic may however be treated with relative brevity. Baltic was incorporated in Jersey on 19th April 1989. It is owned as to 22% by Gamlestaden and as to 78% by another Jersey company, Hengoed Limited, which is in turn beneficially owned by Mr Tryggwe Karlsten ('Mr Karlsten'). It appears that Baltic was incorporated in order to hold an interest in a German partnership, Scandinavian Partners Karlsten and Co KG ('SPK'). SPK was owned as to 22% by Baltic, as to 73% by Mr Karlsten and as to 5% by Mr Hansen. Those were the profit and loss sharing ratios. Mr Karlsten was interested in property development in Hamburg and acquired interests, through SPK, in two substantial properties, namely Chilehaus and Sprinkenhof.
3. In 1990, as a consequence of a collapse in the property market in Sweden, Gamlestaden became insolvent. Liquidation of the group was avoided by a takeover by a consortium of Swedish banks which were creditors of Gamlestaden. The five members of the consortium included Skandinaviska Enskilda Banken ('SEB') and Forenings Sparbanken ('Sparbanken'). The re-structuring of Gamlestaden under the aegis of the banks led to disagreements between Gamlestaden and Mr Karlsten as to the extent of Gamlestaden's obligation to finance the activities of SPK in Germany.
4. Capital had been contributed by some of the partners of SPK and credited to an equity account in the partnership. As at 30th June 1993 that account showed a credit of DM 120.9 million in favour of Baltic, and a credit of approximately DM 650,000 in favour of Mr Hansen. Mr Karlsten had contributed no capital to SPK. In order to fund the acquisition and development of the two properties, Chilehaus and Sprinkenhof, SPK had borrowed heavily. It had borrowed from Baltic which had in turn borrowed from Gamlestaden. According to Gamlestaden's re-amended representation the loans and guarantees from Gamlestaden to Baltic amounted to approximately DM 165.5 million. Baltic had in turn lent to SPK, and at 30 June 1993, Baltic was owed over DM 128 million by SPK.
5. This was the background to a number of transactions which took place during 1993 and 1994, of which complaint is made by Gamlestaden in its re-amended representation. First, it is said that the directors permitted or acquiesced in a series of transactions which allowed Mr Karlsten and Mr Hansen to withdraw DM 104,485,482 and DM 8,172,898 respectively from SPK. Secondly, it is said that the partners in SPK (including the directors on behalf of Baltic), and unknown to Gamlestaden, between September and December 1993 caused SPK to be converted into a limited liability company known as Scandinavian Partners Grundstückgesellschaft MgH ('SPG'). The shareholdings in SPG were allocated as to 98.36% to Baltic, as to 1.54% to Mr Karlsten, and as to 0.1% to Mr Hansen. In the process of converting SPK to SPG the debit balances owed by Mr Karlsten and Mr Hansen to SPK as a result of the withdrawals referred to above were eliminated and not reflected in the accounts of SPG. This was achieved by changing the value of Sprinkenhof from DM 113 million, as reported in the accounts of SPK as at 30th June 1993, to DM 280 million as reported in the opening accounts of SPG. Notwithstanding the allocation of shares, Mr Karlsten was permitted to retain management control over the affairs of SPG. Thirdly, it is said that by an option agreement dated 24th May 1994 Baltic, acting by the directors and without the knowledge of Gamlestaden, granted a Panamanian company, Baltic Partners Holdings SA ('BPHSA') an option to acquire Baltic's shareholding in SPG for DM 1 million. By a further option agreement dated 25th May 1994 Baltic, again acting by its directors and without the knowledge of Gamlestaden, granted to the bearer of the option the right to acquire the issued share capital of BPHSA for DM 200 million and interest. The bearer option was acquired by Mr Karlsten for DM 160,000 shortly afterwards. It is said that the cumulative effect of these transactions was to cap the future benefit which Baltic might derive from SPG at DM 18 m, while leaving Baltic with substantial liabilities.
6. I should record that the Chilehaus had been sold on or about 1 June 1993 for DM 300 million so that the only remaining asset of SPG was its interest in the Sprinkenhof building.
7. Gamlestaden alleges in its re-amended representation that these transactions in which the directors participated or acquiesced were not commercially viable, were not in the interests of Baltic, and merely served the interests of Mr Karlsten and Mr Hansen. Gamlestaden alleges that the directors were in breach of their fiduciary duty to Baltic and claims, inter alia, damages against the directors.
8. It is common ground that, for the purposes of this application to strike out the representation, I must assume that the facts alleged by Gamlestaden are well-founded.
The procedural history
9. Before considering the arguments advanced by counsel for the directors, it is necessary to adumbrate the procedural history. On 22nd May 1995 an application was made by Sparbanken (now part of the consortium of banks which owns Gamlestaden) to declare Baltic en désastre. The application was granted and the declaration en désastre was made. Baltic appealed to the Court of Appeal against that judgment and, on 18th April 1996, the declaration was recalled. In essence the Court of Appeal concluded that Sparbanken did not have a liquidated claim sufficient to establish a right to have the property of Baltic declared en désastre. In the meantime, proceedings had been issued in Sweden which later multiplied and involved Gamlestaden, SPG, Mr Karlsten, SEB, Sparbanken and Baltic. Judgment in these Swedish proceedings was entered against Baltic in March 2002 after a trial lasting some 3 months. Baltic was ordered to pay SEB 205 million krona, plus interest and costs and Sparbanken 255 million krona, plus interest and costs. I was told by counsel for the directors that this translates into damages in the sum of approximately £35 million plus interest and costs. Baltic was initially advised by its Swedish lawyers that it had good grounds to appeal this decision, but that success would depend upon obtaining full discovery. In 2003 the Swedish Court of Appeal refused to order discovery and Baltic was then advised that it had no reasonable prospect of succeeding on appeal. Shortly after Baltic's appeal was withdrawn.
10. In the meantime further proceedings had been instituted by Gamlestaden in Jersey. On 26th August 1997 it issued an Order of Justice in this Court against the directors, Baltic and Abacus (CI) Limited (by whom the directors were employed). In February 1998 Gamlestaden was given leave to amend its Order of Justice seeking derivative relief, including damages, in respect of the conduct of Baltic's affairs. On 23rd February the amended Order of Justice was struck out by order of the Greffier Substitute, essentially on the basis that Gamlestaden could not bring its claim within the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 261. Gamlestaden appealed to this Court against the decision of the Greffier Substitute, but on 1st July 1998 the appeal was adjourned sine die so that Gamlestaden could consider whether it should make an application under articles 141 and 143 of the Companies Law.
11. Such an application was made by representation by Gamlestaden in September 1998. The representation was subsequently amended and re-amended. The procedural history of this representation is examined in more detail below in the context of the directors' application to strike out on the ground of want of prosecution.
Nature of article 141 relief
12. The re-amended representation of Gamlestaden seeks relief under articles 141 and 143 of the Companies Law. Those articles appear in part XX under the heading 'Unfair prejudice'. The relevant parts of those articles are in the following terms -
"Article 141
Power for member to apply to court
(1) A member of a company may apply to the court for an order under Article 143 on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
(2) The provisions of this Article and Articles 142 and 143 apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law, as those provisions apply to a member of the company; references to a member or members are to be construed accordingly.
.............
Article 143
Powers of the court
(1) If the court is satisfied that an application under Article 141 or 142 is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the generality of paragraph (1), the court's order may -
(a) regulate the conduct of the company's affairs in the future;
(b) require the company to refrain from doing or continuing an act complained of by the applicant or to do an act which the applicant has complained it has omitted to do;
(c) authorize civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
(d) provide for the purchase of shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly."
13. Counsel for the directors accepts that for the purposes of this application I must proceed on the basis that the company's affairs have been conducted in a manner which is unfairly prejudicial to the interests of its members or some of them. Counsel submits nonetheless that the representation ought to be struck out on a number of grounds.
Gamlestaden has suffered no loss as shareholder
14. Counsel for the directors has launched two frontal assaults in support of the striking out application as well as some flanking movements. I deal initially with the frontal assaults of which the first is that Gamlestaden has suffered no loss as shareholder and accordingly has no remedy under articles 141 and 143. The submission is essentially that Baltic is insolvent and that any recovery, assuming an action against the directors were successful, would not result in any benefit to Gamlestaden in its capacity as a shareholder of Baltic. Gamlestaden might recover part of the debt due by Baltic, but articles 141 and 143 are designed, so the argument runs, to protect shareholders, not creditors.
15. Counsel pointed out that Gamlestaden is controlled by the banking consortium which includes Sparbanken. It was Sparbanken which alleged in 1995 that Baltic was insolvent and which procured that Baltic was declared en désastre. Counsel submitted that it was clear from paragraph 13 of the representation that Gamlestaden was pursuing this claim on behalf of the creditor Swedish banks, viz the controlling shareholders of Gamlestaden including SEB and Sparbanken. The reality was that the claim was being brought by a creditor and not by a shareholder.
16. In support of his submission that articles 141 and 143 provide protection for shareholders and not creditors, Mr. Le Cocq for the directors cited a number of English authorities dealing with the equivalent statutory provisions in England. Those provisions are now to be found in sections 459 and 461 of the Companies Act 1985. First he cited Re J E Cade & Son Limited [1992] BCLC 213 where Warner J struck out a petition under section 459 on the ground that the petitioner was seeking to protect his interest as a freeholder of a farm licensed to a company of which he was a shareholder and not his interest as a member of the company. As part of the arrangements for the dissolution of a partnership T acquired the freehold of a farm. He granted a licence to C Limited to farm it for five years rent free. T held 6% of the shares in C Limited and was paid a director's fee. J, who occupied the farm, was given an option to purchase the farm for £244,000 at the end of the 5 year period but at that time was unable to afford to do so. He claimed however that C Limited's occupation of the farm was protected under the Agricultural Holdings Act 1986. T petitioned under section 459 seeking inter alia that he should be entitled to possession of the farm or that C Limited should be compulsorily wound up. In dismissing the petition Warner J stated -
"However, the second difficulty to which Mr Girolami pointed was this. It is well established, and was common ground between counsel in this case, that the interests of a member of a company that the court has jurisdiction to protect under article 459 are only his interests as a member. Whilst those interests are not necessarily limited to his strict legal rights under the constitution of the company, they do not extend to interests of his in some other capacity. I was referred to a number of authorities on this point: Re a company (No 00477 of 1986) [1986] BCLC 376, Re a company (No 003843 of 1986) [1987] BCLC 562, particularly at 572-573, Re Ringtower Holdings plc (1989) 5 BCC 82 at 95, and Re a company (No 00314 of 1989), ex p Estate Acquisition and Development Ltd [1991] BCLC 154. Here, Mr Girolami submitted, the interests that Tony seeks to protect by this petition are his interests as a freeholder of Marriotts Drove Farm."
Later in the judgment he continued -
"I can see no way in which, at a hearing of the petition, Tony could overcome the objection that, in seeking possession of Marriotts Drove Farm, he was pursuing his interests as a freeholder of the farm and not his interests as a member of the company."
17. Counsel also referred me to the case of Re Hailey Group Limited [1993] BCLC 459. In that case an application was made by a minority shareholder pursuant to section 459 at a time when the company was flourishing. By the time that the application was heard, the company was however in administrative receivership and insolvent. Refusing to grant relief the judge stated -
"It is very common that the order made on petitions under S 459 is for one warring faction to purchase the shares of the other. In the case of a company which is continuing in business it certainly gives relief in respect of the matters complained of. The petitioner is no longer the bedfellow of the wrongdoer; he is either in control of the company because he has bought the wrongdoer's shares or he is free from the company for a fair price, often adjusted for the damage done to the company by the wrongdoer.
Such relief might well have been appropriate in the present case at the date of the presentation of the petition and so long as it continued as a going concern. To impose on some of the respondents an obligation to purchase the petitioner's shares in the events which have happened is tantamount to imposing a fine on them: there is nothing of any value for them to purchase."
18. Counsel also drew attention to Re Chesterfield Catering Co Limited [1976] 3 All ER 294. This was a petition for the winding up of a company rather than a petition under the predecessor of section 459, but counsel submitted that the principle was the same. The personal representatives of a deceased member of a company petitioned for its winding up. The company had ceased to trade and appeared to be insolvent. The ratio, as expressed in the headnote of the report, was -
"In order to establish his locus standi to petition for the winding-up of a company, a fully paid shareholder had to show that he had a sufficient interest in that, if the company were wound up, he would, as a member, receive some advantage or avoid or minimise some disadvantage which would accrue to him by virtue of his membership of the company. Even if there were exceptions to the general rule that to establish a sufficient interest a fully paid shareholder had to show on the face of the petition a prima facie probability that there would be surplus assets available for distribution amongst the shareholders, the mere fact that the petitioner would derive some private advantage from a winding-up unconnected with his membership could not constitute a sufficient interest."
19. In reply on this point, Mr Costa for Gamlestaden drew my attention to two authorities. The first was Re Macro (Ipswich) Limited [1994] 2 BCLC 354 which involved, inter alia, a failure by the respondent directors to account for certain commissions received. Arden J stated -
"As the conduct is prejudicial in a financial sense to the companies, it must also be prejudicial to the interests of the plaintiffs as holders of its shares."
Later the learned judge continued -
"I would add that the jurisdiction under s 459 has an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case.
With respect to alleged mismanagement, the court does not interfere in questions of commercial judgment, such as would arise here if (for example) it were alleged that the companies should invest in commercial properties rather than residential properties. However, in cases where what is shown is mismanagement, rather than a difference of opinion on the desirability of particular commercial decisions, and the mismanagement is sufficiently serious to justify the intervention by the court, a remedy is available under s 459."
It is to be noted however that in this case the company was not insolvent, and the remedy afforded by the Court was an order that the petitioners' shares be purchased at valuation.
20. Mr. Costa also referred to a passage from the judgment in Re Elgindata Limited [1991] BCLC 959 where Warner J stated -
"This is not, to my mind, a case in which it can be said that conduct that was unfair to the petitioners was prejudicial to their interests because it resulted in a serious diminution of, or in serious jeopardy to, the value of their shares. Of course, the misuse by Mr Purslow of the company's money was reflected in its profit-and-loss account and to the extent that it reduced the company's profits or increased its losses, it reduced the value of the petitioners' shares. But it cannot have been a major cause of the diminution in the value of those shares. The reason why I have concluded that it was conduct unfairly prejudicial to the petitioners' interests is that it was inherently so. By its very nature the misapplication of a company's assets by those in control of its affairs for their own benefit or for the benefit of their family and friends, is unfairly prejudicial to the interests of minority shareholders."
Again I note in passing that this was not a case of an insolvent company, and that the remedy afforded by the Court was an order that the petitioners' shares be purchased by the majority shareholder.
21. Mr Costa's submission was that serious mismanagement and the diversion of company assets are in themselves prejudicial to the interests of a shareholder in that company. It need not be shown, he submitted, that the shareholder has itself suffered a quantifiable loss, or even that the conduct of which complaint is made has had such an effect on the financial affairs of the company or that the value of the shareholder's interest has been diminished or prejudiced. So far as it goes, I accept that submission as being an accurate statement of the law. The difficulty is that it does not go far enough. It goes to the question whether there has been unfairly prejudicial conduct within the meaning of article 141 of the Companies Law. It does not however go to the argument of the directors that, in order to found the jurisdiction under article 141, there must be something which can be done to protect the interests of the member qua shareholder. In my judgment the jurisdiction given to the Court under article 141 necessarily involves protecting the interests of a shareholder in that capacity. It is not sufficient that the shareholder has some other interest, whether as landlord, creditor or otherwise, which he desires to protect. The law may afford other remedies in such circumstances. The jurisdiction created by article 141 is however limited to affording protection to a shareholder in that capacity. If the company is insolvent, so that the shareholder cannot derive any financial benefit from his shareholding, it is difficult to see how the jurisdiction conferred by article 141 can be engaged.
22. What then is the financial position of Baltic? Counsel for the directors submits that it is hopelessly insolvent. It has no assets and has significant judgment debts as a result of the Swedish proceedings. In addition it is indebted to Gamlestaden pursuant to loans and guarantees. Counsel for Gamlestaden did not accept that Baltic was insolvent. He submitted that if the directors had not permitted the cash withdrawals from SPK to be made by Mr Karlsten and Mr Hansen, the banks would have continued to support SPK and there would have been a profitable development of the Sprinkenhof.
23. In its re-amended representation Gamlestaden seeks, inter alia, an order that Gamlestaden be permitted to conduct proceedings on behalf of Baltic against the directors so as to compel the restitution to Baltic of its loss which is said to be not less than DM 98,323,487. That loss is particularized on the premises that the withdrawals of cash had not taken place and on a number of other assumptions. One of those assumptions is that the value of Sprinkenhof was, as shown in the accounts at 30th June 1993, DM 113,341,966. If the value of Sprinkenhof is assumed to be higher, the value of Baltic's investment in SPK rises correspondingly. The representation offers the illustration that if Sprinkenhof were valued at DM 150 million the value of Baltic's investment in SPK would be DM 131,099,609. The question is however, whether, on the basis that SPK's activities had yielded a development profit to Baltic, there would have been any shareholder value in Baltic after its debts had been cleared.
24. This question was put to experts appointed by the directors and by Gamlestaden. Messrs Moore Stephens were appointed by the directors and the report of Mr Milsom of that firm dated 18th August 2003 was placed before me. At paragraph 4.15 et seq Mr Milsom states -
"Any surplus cash from SPK would have firstly had to have been applied in repayment of the Sparbanken and SE Banken loans. Thus cash of DM 122.2 million less loans of DM95 million leaves DM 27.2 million. Amounts due to Gamlestaden in respect items detailed at 4.19 above total approx. DM 70.5 million and it is therefore apparent that even a sale [of Sprinkenhof] at DM 250 million would not produce sufficient funds to Baltic to enable it to make a return to its shareholders.
If this example is worked together with a reversal of the withdrawals to Messrs. Karlsten & Hansen the position is as illustrated at Appendix H, and the net cash available for distribution amounts to DM234.8 million which would enable payment of the Partners current balances in full.
The net cash repayable to Baltic in this example would be DM 153 million, being the capital account II balance DM 32.1 million and its paid in limited Partner Capital, DM 120.9 million. After repayment of the SE Banken and Sparbanken loans (DM95 million) there would be DM58 million remaining to set against amounts due to Gamlestaden, of DM 70.5 million. There would still be a shortfall and therefore there would not be funds available to provide a return to Baltic's shareholders.
A realisation of net assets, after accounting for a reversal of the amounts debited to Messrs. Karlsten & Hansen, and based upon the Representors adjusted net asset statement at 30 June 1993 would have produced approximately DM 98.3 million which would have been payable to Baltic 100% because of the debit balances that still existed on Messrs. Karlsten & Hansen's partner accounts. This would only just have covered repayment of Baltic's bank loans of DM 95 million thus leaving nothing for Baltic's shareholders."
25. The report concludes -
"Gamlestaden, as shareholder has suffered no loss as a result of the actions of the directors because irrespective or not of whether the withdrawals had been made to Messrs. Karlsten & Hansen, and on the basis of a range of values of Sprinkenhof contended for by Gamlestaden in its Re-amended Representation and up to at least DM 240 million, had the Partnership been dissolved there would have remained insufficient funds available for Baltic to have made a return to its shareholders."
26. This report was submitted to Messrs. PFK, Chartered Accountants, and Mr. Richard Bolton, a partner of that firm, submitted his report to Gamlestaden on 14th November 2003. Inter alia, he considered whether the "no loss" argument could be pursued. Mr. Bolton's concluding paragraph reads as follows -
"Accordingly, Baltic suffered loss as a result of its investment in SPK/SPG because of the transactions that had taken place under the authority of Baltic's directors. The amount of the loss is not less than the value of SPK prior to the cash withdrawals which could have been used to repay Baltic's creditors."
Mr. Bolton expresses no view on the question whether Gamlestaden as shareholder has suffered loss. Counsel for the directors submitted that Mr. Bolton could not have overlooked the concluding paragraph of Mr. Milsom's report and that it could accordingly be inferred that he did not disagree with it. Without relying upon any inference, however, it can certainly be asserted that there is nothing in Mr. Bolton's report which positively claims any value for Gamlestaden's shares in Baltic.
27. It is true that the conclusion of Mr. Milsom is based upon the assumption that Sprinkenhof was not worth more than DM 250 million. The possibility that Sprinkenhof might have been worth more than DM 250 million at that time seems to me to be highly speculative. The argument that it might have had that value was not seriously advanced by Gamlestaden. Indeed, counsel for Gamlestaden conceded in his skeleton argument that the liability to Gamlestaden would not have been immediately covered. In addition Baltic has now further indebtedness as a result of the judgment of the Swedish Court. In my judgment, even applying the most favourable assumptions from the viewpoint of Gamlestaden, there is no doubt that Baltic is insolvent and that there is no potential value in the shares in Baltic held by Gamlestaden.
28. In my judgment Mr. Le Cocq was correct when he submitted that it was a precondition to the exercise of the Court's jurisdiction under article 141 that there should be some potential value in the shares of the company in question. Gamlestaden as a creditor of Baltic may have other remedies. As a shareholder it must be able to demonstrate that its shares in Baltic have some value; in that respect it has failed. I therefore hold that there is no jurisdiction to grant relief under article 141 of the Companies Law and the representation of Gamlestaden must be struck out on this ground as disclosing no reasonable cause of action.
29. Having reached that conclusion, it is strictly unnecessary for me to consider the further grounds upon which the directors have relied. In case however that my conclusion in the preceding paragraph is subsequently found to be wrong, and in deference to the submissions made both by Mr. Costa and by Mr. Macrae for the directors, I shall deal with the second frontal assault referred to in paragraph 14 above. That argument is that the representation should be struck out on the ground of want of prosecution.
The background facts
30. The facts may be summarized in the following way. The representation was issued in September 1998. An application to strike out the representation was due to be heard on 3rd April 2000 but was adjourned. In August 2000, a draft amended representation was sent to counsel for the directors. On 27th November 2000 that amended representation was filed by consent. A letter signed by counsel for both parties agreed that the directors would have six months from the filing of further and better particulars of the amended representation to file an answer. On 12th December 2000 a request was made by the directors for further and better particulars, namely particulars of Baltic's alleged loss of DM 98,323,487.
31. Those particulars were filed on 15th January 2001; corrected particulars were filed in June 2001. A date to hear the strike-out application was fixed for 29th November 2001. In July 2001, counsel for Gamlestaden pressed for the filing of an answer and in August 2001, counsel for the directors requested an extension of time. In September 2001 the directors withdrew their application to strike out the representation pending the resolution of the Swedish proceedings. On 28th September 2001 the directors filed an answer to the amended representation.
32. In March 2002 judgment was delivered in the Swedish proceedings. In June 2002 counsel for the directors requested further particularization of Gamlestaden's case. On 28th June 2002, Gamlestaden promised a further amendment of the representation. In November 2002 the request by counsel for the directors was repeated; the directors claimed that their strike-out application could not be pursued until they had a better understanding of Gamlestaden's case. On 11th November 2002 counsel for Gamlestaden replied stating that a revised representation would be provided "within the next couple of weeks".
33. On 28th February 2003 a draft re-amended representation was sent to counsel for the directors. In April 2003 the application to strike out the re-amended representation was served by counsel for the directors.
The law
34. The law was conveniently summarized by Birt, Deputy Bailiff in Garfield Bennett v Phillips (6th November, 2002) Jersey Unreported; [2002/214]in the following terms -
"10. It is well established at the level of the Royal Court that the principles to be applied on an application to dismiss for want of prosecution are those laid down in the leading English case of Birkett -v- James (1978) AC 297 as subsequently elaborated by decisions of the English courts.
11. A convenient summary of the principles as they have developed is to be found in Shtun -v- Zalejski (1996) 3 All ER 411. With minor alterations, we would adopt those principles as reflecting the law of Jersey and would set them out as follows:-
i. In a case where there has been no contumelious conduct by the plaintiff, the Court, if it is to strike out an action for want of prosecution, must be satisfied (a) that there has been inordinate and inexcusable delay on the part of the plaintiff or his lawyers and (b) that such delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in the action or is such as is likely to cause or to have caused serious prejudice to the defendants, either as between themselves and the plaintiff, or between each other, or between them and a third party.
ii. The delay which must be shown to have caused such risk or such likelihood of prejudice is the delay after the issue of proceedings.
iii. But where the plaintiff delays in issuing proceedings and by such delay causes prejudice, the additional prejudice which must be shown to justify dismissal of the action need not be great, provided that it is more than minimal.
iv. Further, once the plaintiff is guilty of further delay causing more than minimal additional prejudice, the prejudice caused by the totality of the period of his delay can be looked at.
v. The prejudice may take a variety of forms, but one recognised form is the impairment of the memory of witnesses. Another form consists of the prejudice to the defendant through having a serious claim hanging indefinitely over him. But the Court should only in exceptional cases treat the anxiety which accompanies all litigation as alone being sufficient to justify dismissing an action.
vi. Save in exceptional cases, an action will not be struck out for want of prosecution before the expiry of the relevant limitation period.
12. We would add two further points -
i. It is clear that the later a plaintiff starts his action, the higher his duty to prosecute it with all due speed. A pace which might have been excusable if the action had been started sooner may be inexcusable in the light of the time that has already passed before proceedings were issued. (See Lord Diplock in Birkett -v- James at 322). This is particularly important in the context of the lengthy limitation period of ten years under Jersey law. The need for a plaintiff to act with diligence and expedition in such circumstances is that much more necessary in Jersey. (See Skinner -v- Myles (1990) JLR 88 at 94).
ii. Where the prejudice relied upon takes the form of impairment of witnesses' recollections, it is not necessary that there should be evidence of particular respects in which potential witnesses' memories have failed; the Court is entitled to draw appropriate inferences from delay (see Shtun -v- Zalejski (supra). Furthermore the Court can infer that any substantial delay at whatever period leads to a further loss of recollection (see Lord Browne-Wilkinson in Roebuck -v- Mungovin (1994) 1 All ER 568 at 574)."
Has there been inordinate delay?
35. Mr. Macrae for the directors stated that the period between the filing of the representation in September 1998 and the filing of the strike-out application in April 2003 was 56 months. He submitted that Gamlestaden had been responsible or principally responsible for 39 months of delay during that period. It appears from the annotated schedule of delay which counsel for Gamlestaden was permitted to file after the hearing that Gamlestaden accepts responsibility for a delay of 6 months between October 1998 and March 1999 (when a date in October 1999 was agreed for the hearing of a strike-out application). In September 1999 counsel for the directors raised the "no loss" argument which I have found to be decisive of the fate of this representation, and invited Gamlestaden to amend its pleading. The strike-out hearing was adjourned by consent to April 2000. By April 2000, the representation had still not been amended and the hearing was again adjourned. A revised representation was produced in August 2000. That period of 11 months between September 1999 and August 2000 includes, in my judgment, at least 6 months of delay for which Gamlestaden must take responsibility.
36. There were sporadic exchanges between August and December 2000 when a request was made by the directors for further and better particulars. Those particulars were provided but no further steps were taken by Gamlestaden until June 2001. There seems to me to be at least another 3 months of delay between January and June 2001 for which Gamlestaden must take responsibility.
37. There were further exchanges during 2001 until payment of security for costs in the sum of £95,000 was agreed in November. The action was then stayed. The security was not paid in until March 2002. I attribute another three months of delay to Gamlestaden in that respect.
38. In June 2002 further complaint was made by the directors as to the lack of particularity of Gamlestaden's case. On 28th June 2002 counsel for Gamlestaden promised a further amendment to the representation "within the next few weeks". The re-amended representation was not delivered until 28th February 2003. I find another six months of delay in this respect for which Gamlestaden must take responsibility.
39. In total therefore, I find that Gamlestaden has been responsible for at least 24 months of delay. Furthermore, the background to this representation cannot be ignored. The judgment of the Court of Appeal recalling the désastre of Baltic was delivered in April 1996. Nothing of substance happened until August 1997 when Gamlestaden issued its Order of Justice. That Order of Justice was struck out in February 1998. Gamlestaden's appeal against that decision was adjourned sine die in July 1998. Against that background it was incumbent upon Gamlestaden to proceed with its representation with diligence and expedition. I have no hesitation in finding that it has failed to do so and that the 24 months' period of delay for which it is responsible is inordinate.
Was the delay inexcusable?
40. Mr. Costa submitted that, even if there had been inordinate delay, such delay was excusable. He relied upon the contents of Advocate Martin's affidavit which gave a number of reasons why delays had occurred. First, it was said that for different reasons there had been delays in obtaining advice from a forensic accountant. Secondly, it was said that counsel for Gamlestaden had been engaged in other weighty litigation. Thirdly, it was said that Gamlestaden's English counsel was appointed to the Bench and that it had taken five months to replace him with another counsel. Fourthly, it was said that the directors had at one stage themselves been seeking a stay pending the conclusion of the Swedish proceedings.
41. I am not persuaded that any of these reasons either individually or collectively render the delay in this case excusable. I reached that conclusion for the following reasons.
(i) While I can understand and excuse some of the delay in obtaining advice from a forensic accountant, the scale of the delay was quite unjustifiable.
(ii) Counsel for Gamlestaden was involved in another commercial trial between January and March 2002, but this was a period during which the action was stayed as a result of Gamlestaden's failure to pay £95,000 into court as security for costs following the agreement in November 2001. Furthermore, an advocate should only take on such amount of work with which he can deal in a timely manner.
(iii) I cannot accept that it takes 5 months to replace one member of the English Bar with another.
(iv) While it is true that the directors did at one time blow hot and cold over their desire for a stay pending the outcome of the Swedish proceedings, in fact a stay was never obtained. It was incumbent therefore on Gamlestaden to press on with their case.
Prejudice
42. Mr. Macrae contended that the directors had suffered prejudice for five main reasons.
(i) The allegations of professional misconduct had been hanging over them for seven years with all the anxiety that that entailed. Gamlestaden had been in possession of all the material facts by early 1996 at the latest. If the representation had been brought to trial within two years, as it should, the matter would have been concluded by September 2000.
(ii) In the interim, one of the directors, David Boleat, had died. Mr. Boleat had had a great deal of knowledge of what had happened in the early years of Baltic's activity, and that was now lost.
(iii) The recollection of Mr. de Figueiredo had been substantially affected by the passage of time. He would be asked to testify about events which happened ten years ago.
(iv) The case of Gamelstaden revolved around the valuation of Sprinkenhof. Expert evidence as to the reasonableness of the valuations obtained in 1993 would be difficult to obtain.
(v) The case had disrupted the professional life of the directors causing them to notify the regulatory authorities of this outstanding claim.
43. Mr. Costa responded that the directors had suffered no prejudice. They had themselves been responsible for part of the delay in seeking a stay. He referred to McGorrin v Pascoe (7th June, 2002) Jersey Unreported; [2002/113] where the delay had been one of fourteen years. Here, he submitted, only five years had passed from the institution of proceedings. Counsel submitted that Mr. Boleat's death was irrelevant in the sense that Mr. de Figueiredo had been the director principally involved. Counsel argued that the lapse of time was insignificant in that the directors were on notice in 1996 of this claim and must surely have made notes of their recollections. So far as the valuation of Sprinkenhof was concerned, counsel doubted whether oral evidence would be necessary, but if it were necessary, the original valuers could be called to justify their valuations. Counsel submitted that there was no evidence of any disruption of professional life, nor of any anxiety other than that necessarily associated with litigation.
Conclusion
44. Balancing these arguments as best I can, I have reached the conclusion that the directors have suffered serious prejudice by reason of the inordinate and inexcusable delay in this case. My principal reasons for arriving at that conclusion are two-fold. First, it seems to me inevitable that after ten years memories will have faded. The evidence of those involved in the transactions about which complaint has been made by Gamlestaden will undoubtedly have been adversely affected by the passage of time. Secondly, the death of Mr. Boleat seems to me to be a significant factor. If Gamelstaden had pursued its action "with diligence and expedition" (see Garfield Bennett v Phillips) the evidence of Mr. Boleat would have been available to the directors. Mr. Boleat was a director of Baltic from the beginning and, according to the affidavit of Mr. de Figueiredo "had a great deal of knowledge as to what had occurred in the early years". Mr. de Figueiredo became a director of Baltic only on 13th August 1992. It is true that Mr. Peter Bailey was appointed a director of Baltic on 25th April 1989 at the same time as Mr. Boleat, and is available to give evidence. However, he retired from practice in 2000 and I get no sense from his affidavit that he was as closely involved in the affairs of Baltic as Mr. Boleat.
45. I would therefore strike out this representation for want of prosecution. On this ground, and on the ground of lack of jurisdiction to grant relief under article 141 of the Companies Law, the application of the directors is granted.
46. Having reached those conclusions it is unnecessary for me to deal with what I described as the flanking movements adopted by counsel for the directors.
Authorities
Companies (Jersey) Law 1991: Articles 141 & 143.
Royal Court Rules 1992: Rule 6/13.
Companies Act 1985: S.459.
Kinsella -v- Lido Bay Hotel (Jersey) Ltd (24th April, 2001) Jersey Unreported; [2001/89].
Jersey Financial Services Commission -v- Black [2002]JLR443.
Garfield Bennett -v- Philips (6th November, 2002) Jersey Unreported; [2002/214].
McGorrin -v- Pascoe (7th June, 2002) Jersey Unreported; [2002/113].
Re: Chesterfield Catering Company Limited [1976] 3 All ER 294.
Joyce -v- Joyce [1979] 1 All ER 175.
Re: Bird Precision Bellows Ltd [1985] BCLC 493.
Re: Commercial & Industrial Insulations Ltd [1986] BCLC191.
Re: Charnley Davies (No. 2 ChD) (1990) BCLC.
Re: Cade [1992] BCLC 213.
Re: Hailey Group Ltd [1993] BCLC 459.
Re: Saul -v- Harrison [1995] 1 BCLC.
Re: Marchday Group plc [1998] BCLC 800.
Re: Premier Electronics GB Ltd [2002] 2 BCLC 634.
McGree on Limitation Periods (4th Ed'n 2002): paras 3 -016.
Blenheim Trust Co. Ltd. -v- Morgan, Abacus (Guernsey) Ltd and another (17th March 1999) Jersey Unreported; [1999/51].
Esteem Settlement and the No. 52 Trust [2000]JLR119.
Bridgmen -v- McAlpine-Brown 2000LTL.
Re: Macro (Ipswich) Ltd 1994 2 BCLC 354.
Elgindata Ltd [1991] BCLC 959.
Mauger -v- Barry (9th October, 1995) Jersey Unreported; [1995/197].
Birkett -v- James [1978]AC297.
Moulipied -v- Sturdy [2003]JRC025.
Garfield Bennett -v- Phillips [2002]JLR N.42.
Besant -v- Pavan [1997]JLR270.
Re A company, ex parte Estate Acquisition and Development Ltd [1991] BCLC154.
Re a Company (No 005287 of 1985) [1986] BCLC 68.
Anderson -v- Hogg (2002) SLT 354.
Re Bhullar Bros Ltd [2003] 2 BCLC 241.
Foss -v- Harbottle (1843) 2 Hare 461.
Re Saul D Harrison & Sons plc [1995] 1 BCLC 14.
Trafford Park Estates -v- Lowe (14th October, 1999) LTL.
Doolan -v- Powerhouse (16th February, 2000) LTL
Re Hailey Group Limited [1993] BCLC 459.