[2009]JRC007
royal court
(Samedi Division)
14th January 2009
Before : |
J. A. Clyde-Smith, Commissioner, sitting alone. |
Between |
Derek Vago |
Plaintiffs |
|
Eric Youngblood Nikolaj Larsen |
|
And |
ACP Capital Limited |
Defendant |
Advocate D. M. Cadin appeared for the Plaintiff.
Advocate M. H. Temple appeared for the Defendant.
judgment
the COMMISSIONER:
1. I sat on 18th December, 2008 to hear the plaintiffs' application for costs.
The claim
2. By their Order of Justice dated 22nd August, 2008, the plaintiffs sought two things from the defendant:-
(i) Firstly, an order for the transfer and issue of certain shares and the delivery up of the share certificates to the plaintiffs and
(ii) secondly, an order for damages arising out of its alleged failure to do so.
3. It transpires that the shares concerned had been issued to the plaintiffs prior to the proceedings being issued but the share certificates, which had been retained, were delivered up to the plaintiffs' advisers after the proceedings had been issued, namely on 17th September, 2008. Thus, the plaintiffs had obtained in full the relief they were seeking under the first part of their claim in respect of which they sought costs. There remains before the Court the issue of the plaintiffs' claim for damages and a counter-claim by the defendant filed with its answer subsequent to the delivery up of the shares certificates.
4. At the headline level, the plaintiffs' claim for costs is straightforward. The defendant had refused to deliver up the share certificates. The plaintiffs therefore issued proceedings, following which the share certificates were duly delivered to them. The plaintiffs have therefore succeeded in that part of their action and should be awarded their costs. The application was however strenuously resisted by Mr Temple on behalf of the defendant and it is therefore necessary to go into the background of the matter.
Background
5. The plaintiffs are former directors of the defendant, which for convenience I will hereafter refer to as "ACP". ACP is a close-ended investment company incorporated in Jersey whose shares are listed on AIM. The plaintiffs are also former employees of ACP Capital Cyprus (HR) Limited, a company in the ACP group.
6. ACP adopted an employee share option scheme (ESOP) and an employee share award scheme (ESAP) for the benefit of employees of companies in the ACP group. The rules relating to the two schemes are similar. ACP had granted certain share options and awards to the plaintiffs under those rules. .
7. In June 2008, the plaintiffs became aware of a proposal to remove them (and others) as directors to be put to an EGM scheduled for 17th July, 2008. On 11th July, 2008, they became aware that the shareholders were likely to vote for the resolution.
8. Under the rules of the schemes, the anticipated change in the constitution of the board would trigger the vesting of options and awards of shares in ACP to the plaintiffs and on 16th July, 2008, (the day before the plaintiffs' removal as directors), the board resolved unconditionally to issue and allot to the plaintiffs the requisite number of shares ("the shares") subject to that change in the constitution of the board taking place and to confirmation being received from the company's auditors as to the tax position of each plaintiff.
9. Rule 9 of the two schemes sets out a procedure for dealing with tax liabilities in relation to what are defined as "Vested Shares" the relevant part of which it is easier to set out in full as follows:-
"9.1.1 If, the Company or any Group Company (the "Employing Company") are or will become liable to account to any revenue or other authority for any sum in respect of any tax or social liability of the Option Holder arising or which will arise in connection with either:
(a) the Option Holder's participation in the Plan: or
(b) any Options made or to be made or Shares obtained or to be obtained under this Plan; or
(c) any awards or grants made under any other ACP share incentive plan;
then the Vested Shares shall not be issued to the relevant Option Holder until such time as the liabilities referred to above have been settled in accordance with Rule 9.2.1 and/or Rule 9.2.2. The Employing Company's auditors shall, using information concerning the Option holder's tax status, determine whether any such liabilities are or will become due. The Option Holder shall (at his own cost) retain a recognised tax adviser (the identity of such recognised tax adviser to be subject to the approval of the CEO) and the recognised tax adviser shall provide all such information to the Employing Company's auditors as soon as is reasonably practicable following receipt of a written request for the relevant information from the Employing Company or the Employing Company's auditors and the Company's reasonable costs incurred in connection with the advice that it receives from the auditors in respect of the Option Holder's personal participation in the Plan will be met by the Option Holder. The approval by the CEO of the Option Holder's recognised tax adviser and the making of any payment pursuant to the auditor's advice shall not waive any rights that any ACP Company,may have to recover any sums which fall properly due under this Rule 9.1, whenever they may fall due."
10. As can be seen, the procedure envisaged that ACP's auditors would determine the existence of any tax liabilities on information provided by the plaintiffs through their own tax advisers. In the event of there being any such liabilities, then they had to be settled in accordance with the procedures set out before the shares were issued. As a further safeguard, under Rule 9.1.3 the plaintiffs were required to indemnify ACP should any tax liabilities arise after the issue of the shares.
11. Rule 6.3.2 of the ESOP and rule 6.2.2 of the ESAP provided that ACP shall arrange delivery of evidence of title to any shares issued "as soon as reasonably practicable".
12. Although the plaintiffs abstained from voting in respect of these resolutions put to the board on 16th July, 2008 as a consequence of their conflict of interest, it is fair to observe that, faced with their imminent removal, the board was procuring the taking of such steps as it properly could to secure the plaintiffs' rights to the shares. I emphasise the word "properly" because ACP does not allege any impropriety in the steps taken by the board in this respect.
13. The auditors' opinions were received on 16th July, 2008, confirming that there were no tax liabilities. Those opinions were issued in part on the basis of a short questionnaire provided by the auditors in which each of the plaintiffs confirmed inter alia that they did not carry out and have not carried out any of their employment and (it is alleged) directorship duties in the United Kingdom.
14. Following the removal of the plaintiffs as directors on 17th July, 2008, ACP made an announcement that the shares were to be admitted to trading on AIM on 25th July, 2008. However, on 25th July, 2008, the plaintiffs learned that this was not to be the case and consulted S J Berwin who wrote to ACP that day setting out in detail their clients' concerns and the action required by ACP to complete the transfers.
15. On 29th July, 2008, ACP informed the plaintiffs that the shares would be allotted/transferred but that the certificates would be retained and not delivered until the auditors of ACP had confirmed that the company would not become liable to any revenue or other tax authority. On 1st August, 2008, S J Berwin gave ACP notice that it had instructed Jersey lawyers to commence proceedings for specific performance and that the plaintiffs would be seeking all their costs.
16. By letter dated 8th August, 2008, Travers Smith, on behalf of ACP, expanded upon the earlier communication of the company as follows:-
"We note that in accordance with the rules of the ESOP and ESAP, your clients are liable for any tax and social security liability arising pursuant to, inter alia, the grant and exercise of options/awards pursuant to the ESOP and ESAP. On 16 July 2008, Kingston Smith LLP (the "Auditors") issued reports addressed to the Company in respect of each of your clients stating that no tax or social security was deductable in relation to ESOP and ESAP.
It has subsequently come to light that certain of the information supplied by your clients to the Auditors in order to prepare their reports is incorrect. In particular, your clients and/or their tax advisers provided confirmations that they did not carry out any duties for the Company in the UK. However, minutes of board meetings of the Company record them as attending by telephone from London (such board meeting attendance clearly being a duty of a director of the Company). At the Company's request, the Auditors are therefore considering whether the working practices of your clients have had any adverse tax consequences for the Company and whether it is required by law to pay UK tax and/or national insurance in relation to the ESOP and ESAP options exercised by your clients.
Whilst this investigation is continuing, the Company considers that it is in the best interests of the Company and its shareholders not to deliver to your clients the share certificates representing their ESOP and ESAP shares. The board of directors of the Company has revoked the board resolution passed in the board meeting on 16 July 2008 which approved the delivery within 14 days of admission to trading on AIM of the share certificates for those shares granted pursuant to the ESOP. Our client is not in breach of any Jersey law obligation regarding the delivery of share certificates."
17. Without going into subsequent correspondence, that explanation remained the position of ACP and was repeated in the answer it later filed.
18. Proceedings were issued on 22nd August, 2008. Two things then happened on 17th September, 2008. Firstly Ozannes, on behalf of ACP, sent Bedell Cristin, on behalf of the plaintiffs, an extensive tax questionnaire prepared by the auditors to be completed by the plaintiffs. Secondly, later that day, Travers Smith delivered to S J Berwin the share certificates without explanation or reservation. Thus, the plaintiffs had received that which they were claiming. It would appear from ACP's answer, filed subsequently, and later correspondence that the catalyst for the delivery of the shares may have been Article 50 of the Companies (Jersey) Law 1991, which makes it an offence not to deliver certificates in respect of shares allotted or transferred within two months.
Submissions
19. Mr Cadin sought costs for the plaintiffs on an indemnity basis. He pointed out that the rules of the scheme specifically provided for tax issues to be resolved prior to the issuing of the shares. In this case, ACP had received clearance from the auditors in accordance with the rules and issued the shares which then became the absolute property of the plaintiffs. Under rule 6.3.2 the certificates then had to be delivered to the plaintiffs "as soon as reasonably practicable".
20. If ACP had concerns about the tax position and the answers given by the plaintiffs to the admittedly simple questionnaire prepared by the auditors, then it should have raised them before allowing the shares to be issued. It was using its possession of the certificates for the improper purpose of coercing the plaintiffs into providing information through the second extensive questionnaire to which it had no right. Its conduct was so unreasonable as to warrant an award of indemnity costs.
21. Mr Temple made submissions as follows:-
(i) It was an implied term of the schemes that the plaintiffs would provide timely, accurate and truthful responses to all questions received from the tax advisers and the auditors concerning tax liabilities. He argued that the plaintiffs were in breach of this implied term and that this entitled ACP to withhold the share certificates. He submitted (although not pleaded) that the obligation of ACP under the rules of the schemes to deliver the certificates "as soon as reasonably practicable" gave it the right in law to withhold the certificates pending settlement of any tax issues.
(ii) He referred to rule 11.2 of the schemes relating to disputes which provides as follows:-
"The Remuneration Committee shall determine all disputes relating to the Plan or the interpretation of the Rules and its decision shall be final and binding on all parties".
He argued (although this was not pleaded) that the withholding of the certificates was a dispute relating to the interpretation of the rules (i.e. whether ACP was entitled to retain the certificates after the shares had been issued) and that the plaintiffs were bound to refer that dispute to the Remuneration Committee as opposed to issuing proceedings. The Remuneration Committee is a committee of the board of directors of ACP.
(iii) Whilst acknowledging the requirement under the rules for tax liabilities to be dealt with before the issuing of shares, he submitted that ACP was bound by the resolutions passed by the board on 16th July, 2008 and therefore had no option other than to issue the shares. The Company Secretary, he said, had to comply with those resolutions as she did later on 29th July, 2008, when she arranged for the shares to be issued and that the new directors had no power to require otherwise.
(iv) The plaintiffs should have been aware that under the provisions of Article 50 of the Companies (Jersey) Law 1991, ACP was bound to deliver the certificates within two months and therefore the issuing of proceedings was premature and unnecessary.
(v) The proceedings were ill conceived, over aggressive and disproportionate and reasonable requests for the proceedings to be delayed pending the investigation of the auditors had been rejected out of hand. Furthermore, an order for costs would prejudge ACP's case and in particular its claim as to an implied term.
Decision
22. The parties reminded me of the principles to be applied in relation to costs as set out by Page, Commissioner, in Watkins and Connell v Egglishaw [2002] JLR 1 and the grounds upon which the Court may make an indemnity order for costs summarised by the Court of Appeal in O'Brien v Marett [2008] JCA 178 as follows:-
"71. A court may make an indemnity costs order only where there has been some culpability, some abuse of process such as deceit, underhanded or unreasonable behaviour, abuse of court procedures, of the submission of voluminous and unnecessary evidence. There are many examples in decided cases of the application of these broad principles - see Dixon, Richardson and Reed Investments Ltd v. Jefferson Seal Ltd [1998] JLR 47, at pp 52-53, Macon v. Quérée [2001] JLR 187, and Jones v. Jones (No 2) [1985-86] JLR 40, noting the reference to "some special or unusual feature" to justify the award of indemnity costs. There are also examples of cases where the court has made an indemnity costs order, even in the absence of culpability or abuse of process, such as Reid Minty (a firm) v Taylor [2001] EWCA Civ 1723, [2002] 2 All ER 150, relying on the court's general discretion, in England and Wales, under CPR Rule 44.3."
23. In the affidavit of John David Chapman, sworn on behalf of ACP, he stated that the issuing of proceedings by the plaintiffs was "a totally unnecessary and aggressive over reaction. I can only assume that it was a fit of pique resulting from the fact that they had been removed from office by the shareholders."
24. I disagree with these sentiments. The unlawful retention of another person's property is a serious matter. In this case the shares were worth some £8M and were issued at a time of considerable market turbulence. As far as the plaintiffs were concerned they were entitled to the certificates and it was perfectly reasonable for them to have recourse to legal proceedings when they were wrongfully (in their view) withheld.
25. Because the certificates have now been delivered there is nothing under the first part of the claim to be determined or judged by the Court other than the issue of costs and for that purpose I do not have to adjudicate on the merits of ACP's defence as pleaded or as submitted by Mr Temple at the costs hearing. The fact of the matter is that ACP decided to retain the share certificates in its own interests. It was given a clear warning that failure to deliver them would result in legal proceedings being issued. It was being advised by Travers Smith and would have been aware of the risk as to costs if proceedings were issued. Notwithstanding that warning it elected to take that risk and withheld the certificates. After proceedings had been issued it then delivered the certificates without explanation or reservation. By so doing it chose not to test its right to retain the share certificates before the Court. There is no escaping the conclusion that the plaintiffs have therefore succeeded in their claim for the delivery of the share certificates and should receive their costs.
26. I reject the assertion that in awarding costs I am in some way pre-judging the remaining issues before the Court, namely the plaintiffs' claim for damages and ACP's counter-claim. By awarding costs I am merely reflecting the fact that because the certificates have now been delivered by ACP, the plaintiffs have succeeded in that part of their action, without the court having to determine any of the pleaded issues.
27. However, I do not accept that ACP should be ordered to pay costs on the indemnity basis. There has been no abuse of the court process by ACP. Indeed it has not used the court process at all, save for filing an answer and counter-claim after the share certificates had been delivered. I accept that ACP had a genuine concern as to the answers given by the plaintiffs in the questionnaire and wished to have the matter further investigated. By retaining the share certificates, it was acting in its own interests, but I do not regard its conduct as so unreasonable as to constitute a special or unusual feature justifying indemnity costs.
28. Taking all the circumstances into account, I determine that justice is done between the parties by awarding the plaintiffs their costs on the standard basis in respect of the first part of their claim up to and including this hearing and I so order.
Authorities
Companies (Jersey) Law 1991.
Watkins and Connell v Egglishaw (2002) JLR 1.
O'Brien v Marett [2008] JCA 178.