Jersey Unreported Judgments

Companies - reasons for dismissal of representor's application for an order under Article 143.

[2012]JRC097

Royal Court

(Samedi)

14 May 2012

Before     :

J. A. Clyde-Smith, Esq., Commissioner, and Jurats Fisher and Milner.

 

Advocate S. J. Young for the Representor.

Advocate J. D. Kelleher for the Second Respondent.

judgment

the commissioner:

1.        On 6^th February, 2012, the Court dismissed the representor's application under Article 141 of the Companies (Jersey) Law 1991 ("the Companies Law") for an order under Article 143 and we now give our reasons. 

2.        The second respondent, Wharf Land Investments (Jersey) Limited ("the Company") was incorporated in Jersey on 7^th September, 2006, as an investment vehicle to acquire the freehold interest in a substantial site in England for the purposes of development.  The Company was owned initially by an English incorporated company, Wharf Land Investments Limited ("Wharf Land"), which was in turn owned by Douglas John Maggs ("Mr Maggs"), a well-known property investor.  

3.        Funds to purchase the site were raised from a number of investors, one of whom was the representor ("Prestigic").  Investors acquired a minimum of four units of £25,000 each comprising one issued share in the Company and 24,999 loan notes of £1 each.  Prestigic holds 2.84% of the shares in the Company and associated loan notes.  The remaining shareholders in the Company have been convened to these proceedings, but their views having been canvassed at an EGM of the Company held on 11^th October, 2011, they did not participate in the hearing. 

4.        The site was acquired by the Company for £23,158,144 (including stamp duty and legal professional fees) on 11^th December, 2006, using a combination of shareholder equity and bank financing. 

5.        The project to develop the site is complex, not assisted by the advent of the recession in England and is still in the planning phase.  The Company had a banking facility of some £9.9M, which had been extended to February 2012, and negotiations for its further extension were in progress at the time of the hearing.  The Company had a bank balance of some £397,000.  The application therefore came at a critical time for the Company. 

6.        The first respondent, JTC Management Limited ("JTC") carries on a trust company business in Jersey and provides directors, a company secretary and company administration services to the Company. 

7.        On 3^rd January, 2007, the Company entered into a property management services agreement with Wharf Land, pursuant to which Wharf Land acts as property adviser to the Company and is entitled to 50% of the profits of the Company, net of certain expenses.  Wharf Land is not an investor or shareholder in the Company; its only interest being through this agreement. 

Article 141

8.        Article 141(1) of the Companies Law is in the following terms:-

"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 the member) 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."

9.        In its representation Prestigic raises three complaints, namely, certain payments made by the Company, the level of the fees charged by JTC and the lack of an audit, which it submits showed that the Company's affairs are being or have been conducted in a manner which is unfairly prejudicial both to its interests and the interests of the members generally.  As Mr Young for Prestigic made clear, it is the payments that lay at the heart of the application. 

The payments

10.      Between 12^th February, 2007, and 24^th September, 2008, the directors of the Company authorised payments to a number of entities totalling £1,522,050, for which there is no apparent justification (bar one relatively small payment) beyond the invoices.  The largest element, namely £1,012,501, was paid to a Gibraltarian company named Shoehorn Limited, since dissolved, on invoices which referred to commission for corporate finance services on the acquisition of the site, when there is apparently no record of the Company receiving any such services.  Other payments have been made to entities apparently associated with Mr Maggs, when the information memorandum given to investors provided that there would be no such dealings.  

11.      The position of the directors, as made clear in the affidavit of Philip Burgin ("Mr Burgin") a group director of JTC and a director of the Company, is that the payments were made in good faith and in reliance on Wharf Land's implicit representations that they were bona fides and properly due.  Beyond the invoices, the directors are unable therefore to provide any further information; that must come from Wharf Land. 

12.      These payments were included in the financial statements of the Company for the period 7^th September, 2006, to 31^st July, 2007, (and subsequently) under the heading "Commissions paid".  As Adrian Richard Goldsmith ("Mr Goldsmith"), a director of Prestigic, makes clear in his affidavit of 9^th June, 2011, he had been pressing the Company unsuccessfully for some three years for a full explanation.  The Company has in turn been pressing Wharf Land but to no avail. 

13.      It is alleged by Prestigic that in authorising these payments the directors acted in breach of their fiduciary and statutory duties to the Company to act honestly and in good faith in the best interests of the Company and have failed to exercise the care and skill of a reasonably prudent person in comparable circumstances.  At the hearing, Mr Young made it clear that it was not being alleged that the directors had acted dishonestly or in bad faith or that they or JTC had benefited in any way from the payments. 

14.      As we shall see shortly, the overwhelming majority of the shareholders have resolved that the payments were made properly and in the interests of the Company.  

Fees

15.      In its amended representation, Prestigic pleads further that "It appears that the Company has likely lost monies taken by JTC in fees which fees ought properly to be the subject of independent inquiry".  In its particulars of claim, it asserts that the directors of the Company, for whom JTC is vicariously liable, are liable to account for the fees, or such part of them as are determined to be repayable, by reason of the payments made in breach of their duties.  The total fees from 7^th September, 2006, to December 2010 amount to in excess of £425,000, which include charging the Company for dealing with the requests made by Mr Goldsmith for an explanation as to the payments.  Mr Goldsmith asserts that Mr Burgin told him that JTC would absorb itself the fees in dealing with his requests.  Mr Burgin denies any such agreement.  In its prayer, Prestigic seeks an inquiry into what fees JTC should properly have charged for the provision of directors and administration services to the Company. 

16.      As acknowledged by Mr Young, the Court had no evidence to show to what extent, if any, excessive fees have been charged by JTC or what level of fees would, objectively, be reasonable for the work undertaken, the scale of which we had no ability to assess.  Mr Young did not refer to this complaint in his skeleton argument and devoted little time to it in his oral submissions.  In reality, this complaint could only be regarded as ancillary to the complaint in relation to the payments.  

17.      Mr Young did question in passing the arrangement by which JTC's invoices are first submitted to Wharf Land for approval before being paid out of Company funds, an arrangement that apparently goes back to the time when Wharf Land was the only shareholder.  It was not suggested, and it would not seem to us to be practicable, for JTC's invoices to be submitted to all of the shareholders for approval before payment and the shareholders have an opportunity to challenge the same when the accounts are put before them at the AGM.  In the circumstances it is probably the only practical arrangement that could be put in place to ensure that there was outside scrutiny of the fees rendered by JTC; Wharf Land through its profit share having as much of an interest as the shareholders in ensuring that they are reasonable.  

Audit

18.      Prestigic alleges that the directors of the Company have failed to have the accounts of the Company audited as it says is required by Article 31.2 of the Articles of Association, and that if they had done so, the issue of the payments would have been identified.  The payments are, of course, disclosed in the accounts and the issue was identified by Mr Goldsmith in early course, but it is no doubt fair to say that they might have been raised earlier by an auditor, although an auditor would have no greater power to obtain an explanation from Wharf Land than the directors.  

19.      Whether an audit is required is a discreet issue of interpretation of the Articles and Mr Kelleher for the Company made it clear that if the Court rejects its interpretation (that no audit is required) then it will make the necessary arrangements to have both the historic accounts and the accounts going forward audited.  We will come to the issue of interpretation shortly.  

Article 143

20.      Article 143 of the Companies Law goes on to provide:-

"143    Powers of court

(1)       If the court is satisfied that an application under Article 127E, 127S, 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; and

(d)       provide for the purchase of the rights 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 accounts accordingly."

21.      In its amended representation, Prestigic sought an order under Article 143(2)(c) authorising it to bring proceedings against JTC in the name of the Company, seeking the following relief, namely, an inquiry as to what sums have been lost by the Company by reason of:-

(i)        the breaches of fiduciary and/or statutory duty owed to the Company by the directors provided by JTC in causing or procuring the payments or all or any of them; and

(ii)       the taking of any unauthorised or unwarranted fees by JTC. 

And an order for payment to the Company by JTC of such sums as shall be found due and owing to the Company for the taking of such an inquiry.  

Shareholder approval and ratification

22.      The financial statements of the Company for the period to 31^st July, 2007, for the financial year to 31^st July, 2008, were approved by the shareholders at an EGM held on 21^st September, 2009.  Following a member's requisition by Prestigic, resolutions were put to the shareholders at an AGM held on 14^th March, 2011, directing the directors to make inquiries with Wharf Land in relation to the payments and appointing Kingston Smith as auditors to audit the accounts and to investigate the payments and fees.  These resolutions were rejected by 83.89% of the shareholders present in person or by proxy.  We were informed that 100% of the shareholders were present or represented at that meeting.  Resolutions approving the financial statements for the financial year to 31^st July, 2009, and to 31^st July, 2010, were passed by 83.89% of the shareholders. 

23.      In the case of Pacific Investments Limited-v-Christensen & Others [1995] JLR 250, where a minority shareholder sought to bring proceedings and other relief as a derivative action and/or under Article 141 and 143 of the Companies Law in respect of alleged corporate wrongdoing by its directors and majority shareholders, the Court expressed the view that in an action brought under Article 141, the views of the independent shareholders should in any event be heard. 

24.      Accordingly, following the making of Prestigic's application on 9^th June, 2011, a further EGM of the shareholders was convened for 12^th October, 2011.  The shareholders were provided with an explanatory letter from Carey Olsen and were given, inter alia, (a) a copy of Carey Olsen's letter of 23^rd September, 2011, to Wharf Land, setting out in detail the information required in relation to the payments, (b) a copy of Carey Olsen's letter of 10^th October, 2011, to Mr Young, asking for the further evidence that Mr Goldsmith claimed to have of wrongdoing in relation to the payments and (c) copies of the invoices and all supporting documentation relating to the payments held by the Company.  There was no criticism made of the explanation given by Carey Olsen or the information provided by the Company to the shareholders. 

25.      Wharf Land had not provided the information requested by Carey Olsen (nor had Mr Goldsmith produced any evidence of wrong doing) and in the light of this the shareholders were asked to consider adjourning the meeting pending the provision by Wharf Land of that information.  That motion was not passed. 

26.      The first resolution put to the shareholders (98.10% of whom were either present or represented by proxy) was that the Company oppose and that the directors be directed to oppose Prestigic's application (such a direction required a special resolution under the articles of association of the Company).  That resolution was passed by 83.58%. 

27.      There were four further resolutions put to the meeting as follows:-

(i)        Second resolution

That the making of the payments was, at the time that each of the payments were made, in the best interests of the Company and a proper exercise of the powers of the Company and that the same be approved and ratified, save that such approval and ratification shall not prejudice any claims the Company might have against any person to whom such payments were made. 

That resolution was passed by 83.58%. 

(ii)       Third resolution

That the authorisation and/or making on behalf of the Company of the payments, at the time that each payment was authorised or made, was in the best interests of the Company and a proper exercise of the powers of the Company and that the same be approved and ratified, save that such approval and ratification shall not prejudice any claims the Company might have against any person to whom such payments were made. 

That resolution was passed by 83.58%. 

(iii)      Fourth resolution

That the reliance by the directors on, and the directors acting (directly or indirectly) upon, the advice of Wharf Land, pursuant to the property management agreement, were appropriate and reasonable and in the best interests of the Company and that such reliance be approved and ratified save that such approval and ratification shall not prejudice any claims the Company might have against any person to whom such payments were made. 

That resolution was passed by 83.58%. 

(iv)      Fifth resolution

That all alleged acts and alleged omissions of the directors described in Prestigic's amended representation were at the relevant time in the best interests of the Company and in each case (as applicable) was a proper exercise of the powers of the Company and/or the directors (as applicable) and that such conduct be approved and ratified save that such approval and ratification shall not prejudice any claims the Company might have against any person to whom such payments were made. 

That resolution was passed by 78.75%. 

28.      Mr Young did not pursue the suggestion made by Mr Goldsmith in his affidavit and contained in Mr Young's skeleton argument that the shareholders were allied to Wharf Land or Mr Maggs and were not therefore acting independently.  We were provided with a number of affidavits from shareholders making it clear that there was no evidence to support such a suggestion. 

29.      We should make it clear that according to the minutes of a meeting held by Mr Goldsmith and others with Mr Maggs on 23^rd November, 2009, Mr Maggs had categorically denied that either he or any co-director of Wharf Land had in any way benefited from the payments but he refused to divulge the identity of the individual who had benefited from the £1M or so payment made to Shoehorn.  The recipient wished to retain anonymity, which he said should be respected given the sensitivity of the brokering of the deal for the site. 

Commercial decision

30.      It was submitted by Mr Kelleher that the shareholders had made a commercial decision that notwithstanding what he conceded was an unsatisfactory position in relation to these historical payments, it was not appropriate for action to be taken against JTC, although the ability for action to be taken against the recipients of the payments at some stage in the future had been preserved.  In essence, the investors he said had invested in Mr Maggs without whose skills there would be no project.  Any action against JTC would inevitably result in the resignation of the current directors, and to Wharf Land being drawn in as a third party, as well as causing a drain on the Company's limited cash resources, as it would have to indemnify Prestigic in relation to the litigation costs.  The shareholders, he said, had decided that it was in their interests to focus on the development of the site, to recoup their investment and to obtain profit.  

31.       Affidavits from other shareholders bear this out.  For example, Paul Portz, a director of a private equity fund, Ecsop Limited, with 37.92% of the share and associated loan notes, (representing an investment of £8M, against the investment of £600,000 by Prestigic) said this at paragraph 10 of his affidavit:-

"Ecsop Limited's view ... on this particular matter, is that the interests of the Company are preserved by focusing all of the Company's resources on creating value for its shareholders by developing the [site] rather than being tied up in expensive, time-consuming and distracting litigation about historical payments."

32.      The inability of the directors to justify these payments made, we accept, at the instance of Wharf Land, and the refusal of Wharf Land to explain why they were properly due by the Company, is undoubtedly prejudicial.  However, for the application to succeed, Prestigic must establish that the conduct of which it complains is not only prejudicial but unfair: one element without the other will not be sufficient.  As Neill LJ commented in Re Saul D Harrison & Sons plc (1994) B.C.C. 475 at 499:-

"The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests ...".

33.      We are concerned here with whether civil proceedings should be issued in the name of the Company against JTC for an inquiry into and potentially recovery of the sums paid away in relation to the payments.  The overwhelming majority of the shareholders have decided that no such proceedings should be issued.  Is it unfair that Prestigic, a minority shareholder of some 2.84%, should be bound by the decision of the majority?

The law

34.      Mr Young relied solely on the Privy Council decision in Gamlestaden Fastigheter AB-v-Baltic Partners Limited, Boleat, De Figueiredo and Bailey [2007] JLR 393 for the proposition that Prestigic's application fell within the discretion afforded to the Court under Articles 141 and 143 of the Companies Law.  However, Gamlestaden was concerned with a strike out application and it was held, following Re Chime Corp. Limited [2004] 7HKCFAR 546 (to which we will return later), that no objection could be taken at the strike out stage to Gamlestaden's prayer in its Article 141 application for an order that the directors pay damages to Baltic for breach of duty.  The important issue addressed was whether Gamlestaden should be precluded from obtaining relief because of Baltic's insolvency, the Privy Council finding that it was not so precluded. 

35.      Gamlestaden does not assist on the criteria the Court should apply to the granting of an application under Article 141.  Mr Kelleher submitted that in its application Prestigic was seeking relief for alleged past misconduct of the directors (authorising the payments) as opposed to bringing to an end mismanagement of the Company.  Where an applicant seeks to bring an action on behalf of the Company in relation to past misconduct rather than to bring mismanagement to an end the claim ought he said to be by way of a common law derivative action as opposed to an unfair prejudice action. 

36.      Articles 141 and 143 of the Companies Law are clearly drawn from and are substantially identical to sections 459 and 461 of the Companies Act 1985.  The Jersey courts have developed a body of case law which draws heavily on English case law in this sphere and it is clear that the approach of both jurisdictions under these statutes is broadly similar (see Gamlestaden). 

37.      The principles underlying the unfair prejudice remedy were summarised in the decision of the English Court of Appeal in Grace-v-Biagioli, Titanium Electrode Products Ltd. Re [2006] BCC 85 following the speech of Lord Hoffman in the House of Lords decision of O'Neill-v-Philips [1999] 1 WLR 1092:-

"One can deduce the following principles:-

(1)       The concept of unfairness, although objective in its focus, is not to be considered in a vacuum.  An assessment that conduct is unfair has to be made against the legal background of the corporate structure under consideration.  This will usually take the form of the articles of association and any collateral agreements between shareholders, which identify their rights and obligations as members of the company.  Both are subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable;

(2)       It follows that it will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration.  Unfairness may, to use Lord Hoffmann's words, 'consist in a breach of the rules or in using rules in a manner which equity would regard as contrary to good faith'; see p. 1099A; the conduct need not therefore be unlawful, but it must be inequitable. 

(3)       Although it is impossible to provide an exhaustive definition of the circumstances in which the application of equitable principles would render it unjust for a party to insist on his strict legal rights, those principles are to be applied according to settled and established equitable rules and not by reference to some indefinite notion of fairness;

(4)       To be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds as formerly required under s.210 of the Companies Act 1948;

(5)       A useful test is always to ask whether the exercise of the power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore.  Such agreements do not have to be contractually binding in order to found the equity;

(6)       It is not enough merely to show that the relationship between the parties has irretrievably broken down.  There is no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer exist.  It is, however, different if that breakdown in relations then causes the majority to exclude the petitioner from the management of the company or otherwise to cause him prejudice in his capacity as a shareholder."

38.      The scope and extent of the statutory remedies for unfair prejudice can only be considered within the parameters of the existing established principles in relation to the management of companies; this point is well made in Hollington QC, Shareholders Remedies (6^th ed.) at paragraph 7-10 drawing on English case law:-

"It is now clear, therefore, that the ambit of the statutory remedy can only be properly understood in the context of the traditional and established principles of law and equity developed by the courts since the middle of the 19th century with regard to commercial relationships including both companies and partnerships, that is to say the principles of internal management and the legal bargain between shareholders, majority rule, the rule in Foss v Harbottle and its exceptions, and the doctrine of 'fraud on a minority' ..."

39.      In Re Saul at page 489, Hoffmann LJ, as he then was, referred to section 459 enabling the court in appropriate cases to outflank the rule in Foss-v-Harbottle (1834) 2 HARE 461 (commenting later that there was often common sense in the rule) but as Mr Kelleher pointed out there is a developing line of authority where the courts of England and Wales and Hong Kong (under equivalent legislation) have sought to distinguish between proceedings where the essence of an applicant's complaint is of unfairly prejudicial conduct of the company's affairs and proceedings where the substance of the petitioner's complaint is in relation to breaches of duty or other misconduct which are actionable by the company. In other words, it distinguishes between relief for mismanagement of the affairs of the company and relief for misconduct.  The emerging position, which Mr Kelleher submitted the Court should adopt, is that only actions in relation to the former are properly within the ambit of the unfair prejudice provisions, and that actions in relation to the latter should properly be made by way of a derivative action. 

40.      This distinction is made clear in the judgment of Millet J in Re Charnley Davis Ltd (No 2) [1990] BCC 605.  The petitioner claimed that the company's administrator had breached his duty of care by selling the company's business at an undervalue and was therefore liable to pay compensation to the company.  On the facts, Millet J found that there was no breach of duty, but went on to consider, obiter, the relationship between derivative actions and unfair prejudice.  He said this at page 625:-

"...the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it.  It is a matter of perspective.  The metaphor is not a supermarket trolley but a hologram.  If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter.  There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company's affairs.  It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong.  In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought."

41.      This passage from Millet J's judgment in Re Charnley Davis was cited with approval by Lord Scott of Foscote, sitting as a judge in the Hong Kong Final Court of Appeal, in Chime at page 571:-

"Millet J in Re Charnley Davies Ltd (No 2) concluded that the essence of the petitioners' complaint was not the unlawfulness of the respondent's conduct, but its unfairness and its prejudicial disregard of their interest.  They wanted to be bought out, not to achieve payment of compensation to the company: "They wanted relief from mismanagement, not a remedy for misconduct" (p. 784).  Millet J did not question the court's jurisdictional ability on an unfair prejudice petition to make an order for payment of compensation, or for restitution to be made, to the company.  What he did question, and in my respectful opinion rightly so, was the propriety of seeking such an order on an unfair prejudice petition if the essence of the complaint was not of mismanagement of the company but of misconduct by the director.  In such a case, a derivative action was, in his view, the appropriate vehicle for relief."

Lord Scott of Foscote gave the judgment of the Privy Council in Gamlestaden in which Chime was followed. 

42.      The distinction between a remedy for misconduct and relief from mismanagement was also considered in Waddington Ltd-v-Chan [2008] 11 HKCFAR 370, a case involving alleged mismanagement of a subsidiary company by its parent.  Lord Millet, sitting on the Hong Kong final Court of Appeal stated at paragraph 77:-

"...while there may be some overlap between such proceedings [for unfair prejudice] and the derivative action they serve essentially different functions.  Unfair prejudice proceedings are concerned to bring mismanagement to an end; derivative actions are concerned to provide a remedy for misconduct: see Charnley Davis (No.2) [1990] BCLC 760; Re Chime Corp Ltd (2004) 7 HKCFAR 546.  While the Court may have jurisdiction in the strict sense on a petition [for unfair prejudice] to order payment of compensation to the company, the derivative action is the proper vehicle for obtaining such relief where the plaintiff's complaint is of misconduct rather than mismanagement: see Re Chime Corp Ltd. at p. 571."

43.      We accept this developing line of authority and the emerging position, namely, that we should distinguish between relief for mismanagement of the affairs of the Company and relief for misconduct and that it is only actions in relation to the former that fall properly within the ambit of the unfair prejudice provisions.  Indeed, we note that in Chime, Lord Scott of Foscote described the use of an unfair prejudice petition to circumvent the rule in Foss-v-Harbottle where the nature of the complaint is misconduct rather than mismanagement as an abuse of process. 

44.      Mr Young conceded that he needed to circumvent the rule in Foss-v-Harbottle as the application did not come within any of the exceptions to it.  In general, the rule provides that where a wrong is done to a company, only the company may sue for any loss suffered as a result of the wrong and that an individual shareholder has no standing to sue.  This rule has been applied in Jersey on many occasions (see, for example, Khan-v-Leisure Enterprises [1997] JLR 313).  In order to bring a derivative action, Prestigic would need to establish that it falls within the "fraud on the minority" exception and in the context of this case would need to establish;

(i)        that there is a prima facie case of equitable fraud on the part of the prospective defendant; and

(ii)       that the alleged wrongdoers themselves were in control of the Company and improperly preventing it from bringing proceedings.  

45.      Mr Kelleher went into these exceptions at some length but in the light of Mr Young's acknowledgement that Prestigic would not be able to establish that it falls within the exceptions, it is unnecessary for us to do so.  Suffice it to say that the alleged wrongdoers, the directors, who are in control of the Company are not improperly preventing it from bringing proceedings against JTC as demonstrated by the meetings held on 14^th March, 2011, and 12^th October, 2011.  The issue has been properly placed before the shareholders (who are all sophisticated investors) and who have resolved overwhelmingly to oppose Prestigic's application.  No criticism has been made of the conduct of those meetings which were attended by Mr Goldsmith. 

46.      Furthermore, whether or not the directors acted negligently or in breach of their duties as directors, no allegations of dishonesty or bad faith are made against them and it is not alleged that either the directors or JTC benefited in any way from the payments.  In other words it is not alleged that they acted fraudulently however wide and equitable a meaning one ascribes to that term (see Khan at page 322). 

47.      It is true that JTC has benefited from the fees charged for the administration of the Company but we have no evidence to indicate that any fees have been taken improperly or indeed what proportion of the fees charged might relate to the issue of the payments.  It seems to us that the issue of the fees can only be addressed if a finding against the directors is made. 

48.      A further hurdle which Prestigic faces is that the fraud on minority exception does not apply, and a derivative action is not available, where the wrong complained of is one that has been, or is capable of being, ratified by a simple majority of shareholders.  Ratification is not possible where it would amount to an expropriation to the majority; where it would allow the majority to oppress the minority.  This was expressed in the judgment of Mellish LJ in MacDougal-v-Gardiner (1875) 1 Ch 13 at 25-26:-

"In my opinion, if the thing complained of is a thing which in substance the majority of the company is entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes ....Of course if the majority are abusing their powers, and are depriving the minority of their rights, that is an entirely different thing, and there the minority are entitled to come before this Court to maintain their rights; but if what is complained of is simply that something which the majority are entitled to do has been done or undone irregularly then I think it is quite right that nobody should have a right to set that aside, or to institute a suit in Chancery about it, except the company itself."

49.      It is also expressed in the judgment of the Privy Council in Cook-v-Deeks [1916] 1 AC 554 at 56:-

"Even supposing it not be ultra vires of a company to make a present to its directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves.  This would be to allow a majority to oppress a minority." [Our emphasis]

50.      Neither the directors nor JTC own any shares in the Company.  The actions of the directors have been ratified by the shareholders who are independent of them.  There is no expropriation to the majority of shareholders or oppression of the minority by them.  In his skeleton argument Mr Young pointed to Article 13.10(c) of the articles of association of the Company which provides that shareholder approval of related party transactions requires a 75% majority, but as Mr Kelleher has pointed out, all of the resolutions passed to ratify the directors' actions were passed by a majority of greater than 75%. 

Decision

51.      Mr Young maintained that we were concerned with a case of mismanagement of the affairs of the Company which was ongoing, but we disagreed.  At the heart of the case is the complaint that some five years ago, ten payments were authorised by the directors at the instance of Wharf Land, which the directors cannot (in the main) justify because they relied on Wharf Land, and Wharf Land have refused to explain; a state of affairs which we accept is of legitimate concern.  Applying Charnley however, the matter can be addressed by the remedy provided by law for the wrong, namely the issuing of proceedings against JTC.  The complaint is one of misconduct simpliciter.  It should, therefore, have been brought by way of derivative claim.  It was an abuse of process, in our view, for Prestigic to attempt to circumvent the rule in Foss-v-Harbottle, the exceptions to which it did not seek to argue it came within, by the use of an Article 141 application. 

52.      The Court has the jurisdiction in a strict sense to entertain Prestigic's application, but that is not enough.  It is necessary for Prestigic to show that the claim for the remedy in question is one that, as a matter of proper practice, the Court should, if the relevant underlying allegations are made good, grant.  Lord Scott of Foscote referred to this in Chime at page 567 where he quoted from his first instance judgment in the case of Edge-v-Pensions Ombudsman [2000] Ch 602:-

"In its strict sense a reference to the jurisdiction of a court or tribunal is a reference to the type of case that the court or tribunal is capable of entertaining.  A reference to the jurisdiction of a court or tribunal is, however, often a reference to the circumstances in which it is proper for a tribunal to entertain a case or to make a particular order".  

53.      Therefore, whilst the Court has jurisdiction in the strict sense to entertain Prestigic's application, because Prestigic seeks relief for alleged misconduct, it should require Prestigic to meet the well established criteria for bringing a derivative action or at the least proceed on the basis that the factors which are relevant to whether Prestigic could bring a derivative action are also relevant to whether or not Prestigic should be able to make an application under Article 141. 

54.      As pointed out by Hoffman LJ in Re Saul at page 488, it is important to bear in mind that fairness in the context of Article 141 is being used in the context of a commercial relationship.  The relationship between Prestigic and the Company is governed by the Articles of Association, which determine the powers of the board and the Company in general meeting.  Everyone who becomes a member of the Company is taken to have agreed to them. 

55.      Prima facie, there would appear to be a cause of action against JTC on the basis that it is vicariously liable for the actions of its directors, but it is a matter for the Company whether it is in its interests to pursue that cause of action.  The need to ascertain the views of the shareholders was stressed in both Pacific Investments and in Chime (at page 576 letter D) and that exercise has been properly undertaken.  The overwhelming majority of the shareholders, exercising their commercial judgement, have resolved that it is not in the interests of the Company for this cause of action to be pursued, and indeed the actions of the directors have been ratified. 

56.      Prestigic with a 2.84% holding and other minority shareholders disagree.  What is fair in these circumstances?  Should the Court itself take a view as to where the commercial interests of the Company may lie and if that view happened to coincide with minority, seek to impose that commercial view upon the majority?  We thought not.  In becoming a shareholder, Prestigic and the other minority shareholders signed up to the principle of majority rule and we saw nothing unfair in them being bound by the clear decision of the majority of their fellow investors as to what was in the best interests of the Company.  This is a case in which the articles of the Company do reflect the understandings upon which the shareholders are associated and accordingly the view of the majority should prevail.  

57.      In short the rule in Foss-v-Harbottle applies; only the Company may bring proceedings against JTC and the overwhelming majority of its shareholders have decided that it should not do so.  Prestigic does not come within any of the exceptions to the rule and is therefore bound by that decision. 

58.      That being the case, the issue of the fees falls away.  Mr Kelleher made submissions to us as to whether Presitigic was a proper plaintiff in any proceedings brought on behalf of the Company but in the light of our findings we had no need to address that issue.  That left us with the issue of the audit, to which we now turn. 

Audit

59.      The Company was incorporated as a private company, but on 12^th October, 2006, adopted a new memorandum and articles of association.  Clause 3 of the memorandum states that it is a public company and Article 31.2 of the articles of association under the heading "Accounts and Audits" provides:-

"31.2   The Company shall appoint an auditor to examine the accounts and report thereon in accordance with the Law."

60.      The Company's interpretation of this article is that an audit is only required if, and only if, it is required under the Companies Law.  Article 113(1) of the Companies Law provides:-

"A company must appoint an auditor to examine and report in accordance with this Law upon its accounts if -

(a)       it is a public company;

(b)       its articles so require; or

(c)       a resolution of the company in a general meeting so requires."

61.      There has been no resolution of the shareholders requiring an audit; on the contrary, a resolution seeking an audit was rejected on 14^th March, 2011.  Mr Burgin states at paragraph 63 of his affidavit that notwithstanding the memorandum, it had always been assumed that this was a private company and that an audit was unnecessary; indeed, none of the financial statements have been audited, which is consistent with that assumption. 

62.      Mr Kelleher cast some doubt on whether the decision to become a public company on 26^th October, 2006, was valid, in that at that time, there was only one shareholder, Wharf Land, and Article 17.1 of the Companies Law provides that:-

"A private company which has at least two members may become a public company by altering its memorandum to state that it is a public company." (Our emphasis)

63.      There is no need for us to resolve that issue because, in our view, an audit is required under Article 31.2 of the articles of association and this as a matter of construction.  The requirement to appoint an auditor is clear.  "The Company shall appoint an auditor ....".  (Our emphasis).  The purpose of such an appointment is then set out, namely for the auditor to examine the accounts and report thereon in accordance with the Companies Law, namely, in accordance with Articles 110 and 111 of the Companies Law which set out the reporting and other duties and powers of an auditor.  Articles of private companies where an audit is not a requirement would typically provide that "The Company may appoint auditors to examine the accounts and report thereon in accordance with the Law".  (Our emphasis). 

64.      The Company has made it plain that if its interpretation is found to be incorrect, it will arrange to have the past and future accounts of the Company audited, but we accept that this is an issue of interpretation, and not a ground for alleging mismanagement of the Company.  There is no evidence that the directors and the shareholders or some of them intentionally avoided the requirement for an audit in order to conceal the payments.  The payments have always been disclosed in the financial statements of the Company and it was that disclosure that led to the issue being raised by Mr Goldsmith. 

65.      In conclusion, and for all the reasons set out above, we rejected the application.  

Authorities

Companies (Jersey) Law 1991.

Companies Act 1985.

Hollington QC, Shareholders Remedies (6th ed.).

Pacific Investments Limited-v-Christensen & Others [1995] JLR 250.

Re Saul D Harrison & Sons plc (1994) B.C.C. 475.

Gamlestaden Fastigheter AB-v-Baltic Partners Limited, Boleat, De Figueiredo and Bailey [2007] JLR 393.

Re Chime Corp. Limited [2004] 7HKCFAR 546.

Grace-v-Biagioli, Titanium Electrode Products Ltd. Re [2006] BCC 85.

O'Neill-v-Philips [1999] 1 WLR 1092.

Foss-v-Harbottle (1834) 2 HARE 461.

Re Charnley Davis Ltd (No 2) [1990] BCC 605.

Waddington Ltd-v-Chan [2008] 11 HKCFAR 370.

Khan-v-Leisure Enterprises [1997] JLR 313.

MacDougal-v-Gardiner (1875) 1 Ch 13.

Cook-v-Deeks [1916] 1 AC 554.

Edge-v-Pensions Ombudsman [2000] Ch 602.