Jersey Unreported Judgments

Companies - judgment sought by the plaintiff in default of filing of an answer by the first defendant.

[2014]JRC132

Royal Court

(Samedi)

18 June 2014

Before     :

J. A. Clyde-Smith, Esq., Commissioner, sitting alone.

 

Advocate A. Kistler for the Plaintiff.

Advocate C. J. Swart for the Defendants.

judgment

the commissioner:

1.        The plaintiff seeks judgment in default of the filing of an answer by the first defendant pursuant to Rule 6/6(6) of the Royal Court Rules 2004 as amended. 

2.        The background to this matter is described in the Court's judgment of 5^th June, 2014, ([2014] JRC 124) and for ease of reasoning I will set out that background again. 

3.        The plaintiff ("Consolidated Resources") and the third defendant ("Global Gold") entered into a joint venture agreement on 27^th April, 2011, to form a new joint venture company to conduct and develop mining and exploration rights in two properties in Armenia.  In very broad terms, the parties contributed to the joint venture by Consolidated Resources investing US$5M and Global Gold introducing the mining and exploration rights. 

4.        Pursuant to the joint venture agreement, the parties incorporated the first defendant (which I will refer to as "the joint venture company") in Jersey and entered into a shareholders' agreement on 18^th February, 2012, to regulate their interests in that company.  It was agreed that Global Gold would own 51% and Consolidated Resources 49% of the equity in the joint venture company, but the powers of the majority shareholder were heavily proscribed.  Each party can nominate one director for every 20% of the shares held (in practice, only one director has been nominated by each party so that there are two directors).  Both directors have to be present for a meeting of the board to be quorate.  Even then, there is a comprehensive list of matters that require the unanimous approval of the directors. 

5.        In addition, the agreement provides for a schedule of "Fundamental Matters" that require the approval of each nominated director.  Under the terms of the shareholders' agreement, there is therefore very little that the joint venture company can do without the approval of the two directors nominated by the parties, but it is not so restricted under its articles of association.  

6.        The mining and exploration activities are carried on by two Armenian entities owned through a wholly owned holding company incorporated in Delaware.  

7.        The second defendant, Mr Van Krikorian ("Mr Krikorian") is the chairman and chief executive officer of Global Gold (which has some 1,300 shareholders and whose shares can be traded over the counter) and he was appointed executive chairman of the joint venture company (in addition to being the director nominated by Global Gold).  As such he is the chief executive of the joint venture company in managing its operations.  The other director, nominated by Consolidated Resources, is Mr Caralapati Premraj.  

8.        Mr Krikorian asserts that it was Mr Premraj (with another) who was held out to be the beneficial owner of Consolidated Resources, but Mr Joseph Borkowski has made the affirmations in favour of Consolidated Resources and states that he is the sole director.  It would appear to be the relationship between Mr Krikorian and Mr Borkowski that has broken down. 

9.        The history of the joint venture is convoluted, but for the purposes of this judgment, I would refer to the following:-

(i)        On 17^th January, 2012, Consolidated Resources and the joint venture company entered into a Note Instrument Agreement pursuant to which Consolidated Resources claims to have advanced US$2,197,453 to the joint venture company (quite separate from the US$5M invested at the outset) for which Convertible Loan Notes to the value of US$1.5M have been issued.  That agreement gives Consolidated Resources additional contractual rights over the joint venture company inter alia preventing the joint venture company from encumbering its assets.  The accounts of the joint venture company for the year ending 31^st December, 2012, also show convertible loan notes having been issued in favour of Global Gold in the sum of $3,571,674, the validity of which are challenged by Consolidated Resources. 

(ii)       In February 2013, it was proposed that the shares of the joint venture company be listed on AIM and each side blames the other for that proposal not coming to fruition. 

(iii)      In September 2013, heads of terms were agreed with an Australian public company Signature Gold Limited ("Signature"), the intention of which was for Signature to acquire the share capital of the joint venture company in return for issuing new shares in Signature to the joint venture company shareholders.  An agreement was entered into on 22^nd November, 2013, but that proposal has not come to fruition for which the parties again blame each other.  The problem appears to have been the inability of Consolidated Resources and Global Gold to agree on the level of debt due to them respectively by the joint venture company for which Signature was going to take responsibility. 

10.      On 10^th March, 2014, Consolidated Resources obtained interim injunctions from this Court against all three defendants restraining the joint venture company from in any way disposing of or encumbering or dealing with or diminishing the value of any of its assets whether they are in or outside of Jersey.  Those injunctions were amended by the Court on 2^nd April, 2014, to allow transactions or arrangements in the ordinary and proper course of business.  The catalyst for Consolidated Resources seeking those interim injunctions is set out in paragraphs 9 - 11 of the Court's judgment of 5^th June, 2014. 

11.      Mr Krikorian and Global Gold applied for those interim injunctions to be lifted on the grounds of material non-disclosure but the Court declined to lift the injunctions for the reasons set out in its judgment of 5^th June, 2014. 

Order of Justice

12.      The claims brought by Consolidated Resources under the Order of Justice can be summarised as follows:-

(i)        A demand against the joint venture company for payment of US$1,670,033.44c being the amount due under the Convertible Loan Notes either issued or which should have been issued (and if issued, to the extent would by now have matured). 

(ii)       A demand against Global Gold for the same sum under the terms of the guarantee entered into by it on 19^th February, 2013, in respect of the obligations of the joint venture company to Consolidated Resources under the Convertible Loan Notes. 

(iii)      Orders under Article 143 of the Companies (Jersey) Law 1991 on the ground that the affairs of the joint venture company are being or have been conducted in a manner which is unfairly prejudicial to Consolidated Resources or in the alternative that the joint venture company be wound up under Article 155.  In particular, orders are sought under Article 143:-

(a)       That the defendants purchase shares of Consolidated Resources in the joint venture company at a price to be assessed or:-

(b)       Consolidated Resources purchase the shares of Global Gold in the joint venture company at a price to be assessed, or

(c)       The defendants to pay damages in a sum to be assessed. 

I will not set out here the particulars of the grounds upon which Consolidated Resources claim that the affairs of the joint venture company have been conducted in a manner which is unfairly prejudicial. 

13.      Consolidated Resources now seeks judgment in respect of the sums due under the Convertible Loan Notes, no answer having been filed by the joint venture company and notice having been given to the Greffier and to the joint venture company pursuant to Rule 6/6(6) of the Royal Court Rules 2004.

Challenge to jurisdiction

14.      According to the Court file there have been two summonses challenging jurisdiction duly issued in this matter.  The first was signed by Advocate Dickinson for the second and third defendants and was dated 27^th March, 2014.  It required Consolidated Resources to appear before the Court on 2^nd April, 2014, to show cause why:-

(i)        the Court should not set aside the interim injunctions and

(ii)       the proceedings against each of the defendants should not be stayed. 

The first part of this summons was heard briefly on 2nd April and then adjourned to 24^th April, 2014, for full argument.  The Court's draft judgment declining to lift the injunctions was issued on 7^th May, 2014, and formally handed down on 5^th June, 2014.  That judgment notes at paragraph 18(i) that the second part of the summons seeking a stay was due to be heard later. 

15.      The second summons was signed by Mr Swart on behalf of all three defendants and was dated 14th May 2014. It required Consolidated Resources to appear before the Court on 25th July 2014 to show cause why "on the application of the second and third defendants" the proceedings should not be stayed and/or the order granting leave to serve the proceedings out of the jurisdiction on Mr Krikorian and Global Gold set aside. 

16.      As a consequence of this Mr Kistler for the plaintiff argues that the joint venture company's challenge to jurisdiction under Rule 6/7(3) contained within the first summons has been withdrawn.  The second summons, although signed by Mr Swart on behalf of all three defendants and seeks a stay in relation to all three defendants, the application was expressly made on behalf of Mr Krikorian and Global Gold. 

17.      Mr Swart did not agree that the joint venture company's challenge to the jurisdiction contained in the first summons had been withdrawn but the apparent confusion arises, he said, out of the difficulties of the joint venture company giving instructions as a consequence of the deadlock and the concern of his firm as to its ability to act for it. 

18.      Mr Kistler's submissions were straightforward.  This is a claim for a liquidated sum against a Jersey company which has been placed on the Pending List.  There is no application under Rule 6/7(3) and therefore the time limits for filing an answer remain in place.  No answer has been filed and due notice has been given of the application for judgment. 

19.      Anticipating that Mr Swart might oppose the application on the ground that the joint venture company was deadlocked as a consequence of the dispute between the shareholders, that ground of objection, he said, was entirely without merit, given that Mr Krikorian continues to purport to act on behalf of the joint venture company in all other regards.  Furthermore, he alleged that Consolidated Resources proposed the appointment of a genuinely independent director, namely Heather Bestwick, who is unconnected with the parties, but Global Gold had declined to sign the written resolution. 

Decision

20.      Whilst Mr Swart's firm is still on the record as acting for the joint venture company, I think the reality here is that they are unable to obtain instructions from it as a consequence of the deadlock between the directors.  I therefore take the view that this company is in effect unable to act in its own defence. 

21.      The matter had been listed to be heard with Jurats, but the parties stood them down shortly prior to the hearing.  This was arguably an error, as it is clear that in considering whether to grant judgment, I am not being confined to points of law or procedure, but am being asked to exercise a discretion at least in part on my assessment of the conduct of the parties. 

22.      Even so, this is not a case where, in my view, judgment should be granted to Consolidated Resources.  This is a joint venture company owned as to 51% by Global Gold and 49% by Consolidated Resources with their shareholdings being regulated by the shareholders' agreement dated 18^th February, 2012.  Section 5.2 of that agreement provides:-

"Section 5.2    Nomination and Election of Directors

(1)       Nomination.    Subject to the remainder of this Section 5.2(1), each of the Shareholders shall be entitled to nominate and have elected one (1) Director for every 20% of the Shares held by such Shareholder (including, for such purposes, its Permitted Transferees).  Pursuant to the immediately preceding sentence, if a Shareholder is entitled to nominate more than one Director, all but one Director nominated by such Shareholder shall be Independent, unless otherwise agreed by the Shareholders.  Any remaining Director(s) to be nominated and elected to the Board of Directors to bring the total number of Directors to five (5) shall be so nominated and elected by a majority vote of the votes cast by the Shareholders present in person or represented by proxy at a meeting of the Shareholde4rs.  Any such remaining Director shall be Independent.  Each member of the Board of Directors shall be qualified to act as a director under the Act."

23.      "Independent" is defined in Section 1.1 as follows:-

"Independent" means a person who is not (i) a Shareholder, other than a Director who has become a Shareholder through the exercise of options or rights granted to him or her as a result of being a Director, (ii) an Affiliate of a shareholder, (iii) a partner, director, officer or employee of, or professional advisor to, any of (i) or (ii) or (iv) any Person related by blood, adoption or marriage to any of the foregoing."

24.      Thus, as I interpret it, (and I have not heard argument of its interpretation), each party can, according to their respective shareholdings, appoint two directors, one of whom must be independent.  A fifth director, who must also be independent, can be nominated and elected by the board to bring the number of directors up to five, but that fifth director must also be approved by a majority of shareholders. 

25.      As far as I can ascertain, neither party has appointed a second independent director.  Accordingly, the only directors are those nominated by the shareholders, namely Mr Krikorian by Global Gold and Mr Premraj by Consolidated Resources.  The latter refused to attend the board meeting called by Mr Krikorian on 12^th February, 2014, (see paragraphs 9 and 10 of the judgment of 5^th June, 2014). 

26.      The correspondence shown to me on this application indicates that Mr Premraj called a meeting of the directors for 2^nd May, 2014, for the purpose of appointing Heather Bestwick as a third director and to delegate to her sole responsibility for the conduct of the joint venture company's defence to the claims brought by the Consolidated Resources.  Mr Krikorian in turn refused to attend that meeting or to sign a written resolution to that effect on behalf of Global Gold for the reasons set out in his email of 28^th April, 2014.  Essentially, as Mr Swart said in his letter of 2^nd May, 2014, to Carey Olsen, any attempt to appoint a director other than in accordance with the terms of the shareholders' agreement would be regarded by Mr Krikorian and Global Gold as invalid and would be ignored. 

27.      Whilst I can deduce from this that the joint venture company is deadlocked and unable to defend these proceedings, I cannot, at this stage and as a single judge, make an assessment as to which of the parties is to blame for this.  Mr Swart informed me that there are defences available to the joint venture company centred around the allegedly fraudulent activities of Mr Borkowski, the sole director of Consolidated Resources.  The audit report refers to claims being subject to a fraud inquiry. 

28.      Ordinarily, a plaintiff would not be prevented from obtaining judgment against a defendant company because of internal difficulties within that company, disabling it from instructing a lawyer, but in this case, the action is being brought by one of the two shareholders in that company which has a shared responsibility for the internal management of the company pursuant to the shareholders' agreement which provides at Section 3.1:-

"Section 3.1                 Actions in Accordance with Agreement.

Each of the Shareholders covenants and agrees that it shall vote its Shares and use all reasonable commercial efforts to cause its nominees to the Board of Directors to act at all times to accomplish and give effect to the terms and conditions of this Agreement and that it shall otherwise act in accordance with the provisions and intent of this Agreement to the maximum extent permitted by Law....."

29.      If judgment were to be granted it is clear that Consolidated Resources would endeavour to enforce it against the bank accounts and other assets of the joint venture company including the shares in its subsidiaries.  Global Gold would be equally entitled to seek judgment in respect of the sums due to it and to enforce that judgement against the same assets.  This would be all at a time when Consolidated Resources is seeking relief under Article 143 of the Companies (Jersey) Law 1991 or alternatively an order under Article 155 that the joint venture company be wound up. 

30.      Until the Court can unravel what has gone on between the shareholders at the hearing of Consolidated Resources' applications under Articles 143 and 155, I must proceed on the basis that both shareholders have contributed to some extent at least to the joint venture company being deadlocked and unable to act in its defence.  It cannot be right in those circumstances for either shareholder to try to take advantage of that vulnerability on the part of the joint venture company and seek judgement in default against it for monies advanced as part of the joint venture, knowing that it cannot defend the claim and then with that judgement seek to expropriate its underlying assets. 

31.      Mr Swart referred me to this extract from the judgment of Harman J in Re a Company No. 002612 of 1984 (1984) 1 B.C.C. 99262:-

"In cases of litigation under s.75 [the equivalent to Article 143] it is most desirable that the position of the company not be altered or disturbed more than is absolutely essential, between the presentation and the hearing of the petition.  The existing share structure, the existing contractual rights, the present service contracts and so forth, should in my judgment be maintained as they are pending the determination of the litigation.  There might be circumstances where change was essential, but if possible the existing position should be preserved.  In my judgment, this is a factor which in these matters arising under contributories' petitions is particularly powerful and has more than the normal 'Cynamid' force in favour of preserving the status quo, since it is the very nature of this matter that the status quo must affect the remedy which may be available."

32.      I take the view that a fair trial of the claim against the joint venture company in these circumstances is not possible.  Justice demands that the status quo in relation to the subject matter of the dispute, which is essentially between the shareholders Consolidated Resources and Global Gold, be maintained pending the Court determining the relief sought by Consolidated Resources under either Article 143 or 155 of the Companies Law, assuming a stay is not granted in the meantime.   

Authorities

Royal Court Rules 2004.

Consolidated Resources-v-Global Gold [2014] JRC 124.

Companies (Jersey) Law 1991.

Re a Company No. 002612 of 1984 (1984) 1 B.C.C. 99262.