Phyllison Ltd v GH Ltd

• Jurisdiction: Cayman Islands
• Judge: (Schofield, J.)
• Judgment Date: 01 July 1992
• Court: Grand Court (Cayman Islands)
• Date: 01 July 1992

Grand Court

(Schofield, J.)

PHYLLISON LIMITED

and

G.H. LIMITED

A. Foster and A. Turner for the plaintiff;

R.D. Alberga, Q.C. and B. Ashenheim for the defendant.

Cases cited:

(1) Aberdeen Ry. v. Blaikie Bros.UNK(1854), 1 Macq. 461; [1843–60] All E.R. Rep. 249.

(2) Erlanger v. New Sombrero Phosphate Co.ELR(1878), 3 App. Cas. 1218; 48 L.J. Ch. 73; [1874–80] All E.R. Rep. 271, followed.

(3) Gluckstein v. Barnes, [1900] A.C. 240.

(4) Lagunas Nitrate Co. v. Lagunas Syndicate, [1899] 2 Ch. 392; [1895–9] All E.R. Rep. Ext. 1349, dicta of Rigby, L.J. applied.

(5) Omnium Electric Palaces Ltd. v. Baines, [1914] 1 Ch. 332; (1914), 83 L.J. Ch. 372, dictum of Sargant J. applied.

(6) Pedro Devs. Ltd. v. Zuiderent, 1990–91 CILR N–7.

(7) Smith v. Kay(1859), 7 H.L. Cas. 750; 11 E.R. 299; 30 L.J. Ch. 45.

(8) Spence v. Crawford, [1939] 3 All E.R. 271.

Companies-promoters-breach of fiduciary duty-promoter”s duty to disclose conflict of interest in transactions of property developers extends to notifying potential shareholders and identifiable investors-in breach if does not disclose ownership of company contracting to purchase property from property developers

Companies-promoters-powers and duties-exclusion of liability-promoter cannot abdicate duties and general equitable obligations to company and potential shareholders by exclusion provisions in company regulations and articles of association

Contract-rescission-affirmation after breach-conduct apparently affirming contract after breach not effective to preclude rescission or create estoppel if resulting from other party”s failure to disclose material facts

Contract-rescission-restitutio in integrum-alteration of subject-matter of contract no bar to rescission as restitutio in integrum still possible if substantial identity maintained and acceptable to party rescinding-right to rescind unaffected by expense and time spent on alterations

The plaintiff sought orders to compel the defendant to honour its obligations under a contract.

The sole beneficial owner of the plaintiff company was Martin Bould, a property developer and the promoter of G.H. Ltd., the defendant company, which had been formed to buy and develop land into 12 high quality apartments. The company was to be half-owned by the vendors of the site and half by subscribers to be found by Mr. Bould. Only when G.H. Ltd. was fully subscribed and contracts of sale made for all 12 apartments was the development to go ahead.

Mr. Bould himself subscribed to one-fifth of the shares in the company and, through the plaintiff company, agreed to purchase one of the principal apartments which he began to alter and improve. When the plaintiff company made this agreement, he was the sole director of G.H. Ltd. but he neither recorded his interest in the plaintiff company, informed the prospective shareholders, nor, when other directors were appointed, revealed it to them. On the contrary, he consistently lied

about his involvement with the plaintiff company and ultimately admitted to a minority shareholding but never to more than a 30% interest. After this admission the other subscribers did not immediately challenge Mr. Bould”s purchase of the apartment but as their relationship with him deteriorated, the board of directors of the defendant company purported to rescind the purchase agreement on the ground of Mr. Bould”s failure to disclose his financial interest in the plaintiff company. To this end, notices of rescission were issued to that company which then brought the present proceedings to challenge the rescission.

At no time until giving evidence did Mr. Bould reveal that he actually had a 100% interest in the plaintiff company.

The plaintiff sought (a) a declaration that the notices of rescission were ineffectual; (b) in the alternative, a declaration that the defendant was estopped or prevented from rescinding the contract; (c) an order to compel the defendant to perform its obligations under the contract; and (d) damages in respect of any loss it suffered as a result of the defendant”s breach.

The defendant counterclaimed, inter alia, for (a) a declaration that it was entitled to rescind; and (b) in the alternative, damages for conspiracy.

The plaintiff submitted, inter alia that (a) although Mr. Bould as promoter of G.H. Ltd. owed a fiduciary duty to disclose his interest in the plaintiff, either to an independent board of directors of the defendant, or to its potential shareholders, and he had been in breach of that duty, this was merely a technical breach as he (i) was unaware that he had such a duty, or (ii) never realized the extent of it and (iii) did not intend to deceive or mislead the defendant”s other directors and shareholders; (b) at the time the contract to purchase the apartment was made, there were no shareholders to whom Mr. Bould could have declared his interest in the plaintiff; (c) the defendant”s articles of association permitted Mr. Bould to enter into a contract with the defendant for the purchase of an apartment; (d) the defendant acted inconsistently with an intention to rescind the contract, had on the contrary affirmed it by subsequent conduct, and was therefore estopped from rescinding it; (e) there could be no rescission since restitutio in integrum was not possible due to the extensive alterations that had been made to the apartment; and (f) it would be unjust to permit the rescission as Mr. Bould had already spent large sums of money and a great deal of time on the apartment after the contract had been approved.

Held, refusing to grant the orders sought:

(1) As a director of the defendant, Mr. Bould had a duty not to put himself in a position where his own interests might conflict with those of the defendant. As a promoter he had a duty to disclose to the defendant any interest he had in any transaction entered into by the company. Even though at the time the plaintiff contracted to purchase the apartment from the defendant, the defendant”s shareholders had not yet been confirmed, Mr. Bould still had a duty to notify potential

shareholders of his interest in the plaintiff in the offering memorandum or by giving identifiable investors notice in some other way before they committed themselves to the venture. Moreover, as a promoter, Mr. Bould could not relieve himself of his duties and general equitable obligations, nor could he deprive the defendant of its remedy of rescission or any other remedy by drafting such provisions into regulations or articles of association of the company. He had clearly set out to deceive the shareholders and subsequently the other directors of the defendant. He was in breach of his fiduciary duties to the defendant in his capacity both as a director and promoter (page 175, line 34 – page 176, line 12; page 176, line 27 – page 178, line 24).

(2) Since the directors and shareholders of the defendant might have acted differently had they known the extent of Mr. Bould”s interest in the plaintiff, that information was a material fact, knowledge of which was essential to the affirmation of the contract. It followed that the conduct or representations of the directors and shareholders of the defendant which apparently affirmed the contract did not in fact do so, since they never knew of Mr. Bould”s full interest in the plaintiff until the hearing of the trial; nor could their actions be relied upon as creating an estoppel since they were induced by the concealment of a material fact. The plaintiff was therefore not entitled to any of the relief sought (page 178, line 36 – page 179, line 26; page 181, lines 8–19).

(3) Although it was conceded that the apartment, the subject-matter of the contract, had been altered in its design, there was no bar to rescission since restitutio in integrum was still possible as the substantial identity of the apartment remained the same. As it was prepared to accept the apartment in its altered state, the defendant was therefore entitled to exercise the right it undoubtedly had to rescind the contract and it would be artificial to treat the plaintiff as separate from Mr. Bould with respect to the granting of the remedy. Moreover, the fact that Mr. Bould had otherwise expended a great deal of time and money on the apartment should not be allowed to affect the substantial justice of the case or its overall outcome. Since he was not paid by the plaintiff for his time and expenditure, it would be wrong to order the defendant to compensate him personally in this respect. The court would, however, order that the defendant compensate the plaintiff by repaying all instalments so far paid together with interest and all its expenses related to the alteration. The plaintiff”s action would therefore be dismissed and the defendant would be granted the declaration sought in its counterclaim (page 180, lines 3–10;page 180, line 39 – page 181, line 7).

SCHOFIELD, J.: The Great House is a superior condominium
complex situated along Seven Mile Beach, Grand Cayman, on
land registered as West Bay Beach North, Registration Section
Block 110, Parcel 21. It was designed and built after the fashion
15	of a Caribbean great house. The idea of the complex was that of
Martyn Bould who is the senior partner of a firm of quantity
surveyors known as B.C.Q.S. In recent years Bould has been
involved in other building development projects including the
Plantana Condominiums which are adjacent to the Great House.
20	The land upon which the Great House is built was owned by the
Webster family of Grand Cayman through one of the family-
owned companies. A company was formed, called G.H. Ltd., for
the purpose of developing the complex and the land was sold to
G.H. Ltd. The Webster family company received US$2m. for the
25	land plus US$2m. worth of preference shares in G.H. Ltd. G.H.
Ltd. is the defendant to this suit.
The plaintiff

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