Prospect Properties Ltd ((in Liquidation)) v McNeill et Al

• Jurisdiction: Cayman Islands
• Judge: Harre, J.
• Judgment Date: 03 December 1990
• Court: Grand Court (Cayman Islands)
• Docket Number: 276/89
• Date: 03 December 1990

Prospect Properties Ltd. (In Liquidation)

and

McNeill et al

Harre, J.

276/89

Grand Court

Company law - Directors — Duties — Breach of fiduciary duty — Agreement dated January 12, 1983 between first and second defendants for the sake by the first defendant of all his shareholding in the plaintiff — Purchase price was U.S.$500,000 — First defendant was to receive U.S.$250,000.00 from accounts receivable by the plaintiff and the other U.S.$250,000.00 by assignment of the second defendant's alleged right over certain property owned by the plaintiff — Second defendant also gave the first defendant a promissory note — On January 12, 1983 the first and second defendants and the second defendant's father, acting as shareholders of the plaintiff, held a shareholding meeting — At the meeting resolutions were passed declaring a dividend of U.S.$250,000 and approving a loan of U.S.$250,000 to the second defendant — Plaintiff in liquidation — Whether the shareholders' meeting was a valid and lawful meeting of all the shareholders of the plaintiff — Whether shareholders had the power to declare a dividend or make a loan — Whether the plaintiff purchased its own shares or financially assisted the second defendant in so doing — Whether the plaintiff had sufficient profits to declare a dividend of U.S.$250,000 — Whether the plaintiff was insolvent at the time the resolutions were passed or became insolvent as a result of the resolutions — Whether the resolutions were ultra vires — Whether the resolutions were in the best interest of the plaintiff's creditors — Whether first defendant a constructive trustee for monies received by him.

Appearances:

For the plaintiff: Ramon Alberga Q.C. and Mr. A. Turner

First defendant in person

For the second defendant: Mr. E. Grant, instructed by Mr. Keith Collins & Co.

Harre, J.

1 This case is about some fundamentals of company law in the Cayman Islands. It arises from arrangements which are admitted to have been made in order to further the implementation of a written agreement (“the McNeill agreement”) dated 12th January 1983 under which the first defendant (“McNeill”) agreed to sell to the second defendant (“Bodden II”) the whole of McNeill's shareholding in the plaintiff (“the Company”). The company carried on the business of developing and selling real estate at Prospect, Grand Cayman.

2 The agreed purchase price of the shares under the terms of the McNeill agreement was U.S.$500,000. On the same date as that of the agreement McNeill, Bodden II and his father, the late James M. Bodden Sr., in their capacity as the alleged shareholders of the company, purported to hold a shareholders meeting and to reach decisions which were recorded as follows in a minute —

“Motion was made and carried for the company to declare a dividend of Two Hundred and Fifty Thousand United States Dollars from the company's profit. It was agreed that this be paid to J.M. Bodden II and that J.M. Bodden II would waive his rights to future dividends of the company and this dividend be paid by way of assignment of existing agreements for sale of the company's property to J.M. Bodden II or nominee and that these agreements agreed to would be appended to the minutes of this meeting in a form known as Schedule A and that a loan of two Hundred and Fifty Thousand United States Dollars be made to J.M. Bodden II and this loan be in the form of a collateral charge for security of the undeveloped lots in the company's sub-division in Prospect as detailed in Schedule B.”

3 The minutes also record that McNeill tendered his resignation as a director shareholder of the company. There is an issue as to whether he was a director at the time.

4 The minutes were signed by McNeill, James M. Bodden Sr. and Bodden II, who were described in the body of the minutes as representing all the shares issued. Whether that was true is another issue in the case.

5 The thrust of the allegations against McNeill and Bodden II is that in arranging and orchestrating the meeting of 12 ^th January, 1983 and in facilitating and procuring the resolutions referred to in the extract from the minutes which I have just quoted, McNeill and Bodden II acted in their capacity as directors of the company and in so doing were in breach of their fiduciary duty to the company since the business transacted at the meeting was of no benefit or advantage to the company but was only for the purpose of furthering their interest. The interest concerned was the provision from the assets of the company of the resources to enable Bodden II to purchase McNeill's shares.

6 The terms of the McNeill agreement were, as regards payment of the purchase price of the shares that McNeill would receive U.S.$250,000 from the accounts receivable by the company and U.S.$250,000 by way of an assignment of Bodden's alleged right over undeveloped lots of land owned by the company. These were the undeveloped lots set out as Schedule B of the minute to which I have referred. McNeill was to take a charge over these lots as security for payment of US$250,000. That sum was also the subject of a promissory note given by Bodden II to McNeill. McNeill agreed to discharge his security over any one of the 40 lots upon receipt by him of the sum of US$6250. That amount is, of course, one fortieth of U.S.$250,000.00.

7 In the event, McNeill was unable to take his charges over the 40 lots. He had to be content with cautions. The reason for this was that charges had already been registered in favour of one Douglas Woolf over all the lots. The significance of that event in the context of the present case will unfold during the course of this judgment.

8 I mentioned by way of introduction the thrust of the allegations against the defendants and I now look at the issues derived from the pleadings in more detail. The company is now in liquidation and, through its liquidator, says —

• (1) That McNeill and Bodden II owed a fiduciary duty to the company to act for its benefit or advantage and were in breach of that fiduciary duty for the reasons to which I have referred.

• (2) That as a result of whit they did sums of US$170,474.56 and CI$27,906.75 wrongly came into the hands of McNeil and the company was thereby deprived of receivables which were properly due to it;

• (3) That the meeting which was held are 12th January 1983 was not a valid and lawful meeting of all the shareholders of the company;

• (4) That the shareholders of the company had no power under the Articles to declare a dividend or to make a loan. Such power was vested solely in the directors;

• (5) That the result of the resolutions passed on the 12 ^th January 1983 was that McNeill and Bodden II caused the company to purchase its own shares or alternatively caused it to provide financing to them to assist Bodden II in purchasing the shares;

• (6) That the resolutions passed at the meeting of the 12th January, 1983, if such meeting was a valid and lawful meeting, were ultra vices and of no legal effect;

• (7) That in any event the directors army have power to declare and pay a dividend out of profits and the company did not have sufficient profits to declare and pay a dividend of $250,000.00;

• (8) That the resolutions passed on the 12th January 1983 were not in the interests of the creditors and were prejudicial to the creditors and the Defendants knew or ought to have known that as a result of these resolutions the company could not finance payments to McNeill, pay its other creditors and continue its development at Prospect so as to fulfil its obligations to the purchasers;

• (9) That the company was insolvent when the resolutions were passed on the 12th January 1983 or became insolvent as a result of the resolutions passed;

• (10) That McNeill is a constructive trustee of the sums of US$170,474.56 and CI$27, 906.75 which he received;

• (11) That McNeill and Bodden II are jointly and severally liable to the company in damages for breach of fiduciary duty.

9 In addition to damages, the company claims interest on such sums as may be found due to it, and costs.

10 The broad issues raised in McNeill's defence, and the plaintiffs reply thereto, are these. He says that—

• (1) he was a non-resident director up to the annual general meeting on 21st October 1987 when he demitted office and was not re-elected thereto; he ceased to be a director on that day, and accordingly his resignation of the 12th January 1983 was unnecessary; the plaintiff replies that the meeting of 21st October 1982 was not valid, that McNeill did not demit office on that day and is estopped from saying that he was a director on 12th January 1983;

• (2) in 1976 Bodden II acquired his shares from at least one former shareholder, Rex Crighton; the transfer of those shares was duly executed, and approved by the directors but was not registered in the register of members; the plaintiff says that Crighton remained a member of the company at all material times.

• (3) the method of financing the transfer of his shares to Bodden II was perfectly legal; the plaintiff denies that but says that even if it were so McNeill was wrongfully using the company's funds to the detriment of the company, purchasers of lots from the company, and its creditors;

• (4) the details of the transaction were determined by attorneys; the plaintiff says that even if this were so, it is irrelevant.

• (5) he and Bodden II agreed a price for his shares which was a fair price for both parties and corresponded generally to the actual value of the shares at that time. The price was to be paid aver a period of time and legal title to the shares would pass to Bodden II when the full price was paid; the plaintiff admits only the arrangement for the payment of the price and the transfer of the shares;

• (6) the agreement and resolutions of 12th January 1983 were passed, signed, or acquiesced to by all the corporators of the company; the...