Prospect Properties Ltd ((in Liquidation)) v McNeill

• Jurisdiction: Cayman Islands
• Judge: (Harre, J.)
• Judgment Date: 03 December 1990
• Court: Grand Court (Cayman Islands)
• Date: 03 December 1990

Grand Court

(Harre, J.)

PROSPECT PROPERTIES LIMITED (in liquidation)

and

McNEILL and J.M. BODDEN II

R.D. Alberga, Q.C. and A. Turner for the plaintiff.

The first defendant appeared in person.

E. Grant and K. Collins for the second defendant.

Cases cited:

(1) Agip (Africa) Ltd. v. Jackson, [1990] Ch. 265; on appeal, [1991] Ch. 547, followed.

(2) Alexandra Palace Co., In reELR(1882), 21 Ch. D. 149, considered.

(3) Ammonia Soda Co. Ltd. v. Chamberlain, [1918] 1 Ch. 266; [1916–17] All E.R. Rep. 708, considered.

(4) Att. Gen.”s Reference (No. 2 of 1982), [1984] Q.B. 624; [1984] 2 All E.R. 216; (1982), 78 Cr. App. R. 131, considered.

(5) Bailey, Hay & Co. Ltd., In re, [1971] 1 W.L.R. 1357; [1971] 3 All E.R. 693.

(6) Belmont Fin. Corp. Ltd. v. Williams Furniture Ltd., [1979] Ch. 250; [1979] 1 All E.R. 118, dicta of Buckley, L.J. applied.

(7) Brady v. Brady, [1988] BCLC 20; on appeal, [1989] A.C. 755; [1988] 2 All E.R. 617; 1988 PCC 316, dicta of Nourse, L.J. applied.

(8) Brazilian Rubber Plantations & Estates Ltd., In re, [1911] 1 Ch. 425, considered.

(9) Cane v. Jones, [1980] 1 W.L.R. 1451; [1981] 1 All E.R. 533.

(10) City Equitable Fire Ins. Co. Ltd., In re, [1925] Ch. 407; [1924] All E.R. Rep. 485, observations of Romer J. applied.

(11) Dimbula Valley (Ceylon) Tea Co. Ltd. v. Laurie, [1961] Ch. 353; [1961] 1 All E.R. 769, dicta of Buckley J. applied.

(12) Duomatic Ltd., In re, [1969] 2 Ch. 365; [1969] 1 All E.R. 161.

(13) Exchange Banking Co., In re, Flitcroft”s CaseELR(1882), 21 Ch. D. 519, applied.

(14) Express Engr. Works Ltd., In re, [1920] 1 Ch. 466.

(15) Greenhalgh v. Arderne Cinemas Ltd., [1951] Ch. 286; [1950] 2 All E.R. 1120.

(16) Ho Tung v. Man On Ins. Co. Ltd., [1902] A.C. 232, considered.

(17) Horsley & Weight Ltd., In re, [1982] Ch. 442; [1982] 3 All E.R. 1045.

(18) Kinsela v. Russell Kinsela Property Ltd.UNK(1986), 4 N.S.W.L.R. 722.

(19) Lee v. Neuchatel Asphalte Co.ELR(1889), 41 Ch. D. 1; [1986–90] All E.R. Rep 947, considered.

(20) Lee, Behrens & Co. Ltd., In re, [1932] 2 Ch. 46; [1932] All E.R. Rep. 889, followed.

(21) Lubbock v. British Bank of S. America, [1892] 2 Ch. 198, considered.

(22) Mammoth Copperopolis of Utah, In re(1880), 50 L.J. Ch. 11, considered.

(23) Mercantile Trading Co., In re, Stringer”s CaseELR(1869), L.R. 4 Ch. 475, considered.

(24) Multinational Gas & Petrochemical Co. v. Multinational Gas & Petrochemical Servs. Ltd., [1983] Ch. 258; [1983] 2 All E.R. 563.

(25) National Bank of Wales Ltd., in re, [1899] 2 Ch. 629; [1895–9] All E.R. Rep. 715.

(26) Parker & Cooper Ltd. v. Reading, [1926] Ch. 975; [1926] All E.R. Rep. 323.

(27) R. v. LorangUNK(1931), 22 Cr. App. R. 167, considered.

(28) Roith (W. & M.) Ltd., In re, [1967] 1 W.L.R. 432; [1967] 1 All E.R. 427.

(29) Rolled Steel Prods. (Holdings) Ltd. v. British Steel Corp., [1986] Ch. 246; [1985] 3 All E.R. 52, dicta of Slade, L.J. applied.

(30) Salomon v. Salomon (A.) & Co. Ltd., [1897] A.C. 22; [1895–9] All E.R. Rep. 33.

(31) Sharpe, In re, [1892] 1 Ch. 154, dicta of Lindley, L.J. applied.

(32) Shuttleworth v. Cox Bros. & Co. (Maidenhead) Ltd., [1927] 2 K.B. 9; [1926] All E.R. Rep. 498, dicta of Scrutton, L.J. considered.

(33) Spanish Prospecting Co. Ltd., In re, [1911] 1 Ch. 92; [1908–10] All E.R. Rep. 573.

(34) Sparkes v. SparkesUNK(1980), 119 D.L.R. (3d.) 330, considered.

(35) Tito v. Waddell (No. 2), [1977] Ch. 106; [1977] 3 All E.R. 129.

(36) Trevor v. WhitworthELR(1887), 12 App. Cas. 409; [1896–90] All E.R. Rep. 46.

(37) V.G.M. Holdings Ltd., In re, [1942] Ch. 235, dicta of Lord Greene, M.R. applied.

(38) Verner v. General & Comm. Inv. Trust, [1894] 2 Ch. 239, observations of Lindley, L.J. applied.

(39) West Mercia Safetywear Ltd. v. Dodd, [1988] BCLC 250; 1988 PCC 212, dicta of Dillon, L.J. applied.

(40) Winkworth v. Edward Baron Dev. Co. Ltd., [1986] 1 W.L.R. 1512; [1987] 1 All E.R. 114, dicta of Lord Templeman applied.

Legislation construed:

Limitation of Actions Law (Laws of the Cayman Islands, 1963, cap. 86), s.46:

‘In actions of debt, or upon the case grounded upon any simple contract, no acknowledgment or promise by words only shall be deemed sufficient evidence in any of the Courts of the Island, of a new or continuing contract, whereby to take any case out of the operation of the Imperial Statute 21 James I. cap. 16, which has been recognized and is now esteemed, used, accepted and received as one of the Laws of the Islands. . . . ’

Trusts Law (Revised) (Law 6 of 1967, revised 1976), s.44:

‘(1) A trustee . . . shall be answerable and accountable only for his own acts, receipts, neglects, or defaults, and not for those of any other trustee . . . nor for any other loss, unless the same happens through his own wilful default.’

s.64: The relevant terms of this section are set out at page 211, lines 26–28.

Limitation Act 1623 (21 Jac. I, c.16), s.3:

‘ . . . [A]ll actions of account, and upon the case . . . shall be commenced . . . within six years next after the cause of such actions or suit, and not after. . . . ’

Companies-shares-acquisition of shares-financial assistance by company-direct assistance to director to purchase company”s own shares unlawful-indirect assistance not per se unlawful but may be if director acting in breach of fiduciary duty

Companies-shares-dividend-payment pari passu-payment of dividend invalid if made to directors but not all other shareholders, especially if company has no profits and declaration of dividend merely device to further directors” interests

Companies-directors-breach of fiduciary duty-director constructive trustee of company funds-duty to account for misapplied fund in his hands if actual or constructive knowledge of misapplication-immaterial that no fraud alleged

The plaintiff company by its liquidator sought to recover funds from the defendants in respect of their alleged breaches of fiduciary duty as directors of the company or as constructive trustees.

The defendants were directors of the company, a property development company. The first defendant, a foreign national, was also a shareholder in the company but although the second defendant, a Caymanian, had apparently been the recipient of transfers of shares, none of the instruments of transfer was valid and he had not been registered in the company”s books as a shareholder. The defendants agreed that the first defendant would sell his shareholding to the second defendant for US$500,000, allegedly to consolidate all shares in the hands of the second defendant”s family and bring the company completely under Caymanian control.

The defendants purported to call a shareholders” meeting in January 1983, though they did not give notice of the meeting to all registered shareholders. The meeting, with the second defendant present and voting, purported to declare a dividend of US$250,000 out of the company”s profits, such dividend to be paid to the second defendant; in addition, it resolved to make him a loan of US$250,000 secured by means of an assignment by the second defendant of his alleged rights over several of the company”s development plots. The second defendant then used the total $500,000 to buy the first defendant”s shareholding on the same day as the meeting took place.

In fact, at that time the company had acquired no additional assets or

revenue and its ‘profits’ were calculated on the basis of an upward valuation of its development lots for which there was apparently little justification. The company”s statements of affairs showed other inconsistencies and had not been prepared in accordance with established accounting procedures. A more accurate calculation showed an accumulated deficit of nearly US$200,000 shortly before the ‘shareholders” meeting’ and the company went into liquidation shortly after.

The liquidator then brought the present proceedings in late 1989 to secure the restoration to the company of the funds which had come into the hands of the first defendant through the second defendant as part of the purchase price for his shareholding.

He made the following submissions: (a) The declaration of the dividend, its payment to the second defendant and the granting of the loan to the second defendant were all invalid because (i) no valid shareholders” meeting had taken place since no notice had been given to all shareholders and the second defendant, who was not a shareholder, had been present and voted, and (ii) the resolutions purportedly passed at the meeting were invalid because they were beyond the powers of a shareholders” meeting, the dividend could not properly have been declared out of profits because there were no profits, they amounted to the direct or indirect giving of assistance by the company in the purchase of its own shares which was unlawful in the Cayman Islands, and the resolutions were not retrospectively validated by the later consent or acquiescence of the whole body of the shareholders since there was no evidence of any such consent or acquiescence;

(b) The defendants were in breach of their fiduciary duty as directors of an apparently insolvent company in that they did not act for the benefit of the company, its customers or creditors but solely for personal advantage; they were not entitled to indemnification under the company”s articles in respect of their acts as directors because they were disqualified from indemnification by their ‘wilful neglect or default’- their recklessness as to the harm their acts would cause to the company;

(c) Independently of their positions as directors the defendants were constructive trustees of the funds they had improperly caused the company to pay out and the first defendant, as the person ultimately in possession of them, was liable to account to the company for them; and

(d) No statutory limitation period applied to this suit and the action could not therefore be barred by statute. In any case, the delay in bringing the...