Prospect Properties Ltd ((in Liquidation)) v McNeill

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

PROSPECT PROPERTIES LIMITED (in liquidation)

and

McNEILL and J.M. BODDEN II

(Harre, J.)

Grand Court

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

Held, giving judgment for the plaintiff:

(1) The declaration of the dividend, its payment to the second defendant and the granting of the loan to the second defendant at the January 1983 meeting were all invalid because-

(a) no valid shareholders” meeting had been held, since no notice had been given to all the shareholders in accordance with the company”s articles and, since the evidence established that the second defendant was not a shareholder at that time, it was improper that he had been present and voted at the meeting;

(b) the resolutions could not properly be passed by a shareholders” meeting but only by a directors” meeting; and

(c) they had not been retrospectively validated by the later consent or acquiescence of the whole body of the shareholders since there was no evidence of such consent or acquiescence in the company”s improperly kept and internally inconsistent records (page 188, lines 6–36; page 189, line 23 – page 190, line 24).

(2) The resolutions passed did not involve the company”s directly giving assistance in the purchase of its own shares, which was unlawful at common law, but rather the indirect provision of funds to assist the second defendant in his purchase of the first defendant”s shares. This course of action was not of itself unlawful in the Cayman Islands but the particular circumstances of the present case, i.e. the giving of assistance through the improper declaration of a dividend and the making of a loan secured by charges over property which appeared to belong to the company itself, enabled the court to invoke the principle that, if such arrangements were demonstrably to the detriment of the company, it

could declare them ultra vires and invalid (page 190, lines 30–35; page 192, lines 10–35; page 193, lines 2–10).

(3) The declaration of the dividend out of the profits of the company was invalid because-

(a) the company had no profits at the relevant time but rather, in the light of the credible accountancy evidence, was probably technically insolvent, and therefore had no assets which could lawfully be distributed as dividend. The minimum requirements for defining a ‘profit’ in circumstances in which surplus on capital account was the result of a valuation of the company”s fixed assets were that (i) the valuation should not be open to criticism, and (ii) the company should have liquid assets available for the payment of the dividend, leaving it with other assets of sufficient value to enable it to meet its liabilities. The company failed to meet both these requirements; and

(b) the declaration of the dividend appeared to-be a device wholly to further the interests of the defendants, a conclusion which was reinforced by the fact that only the second defendant and none of the company”s legitimate shareholders received any part of it (page 195, lines 31–34; page 198, line 22 – page 199, line 4).

(4) The defendants, as directors, were in breach of their fiduciary duty to the company, which extended to its customers and creditors and was independent of and paramount to any duty they might have had as shareholders to act bona fide for the benefit of the company. The nature of the company”s business, its financial position (which was probably one of technical insolvency and at best of doubtful solvency), and above all the obvious effect of the resolutions and their consequences on the company”s liquidity and its ability to carry on its business, made it a vital part of the directors” duty to the company to consider the interests of its creditors. It was in the interests of the creditors to be paid and correspondingly in the interests of the company to be safeguarded against being put in a position in which it was unable to pay its debts. As directors, the defendants had failed in their fiduciary duty because the measures they had supported had not been reasonably incidental to the carrying on of the company”s business, had not been bona fide and had not been for the overall financial benefit of the company, notwithstanding that there would have been some benefit to be derived from total Caymanian ownership of the company. Moreover, the defendants could not claim the protection of art. 129 of the company”s articles or of ss. 44 and 64 of the Trusts Law (Revised), since they had exhibited sufficient recklessness as to the detriment they might cause to the company to make them guilty of wilful neglect of or default in their duty to it and to its creditors (page 199, lines 19–24; page 202, line 40 – page 203, line 26; page 211, lines 17–33).

(5) Independently of their position as directors, the defendants were also constructive trustees of the misapplied funds and with respect to the first defendant in particular, he could not in consequence legitimately retain the sum he had obtained as the purchase price of the shares. He

had received for his own benefit trust property transferred to him in breach of trust with actual knowledge (although constructive knowledge would have been sufficient) that those were the circumstances. He was therefore liable to account for the money paid to him and it was immaterial that the breach was not alleged to be fraudulent (page 205, lines 7–22; page 206, line 37 – page 207, line 5).

(6) There was no statutory bar in the Cayman Islands to an action against directors or constructive trustees for breach of fiduciary duty, since the Limitation of Actions Law (cap. 86), s.46 expressly applied the Limitation Act 1623 of the United Kingdom which prescribed no bar in such circumstances. Section 46 of the Jamaican Trustee Act (cap. 393), which would have allowed the defendants to rely on a six-year limitation period, did not apply in the Cayman Islands. The court was also satisfied that the liquidator had sufficiently justified his delay in bringing the action and accordingly the defence of laches was not available to the defendants. The court was therefore entitled to make an award in favour of the company to the extent that would put it in the position it would have been in if it had not suffered the wrong and would order that since the sum paid to the first defendant by the second defendant had been improperly obtained from the company, it be remitted to the company with interest (page 207, line 17 – page 208, line 4; page 208, lines 22–41; page 213, lines 6–13).

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...