Re Fortuna Dev Corporation

• Jurisdiction: Cayman Islands
• Judge: (Henderson, J.)
• Judgment Date: 25 October 2004
• Court: Grand Court (Cayman Islands)
• Date: 25 October 2004

Grand Court

(Henderson, J.)

IN THE MATTER OF FORTUNA DEVELOPMENT CORPORATION

J.R. McDonough for the inspectors;

A.J. Jones, Q.C. for the petitioner;

W. Trower, Q.C. for the company and the majority shareholders.

Cases cited:

(1) CAS (Nominees) Ltd. v. Nottingham Forest plc., [2001] 1 All E.R. 954, referred to.

(2) Mirror Group Newspapers Plc., In re, [2000] Ch. 194; [1999] 2 All E.R. 641, referred to.

(3) Pergamon Press Ltd., In re, ELR[1971] Ch. 388, referred to.

(4) R. v. Board of Trade, ex p. St. Martins Preserving Co. Ltd., [1965] 1 Q.B. 603; [1964] 2 All E.R. 561, referred to.

(5) R. (Morgan Grenfell & Co. Ltd.) v. Income Tax Special Commr., [2002] 3 All E.R. 1; [2003] 1 A.C. 563, referred to.

(6) St. Piran Ltd., In re, [1981] 1 W.L.R. 1300; [1981] 3 All E.R. 270, referred to.

(7) Woodhouse & Co. (Ltd). v. WoodhouseUNK(1914), 30 T.L.R. 559, referred to.

Legislation construed:

Companies Law (2004 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 2004), s.2(1): The relevant terms of this sub-section are set out at para. 7.

s.64: The relevant terms of this section are set out at para. 7.

s.65: The relevant terms of this section are set out at para. 8.

s.66(2): The relevant terms of this sub-section are set out at para. 8.

s.67: The relevant terms of this section are set out at para. 9.

s.68: The relevant terms of this section are set out at para. 8.

Companies Act 1985 (c. 6), s.452(1):

‘Nothing in sections 431 to 446 requires the disclosure to the Secretary of State or to an inspector appointed by him-

(a) by any person of information which he would in an action . . . be entitled to refuse to disclose on grounds of legal professional privilege except, if he is a lawyer, the name and address of his client . . .’

s.740: ‘References in this Act to a body corporate or to a corporation do not include a corporation sole, but include a company in-corporated elsewhere than in Great Britain.

Companies-administrative control of companies-inspectors-confidentiality of investigation-duties of confidentiality owed to court, company under investigation, and parties-confidential information obtained during investigation to remain confidential-consent of company to disclosure for further investigation or inclusion in report not required

Companies-administrative control of companies-inspectors-examination of documents and witnesses-as long as acting in good faith, inspectors, not company, shareholders or legal advisers, to decide what relevant to investigation-no right for company”s attorneys to scrutinize every document for relevance before production to inspectors

Companies-administrative control of companies-inspectors-investigation of subsidiaries-affairs of subsidiary in relation to company are ‘affairs of company’ and subject to investigation under Companies Law, s.64(b)-company to compel subsidiary to produce information thought relevant by inspectors-no inspection of independent activities of subsidiary incorporated abroad

Companies-administrative control of companies-inspectors-professional privilege-company can claim legal professional privilege and litigation privilege against inspectors-not available when inspectors appointed on shareholder”s petition as no privilege against shareholder, unless in hostile litigation with company

Inspectors were appointed to investigate the affairs of a company following a petition for its winding up.

The petitioner, a limited company and a minority shareholder in another company, petitioned for the winding up of that company, which was incorporated in the Cayman Islands but had a number of subsidiaries incorporated in other countries. The petition was on the ‘just and equitable’ ground and based upon the allegation that the majority shareholders were acting in an oppressive and prejudicial manner towards the minority, and that dividends had been declared but not paid after January 1st, 2002. The principal of the petitioner had also brought two civil actions in Taiwan, where the company maintained its corporate

offices, challenging his removal as a director, made a criminal complaint to the police authorities there and the petitioner had sued the company in respect of the allegedly unpaid dividends.

The Grand Court (Levers, J.) refused to appoint provisional liquidators but ordered the appointment of inspectors under s.64 of the Companies Law to examine into the ‘affairs of the company and its subsidiaries from January 1st, 2002 to the present’ and made an order for directions. The inspectors then sought further directions inter alia regarding their confidentiality obligation, the permissible scope of their investigation and the company”s alleged need to scrutinize each document for relevance, the mechanics of document disclosure by the company, legal professional privilege and litigation privilege, and the obligation of the company”s auditors to disclose documents, which had been causing them difficulties.

The petitioner, with leave of the court, renewed its request for the appointment of joint provisional liquidators (which would obviate the need for inspection).

Held, refusing to appoint joint provisional liquidators:

(1) The difficulties encountered by the inspectors were insufficient to warrant discharging them and appointing joint provisional liquidators instead. The rights and obligations of the inspectors, appointed after the commencement of the other proceedings and investigation, had to be assessed in that context. They had duties of confidentiality to the court, the company and the parties and held any confidential information imparted to them in the course of their investigation subject to obligations of confidentiality. This did not, however, require them to obtain the consent of the company before revealing information or documents obtained during the investigation for the purposes of furthering the investigation and including such information in the report, as otherwise the control and direction of the investigation would be transferred from the inspectors to the company, contrary to the intent of the legislation (para. 11; paras. 14–15).

(2) The inspectors were authorized to examine any documents and question any witness, and as long as they were acting in good faith they, and not the company, shareholders or legal advisers, were to determine what was relevant, their role being analogous to that of auditors. They should be able to examine records relating to transactions before or after January 1st, 2002, regardless of when created, if there were some prospect they might shed light on the subject of the investigation (paras. 18–19; para. 21).

(3) Their remit included the investigation of the company”s subsidiaries, whether wholly owned or not, not merely because this was specifically stated but also because their affairs were part of ‘the affairs of the company’ within the meaning of s.64(b) of the Law. It directly controlled the boards of directors of its subsidiaries and its financial statements were consolidated with those of its subsidiaries. Although the

inspectors could not therefore be appointed to inquire into any independent and separate affairs of subsidiaries incorporated abroad (by virtue of the narrow definition of ‘company’ in s.2(1) of the Law), their affairs conducted on behalf of the company could be investigated and the company had an obligation to compel the subsidiaries to produce documents, records and books which, in the opinion of the inspectors, were relevant to the investigation (paras. 25–26; para. 30; para. 32).

(4) The arrangement for disclosure agreed by the company and the inspectors would be endorsed only because of parallel litigation which required disclosure to be considered simultaneously with that for inspection. The company had no right to have its attorneys scrutinize every document for relevance before producing it to the inspectors, since it would normally have to provide the inspectors with free access to all documents in its custody or power, in a manner similar to that in which it would produce them to its external accountants during an audit (paras. 34–35).

(5) There was nothing in ss. 64–68 of the Law to suggest that legal professional privilege or litigation privilege were set aside. The company, therefore, continued to enjoy these rights and would be able to assert them against the inspectors; however, as a company could not assert privilege against a shareholder, it could not be relied upon against the inspectors, appointed on a shareholder”s petition. But to the extent that the company and shareholder were engaged in separate hostile litigation, the company...