Re Omni Secs Ltd (No 5)

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 12 June 2000
• Court: Grand Court (Cayman Islands)
• Date: 12 June 2000

Grand Court

(Smellie, C.J.)

IN THE MATTER OF OMNI SECURITIES LIMITED (No. 5)

D.T.J. McCahill for the plaintiff;

N.R.L. Clifford for the first to seventh, ninth and tenth defendants;

G.C. Vos, Q.C., Miss R.C. Whittaker-Myles and G.F. Ritchie for the eighth defendant.

Cases cited:

(1) Moxham v. Grant, [1900] 1 Q.B. 88; (1899), 69 L.J.Q.B. 97, applied.

(2) Sasea Fin. Ltd. v. KPMG, [1999] BCC 857; [1998] T.L.R. 527; on appeal, [2000] 1 All E.R. 676; [2000] 1 BCLC 236; [2000] Lloyd”s Rep. P.N. 227, considered.

(3) Towers v. African Tug Co., [1904] 1 Ch. 558; (1904), 73 L.J. Ch. 395, considered.

(4) Verner v. General & Comm. Inv. Trust, [1894] 2 Ch. 239; (1894), 63 L.J. Ch. 456, dicta of Lindley, L.J. applied.

(5) X (Minors) v. Bedfordshire County CouncilELR, [1995] 2 A.C. 633; sub nom. E (A Minor) v. Dorset County Council, [1994] 4 All E.R. 640; on appeal, [1995] 2 A.C. 633; [1995] 3 All E.R. 353, dicta of Bingham, M.R. applied.

Civil Procedure-pleading-striking out-may hear early application to strike out specific claims if in interests of resolving entire action and likely to save time and costs later

Civil Procedure-pleading-striking out-may strike out claim for want of cause of action if bound to fail on any version of facts-also abuse of process if party seeks to rely on conflicting assertions of fact

Companies-shares-dividend-payment out of capital unlawful and repayable by shareholder if party to illegality-payment to holding company by set-off against existing debt in inter-company accounts recoverable by reversal of book entry

The plaintiff brought proceedings to recover damages for breach of contract and negligence in the audit of its accounts by the eighth defendant.

The plaintiff, a Cayman company, was part of an international group of companies, and was wholly owned by its Swiss parent company, OHAG. On the initiative of OHAG, the plaintiff made or arranged unsecured loans to certain subsidiary and affiliated companies. On the assumption that the loans were recoverable, the plaintiff declared a dividend in favour of its shareholder, OHAG. In fact, to the extent that those loans were unrecoverable, the dividend was paid from capital rather than profit and was unlawful. The dividend was not paid over to OHAG but instead an equivalent sum was deducted in the inter-company accounts from OHAG”s debts to the plaintiff.

The eighth defendant was subsequently appointed the auditor of the plaintiff. When, some years later, the plaintiff went into liquidation, it brought the present action claiming damages for, inter alia, the defen-dant”s failure to alert it to the illegality of the dividend already declared and the consequent loss of opportunity to recover it. By the time of its liquidation, the plaintiff owed OHAG large sums, against which, the plaintiff asserted, the value of the dividend could have been off-set but for the negligence of the eighth defendant. OHAG was now also in liquidation.

The eighth defendant applied for the claim to be struck out as dis-closing no reasonable cause of action.

The plaintiff submitted that (a) the court should decline to hear the eighth defendant”s application at this stage, since its decision would inevitably be appealed, increasing costs, and the matter was best resolved

at trial; (b) the eighth defendant was liable to compensate it for the lost dividend, since OHAG would then probably have agreed to repay it (whether or not obliged to do so) in order to avoid the damaging consequence of the plaintiff”s being given a qualified audit; and (c) now that both companies were in liquidation, OHAG could not consent to a simple amendment of the inter-companies accounts, since it was under no obligation to return the dividend, having had no knowledge of its illegality at the time.

The eighth defendant submitted in reply that (a) since the application related to a small and discrete part of the pleaded claims, much time and expense would be saved by disposing of it before trial; (b) if, as the plaintiff asserted, OHAG had received the dividend payment without knowledge of its illegality, it had not been repayable at any time and the plaintiff could have no claim against the defendants for loss of a right to recover it; however (c) since the statement of claim alleged that OHAG controlled all aspects of the plaintiff”s business at the relevant time, it must have known of the financial situation in which the dividend was declared, and the necessary repayment could be achieved by a simple book entry in the context of the liquidations.

Held, striking out the relevant parts of the statement of claim:

(1) The court was justified in hearing the present application, since the validity of the particular claim in question was important to the resolution of the dispute as a whole and costs could be saved which might otherwise be incurred in arguing the matter at trial. In hearing the application, the court must assume that the pleaded facts could be proved, and in this case it had no hesitation in striking out the relevant parts of the statement of claim, since they disclosed no reasonable cause of action whatever the underlying facts. Furthermore, since the plaintiff sought at the same time to approbate and reprobate by relying on contradictory assertions of fact, the claim was frivolous and vexatious and an abuse of process (page 194, line 31 – page 195, line 43).

(2) The dividend declared by the plaintiff in favour of OHAG was, to the extent that it was paid out of capital rather than profits, indisputably illegal. Furthermore, it would be unrecoverable from OHAG, the shareholder, if OHAG had been unaware of its illegal nature at the time it was received. However, since the plaintiff”s pleaded case was that (i) OHAG was the controlling mind behind all transactions carried out in the plaintiff”s name, and (ii) the reality of the financial circumstances in which the dividend was declared was clear from the company accounts in OHAG”s possession, the assertion that OHAG received the dividend innocently was untenable. Such a claim could not found a right to recover the dividend from the eighth defendant-which was appointed after the payment had been made-but at most a speculative loss of opportunity to recover what OHAG would have had every right to keep. On the basis that OHAG did know of the illegality and that no assets were actually

transferred, the recovery of the dividend from OHAG could be achieved by a simple reversal of the book entry by which it was paid or by rejection of OHAG”s proof of claim in the plaintiff”s liquidation to the extent of the dividend (page 191, lines 1–29; page 192, lines 20–32; page 193, line 6 – page 194, line 37).

25	SMELLIE, C.J.: This is the eighth defendant”s application to strike
out those aspects of the plaintiff”s pleadings which relate to a claim to
recover S.Fr. 14.2m. The plaintiff (‘OSEC’)”s claim is that that amount
was paid over to the plaintiff”s parent company, Omni Holding A.G.
(‘OHAG’), by way of dividends unlawfully declared by the board of
30	directors of the plaintiff. OHAG was the Swiss holding company of the
worldwide Omni Group which included the plaintiff. The claim is that the
defendants failed in their duty as auditors of the plaintiff to advise that
this unlawful payment had occurred, resulting in the plaintiff”s loss of
opportunity to recover the unlawful dividend payment from OHAG.
35	It is common ground that in fact no actual payment of money was
made to OHAG. Instead the payment comprised part of a larger dividend
payment (S.Fr. 25m.) to OHAG by way of a credit entry in the joint inter-
companies accounts ledger of the plaintiff and

...