Renova Resources Private Equity Ltd v Gilbertson

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Foster, Ag. J.)
• Judgment Date: 14 April 2009
• Date: 14 April 2009

RENOVA RESOURCES PRIVATE EQUITY LIMITED

and

GILBERTSON and FOUR OTHERS

(Foster, Ag. J.)

Grand Court

Civil Procedure-pleading-fraud-in pleading equitable fraud, not necessary to use words ‘dishonest’ or ‘dishonesty’ if acts self-evidently dishonest-allegation deemed implicit in pleading

Companies-derivative action-leave to continue action-on application for leave, to consider whether plaintiff has prima facie case on merits of claim on behalf of company and that alleged wrongdoing by majority of shareholders able to prevent claim-claim not to be unfounded or speculative, but to be bona fide, in interests of company and sufficiently strong

Companies-derivative action-leave to continue action-on application for leave, not to consider views of hypothetical board of directors unless plaintiff seeks indemnity costs from company-financial consequences of indemnity costs may require court to consider whether hypothetical board would approve expenditure

Companies-derivative action-multiple derivative action-to be permitted in appropriate circumstances when loss to subsidiary causes indirect loss to parent company and its shareholders

Companies-derivative action-reflective loss-to prevent double recovery of losses, parent company or shareholder not allowed to recover reflective loss mirroring that sustained directly by subsidiary-not to prevent shareholder or parent bringing derivative action for relief on behalf of subsidiary

Companies-directors-breach of fiduciary duty-exclusion of liability-irreducible core of obligations owed by fiduciary (duty to act honestly and in good faith) and thus claims for equitable fraud not to be excluded by exemption clause

Held, granting the plaintiff leave to continue its action:

(1) The appropriate test to be adopted in considering an application for leave to continue a derivative action was that the court would have to be satisfied that the plaintiff had a prima facie case both in relation to the merits of the claim on behalf of the company, and that the alleged wrongdoing had been perpetrated by the majority of the shareholders, who were in a position to prevent the company from pursuing the claim against them. The requirement to obtain leave was to protect the defendant against and prevent the wasted expense and time of vexatious litigation. In deciding whether the plaintiff had shown a prima facie claim, the court would have to take a view of its merits, based on its first impressions of all the evidence presented, including that submitted by the defendant. The court would have to be satisfied that it was not unfounded or speculative, that it had been seriously brought on bona fide grounds in the interests of the company and that it was sufficiently strong to justify granting leave to continue the action rather than dismissing it at a preliminary stage. In the instant case, the court was satisfied that the plaintiff had a prima facie case against the defendants. The defendant director, with control of 50% of the shares in the company, was in a position to prevent the company from bringing a claim against him and, prima facie, his diversion of a valuable commercial opportunity away from the company for his own personal benefit was a breach of his fiduciary duties to the company. Leave would therefore be granted to continue the action pursuant to O.15, r.12A(2) of the Grand Court Rules (paras. 11–12; paras. 31–32; para. 35; para. 50; para. 73).

(2) When the court was considering whether the plaintiff should have leave to continue a derivative action, there was no need for it to concern itself with the views of a hypothetical board of directors. This test would only be necessary when a plaintiff sought indemnity costs from a company, since in such a case there would be financial consequences for the company and the court would need to consider hypothetically whether a reasonable board of directors would have approved the incurring of such costs. The plaintiff had made it clear that it did not intend to seek indemnity costs and, given there was no evidence that a hypothetical board would not have proceeded with the claim, the test was irrelevant (para. 24; paras. 30–32).

(3) The breach of the irreducible core of obligations owed by a fiduciary-the duty to act honestly and in good faith-and thus claims for equitable fraud could not be excluded by an exemption clause. Further, it

was not necessary for the plaintiff to have used the words ‘dishonest’ or ‘dishonesty’ in its pleadings since if the acts were self-evidently dishonest, the allegation would be deemed implicit in what was pleaded. Therefore, when considering this and the explicit exclusion of the dishonesty of a director in the indemnities in the company”s articles of association, the first defendant had not shown a compelling argument that he would be exonerated through an indemnity or exclusion clause so that it was sufficient to justify the refusal of leave to the plaintiff to continue this action. Moreover, the fact that the agreement between the parties had subsequently been declared null and void was also irrelevant since the core fiduciary duties he owed in his capacity as director of the second defendant company were imposed as a matter of law and not derived from the written agreement (paras. 56–57; paras. 60–61; para. 72).

(4) In appropriate circumstances, a multiple derivative action-as in this case in which the plaintiff brought an action for losses incurred by a wholly-owned subsidiary of the company in which he was a shareholder-would be permitted, since any loss to the subsidiary caused indirect loss to its parent company and shareholders. A sub-subsidiary of the company, the master fund, had in this case sustained significant losses as a result of the actions of the first defendant, without the knowledge or consent of any of the companies in the investment structure, and in these circumstances, a multiple derivative action on behalf of the company would not be objectionable (para. 66).

(5) To prevent double recovery of losses, a shareholder or parent company would not be allowed to recover reflective loss, the indirect loss mirroring that suffered directly by the subsidiary. In the present case, the plaintiff as shareholder of the second defendant company would be permitted to bring a multiple derivative action on behalf of the master fund, but not a derivative action on behalf of the company, to recover compensation for loss reflective of that sustained by the master fund. It was clear that the plaintiff was seeking relief on behalf of the whole investment structure and so it was evident that this was not a derivative action to recover compensation for reflective loss and thus leave to continue the action would be granted (paras. 68–69).

Cases cited:

(1) Airey v. Cordell, [2007] Bus. L.R. 391; [2007] BCC 785; [2006] EWHC 2728 (Ch), not followed.

(2) Armitage v. Nurse, [1998] Ch. 241; [1997] 3 W.L.R. 1046; [1997] 2 All E.R. 705; [1997] Pens. L.R. 51; (1997), 74 P. & C.R. D13, followed.

(3) Beddoe, In re, Downes v. Cottam, [1893] 1 Ch. 547; (1892), 62 L.J. Ch. 233; 37 Sol. Jo. 99, referred to.

(4) Bristol Fund Ltd., In re, 2008 CILR 317, followed.

(5) Edwards v. Halliwell, [1950] 2 All E.R. 1064; [1950] W.N. 537; (1950), 94 Sol. Jo. 803, referred to.

(6) Foss v. HarbottleENR(1843), 2 Hare 461; 67 E.R. 189, referred to.

(7) Johnson v. Gore Wood & Co., [2002] 2 A.C. 1; [2001] 2 W.L.R. 72; [2001] 1 All E.R. 481; [2001] 1 BCLC 313, considered.

(8) Mumbray v. Lapper, [2005] BCC 990; [2005] EWHC 1152 (Ch), not followed.

(9) Nurcombe v. Nurcombe, [1985] 1 W.L.R. 370; [1985] 1 All E.R. 65; [1984] BCLC 557, considered.

(10) Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1981] Ch. 257; [1980] 3 W.L.R. 543; [1980] 2 All E.R. 841; on appeal, [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354, followed.

(11) Schultz v. Reynolds, 1992–93 CILR 59, considered.

(12) Smith v. Croft, [1986] 1 W.L.R. 580; [1986] 2 All E.R. 551; [1986] BCLC 207, referred to.

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

(14) Viscount of Royal Ct. v. Shelton, 1985–86 JLR 327; [1986] 1 W.L.R. 985; (1986), 2 BCC 99, 134, referred to.

(15) Waddington Ltd. v. Chan Chun Hoo, [2008] HKEC 1498, followed.

(16) Wallersteiner v. Moir (No. 2), [1975] Q.B. 373; [1975] 2 W.L.R. 389; [1975] 1 All E.R. 849, considered.

Legislation construed:

Grand Court Rules 1995, O.15, r.12A: The relevant terms of this rule are set out at para. 2.

The plaintiff company applied for leave to continue a derivative action, pursuant to O.15, r.12A(2) of the Grand Court Rules, in which the first and fifth defendants had given notice of their intention to defend.

The plaintiff company was owned by a holding company which was a member of a group of companies. The plaintiff owned 50% of the shares

in the second defendant company with the other 50% being owned by a company of the first defendant, who was also one of its directors. An investment structure was established, pursuant to an agreement between the plaintiff”s holding company and the first defendant, whereby the second defendant company was set up as the general partner of the third defendant company, which in turn was set up as the general partner of the fourth defendant, the master fund. The structure was established to enable ultimately the second defendant company and its shareholders to benefit from the acquisition and management of investments held by and through the master fund. The agreement provided that the first defendant would be in charge of developing and implementing the structure”s investment funds.

The dispute between the parties arose over the acquisition of rights in a well-known commodity. The acquisition was initially proposed by the first defendant as an investment to be held within the investment structure but, without the consent or knowledge of the plaintiff or...