Schultz v Reynolds

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Georges and Kerr, JJ.A.)
• Judgment Date: 15 April 1992
• Court: Court of Appeal (Cayman Islands)
• Date: 15 April 1992

Court of Appeal

(Zacca, P., Georges and Kerr, JJ.A.)

SCHULTZ

and

REYNOLDS and NEWPORT LIMITED

P. Lamontagne, Q.C. and D. Bannon for the appellant;

R.D. Alberga, Q.C. and N. Clifford for the first respondent.

The second respondent did not appear and was not represented.

Cases cited:

(1) Bagshaw v. Eastern Union Ry. Co.ENR(1849), 7 Hare 114; 68 E.R. 46, considered.

(2) Birch v. Sullivan, [1957] 1 W.L.R. 1247; [1958] 1 All E.R. 56, dicta of Harman J. considered.

(3) Burland v. Earle, [1902] A.C. 83; (1902), 71 L.J.P.C. 1, dicta of Lord Davey applied.

(4) Daniels v. DanielsELR, [1978] Ch. 406; [1978] 2 All E.R. 89, dicta of Templeman J. applied.

(5) Edwards v. Halliwell, [1950] 2 All E.R. 1064; (1950), 94 Sol. Jo. 803, dicta of Jenkins, L.J. applied.

(6) Estmanco (Kilner House) Ltd. v. G.L.C., [1982] 1 W.L.R. 2; [1982] 1 All E.R. 437, dicta of Megarry, V.-C. applied.

(7) Exchange Travel (Holdings) Ltd., Re, [1991] BCLC 728, dictum of Harman J. applied.

(8) Fargro Ltd. v. Godfroy, [1986] 1 W.L.R. 1134; [1986] 3 All E.R. 279; [1986] BCLC 370, considered.

(9) Foss v. HarbottleENR(1843), 2 Hare 461; 67 E.R. 189, applied.

(10) Great W. Ry. Co. v. RushoutENR(1852), 5 De G. & Sm. 290; 64 E.R. 1121, distinguished.

(11) Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd., [1991] 1 A.C. 187; [1990] 3 All E.R. 404; [1990] 2 Lloyd”s Rep. 95, considered.

(12) Lonrho PLC v. Fayed, [1992] 1 A.C. 448; [1991] 3 All E.R. 303; [1991] BCLC 779.

(13) Lonhro Ltd. v. Shell Petroleum Co. Ltd., [1982] A.C. 173; [1981] 2 All E.R. 456.

(14) Metall & Rohstoff AG v. Donaldson, Lufkin & Jenrette Inc., [1990] 1 Q.B. 391; [1989] 3 All E.R. 14.

(15) Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1981] Ch. 257; [1980] 2 All E.R. 841; on appeal, [1982] Ch. 204; [1982] 1 All E.R. 354, applied.

(16) Stena Fin. BV v. Sea Containers Ltd., [1989] LRC (Comm.) 641, considered.

(17) Telecommunications of Jamaica Ltd. v. Bernard, Court of Appeal of Jamaica, Case No. 88 of 1990, unreported, applied.

(18) Wallersteiner v. Moir (No. 2), [1975] Q.B. 373; [1975] 1 All E.R. 847, dicta of Lord Denning, M.R. applied.

(19) Williams v. British Gas Corp.(1980), 41 P. & C.R. 106; 257 E.G. 833.

Legislation construed:

Companies Law (Revised) (Laws of the Cayman Islands, 1963, cap. 22, revised 1990), s.37:

‘The subscribers of the memorandum of association of any company shall be deemed to have agreed to become members of the company whose memorandum they have subscribed, and upon the registration of the company shall be entered as members on the Register of members hereinafter mentioned, and every other person who has agreed to become a member of a company and whose name is entered on the register of members, shall be deemed to be a member of the company.’

Companies-minority shareholders-right to bring action-entitled to bring action on behalf of company against directors fraudulently or negligently benefiting themselves at company”s expense-no action by beneficial owner unless registered shareholder

Companies-shares-beneficial owner-joint beneficial owners-beneficial owner bringing proceedings must join co-owner in proceedings

Civil Procedure-pleading-amendment-amendment of statement of claim to introduce new cause of action may be allowed by Court of Appeal even though statement of claim already struck out by Grand Court

The appellant brought an action against the first respondent in the Grand Court for breach of trust.

The appellant alleged that D had agreed to pay her US$500,000 for certain business services she had performed for him. A company (the second respondent) was formed and the money deposited in an account in its name at the Canadian Imperial Bank of Commerce (‘CIBC’). The shares in the company were held by a nominee shareholder, Commerce Management Services (‘CMS’), jointly for the benefit of the appellant and D. CMS, a wholly-owned subsidiary of CIBC, managed the affairs of the new company, the directors of which were the first respondent (a trust officer with CIBC) and four other local employees of CIBC. They were also the subscribers to its memorandum of association. The first respondent explained that the purpose of this arrangement was to ensure that, should the appellant predecease D, any sums to the credit of the account would accrue to him but as long as she was alive the funds would be hers and under her control. Nonetheless, the printed nominee agreement form allowed ‘any one/all of the beneficial owners’ to authorize the transfer of the shares.

The appellant suspected that the money was no longer in the account and discovered that the first respondent, acting on instructions from D, had transferred the money to another account in D”s name. She brought the present proceedings on behalf of the company against the first respondent for breach of trust and, since it was a derivative action, she also named the company as a defendant.

The first respondent applied for the action to be struck out on the grounds that the appellant had no locus standi and her statement of claim disclosed no cause of action. The Grand Court (Malone, C.J.)

held that there was an arguable case that she was entitled to sue on the company”s behalf but nevertheless struck out the statement of claim for disclosing no cause of action.

The appellant appealed but first sought an amendment to the statement of claim to include an allegation of conspiracy. The application for the amendment was heard in the course of the appeal.

The appellant submitted that (a) as a beneficial owner of the shares in the second respondent she was entitled to bring the action in her own name; (b) to bring a derivative action she needed to prove only that a fraud had been committed by the first respondent and that he was legally in control of the second respondent. She was not required to prove that he had personally benefited from the fraud; (c) his fraud stemmed from the fact that he knew that the money had been deposited in the account for her own use and had transferred it without her knowledge; (d) the action had been properly brought against the first respondent since in his capacity as one of the directors of the second respondent, all of whom were employees of the bank that ultimately controlled that company, he was in fact and law in control of it; and (e) there had been a conspiracy between the first respondent, the bank and the other beneficial owner of the shares to commit a breach of trust against the second respondent by unlawfully utilizing its funds against its interest.

The first respondent submitted in reply that (a) under the Companies Law (Revised), s.37 the appellant, being neither a member nor a shareholder of the second respondent, had no locus standi to bring or sustain an action on its behalf; (b) any wrong allegedly suffered would have been suffered by the company, which alone could sue; (c) even if the appellant were entitled to bring an action on behalf of the second respondent, she had failed in essence to establish a cause of action because it was clear that he did not control the second respondent and no facts had been pleaded to support a claim of fraud or negligent breach of trust nor to show what benefit he had derived from the act complained of; (d) it was essential to establish in a derivative action that the alleged wrongdoer was not only in control of the company on whose behalf the suit was brought but that the act complained of was committed with the intention of bringing some benefit to himself; and (e) the court had no jurisdiction on an appeal to grant the amendment sought since the appellant”s defective statement of claim had already been struck out and, accordingly, there was no document which could be amended.

Held, dismissing the appeal:

(1) It was the general rule that the proper plaintiff in an action in respect of a wrong alleged to be done to a company was prima facie the company itself and, as an exception, a minority shareholder might bring a derivative action on behalf of the company against the wrongdoers if they used their controlling powers either fraudulently or negligently with the intention of benefiting themselves at the expense of the company. Accordingly, the appellant would have been able to bring a

derivative action if she had been a minority shareholder, but as she was not (being only the beneficial owner of shares in the company), she could not sue on its behalf and it was only the subsidiary company of the bank, in which name all the shares of the second respondent were registered, that could do so. In any case, as one of two joint beneficial owners, the appellant also lacked the capacity to sue on her own but would have had to join her co-owner. It would have been more appropriate to bring a different type of action naming her co-owner and the nominee shareholding company as defendants (page 63, line 40 – page 64, line 4; page 67, lines 3–7;page 69, lines 27–38;page 77, lines 1–15).

(2) Moreover, there seemed to be no justification for bringing proceedings against the first respondent. The first respondent was a director but not a shareholder of the second respondent, which was legally controlled by a nominee shareholding company, a subsidiary of the bank employing the first respondent and other directors of the second respondent. However, it did not follow from this that the first respondent controlled the second respondent. On the contrary, he was under a legal obligation to act independently in the interests of the second respondent and was under no obligation to heed the wishes of his employer, the bank. There was also nothing pleaded to establish fraud or that the first respondent had gained any benefit from his alleged breach of trust or wrongful exercise of authority vis-a-vis the second respondent and proof of improper benefit was essential-whether the act complained of was fraudulent or negligent-for the appellant to...