Svanstrom v Jonasson

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Georges and Kerr, JJ.A.)
• Judgment Date: 04 April 1997
• Court: Court of Appeal (Cayman Islands)
• Date: 04 April 1997

Court of Appeal

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

SVANSTROM and NINE OTHERS

and

JONASSON

A. Bueno, Q.C. and D.A. Harris for the first, seventh and eighth appellants;

A. Bueno, Q.C. and H. St.J. Moses for the third, fifth and sixth appellants;

J.A. Leo-Rhynie, Q.C. and A. McN. McLaughlin, Jnr. for the respondents.

The fourth, ninth and tenth appellants did not appear and were not represented.

Cases cited:

(1) Bagshaw v. Eastern Union Ry. Co.ENR(1849), 7 Hare 114; 68 E.R. 46; 18 L.J. Ch. 193, distinguished.

(2) Binney v. Ince Hall Coal & Cannel Co.(1866), 35 L.J. Ch 363; 14 L.T. 392, distinguished.

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

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

(5) Fulloon v. RadleyUNK(1991), 9 A.C.L.C. 1434; [1992] 2 Qd. R. 290, observations of Master White applied.

(6) Great W. Ry. Co. v. RushoutENR(1852), 5 De G. & Sm. 290; 64 E.R. 1121, not followed.

(7) Hooker Invs. Pty. Ltd. v. Email Ltd.(1986), 10 A.C.L.R. 443, dicta of Young J. applied.

(8) Maas v. McIntosh(1928), 28 S.R. (N.S.W.) 441; 45 W.N. (N.S.W.) 107, dicta of Harvey, C.J. in Eq. applied.

(9) Perkins, In re, ex p. Mexican Sta. Barbara Mining Co.ELR(1890), 24 Q.B.D 613, followed.

(10) Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204 ; [1982] 1 All E.R. 354, applied.

(11) Schultz v. Reynolds, 1992-93 CILR 59, explained.

(12) Stena Fin. BV v. Sea Containers Ltd., [1989] L.R.C. (Comm.) 641.

Legislation construed:

Companies Law (1995 Revision) (Laws of the Cayman Islands, 1963, cap. 22, revised 1995), s.37: The relevant parts of this section are set out at page 200, line 40 – page 201, line 2.

Companies-legal proceedings-action in respect of corporate wrong-only shareholders on register may bring action under exception to rule in Foss v. Harbottle against controlling interests for loss caused to company-no locus standi for beneficial owners even if registered shareholders joined as defendants

The respondent brought an action against the first four appellants in the Grand Court to recover damages for losses caused to his companies by breaches of their fiduciary duties.

The respondent was the beneficial owner of a minority shareholding in the seventh and eighth appellant companies. The first four appellants were directors of the companies and together held the beneficial interest in a majority of the shares of both. The entire issued share capital of both companies was registered in the name of the ninth appellant.

The respondent claimed on behalf of himself and other beneficial owners of minor shareholdings in the companies for loss resulting from the sale of company assets by the first four appellants at an undervalue and from the loss of contracts which the directors diverted to other companies in which the four of them held substantial interests.

All the appellants except the ninth and tenth appellants-the nominee shareholders representing, respectively, the first eight appellants and the respondent-filed a summons seeking to have the respondent”s claim struck out on the ground, inter alia, that he had no locus standi to bring the action.

The Grand Court dismissed the summons on the basis that the respondent had locus standi to bring his action on behalf of each company in respect of a wrong done to it, under an exception to the general rule that the company itself must be the plaintiff, allowing a minority shareholder to complain of fraud on the part of the controlling majority. He relied on Cayman precedent for the proposition that, provided that registered shareholders were joined as defendants, a person such as the respondent, for whom those nominees held on trust, could bring such an action.

On appeal the first eight appellants submitted that (a) the trial judge had erred in his construction of the Cayman case law, since the issue of whether a beneficial owner of shares could bring a derivative action on behalf of the company had not yet been determined by the Cayman courts; (b) the exception to the common law principle that the company

itself was the proper plaintiff to bring an action based on a wrong perpetrated against it applied only to aggrieved minority shareholders who would otherwise be denied justice by the fraudulent majority”s refusal to sue on the company”s behalf; and (c) since the respondent and his fellow beneficial owners were not on the register of company shareholders, and since under art. 11 of each company”s articles of association the company was not bound to recognize any equitable interest in its shares, they did not constitute an aggrieved minority with locus standi to bring an action.

The respondent submitted in reply that (a) authority both in England and the Cayman Islands showed that the beneficial owner of a minority shareholding had locus standi to bring an action on behalf of the company if he alleged fraud and the wrongdoers were in control of the company; (b) any other interpretation of the exception to the general common law rule would enable the first four appellants to avoid being held accountable in the courts to all those with substantial beneficial interests in the two companies; and (c) the trial judge had therefore correctly dismissed the appellant”s summons to strike out his action against them.

Held, striking out the respondent”s action:

(1) The respondent, as beneficial owner of a minority interest in the seventh and eighth appellants, had no locus standi to bring an action on behalf of the companies against their directors. The proper plaintiff in such cases was the company itself, subject to well-recognized exceptions, the relevant one in this case being where a minority shareholder wished to allege fraud by the controlling members resulting in loss to the company (page 200, line 34 – page 201, line 6; page 205, line 44 – page 206, line 17).

(2) Since the respondent was not a registered member of either company, however, he did not fall within this general exception, and there was no authority to the contrary in either England or the Cayman Islands. In the absence of an arrangement between the nominee shareholder and the beneficial owners of the companies” shares whereby the nominee could be compelled to bring proceedings on behalf of the companies, the respondent had no remedy. He could not succeed merely by joining the registered shareholder as a defendant (page 197, line 31 – page 198, line 21; page 202, lines 1–16; page 203, lines 18–44; page 207, lines 17–26; page 208, lines 27–43).

(3) Moreover, the common law principle that a company was not obliged to recognize a trust affecting its shares was reflected in each company”s articles of association, which stated that the company was not bound to recognize any equitable interest but would regard a registered shareholder as being absolutely entitled. For this reason too the respondent had no standing to bring the proceedings (page 199, lines 4–5; page 200, lines 19–33; page 203, lines 29–34; page 207, line 41 – page 208, line 14).

35	GEORGES, J.A.: The respondent, Mr. Jonasson, is the beneficial
owner of 15.11% of the shares in Rio Number Two Ltd. (the seventh
appellant) and Rio Number Three Ltd. (the eighth appellant). The first to
fourth appellants are the directors of the seventh and eighth appellants
and together hold the beneficial interest in 51.02% of these two
40	companies. Campbell Nominees Ltd. (‘CNL’) is the registered
shareholder of the entire shareholdings in the seventh and eighth
appellants and was named as the ninth and tenth defendants in the action
in relation to its holdings in each of the companies. It entered appearances
in the action but thereafter took no further part.
45	The action is a derivative action. The respondent claims on behalf of

himself and other shareholders of the seventh and eighth appellants (save
the first, second, third and fourth appellants) for loss caused to the
seventh and eighth appellants when their assets were sold at an
undervalue and contracts which they could have secured were diverted to
5	other companies in which the first to fourth appellants held substantial
interests. The details of the allegations supporting these claims need not
now be canvassed.
The first to eighth defendants filed a summons asking that the action be
struck out under r.41 of the Grand Court (Civil Procedure) Rules or under
10	the inherent jurisdiction of the court on two grounds; first, that the
respondent did not at the date of the commencement of the action have
locus standi to bring the action and secondly, that the action was
obviously unsustainable against any of the appellants. At the hearing of
the summons, arguments were advanced solely to the ground of locus
15	standi. The judge dismissed the summons, gave leave to appeal and
stayed all further proceedings until the hearing and determination of the
appeal.
Both sides agree that the principle has been clearly established in Foss
v. Harbottle (4) that in an action in respect of a wrong to a company,
20	prima facie, the proper plaintiff is the company itself. In Prudential
Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2) (10) the Court of Appeal in
England (Cumming-Bruce, Templeman and Brightman, L.JJ.) set out the
classic definition of the rule in Foss v. Harbottle as stated in the judgment
of Jenkins, L.J. in Edwards v. Halliwell (3) as follows ([1982] Ch. at
25	210-211):
‘(1) The proper plaintiff in an action in respect of a wrong alleged to
be done to a corporation is, prima facie, the corporation. (2) Where
the alleged wrong is a transaction which might be made binding on
the corporation and on all its members by a simple majority of the
30	members, no

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