Top Jet Enterprises Ltd v Sino Jet Holding Ltd
| Jurisdiction | Cayman Islands |
| Judgment Date | 19 January 2018 |
| Date | 19 January 2018 |
| Docket Number | CAUSE NO: FSD 106 OF 2017 (NSJ) |
| Court | Grand Court (Cayman Islands) |
CAUSE NO: FSD 106 OF 2017 (NSJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Derivative action — derivative action brought in Missouri — whether the provisions of the Grand Court Rules relating to the need for leave to continue derivative actions and for representative actions apply in the case of foreign derivative actions — whether the Court can and should grant declaratory relief concerning the right of a shareholder in a Cayman company to bring a foreign derivative action
Colin McKie QC and Paul Smith of Maples and Calder acting for the Plaintiff
No appearance for the First Defendant or Second Defendant
This case concerns the law and procedural rules applicable to derivative proceedings commenced abroad (outside Cayman) by a shareholder of a Cayman company (in the name and on behalf of that company) against a defendant resident in the foreign jurisdiction. It raises the question of whether leave to continue is required from this Court in such a case (after the defendant in the foreign proceedings has defended the action) and, if leave is not required, whether and in what circumstances this Court should entertain an application by the shareholder seeking to establish its right under Cayman law to bring the derivative action in the foreign court.
Top Jet Enterprises Limited ( Top Jet) is a shareholder of a Cayman company called Sino Jet Holding Limited ( Sino Jet). Top Jet has commenced proceedings in State Court in Missouri, USA in the name and on behalf Sino Jet against Jet Midwest, Inc. ( Jet Midwest). In the Missouri proceedings Jet Midwest has questioned and challenged Top Jet's standing to do so. That issue is to be dealt with by the Missouri court at trial but before trial Top Jet has issued a separate application in this Court. In that application Top Jet seeks leave to continue the Missouri proceedings, if leave is required, and a declaration that under Cayman law it is entitled to bring a claim against Jet Midwest derivatively. Jet Midwest has been made a party to and served with the Cayman application but has chosen not to participate in these proceedings. I have concluded, for the reasons set out below, that:
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(a). leave to continue the Missouri proceedings is not required.
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(b). I should make the orders sought by Top Jet declaring that if the facts and matters set out in its pleading in the Missouri proceedings (a petition) are proven at trial then Top Jet is entitled under Cayman law to bring the Missouri proceedings against Jet Midwest on Sino Jet's behalf.
I have considered carefully whether Top Jet should be required to establish its right to bring the Missouri proceedings derivatively in the Missouri court and whether a separate application to this Court should be permitted. On balance I have concluded that in the circumstances of this case it is appropriate that the application be made (and served out of the jurisdiction) and that the relief sought be granted. This is in part because this is the first time, as far as I am aware, that this issue has been dealt with by this Court and there is a question as to whether leave from this Court is necessary even if the Missouri court does not require it, so that a decision of this Court is needed. It is also in part because Top Jet is seeking to exercise and enforce its Cayman law right as a shareholder of a Cayman company to be allowed to act in the name and on behalf of the company (in circumstances where it can establish that an exception to the rule in Foss v Harbottle (1843) 2 Hare 461 applies) and that issue particularly concerns the other shareholder of Sino Jet and Sino Jet's directors such that it is closely connected with this jurisdiction. I have, as I explain below, been concerned that the declarations are being sought by reference to assumed facts and without the benefit of the evidence in support of and opposition to the Missouri claim, and to ensure that any orders I make do not interfere with the Missouri proceedings. But on balance I have concluded that I should nonetheless make the declaration outlined above and am satisfied that the orders I make will not interfere with the Missouri proceedings. It will be a matter for the Missouri court to decide whether Cayman law applies to the issue of Top Jet's standing (it appears that it may well do so) and the effect in the Missouri proceedings of the orders I have made and my decision.
As I have explained Top Jet commenced the proceedings against Jet Midwest in State Court in Missouri, USA. Top Jet is a member of Sino Jet and owns fifty per cent of Sino Jet's shares. The other fifty per cent is owned by Skyblueocean Limited ( Skyblueocean) a company incorporated in the British Virgin Islands. Skyblueocean is said to be owned and controlled by Mr. Paul Kraus ( Mr. Kraus) and his sister. Mr. Kraus is a director of both Skyblueocean and Sino Jet. Skyblueocean has appointed three of the six directors of Sino Jet of whom Mr. Kraus is one. Sino Jet was a party to a consignment agreement entered into in December 2015 (the Consignment Agreement) with Jet Midwest, a company incorporated in the State of Kansas, USA but with its principal place of business in Kansas City Missouri. The Consignment Agreement was governed by New York law. Top Jet asserts that Jet Midwest is in breach of the Consignment Agreement and is liable to account, and pay damages, to Sino Jet, that Jet Midwest is owned and controlled by Mr. Kraus and his sister and that Mr. Kraus and the other directors of Sino Jet appointed by Skyblueocean, in breach of duty, have failed to act so as to cause Sino Jet to enforce, and will prevent Sino Jet from enforcing, its rights and recovering its property from Jet Midwest. Accordingly, Top Jet argues that it is entitled as a matter of Cayman law to issue derivative proceedings, on behalf of all Sino Jet's shareholders and in the name of Sino Jet, against Jet Midwest. But since Jet Midwest is located in Kansas City Missouri, it has been necessary to issue proceedings there, which was done by way of a first amended petition dated 5 May 2017 (the Petition).
The Petition was expressed to be issued by Top Jet derivatively on behalf of Sino Jet. In the Petition the following facts and matters are averred and relied on:
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(a). that under Sino Jet's articles of association board approval is required before Sino Jet can commence proceedings against Jet Midwest. Such approval requires a vote of the majority of the board (paragraphs 64 and 65).
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(b). a majority in favour of bringing proceedings cannot be obtained because three of the six members of the board (Mr. Kraus, Mr. Woolley and Ms. Lumley) have an interest in shielding Jet Midwest and therefore have a conflict of interest, have turned a blind eye to Jet Midwest's failure to perform its obligations under the Consignment Agreement and would block Sino Jet from enforcing the Consignment Agreement (paragraphs 66 and 67).
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(c). furthermore, Sino Jet's articles also provide that Sino Jet cannot commence any material litigation in which the amount in dispute is or could reasonably be expected to exceed US$300,000 without the approval of the Sino Jet board including the affirmative vote of at least one director appointed by Skyblueocean, and the dispute with Jet Midwest satisfies this test (paragraph 69).
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(d). Top Jet cannot replace the directors appointed by Skyblueocean because they can only be removed and replaced by Skyblueocean (paragraph 68).
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(e). accordingly Sino Jet is effectively prevented from taking action to protect its interests and rights under the Consignment Agreement (paragraph 70).
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(f). Skyblueocean can prevent Sino Jet from enforcing its rights only by misusing its de facto control of Sino Jet and by causing the directors it has appointed and controls to breach their fiduciary duties to the Sino Jet shareholders as a whole for the benefit of Jet Midwest and at Sino Jet's expense (paragraph 82)
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(g). a demand for the board to approve the commencement of proceedings against Jet Midwest would be futile because the directors appointed by Skyblueocean are unable to exercise independent and disinterested judgment on the matter (paragraph 83).
On 5 June, 2017 Jet Midwest filed its answer (the Answer) to the Petition and in addition to denying the claims made against it asserted by way of affirmative defence (in paragraph 95 of the Answer) that although the claims for relief alleged in the Petition were “ a purported shareholder derivative action, there [had] been no compliance with the [Sino Jet] articles of association much less the requirements of the laws of the Cayman Islands prior to the initiation of [the Petition].”
Shortly before the filing of the Answer, on 25 May 2017, Top Jet had issued an originating summons (the Original Originating Summons) in this Court with itself as plaintiff and Sino Jet as respondent seeking leave pursuant to GCR O. 15, r.12A(2) to continue the proceedings commenced by the Petition (the Missouri Proceedings) and an order that Top Jet be indemnified out of the assets of Sino Jet in respect of its costs incurred and to be incurred in the Missouri Proceedings and these proceedings. The evidence filed in support of the Original Originating Summons included an affidavit sworn by Constance Meng, a director and the chairman of Sino Jet (who had been appointed by Top Jet).
In the Original Originating Summons Top Jet sought the following orders:
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(a). pursuant to GCR O. 15, r. 12A(2) a declaration that Top Jet shall have leave to continue the Missouri Proceedings derivatively on behalf of Sino Jet;...
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