Top Jet Enterprises Ltd v Sino Jet Holding Ltd and Jet Midwest Incorporated

• Jurisdiction: Cayman Islands
• Judge: (Segal, J.)
• Judgment Date: 19 January 2018
• Court: Grand Court (Cayman Islands)
• Date: 19 January 2018

Grand Court, Financial Services Division (Cayman Islands)

(Segal, J.)

TOP JET ENTERPRISES LIMITED

and

SINO JET HOLDING LIMITED and JET MIDWEST INCORPORATED

C. McKie, Q.C. and P. Smith for the plaintiff;

The first and second defendants did not appear and were not represented.

Cases cited:

(1)Autumn Hldgs. Asset Inc. v. Renova Resources Private Equity Ltd., 2017 (2) CILR 136, considered.

(2)Barrett v. Duckett, [1995] 1 BCLC 73; [1993] BCC 778; on appeal, [1995] 1 BCLC 243; [1995] BCC 362, referred to.

(3)Daniels v. Daniels, [1978] Ch. 406; [1978] 2 W.L.R. 73; [1978] 2 All E.R. 89, dicta of Templeman, J. referred to.

(4)Davis v. Scottish Re Group Ltd., New York C.A., No. 111, November 20th, 2017, unreported, referred to.

(5)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. referred to.

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

(7)Fraser v. Oystertec plc, [2004] EWHC 1582 (Ch); [2006] 1 BCLC 491; [2005] BPIR 381, referred to.

(8)Grosvenor & West End Ry. Terminus Hotel Co. Ltd., Re (1897), 2 Q.B. 124; 76 L.T. 337, referred to.

(9)Konamaneni v. Rolls Royce Indus. Power (India) Ltd., [2002] 1 W.L.R. 1269; [2002] 1 All E.R. 979; [2002] 1 All E.R. (Comm) 532; [2002] 1 BCLC 336; [2003] BCC 790; [2002] I.L. Pr. 40, considered.

(10)Nurcombe v. Nurcombe, [1985] 1 W.L.R. 370; [1985] 1 All E.R. 65; [1984] BCLC 557; (1984), 1 BCC 99269, considered.

(11)Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354; [1981] Com. L.R. 265, referred to.

(12)Renova Resources Private Equity Ltd. v. Gilbertson, 2009 CILR 268, referred to.

(13)Russell v. Wakefield Waterworks Co. (1875), L.R. 20 Eq. 474, considered.

(14)Smith v. Croft, [1986] 1 W.L.R. 580; [1986] 2 All E.R. 551; [1986] BCLC 207; 1986 PCC 412; further proceedings, sub nom. Smith v. Croft (No. 2), [1988] Ch. 114; [1987] 3 All E.R. 909; 1987 PCC 209; [1987] 1 FTLR 319, referred to.

Legislation construed:

Grand Court Rules 1995 (Revised), O.15, r.12: The relevant terms of this rule are set out at para. 22.

O.15, r.12A: The relevant terms of this rule are set out at para. 19.

Companies — derivative action — foreign derivative action — 50% shareholder entitled, under Cayman law, to bring foreign derivative action against third party with liability to company where company unable to enforce its rights because controlled by same wrongdoer as third party

The plaintiff brought a derivative action against the second defendant in the United States.

The plaintiff owned 50% of the shares in the first defendant, a Cayman company. The remaining 50% were owned by Skyblueocean Ltd., a BVI company. The first defendant had six directors: Skyblueocean’s owner and director, Mr. Kraus, was a director and Skyblueocean had appointed two of the others. In December 2015, the first defendant had entered into a consignment agreement with the second defendant, a company incorporated in the United States, which operated in Kansas City, Missouri. The plaintiff asserted that the second defendant was in breach of the agreement and liable to account and pay damages to the first defendant. It also asserted that the second defendant was owned and controlled by Mr. Kraus and his sister; and that Mr. Kraus and the other directors of the first defendant appointed by Skyblueocean, in breach of duty, prevented the first defendant from enforcing its rights and recovering its property from the second defendant. Under the first defendant’s articles of association, board approval by a majority vote was required before it could commence proceedings against the second defendant.

The plaintiff therefore commenced derivative proceedings in the name of the first defendant and against the second defendant in Missouri. In its answer, the second defendant denied the claims against it and alleged inter alia that the plaintiff had not complied with the requirements of Cayman law in bringing its petition.

The plaintiff issued a summons in this court seeking the following relief: a declaration pursuant to GCR O.15, r.12A(2) that it had leave to continue the Missouri proceedings, alternatively pursuant to GCR O.15, r.12(1) that it be appointed representative of the first defendant and have leave to continue the Missouri proceedings in that capacity. The plaintiff applied for leave to re-amend the amended originating summons to include a claim for a further declaration (para. 1A), namely that (a) thefacts and matters set out in the petition, if proven at trial, constituted a fraud on the minority in terms of such exception to the rule in Foss v. Harbottle; (b) the cause of action brought in the Missouri proceedings as set out in the petition was a cause of action that might be pursued derivatively as a matter of Cayman Islands law; and (c) if, as a matter of Missouri law, Cayman Islands law governed the question, the plaintiff had standing to commence and to continue the Missouri proceedings.

It sought leave to serve the summons out of the jurisdiction on the second defendant, pursuant to GCR O.11, r.1(1)(c).

The plaintiff submitted that leave to serve the summons on the second defendant out of the jurisdiction should be granted on the basis that the second defendant was a necessary party to the originating summons and that the other requirements for the grant of leave were satisfied, namely the plaintiff could show that its claim against the second defendant in Missouri had a reasonable prospect of success and that the case was a proper one for service out of the jurisdiction (because, inter alia, Cayman was the appropriate forum).

The plaintiff submitted in respect of its right to bring a derivative action that (a) a shareholder could bring a claim if, like the plaintiff, it held 50% of the issued share capital of the company concerned; (b) it was necessary for the shareholder to establish conduct which constituted a fraud on the minority; the plaintiff pointed to the failure by the directors of the first defendant appointed by Skyblueocean to authorize and cause the company to enforce its rights against the second defendant; (c) it was also necessary for the shareholder to establish that the wrongdoers were in control of the company; in the present case Mr. Kraus and his sister controlled the board of the first defendant and the first defendant itself; (d) a claim by a company for a breach of a contract made between the company and a third party could be brought derivatively; and (e) it was also unnecessary, in a case such as the present, for a shareholder to show that it had made a demand or request to the company’s board or other shareholders to commence the relevant proceedings where it could show that such a demand or request would be futile and would not be acted upon.

Held, ordering as follows:

(1) The plaintiff would be granted leave to serve the amended original originating summons out of the jurisdiction. GCR O.11, r.1(1)(c) permitted service in a case where a claim was brought against a person who had been or would be served within or out of the jurisdiction and a person out of the jurisdiction was a necessary or proper party thereto. While proceedings in Cayman (as the country of incorporation of the company concerned) to establish and declare a shareholder’s right to bring a derivative claim in another jurisdiction would not always be necessary, justified or appropriate, the summons was necessary, justified and appropriate in the present case. Where a derivative action was being litigated in another jurisdiction, the foreign court had conduct of the action and the question whether the action had been properly constituted and commenced was amatter for the foreign court. Any challenge to the standing of the shareholder who had commenced the action on the company’s behalf would be made in the foreign court. To the extent that that court applied Cayman law to that issue, one would expect that it would be able to deal with the issue with the benefit of expert evidence on Cayman law. In the present case, the second defendant had put in issue in its answer the plaintiff’s right to bring the Missouri proceedings. It had asserted that the plaintiff had failed to comply with Cayman law prior to the initiation of the Missouri proceedings. The second defendant had, however, not made an application in the Missouri court (assuming it could do so) or in the present court for an order requiring the plaintiff to terminate and withdraw the Missouri proceedings. It was content to leave the issue to be determined at trial. The plaintiff, however, was not content to do so. If the Missouri court decided to apply Cayman law, including GCR O.15, r.12A(2), to the issue of the plaintiff’s right to commence and continue the Missouri proceedings on behalf of the first defendant, and if GCR O.15, r.12A(2) applied to the Missouri proceedings such that leave from this court was required once the second defendant filed the answer, the plaintiff would need an order from this court granting leave in order to be able to continue the Missouri proceedings to trial. Accordingly, the plaintiff needed to establish whether leave from this court was required and, if so, to apply for and obtain leave to continue the Missouri proceedings. The claim for which leave to serve out was sought was the claim for leave to continue the Missouri proceedings, originally commenced as a freestanding originating summons against the first defendant to which the second defendant had been added. The plaintiff could properly commence and justify such an application against the first defendant and the second defendant was a necessary or proper party thereto. Even though the plaintiff’s derivative action itself was taking place in another jurisdiction, the plaintiff could seek to enforce its rights by asking this court to declare that it was entitled to act on behalf of the first defendant, a Cayman company, and if necessary to...