NARBHAY RAM SUNDARJI
Defendant
T. Fa for the Plaintiffs
R.K. Naidu for the Defendant
Daf Hearing: 28th, 29th, 30th, 31st July, 5th, 7th, 24th, 25th August and 14th September 1998 1998
Date of Judgment: 4th June 1999
ass=MsoNormal alal align=center style="text-align: center; margin-top: 1; margin-bottom: 1"> JUDGMENT
The stohistory of this litigation up to September 1993 is set out in the decision of Scott J. of t of the 17th of September 1993
when he dismissed an application by the Defendant to strike out the Plaintiffs' claim on the ground of want of prosecution. Since
then the action has proceeded with a little more expedition although it will be noted that nearly five years have lapsed since Scott
J.'s decision and the date the hearing of this action commenced before me. It has been characterised by numerous delays and almost
equally characterised by change of solicitors for both parties culminating somewhat ironically in the present solicitor for the Plaintiffs
who was appointed in that capacity in January 1991 and ceased on the 7th of May 1992 returning to act for the Plaintiffs on the 30th
of June 1993.
There is a related action HBC 91 of 1992 which is a winding-uition in respect of a familfamily Company Jethasons Limited.
On the 6th of March 1998 when fixie hearing dates for Action 1025 I directed that both the wihe winding-up petition and the present
action proceed together and I allotted four days for this purpose, that being the estimate of the solicitors for both parties. Not
for the first time in the experience of this Court that estimate proved wrong. Earlier this month I directed that proceedings in
the winding-up be stayed pending my judgment in this case.
The Writ was issued on the 29th of September 1986, the principaim being that an allotmenttment of shares in the family Company Jethasons
Limited (the Company) allegedly made to the Defendant was fraudulent, unlawful and of no effect. More particularly the Plaintiffs
allege that the Defendant, fraudulently and in breach of the Companies Ordinance (mistakenly called "Act") procured registration
of a Return of Allotment purportedly made on 14th January 1977 and purporting to issue the following shares:
(1) rji Jethalal-23400 shares
(2) Narbhay Ram Sundarji-34199 shares
(3) Natwar Lal Sundarji-2400 shares
(4) Nandu Ben Sundarji-1 share
The first person named Sundarji Jethalal now deceased was the husband of the First-named First Plaintiff and father of the Second-named
Plaintiff and the Defendant.
The Statement of Claim then alleget no resolution to allot any new shares to the Defendant want was ever proposed or passed at any
meeting of Directors or Shareholders.
The following particulars are then given:
(i) The Directors had no powers to decide on the allotment of shares.
(ii) The allotments were made in breach of the Articles of Association iion in that no prior offer had been made to the other shareholders
to take up the new shares in proportion to their existing shareholding.
(iii) No consideration was paid for the allotted shares.
(iv) The allotment was made in an attempt by the Defendant to gain control of the Company and substantially lessen the voting strength
of the Plaintiffs in the Company.
The parties called only two witnesses, the Second Plaintiff and the Dent (Narbhay). When beginnininning his examination-in-chief
the Second Plaintiff whom I will henceforth refer to as Natwar stated that his mother would not give evidence because she was old
(aged about 75) forgetful at times and was not in Court because the steps to No. 3 Court where the trial took place were too high
for her. I shall now summarise the evidence beginning with Natwar. He first produced the Memorandum of Association and Articles of
the Company to record the fact that four shares were initially issued; that he discovered the allotment on which the Plaintiffs relied
in 1982; that his mother was disturbed by it; that he took legal advice, and he denied any approval of the allotment.
In cross-examination Natwar accethat he had at all times been Company Secretary for tax purx purposes; and that tax returns to which
Company accounts were required to be attached had been prepared by him after 1977 or 1978. He said he had managed the Company to
the best of his ability, kept the accounts up-to-date and had filed tax returns, which he had signed in the usual manner.
d this evidence difficult to accept in the light of his other evidence. First his statementement that he had come to prepare accounts
and/or sign tax returns to which accounts were attached, which in each of 1977, 1978, 1979, 1980 and 1981 (Defence Exhibits 23-27)
showed a share capital of $60,000.00. These were all years before Natwar's discovery of the allotment. If, as he said he prepared
accounts in ignorance of the Allotment, surely I would have thought they would show issued capital of $4.00.
By consent and very late in the case he tendered draft accounts for 1977 prepared by Narbhay and left with Natwar (with a notation
on the notes to the draft) "Natwar - do we need to show this?" Even this draft showed issued and paid up capital of $60,000.00.
The second difficulty I have with this evidence about theturns is his explanation aion as to why he had signed annual returns of
the Company for the years 1978 - 81 which showed paid up capital of $60,000.00. When I questioned him about this his explanation
was that he had filed these returns only after his 1982 "discovery" and had meekly followed the directive from the Companies'
Office to complete $60,000.00 as paid up capital because that was what previous documents said. Earlier he said he was taking advice
from his lawyer but if this be true I would have thought it almost certain that his lawyer would have advised him not to prepare
an annual return which did not agree with his understanding of what the records of the Company should be.
Then there is the last-minuteovery of Plaintiffs' Exhibit CC, which is a letter from them the Inland Revenue Department dated 26th
June 1978 addressed to him, seeking clarification of the allotment to Narbhay. This letter was dated (and presumably received) some
four years before his alleged "discovery".
In contrast to certain other correspondence which he denied rece he admitted having receiveceived this letter by the simple fact
of producing and tendering it.
Defendant submits that the clear inference to be drawn by Plaintiffs' Exhibit CC together wher with his evidence about the tax returns
from 1977 to 1981 is that Natwar's evidence of the 1982 "discovery" is false. I conclude that the only reason Natwar would
lie about this would be to conceal the fact that he had acquiesced in the Allotment at the time it was made or (as claimed by Narbhay)
he had given his active assent to it in the shareholders' meeting the existence of which he denied.
He flatly denied having received any of the letters his brother had sent to him in 1983-1985 (Defence Exhibits 15, 19, 20, 30 and
31) in which Narbhay requested information about Jethasons Limited and three other investments the Company held namely Tebara Restaurant,
Southern Printers and Sundarji Agencies as to whether funds for these businesses had been applied as authorised. Here a letter from
the Defendant's solicitors dated 6th July 1983 is interesting. It states that Narbhay had not received any reply to his complaints
and requests and then refers to a letter of the 28th of January 1982 written by Natwar on the letterhead of Jethasons Limited and
signed by him as the Company Secretary advising the Bank of New Zealand that Narbhay had been removed as a signatory to the Company's
account with the Bank.
According to the lettis was done in the presence of two of the three Directors nors namely Natwar and his mother. Narbhay denied
any knowledge of his removal and said that it could only have been done at an irregular meeting of Directors. I accept Narbhay's
evidence on this.
The other letters dated 5th of April 1984 (Defence Exhibit 20), 4th December 1985 written to Natwar's then solicitors and 14th January
1986 again written to Natwar's solicitors, repeat Narbhay's request for information about the Company's accounts which Narbhay said
were never replied to. Having observed both witnesses in the witness box in my judgment Natwar did receive these letters or, in the
case of those to his solicitors, became aware of their contents. I find his denial of this very curious for the simple reason that
despite the requests for information, here was a golden opportunity for him to raise concerns about the Allotment. He failed to do
so.
In the end Narbhay's patience was exha and he had recourse to legal action. In September 1986 Roo6 Rooney J. in the then Supreme
Court had ordered the holding of an Annual General Meeting (a requirement which Natwar admitted he had annually ignored before then).
I have little doubt that Natwar believed he was at risk of being out-voted by his brother's 57% interest or perhaps even being voted
out of his position in the Company. "The fraudulent allotment" allegation first surfaces in the Statement of Claim, issued
two weeks after Rooney J.'s order) three weeks before the holding of the Annual General Meeting, and four years after it was "discovered".
Nothing on the subject had been heard before. In cross-examination on the 30th of July 1998 Natwar confirmed that the only subject
on which he had written to Narbhay in the years since 1981 was "how much he wanted to sell his shares for". He added when
pressed that the only reason why he called the Annual General Meeting was because of Rooney J.'s order and he added for good measure
that he never called any other Annual General Meeting subsequently.
At various timehis cross-examination of the Defendant counsel for the Plaintiffs asked the Defendant whethwhether he had any documentary
evidence of the meetings held by the family in December 1976 and January 1977 at which according to the Defendant the issue of new
shares in the Company to be formed was agreed. The Defendant could not produce any such documentation for the simple reason as he
said that it was not thought necessary to do so. In any event he said it was the Plaintiff's duty as Company Secretary to keep minutes
of such meetings if any were required and he failed to do so. I shall discuss Narbhay's evidence in more detail shortly but comment
here that any lack of documentation was not confined to the Defendant. Natwar produced no documents to contradict those of his brother
particularly in relation to accounts. I can not understand the purpose in Natwar tendering the 1977 draft accounts and work papers
for Jethasons Limited unless it was to disown them which he never did. Such statements became part of the Plaintiffs' case on their
tender and I can only conclude from this that Natwar accepted the accounts of the Company and his father's sole trader business,
Sundarji Jethalal & Sons on which they were based.
He said he did now how Narbhay had acquired an equity of $6,208.83 in his father's business on 31st Decembecember 1975 but could
produce no document which might contradict the accounts. I am entitled to assume from this that he accepted these accounts. One other
piece of evidence by Natwar was obviously untrue. He stated in his evidence-in-chief that "he never had a partner" in his
accountancy practice. This was clearly contradicted by Defence Exhibits 2, 3 and 14 which are returns under the Registration of Business
Names Ordinance. This may have been an oversight by Natwar and probably very little overall hinges on it but in my view it is an
example of at best faulty recollection. Likewise he did not declare that he had been struck off as a Licensed Accountant by the Tax
Agents Registration Board on the 6th of February 1998 for failing to maintain his personal tax affairs in a satisfactory state.
Again this may have been a mere oversight because a letter from Ministry of Finance dated 15th April 1998 to Natwar states that the
Tax Agents Registration Board had been requested to re-instate his registration as a tax agent pending further investigation of his
case. The matter was never pursued but the fact is that whilst in one breath he accuses Narbhay of dishonesty he was not prepared
to admit that he had had a problem with the Inland Revenue Department.
I turn now to the Defendant's evidence. He stated that he was the elder brother of Natwar and that his father had arrived in Fiji
from India in 1930 following which in 1932 he began business as a general merchant. In the early 1950s he moved to the premises presently
occupied by Jethasons Limited of which he first had a sub-lease from Morris Hedstrom Limited. From 1956 to 1958 his father erected
a building with three shops on the ground floor and a dwelling on the first floor. He rented out two of the shops and used one as
his own business known as Sundarji Jethalal and later Sundarji Jethalal & Sons. In 1967 his father got into financial difficulties
and owed a lot of money on the building. Narbhay left secondary school to take employment in January 1967 in the Fiji Civil Service.
He said he gave his entire earnings to his father to help him to repay his debts and assisted him in the evenings and in the weekends
in looking after the business. In 1967 he began studies in accountancy and eventually qualified. When Natwar qualified as an Accountant
the two brothers went into partnership. Also from 1969 to 1981 he worked for the University of the South Pacific full time and while
there gave his entire salary to his father to help him pay his debts.
Eventually the family agreed that they should buy the existing land for $53,0 which was to be financed nced by the Bank of New Zealand.
He said that he prepared a submissi the Bank which was accepted on two conditions -
>
(1) that the family a limited liability company; and
(2) that their contribution would comprise improvements on his father's leased land her with a capital account of the father's business
which hich had to be not less than $60,000.00.
(1) Narbhay-34199 (2) Natwar-2400
(3) Sundarji-23400
(4) Nandu Ben-1
He said that he gave the Annual Return form to Natwar to file but d not do so. It was only whly when Narbhay returned to Fiji in
December 1977 that he presented the Return for filing. (It is recorded as being lodged on 2nd December 1977.)
Narbhay gave further evidence that the Companies O told him when he presentedented the Annual Return for filing that he must first
file a Return of Allotments. This appears on page 3 of the Annual Return. This Return lists the total shares as $60,000.00 fully
paid up as to one dollar each.
In cross-examination Narbhay was repeatedly asked whether his father's instructions on the allotment of shares were written or recorded.
He said that they were not but that his father had only a limited education in Gujrati or English so that this is not a cause for
surprise.
He was also cross-examined at some length on the notionaance sheet of a proposed Coed Company called "Sundarji Holdings Limited
(SHL)". The aim of this attack was presumably to show that in 1974 the intention was that the father would hold the majority
of shares. It is common ground that this proposal never came to fruition. It is worth noting here that SHL was to be a Company owning
equipment and motor vehicles which never formed part of the assets of Jethasons Limited and was thus not the Company Jethason Limited
ultimately became. He was asked by counsel how the share proportions listed in the proposed balance sheet of SHL which was sent to
the Bank of New Zealand on the 28th of July 1975 were arrived at.
Narbhay stated that they were "plucked from the air"in the letter which he wrot wrote to the Bank he records that they
were to be held "according to the net assets contributed by each partner and taken over by the Company". He said that the
notional allotment finally agreed to Jethasons Limited was based on the Bank's request. Natwar denied that the meetings of December
1976 and January 1977 ever took place whereas Narbhay said that they did and the decision on the allotment was unanimous and reached
under the leadership of his father who chaired the meeting. He further said that in the January 1977 meeting of the Company the 1976
accounts of Jethasons Limited were presented and approved by all the family present. I accept this evidence.
That would be enough to conclhe matter unless the law holds otherwise, so I turn now to w to my understanding of the relevant law.
Any allegation of fraud in a civil case must as in all civil cases be established on the balance of probabilities but on a higher
standard than that in an ordinary civil case. It is said that the greater the gravity of the allegation the more cogent must be the
evidence to support it. It was so held in Re Dellow's Will Trusts (1964) 1 ALL E.R. 771. This was a decision of Ungoed-Thomas J. who at p. 773 quoted Lord Denning in Hornal v. Neuberger Products Limited (1956) 3 ALL E.R. 970. At p.973 Lord Denning said:
"The more serious the allegation the higher the degree of probability that is required; but it need not, in a civil case, reach
the very high standard required by the criminal law."
p class=MsoNormal stal style="margin-top: 1; margin-bottom: 1"> The Allotment has been attacked alternatively (paragraof the Statement of Claim) aim) as "improper, unlawful and invalid".
Further and better particulars were supplied by the Plaintiff on the 7th of July 1987 in which reliance was placed of Section 43
of the former Companies Ordinance Cap. 216 the equivalent of which is now Section 56 of the Companies Act Cap. 247 except that sub-section (3) has changed from a criminal offence excusable for good reason to a "regulatory" offence
with a smaller penalty.
The buof this attack is set out in the Statement of Claim first that the Directors had no powers wers to decide on the allotment
of shares. I find this a very strange allegation to make. Article 50 of the Companies Articles makes it clear that the disposition
of new shares is, subject to its terms, the function of the Directors. Further, the evidence is that the Allotment was agreed by
the shareholders who were also all the Directors at the January 1977 meeting.
I find this allegatot true.
(b) The Allotments were made in breach of the Articles of Association in that no prior offer had been made to the other shareholders
to take up the new shares in the proportion to their existing shareholding.
Again Article 50 is relevant. This begins that, subject to any direction to the contrary in a resolution sanctioning an increase
in share capital, all new shares must first be offered to such persons who are entitled to receive notices from the Company of the
General Meetings in proportion as nearly as possible to the amount of the existing shares which they hold. I have said that I accept
Narbhay's evidence of the unanimous agreement of the meeting of the January 1977 to the allotment of the new shares in which they
were ultimately allotted.
I therefore find this allen not sustained.
(c) No consideration was paid for the allotted shares.
The shares were allotted in exchange for each of Sundarji's, Jethalal's, Narbhay'bhay's and Natwar's interests in the equity of Sundarji
Jethalal & Sons. I accept the Defendant's evidence on this which I find was also discussed and agreed to at the January 1977
meeting. Accordingly I reject this allegation also.
p class=MsoNormal stal style="margin-top: 1; margin-bottom: 1"> (d) The allotment was in an attempt by the Defendant to gain control of the CompaCompany and substantially lessen the voting strength
of the Plaintiffs in the Company.
I have previously rejected Natwar's evidence on the actions of the Defendant as alleged fraudulent conduconduct.
p class=MsoN=MsoNormal style="margin-top: 1; margin-bottom: 1"> SECTION 43
p class=MsoN=MsoNormal style="margin-top: 1; margin-bottom: 1"> I have previously referred to Narbhay's evidence that hempted to file an Annual Real Return for the Company in December 1977 in ignorance
of the requirement that the Company was required to file a Return of Allotments. The Return was duly filed after he received advice
from the Companies' Office. Clearly, the Companies' Office considered this was satisfactory notwithstanding that there is no evidence
that the requirements of Section 43(1)(b) were complied with.
In any event, the issue is irrelevant in respect of the rights betwee shareholders which is thes the subject of this action. Section
43, like its successor, Section 56, is a regulatory provision; it has criminal sanctions for non-compliance but does not invalidate
a bargain made between shareholders. Non-compliance does not invalidate, or make the transaction void or voidable in contrast for
example to Sections 53 and 98 of Cap. 247. Section 53(1) states that an allotment made by a Company to an Applicant contrary to Section
51 or 53 shall be voidable at the instance of the Applicant within one month after the holding of the statutory meeting of the Company.
Section als with the registration of charges and begins by saying that every charge created after ater a certain date by a Company
to which the section applies shall be void against the liquidator and any creditor of the Company unless prescribed particulars of
the charge are delivered to the Registrar.
p class=MsoNormal stal style="margin-top: 1; margin-bottom: 1"> In Volume II of Morison's Company Law, 4th Edition (Buorths) 1990 the author comm comments in paragraph 9.04 on the equivalent Section
60 of the former New Zealand Companies Act, stating that failure to comply with Section 60 renders the Company and its officers liable to fines but the right of the shareholder
under the contract to have his shares treated as fully or partly paid up shares is unaffected. Reliance is placed on Wright v. Horton [1887] UKLawRpAC 20; (1887) 12 App Cas 371. Although this case concerned registration of mortgages over a Company, it is authority for the principle that mere omission to register,
without concealment did not invalidate the debentures, at all events (in that case) as between a Director and Creditors. Lord Halsbury
said at 377:
"..it is impossible to acquiesce in the bald statement that there is a ;rule" or an "equitable principle" that
an u an unregistered mortgage or debenture is invalid as against a director, without some further exposition of what the "rule"
or the "principle" is by which it is rendered invalid. The statute, for very obvious reasons, in constituting a code for
the regulation of trading companies, has enacted that they should keep an account of mortgages or charges... Had the legislature
thought right it might have rendered all mortgages or charges invalid unless they had been entered in this account; it has not done
so ... it has simply enacted a pecuniary penalty for the non-performance of the statutory duty when that statutory duty is knowingly
and wilfully omitted."
Lord FitzGerald at page 384 disapproved earlier contrary authority and said:
"Bagallay L.J. took part in the decision of In re Native Iron Iron Ore Company [1876] UKLawRpCh 141; 2 Ch D.345 and in the subsequent case, In re South Durham Iron Company [1879] UKLawRpCh 145; 11 Ch D. 579, in an elaborate judgment he states what he considers to be the principle of the prior cases thus: "If a director of a company
advances money to the company, and takes as security for such advance a charge upon property of the company and omits to register
such charge, he is not at liberty to avail himself of such security as against the other creditors of the company." But on what
foundation does this forfeiture rest if not on the language of the statute? And there it is not to be found. It seems to me that
the effect of these prior decisions has been to inflict a forfeiture which the statute does not impose, in addition to the penalty which it does. I quite concur with my noble and learned friend that we cannot In re Globe New Patent Iron and Steel Company 48. J.J. (Ch) 295, which, with him, I adopt. The prior decisions may have been wholesome, but they are not warranted by the statute,
and I know of no equitable principle on which they can be sustained."
I accept the submission of counsel for the Defendant that a failure to complh Section 43 of the Companimpanies Ordinance (Cap. 213)
or Section 56 of the Companies Act Cap. 247 does not lead to invalidation of the allotment. The principle is that what the shareholders have agreed between themselves
binds them; what they may or may not have represented to others on the Companies' Register is a different matter. Even if I were
to find for the Plaintiffs on their claim that no meetings were held in December 1976 and January 1977 in my judgment the result
would be no different because I consider that the Plaintiffs, having sat back and acquiesced in the situation, cannot now rely on
the absence of formality required by the Articles. In my view they would be estopped from doing so. Furthermore, the Company is bound
in a matter intra vires by the unanimous agreement of all its corporators: Parker and Cooper, Limited v. Reading (1926) 1 Ch 975, and the adoption of matters normally required to be formalised in general meeting may be proved by a long course of acquiescence:
Ho Tung v Man On Insurance Company Limited (1902) AC 232, a case concerning Articles of Association.
To sum up I am satisfied that the documents tendered by the Defendant including ding its accounts and documents filed at the Companies
Office including the disputed allotment reflect the true state of affairs of the Company. In my judgment the Plaintiffs' attack on
the Defendant has consisted of mere assertions of fraud, brought too late after events to be credible.
I was not impressed by the Second Plaintiff as a witness whereas I find the evidence of the Defendant credible and logical. It is
one thing to make allegations of fraud but as this case proves, quite another to prove them. I accordingly dismiss the Plaintiffs'
claim and order them to pay the Defendant's costs.
Before leavhis matter it will be noted that I did not receive any submissions from the Plaintiffs. Thi. This was after their counsel
had been given several extensions of time in which to make his submissions and failed to do so. Accordingly I directed the Registry
not to accept any submissions from him should he attempt to file them after 6th of January 1999.
JOHN E. BYRNE
JUDGE
Cases referred to inment:
Ho Tung v. Man On Insurance Company Limited (1902) AC 232.
Re Dellow's Will Trusts (1964) 1 ALL E.R. 771.
Parker and Cooper, Limited v. Reading (1926) 1 Ch 975.
Wright v. Horton [1887] UKLawRpAC 20; (1887) 12 App Cas 371.
Hbc1025j.86s
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