Pautogo v Goldenwest Enterprises Ltd [2005] FJHC 710; HBF 013.2003 (5 April 2005)

IN THE HIGH COURT OF FIJI
AT LAUTOKA

CIVIL JURISDICTION

WINDING UP ACTION NO. HBF013/2003

BETWEEN

TIMOCI PAUTOGO
PETITIONER

AND

GOLDENWEST ENTERPRISES LTD.
RESPONDENT

Date of Hearing: 30 March 2005
Date of Judgment: 5 April 2005

Ms N. Khan for the Petitioner
Mr. H.A. Shah for the Respondent

JUDGMENT OF FINNIGAN J.

This is a petition for winding up a limited liability company. It was filed on 23 April 2003. The Petitioner claims that he is a shareholder and a former director of the company, and that the conduct of the other directors towards him in particular has been such that it is just and equitable that the company should be wound up. This ground is provided at Section 220(f) of the Companies Act Cap. 247

Evidence was given by the Petitioner and by Mr. Semi Mana. Mr. Mana's evidence can best be described as evidence of conduct between himself and the two major directors of the company which parallels the experience of the Petitioner.

On the day of the hearing the witnesses who might have given evidence for the company were said to be not available. I refuse an adjournment because the date of the hearing had been fixed by agreement of Counsel upon their appearance for that very purpose, and there had already been adjournments going back to September 2003. The oral evidence therefore came in only from the Petitioner's side of the case. There were also affidavits filed inadvance of the hearing and these were referred to. Also several of the affidavit annexures were tendered as exhibits at the hearing. From the certificate of incorporation I am satisfied that the company was incorporated on 11 January 2001 and at that time the Petitioner was allocated twenty of the one hundred shares then created. The directors about whose conduct he complains were William Hong and Carol Van and at that time they were allocated 30 shares each. A fourth director Shakil Kumar was allocated the other twenty shares. Subsequently these shareholdings were increased, I have not been told how, but I am satisfied from the evidence that by the time of the Petitioner's complaint each shareholding had been increased, so that the Petitioner eventually held twenty thousand shares out of one hundred thousand, and the other shareholdings increased in the same proportion.

It was submitted by Counsel for the company that the Petitioner has no standing because he is no longer a shareholder. The foundation for this submission is in an affidavit sworn by the fourth director Shakil Kumar on 19 May 2003 in which the deponent states:

"......I say that the Petitioner is no longer a shareholder in the said Company as he has not paid his equity for the twenty (20) percent shares. That I annexe herewith a copy of the Director's Meeting held on the 15^th day of January 2001 and mark it as Annexure 'A'. The Petitioner to date has not paid his shares as demanded by the Company........"

Annexure 'A' to the affidavit is a copy of the Minutes of the Meeting of Directors held on 15 January 2001. There is an item in the Minutes as follows:

"(2) It was pointed out to Tim Pautogo and Shakil Kumar that they have to pay for their shares in the sum of $50,000 each as they had not paid. They agreed to pay as and when demanded by the Company."

Although Counsel did not advert during submissions to paragraph 3 of those Minutes it is worth setting out here:

"(3) SALE OF SHARES

It is agreed and resolved that any share holder wanting to sell his share must offer the same to existing shareholders first in terms of the Articles or otherwise. The other shareholders shall have the first right of refusal if they do not wish to buy the shares offered for sale. In that event it may be sold to any third party. Further it was agreed that if demanded, the shareholders namely Tim Pautogo and Shakil Kumar must pay for their shares. If they are not able to pay then it should likewise be available for sale to the existing other shareholders who shall have the first right of refusal."

On 12 December 2002 the Petitioner through his solicitor wrote to the other three directors a letter in which, among other things, he offered to sell them his shares for $85,000. That offer was declined.

No other evidence was offered in respect of the Petitioner's shareholding. If that is all there is to it, I have no difficulty holding that he is still a shareholder in the company. The director's Minutes make payment for shares dependant upon a demand or a call and there is no evidence that a demand was ever made, other than the unsupported assertion of Mr. Kumar. The Petitioner has in fact paid nothing for the shares, but that is immaterial to their resale and at their meeting on 15 January 2001 (paragraph 3 above, last sentence) the other directors recognized that. In any event, Article 16 of the Company's Article provides that while the directors may from time to time make calls upon the members in respect of any money unpaid on their shares, the call shall not exceed one-fourth of the nominal value of share or be payable at less than one month from the date fixed for the payment of the last preceding call. As well, each member was entitled to at least fourteen days' notice of time place and amount called. Forfeiture of shares is provided for at Article 37 to 44, and there is a detailed procedure to be followed for forfeiture upon failure to pay any call. There is no evidence of any such procedure in this case. On the face of it the claim of Mr. Kumar is only a loose and unsupported assertion. In find that the Petitioner was and is a shareholder.

The Petitioner's Complaints

The Petitioner said that in 1999 he had been working with two directors of the Defendant Company, Bill Hong and Carol Van. He himself had a business called Koro Seas Marine Products, the name of which he registered on 3 April 2000. Bill and Carol had told him in 2000 what they were going to form a company and offered him the opportunity to join as a director and shareholder. He agreed and all concerned carried on as before. The new company used his vehicle and other machinery, including diving equipment. He continued purchasing these items on hire purchase at his own expense. He said his contribution to the new company was to be what he already supplied, his expertise in beche de mer and the fact that he was a Fijian. He said the business required him for a license to the beche de mer. He was not initially asked to pay for his shares. As well as being a director, his part in the business was to do the dealing in beche de mer and to account to Bill and Carol for his purchases and his expenses, which he did on a daily basis by fax to them when they were in America. In effect, he had transferred his expertise and his daily endeavours and his business plan from his own business to the new company.

There was some dissatisfaction recorded in the Minutes of the directors' meeting of 26 December 2001 and promise was recorded there that he would improve. He was a salaried servant of the company being paid initially about $2000 per month. This was increased at this directors' meeting to $2500, and simultaneously the company granted him $500 per month until completion of purchase towards purchase of the vehicle being used, which was his.

He said in evidence that he was never shown any audited annual accounts, and that indeed he was shown no accounts for the company at all. He said he began to enquire about this, upon which Bill and Carol started to push him away from the management of the company and became biased towards him. He had been working for the company during 2001 and 2002. On 26 November 2002 he was present at a meeting where the directors were present and a number of other people, whom he named, mostly Government officials it seems. At this meeting by vote of the other directors he was dismissed from this employment with the company and from this directorship. The reason given to him was that a recent newspaper article had been published critical of the company and he was blamed for leaking the information contained in it.

He said he was paid directors' fees at the first directors' meeting which he thought were $4000. He received no other fees, did not know on what basis the money had been paid to him and had no idea at any time of what profit or loss the company was making or what was the condition of its accounts. These matters were not revealed to him despite his requests. He had alleged expropriation of company funds by other directors and had asked for account pursuant to the Company's Articles 123 & 124.

The presence of the other people at the meeting was never explained to him.

Later, armed with a Court Order which he said entitled him to go into the company premises, he went there but was refused entry by Bill Hong. He has claimed that the other directors are trying to strip the company of its assets and deprive him of the value of his shares.

Mr. Semi Mana gave evidence of his dealings with Bill Hong and Carol Van which eventually caused him to complain to the Commissioner of Police about their conduct. Some of the matters that he mentioned were serious in nature and the net result was that the business he had been operating, apparently successfully, before his involvement with them, is no longer operating and it appears that his income may be very much reduced. However I am not able to see any basis on which his experience may be used to support a conclusion that it is just and equitable to wind up the company in which the present Petitioner was involved.

The Applicable Law

Counsel for the company rested his submissions on the facts of the matter. For the Petitioner, counsel rested his submissions on the facts of the matter. For the Petitioner, counsel relied on two authorities, the chief of which is Loch & Anor.v. John Blackwood Ltd. [1924] UKPC 45; [1924] AC 783. This case has some similarities to the case before me.

Counsel for the Petitioner submitted that the three most common types of circumstances which may justify a winding up order on the just and equitable ground are:

(1) Explusion from office

(2) Loss of confidence in management

(3) Deadlock in the management of the affairs of the company.

She submitted that all three circumstances has been proved in the present case. Her submission was based on a passage in a text book Minority Shareholders' Rights by Robin Holington (1990) Sweet & Maxwell, at page 33, paragraph 3-014 in so far as the textbook may have some persuasive value, that passage must surely be subject to the statement of principle that appears on page 31, paragraph 3-009:

"It is but common sense that a shareholder should not be permitted to petition to wind up a company if he will gain nothing from a winding-up. In general, therefore, if the company is insolvent, in the sense that there will be no surplus for shareholders after payment of the company's debts and the costs and expenses of the liquidation, then a fully paid-up shareholder's petition will be struck out. Indeed, any shareholder's petition which does not expressly plead such a surplus is liable to be struck out. [The authority cited for that proposition is re Rica Goldwashing Co. Ltd [1879] UKLawRpCh 18; (1879) 11 Ch D. 36]. In the normal case, therefore, the petitioner must allege a surplus and then, at trial, prove that surplus, which is not merely negligible, on a balance of probabilities. [The authority cited for that proposition, re Martin Coulter [1988] BCLC 12, 17c].

3-010. There is one clear exception to this general rule, namely where......the petitioner's inability to prove his tangible interest is due to the company's own default in providing him with information to which as a member he is entitled. [The authority cited, re Commercial and Industrial Insulations Ltd. [1986] BCLC 191]. This exception is limited in scope, since a member has only a limited right to information from the company.......his sole right is to receive audited accounts in accordance with the [Companies] Act."

I note that Article 126 of the Company's Articles made provision for audits under the Companies Act, and that this Petitioner had other rights under Articles 121-125.

After discussing other possibilities, the learned author states at page 33, paragraph 3-013 that in the case of a fully paid up shareholder of a limited company it is very difficult to conceive of any 'sufficient interest' other than an interest in a surplus on winding up.

In the present case the Petitioner has paid nothing for his fifty thousand shares. He has offered to sell them to the other shareholders for $85.000. Apart from this self evaluation there is no evidence whatever of the value of his shares and no evidence whatever of the value of the company. There is no evidence of what might be realized if the company is wound up and its assets sold.

Further to the passages cited above, the learned author of the textbook relied upon discusses at length each of the three circumstances listed above, and (at page 33 last 3 lines) in respect of expulsion from office acknowledges that it would appear drastic to wind the company up on the basis that from the inception of the company the excluded shareholder had reasonably expected to remain in salaried office. However, in respect of loss of confidence (at page 37) the author states that where a minority shareholder may be able to show a justifiable loss of confidence in the probity of the Board of Directors, then the Court may make a winding up order. He goes on however to submit that the facts will have to be fairly extreme to justify this cause, unless there has been breach of some underlying obligation as in re Westbourne Galleries [1973] AC 360 (H.L.). In respect of deadlock, the author acknowledges (at page 38) that total deadlock in the management of the affairs of a company is unusual. If there is practical deadlock then the Court may order a winding up. In the present case I am invited to hold that exclusion of a former director from policy and management decisions amount to management deadlock.

I return now to the Loch case (above). Without reciting the facts of that case, it was a situation in which the trusts of a Will were being carried out through a company and the directors of the company had formed such a majority as to outweigh the proportions of the bequests and were using their excessive power to deprive other beneficiaries of their just entitlements. It was a clear case of winding up for reasons of justice and equity. The petitioner had an interest which was substantial and gained that interest upon the winding up. The present case does have some similarities and to a degree they highlight the difference between the Petitioner's position and that of the petitioner in the cited case. The principles really amount to a discretion in the Court to decide what is the fair thing to do.

I return also to Re Westbourne Galleries (above). The leading judgment of Lord Wilberforce also emphasizes the primacy of the words 'just and equitable'. He cautions the Courts to be less timorous than they had been before 1971 in giving them their full force. He pointed out that the members of a company retain their expectations and obligations inter se which are not necessarily submerged in the company structure. (See p.379). In particular, the [Petitioner, in this case] if taken into the company on the basis that his skills etc. would be used in management, is entitled to expect to continue participating in management.

Conclusion

After considering these cases, and the facts in the evidence which I heard, both at length, I have reached the view that the Petitioner has made out a clear case for the relief which he seeks. He transferred his business activities from his own enterprise into the New company, in expectation of continued successful trading by his participation in a bigger enterprise, a partnership with three others, and the protection of limited liability. Suddenly and for apparently insufficient reason he was unilaterally deprived of that. It is a matter for concern that the remaining directors/shareholders are not interested, it seems, in acquiring his shares. He has been excluded from his own enterprise and there is no word offered by the other three members about what proposals they may have for the company. I conclude that this is a case calling for winding-up of the respondent company, with perhaps some degree of urgency.

I order accordingly. I award costs to the Petitioner in the sum of $1000. Leave is reserved to apply for further relief on directions if needed.

D.D. Finnigan
Judge

At Lautoka
5 April 2005