Tadra Institute (Fiji) Ltd, In re [2016] FJHC 16; HBC42.2011 (22 January 2016)

IN THE HIGH COURT OF FIJI
WESTERN DIVISION
AT LAUTOKA

CIVIL JURISDICTION

Winding Up Cause No. HBC 42 of 2011

IN THE MATTER of TADRA INSTITUTE (FIJI) LIMITED

AND IN THE MATTER of the Companies Act 1983 Section 212 and Section 222.

Mr. Roopesh Prakash Singh for the Petitioner
Mr. Chen Bunn Young for the Respondent

Date of Hearing: - 16th September 2015
Date of Ruling : - 22nd January 2016

RULING

(1) The Petitioner, (Ms) Glynne Hilton (hereinafter referred to as "the Petitioner") has brought "Winding up" proceedings against the Respondent, "Tadra Institute (Fiji) Ltd" (hereinafter referred to as "the Respondent") under Section 212 (1) of theCompanies Act, 1983. The Petitioner claims that she is a director, shareholder and a member of the Respondent Company and she applies under Section 212 (1) of the Companies Act, to obtain a Winding up order, as there is deadlock in the conduct and management of the business.

(2) A preliminary issue was raised by the Counsel for the Respondent Company. The Counsel for the Respondent submitted that the Petitioner lacked locus to bring the action under Section 212(1) of the Companies Act, 1983 on the ground that the Petitioner is not a member or shareholder of the Company.

(3) I was asked to rule on this preliminary issue prior to proceeding with the Petition. This ruling concerns with the preliminary objection raised by the Counsel for the Respondent.

(4) Before passing to the substance of the preliminary issue, let me record that the Counsel for the Petitioner and the Respondent in their written submissions has done a fairly exhaustive study of the judicial decisions and other authorities which they considered to be applicable.

I interpose to mention that I have given my mind to the oral submissions made by the Counsel for both parties as well as to the written submissions and the judicial authorities referred to therein.

(5) The Counsel for the Respondent's preliminary objection runs essentially as follows;

[Counsel in his submission writes ...]

Para 4. In Glynne Hilton's Affidavit Verifying Petition (Exhibit 4) she

exhibits her subscription to the memorandum of association as to 125,000 shares in the company on 11 November 2009. Her address at the material time was in Queensland, Australia.

8. Section 10 states:-

"(1) Except with the permission of the Minister, no person shall in Fiji issue any security or, whether in Fiji or elsewhere, issue any security which is registered or to be registered in Fiji, unless the following requirements are fulfilled, that is to say:-

(a) Neither the person to whom the security is to be issued nor the person, if any, for whom he is to be a nominee is resident outside Fiji; and

(b) The prescribed evidence is produced to the person issuing the security as to the residence of the person to whom it is to be issued and that of the person, if any, for whom he is to be a nominee.

(2) The subscription of the memorandum of association of a company to be formed under the Companies Act, by a person resident outside Fiji, or by a nominee for another person so resident, shall, unless he subscribes the memorandum with the permission of the Minister, be invalid in so far as it would on registration of the memorandum, have the effect of making him a member of or shareholder in the company, so, however, that this provision shall not render invalid the incorporation of the company; and, if, by virtue of this subsection, the number of the subscribers of the memorandum who, on its registration, become members of the Company is less than the minimum number required to subscribe the memorandum, the provisions of the said Act relating to the carrying on of business of a Company the number of whose members is reduced below the legal minimum shall apply to the Company as if the number of its members had been so reduced".

The important feature in this section is residence and not citizenship.

9. Under Legal notice No. 98 of 1981 the Minister pursuant to Section 39 "has delegated to the Reserve Bank of Fiji all of his powers under the said Act other than the power to make orders or to give authority to apply for search warrant". Thus the Reserve Bank is delegated the power to grant the necessary permissions under Section 10.

10. The effect of Section 10 (2) is that if Glynne Hilton has subscribed to the Memorandum of Articles of the Company before obtaining the Minister's (in this case the Reserve Bank) permission, her subscription is invalid so far as her status of being a member or shareholder.

11. It is on this basis that the Respondent submits that Glynne Hilton is not a member (or shareholder) because the permission of the Reserve Bank was given on 10 February 2010.

12. This submission is supported by the reasoning in the High Court case (which dealt with Section 10 (1)) of Alessandro Bianco v Gluseppe Ruggiero, (Civil Action No., HBC 0284 of 1995) which was affirmed by the Court of Appeal in Ruggiero v Bianco [1998] FJCA 58.

13. Hence it is clear that the legal position is that Glynne Hilton is not a member or shareholder of the Company. Therefore, the Petition should be dismissed without further consideration.

(Emphasis added)

(6) In adverso, the Counsel for the Petitioner submits;

[Counsel in his submissionwrites ...]

Para 3. It is agreed that the Company was registered on the 20 of

November 2009. However the shares were only allotted to the proposed shareholders and not issued as no monies were paid into the company for the business of the company.

4. It is clear from what the Respondent has submitted that a foreign investor cannot carry on business unless a Foreign Investment Certificate is in place. It is not stop the incorporation of a company. It is clear that the Fiji Investment Certificate was issued tothe Company on the 12 of February 2010. Refer to Exhibit 3 of Petitioner sworn on the 23 of December 2011. There is no evidence that the Company did any business before the Certificate was issued.

5. The Exhibit SW-1 refer to by the Respondent is a letter dated 10 of February 2010 issued by the Reserve Bank of Fiji (RBF). The letter is not enough for the Court to make a preliminary decision on the issue raised by the Respondent. The letter refers to "... your application Form 1.1 dated the 5 of February 2010."In the first line. The Respondent does not exhibit this application. It is clear that the RBF was aware that the Company was registered, hence it authorizes the issue of shares for Tadra Institute (Fiji) Limited, on the caption.

6. Therefore it can be reasonably and in fact logically submitted that the RBF had before it in the application the made the incorporation particulars of Tadra Institute Fiji Limited and also the shares that were to be issued. Hence the second paragraph of the letter stating;

"Permission under the Exchange Control Act is granted under the permit number 15/0210/16 for issue of 250,000 shares equally to Glynne Hilton and Mike Waters, in the above named company."

7. Therefore we submit that the proper consents and approvals were obtained in compliance with the Exchange Control Act. We further submit that no business conducted and it was only after the approval obtained from the RBF did the Petitioner bring in $300,000.00 FJD for the purchase of a property. Refer to transfer document at Exhibit 7 sworn on the 23 of December 2011.

8. The case of Alessasandro Bainco v Guiseppe Ruggiero and ors Civil Action Number HBC 0284 of 1995 is distinguishable on the facts for various reasons. In the case of Alessandro Bainco v Guiseppe Ruggiero and ors Civil Action Number HBC 0284 of 1995, which has been cited by the Respondent, monies were actually paid to the Defendant and shares actually issued in consideration for the payment (refer to page 4 of the High Court decision). There was evidenced by the resolution of the company. The Plaintiff thereafter rescinded the agreement and sought a refund of the monies, his own money and argued that no consent under the Exchange Control Act was obtained. The parties had performed the contract without the approval of the RBF.

9. In this instance it is different, it is clear that the RBF was aware at all material times that the Company, TIL as refers in the RBF letter, was incorporated and the shares were to be issued as applied for.

11. Here the parties merely applied for incorporation and applied for approval of RBF as the Company and obtained the required approval. The shares were not issued to the Petitioner and neither paid for.

(Emphasis added)

(7) The preliminary matter raised by the Counsel for the Respondent needs to be disposed of. Let me proceed to examine the preliminary legal issue now.

As I mentioned earlier, the Petitioner brought "Winding up" proceeding against the Respondent Company pursuant to Section 212 (1) of the Companies Act, 1983.
Let me have a close look at Section 212 of the Companies Act, 1983.

I should quote Section 212 which provides;

Alternative remedy to winding up in cases of oppression

212.- (1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself),or, in a case falling within subsection (2) of section 173, the Attorney-General, may make an application to the court, by petition, for an order under this section.

(2) If, on any such petition, the court is of opinion –

(a)that the company's affairs are being conducted as aforesaid; and

(b)that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the Company's affairs in future, or for the purchase of the shares of any members of the Company by other members of the Company or by the Company and, in the case of a purchase by the Company, for the reduction accordingly of the Company's capital, or otherwise.

(3) Where an Order under this section makes any alteration in or addition to any company's memorandum or articles, then, notwithstanding anything in any other provision of this Act but subject to the provisions of the order, the company concerned shall not have power, without the leave of the court, to make any further provisions of the order; but, subject to the foregoing provisions of this subsection, the alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company and the provisions of this Act shall apply to the memorandum or articles as so altered or added to accordingly.

(4) A certified copy of any order under this section altering or adding to, or giving leave to alter or add to, a company's memorandum or articles shall, within 14 days after the making thereof, be delivered by the company to the registrar, for registration; and, if a Company makes default in complying with this subsection, the company and every officer of the company who is in default shall be liable to a default fine.

(5) In relation to a petition under this section, section 345 shall apply as it apples in relation to a winding- up petition.

(Emphasis added)

Section 212 of the Companies Act, 1983 is quite clear. As I read Section 212 (1), the qualification of (Ms) "Glynne Hilton", the Petitioner, must be that she should be a member of the Respondent Company.

(8) As I understand the evidence, It is not in dispute that;

• ❖ The Petitioner, (Ms) Glynne Hilton was a non-resident of Fiji at the time of her subscription to the Memorandum of Association of the Respondent Company.
  
• ❖ The Petitioner, (Ms) Glynne Hilton has subscribed to the Memorandum of Association of the Company without obtaining the permission of "Reserve Bank of Fiji".
  
• ❖ The Petitioner is legally required to obtain the permission of "Reserve Bank of Fiji" under Section 10 (2) of the Exchange Control Act for subscription to the Memorandum of Association of the Company.
  

(9) The pivotal question that awaits determination by this Court is whether the Petitioner has "locus standi" or "legal standing" to bring "Winding Up" proceedings against the Respondent Company, pursuant to Section 212 (1) of the Companies Act, (Cap 247).

(10) What is the "status of membership?

"Palmers" on Company Law, Vo. 01, 25th Edition, at paragraph 7.001 to 7.003 states as follows;

The meaning of membership; "members" and "shareholders"

7.001 Every company is composed of members, though the law regards the company as an entity distinct from its constituent members. In the case of a company limited by shares, a member is a person holding shares in the company; there can be no membership, i.e. proprietary relationship to a company, otherwise than through the medium of shareholding. Consequently the terms "member" and "shareholder" are synonymous, apart from the now exceptional case of the bearer of a share warrant who is a shareholder but is not a member because he is not registered in the register of members.

It is in his capacity of member that the shareholder exercises the rights, enjoys the benefits and is subject to the obligations which the holding of shares carries. Although the rights or a member do not necessarily depend on the number of shares he holds, normally the quantum of membership in a company limited by shares is determined by the number of shares which the member holds, in conjunction with the provisions in the memorandum and articles defining the rights and duties carried by the shares. Assuming that a company has only one class of shares, a member holding 10 shares has, in principle, 10 times the rights of a member holding one share, and at the same time is liable to contribute 10 times the amount which the latter has to contribute.

What constitutes membership?

7.002 The general position is that the law requires a company to have two or more members. However, since 1992 one person may, by subscribing a memorandum of association and otherwise complying with the Act, incorporate a private company limited by shares or by guarantee. This change was implemented in Britain following the Twelfth European Company Law Directive. Section 1(3A) permits the registration of single-member private limited companies and the implementing regulation repeals in relation to them the previous law which provided compulsory winding up if any company's membership fell below two members and which made the remaining member personally liable for the company's debts. Prior to the Directive, which required Member States to provide a legal form whereby individuals could trade with limited liability, the view in Britain had been that limited liability was only appropriate for persons who invested in a business without taking part in its management. The one-man company affords a means of combining limited liability with the degree of control found in an individual proprietorship or partnership. Today the concept of a single member becoming personally liable arises only in relation to a company, other than which carries on business without having at least two members and does so for more than six months. Thereafter the person who is a member and knows it is carrying on business with only one member, shall be liable (jointly and severally with the company) for the company's debts contracted during the whole or any part of the period in which it continues to carry on business after the expiration of the six month period.

The question of what constitutes membership in a company is a point of first importance in the law of companies. Section 22 of the Companies Act 1985 provides that the members of a company are:

1. The subscribers to the memorandum of the company(they become members of the company upon its incorporation even though they are not yet registered in the register of members) (s.22(1));
   
2. Other persons who have agreed to become members (they become members upon registration in the register of members) (s.22(2)).
   

These, and only these, can strictly be called members in the sense of having acquired the full status of membership. Section 22 is not, however, intended to be conclusive as to membership.

A person may, therefore, become a member in any of the following ways:

1. By subscribing to the memorandum of association, upon the incorporation of the company.
   
2. By agreeing with the company to take a share and being placed on the register of members.
   
3. By taking a transfer of a share and being placed on the register of members
   
4. By succeeding to the estate of a deceased or bankrupt member and being placed on the register of members.
   
5. By allowing his name to be on the register of members or otherwise holding himself out or allowing himself to be held out as a member.
   

Subscribers to the memorandum

7.003 Every subscriber to the memorandum of association becomes a member ipso facto on the incorporation of the company, and liable as the holder of whatever number of shares he has subscribed for. "It is plain," said Lord Cairns in Evans Case," that the original subscribers are, by the Act of Parliament, deemed to have taken the shares set opposite their names," the object being that the public might rely with confidence on the subscribers of the memorandum becoming members of the company. In the case of the subscribers of the memorandum, therefore, no allotment is required, and no entry on the register of members is necessary in order to constitute membership. The subscriber is bound to take the shares from the company, and to pay for them on calls duly made like any other shareholder. He cannot in satisfaction of this obligation take a transfer of fully paid shares from another member; the only way he can possibly escape liability is by showing that all the shares have been allotted to others. In Re Esparto Trading Co.a subscriber who had not been placed on the register was nevertheless held liable after a lapse of nine years for the shares for which he had subscribed. This would be the case only if the Company still had unissued shares which could have been allotted to him according to Malins V-C in Re Tal y drws Slate Co. (Mackley's Case).

But where the subscriber wowed that his subscription was intended to be on behalf of his firm, and the shares were allotted to the firm, it was held that, on the facts of the case, there was only one agreement to take shares, and that the subscriber's obligation was accordingly discharged when his firm took the shares for which he had subscribed to the memorandum.

After the incorporation of the company a subscriber cannot repudiate on the ground of misrepresentation, nor, it is believed, has the court jurisdiction to order the rectification of the list of subscribers.

While in the case of subscribers the entry in the register of members is not an essential condition of membership, such entry is mandatory, since section 22(1) requires the company on registration to enter the names of the subscribers in its register of members; this section does not, however, contain a criminal sanction, such as a default fine, if the company fails to comply with its provisions.

(11) Section 30 of the Companies Act reads;

Definition of member

30- (1) The subscribers to the memorandum of a company shall be deemed to have agreed to become members of the company and, on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, shall be a member of the company.

(12) The Respondent's argument is that as a non-resident, the Minister's permission (now the Reserve Bank of Fiji) is needed before the subscription to the Memorandum of Association of the Company. As no such permission was obtained prior to the subscription to the Memorandum of Association of the Company, Section 10 (2) of the Exchange Control Act [Cap 211] has been breached. Counsel for the Respondent consequently argued that the Petitioners subscription to the Memorandum of Association and the membership is null and void ab initio.

As I will explain later, I consider this as a correct view.The Counsel relies substantially on the judgment of Hon. Justice John Lyons in "Alessandro Bianco v Ruggiero and Mediterranean Island Resort Limited,HBC 0284 of 1995L. That case bears a superficial resemblance to the case before me to the extent that, there as here a breach of Section 10 of the Exchange Control Act.

In adverso, with breath taking disingenuousness, Counsel for the Petitioner submits that the proper consent and approvals were obtained in compliance with the Exchange Control Act. Moreover, the Counsel submits that no business conducted and it was only after the approval was obtained from the Reserve Bank of Fiji, did the Petitioner bring in $300,000.00 for the purchase of the property. It is further submitted that the Reserve Bank was aware at all material times that the Company was incorporated and the shares were to be issued as applied for. It is further argued that the Reserve Bank approved the issue of shares in the Company by their letter dated 10th February 2010 (Exhibit SW-1) and hence there is no breach of Exchange Control Act and the Petitioner is a bon fide member of the Company.

As I will explain later, I entirely dissent from this proposition.

(13) The Respondent's preliminary objection is based on Section 10 (2) of the Exchange Control Act, Cap 211. Let me have a close look at Section 10 (2)

Section 10 (2) of the Exchange Control Act reads as follows;

(2) The subscription of the Memorandum of Association of a Company to be formed under the Companies Act, by a person resident outside Fiji, or by a nominee for another person so resident, shall, unless he subscribes the memorandum with the permission of the Minister, be invalid in so far as it would, on registration of the memorandum, have the effect of making him a member of or shareholder in the company, so, however, that this provision shall not render invalid the incorporation of the company; and if, by virtue of this subsection, the number of the subscribers of the memorandum who, on its registration, become members of the company is less than the minimum number required to subscribe the memorandum, the provisions of the said Act relating to the carrying on of business of a company the number of whose members is reduced below the legal minimum shall apply to the company as if the number of its members had been so reduced. (Cap. 247)

(Amended by Legal Notice 112 of 1970; Act 24 of 1979, s.9

When reduced to its essentials, Section says that, except with the permission of the Minister (now the Reserve Bank of Fiji), no person in Fiji (a non-resident) shall subscribe to the Memorandum of Association of a Company.

Returning back to the present case, as I understand the evidence, it is not in dispute that there existed no approval for the subscription to the Memorandum of Association of the Company. Section 10 (2) of the Exchange Control Act is quite clear. If a person is a non- resident, permission must be obtained before any subscription to the Memorandum of Association. Section 10 (2) of the Exchange Control Act has been breached by the Petitioner due to the failure to obtain the Minister's approval. I consider that, in breach of Section 10 (2) of the Exchange Control Act, the Petitioner's subscription to the Memorandum of Association and her membership in the Company is null and void ab initio and illegal and thus the Petitioner lack locus standito bring Winding Up proceedings against the Respondent. In these circumstances, the Petition must fail.

I have before me a number of propositions advanced by the Counsel for the Petitioner. The Counsel for the Petitioner contended that;

(1) The proper consent and approvals were obtained in compliance with the Exchange Control Act.

(2) That no business conducted and it was only after the approval was obtained from the Reserve Bank of Fiji, did the Petitioner bring in $300,000.00 for the purchase of the property.

(3) The Reserve Bank was aware at all material times that the Company was incorporated and the shares were to be issued as applied for.

(4) The Reserve Bank approved the issue of shares in the Company by their letter dated 10th February 2010 (Exhibit SW-1) and hence there is no breach of Exchange Control Act and the Petitioner is a bon fide member of the Company.

I sympathise with the propositions advanced by the Petitioner. The propositionsare based upon a misapprehension of the preliminary legal issue raised by the Respondent. It is essential to bear in mind that the preliminary legal issue is based on Section 10 (2) of the Exchange Control Act which deals with permission of the Minister (now the Reserve Bank of Fiji) to a non- resident to subscribe to the Memorandum of Association of a Company. The Respondent's argument is very specific and quite clear. He says that at the time of subscription to the Memorandum of Association of the Company, there existed no approval as envisaged in Section 10(2) of the Exchange Control Act. The Respondent does not complain about the Petitioner being in contravention of Section 4(1) of the Foreign Investment Act, 1999, which deals with Foreign Investment Certificate to a foreign investor to carry on business in Fiji. Moreover, the Respondent does not complain about the Petitioner being in Contravention of Section 10 (1) of Foreign Exchange Control Act which deals with permission of the Minister (now the Reserve Bank of Fiji) to a non- resident for the issue of shares.

Therefore, it is irrelevant whether the Company carried on business before the Foreign Investment Certificate was issued. Moreover, it is completely irrelevant whether the company issued any shares without obtaining the permission of the Reserve Bank of Fiji under Section 10(1) of the Foreign Exchange Control Act.

That is not the case here. The propositions advanced by the Counsel for the Petitioner do not offer assistance on the matter before the Court. They have no relevance to the preliminary legal issue raised before the Court. All this clearly demonstrates that the Petitioner is clutching at straws. I note Exhibit SW-1, a letter dated 10th February 2010, issued by the Reserve Bank of Fiji. I also note paragraph 02 of the correspondence. The Counsel for the Petitioner placed more emphasis on paragraph two of this correspondence. This correspondence is well over two months and twenty days after the incorporation of the Respondent Company. This correspondence, especially paragraph two is based on Section 20(2) of the Exchange Control Act which deals with retrospective validation of issue of shares. The retrospective validation of the issue of shares appears to be the intent to this correspondence.That is not the case here. It is essential to bear in mind that the preliminary legal issue is based on Section 10 (2) of the Exchange Control Act which deals with permission of the Minister (now the Reserve Bank of Fiji) to a non- resident to subscribe to the Memorandum of Association of a Company. This correspondence has no relevance to the preliminary legal issue raised before the Court. Accordingly, I do not place any value on this correspondence. No amount of hair splitting in this regard by the Counsel for the Petitioner will be of any avail to the Petitioner. Therefore, it is not necessary for me to express my views on the merits of the Petitioner's arguments relating to Section 4(1) of the Foreign Investment Act and Section 10 (1) of the Foreign Exchange Control Act. It will be at best a matter of academic interest only or at worst an exercise in futility to discuss the merits of the Petitioner's arguments in relating to Section 4(1) of the Foreign Investment Act and Section 10 (1) of the Exchange Control Act.

I certainly agree with the sentiments which were expressed inferentially in the Respondent's submissions. I therefore uphold the preliminary objection.I must confess that I am not in the least impressed by the propositions advanced by the Petitioner.

Essentially that is all I have to say.

CONCLUSION

On the whole of the material disclosed in this case, I venture to say beyond a per adventure that the Petitioner has no legal standing to bring Winding up proceedings against the Respondent Company pursuant to Section 212(1) of the Companies Act, 1983. The Petitioner is not a member of the Respondent Company.

Accordingly, I have no alternate but to dismiss the Petition. I cannot see any other just way to finish the matter than to follow the law.

FINAL ORDERS

(1) The preliminary objection in relation to the locus standi of the Petitioner is upheld.

(2) The Winding up Petition dated 20thDecember 2011 is dismissed for want of locus standi.

(3) The Petitioner is ordered to pay costs of $ 1500.00 (summarily assessed) to the Respondent which is to be paid within 14 days from the date hereof.

I do so order.

.......................................
Jude Nanayakkara
Master of the High Court

At Lautoka
22nd January 2016