N3376

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NOs 19 & 33 OF 2007

OS 19 OF 2007

GAWAN KUYAN, BUMBUM BAIS & RAIKOS HOLDINGS LTD
Plaintiffs

V

ANDREW SALLEL, BATTENG PUTO, IGNAS MAMBEI,
USUM MAI & YANAM MUL
Defendants

OS NO 33 OF 2007

ANDREW SALLEL, BATTENG PUTO, BAWAN BULUM,
IGNAS MAMBEI, USUM MAI, YANAM MUL
& RAIKOS HOLDINGS LTD
Plaintiffs

V

GAWAN KUYAN, ALBERT ARENG, ASANGUL BALIFUN,
BADIA DEREK, BUMBUM BAIS, JOHN HIMSO,
JOHNSON DAMBE, JONAH DEMBI, KARE BULUK,
PORCHE ENTERPRISES LTD, RICKY BAIS, SAID MIRIZE,
TEUP GOLEDU (REGISTRAR OF COMPANIES),
TONY TAI TUNG CHI, YOUNG WADAU & YUAN CHIEN CHENG
Defendants

Kimbe 2007: 23 November
Waigani 2008: 28 March
Madang: Cannings J
2008: 26 May

COMPANY LAW – change of directors – transfer of shares – corruption allegations – whether changes made in accordance with Companies Act – whether the Court should endorse the changes.

A dispute arose amongst the shareholders and directors of a company. One group convened meetings, which resolved to sack the managing director, install a new board of directors and transfer some of the shares in the company to a new group. The new group notified the Registrar of Companies of the changes in directors and shareholders, the transfer of some shares and issue of some new shares. The Registrar entered the changes in the register of companies. The new group commenced OS proceedings in the National Court seeking declarations that the changes had been lawfully effected. The old group commenced separate OS proceedings, seeking declarations that the changes were unlawful and that they were still the directors and shareholders of the company. The two proceedings were heard together.

Held:

(1)	Directors of a company are, unless the company’s constitution provides otherwise, removed and appointed by the company’s shareholders.

(2)	In the usual case, for a valid transfer of a share to take place, property in the share must pass by agreement, assignment or some other transaction or process recognised by law, ie property in the share must, as a matter of law, pass to the transferee.

(3)	For a valid issue of shares to take place, other than when a company is initially registered or amalgamated, the company’s board of directors must first decide the consideration for which the shares will be issued and resolve that in its opinion, the consideration for and terms of the issue are fair and reasonable to the company and to all existing shareholders.

(4)	In the present case, there was no meeting of shareholders in August 2006. Nor was there a resolution for removal of any director in writing in lieu of a meeting. Other requirements for removal of directors were also not complied with.

(5)	The requirements for appointment of new directors were also not complied with.

(6)	As to the transfer of shares, there was no evidence of any instrument of transfer showing an agreement, assignment or transmission or any other transaction or process recognised by law by which property in the shares was passed. Other requirements for transfer of shares were also not complied with.

(7)	As to the issue of new shares, the board failed to pass the necessary resolutions.

(8)	None of the changes in directors or the transfer and issue of shares in 2006 were made in accordance with the Companies Act.

(9)	The breaches of the Companies Act were serious and extensive and it was not open to the Court to endorse what had happened.

(10)	Declarations were accordingly made that what had happened was null and void and the Registrar of Companies was ordered to rectify the register of companies to the extent necessary to show the company’s true state of affairs.

Cases cited

The following cases are cited in the judgment:

Magasaki Ltd v Linus Bai (2007) N3221
Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS No 924 of 2006, 23.01.07 (re motion for dismissal of proceedings)
Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS Nos 616 & 924 of 2006, 02.11.07 (re motion for default judgment)
Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS Nos 616 & 924 of 2006, 02.11.07 (re motion for contempt)

ORIGINATING SUMMONSES

This is a ruling on two originating summonses seeking declarations as to control and ownership of a company and consequential orders.

Counsel

Y Wadau, for the plaintiffs in OS 19/2007, and for the defendants (other than the Registrar of Companies) in OS 33/2007
I P Mambei and P Wariniki, for the defendants in OS 19/2007, and for the plaintiffs in OS 33/2007

26 May, 2006

1. CANNINGS J: This case is about the affairs of a company called Raikos Holdings Ltd, a landowner company in the Rai Coast district of Madang Province. Raikos Holdings is the permit holder for the Rai Coast TRP, issued under the Forestry Act in 1990. It has since 2005 had a logging and marketing agreement with a foreign company called Porche Enterprises Ltd, which was renewed in controversial circumstances in January 2007.

2. The controversy emanates from a split that developed in the ranks of Raikos Holdings’ directors and shareholders in 2006. Claims and counter-claims of corruption and bribery were made. One group of shareholders and directors was concerned about the conduct of the company’s managing director. They convened a series of meetings, which resulted in Mr Sallel being sacked and a new board of directors being installed. Later, some of the company’s shares were transferred to the new group and a fresh issue of shares was made to some of its members.

3. The new group aligned itself with Porche while Mr Sallel and his supporters have had a falling out with Porche. The new group notified the Registrar of Companies of the changes in directors and shareholders and the Registrar effected the changes in the register of companies. 

4. The new group of directors commenced OS proceedings in the National Court, No 19 of 2007, seeking declarations that the changes had been lawfully effected. Shortly afterwards, the old group, led by Mr Sallel, commenced separate OS proceedings, OS No 33 of 2007, seeking declarations that they are still shareholders and directors of the company. 

ISSUES

5. The two proceedings were heard together as the issues are the same in each, that is: 

•	Were the changes in directors made in accordance with the Companies Act? 

•	Were the transfers and issue of shares done in accordance with the Companies Act? 

•	If not, should the changes nevertheless be endorsed by the Court as being in the best interests of the company and the resource owners? 

6. The new group says the answer to all issues is yes. The old group says the answer to all of them is no.

HISTORY

7. The two OS proceedings now being determined are in addition to two other OS proceedings involving much the same sets of parties, OS Nos 616 and 924 of 2006, that I have been dealing with since January 2007. 

8. In Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS No 924 of 2006, 23.01.07, I refused a motion for dismissal of the proceedings and made various interlocutory orders, including that OS Nos 616 and 924 of 2006 be merged.

9. In Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS Nos 616 & 924 of 2006, 02.11.07, I refused a motion for default judgment and stayed OS Nos 616 & 924 of 2006 pending a final determination of OS Nos 19 and 33 of 2007.

10. In Raikos Holdings Ltd v Tony Tai Tung Chi and Others, OS Nos 616 & 924 of 2006, 02.11.07, I found Tony Tai Tung Chi and other defendants not guilty of contempt of court.

KEY PLAYERS

The ‘new group’

11. It is led by Gawan Kuyan, one of the original Raikos Holdings directors and shareholders, who says he is now the company chairman, and includes:

•	Albert Areng, a newly appointed director and a new shareholder
•	Asangul Balifun, one of the original directors and shareholders
•	Badia Derek, a newly appointed director and a new shareholder
•	Bumbum Bais, the newly appointed managing director and a new shareholder
•	Jack Kabor, a resource owner representative 
•	John Himso, a newly appointed director
•	Johnson Dambe, a newly appointed director and a new shareholder
•	Jonah Dembi, the company secretary since 2004 and an original shareholder
•	Kare Buluk, a newly appointed director and a new shareholder
•	Ricky Bais, a newly appointed director and a new shareholder
•	Saiid Mirize, a newly appointed director and a new shareholder.

12. Supporting this group is:

•	Porche Enterprises Ltd, the LMA contractor
•	Tony Tai Tung Chi, Porche’s managing director
•	Young Wadau, the group’s lawyer
•	Yuan Chien Cheng, another Porche official. 

The ‘old group’

13. It is led by Raikos Holdings former managing director and shareholder, Andrew Sallel, who says he is the individual responsible for rejuvenating the company and renewing the TRP, and includes:

•	Batteng Puto, a former director and shareholder, who was removed as director and had his share transferred in 2006 
•	Bawan Bulum, a former shareholder, who had his share transferred in 2006
•	Usum Mai, a former director and shareholder, who was removed as director and had his share transferred in 2006 
•	Yanam Mul, a former director and shareholder, who was removed as director and had his share transferred in 2006.

14. Supporting this group is:

•	Ignas Polos Mambei, the group’s original lawyer
•	Phillip Wariniki, lawyer of Blake Dawson Waldron who has recently taken over the case from Mr Mambei. 

CHANGES IN DIRECTORS AND TRANSFER OF SHARES

15. A number of meetings of resource owner representatives were held in the first half of 2006, organised by Bumbum Bais, to express concern about mismanagement of the company. In August 2006, the issues came to a head. 

16. On 11 August 2006 a meeting was held at Smugglers Inn Hotel, Madang. Mr Kuyan says he called this meeting as a matter of urgency to discuss a court case that had been commenced in the name of Raikos Holdings against Porche Enterprises, OS No 555 of 2006. He says the case was commenced without his or the board’s knowledge or consent. 

17. On 14 August 2006 a meeting of ‘stakeholders’ was held at Malaun base camp. They resolved to sack Mr Sallel on the grounds of misuse of about K364,000.00 of company funds and his failure to establish an office for the company. 

18. On 21 August 2006 a board meeting was held and a resolution passed that Mr Sallel is no longer the company’s managing director. The resolution was signed by:

•	Mr Balifun, as chairman;
•	Mr Puto, as vice-chairman;
•	Mr Kuyan, as director;
•	Mr Dembi, as company secretary;
•	Mr Mul, as director; and
•	Mr Jack Gabor, as chairman, resource owners’ committee.

19. A termination notice, dated 21 August 2006, was signed by Mr Balifun as chairman, Mr Puto, as vice-chairman, and Mr Dembi, as company secretary. (Mr Puto has since changed his allegiance and now supports Mr Sallel.) 

Directors

20. On 28 August 2006, the following people signed form 15s, consenting to be directors:

1	Albert Areng
2	Badia Derek
3	John Himso
4	Johnson Dambe
5	Kare Buluk
6	Ricky Bais
7	Saiid Mirize.

21. On 28 September 2006 Mr Kuyan attended the office of the Registrar of Companies in Port Moresby and lodged the form 15s. He also lodged a form 16, notice of change of directors and particulars of directors, which was signed by Mr Balifun. This form showed that the following ceased to be directors on 28 August 2006:

1	Andrew Sallel
2	Batteng Puto
3	Usum Mai
4	Yanam Mul.

22. All the forms were submitted in the name of the company secretary, Jonah Dembi. The Registrar accepted and registered the forms that day. On 28 September 2006 the directors were shown as:

1	Albert Areng, appointed 28.08.06
2	Asangul Balifun, one of the original directors
3	Badia Derek, appointed 28.08.06
4	Gawan Kuyan, one of the original directors
5	John Himso, appointed 28.08.06
6	Johnson Dambe, appointed 28.08.06
7	Kare Buluk, appointed 28.08.06
8	Ricky Bais, appointed 28.08.06
9	Saiid Mirize, appointed 28.08.06.

23. On 4 January 2007 the company register showed that there were ten directors: the above nine plus Bumbum Bais, who was appointed on 22 November 2006. 

Shares

24. There were eight shareholders in August 2006, who each held one ordinary share:

1	Andrew Sallel
2	Asangul Balifun
3	Batteng Puto
4	Bawan Bulum
5	Gawan Kuyan
6	Jonah Dembi
7	Usum Mai
8	Yanam Mul.

25. On 29 December 2006 Mr Kuyan submitted a form 13, notice of change of shareholders (share transfers), to the office of Registrar of Companies. This showed that one share was transferred by each of five shareholders to a new shareholder on 29 December 2006, as shown in the following table: 

No	Transferor	Transferee	
1	Andrew Sallel	Albert Areng	
2	Batteng Puto	Ricky Bais	
3	Bawan Bulum	Badia Derek	
4	Usum Mai	Bumbum Bais	
5	Yanam Mul	Saiid Mirize	

26. Also on 29 December 2006, one ordinary share each was issued to:

1	John Himso
2	Johnson Dambe
3	Kare Buluk.

27. Thus since 29 December 2006 there have been 11 shareholders, each holding one ordinary share:

1	Albert Areng, transferred 29.12.06
2	Asangul Balifun, an original shareholder
3	Badia Derek, transferred 29.12.06
4	Richard Bumbum Bais, transferred 29.12.06
5	Gawan Kuyan, an original shareholder 
6	John Himso, issued 29.12.06
7	Johnson Dambe, transferred 29.12.06
8	Jonah Dembi, an original shareholder (and company secretary)
9	Kare Buluk, issued 29.12.06
10	Ricky Bais, transferred 29.12.06
11	Saiid Mirize, transferred 29.12.06.

Summary of changes in control and ownership in 2006

Managing director

•	Bumbum Bais replaced Andrew Sallel.

Directors

•	Four of the original six were removed: Andrew Sallel, Batteng Puto, Usum Mai and Yanam Mul.

•	Two of the original six remained: Asangul Balifun and Gawan Kuyan.

•	Eight were newly appointed: Albert Areng, Badia Derek, Bumbum Bais, John Himso, Johnson Dambe, Kare Buluk, Ricky Bais and Saiid Mirize.

•	Thus the company has ten directors: the original two plus eight newly appointed.

Shareholders

•	Shares of five of the original eight shareholders have been transferred: Andrew Sallel, Batteng Puto, Bawan Bulum, Usum Mai and Yanam Mul. 

•	Those shares were transferred to: Albert Areng, Ricky Bais, Badia Derek, Bumbum Bais and Saiid Mirize.

•	Three of the original eight shareholders retained their shares: Asangul Balifun, Gawan Kuyan and Jonah Dembi.

•	Three new shares were issued to: John Himso, Johnson Dambe and Kare Buluk.

•	Thus the company has 11 shareholders: the original three plus eight who acquired their shares in 2006.

WERE THE CHANGES IN DIRECTORS MADE IN ACCORDANCE WITH THE COMPANIES ACT? 

Powers of shareholders

28. Directors of a company are, unless the company’s constitution provides otherwise, removed and appointed by the company’s shareholders. 

29. The shareholders’ powers of removal and appointment can only be exercised at a meeting of shareholders or by a resolution in lieu of a meeting, in accordance with Sections 86(1) (exercise of powers reserved to shareholders), 101 (annual meeting of shareholders), 102 (special meeting of shareholders), 103 (resolution in lieu of meeting) and 104 (court may call meeting of shareholders), which state:

86. (1)	Powers reserved to the shareholders of a company by this Act may be exercised only—

(a)	at a meeting of shareholders pursuant to Section 101 or Section 102; or

(b)	by a resolution in lieu of a meeting pursuant to Section 103.

(2)	Powers reserved to the shareholders of a company by the constitution of the company may, subject to the constitution, be exercised—

(a)	at a meeting of shareholders pursuant to Section 101 or 102; or
(b)	by a resolution in lieu of a meeting pursuant to Section 103.

101. (1)	Subject to Subsection (2), the board of a company shall call an annual meeting of shareholders to be held—

(a)	once in each calendar year; and
(b)	not later than six months after the balance date of the company; and
(c)	not later than 15 months after the previous annual meeting.

(2)	A company is not required to hold its first annual meeting in the calendar year in which it was first incorporated (whether or not under this Act), but shall hold that meeting within 18 months of such incorporation.

(3)	The Registrar may, on the application of the company, and for any special reason the Registrar thinks fit, extend any of the periods referred to in Subsection (1) or (2) even if, as a result, the period is extended beyond the calendar year.

(4)	The company shall hold an annual meeting of shareholders on the date on which it is called to be held.

102. A special meeting of shareholders entitled to vote on an issue—

(a)	may be called at any time by—

(i)	the board; or
(ii)	a person who is authorised by the constitution to call the meeting; and

(b)	shall be called by the board on the written request of shareholders holding shares carrying together not less than 5% of the voting rights entitled to be exercised on the issue.

103.(1)	Subject to Subsections (2) and (3), a resolution in writing signed by not less than 75% of the shareholders who would be entitled to vote on that resolution at a meeting of shareholders who together hold not less than 75% of the votes entitled to be cast on that resolution is as valid as if it had been passed at a meeting of those shareholders.

(2)	A resolution in writing that—

(a)	relates to a matter that is required by this Act or by the constitution to be decided at a meeting of the shareholders of a company; and

(b)	is signed by the shareholders specified in Subsection (3),

is made in accordance with this Act or the constitution of the company.

(3)	For the purposes of Subsection (2)(b), the shareholders are the shareholders referred to in Subsection (1).

(4)	A person who is registered as the holder of parcels of shares having different beneficial owners may expressly sign a resolution under this section in respect of shares having one beneficial owner and refrain from signing the resolution in respect of shares having another beneficial owner.

(5)	It shall not be necessary for a company to hold an annual meeting of shareholders under Section 101 where everything required to be done at that meeting (by resolution or otherwise) is done by resolution in accordance with Subsections (2) and (3).

(6)	Within five days of a resolution being passed under this section, the company shall send a copy of the resolution to every shareholder who did not sign the resolution or did not sign the resolution in respect of all the shares registered in that shareholder's name.

(7)	A resolution may be signed under Subsection (1) or Subsection (2) without any prior notice being given to shareholders.

(8)	Where a company fails to comply with Subsection (6)—

(a)	the company commits an offence and is liable on conviction to the penalty set out in Section 413(1); and

(b)	every director of the company commits an offence and is liable on conviction to the penalty set out in Section 414(1).

104. (1)	Where the Court is satisfied that—

(a)	it is impracticable to call or conduct a meeting of shareholders in the manner specified in this Act or the constitution; or

(b)	it is in the interests of a company that a meeting of shareholders be held,

the Court may order a meeting of shareholders to be held or conducted in such manner as the Court directs.

(2)	Application to the Court may be made by a director, or a shareholder, or a creditor of the company.

(3)	The Court may make the order on such terms as to the costs of conducting the meeting and as to security for those costs as the Court thinks fit.

30. Other requirements for calling and conducting meetings of shareholders are governed by Section 105 (proceedings at meetings) and, to the extent that a company’s constitution does not make provision for it, Schedule 2 (proceedings at meetings of shareholders). Schedule 2 prescribes things such as the chairing of the meeting, notice of meetings, methods of holding meetings, quorum, voting, proxies, minutes, shareholder proposals, representations by corporations, votes of joint holders, loss of voting right where calls unpaid and the power of a meeting of shareholders to regulate its own procedure on matters of procedure not covered by Schedule 2.
 
Removal of directors

31. The Companies Act provides for removal of directors in Section 134 (removal of directors):

(1)	Subject to the constitution of the company, a director of a company may be removed from office by ordinary resolution passed at a meeting called for the purpose or for purposes that include the removal of the director.

(2)	The notice of a meeting referred to in Subsection (1) shall state that the purpose or a purpose of the meeting is the removal of the director.

32. This means that unless the company’s constitution provides otherwise, if a director of a company is to be lawfully removed from office the following procedure applies: 

•	there must be a meeting of shareholders (s 134(1)) OR a resolution in writing in lieu of a meeting (s 103);

•	if there is a meeting of shareholders, at least 14 days written notice of the meeting must be given to all shareholders, directors and auditors of the company (Schedule 2, s 2(1));

•	the notice must state the nature of the business to be transacted at the meeting in sufficient detail to enable a shareholder to form a reasoned judgment in relation to it (Schedule 2, s 2(2));

•	the meeting must be called for the purpose or for purposes that include the removal of a director and the notice must state that the purpose, or a purpose, of the meeting is the removal of a director (s 134(2));

•	the question of removal of a director must be passed by ordinary resolution, ie a resolution approved by a simple majority of votes of those shareholders entitled to vote and voting on the question (ss 87(2), 134(1));

•	if there is no meeting of shareholders, the resolution for removal of a director must meet the 75% requirements of s 103.

Appointment of directors

33. The Companies Act provides for appointment of directors in Sections 130 (director’s consent required), 131 (appointment of first and subsequent directors), 132 (court may appoint directors) and 133 (appointment of directors to be voted on individually), which state:

130. A person shall not be appointed as a director of a company unless he has consented in writing, in the prescribed form, to be a director and certified that he is not disqualified from being appointed or holding office as a director of a company.

131. (1)	A person named as a director in an application for registration or in an amalgamation proposal holds office as a director from the date of registration or the date the amalgamation proposal is effective, as the case may be, until that person ceases to hold office as a director in accordance with this Act.

(2)	All subsequent directors of a company shall, unless the constitution of the company otherwise provides, be appointed by ordinary resolution.

132. (1)	Where—

(a)	there are no directors of a company, or the number of directors is less than the quorum required for a meeting of the board; and

(b)	it is not possible or practicable to appoint directors in accordance with the company's constitution,

a shareholder or creditor of the company may apply to the Court to appoint one or more persons as directors of the company, and the Court may make an appointment where it considers that it is in the interests of the company to do so.

(2)	An appointment under Subsection (1) may be made on such terms and conditions as the Court thinks fit.

133. (1)	Subject to the constitution of the company, the shareholders of a company may vote on a resolution to appoint a director of the company only where—

(a)	the resolution is for the appointment of one director; or
(b)	the resolution is a single resolution for the appointment of two or more persons as directors of the company and a separate resolution that it be so voted on has first been passed without a vote being cast against it.

(2)	A resolution moved in contravention of Subsection (1) is void even though the moving of it was not objected to at the time.

(3)	Subsection (2) does not limit the operation of Section 136.

(4)	No provision for the automatic reappointment of retiring directors in default of another appointment applies on the passing of a resolution in contravention of Subsection (1).

(5)	Nothing in this section prevents the election of two or more directors by ballot or poll. 

34. Procedures for calling and conduct of meetings of shareholders are governed by Section 105 (proceedings at meetings) and Schedule 2 (proceedings at meetings of shareholders). 

35. This means that, in most cases, unless the company’s constitution provides otherwise or if directors are appointed by the court (s 132), if a director is to be lawfully appointed, the following procedure applies:

•	there must be a meeting of shareholders OR a resolution in writing in lieu of a meeting (s 103);

•	the resolution must be for the appointment of one director OR if the resolution is a single resolution for the appointment of two or more persons as directors, a separate resolution that it be so voted on must first be passed without a vote being cast against it (s 133(1));

•	if there is a meeting of shareholders, at least 14 days written notice of the meeting must be given to all shareholders, directors and auditors of the company (Schedule 2, s 2(1));

•	the notice must state the nature of the business to be transacted at the meeting in sufficient detail to enable a shareholder to form a reasoned judgment in relation to it (Schedule 2, s 2(2));

•	the question of appointment of a director must be passed by ordinary resolution, ie a resolution approved by a simple majority of votes of those shareholders entitled to vote and voting on the question (s87(1), s87(2), s133(1)); 

•	if there is no meeting of shareholders, the resolution for appointment of a director must meet the 75% requirements of s 103;

•	the person appointed must consent to being a director and certify that he or she is not disqualified (s 130).

The present case

Removal of directors

36. The evidence reveals that the Companies Act was not complied with when Messrs Sallel, Puto, Mai and Mul were removed as directors in August 2006.

37. There was no meeting of shareholders in August 2006. Nor was there a resolution for removal of any director in writing in lieu of a meeting under Section 103. 

38. In August 2006 the company had eight shareholders: Messrs Sallel, Balifun, Puto, Bulum, Kuyan, Dembi, Mai and Mul. None of the meetings of 11 August (Smugglers Inn), 14 August (Malaun base camp) and 21 August (venue unclear) can be regarded as a meeting of those shareholders. Those meetings were stakeholder meetings: gatherings of people who had an interest in the affairs of Raikos Holdings. Such meetings have no legal status under the Companies Act. Even if they did, other requirements of the Companies Act for removal of directors were not complied with, in that the notice requirements of Schedule 2 were breached and there is no evidence of a resolution for removal of any director being passed or voted on. 

39. The form 16, stating that Messrs Sallel, Puto, Mai and Mul ceased to be directors on 28 August 2006, which was submitted by the company secretary, Mr Dembi, signed by Mr Balifun and lodged with the Registrar by Mr Kuyan on 28 September 2006, is of no legal effect. It cannot be evidence of something lawfully done when the events underpinning it were not lawfully done. The fact that the Registrar accepted the form and amended the register of companies in accordance with the changes stated is of no legal consequence. The Registrar cannot, by amending the register, make good a defect in removal of a director.

40. The removal of Messrs Sallel, Puto, Mai and Mul as directors was, clearly, not in accordance with the Companies Act.

Appointment of directors

41. As was the case with removal of four directors, the Companies Act was not complied with when Messrs Areng, Derek, Himso, Dambe, Buluk, Ricky Bais and Mirize were appointed as directors in August 2006. Nor was the Act complied with when Bumbum Bais was appointed in November 2006. 

42. As explained earlier, there was no proper meeting of shareholders in August 2006 or at any other relevant time. There was no resolution for appointment of any director in writing in lieu of a meeting under Section 103. Even if one or more of the meetings of 11, 14 or 21 August were regarded as a lawful meeting of shareholders, other requirements of the Companies Act for appointment of directors were not complied with, in that the notice requirements of Schedule 2 were breached and there is no evidence of a resolution for appointment of any director being passed or voted on. 

43. There is no evidence of a meeting of shareholders that passed a resolution for the appointment of Bumbum Bais. Nor was there a resolution in writing for his appointment, in lieu of a meeting. 

44. There is evidence that the requirements of Section 130 were met in that each of the new directors completed a form 15, thereby consenting to being a director and certifying that he was not disqualified. But without being lawfully appointed, their signing of the form 15s is of no legal effect. The fact that the Registrar accepted those forms, together with the form 16 summarising the changes in directors, and amended the register accordingly, is also of no consequence, for the same reasons given in relation to the removal of the four directors.

45. The appointment of Messrs Areng, Derek, Himso, Dambe, Buluk, Ricky Bais, Mirize and Bumbum Bais as directors was, clearly, not in accordance with the Companies Act. 

WERE THE TRANSFER AND ISSUE OF SHARES MADE IN ACCORDANCE WITH THE COMPANIES ACT? 

Transfer of shares

46. A share in a company is personal property (Companies Act, Section 36) and can be transferred in accordance with Sections 40 (transferability of shares), 65 (transfer of shares) and 66 (transfer of shares by operation of law), which state:

40. (1)	Subject to any limitation or restriction on the transfer of shares in the constitution of the company, a share in a company is transferable.

(2)	A share is transferred—

(a)	by entry in the share register in accordance with Section 65; or
(b)	in accordance with the terms of any exemption given by the Registrar under Section 77.

(3)	The personal representative of a deceased shareholder may transfer a share even though the personal representative is not a shareholder at the time of transfer.

65.  (1)	Subject to the constitution of the company, shares in a company may be transferred by entry of the name of the transferee on the share register.

(2)	For the purpose of transferring shares, a form of transfer signed by the present holder of the shares or by his personal representative shall be given to—

(a)	the company; or
(b)	an agent of the company who maintains the share register under Section 67(3).

(3)	The form of transfer shall be signed by the transferee.

(4)	On receipt of a form of transfer in accordance with Subsection (2) and (3), the company shall forthwith enter or cause to be entered the name of the transferee on the share register as holder of the shares, unless—

(a)	the board resolves within one month of receipt of the transfer to refuse or delay the registration of the transfer, and the resolution sets out in full the reasons for doing so; and

(b)	notice of the resolution, including those reasons, is sent to the transferor and to the transferee within five days of the resolution being passed by the board; and

(c)	the Act or the constitution expressly permits the board to refuse or delay registration for the reasons stated.

(5)	Subject to the constitution of a company, the board may refuse or delay the registration of a transfer of shares under Subsection (4) where the holder of the shares has failed to pay to the company an amount due in respect of those shares, whether by way of consideration for the issue of the shares or in respect of sums payable by the holder of the shares in accordance with the constitution.

(6)	Following entry of the name or names of a transferee or transferees on the share register the company shall submit to the Registrar notice in the prescribed form of that entry unless—

(a)	the company is subject to a listing agreement with a stock exchange; or

(b)	the total number of shares transferred since the date of incorporation or the last annual return under Section 215 is less than 50% of the issued shares; or

(c)	the company submits to the Registrar its annual return under Section 215 within one month of the date of entry of the transfer.

(7)	Where a company fails to comply with Subsection (4) or (6)—

(a)	the company commits an offence and is liable on conviction to the penalty set out in Section 413(1); and

(b)	every director of the company commits an offence and is liable on conviction to the penalty set out in Section 414(1).

66. Shares in a company may pass by operation of law notwithstanding the constitution of the company.

47. The transfer of shares must be reflected in a company’s share register, which the company is required to maintain under Division VI.9 of the Companies Act. Key provisions are Sections 67 (company to maintain share register), 69 (share register as evidence of title) and 71 (power to rectify share register), which state:

67. (1)	A company shall maintain a share register that records the shares issued by the company and states—

(a)	whether, under the constitution of the company or the terms of issue of the shares, there are any restrictions or limitations on their transfer; and

(b)	where any document that contains the restrictions or limitations may be inspected.

(2)	The share register shall state, with respect to each class of shares—

(a)	the names, alphabetically arranged, and the latest known address of each person who is, or has within the last ten years been, a shareholder; and
(b)	the number of shares of that class held by each shareholder within the last ten years; and
(c)	the date of any—

(i)	issue of shares to; or
(ii)	repurchase or redemption of shares from; or
(iii)	transfer of shares by or to,

each shareholder within the last ten years, and in relation to the transfer, the name of the person to or from whom the shares were transferred.

(3)	An agent may maintain the share register of a company.

(4)	Where a company fails to comply with Subsection (1) or (2)—

(a)	the company commits an offence and is liable on conviction to the penalty set out in Section 413(2); and
(b)	every director of the company commits an offence and is liable on conviction to the penalty set out in Section 414(2).

69. (1)	Subject to Section 71, the entry of the name of a person in the share register as holder of a share is prima facie evidence that legal title to the share vests in that person.

(2)	A company may treat the registered holder of a share as the only person entitled to—

(a)	exercise the right to vote attaching to the share; and
(b)	receive notices; and
(c)	receive a distribution in respect of the share; and
(d)	exercise the other rights and powers attaching to the share.

71. (1)	Where the name of a person, or other particulars, are wrongly entered in, or omitted from, the share register of a company, the person aggrieved, or a shareholder, may apply to the Court—

(a)	for rectification of the share register; or
(b)	for compensation for loss sustained; or
(c)	for both rectification and compensation.

(2)	On an application under this section the Court may order—

(a)	rectification of the register; or
(b)	payment of compensation by the company or a director of the company for any loss sustained; or
(c)	rectification and payment of compensation.

(3)	On an application under this section, the Court may decide—

(a)	a question relating to the entitlement of a person who is a party to the application to have his name or other particulars entered in, or omitted from, the register; and

(b)	a question necessary or expedient to be decided for rectification of the register.

(4)	Any clerical or minor error in a share register of a company may be corrected where either the Registrar or every shareholder of the company at the time of correction, has agreed in writing to the correction.

48. This means that, in the usual case, for a valid transfer of a share to take place:

•	property in the share must pass by agreement, assignment, transmission or some other transaction or process recognised by law (ss 36, 41(1)); 

•	a transfer form is signed by the transferor and transferee and given to the company or its agent (ss 65(2) and (3)); 

•	the transfer is entered in the share register and becomes prima facie evidence that legal title vests in the transferee (ss 40(2), 65(4), 69(1));

•	notice of the entry is given to the Registrar (s 65(6), form 13).

Issue of shares

49. Shares are issued in accordance with Divisions VI.1 (attributes of shares) and VI.2 (issue of shares) of the Companies Act, the key provisions being Sections 43 (issue of other shares), 44 (notice of share issue), 46 (consideration for issue of shares), 47 (consideration to be decided by board) and 49 (time of issue of shares), which state:

43. (1)	Subject to this Act and the constitution of the company, the board of a company may authorise the issue of shares at any time, to any person, and in any number it thinks fit.

(2)	Where the board authorises the issue of shares which confer rights other than those set out in Section 37(1), or which impose any obligation on the holder, the board shall approve terms of issue which set out the rights and obligations attached to the shares.

(3)	Terms of issue approved by the board under Subsection (2):

(a)	shall be consistent with the constitution of the company, and to the extent that they are not so consistent are invalid and of no effect; and
(b)	are deemed to form part of the constitution, and may be amended in accordance with Section 33.

44. (1)	Except where shares are issued under Section 42(a), the board of a company shall submit to the Registrar for registration, within one month of the issue of shares, a notice in the prescribed form of the issue of the shares by the company stating—

(a)	the number of shares issued; and
(b)	the names and other prescribed details of the shareholders; and
(c)	the class of shares issued; and
(d)	the consideration for which the shares were issued.

(2)	The requirement of Subsection (1)(b) need not be included in that notice of issue of shares where the company complies with Section 67 and 68, and—

(a)	the number of shareholders who have been issued shares the subject of the notice of issue of shares exceeds 100; or

(b)	the company is subject to a listing agreement with a stock exchange.

(3)	The notice of issue of shares shall have attached—

(a)	any terms of issue of the shares approved by the board under Section 43(2); and;

(b)	where the shares were issued for a consideration (whether totally or partially) other than cash, a copy of the certificate required under Section 47(2).

(4)	Where the board of a company fails to comply with Subsection (1) or (2) or (3), every director of the company commits an offence and is liable on conviction to the penalty set out in Section 414(2).

46. The consideration for which a share is issued may take any form and may be cash, promissory notes, contracts for future services, real or personal property, or other securities of the company.

47. (1)	Before the board of a company issues shares under Section 43, the board shall—

(a)	decide the consideration for which the shares will be issued; and
(b)	resolve that, in its opinion, the consideration for and terms of the issue are fair and reasonable to the company and to all existing shareholders.

(2)	The directors who vote in favour of a resolution required by Subsection (1) shall forthwith sign a certificate—

(a)	stating the consideration for the issue of the shares; and
(b)	stating that, in their opinion, the consideration for the issue is fair and reasonable to the company and to all existing shareholders.

49. Except as otherwise provided in any applicable exemption given by the Registrar under Section 77, a share is issued when the name of the holder is entered on the share register.

50. This means that for a valid issue of shares to take place, other than when a company is initially registered or amalgamated: 

•	the company’s board of directors must first decide the consideration for which the shares will be issued and resolve that in its opinion, the consideration for and terms of the issue are fair and reasonable to the company and to all existing shareholders (s 47(1));

•	the directors voting in favour of a resolution under Section 47(1) must sign a certificate stating the consideration and that it is in their opinion fair and reasonable (s 47(2)); 

•	the board authorises the issue of shares and may do so at any time, to any person, in any number it thinks fit and for the form and amount of consideration it decides on and on the terms it approves, provided that the consideration is fair and reasonable and that the terms are consistent with the company’s constitution (ss 43, 46, 47); 

•	the company or its agent records the issue and enters the name of the shareholder on the share register (ss 49, 67); 

•	within one month after issue, the board submits a notice of issue of shares to the Registrar, for registration (s 44). 

The present case

Transfer of shares

51. The evidence reveals that the Companies Act was not complied with when shares of five of the original shareholders were transferred to Messrs Areng, Ricky Bais, Derek, Bumbum Bais and Mirize in December 2006.

52. There is no evidence of any instrument of transfer showing an agreement or assignment or any other transaction or process recognised by law by which property in the shares was passed. There are no transfer forms signed by the transferor and transferee. There is no evidence of the entry of any transfers in the share register; and the share register was not admitted into evidence. 

53. The form 13, stating that the shares were transferred on 29 December 2006, which was submitted by the company secretary, Mr Dembi, signed by Mr Kuyan and lodged with the Registrar in late December 2006-early January 2007, is of no legal effect. It cannot be evidence of something lawfully done when the events underpinning it were not lawfully done. The fact that the Registrar accepted the form and amended the register of companies in accordance with the changes stated is also of no legal consequence. The Registrar cannot, by amending the register, make good a defect in transfer of a share. The entry in the share register of a person’s name as a shareholder is only prima facie evidence that legal title to the share vests in that person (s 69). I am satisfied that that evidence is rebutted by evidence of the true state of affairs and that there was no valid transfer of shares. 

54. The transfer of the shares of Messrs Sallel, Puto, Bulum, Mai and Mul to Messrs Areng, Ricky Bais, Derek, Bumbum Bais and Mirize in December 2006 was, clearly, not in accordance with the Companies Act.

Issue of shares 

55. As was the case with the transfer of shares, the Companies Act was not complied with when three new shares were issued to Messrs Himso, Dambe and Buluk in December 2006. 

56. There was no decision by the board on the consideration for which the shares would be issued and no resolution that in the board’s opinion, the consideration for and terms of the issue were fair and reasonable to the company and to the existing shareholders. There is no evidence of any certificate being signed by the directors under Section 47(2.). Nor is there evidence that the board authorised the issue of the shares or that the issue of shares was entered on the share register. 

57. It appears that the requirements of Section 44 were met in that the board submitted a notice of issue of shares to the Registrar, who amended the register of companies accordingly. However, the Registrar cannot, by amending the register, make good a defect in the issue of shares. The entry in the share register of a person’s name as a shareholder is only prima facie evidence that legal title to the share vests in that person (s 69). I am satisfied that that evidence is rebutted by evidence of the true state of affairs and that there was no lawful issue of shares. 

58. The issue of the shares to Messrs Himso, Dambe and Buluk in December 2006 was, clearly, not in accordance with the Companies Act.

SHOULD THE CHANGES IN DIRECTORS AND THE TRANSFER AND ISSUE OF SHARES BE ENDORSED BY THE COURT? 

59. Mr Wadau submitted that if the court finds (as it has) that the changes in the directors of the company or the transfer or issue of shares have not been made in accordance with the Companies Act, the court should nevertheless endorse the changes in view of the evidence of mismanagement and corruption in the affairs of the company under the stewardship of Mr Sallel. 

60. I reject this submission for a number of reasons. First, I have not been alerted to any provision of the Companies Act under which an order could be made for removal of directors. In any event, no application for an order for removal of any directors has been made to the court.

61. As to the appointment of directors, the court is empowered by Section 132(1) of the Companies Act to appoint one or more directors where it considers it is in the interests of the company to do so. However, this can only be done on application by a shareholder or creditor and no such application has been made in this case.

62. As to the transfer and issue of shares, I have not been alerted to any provision of the Companies Act under which an order could be made for transfer or issue outside the modes of transfer and issue prescribed by the Act. In any event, no application for an order for transfer or issue of any shares has been made to the court.

63. Though it is arguable that the National Court, having power under Section 155(4) of the Constitution to make such orders as are necessary to do justice in the circumstances of a particular case, may invoke that power to make orders regarding removal or appointment of directors or transfer or issue of shares, that power should, in my view, only be invoked, if at all, in an exceptional and urgent case; and only where it is clearly necessary to make such an order to protect the interests of a company and its shareholders. I am not satisfied that this case meets those criteria.

64. The National Court is able under Part IX (enforcement) of the Companies Act to make orders in the nature of injunctions to restrain persons from engaging in conduct that contravenes the constitution of a company (Section 142). The National Court can, on application by a shareholder or any other entitled person under Section 152, where it considers it just and equitable to do so, make such order as it thinks fit, including regulating the conduct of the company’s affairs. These are extensive powers but they must be properly invoked and no application is before the court in this case that would warrant the making of such orders. 

65. The allegations of mismanagement and corruption that have arisen in this case are vague and unsubstantiated. Given the lack of evidence of impropriety on the part of Mr Andrew Sallel and those in his group, it would be unfair and unjust to endorse the changes in directors and the transfer and issue of shares. 

66. The breaches of the Companies Act that have occurred are not minor or technical breaches. They are properly characterised as major and extensive. In view of the extent of non-compliance with the Act, the argument that the persons involved in the company’s affairs – the resource owners – are unsophisticated, uneducated or illiterate villagers and that the court can overlook the breaches of the Companies Act that have occurred, carries little weight. Raikos Holdings Ltd has been registered under the Companies Act, it is engaged in business and its affairs must be run according to the law applying to all such business enterprises in the country (Magasaki Ltd v Linus Bai (2007) N3221).

67. I conclude therefore that the changes in the directors of the company and the transfer and issue of shares that occurred in 2006 are void and of no effect and cannot be endorsed in any way by the court.

WHAT ORDERS SHOULD BE MADE?

68. In addition to making declarations concerning the changes in directors and the transfer and issue of issues, I will make a consequential declaration about the position of the managing director of the company. I will also make orders to rectify the register of companies and I will consider the question of costs of these proceedings.

69. As to the managing director, Mr Sallel was removed from that position by a resolution at a meeting on 21 August 2006, which was said to be a meeting of the board of directors. However, there was no quorum present and the meeting in a number of other respects failed to satisfy the provisions governing proceedings of a meeting of the board of a company under Section 138 and Schedule 4 of the Companies Act. The board was not properly constituted, its proceedings were not lawful and it lacked power to resolve to terminate Mr Sallel or appoint Mr Bumbum Bais as managing director.

70. As to rectification of the register, I will order the Registrar of Companies to amend the register to ‘undo’ the changes in directors and the transfer and issue of shares in 2006 and early 2007.

71. As to costs, both sides of the dispute have been legally represented but not all persons joined as parties have had an active role in the case so I will reserve the issue of costs, pending submissions.

ORDERS

72. I propose to make orders in the following terms:

(1)	It is declared that the changes to the directors of Raikos Holdings Ltd in 2006, involving removal of four directors and appointment of eight new directors, are void and of no effect.

(2)	The Registrar of Companies shall forthwith, after service of the court’s order upon him, rectify the register of companies to the extent necessary to show that the directors of Raikos Holdings Ltd are:

(a)	Andrew Sallel; 
(b)	Asangul Balifun; 
(c)	Batteng Puto; 
(d)	Gawan Kuyan; 
(e)	Usum Mai; and
(f)	Yanam Mul.

(3)	It is declared that the changes to the shareholdings of Raikos Holdings Ltd in 2006, involving transfer of five shares and issue of three shares, are void and of no effect.

(4)	The Registrar of Companies shall forthwith, after service of the court’s order upon him, rectify the register of companies to the extent necessary to show that the shareholders of Raikos Holdings Ltd are:

(a)	Andrew Sallel 
(b)	Asangul Balifun
(c)	Batteng Puto
(d)	Bawan Bulum 
(e)	Gawan Kuyan 
(f)	Jonah Dembi 
(g)	Usum Mai 
(h)	Yanam Mul.

(5)	It is declared that the appointment of Bumbum Bais as managing director of Raikos Holdings is void and of no effect and that Andrew Sallel is the managing director of Raikos Holdings Ltd and holds that position until the board of directors of Raikos Holdings Ltd decides otherwise.

(6)	The question of costs is reserved, pending submissions.

Judgment accordingly.
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Young Wadau Lawyers: Lawyers for the plaintiffs in OS 19/2007, for the defendants (other than the Registrar of Companies) in OS 33/2007

Mambei Lawyers & Consultants/Blake Dawson Waldron Lawyers: Lawyers for the defendants in OS 19/2007, for the plaintiffs in OS 33/2007