Putto v Sallel [2015] PGNC 71; N5845 (30 January 2015)

N5845

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NO 640 OF 2014

BATTENG PUTTO, ASANGUL BALIFUN, GAWANG KUYAN& BAWIN BULUM, DIRECTORS OF RAIKOS HOLDINGS LIMITED
Plaintiffs

V

ANDREW SALLEL & USAM MAI
Defendants

Madang: Cannings J
2014: 8, 9 December
2015: 30 January

COMPANY LAW – issue of shares –whether shares issued in accordance with Companies Act – whether the Court should order rectification of Companies Register

COMPANY LAW – directors – order sought by originating summons for removal of directors – allegation of constructive fraud – whether proper procedure

The plaintiffs are directors of a company. They were aggrieved by the issue of new shares to the defendants, who are directors of the same company. The plaintiffs asserted that the shares were issued secretly and unlawfully and that the defendants were guilty of constructive fraud. They sought a declaration that the share issue was null and void and an order removing the defendants as directors and an order for rectification of the Register of Companies. A trial was conducted to determine whether the plaintiffs should be granted the relief sought.

Held:

(1) 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.

(2) The board failed to pass the necessary resolutions and the share issue was unlawful. Despite the long delay in seeking relief, a declaration was made that the issue was null and void.

(3) Directors of a company are, unless the company's constitution provides otherwise, removed by the company's shareholders in accordance with procedures prescribed by the Companies Act.

(4) There is a clear procedure under the Companies Act for removal of directors, which was not invoked by the plaintiffs. Therefore it was inappropriate to consider an order for removal of the defendants and it was unnecessary for the Court to determine the allegation of constructive fraud.

(5) Having declared that the share issue was null and void the Court ordered rectification of the register of companies.

(6) Having refused to order the removal of the defendants as directors, the Court refused other relief sought by the plaintiffs and ordered the parties to bear their own costs.

Cases cited

The following cases are cited in the judgment:

David Yaga v Andrew Sallel (2012) N4612
Gawan Kuyan v Andrew Sallel (2008) N3376
Madang Cocoa Growers Export Co Ltd v Noilai Gunar (2012) N4703
Robinson v National Airlines Commission [1983] PNGLR 476
The State v Lohia Sisia [1987] PNGLR 102

Counsel

T Anis, for the plaintiffs
A Sallel, for the defendants, with leave of the Court

30th January, 2015

1. CANNINGS J: The plaintiffs challenge by originating summons the issue of shares in Raikos Holdings Ltd to the defendants and seek their removal as directors. A trial has been conducted on the originating summons.

2. The four plaintiffs, Batteng Putto, Asangul Balifun, Gawang Kuyan and Bawin Bulum, are directors and shareholders of Raikos Holdings Ltd. They hold one share each. The two defendants, Andrew Sallel and Usam Mai, are also directors and shareholders of Raikos Holdings Ltd. They hold 10,000 and 1,000 shares respectively. The plaintiffs say that from the time of their and the defendants' appointment as directors until 31 July 2008 they all held one share each. They say that on 1 August 2008 the Companies Register was amended to show that new shares had been issued, so that the shareholdings are:

Batteng Putto (a plaintiff, a director) 1 share

Asangul Balifun (a plaintiff, a director) 1 share

Gawang Kuyan (a plaintiff, a director) 1 share

Batteng Putto (a plaintiff, a director) 1 share

Jonah Dembi (not a plaintiff, not a director) 1 share

Yanam Mul (not a plaintiff, not a director) 1 share

Andrew Sallel (a defendant, a director) 10,000 shares

Usam Mai (a defendant, a director) 1,000 shares

3. The plaintiffs areaggrieved by the issue of new shares to Mr Sallel and Mr Mai, which brought their shareholdings to 10,000 and 1,000 respectively. They say that it was done secretly and unlawfully and contrary to the decision of this Court in a previous case, OS 19 and 33 of 2007, reported as Gawan Kuyan v Andrew Sallel (2008) N3376. They say that the defendants are guilty of constructive fraud. They seek a declaration that the issue of shares to the defendants is null and void and an order removing them as directors and an order for rectification of the register of companies.

4. The originating summons states that the plaintiffs seek the following relief:

1. Leave of Court pursuant to Section 143(1)(a) of the Companies Act 1997 to bring proceedings in the name and on behalf of Raikos Holdings Limited against directors Andrew Sallel and Usam Mai.
   
2. A declaration that the creation and transfer of shares of Raikos Holdings by Andrew Sallel and Usam Mai to themselves for 10,000 and 1,000 shares respectively in 2008 after the Court's order in proceedings OS 19 and 33 of 2007 are null and void.
   
3. A declaration that those shareholders and directors that were declared and reinstated by the Court in the Court's order in proceedings OS 19 and 33 of 2007 shall be reinstated.
   
4. A declaration that the actions or conduct of Andrew Sallel and Usam Mai amount to constructive fraud and consequently that they be immediately removed as directors of Raikos Holdings Ltd.
   
5. Alternatively an order that upon the Court's findings of constructive fraud, the Court shall assist with consequential orders for the immediate meeting by the company to determine whether Andrew Sallel and Usam Mai shall be removed as directors of Raikos Holdings Ltd.
   
6. An order that the Registrar of Companies shall take immediate steps and rectify its records to reflect the orders of the Court.
   
7. An order that the defendants shall pay the costs of the proceedings.
   
8. Such further or other orders as this Honourable Court deems appropriate.
   

PRELIMINARY MATTERS

5. At the commencement of the trial the defendants, who were with the leave of the Court represented by Mr Sallel himself, raised two preliminary issues. First, that counsel for the plaintiffs, Mr Anis, was in a conflict of interests as he had represented the company in previous litigation and taken instructions from Mr Sallel and should be disqualified from appearing in these proceedings. Secondly, that the proceedings should be summarily dismissed as the plaintiffs had not pleaded particulars of the alleged fraud under Order 8, Rule 30 of the National Court Rules.

6. I reject both arguments as they should have been but were not pursued by notice of motion supported by affidavit before the commencement of the trial. I am also not convinced that Mr Anis is in any conflict of interests that makes it necessary that he be disqualified. Nor am I convinced that it was necessary for the plaintiffs to plead particulars of the alleged fraud. That might have been necessary if the proceedings had been commenced by writ of summons but they were not and no issue was taken as to the mode of commencing the proceedings before the start of the trial. The proceedings were commenced by originating summons. Commencement by writ of summons, under Order 4, Rule 2 of the National Court Rules, was not necessary as the relief sought under the originating summons can be granted without a finding of actual or constructive fraud against the defendants.

AGREED FACTS

7. The defendants do not dispute the essential facts alleged by the plaintiffs. I find as a fact that, with effect from 1 August 2008, there are eight shareholders, six of whom are directors, and that they hold the following number of shares:

• the four plaintiffs hold one share each,
• two others who are not plaintiffs hold one share each,
• Mr Sallel holds 10,000 shares,
• Mr Mai holds 1,000 shares, and
  

The total number of shares issued is 11,006.

ISSUES

8. The plaintiffs did not pursue paragraph 1 of the originating summons, so there are two main issues. First, whether a declaration should be made that the issue of new shares to the defendants is null and void. Secondly whether the defendants should be removed as directors.

1 SHOULD THE ISSUE OF SHARES TO THE DEFENDANTS BE DECLARED NULL AND VOID?

9. In Gawan Kuyan v Andrew Sallel (2008) N3376 I emphasised that shares in a company must be 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). 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).
  

9. The plaintiffs have brought evidence that those procedures were not followed. The defendants do not deny that that an issue of new shares to Mr Sallel and Mr Mai was registered on 1 August 2008, which increased their shareholding from one each to 10,000 and 1,000 respectively. They brought no evidence to counter the assertion that the above procedures were not followed. Their primary defence is to claim that they had been the ones doing most work for the company and they deserved the extra shares.

10. I find that the claims of the defendants are irrelevant, vague and unsubstantiated. It is clear that the procedures of the Companies Act were not followed. 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. It appears that the requirements of Section 44 were met in that a notice of issue of shares was submitted 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 to Mr Sallel or Mr Mai.

11. Should a declaration be granted to that effect? As I pointed out in David Yaga v Andrew Sallel (2012) N4612 a declaration is an equitable remedy, so a plaintiff who establishes a cause of action is not entitled as of right to it. Equitable principles must be applied when the court as a matter of discretion decides whether to grant such a remedy, one of the most important being whether the plaintiff is guilty of undue delay (laches) in seeking relief (Robinson v National Airlines Commission [1983] PNGLR 476, The State v Lohia Sisia [1987] PNGLR 102). The question of whether there has been undue delay is determined by the circumstances of each case. There is no strict limitation period. The six-year limitation period that applies to many types of proceedings under Section 16 (limitations of actions in contract, tort etc) of the Frauds and Limitations Act 1988 does not apply to a claim for equitable relief, and this is made clear by Section 18 (claims for specific performance etc) of that Act.

12. There was a lapse of six years, one month and one week between the date of registration of the issue of the shares (1 August 2008) and the date on which the originating summons was filed (15 September 2014). This is certainly a long delay but the plaintiffs have provided a satisfactory explanation for it. Since the delivery of the decision in Gawan Kuyan v Andrew Sallel (2008) N3376 on 26 May 2008 Mr Sallel, who is the Managing Director of Raikos Holdings Ltd, has assumed primary responsibility for conducting the business of the company. There have been no board meetings since that date. Mr Sallel did not inform the plaintiffs that new shares had been issued. The plaintiffs only became aware of it in 2014.In these circumstances I see no good reason to refuse the declaration sought. I will declare that the issue of new shares in Raikos Holdings Ltd to Andrew Sallel and Usam Mai, which was registered on 1 August 2008 and increased the number of shares they held to 10,000 and 1,000 respectively, is null and void.

2 SHOULD THE DEFENDANTS BE REMOVED AS DIRECTORS?

13. The plaintiffs argue that the defendants are guilty of constructive fraud and that they should be removed as directors. The problem with this argument is that there is no precedent for it or at least none to which Mr Anis was able to refer. By precedent, I mean a case in PNG or in an overseas jurisdiction with company laws similar to ours where the directors or shareholders of a company have come to court arguing and succeeding with a claim that a person should be removed as a director of the company on the ground of constructive fraud.

14. The reason that there is no precedent for such a cause of action is probably because the Companies Act prescribes clear and detailed procedures for removal of directors. I outlined them in Gawan Kuyan v Andrew Sallel (2008) N3376 and in Madang Cocoa Growers Export Co Ltd v Noilai Gunar (2012) N4703. Directors of a company are unless the company's constitution provides otherwise, removed by the company's shareholders. The shareholders' powers of removal are 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) of the Companies Act.

Section 134 (removal of directors) states:

(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.

15. 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% requirement of Section 103.
  

16. It is agreed that the plaintiffs have not attempted to remove the defendants by invoking the above procedures. I consider that as a matter of good sense and justice those procedures must be invoked before consideration can properly be given to finding that the defendants are guilty of constructive fraud or ordering their removal from office as directors. I refuse to declare that the defendants are guilty of constructive fraud and refuse to order their removal as directors.

CONCLUSION

17. The plaintiffs have succeeded on the first major issue and failed on the second. This result will be reflected in the formal order of the Court.

ORDER

(1) The relief sought in paragraphs 1, 3, 4, 5 and 7 of the originating summons is refused.

(2) The relief sought in paragraph 2 of the originating summons is substantially granted and accordingly it is declared that the issue of new shares in Raikos Holdings Ltd to Andrew Sallel and Usam Mai, which was registered on 1 August 2008 and increased the number of shares that they held to 10,000 and 1,000 respectively, is null and void.

(3) The relief sought in paragraph 6 of the originating summons is granted and accordingly it is ordered that 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 as prescribed by the order of 26 May 2008 in OS 19 and 33 of 2007, namely:

• (a) Andrew Sallel
• (b) Asangul Balifun
• (c) Batteng Putto
• (d) Bawan Bulum
• (e) Gawang Kuyan
• (f) Jonah Dembi
• (g) Usam Mai
• (h) Yanam Mul;
  

and they hold one ordinary share each.

(4) The parties shall bear their own costs.

(5) Time for entry of this order is abridged to the date of settlement by the Registrar which shall take place forthwith.

Ordered accordingly.

______________________________________________________________
Bradshaw Lawyers : Lawyers for the Plaintiffs