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Gware v Ahi [2023] PGNC 32; N10120 (14 February 2023)

N10120


PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]


OS NO. 256 OF 2020


BETWEEN:
MISIAN GWARE AND OTHERS as shareholders of BUP Development Company Limited
-Plaintiff-


AND
THOMAS AHI in his capacity as the Chief Executive Officer and Managing Director of BUP Development Company Limited
-First Defendant-


AND
WILLIAM KISING in his capacity as the Chairman of the Board of Directors of BUP Development Company Limited
-Second Defendant-


AND:
JOHN MALIAKI in his capacity as the Deputy Chairman of the Board of Directors of BUP Development Company Limited
-Third Defendant-


AND:
EPAFRAS PHILEMON, AWASA LOU, JOHN NGANDANG and DARIOUS KEN in their individual capacity as Directors of BUP Development Company Limited
-Fourth Defendant-


Lae: Dowa J
2021: 7th October
2023: 14th February

PRACTICE AND PROCEDURE-proceedings incompetent for lack of representative capacity – Order 5 Rules 3 and 13 of the National Court Rules-

COMPANIES ACT-lack of representative capacity as shareholder-section 151 of Companies Act-derivative action under section 143 of Companies Act-requires leave of Court-failure to meet company constitution renders meeting and resolutions invalid-Court has discretion under section148 of the Companies Act and section 155(4) of the Constitution to make other orders that is just and equitable in the circumstances of the case.

Cases Cited:


Simon Mali -v- The State (2002 SC690)
Tigam Malevo v Keith Faulkner (2009) SC960
Jackson Tuwi -v- Goodman Fielder International Limited (2016 SC1500
Polti Wara v Sapom Kipa & Ors (2008) N3402


Counsel:


M. Karu, for the Plaintiff
N. Tenige, for the Defendant


DECISION


14th February, 2023


  1. DOWA J: The Plaintiffs seeks the following declaratory orders in its Amended Originating Summons:
    1. An Order declaring that Thomas Ahi was removed as Chief Executive Officer and Managing Director of BUP Development co. Ltd by virtue of Special Resolution of the Shareholders dated 30/01/2020 made pursuant to Clause 25.4 of the Constitution of BUP Development Co. Limited.
    2. An Order declaring that William Kissing, John Maliaki, Epafras Philemon, Awasa Lou, Johyn Ngandang, Tawasi Nasinom and Darius KEN were removed as members of the Board of Directors of BUP Development Co. Ltd by virtue of Special Resolution of the Shareholders dated 30/01/2020 made pursuant to Clause 25.4 of the Constitution of BUP Development Co. Limited.
    3. An Order declaring that Missiang Gware, Glen Hoping, Chris Akive, Lina Michael, Michael Wagasi and Bingmalu Ahie are recognized as the Interim Board and Directors of BUP Development Corporation Limited by virtue of Special Resolution of the Shareholders dated 11/11/2019 and 30/01/2020 made Pursuant to Clause 25.4 of the Constitution of BUP Development Co. Limited.
    4. An Order declaring Missian Gware, Glen Hoping and Lina Michael be accepted as new signatories to BUP Development Co. Limited Bank Accounts held by all or any of the Commercial banks.
    5. An order directing Thomas Ahi, William Kissing, John Maliaki, Epafras Philimon, Awasa Lou, John Ngandang, Darious Ken, Tawasi Nasinom, Douglas Maliaki, Moses Philimon, Jesse Geali, Kerro Guhuic, Nabi Gware, Silas Kising and Jairus Tikoc to surrender all and every company properties in their possession and further vacate Company premises for the Interim Management to take up office.

Background Facts


  1. The Plaintiff is a member of BUP Association. BUP Association is a landowner group from Busulum clan of Butibam, Ucapu of Kamkumung and Pwalu clan of Yanga village, the traditional landowners of Lae city. BUP Association is the shareholder of BUP Development Co. Ltd. The directorship and shareholding are arranged through the trustee arrangements through their respective clans.
  2. The Applicants allege that the current directors and management team have failed the members of the Association or shareholders in the management of BUP Development Co Ltd. In special members’ meetings of 11th November 2019 and 30th January 2020, changes were made to the directorship and management team of BUP Development Co. Ltd.
  3. The Plaintiff is now seeking declaratory orders affirming the resolutions made in those meetings.
  4. The Defendants oppose the application, disputing the validity of the special meetings and resolutions. The defendants have also raised a preliminary issue of the Plaintiff’s standing to institute the proceedings.

Evidence


  1. The Plaintiff relies on both oral and documentary evidence. In respect of documentary evidence, the following affidavits were tendered:
  2. The Defendants called witnesses as well who were cross-examined. They also tendered the following affidavits:

Issues


  1. The issues for consideration are:
    1. Whether Mission Gware has standing to initiate the current proceedings,
    2. Whether the resolutions of the members of BUP Development Co. Ltd are valid,
    1. Whether the Plaintiffs are entitled to the reliefs sought in the proceedings.

Preliminary Issue: Whether Mission Gware has standing to institute the

proceedings


  1. Counsel for the defendants submits that Mission Gware, who initiated the proceedings lacks representative capacity to institute the proceedings without express authority.
  2. Mr Karu, counsel for the Plaintiff, submits that the Plaintiff, Mission Gware has standing as he is a member of the Pwalu Clan and has the support of the leaders and shareholders.
  3. The relevant rules dealing with representative capacity is Order 5 Rule 13 of the National Court Rules. Rules 13 reads:

“13. Representation; Current interests. (8/13)

(1) Where numerous persons have the same interest in any proceedings the proceedings may be commenced, and, unless the Court otherwise orders, continued, by or against any one or more of them as representing all or as representing all except one or more of them.

(2) At any stage of proceedings pursuant to this Rule the Court, on the application of the plaintiff, may, on terms, appoint any one or more of the defendants or other persons (as representing whom the defendants are sued) to represent all, or all except one or more, of those persons in the proceedings.

(3) Where, under Sub-rule (2), the Court appoints a person who is not a defendant, the Court shall make an order under Rule 8 adding him as a defendant.

(4) A judgement entered, or order made in proceedings pursuant to this Rule shall be binding on all the persons as representing whom the plaintiffs sue or the defendants are sued, as the case may be, but shall not be enforced against any person not a party to the proceedings except with the leave of the Court.

(5) An application for leave under Sub-rule (4) shall be made by motion, notice of which shall be served personally on the person against whom it is sought to enforce the judgement or order.

(6) Notwithstanding that a judgement or order to which an application under Sub-rule (5) relates is binding on the person against whom the application is made, that person may dispute liability to have the judgement or order enforced against him on the ground that by reason of facts and matters particular to his case he is entitled to be exempted from the liability........”

  1. Section 151 of the Companies Act is also relevant. Section 151 reads:

“151. REPRESENTATIVE ACTIONS.


Where a shareholder of a company brings proceedings against the company or a director, and other shareholders have the same or substantially the same interest in relation to the subject-matter of the proceedings, the Court may appoint that shareholder to represent all or some of the shareholders having the same or substantially the same interest, and may, for that purpose, make such order as it thinks fit including, without limiting the generality of this section, an order–


(a) as to the control and conduct of the proceedings; and

(b) as to the costs of the proceedings; and

(c) directing the distribution of any amount ordered to be paid by a

defendant in the proceedings among the shareholders represented.”

  1. The law on representative capacity is settled in the cases, Simon Mali -v- The State (2002 SC690), Tigam Malevo v Keith Faulkner (2009) SC960 and Jackson Tuwi -v- Goodman Fielder International Limited (2016 SC1500. The basic elements of instituting class action are:
    1. All intended Plaintiffs be named in the originating process.
    2. Each intended Plaintiffs must give specific instructions evidenced in writing to the lawyers to act for them.
    1. The principal or lead Plaintiff must produce an authority to the Court to show that he is authorized by them.

14. The evidence shows Mission Gware is a member of BUP Association. BUP Association Inc. is the shareholder of BUP Development Co Ltd, through representatives representing the three tribes. Under Section 10 of the Associations Incorporation Act, BUP Association has capacity to sue and be sued and hold shares in a company. The company extract produced in evidence does not show BUP Association as shareholder in BUP Development Co Ltd. Instead, the IPA records show three individuals, namely Nanong Ahe, John Ngandang and John Bobola who are registered as shareholders. The Defendants explain that the three individual shareholders are trustee shareholders representing the three villages. This is based on a Tri-partite Clan Agreement signed by the three clans, Busulum, Ucapu and Pwalu in 2006.


15. Whilst the Plaintiffs allege, it was the shareholder’s resolution for change in the management and directorship, some members of BUP dispute that the idea for change is orchestrated by only a few and not the majority. The Defendants maintain that the channel for making changes to the directorship of BUP Development Co. Ltd is to be effected through individual clan resolutions based on the Tripartite Clan Agreement and this has not been followed.


16. There is no evidence that Mission Gware is authorized by the entire shareholders to institute these proceedings, although he has authority from some of the shareholders including John Bobola to institute these proceedings. There is no written consent or authority being filed to indicate representative capacity.


17. Although the Court is given power under Section 151 of the Companies Act to appoint a shareholder to represent all or some of the shareholders, the shareholding membership is not clearly settled. Missian Gware is not a registered shareholder for the purposes of section 151. For these reasons Missian Gware lacks standing to institute the proceedings.


Whether the Plaintiffs have standing to institute proceedings for and on behalf of BUP Development Co Ltd


18. The next collateral and equally important issue to consider is whether the Plaintiff is entitled to institute proceedings against the directors on behalf of the company, BUP Development Co. Limited (BUPDCL). The proceedings are seemingly brought against the directors of DUPDCL on behalf of the shareholders of the company. The reliefs sought in the proceedings are in respect of the directorship and management of the company. However, the company, BUPDCL, is not named as a party in the proceedings. BUPDCL has not taken a position in the proceeding. I say this because BUPDCL has legal personality under section 16 of the Companies Act. It can sue and be sued in its corporate name. How is the interest of BUPDCL be best served if the shareholders are against the directors whom they appointed to run the affairs of the company in the first place?


19. This is a scenario where section 143 of the Companies Act is relevant. It provides for a shareholder or director to apply to the Court for leave to bring an action or defend any proceeding in the name and on behalf of the company, BUPDCL, and is applicable to the conduct of this proceeding. It is known as derivative action.


20. Section 143 states:


“143. DERIVATIVE ACTIONS.


(1) Subject to Subsection (3), the Court may, on the application of a

shareholder or director of a company, grant leave to that shareholder or director to–


(a) bring proceedings in the name and on behalf of the company or any

related company; or

(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.


(2) Without limiting Subsection (1), in determining whether to grant leave

under that subsection, the Court shall have regard to–


(a) the likelihood of the proceedings succeeding; and

(b) the costs of the proceedings in relation to the relief likely to be obtained;

And


(c) any action already taken by the company or related company to obtain

relief; and


(d) the interests of the company or related company in the proceedings

being commenced, continued, defended, or discontinued, as the case may be.


(3) Leave to bring proceedings or intervene in proceedings may be granted

under Subsection (1), only where the Court is satisfied that either–


(a) the company or related company does not intend to bring, diligently

continue or defend, or discontinue the proceedings, as the case may be;

or

(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the

determination of the shareholders as a whole.


(4) Notice of the application shall be served on the company or related

company.


(5) The company or related company–

(a) may appear and be heard; and

(b) shall inform the Court, whether or not it intends to bring, continue,

defend, or discontinue the proceedings, as the case may be.


(6) Except as provided in this section, a shareholder is not entitled to bring or

intervene in any proceedings in the name of, or on behalf of, a company or a related company.”


  1. The necessity of leave in a derivative action was discussed by his Honour Makail J in Polti Wara v Sapom Kipa & Ors (2008) N3402 at paragraphs 74 -76 of the judgment:

“74. Section 143 is clear and unambiguous. The reason for shareholders or directors to seek leave before bringing any Court proceeding in the name of a company is that under section 16 of the Companies Act 1997, a company is a separate entity from its shareholders, directors, officers and employees. His Honour Mr Justice Sakora puts it more neatly in the case of AGC (Pacific) Limited -v- Woo Textile International Pty Limited [1992] PNGLR 100 in the following terms:

"The point is further illustrated by looking closely at one of the essential attributes or characteristics of a company as a corporate entity or body. And this is its capacity to sue and liability to be sued: s 18(4) Companies Act. When a wrong is done to the company, the company is the proper plaintiff to maintain, in its own name, an action for redress. Members, as such, have generally no standing to sue on behalf of the company. Similarly, if a company commits a wrong or incurs a liability in the course of its operations, it (and not the members or officials) is the proper defendant. This is sometimes referred to as the "proper plaintiff" rule or the rule in Foss -v- Harbottle [1843] EngR 478; (1843) 2 Hare 461, Ch 12 LJ 319. And the wrong obviously is the wrong (liability) committed by the officers and employees of the company. That a company is capable of suing and is liable to be sued in its corporate name is not merely an administrative convenience; it follows logically from the concept of separate legal entity and principles of agency. Thus, civil liability and criminal responsibility of the company arise from a myriad of situations through the acts and omissions of its servants and agents.

But not every act or omission or default can give rise to legal consequences or responsibilities, nor can every servant or agent commit the company or incur liability. It all depends on the circumstances surrounding the act or omission in question, the nature of the act or omission, the relative position of the agent or servant in the hierarchy of the corporation and what they are and are not empowered to do. Thus, putting it another way, not every servant of the company is a "responsible officer"; the mind of some employees is not the mind of the company".

  1. It is not disputed that Mamgogl Limited is a company incorporated under the Companies Act 1997 and is the management company of Tremene Coffee Plantation.
  2. And so there is no doubt in my mind that this Court proceeding is supposed to be a derivative action if the Plaintiffs are indeed Shareholders or acting in their capacity as Directors of the Board of Directors of the Mamgogl Limited. They ought to have applied for leave to issue this Court proceeding in the first instance. They have not and I have no difficulty in finding that the entire Court proceeding of the Plaintiffs is defective and incompetent. It is frivolous and vexatious and also an abuse of process. It should also be dismissed for this reason.”

22. In the present case, the allegations are against the present directors of BUPDCL for failing their duties owed to the company and the shareholders. The reliefs sought are for the benefit of the company and the shareholders. Although BUPDCL is not named as a party, the proceedings are brought on its behalf in as much as it is for the shareholders. A company does not exist in isolation. It has life. Its Constitution and the Companies Act contain its mind and heart. The directors and senior management are its limbs (hands and legs) and they carry out its functions and intentions. Any action taken against its directors does affect the operations of the company. It is therefore necessary for the Plaintiffs to have leave from the Court under section 143 of the Companies Act to institute these proceedings on behalf of BUPDCL.


23. The Plaintiffs have not sought leave to bring this action against the directors. For this reason, the Plaintiff has no standing, and the proceeding is incompetent.


Substantive Issue: Whether the shareholders’ resolutions of 11th November 2019 and 30th January 2020 are valid.


24. The Defendants contend that the shareholders special resolutions are invalid for failing to comply with Section 16.5(b) of the BUPDCL’s Constitution. Section 16.5 reads:


“16.5 Calling of special meetings. A special meeting:


  1. May be called by the Board any time;
  2. Shall be called by the Board on written request of shareholders holding share carrying together not less than 5 percent of the voting rights entitled to be exercised on any of the questions to be considered at the meeting.”

25. The Plaintiffs submit that many requests have been made to the directors of BUPDCL to call a meeting, but their requests have been ignored thus resulting in the subject meetings. The meetings and the resolutions show the ordinary shareholders level of displeasure at the current management of their company.


26. It is clear and there is no dispute that these meetings were not called by the Board of BUPDCL. There is no clear evidence of a written request being made by shareholders having no less than 5% shareholding to the Board for the special meeting. The evidence also shows, the directors of Bup Development Co. Ltd have expressly opposed any such meeting.


27. The minutes of the Special Shareholders Meeting of 30th January 2020 show two of the current shareholders John Bobola representing the Busulum Clan and Nanong Ahe representing Pwalu clan were among those who were present in the meeting. According to the company records, the two men hold 2 of the 3 shares issued. This represents 66% of the entire shareholding of Bup Development Co Ltd. It is arguable that those who were present in the meeting were the majority shareholders. However, there is no evidence of a written request being made to the Board prior to the calling of the special meetings. To that extent the meetings of 11th November 2019 and 30th January 2020 were not sanctioned and thus, the resolutions passed in those meetings would be invalid.


28. Under Clause 25.4 of the Constitution of BUP Development Corporation Ltd, a director can be removed by special resolution of the shareholders. However, as I have found the resolutions were passed in a meeting that was invalid for non-compliance of Clause 16.5 of the BUPDCL’s Constitution. For these reasons, the reliefs sought in the Originating Summons are refused.


What orders should the Court make?


29. Although the reliefs sought in the proceedings are refused, the Court shall make other orders that are equitable and just in the circumstances of this case.


30. It seems the Plaintiffs proceedings are supported by John Bobola and Nanong Ahe, the two trustee shareholders representing two major clans. There are serious allegations against the directors and management over the discharge of their statutory duties under the Companies Act. Some of the allegations against the directors and management team are: their failure to prepare and report to the shareholders annual reports (Section 209 and 210), prepare and report to shareholders the Financial Statements (Section 211 and 212), submit annual returns to the Registrar of Companies (Section 215), declare and pay dividends (Section 51) of the Companies Act. There are also serious complaints of financial mismanagement which resulted in the laying of criminal charges against some of the current directors and management.


31. The current directors have admitted to their failure in complying with some of the regulatory requirements under the Companies Act.


32. BUP Development Co. Ltd is a public company for the landowners. The directors and management are accountable to the shareholders. The evidence presented by the parties show that the company is run in isolation and without much financial accountability.


33. The Court will do injustice to the shareholders to dismiss the proceedings on a mere technicality. The merits of the proceedings call for corporate action and intervention by the Court. BUPDCL itself cannot do anything without the innovative and proactive leading by the Directors.


34. In my view, the Court has jurisdiction under section 148 of the Companies Act to make an order requiring the directors of the company, BUPDCL, to take such action that is required to be taken by the directors under the Act. Section 148 reads:


“Notwithstanding Section 147, the Court may, on the application of a shareholder of a company, where it is satisfied it is just and equitable to do so, make an order requiring a director of the company to take any action that is required to be taken by the directors under the constitution of the company or this Act and, on making the order, the Court may grant such other consequential relief as it thinks fit.”


35. Even if I am wrong in my view, the Court has an inherent power under section 155(4) of the Constitution to make, in such circumstances as seems to it proper, such other orders as are necessary to do justice in the circumstances of this case. I am therefore inclined to grant directional orders for the directors to call up a shareholder meeting to sort out the management and directorship issues. I will also make an order for the freezing of the accounts until these directional orders are complied with. The freezing of the account is necessary, because the management has a tendency to play down directional orders previously given. On 20th November 2020, the Court directed the defendants not to draw from BUP’s account and make substantial payments apart from administrative costs. It has been brought to the Courts attention of the defendants’ recent uncontrolled spending over and above the basic administrative costs. It is therefore necessary for the accounts to be frozen until the pending issues are satisfactorily dealt with.


36. Although the Court will not grant the reliefs sought in the proceedings, it will make alternative orders that is just and equitable.


Costs


37. Cost is a discretionary matter. I note the Plaintiff has a right to raise the issues on behalf of the others, The reliefs are refused on technical issues. The merits have not been considered. In the circumstances, it is just and fair that the cost of the proceedings be paid from the funds held in the account of BUPDCL only after taxation.


Orders


38. The Court Orders that:


  1. The reliefs 1 to 5 sought in the Amended Originating Summons is refused.
  2. There shall be a shareholder meeting of BUP Development Co. Ltd within 21 days from date of this order.
  3. For clarity and convenience, an equal number of senior members representing the clans, Busulum, Ucapu and Pwalu shall attend the meeting.
  4. The agendas amongst others to be discussed at the meeting shall be:
    1. Election of directors
    2. Shareholding arrangements
    1. Management of BUP Development Co Ltd
  5. Pending the meetings above, there shall be a freeze on the accounts of the BUP Development Co. Ltd forthwith.
  6. The Plaintiff, Misian Gware shall take out a minute of this order and serve on the BUP Development Ltd’s banks forthwith.
  7. The cost of the parties to these proceedings should be taxed and paid by BUP Development Co. Ltd.
  8. Time be abridged.

Daniels & Associate Lawyers: Lawyers for the Plaintiff
M S Wagambie Lawyers: Lawyers for the Defendants

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