Sabatica Pty Ltd v Battle Mountain Canada Ltd [2003] PGSC 16; SC709 (15 August 2003)

SC709

PAPUA NEW GUINEA

[IN THE SUPREME COURT OF JUSTICE AT WAIGANI]

SCA No. 25 of 2002

BETWEEN:

SABATICA PTY LIMITED

Appellant

AND:

BATTLE MOUNTAIN CANADA LTD

First Respondent

AND:

BATTLE MOUNTAIN GOLD COMPANY ARN 010 725 774

Second Respondent

Waigani: Amet CJ., Kapi DCJ., Los J.
23rd April, 15th August 2003

APPEAL – Company Law – Rights of minority shareholders – Cause of action in Common Law – Cause of action under s 152 of the Companies Act 1997.

Cases cited:
Prudential Assurance Co Ltd (No. 2) [1982] 1 Ch 204
John v. Gore Wood & Co [2002] 2 Ch 1
Chen v. Karandonis [2002] NSWCA 412
Thomas and HW Thomas Ltd [1984] 1 NZLR 686
Percival v. Wright [1982] 2 Ch 421

Legislations cited:
Companies Act 1997
Company Law in Australia by ford
The New Zealand Companies Act
Companies Amendment Act 1980

Counsel:
I. Molloy for the Appellant
E. Anderson for the Respondents

15th August 2003

BY THE COURT: This appeal is against a decision of the National Court (Sheehan J) in which the Court dismissed a writ of summons for not disclosing a valid cause of action.

Sabatica Pty Ltd (Appellant) issued a writ of summons against Battle Mountain Canada Ltd (BMC) (First Respondent) and Battle Mountain Gold Company (BMG) (Second Respondent) for damages arising out of failure on the part of the Respondents as majority shareholders in the control and management of Niugini Mining Limited (NML)

The circumstances giving rise to this cause of action may be restated from the judgment of the Court below. The Appellant is a minority shareholder in NML with BMC as the major shareholder and with BMG as parent company between them they nominate the majority of the directors of NML.

In 1998 the Appellant bought a shareholding in NML which had major cash deposits and a shareholder with Lihir Gold Limited (Lihir). However, NML traded its shares consistently at a discount of some 30 to 40% below the value of NML’s underlying asset value because of market perception that its value followed the fortunes of Lihir. The Appellant sought to overcome the discount in the shares by suggestions to the directors of NML seeking to maximize returns for shareholders while Lihir share prices were at optimum. These suggestions were rejected by majority shareholders as a formal shareholders proposal at the Annual General Meeting of NML in June 1999.

In December 2000 a proposal to merge NML and Lihir was brought before the National Court for approval under s 25 of the Companies Act 1997. In this merger NML shares would be exchanged for Lihir shares at a stipulated rate of exchange. Subsequently after a meeting of shareholders, convened at the direction of the Court, voted in favour of the proposal it was returned to the Court which granted its seal of approval to the merger.

Counsel for the Appellant submitted in the Court below that the decision of the directors controlled by the Respondents (1) failed to properly consider the proposals put by the minority shareholders (2) failed to convene Board Meetings when appropriate to allow independent directors to be heard (3) failed to inform independent directors of management decisions (4) failed to obtain and disseminate information regarding changes in NML’s interest in Lihir.

The Court below concluded:

"Deciding the Defendant’s application I find that the plaintiff has not pleaded any cause of action of discriminatory behaviour, oppression or breach of duty. But even had it been the case that such claims had been properly pleaded, the Plaintiff’s delay in seeking the courts exercise of its equitable discretion must have been fatal to any such claim.

The Plaintiff had the opportunity and the access to the court to claim for perceived wrongs as and when they arose. But it did not make use of its rights in law under the Companies Act to do so till now, and that, after a shareholder approved merger under the Courts supervision. In seeking equity a Plaintiff must show reason why it has not taken advantage of lawful process available to it at proper time or explain the failure to so. All shareholders including the Plaintiff were given full opportunity to appear before the National Court to challenge the fairness or the appropriateness of the merger but no shareholder did so. The merger was approved without opposition. By its inaction and delay the Plaintiff has in effect imposed its own time bar on such claims. If there had been any cause pleaded here it would have been inequitable for a Court to set the clock back."

The Appellant has appealed against this decision. Counsel for the Appellant submits that the trial judge fell into error when he treated the appellants claim under s 147 (1) of the Companies Act. He submits that the appellant’s claim is based on three bases; (1) a claim under s 152 of the Companies Act (2) claim under common law principles of negligence and (3) claim for breach of fiduciary duty.

Counsel for the Appellant does not regard the third cause of action as its strongest claim. Therefore we do not consider it.

We should deal first with the common law claim based on negligence. In Company Law in Australia by Ford, paragraph 8.320 states:

"It is now clear that directors are subject to a common law duty to exercise reasonable care and skill in addition to any contractual law duty or statutory obligations."

This duty is generally owed to the company, and an individual shareholder cannot ordinarily sue in his own right. The basis of the prohibition on a shareholder suing is that where a director acts negligently the loss suffered is usually that of the company (see Prudential Assurance Co Ltd (No 2) [1982] 1 Ch 204 at pages 222-223).

However, where the company has not suffered any loss through the directors breach, or has no cause of action, or where a shareholder has suffered a separate and distinct loss, then the shareholder may have separate cause of action in its own right (see Johnson v Gore Wood & Co [2002] 2 Ch 1; Chen v Karandonis [2002] NSWCA 412).

In the present case, the Appellant pleaded negligence on the part of the Respondents to the detriment of the Appellant and as a result suffered damages as a minority shareholder (paragraphs 49 - 57 of the Statement of Claim). Whether or not this claim will succeed is a matter to be proven at the trial. We consider that this is a valid cause of action in law.

Counsel for the Appellant also relies on breach of s 152 of the Companies Act:

"152. Prejudiced shareholders.

(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity or in any other capacity, may apply to the Court for an order under this section.

(2) Where, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—

(a) .... or

(b) requiring the company or any other person to pay compensation to a person;

(c) ..."

This cause of action is pleaded in paragraph 56 of the Statement of Claim.

Section 152 has not received any judicial consideration in our jurisdiction. The New Zealand Companies Act s 209 as amended by s 11 of the Companies Amendment Act 1980 provides:

"(1) Any member of a company that the affairs of the company have been or are being or a likely to be conducted in a manner that is, or any act or acts of the company have been or are likely to be, oppressive, unfairly prejudicial, to him (whether in his capacity as member or in any other capacity) or, in a case falling within section 173 (3) of this Act, the Attorney-General, may make an application to the Court for an order under this section.

(2) If on any such application the Court is of the opinion that it is just and equitable to do so, the Court may make such order as it thinks fit, ..."

While the New Zealand legislation has significant variations, the use of the words "oppressive, unfairly discriminatory or unfairly prejudicial" is common. In Thomas and HW Thomas Ltd [1984] 1 NZLR 686, at page 693 Richardson J said:

"In employing the words ‘oppressive, unfairly discriminatory or unfairly prejudicial’ Parliament has afforded petitioners a wider base on which to found a complaint. Taking the ordinary dictionary definition of the words from the Shorter Oxford English Dictionary: oppressive is ‘unjustly burdensome’; unfair is ‘not fair or equitable; unjust’; discriminate is ‘to make or constitute a difference in or between; to differentiate’; and prejudicial, ‘causing prejudice, detrimental, damaging (to rights, interests, etc). I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company."

This passage is helpful in indicating the nature of the cause of action under s 152 of the Act and we would adopt it.

The trial judge in dismissing the cause of action stated:

"I am satisfied that the Plaintiff has pleaded no cause of action based on duties of directors to shareholders in terms of s 147 (1). There is no duty in the directors to maximize the value of shares or returns on shares for the benefit a shareholder or shareholders. No facts or conduct has been pleaded which stipulates unfair or deliberately discriminatory actions. Such matters are pleaded refer only to a failure to heed proposals by the Plaintiff to the directors which it considered would enhance values. These disclose no of action and would in any case would simply fall squarely into the provisions of s 147 (2) which gives no cause of action for a reduction in value of chares by reason only of a loss...suffered or a gain forgone.

Again in terms of s 148 there is no cause, no conduct, discriminatory or oppressive or breach of fiduciary duty pleaded, no application made for just and equitable relief. The Plaintiff does plead that during 1998 and 1999 proposals made by it were ignored, "independent" directors were not advised or informed of board decisions. Assertions that proposals were made from time to time to the Directors as to the disposition or the use of cash holdings amount to no more that that. They give rise to cause of action.

But no action was taken by the Plaintiff or other shareholders, no application made pursuant to the Companies Act for the Court to exercise an equitable jurisdiction in respect of such matters. And it would seem the independent directors, if they had cause of action, did not do so either. The Plaintiff took no formal step within the company procedures to make proposals to the company or the board of directors except on one occasion when it made a proposal to the annual general meeting of the shareholders. The fact that such a proposal was defeated, of itself provides no cause of action without pleading matters necessary to ground a complaint. Again, while it can be said that for most purposes, directors do occupy a fiduciary positions in regard to the company, a director is in no sense a trustee for individual shareholders Percival v Wright [1982] 2 Ch 421. Here too there is no cause pleaded."

We agree with counsel for the Appellant that the trial judge fell into error in characterizing the Appellant’s claim as falling within s 147 (1) of the Companies Act and failed to consider s 152 of the Act. We accept the submission by counsel for the Appellant that the Respondents did not have to be cast as "directors" to be liable under s 152 of the Companies Act. The claim may be brought against "any person" who breaches the section.

Secondly, the Appellant alleged that the Respondents, by their acts or omissions breached s 152 (paragraph 56 of the Statement of Claim). The allegations are that they did not allow proper consideration of (or give effect to) proposals which would have seen NML’s assets distributed to its shareholders. That was not a complaint about some act or omission that led to a reduction in the value of the shares or failure of the shares to increase in value.

In respect of delay, we consider that this is a matter which may be raised in defence to the action at the trial. Similarly, the fact that the Appellant did not challenge the fairness or appropriateness of the scheme for merger of Lihir and NML are matters which may be raised by the Respondents at the trial.

We conclude that the trial judge fell into error when he ruled that the writ of summons disclose no cause of action in law.

In the result we would allow the appeal, quash the decision of the National Court with costs to the Appellant. The parties should progress the matter to trial.
____________________________________________________________________
Lawyers for the Appellant : Blake Dawson Waldron
Lawyers for the Respondents : Gadens