Ah Kuoi v Keil & Ah Kuoi [2003] WSSC 14 (19 September 2003)

IN THE SUPREME COURT OF SAMOA
HELD AT APIA

IN THE MATTER of Caveat 872x affecting all that land at Matautu
described as Parcel 468/78 of which
PATRICK AH KUOI is registered as Proprietor.

BETWEEN

PATRICK AH KUOI
of Siusega, Businessman.
Applicant

AND

LAURA KEIL
of Tulaele, Married Woman and
NICHOLAS AH KUOI
of Palisi, Businessman.
Respondents

Counsel: R Drake for applicant
A Pereira and M Tuatagaloa for respondents

Reasons: 19 September 2003

JUDGMENT OF SAPOLU CJ

Background

The present proceedings were brought by the applicant for removal of a caveat lodged by the respondents with the Registrar of Lands on 25 November 2002. I dealt with the application for removal of the caveat on 19 August 2003 and concluded that the caveat should be removed. Accordingly, removal of the caveat was ordered. I indicated to counsel that my decision and reasons will be reduced to writing and made available to them in due course. As I had to be away from Samoa for three weeks it has not been possible to provide a written decision until now.

The first named respondent Laura Keil is a sister of the applicant and the second named respondent Nicholas Ah Kuoi is a brother of the applicant. All three of them together with two other sisters, a nephew, and one other person were by the time of the present proceedings the shareholders in J & M Ah Kuoi Ltd a family company which was set up by their father and mother who passed away in 1985 and 1990 respectively. As it appears from the respondents affidavits, the total number of shares in the company as from 2002 to the time of these proceedings is 25,000. The applicant has 6,750 shares or 27% of the total shares in the company; the first named respondent has 1,500 shares or 6% of the total shares in the company; and the second named respondent has 6,750 shares or 27% of the total shares in the company. The affidavits by the applicant show that he, the first named respondent and two other shareholders are directors of the company. The first named respondent in one of her affidavits states that she does not recall being appointed a director of the company and therefore declares herself not a director of the company. In this regard, the applicant produced a copy of a company resolution dated 6 June 1988 which was presented by the then solicitors of the company to the registrar of companies advising the names of the directors and the secretary of the company and the name of the first named respondent appears therein as a director.

The company used to be one of the major trading companies in Apia. It operated two stores, one on its commercial property at Matautu-uta and the other on its commercial property at Matafele in Apia. The company at that time appeared to be doing well. In 1985 the father of the applicant and the respondents died. The mother then decided that the applicant would manage the Matautu-uta business whilst she and the second named respondent would manage the Matafele business. Unfortunately the Matafele business got burnt down in a fire.

According to the applicant in one of his two affidavits, the company then obtained a loan to rebuild its Matafele business. As security for the loan, a mortgage was executed over the Matafele property. Repayments for the loan were originally paid by the business at Matautu-uta, but when the new building on the Matafele property was completed, it was left to the second-named respondent who was managing the Matafele business to look after the loan repayments from the Matafele business. The repayments fell into arrears. The mother of the applicant and the respondents then passed away in 1990. The second named respondent thus became solely responsible for the management of the Matafele business. In 1991 the mortgagee commenced to exercise its power of sale. As the shareholders of the company did not want the Matafele business to pass to someone outside of the family, they resolved at a meeting to transfer the Matafele property to one of their sisters and for her to assume full responsibility for repayment of the loan. The Matafele property was accordingly transferred.

Apparently, the company's Matautu-uta business was also in financial difficulties. It was also the subject of a mortgage security to a bank from which the company had obtained a loan. In April 1993 the bank served a default notice on the company and in September the same year the bank gave notice that it would auction the Matautu-uta property by way of a mortgagee sale. In consequence, the company's secretary called a meeting of all the shareholders to discuss the bank's proposed mortgagee sale. The meeting was to be held on 1 October 1993. Notices of the meeting, according to one of the applicant's affidavits, were issued to all the shareholders. Only three of the shareholders and the company secretary attended the meeting. These shareholders included the applicant, the first named respondent, and their sister to whom the Matafele property of the company had been transferred in 1991. The said three shareholders, according to the applicant, are also directors of the company. One of the director/shareholder who did not attend the meeting sent her apologies. The other three shareholders, including the second named respondent who has deposed that he does not recall receiving a notice of the meeting, did not attend. In consequence, there was no quorum for a shareholders meeting.

As there was no quorum for a shareholders meeting, the applicant states in one of his affidavits that the meeting became a directors meeting. A resolution signed by the directors/shareholders attending that meeting shows that the applicant was given the go ahead to negotiate with the bank the payment of the debt on the Matautu-uta property using his own resources and the transfer of the said property to him as it was done with the Matafele property which had been transferred to one of the other shareholders, a sister of the applicant. It is also shown in the same resolution that the company secretary was to take steps to have the company voluntarily wound up. As it also appears from the supplementary affidavit by the second named respondent, the last annual return which was filed by the company with the registrar of companies was made up to 31 January 1988. Then on 7 October 1993 a deed was executed for the transfer of the company's Matautu-uta property to the applicant. The first named respondent is shown as one of the two persons who signed the deed to witness the affixation of the company's common seal. She has deposed in one of her affidavits that the document she signed was not explained to her by the solicitor before whom the document was signed and she did not understand the effect of the document. The deed was registered on 13 October 1993.

According to the applicant, at some time in 1994 he had paid off the various debts of the company. The name of the company was then removed from the Matautu-uta property. Thus J & M Ah Kuoi Ltd was a company that existed only in name from that time as both its Matautu-uta property and Matafele property had been transferred to the applicant and one of his sisters respectively. Anyone familiar with the sight of the Matautu-uta business would have observed that for a number of years prior to 2002, the business was not doing well. In that year, a third party approached the applicant with an offer to purchase the Matautu-uta property. The applicant accepted the offer but in the end the sale did not eventuate. In November 2002 the respondents engaged a solicitor to prepare a caveat. It is not clear when the caveat was lodged with the registrar of lands but it was not registered until 24 January 2003. Then another third party offered to purchase the Matautu-uta property and it was in the course of the negotiations in January 2003 for the second proposed sale that the applicant came to learn of the caveat which had been lodged by the respondents against the Matautu-uta property.

In their affidavits, the respondents have made allegations of invalidity and fraud concerning the meeting that was held where it has been alleged by the applicant that a resolution was passed to transfer the Matautu-uta property to him on the condition that he assumed full responsibility for payment of the company's loan to the bank which had given notice of a mortgagee sale of that property. Similar allegations are made in the respondents affidavits concerning the manner by which the Matautu-uta property was subsequently transferred to the applicant. These allegations, as they appear from the respondents affidavits, are in part based on legal advice by counsel for the respondents so that they are a mixture of allegations of fact and legal conclusions. It should be pointed out that the respondents affidavits should have been restricted to allegations of fact; matters of law should have been left to be addressed in the submissions of counsel. The first affidavit by the applicant would be an example of what I mean by an affidavit that is restricted to allegations of fact. Be that as it may, the applicant in his affidavits has denied the allegations of fraud against him. Perhaps I should add here that it is not clear whether the fraud that is being alleged is actual or common law fraud, or constructive or equitable fraud.

Application for removal of caveat

The principal ground in support of the application for removal of the respondents caveat is that the respondents have no caveatable interest in the Matautu-uta property to sustain their caveat. Several authorities were cited by counsel for the applicant in support of that ground. Those authorities will appear in what I am about to say.

It is a basic principle of company law that a company is a distinct legal entity from its shareholders: Salomon v A Salomon & Co Ltd [1897] AC 22. For a New Zealand case where the Privy Council followed the Salomon principle, see Lee v Lee's Air Farming Ltd [1961] AC 12; [1961] NZLR 325. For a modern English case which reflects the application of the Salomon principle, see Adams v Cape Industries plc [1900] Ch 433. It has also become an established principle of company law that the shareholders of a company have no proprietary interest, whether legal or equitable, in the assets of the company in which they hold shares. Macaura v Northern Assurance Co Ltd [1925] A11 ER 51, 54. For a recent New Zealand case where that principle was applied, see Ten Pin Properties Ltd v Bowlarama (NZ) Ltd (1989) (High Court, Christchurch M 655/89, 18 December 1989, per Tipping J). The rights of shareholders which are derived from the shares they hold in a company are the rights to a dividend and to a return of capital upon the winding up of a company: Macaura v Northern Assurance Co Ltd [1925] A11 ER 51, 54, Peters' American Delicacy Co Ltd v heath [1939] HCA 2; (1939) 61 CLR 457, 503 – 504. To those rights of shareholders may be added the right to vote, the right to inspect the registers of the company, and the right to receive audited annual financial statements of the company. But shareholders have no proprietary interest in the assets of the company in which they hold shares. Their shares in the company confer upon them no such interest. In consequence, shareholders have no caveatable interest in the assets of the company. Mrs Drake for the applicant cited two authorities in this regard. The first is Ten Pin Properties (supra) where Tipping J in dealing with an application for removal of a caveat states at p3:

"This seems to me to run quite contrary to the well established rule that a shareholder has no proprietary interest whether legal or equitable in the assets of the company in respect of which he holds his shares. Mr Kellar mentioned Macaura v Northern Assurance Co Ltd [1925] A11 ER 51 as authority for that proposition. It seems to me that the caveat would have to go, simply on the basis of the way in which it is claimed to exist because it runs quite contrary to that rule and no submission has been made to me to demonstrate why the rule should not apply in these particular circumstances."

Mrs Drake for the applicant also referred to Land Law in New Zealand (1997) by Hinde, McMorland & Sim where it is stated at p273:

"The property of a company is not the property of its members. A shareholder has no proprietary interest, either legal or equitable, in the assets of the company in which the shares are held. It follows that a shareholder in a company has no caveatable interest in land owned by that company. Likewise a person who has entered into a contract to purchase shares in a company has no caveatable interest in land owned by the company."

These statements of principles are straight forward as far as they go. But it must be borne in mind that the property in question in the present case is no longer owned by the company for it had been transferred to the applicant in 1993.

Counsel for the respondents did not challenge the proposition that a shareholder of a company has no proprietary interest, legal or equitable, in the assets of a company of which he is a holder. They appear to have accepted that proposition as a matter of law. Senior counsel for the respondents, however, urged the Court to develop the principle applied in the case of Attorney-General for Hong Kong v Reid [1993] UKPC 2; [1994] 1 AC 324; [1994] 1 NZLR 1 so as to make it applicable to this case. It was not demonstrated, or sufficiently demonstrated, how that can be done. Without intending any discourtesy to counsel for the respondents, I must point out that if counsel wants the Court to develop the law, particularly in a complex area where the law is still developing, in order to provide a peg for a client to hang his hat on, then counsel must be prepared to provide adequate submissions sufficiently supported by relevant authorities. Furthermore, in proceedings for removal of a caveat, the onus is on the caveator to demonstrate that his caveat must continue.

The essential facts of Attorney-General for Hong Kong v Reid may be briefly stated. Reid was a public prosecutor for the government of Hong Kong. In that position he accepted bribes to obstruct the prosecution of certain criminals. He held three freehold properties in New Zealand which were alleged to have been purchased with the bribes that he received in Hong Kong. The Attorney-General for Hong Kong then registered caveats on behalf of the Hong Kong government against the titles to the said freehold properties and subsequently applied to renew those caveats to prevent any dealing with the properties pending the hearing of a claim by the government of Hong Kong that it was entitled to those properties on the basis of a constructive trust.

Reid is obviously quite a different case from the present case. It was not concerned with a company and therefore not a case in company law which has principles of its own. The relationship between the government of Hong Kong and Reid was also one of employer and employee. It was also a case concerning the acceptance of a bribe by a civil servant in his official position. It also appears from the judgment of the Privy Council delivered by Lord Templeman that the relationship between the government of Hong Kong and Reid was a fiduciary relationship and that Reid was a fiduciary, though a 'false fiduciary'. As a fiduciary Reid was held to owe a fiduciary duty to the government of Hong Kong as his principal. It follows that by accepting bribes in the course of his employment to obstruct the prosecution of certain criminals, Reid as a public prosecutor was in breach of his duty as a fiduciary. Lord Templeman therefore considered that the freehold properties purchased with the bribes were held on a constructive trust for the government of Hong Kong which was therefore entitled to have its caveats renewed.

In the present case, it was not argued that the relationship between the applicant and the respondents was a fiduciary one which gives rise to a fiduciary duty on the part of the applicant towards the respondents as directors or shareholders of J & M Ah Kuoi Ltd. It is a general principle of company law that a director of a company owes fiduciary duties only to the company and not to other directors or shareholders of a company. To depart from that principle in the circumstances of the present case requires adequate submissions from the respondents who bear the onus of demonstrating that their caveat must remain.

However, I should point out that I do not accept that whilst in principle shareholders have no proprietary or caveatable interest in the assets of a company, they may have a caveatable interest in a company asset that has been transferred to someone else. To hold that shareholders may hold a caveatable interest in such an asset would be contrary to principle. It would be preferable for the shareholders in an appropriate case to ask the company to act. If that is not possible because the directors or other shareholders disagree, then consider bringing derivative proceedings in the name of the company.

I am therefore of the opinion that the respondents should have considered whether to call a meeting with the other shareholders for the company to take proceedings in its name. If, however, the other shareholders which constitute the majority would not agree to the company taking such action, then perhaps the respondent should have considered bringing derivative proceedings in the name of the company.

All in all then, the respondents who bear the onus of demonstrating that their caveat must continue, have not satisfied me that their caveat must remain. Accordingly, it is ordered that their caveat be removed.

CHIEF JUSTICE

Solicitors:
Drake & Co Law Firm for applicant
AT Pereira Law Firm & Brunt Keli Law Firm for respondents