Contact: Voisin (Jersey)
Advocate Nigel Pearmain and English Solicitor Chris Le Quesne of Voisin’s Commercial team examine the options that aggrieved shareholders in Jersey companies have to bring a claim against their company directors.
The recent judgment of the Royal Court in Prestigic (Wisley) Nominees Limited Company -v- JTC Management Limited and Others [2012] JRC097 provides valuable guidance as to the distinctions between derivative actions and unfair prejudice actions and the circumstances in which it would be appropriate to bring one claim instead of the other.
The facts of the case concerned Wharf Land Investments (Jersey) Limited (the “Company”), a property holding company administered by the first respondent JTC Management Limited (“JTC”), which provided directorial services to the Company. The acquisition funds to purchase the property held by the Company were raised from investors including the representor Prestigic (Wisley) Nominees Limited Company (“Prestigic”). The Company was party to a property management services agreement with Wharf Land Investments Limited (“Wharf Land”), by which Wharf Land was to act as property advisor in consideration for approximately 50% of the Company’s profits. Wharf Land was not an investor or shareholder in the Company.
Prestigic launched proceedings under Article 141 of the Companies (Jersey) Law 1991 (the “Law”) on the grounds that it had been unfairly prejudiced in the following ways:
- That between February 2007 and September 2008 the directors of the Company authorised certain payments with no apparent justification (the “Payments”);
- The level of fees charged by JTC; and
- The lack of an audit.
It was made clear that the Payments were the central reason for the application. Prestigic sought an order from the Court under Article 143(2)(c) of the Law by which it would be authorised to bring proceedings in the name of the Company against JTC seeking relief in respect of (i) any breaches of fiduciary or statutory duty resulting from the Payments; and (ii) any unauthorised or unwarranted fees of JTC.
In accordance with the guidance in Pacific Investment Limited -v- Christensen & Others [1995] JLR 250 that, in regards to actions brought under Article 141 of the Law, the views of any independent shareholders should be taken into account, an EGM was held in which the shareholders passed various resolutions ratifying the events underpinning the proceedings brought by Prestigic. The rationale behind this was that the shareholders decided that it was in their interests to focus on the development of the property, to recoup their investment and to obtain profit, rather than hinder the project by allowing for the investigation and litigation of the above mentioned events.
The Court considered the Jersey and English judicial authorities applicable to claims of unfair prejudice and went on to review an emerging line of authority that there is a distinction between seeking relief for the ongoing mismanagement of the affairs of a company and seeking a remedy for past misconduct. The Court noted the making of this distinction in Re Charnley Davis Ltd (No 2) [1990] BCC 605, its approval in Re Chime Corporation Limited [2004] 7HKCFAR 546 and also its consideration in Waddington Limited -v- Chan [2008] 11 HKCFAR 370. The Court also observed that in Chime Lord Scott of Foscote considered the use of an unfair prejudice petition to circumvent the rule in Foss -v- Harbottle (1834) 2 HARE 461, where the nature of the complaint is misconduct rather than mismanagement, to be an abuse of process.
The Court accepted that there is indeed a distinction between relief for the mismanagement of a company and a remedy for misconduct and that “it is only actions in relation to the former that fall properly within the ambit of the unfair prejudice provisions”. On this basis, the Court rejected the respondents’ argument that the case concerned mismanagement of the affairs of the Company which was an ongoing issue. The Court acknowledged that the absence of an explanation of the Payments was a legitimate concern, but that by applying Charnley, the matter could be addressed by the remedy provided by law for the wrong, namely the issuing of proceedings against JTC, describing the complaint as being one of “misconduct simpliciter” and, therefore, proceedings should have been brought by way of a derivative claim. Furthermore, the Court considered it to have been an abuse of process for Prestigic to attempt to circumvent the rule in Foss -v- Harbottle, (and Prestigic did not argue that it fell within the exceptions to that rule) by the use of an application under Article 141 of the Law.
The Court accepted that, while it essentially did have jurisdiction to entertain Prestigic’s claim insofar as Prestigic had complained of misconduct, it was of the view that, insofar as Prestigic only held a 2.84% stake in the Company, it would not be appropriate to compel the majority shareholders to adopt a different commercial position. In signing up to the articles of association of the Company, Prestigic availed itself to the rights contained therein including the principle of majority rule and the Court saw nothing unfair in a clear majority decision being binding upon a minority. Given that Prestigic did not fall within one of the established exceptions to Foss -v- Harbottle, the Court considered that only the Company, and not Presitigic, could bring proceedings against JTC; a course of action that had been decided against by the vast majority of the shareholders.
This case will be of value to shareholders who are considering whether claims can be brought on behalf of the company of which they are members. The emerging distinction between mismanagement of a company’s affairs and misconduct is crucial. Shareholders must take care to identify whether they wish to apply for relief from an ongoing mismanagement problem, or whether they effectively require a remedy for misconduct that has occurred. The former should be applied for under Article 141 of the Law, whereas the latter should be dealt with by way of a derivative action (provided it is appropriate to make such a claim in the circumstances). Failure to adopt the correct process may mean that the Court is unwilling to entertain an application, irrespective of whether it shall be minded to grant relief or not.
For further information on this matter, or about companies in Jersey, please contact Nigel Pearmain (nigelpearmain@voisinlaw.com), Chris Le Quesne (chrislequesne@voisinlaw.com) or any member of Voisin’s Commercial team.
