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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Iesini & Ors v Westrip Holdings Ltd & Ors  EWHC 2526 (Ch) (16 October 2009)
Cite as:  BCC 420,  EWHC 2526 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| Dimitri Giacobbe Iesini
| - and -
|Westrip Holdings Ltd
Gregory Bennett Barnes
Janine May Walker
Hans Kristian Schønwandt
Rimbal Pty Ltd
Horrocks Enterprises Pty Ltd
Michael Todd QC and Ruth Holtham (instructed by Farrer & Co) for the First, Fourth and Fifth Defendants
Peter de Verneuil Smith (instructed by SC Andrew LLP) for the Second, Third, Sixth and Seventh Defendants
Hearing dates: 28th- 30th September and 5th & 6th October 2009
Crown Copyright ©
Mr Justice Lewison :
i) Westrip was to control the management and implementation of the Scheme for the development of the licensed areas (or "tenements");
ii) Rimbal assigned to Westrip all of its present and future rights to all profits arising from any exploitation of mineral deposits within the tenement;
iii) If Westrip paid £2.5 million, 51 per cent of Rimbal's shares would be transferred to Westrip (although it is difficult to see how Rimbal itself could have procured the transfer of its own shares);
iv) The term of the 2002 licence was 2 years from May 2002; and
v) The agreement was governed by English law.
"These shares are being allotted to Greg [Barnes] and Janine Walker in consideration of transferring Rimbal to Westrip as a wholly owned subsidiary. The transaction will be contemporaneous with the sale of a separate licence to Uranium Resources and issue of shares in the ultimate public quoted company seeking to acquire Uranium Resources. The Members' and company interests will be protected at all times by funds and shares being held in escrow…
With Greg and Janine Walker exclude[d] from voting, the proposal was agreed by more than 76% and therefore special resolution was passed…"
"The following resolution was passed: 1. To issue 2,500,000 redeemable preference shares without voting, dividend or winding up rights."
"that the ordinary shares of Rimbal Pty Ltd be acquired on the terms set out in Annex 3 and it is further resolved that Simon Stafford-Michael have the authority to negotiate the final wording of the contract and execute all such documents necessary for the closure of such transaction."
"Although Exploration Licence 2005/17 was granted in the name of [Rimbal], [Rimbal] holds it on trust for [Westrip]. [Westrip] paid for this Exploration Licence to be pegged and has met the minimum expenditure requirements to ensure that this Exploration Licence is maintained in good standing."
"The conditions in clause 3 (1) are for the benefit of the Vendor and may only be waived by the Vendor."
i) Clause 6 provided that time was of the essence of the contract;
ii) Clause 10.1 contained a warranty by Westrip (which was to be correct both at the date of the agreement and at the date of settlement) that the redeemable preference shares had been validly allotted and issued;
iii) Clause 19 provided that in the event of any breach of the agreement by Westrip Mr Barnes and Ms Walker would be entitled "to rescind" the agreement and to exercise the option to retain the shares in Rimbal and sue for damages; and
iv) Clause 21 provided that any waiver of rights under the agreement was not to have any effect unless made in writing and executed by the party whose rights were waived.
"In addition and just as important is the attached written resolution regarding the issue of preference shares at an extraordinary meeting of the company on 10 June 2006. At that time, we neglected to cover the aspect of shareholder rights in specific detail. In simple terms this makes the "Rimbal" agreement happen smoothly and gives Westrip ownership of the licences, through owning 100% of Rimbal."
"… Westrip's rights to, inter alia, promote and develop the Exploration Licence by virtue of Rimbal holding upon trust for, and as nominee of, Westrip as owner of the full, absolute and entire beneficial interest in the Exploration Licence."
"presently held by a wholly owned subsidiary of Westrip ("Subsidiary") and by virtue of Subsidiary holding upon trust for, and as nominee of, Westrip as owner of the full, absolute and entire beneficial interest in the Existing Exploration Licence, Westrip is entitled to enter into this agreement."
"… it was agreed that payments of £150k be made forthwith to Gregory Barnes & Janine Walker under the terms of the Share Purchase Agreements (and latest draft Variations thereto)."
"The company acquired 100% of ownership of Rimbal … on 14 June 2007 at a cost of £2,500,000. The transaction was funded by shareholder resolution of redeemable preference shares to that value."
"Mr Barnes is a founding shareholder of the Company, holding an approximately 15.0% voting stake, with additional preference shares which may be redeemed in or about September 30, 2008…"
"I have been informed that Greg Barnes has requested an EGM to accomplish these changes in lieu of voluntary resignations and that he currently holds proxies, including his own shareholding, that represent approximately sixty seven per cent of the outstanding Westrip shares. This overwhelming majority makes it very likely that Westrip will be able to make the required changes and move to closing the interim funding."
"The original plan was to use Westrip's GGG shares to raise £20 million. This £20 million would be used to create two highly leveraged hedge funds which would raise sufficient monies to be able to fund Westrip's needs. In other words, the only capital introduced at the first stage was going to come via Westrip's shares in GGG other than the £250,000 borrowed from Westrip."
"WE ARE BROKE, WE ARE ON THE BRINK OF INSOLVENCY. If we don't put up the collateral that we have then we will not get finance from anyone."
"It was not the moment to be trying to find £2.2 million plus funding for further development costs against a long distant hoped-for profits stream. The board concluded that not only could Westrip not make any payment to Mr Barnes or Ms Walker, but further, it could not approach them with any meaningful proposal to make payment in the future."
i) Whether Westrip had complied with its obligations under the SSA to create and allot compliant preference shares to Mr Barnes and Ms Walker; and
ii) If not, whether there were any steps that Westrip could take to rectify the situation so as to preserve for Westrip its interest in Rimbal and Horrocks and the value of the underlying mineral licences.
i) Prior to 14 June 2007 no purported allotment of redeemable preference shares could have been valid; and
ii) After that date there was no evidence of any actual decision by the board of directors to make such an allotment.
"Rimbal has at least reasonable prospects of successfully pursuing the Company for remedies arising out of the Company's failure to issue Rimbal the redeemable preference shares … under the … [SSAs]"
"In circumstances where a court is likely to form the view (based on the materials presently before us) that the Company holds Exploration Licence Number 2005-17 on trust for Rimbal, it is our view that the terms are reasonable as it will involve a monetary settlement (in effect) of approximately AUD$8 million."
"Accordingly, Mr Barnes' instructions cannot be said to have affected the advice given by Mallesons in relation to either the rescission of the SSAs or … the proposed settlement of CIV 1447."
The Claimants' case
i) An allegation that the board of Westrip colluded in the rescission as part of a conspiracy to deprive Westrip of its assets;
ii) An allegation that the board of Westrip were in breach of duty in failing to consider possible defences which Westrip might advance to challenge the rescission; in particular a defence that Mr Barnes and Ms Walker were estopped from alleging that compliant preference shares had not been allotted and issued in time; and
iii) An allegation that, whether or not the rescission was effective, Westrip was and remains entitled to assert ownership of the 30 million GGG shares and to assert beneficial ownership of the Northern Licence on the ground that Rimbal held it on trust for Westrip.
i) The creation of Weyhill, the Liechtenstein Foundations and the making of the Weyhill offer;
ii) The use of the Weyhill offer to change the board of directors of Westrip;
iii) The promoting and making of a false claim for rescission;
iv) The acceptance of that claim by a board acting in breach of duty;
v) The re-transfer of the shares in Rimbal and Horrocks to Mr Barnes and Ms Walker; and
vi) The decision of the board not to defend the proceedings issued by Rimbal in Western Australia.
i) Budgets and spreadsheets produced by Westrip to show its financial position referred to the redeemable preference shares held by Mr Barnes and Ms Walker and the need to redeem them. Ms Walker was a director of Westrip at the time;
ii) Westrip's financial statements for the year ended 31 January 2007 recorded that it had acquired ownership of Rimbal on 14 June 2006 at a cost of £2.5 million which it had funded by the issue of redeemable preference shares to that value. The financial statements were approved by the board on 20 September 2007 and at Westrip's AGM on 29 September 2007; and
iii) In conversations in late 2007 and at Westrip's EGM on 9 June 2008 Mr Barnes and Ms Walker assured Westrip that they would not seek to redeem the remainder of the preference shares until further funds were available.
i) Westrip paid £300,000 to Mr Barnes and Ms Walker in redemption of some of the redeemable preference shares;
ii) Westrip incurred substantial expenditure in connection with Tanbreez; and
iii) Because of the assurances given by Mr Barnes and Ms Walker, Westrip committed its funds to the development of Tanbreez.
The legal framework
"(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company.
This is referred to in this Chapter as a "derivative claim".
(2) A derivative claim may only be brought—
(a) under this Chapter, or
(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).
(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
The cause of action may be against the director or another person (or both)."
"(1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.
(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court -
(a) must dismiss the application, and
(b) may make any consequential order it considers appropriate.
(3) If the application is not dismissed under subsection (2), the court -
(a) may give directions as to the evidence to be provided by the company, and
(b) may adjourn the proceedings to enable the evidence to be obtained.
(4) On hearing the application, the court may -
(a) give permission (or leave) to continue the claim on such terms as it thinks fit,
(b) refuse permission (or leave) and dismiss the claim, or
(c) adjourn the proceedings on the application and give such directions as it thinks fit."
"(1) The following provisions have effect where a member of a company applies for permission (in Northern Ireland, leave) under section 261 or 262.
(2) Permission (or leave) must be refused if the court is satisfied-
(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission-
(i) was authorised by the company before it occurred, or
(ii) has been ratified by the company since it occurred.
(3) In considering whether to give permission (or leave) the court must take into account, in particular-
(a) whether the member is acting in good faith in seeking to continue the claim;
(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;
(c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be-
(i) authorised by the company before it occurs, or
(ii) ratified by the company after it occurs;
(d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company;
(e) whether the company has decided not to pursue the claim;
(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.
(4) In considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter."
"(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."
"It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v. Harbottle (1843) 2 Hare 461. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs - by directors who hold a majority of the shares - who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress."
"6.31 So far as the second situation is concerned, one respondent gave the following example. A profitable company is a victim of a tort by a third party, and the board, although otherwise committed to the well-being of the company, have ulterior motives of their own for not wishing to enforce the remedy for the tort. Although the board would in those circumstances be in breach of duty, their breach would not have given rise to the claim.
6.32 We accept that in this type of situation an individual shareholder would have no right to bring a derivative action against the third party tortfeasor under our proposals. (There would of course be a potential claim for damages against the directors themselves, although this may give rise to difficulties of causation or quantification, and it is possible that the directors may not have sufficient funds to meet the claim). However, we do not consider that this is an issue which needs to be addressed for two main reasons.
6.33 First, we are not aware of any cases under the current law where a derivative action has been successfully brought in circumstances such as those described in paragraph 6.31.
6.34 Secondly, (and more importantly) it is consistent with the proper plaintiff principle which we endorsed in the consultation paper and which received virtually unanimous support on consultation. The decision on whether to sue a third party (ie someone who is not a director and where the claim is not closely connected with a breach of duty by a director) is clearly one for the board. If the directors breach their duty in deciding not to pursue the claim then (subject to the leave of the court) a derivative claim can be brought against them. To allow shareholders to have involvement in whether claims should be brought against third parties in our view goes too far in encouraging excessive shareholder interference with management decisions. This is particularly important as we are proposing that derivative actions are to be available in respect of breaches of directors' duties of skill and care. A line has to be drawn somewhere and we consider that this is both a logical and clearly identifiable place in which to draw the line."
"It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v. Harbottle and sanctions the very mischief that the rule is designed to prevent. By the time a derivative action is concluded, the rule in Foss v. Harbottle can have little, if any, role to play. Either the wrong is proved, thereby establishing conclusively the rights of the company; or the wrong is not proved, so cadit quaestio."
"In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle."
"6.63 … We do not want individual shareholders to apply to take over current litigation being pursued by their company just because they are not happy with the progress being made. The provision is intended to deal with those situations where the company's real intention in commencing proceedings is to prevent a successful claim being brought." (Emphasis in original)
Is there a mandatory bar on the claim?
"a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim."
Rescission of the SSAs
"Barnes and Walker may therefore be prevented by a Court from exercising the rights to terminate [under the SSA] if Westrip is able to establish that Barnes and Walker had affirmed the Agreements, that they should be estopped from terminating the Agreements, or that they were in breach of implied terms requiring them to act in good faith."
"On the material available to us we consider that the conduct of the parties demonstrates that each of them shared an agreed assumption that the redeemable preference shares had been validly issued and allotted to Barnes and Walker and that their relationship, prior to October 2008, was conducted on the basis of that shared assumption. Circumstances such as the entry of the redeemable preference shares in the names of Barnes and Walker into Westrip's share register and entry into the Second Variation Agreement support the existence of this assumption."
"105. Further or in the alternative, in the belief that it owned the licences Westrip incurred expenditure in developing the Tanbreez licence as set out above. If, contrary to Westrip's case, its belief that it owned the Licences was wrong because the share purchase agreements were liable to be and have been validly rescinded, it incurred that expenditure acting under a mistake. Rimbal and Horrocks would be unjustly enriched at the expense of Westrip by the re-transfer of the shares as they would benefit from the enhanced value of the Tanbreez licence.
106. The Claimants, on behalf of Westrip, therefore seek an order for restitution of the value of the benefit conferred on Rimbal and Horrock. The Claimants cannot particularise the value of the benefit at this stage: it will be a matter for expert evidence."
The trust claim
i) If the trust exists, it exists independently of any default or breach of duty (etc.) by the board. If it exists it does so because Westrip paid for the pegging of the licence and (more importantly) because Rimbal has acknowledged and warranted the existence of the trust in a number of deeds to which Westrip was a party and upon which it plainly relied in entering into JV arrangements;
ii) If there is a trust it still exists, and Westrip's primary concern must be to establish beneficial ownership of its own assets. Unlike the rescission claim therefore, this is more than a financial claim against the directors;
iii) If the trust exists, then as it seems to me, Westrip will have provided good consideration under the terms of the joint venture with Broadstone and subsequently with GGG. If that is right, then Westrip will be entitled to retain both its share in the joint venture and also its shares in GGG;
iv) Since the trust claim exists independently of any default or breach of duty (etc.) by the directors, it is not a cause of action which arises out of any such default or breach of duty (etc.). The underlying trust claim does not, therefore, fall within the definition of a derivative claim capable of being brought under Chapter 1 (although it could be brought following proceedings under section 994);
v) Mr Todd's clients (Mr Schønwandt, Mr Powar and Westrip) have now accepted that there is at least an arguable claim that the trust exists, and have said that the board will reconsider their decision to enter into the proposed consent order forming the second stage of the proposed settlement. If, having reconsidered the position, the board decides to assert the existence of the trust there is no real point in pursuing a claim against them because their previous decision will not have resulted in any loss to Westrip.
Are the Claimants proper claimants?
"It is pertinent to remember, however, that a minority shareholder's action in form is nothing more than a procedural device for enabling the court to do justice to a company controlled by miscreant directors or shareholders. Since the procedural device has evolved so that justice can be done for the benefit of the company, whoever comes forward to start the proceedings must be doing so for the benefit of the company and not for some other purpose. It follows that the court has to satisfy itself that the person coming forward is a proper person to do so. In Gower, Modern Company Law, 4th ed (1979), the law is stated, in my opinion correctly, in these terms, at p. 652:
"The right to bring a derivative action is afforded the individual member as a matter of grace. Hence the conduct of a shareholder may be regarded by a court of equity as disqualifying him from appearing as plaintiff on the company's behalf. This will be the case, for example, if he participated in the wrong of which he complains.""
"The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed."
"To my mind, under this statute a claim is made "in good faith" when it is made honestly and with no ulterior motive. It must be made by the tenant honestly in the belief that he has a lawful right to acquire the freehold or an extended lease, and it must be made without any ulterior motive, such as to avoid the just consequences of his own misdeeds or failures."
"The phrase manifestly cannot embrace every advantage sought or obtained by a litigant which it is beyond the court's power to grant him. Actions are settled quite properly every day on terms which a court could not itself impose upon an unwilling defendant. An apology in libel, an agreement to adhere to a contract of which the court could not order specific performance, an agreement after obstruction of an existing right of way to grant an alternative right of way over the defendant's land -- these are a few obvious examples of such proper settlements. In my judgment, one can certainly go so far as to say that when a litigant sues to redress a grievance no object which he may seek to obtain can be condemned as a collateral advantage if it is reasonably related to the provision of some form of redress for that grievance. On the other hand, if it can be shown that a litigant is pursuing an ulterior purpose unrelated to the subject matter of the litigation and that, but for his ulterior purpose, he would not have commenced proceedings at all, that is an abuse of process. These two cases are plain; but there is, I think, a difficult area in between. What if a litigant with a genuine cause of action, which he would wish to pursue in any event, can be shown also to have an ulterior purpose in view as a desired by-product of the litigation? Can he on that ground be debarred from proceeding? I very much doubt it."
"Early payment — i.e. before the conclusion of the trial — does indeed impose an additional liability. That may become necessary: if, for example, the plaintiff is a person who literally has no resources of his own, then it may well be that an order for interim payment should be made in order to ensure that the action proceeds at all. Without the supplementary order, the original order may stand in danger of being stultified.
It therefore appears to me that in order to hold the balance as fairly as may be in the circumstances between plaintiffs and defendants, it will be incumbent on the plaintiffs applying for such an order to show that it is genuinely needed, i.e. that they do not have sufficient resources to finance the action in the meantime. If they have, I see no reason at all why this extra burden should be placed upon the company."
Views of members with no personal interest
"Ultimately the question which has to be answered in order to determine whether the rule in Foss v. Harbottle applies to prevent a minority shareholder seeking relief as plaintiff for the benefit of the company is, "Is the plaintiff being improperly prevented from bringing these proceedings on behalf of the company?" If it is an expression of the corporate will of the company by an appropriate independent organ that is preventing the plaintiff from prosecuting the action he is not improperly but properly prevented and so the answer to the question is, "No". The appropriate independent organ will vary according to the constitution of the company concerned and the identity of the defendants who will in most cases be disqualified from participating by voting in expressing the corporate will.
Finally on this aspect of the matter I remain unconvinced that a just result is achieved by a single minority shareholder having the right to involve a company in an action for recovery of compensation for the company if all the other minority shareholders are for disinterested reasons satisfied that the proceedings will be productive of more harm than good. If Mr. Potts' argument is well founded once control by the defendants is established the views of the rest of the minority as to the advisability of the prosecution of the suit are necessarily irrelevant. I find that hard to square with the concept of a form of pleading originally introduced on the ground of necessity alone in order to prevent a wrong going without redress."
"In considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter."
i) The position of a liquidator is different because he has no personal interest in the outcome of the action. In the present case the claimants have a lively interest in the outcome of the action;
ii) In DPR itself, assets worth £2.3 million were frozen and the offered cross-undertaking was valued at £2 million. In the present case, if the cross-undertaking is ever called upon the assets of Westrip are unlikely to be able to cover the loss;
iii) In the present case, as Mr Iesini has said, the claimants have the benefit of an indemnity from GGG, which extends to any damages awarded against the claimants; and he relied on that in his third witness statement when dealing with the value of the cross-undertaking;
iv) If a cross-undertaking is inadequate that may, in itself, be a reason for refusing an injunction;
v) Had Mr Iesini pursued his alternative remedy under section 994 he would not have been entitled to limit an undertaking in that way.