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North Solomons Provincial Government v Bougainville Development Corporation Ltd [1988] PGLawRp 35; [1988] PNGLR 247 (21 December 1988)

Papua New Guinea Law Reports - 1988-89

[1988] PNGLR 247 - North Solomons Provincial Government v Bougainville Development Corp Ltd�

[1988] PNGLR 247

SC363

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]

NORTH SOLOMONS PROVINCIAL GOVERNMENT

V

BOUGAINVILLE DEVELOPMENT CORPORATION LTD, LEO HANNETT, THEODORE MIRIUNG, PAUL NERAU AND ALOYSIUS NOGA

Waigani

Bredmeyer Woods Hinchliffe JJ

24-25 November 1987

21 December 1988

COMPANIES - Shareholders - Register of members - Rectification of - Practice - Parties - Shares issued for unlawful and improper purpose - Directors appropriate defendants.

COMPANIES - Shareholders - Register of members - Rectification of - Shares issued for unlawful and improper purpose - Interlocutory injunction to restrain processing of allotment - Allottees of shares not essential parties - Relief appropriate where prima facie case established.

INJUNCTIONS - Interlocutory injunctions - Prima facie case - Proceedings for rectification of company register - Restraint of processing of shares - Interlocutory injunction granted.

In proceedings for rectification of a company register where it was alleged that directors of the company acted unlawfully and contrary to the interests of the company in the issue and allotment of shares,

Held

N1>(1)����� It was appropriate that the directors be sued as co-defendants with the company.

Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3; [1974] AC 821, followed.

N1>(2)����� It was not fatal to an application for injunctive relief restraining the directors from processing the allotment of shares that the allottees of the shares were not joined as defendants.

Ashburton Oil NL v Alpha Minerals NL [1971] HCA 5; (1971) 123 CLR 614, followed.

N1>(3)����� Where there was a prima facie case that the allotment of shares was unlawful and for an improper purpose, it was appropriate that an interlocutory injunction restraining any processing of the shares so issued be made.

Cases Cited

Ansett v Butler Air Transport Ltd (1958) 75 WN (NSW) 299.

Ashburton Oil No Liability v Alpha Minerals No Liability [1971] HCA 5; (1971) 123 CLR 614; 45 ALJR 162.

Bamford v Bamford [1970] 1 Ch 212.

Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3; [1974] AC 821.

McGuire v Ralph McKay Ltd (1987) ACLC 891.

Appeal

The board of directors of Bougainville Development Corporation Ltd at a meeting held on 26 February 1985 issued and allotted 700,000 new shares in the company. The North Solomons Provincial Government, which was a shareholder in the company, issued a writ claiming that the allotment was invalid as contrary to the articles of association and not in the best interests of the company. The Provincial Government joined the company as co-plaintiff and sued four directors as defendants. The plaintiffs obtained an interim injunction restraining the directors from processing in any way the allotment of the new shares. In interlocutory proceedings Los J ordered, inter alia, that the directors be struck off the record as defendants and that the interim injunction be dissolved. The plaintiffs appealed.

Counsel

A G Uren QC and J Goodman, for the appellant.

W W Caldwell and G Evans, for the respondents.

Cur adv vult

21 December 1988

BREDMEYER WOODS HINCHLIFFE JJ: This is an appeal against an interlocutory judgment of the National Court given on 20 September 1985, whereby the court ordered that Bougainville Development Corporation be removed as plaintiff, the four-named respondent directors be removed from the record as defendants, the Bougainville Development Corporation be placed on the record as the defendant, and that an injunction be dissolved. Further orders were made as to costs.

The substantive action in this case is a writ of summons issued by the North Solomons Provincial Government challenging the validity of the issue of 700,000 shares at a meeting of the directors of Bougainville Development Corporation Ltd (BDC) held on 26 February 1985. The new shares were not issued at the meeting on a pro rata basis to existing shareholders but by special placement to the following:

The plaintiff claims that it was a major shareholder in the company, the owner of 400,000 shares out of 699,767 in the company, and that the issue and allotment of new shares was unlawful as contrary to the articles of association. The plaintiff claims that its director on the board was not given notice of the meeting, that the meeting lacked a quorum, that the Provincial Government was not invited to take up any new shares, and that one of the directors voted on the resolution when he had an interest in two of the allottees which he failed to disclose. The plaintiff claims that the value of each share was K9 and yet it was allotted at K1.30 each thus giving a substantial windfall to all the allottees including two of the directors whose family companies received allotments of 100,000 shares each. The writ claims that the directors acted for an improper purpose, to benefit themselves and to maintain control of the company, and not for the benefit of the company as a whole. At the time the Provincial Government was trying to remove the directors and this issue of new shares had the effect of diluting the Provincial Government�s equity in the company.

The allotment of the shares was made on 26 February 1985. On 24 July 1985 the North Solomons Provincial Government obtained an ex parte interim injunction from Cory J against five-named directors. This was followed shortly afterwards by a writ of summons, WS No 381 of 1985, which was issued in the name of the North Solomons Provincial Government and Bougainville Development Corporation as plaintiffs and four-named directors as defendants. Three notices of motion were filed by BDC and the directors moving that BDC be removed from the record as a plaintiff, the interim injunction be dissolved, the proceedings be dismissed, and also for costs. These motions came before Los J on 6 and 20 September 1985 and resulted in the order now under appeal.

THE REMOVAL OF THE DIRECTORS FROM THE RECORD AS DEFENDANTS

The writ of summons in this case was issued by North Solomons Provincial Government and BDC as plaintiffs against Messrs Hannett, Miriung, Nerau and Noga as defendants. The three notices of motion before Los J sought the removal of BDC as plaintiff and other relief; they did not seek the removal of the directors as defendants. The orders made by Los J removed BDC as a plaintiff and substituted it as a defendant. That was quite proper and no appeal is raised against that part of the order. The order went on to remove the four directors as defendants and that part of the order is in issue before us.

The appellant argues that when a shareholder contends that directors have acted, in this case, in the allotment of shares, improperly, contrary to the articles, and not bona fide in the interests of the company, then they should be joined as defendants. The principle is that if the directors had acted properly, a dissatisfied shareholder can sue the company but, where they have acted improperly, he can sue the company and the directors personally.

The appellant cited a number of cases in support of that contention. In Ansett v Butler Air Transport Ltd (1958) 75 WN (NSW) 299, the board of directors held a meeting and allotted 100,000 shares to a large number of people who were employees of the company and who already held shares in it. Five dissatisfied shareholders brought an action against the company and three directors and others, claiming that the meeting of the directors was improperly convened, that insufficient notice of it was given to the other directors, that there was no proper quorum, and that the directors did not act in good faith in issuing the shares, their aim being to give a lot of shares to people who could be expected to keep those three directors in office and stave off a take-over by Ansett. Note that the writ was issued against the company and three directors, and there is nothing in the judgment to say that this was incorrect.

An authority from a higher court is Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3; [1974] AC 821, a Privy Council decision on appeal from the Supreme Court of New South Wales. That case arose out of a take-over battle. The target company was R W Miller (Holdings) Ltd (Millers) and the take-over protagonists were Ampol and its related company Bulkships, on the one hand, Howard Smith on the other. Ampol and Bulkships owned a 55 per cent stake in Millers and wanted to take it over. The directors of the company favoured the other contender Howard Smith. At a director�s meeting Millers issued 4.5 million shares to Howard Smith, which had the effect of diluting the shareholding percentage of Ampol and Bulkships and increasing the stake of Howard Smith and making it very likely that Howard Smith�s offer to buy all shares would succeed. Ampol and Bulkships sought a declaration that the allotment of shares was invalid, made for an improper purpose and should be set aside. The issue of the shares was set aside by Street J and this was upheld by the New South Wales Supreme Court and by the Privy Council, but the relevant point for our purposes is that the action was brought against Millers, Howard Smith and 11 directors or alternative directors of Millers.

McGuire v Ralph McKay Ltd [1987] ACLC 891 was a similar case. There the directors of Ralph McKay Ltd decided to raise $8 million by a one-for-three rights issue. The rights were non-renounceable and all rights not taken up by shareholders were to be taken up by an underwriter, Dawebanke International Ltd (Dawebanke). The plaintiff shareholder applied for an interlocutory injunction to prevent the rights issue on the ground that the principal object of the issue was not to raise capital but to ensure that Dawebanke acquired a substantial parcel of shares. The interim injunction was obtained against the company and its directors and, although later dissolved by Tadgell J, the naming of the directors as defendants was not thought incorrect by Tadgell J or by the Victorian Supreme Court on appeal.

Ashburton Oil No Liability v Alpha Minerals No Liability [1971] HCA 5; (1971) 123 CLR 614 concerned the issue of 4 million shares by Alpha, 3 million to three men and 1 million to a company. The plaintiffs were three companies which held shares in Alpha and they claimed a declaration that the issue and allotment of those shares was not made in good faith and for the benefit of the company as a whole and was outside the powers of the directors. In that case the plaintiffs sued the company alone, they did not name the directors as such, but Gibbs J (at 641) said that he thought the directors should have been joined as defendants.

In our view the authorities cited in favour of that view are overwhelming. The respondent cited to us Bamford v Bamford [1970] 1 Ch 212, an English Court of Appeal decision. There the litigation arose out of an issue of shares in the context of a take-over bid. Bamford Ltd had 5 million shares of which 4.5 million were issued and 0.5 million unissued. At a meeting of directors they allotted the 0.5 million unissued shares to Frederick H Burgess Ltd which was a distributor of the agricultural implements made by Bamfords. The plaintiffs, who were minority shareholders, sought a declaration that the allotment was invalid on the ground that the directors had made it in bad faith and not in the interests of the company, but as a tactical move to block the take-over bid made by J C Bamford (Excavators) Ltd. As a counter to that writ the directors convened a general meeting of shareholders of the company and at that meeting a resolution was passed by a majority of the votes of the shareholders approving the allotment. The Court of Appeal upheld the trial judge that the general meeting had validated the allotment and any bad faith or improper motive on the party of the directors. The relevance of the case as we see it, is as to a different point: the plaintiffs, as in the Australian cases cited, sued the company and the directors.

The respondent argued that the allotment of shares was made for a proper purpose, viz, the company�s need for capital, and not for any improper purpose such as to benefit defendant directors and their families, or to strengthen the votes controlled by the defendant directors because the Provincial Government had given notice that it wanted them dismissed. The respondent also argued that the plaintiff�s director, Melchior Togolo, in fact had proper notice � oral notice � of the meeting. Counsel for the respondent said that any lack of a quorum at the meeting of 26 February 1985 which issued the shares made the allotment voidable and not void, and was ratified at later, properly-constituted meetings. We consider that these arguments, which may well be of substance, go to the merits of the case and should be properly left for the trial. We consider that the four-named directors were properly joined in the writ originally issued and were improperly struck out by the motions judge. We would reverse that part of his order.

THE DISSOLUTION OF THE INJUNCTION

Los J on 20 September 1985 dissolved the injunction granted by Cory J on 24 July 1985. At that time 510,000 of the 700,000 new shares issued had already been allotted, paid for, and registered in the name of the allottees. They included 100,000 shares to Liz & Krist Enterprises Ltd (the director Leo Hannett�s family company) and 100,000 shares to Okoira Traders Pty Ltd (the director Paul Nerau�s family company). The injunction prevented those allottees from registering any transfers of those shares. At the time of the interim injunction 190,000 shares had been allotted but not paid for or registered. They were allotted to:

In respect of these allottees the interim injunction prevented them from receiving the shares; it prevented the issue and registration of share certificates.

The learned motions judge did not give any reason why he dissolved the injunction. Most of his judgment is concerned with the naming of Bougainville Development Corporation as a plaintiff. He said the �basic issue� was whether the Provincial Government as a shareholder could initiate proceedings on behalf of Bougainville Development Corporation, and he decided it could not. We agree with those reasons and with his order striking out Bougainville Development Corporation as a plaintiff and making it a defendant. We are left with no stated reason why the injunction was dissolved. It may have been that because the injunction was initially given against the four director defendants, and because the judge struck them off the record, he saw no reason for the injunction continuing. In our view that does not logically follow; the injunction could have been made against the company which he substituted as defendant.

We have heard detailed argument on an injunction and at the end of argument, and knowing that we were going to reserve our decision for some time, we imposed an injunction on the defendants pending the handing down of our decision.

The appellant has argued that the injunction ordered by Cory J on 24 July 1985, or one in similar terms, should be imposed pending the final determination of the writ. The appellant argues that there is a serious question to be tried, that the issue of the new shares was unlawful and for an improper purpose. The writ alleges that there was no proper notice to the plaintiff, no proper quorum, one of the directors, Theodore Miriung, failed to declare his interest in two of the allottee companies, that the shares valued at K9 each were allotted at K1.30 each, and that the directors acted primarily for their own benefit and not bona fide in the interest of the company.

The plaintiff�s evidence in support of the injunction was put before Cory J ex parte primarily in an affidavit of Melchior Togolo and, it has been well argued on this appeal by the respondent, that it did not tell the complete story. The most striking misrepresentation alleged by the respondent is that the plaintiff, far from owning 400,000 shares of the total issued capital of 699,267 shares in existence before the meeting of 26 February 1985, in fact only owned one share. It appears that 400,000 shares are owned by the Bougainville or North Solomons Royalty Trust; but that fact may be less significant if in fact that Trust is controlled by the North Solomons Provincial Government.

The respondent drew our attention to minutes of the Board meeting on 13 February 1985, the meeting immediately preceding the meeting of 26 February. There was some discussion at that meeting of a forthcoming share issue and Mr Togolo said that the North Solomons Royalty Trust or the Provincial Government may not have any funds to take up a new issue. The Chairman then advised the members that the next meeting would be held on 26 February and Mr Togolo advised the Board that he would be away at that time. The respondent contends from this that the plaintiff director Mr Togolo knew that a share issue was contemplated and had oral notice of the meeting of 26 February and chose not to be present. On the other side it must be said that the oral notice did not state that one of the items of business for the meeting was to increase the share capital and allot new shares to certain individuals and companies.

We agree that Mr Togolo�s affidavit probably does not tell the full story and there is contrary evidence which the company will put at the trial. Nevertheless, we think that there is a real triable issue in this case and that there has been no great failure to disclose material matters on Mr Togolo�s part which would disentitle the plaintiff from injunctive relief.

The respondent argued that the dissolution of the injunction by Los J on 24 July 1985 should not be disturbed because all interested parties were not named as defendants in court. As we have said, at the time of the injunction six allottees had paid for and received their shares and the injunction prevented them from selling them.

They are:

Road Mining Tailings Leases Trustees Ltd

Bougainville Copper Superannuation Fund

Liz & Krist Enterprises Ltd

Okoira Traders Pty Ltd

Anua Transport Pty Ltd

Severinus Ampaoi

Counsel for the respondent argued that these allottees were vitally affected by the injunction, yet they were not joined as defendants to the injunction, and, although the motions judge did not refer to the question, it is a good legal reason to uphold his order.

When we look at the cases cited above where the issue and allotment of shares were under challenge, in three cases the allottees were joined and in one they were not. In Howard Smith Ltd v Ampol Ltd, the one allottee of shares, Howard Smith Ltd, was joined as a defendant. Likewise in Bamford v Bamford, the one allottee of the newly issued shares was joined as a defendant. In Ansett v Butler Air Transport Ltd, 100,000 shares had been issued to employees and hence there were hundreds of allottees. A representative order was made naming two of them as representatives of all the others and those two were named as defendants. Contrast these cases with Ashburton Oil NL v Alpha Minerals NL [1971] HCA 5; (1971) 123 CLR 614, where the four allottees of the shares, the issue of which was contested, were not named as defendants and this was not criticised by the judges of the High Court.

Following Ashburton Oil NL v Alpha Minerals NL, we do not think it essential to the fate of the applications for injunction that the six allottees should have been joined as defendants and we are aware of the general principle found in O 5, r 7 of the National Court Rules that an action shall not be defeated by reason of misjoinder or non-joinder of any person. We do not think the non-joinder of the allottees is any bar to interlocutory relief.

We consider that there was no good reason why the injunction should have been dissolved and we see good reason why it should be reinstated or continued. On the material before us the plaintiff has a prima facie case that the allotment of shares was unlawful and for all improper purpose. The directors were under attack, the Provincial Government � query its powers � �directed them to be removed�, the directors issued 700,000 shares below value, inter alia, to their own companies, and to the detriment of other shareholders including the plaintiff, the North Solomons Royalty Trust and the Catholic Church which together owned about 70 per cent of the shares in the company. We propose to allow this part of the appeal and restore the injunction to prevent the company and the directors from processing in any way the 700,000 share issue of 26 February 1985. We are aware, however, that the shareholding may have altered in the two year two month period when no injunction was in force. The interim injunction was imposed by Cory J on 24 July 1985, and dissolved by Los J on 20 September 1985. The plaintiff�s appeal was lodged on 1 November 1985 but no stay of execution of the order of Los J was obtained. Hence from 20 September 1985 until 15 November 1987 when argument on the appeal concluded and we imposed an injunction, a period of two years two months, there was no injunction in force and the shareholding may have changed. The six allottees who paid for and received share certificates for 510,000 shares may have sold some of them, and the three allottees of 190,000 shares who had not paid for them, may now have paid for them and received their certificates. Nevertheless we propose to order that, pending determination of the writ, the company and the directors shall not complete any allotment made on 26 February 1985 or register any transfer of shares allotted at that time. If any person is aggrieved by this, for example, a purchaser of shares for value, he may apply to the court for relief.

COSTS

The appellant has succeeded in this appeal in getting the directors put on the record as defendants and getting an injunction reinstated. The appellant should therefore get the costs of the appeal.

The effect of our decision on the order of Los J as to costs is as follows. The learned motions judge was correct in ordering the striking off of Bougainville Development Corporation as a plaintiff and entering the company as a defendant, and in our view, he was right in punishing the Provincial Government by an award of solicitor-client costs against it for purporting to instruct lawyers on the part of the company without proper authority. But, on the other hand, as a result of our judgment the motions judge was wrong in striking off the directors as defendants and dissolving the injunction. This means that each side partly won and partly lost before Los J and we therefore think it just that the Provincial Government and the defendants should bear their own costs of appearing before Los J. We certify that both before Los J and before us the case was an appropriate one to engage overseas counsel and we thank them for their learned submissions.

Our orders are as follows:

N1>1.������ Appeal against the order of Los J made on 20 September 1985 allowed in part.

N1>2.������ That Leo Hannett, Theodore Miriung, Paul Nerau, and Aloysius Noga be joined as second defendants to the writ WS 381 of 1985.

N1>3.������ That the defendants (that is, Bougainville Development Corporation and the second defendants named above) and any of them be restrained:

N2>(a)����� from doing or causing to be done any act or thing which may be required to be done to complete the allotment of 700,000 shares in the capital of Bougainville Development Corporation in accordance with the provisions of a resolution made by the directors at a meeting held on 26 February 1985, and

N2>(b)����� from registering in the register of members of the company any instrument of transfer of shares allotted at the said meeting.

N1>4.������ The orders contained in par 3 hereof are to remain in force until the validity of the allocation of the shares made at the meeting of directors on 26 February 1985 is determined by the court, or until further order.

N1>5.������ Each party to bear its own costs of appearing before Los J in September 1985.

N1>6.������ The respondents to pay the appellant�s costs of this appeal.

N1>7.������ Liberty to apply.

Appeal allowed in part

Orders accordingly

Lawyer for the appellant: Steeles.

Lawyer for the respondents: Gadens.