S. Palani Batcha vs Christopher Gopal and another (Civil Side No. 16 of 2011) [2011] SCSC 96 (01 December 2011);

 

RULING

 

Egonda-Ntende CJ

 

  1. The plaintiff holds 10% of the shares and the defendant no.1 holds 90% of the shares in the company known as Indian Ocean Printing Services (Pty) Ltd registered in the Republic of Seychelles. Both plaintiff and defendant no.1 are directors of the said company. The company obtained a loan from defendant no.1 to purchase a printing press in the sums of US$400,000.00; US$140,000.00 and an overdraft facility of SR150,000.00.

 

  1. The company granted to the defendant no.2 a lien over all machineries of the company as part of the security for the loans. The company defaulted on the repayment of the loans. It is contended for the plaintiff that the defendant no.1 colluded with defendant no.2 and sold all the machineries of the company ‘without the knowledge, permission, and any supporting resolution from the plaintiff.’ The machinery was sold for SR1,800,000.00 when its market value was SR8,060,000.00. It was therefore sold at only a fraction of its real market value. That this sale has been to the detriment of the company and the plaintiff.

 

  1. The plaintiff contends that the said sale is unlawful and invalid. The conduct of defendant no.2 was unfair and unethical. The plaintiff therefore prayed that the sale of the said machinery of the company be declared unlawful, invalid and that the same be vitiated. Secondly that this court should order a re-sale of the said machinery with the assistance of an independent valuer.

 

  1. Defendant no.1 in his defence raised a plea in limine litis to the effect that this matter had wrongly been instituted by way of a plaint, instead of by petition in accordance with the Companies Act (Supreme Court Proceedings) Rules 1972, S.I. No. 94 of 1972. On the merits of the action defendant no.1 states that he was the sole director running the business of the company. The plaintiff failed in his duty as a director by not getting involved in the management of the company. The defendant no.1 further denied that the machinery were sold at a fraction of their value. He stated that the machinery were sold by the Company as it was entitled, with defendant no.1 acting in his capacity as a director, given that the company was defaulting on its loans. He prayed that this suit should be dismissed.

 

  1. The defendant no 2 raised a plea in limine litis to  the effect that the plaint did not disclose a cause of action against defendant no.2. Secondly that the plaint did not disclose any fraud or give any particulars of fraud as against the defendant no.2. Lastly that the prayer sought in prayer (b) cannot be ordered by the Court. The defendant no.2 did set out a defence on the merits as well which I shall not bother recount given that at this stage I am only concerned with ruling on the plea in limine litis.

 

  1. Mr Basil Hoareau, learned counsel for the defendant no.1, submitted that pursuant Rule 3 of the S.I. 94 of 1972 every application made under the Companies Act had to be by petition in accordance with the said rules. The action of the plaintiff in this case is an action by a shareholder envisaged by section 201 of the Companies Act. As this action has been brought by plaint, it is wrongly before the court and must be dismissed.

 

  1. Ms Teresa Micock, learned counsel for defendant no.2 submitted that there was no cause of action against the defendant no.2 on the plaint. Secondly that the allegation of fraud did not contain any particulars.  Lastly that section 39 of the Companies Act, protected any person who dealt with a director of the company from ay internal regularities in the company except if there was an allegation of fraud. She submitted that this plaint should be dismissed.

 

  1. Mr Rajasundaram, learned counsel for the plaintiff responded that it was not mandatory for the plaintiff to proceed by petition. That was only one option but the plaintiff was always free to come under general principles of law by way of plaint. Secondly he submitted that the plaint did not allege any fraud against the defendant no.2. He prayed that the plea in limine litis should be dismissed.

 

  1. Rule 3 of the Companies (Supreme Court Proceedings) Rules, states,

 ‘Except in the case of applications by way of appeal to the court from a decision, order, act or omission of the Registrar of Companies and of applications made in proceedings under Part VI of the Act, every application to the court under the Act shall be made by petition in accordance with these rules.’

 

  1. It appears pretty clear from the foregoing rule that ‘every application to the court’ under the Companies Act, ‘shall be made by petition in accordance with these rules.’ On the face of it this rule appears mandatory with the use of word shall.

 

  1. The question that must be answered is whether the plaintiff’s action is an action brought under the Companies Act. The plaintiff is complaining about the sale of company assets without his involvement as a director of the company. He alleges that no resolution was passed by the directors authorising such sale. He claims to be shareholder of 10% shares in the company which is a minority shareholder.

 

  1. Ordinarily a shareholder cannot bring an action on behalf of the company or purportedly to protect company assets given the separate personality between the shareholder and the company. It is only under the purview of the Companies Act that an action can be commenced in such circumstances as are covered by Section 201 of the Companies Act, which states,

 

‘201.(1) Any shareholder of a company who complains that the affairs of the company are being conducted in a manner which is oppressive or unfairly prejudicial to some part of the share holders (including himself) or, in a case falling within section 190(3), the Registrar, may make an application by way of petition to the court for an order under this section.                                                                               (2) If on the hearing of the application the court is satisfied either:-                                                                                                 (a) that the applicant, either alone or together with other shareholders, has been treated oppressively in one or more respects over a period of time, or that action has been taken by the persons who are or were in control of the affairs of the company, being action which was known by them to be likely to prejudice unfairly the interests of the applicant, either alone or together with other shareholders; or                                    (b) the persons who are or were in control of the affairs of the company have been guilty of serious misconduct or breaches of duty which has or have prejudicially affected the interests of the applicant, either alone or together with other shareholders; the court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any shareholders of the company by other shareholders of the company or for the acquisition of any such shares by the company and, in the case of such an acquisition by the company, for the reduction accordingly of the company’s capital, or otherwise.’

 

  1. The plaintiff’s action is complaining of misconduct of the defendant no.1, the director that was running the company and the majority shareholder. That action can only be brought in accordance with the Companies Act that regulates companies and cannot be brought by way of undefined general principals of law as Mr Rajasundaram submitted. A company is a different person from its members as noted in Salomon v Salomon [1897] A C 22. The plaintiff is not the owner of the assets or property over which he has commenced an action. He has no right to commence such action in the manner he has done. It is not his property.

 

  1. I agree with Mr Basil Hoareau that this action is wrongly brought by plaint. The plaintiff could only have brought this action under section 201 of the Companies Act and then only by way of petition as provided for under the relevant rules, The Companies (Supreme Court Proceedings) Rules. Such an action could be commenced in his capacity as a minority shareholder. Where there is a specific law by way of legislation covering a specialised subject it must be risky in the extreme to ignore the special vehicle created for the resolution of such a dispute and purport to go for general principles of law without citing any as Mr Rajasundaram chose to do.

 

  1. I agree with Ms Teresa Micock that this plaint discloses no cause of action on the simple ground that the plaintiff has no right in the property he has chosen to litigate about. That property belongs to a company which is not even a party to these proceedings. The plaintiff in those circumstances has no right that has been violated and for which he would seek and be entitled to relief in the manner he has done. The plaintiff, at law, is a stranger to the matters in issue. He has no cause of action against the defendant no.2. Ms Micock also submitted that as a third party the defendant no.2 was protected by section 39 of the Companies Act from an irregularities in the internal running of the company. I agree. Section 39 states,

 

‘(1) A person who deals with the directors of a company, or a director of a proprietary company, or a managing director of any other company, shall not be affected by any irregularity of procedure in connection with the authorisation of the transaction by a general meeting or other meeting of shareholders, or by the directors or any committee of directors, or the non-fulfilment of any condition imposed by the memorandum or articles in connection with the transaction.                                                     (2) A person who deals with another person who is represented by the directors, or by a director of a proprietary company, or by a managing director of any other company, as having authority to act on the company’s behalf in connection with any transaction, may treat the company as bound by the acts of that person done within his apparent authority, even though he has not been authorised by the company to do those acts on its behalf. (3) This section shall not entitle anyone to recover a debt from a company, or to enforce any liability against it, or to treat a transaction as binding on it, if in connection with the same matter he has been guilty of a fraud upon the company, or has participated or acquiesced in a fraud committed upon it.

 

  1.  Cleary if the complaint is that the defendant no.1 did not agree with plaintiff as co director to authorise the sale of the assets of the company in question or to appropriate the wording of the plaint, ‘without the knowledge, permission, and any supporting resolution from the plaintiff’ this leaves the defendant no.2 protected by section 39 of the Companies Act. The action could only be maintained against defendant no.2 if there was an allegation of fraud in terms of section 39(3) of the Companies Act.  Mr Rajasundaram has made it clear that there are no allegations of fraud against the defendant no.2.

 

  1. In the result this action cannot be maintained. This suit is dismissed with costs.

 

Signed, dated and delivered at Victoria this 2nd day of December 2011

 

 

  

FMS Egonda-Ntende

Chief Justice