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As usual, we must at the outset inform our readers that we do not have any issue with the protagonists or major players in the conflict engulfing the Grand Bahama Port Authority. Whenever this column deals with a legal matter, our concern remains to educate, enlighten, inform and entertain our numerous readers consistent with the true spirit of journalism and academics. We will be looking at the recent order of receivership made against the Port Authority which involved the judicial removal of the Chairman and appointment of Receivers to take over and manage the business of the Port Authority pending the determination of the substantive issue. We will be examining receivership and circumstances under which a company may be put into receivership, shareholder protection, rights and remedies and unfair prejudicial and oppressive conduct and the role that the Grand Bahama Port Authority plays in the Bahamian economy in general and Freeport’s economy in particular.
Every honest, reasonable person will agree that this spate of cantankerous litigations currently afflicting the Grand Bahama Port Authority is not in the best interest of the Bahamian economy as it undermines investor confidence not only in Grand Bahama where the Port Authority is a major player but also in the entire Bahamas. Thus we solemnly adjure these cantankerous litigants and their attorneys besieging and overwhelming the Port Authority with litigation to exercise restraint and sheath their swords and seek resolution within the framework of a negotiated settlement. Receivership is almost a draconian step to be taken against an ongoing company notwithstanding the provisions of section 287(3)b of the Companies Act 1992 Statute Laws of The Bahamas and as such judicial circumspection ought to have been exercised by Her Ladyship Hon. Justice Jeane Thompson. The remedies under the above mentioned sections are sparing exercised and not capriciously or whimsically exercised. Receivership is always associated with a company that is on the verge of insolvent liquidation, and is a remedy commonly available to creditors as a last resort. The Port chairman who was removed by the Court has not been charged with asset stripping of the Company or dissipation of the assets of the Grand Bahama Port Authority or unlawful declaration and distribution of dividends or having treated any complainants oppressively, unfairly and prejudicially, see sections 285, 286, 287, and 290 of the Companies Act 1992 Statute Laws of The Bahamas. In fact, the ruling of the Hon. Justice in this matter cannot be justified by reference to any coherent and settled principle of English Company jurisprudence from which the Bahamas Companies Act is derived from though with some admixture from Canadian Company jurisprudence.
What then is receivership and under what circumstances will it be proper for a court to appoint a Receiver? Generally speaking, a receiver is usually appointed by a lender who holds a charge over some or all of the company’s assets. In well-regulated jurisdictions when property has been used as security for a loan under a fixed charge, the lender usually takes power to appoint a receiver out of court under that fixed charge. We are not aware of the Port Authority being pursued by creditors holding fixed charge under any debenture which would have entitled them to apply to the court or justify the appointment of receivers for the Port Authority. The remedies under sections 285, 286, and 287 of the Companies Act are invoked in circumstances of exceptionality, which do not exist in the instant matter so far. Note also that the main responsibility of the receiver is to take control of the company so as to pay off the appointing creditor. Owing to the fact that this may have a considerable and permanent effect on the company and its potential investors, the judicial appointment of receivers is not a remedy that is easily available to an aggrieved shareholder who may be alleging unfair and oppressive prejudicial conduct against the company or its majority shareholders. A spurious interpretation or construction of the provisions of section 287(3)b of the Companies Act 1992 may lead to a misleading conclusion that once a complainant has any interest or complaint against a company he/she can rush to the court and obtain an order of receivership. If some members of the Grand Bahama Port Authority are alleging part ownership of the Company in its shareholding, remedies are available to them under minority protection. Authorities on this are legion. See for example the exceptions to the rule in Foss v Harbottle and more particularly the observation of Jenkins LJ in Edwards v Haliwell.
Receivership, for all practical purposes, is commonly associated with insolvency and not shareholders remedies. At most, part of the issues in the Port Authority matter largely borders on who owns what as far as the shares of the company is concerned. It has not to do with the property of the Grand Bahama Port Authority. The reason for this is that, juristically speaking, a company once incorporated is different, distinct and separate form its members. This is a corollary of the concept of corporate personality and it is further underscored by the unique statutory contract created by virtue of section 11, Companies Act 1992, Statute Laws of the Bahamas. See also the decision of the court in Macaura v Northern Assurance Co (1925) AC 619. It is trite and settled beyond any cavil and peradventure that the Macaura decision is a very good example of the separation of shareholders’ property from the company’s. A shareholder, despite all the shares or substantial part of it in the company only "owned" his shares and not the company’s property. Those shares represented all the participation rights in the company which he/she could sell if he/she wishes. A share is in no way a representation of the fractional value of the company’s property. The company as a separate legal entity owns its own property and there is no legal connection between a share in the company and the company’s property. Shareholders generally benefit from this because it facilitates limited liability as the company also owns its own debts. The reason why we are against this apparently specious and misleading Supreme Court ruling, based on the provisions of section 287(3)b of the Companies Act 1992, is that there is no evidence that the people who obtained this order of receivership against the Port Authority are secured creditors holding a fixed charge under a debenture neither have they sufficiently proved unfair, oppressive and prejudicial conduct against them by the Port Authority or the chairman of the Port Authority nor is the Port going through corporate insolvency. Where then is the justification or rationale of the ruling of the court in this action? Under what power did the court remove the Chairman of the Port Authority?
n CONTINUED NEXT WEEK......
The current matter involves people claiming beneficial interest in the company and they are not legally entitled to the order of receivership. The Court fundamentally erred in this regard. See the case of Sheppard and Cooper Ltd v TSB Bank Plc (1996) 2 ALL ER 654. Attorneys for the Port Authority can seek to invalidate the appointment of receivers on the authority of this English Court of Appeal decision and restrain the persons appointed by Hon. Jeane Thompson from acting as the Port Authority’s receivers following their wrongful appointment by the court and ask the Court of Appeal to give a teleological and pragmatic interpretation/construction of the provisions of section 287(3)b of the Companies Act 1992. Our research did not disclose circumstances where receivership has been ordered by the court outside the framework of corporate insolvency or within the context of a creditor like a bank or debenture holder trying to recover his security because the company cannot repay its overdraft or security which has been called in by the bank. This is the more usual context than receivership being ordered by aggrieved shareholders or persons alleging beneficial interest in the company. The remedies under the provisions of section 287(3)b can be invoked under circumstances of extremity.
As for shareholders or those claiming other forms of beneficial interest in a company, space will not permit us to fully discuss their position without sufficient engagement in the argument of scholars of Company jurisprudence detailing the principles of corporate personality and limited liability, the shareholders agreement and minority protection. However, we will say that one of the consequences of corporate personality is that a company, as a metaphysical person, can sue in its own right to vindicate a wrong done to it. This is not easy to understand by a layman because a company must act through the instrumentality of its organ of management (i.e. the directors) and thus the decision to bring legal proceedings is generally vested in the Board. The question that arises is: What if the wrongdoers are the directors? They are hardly likely to cause the company to sue them. It is in this perplexing conundrum that the Law seeks to solve the intricate complexity by permitting minority shareholders to initiate proceedings on behalf of the company when the wrongdoers (directors) are themselves in control and thus preventing the company from seeking legal redress. There are also various statutory remedies available to a minority shareholder personally by way of petition on the grounds of just and equitable winding up and unfair prejudice. However, none of these remedies will entitle an aggrieved shareholder or any person claiming beneficial interest in the company to an order of receivership at the interim or preliminary or interlocutory stage save and except where the judge misapprehended the true purport of the provision of section 287(3)b of the Companies Act 1992 as Hon. Jeane Thompson has in fact done having gratuitously and capriciously ordered receivership against the Port Authority when issues relative to the abovementioned section have not been examined. Parties in the Port Authority’s conflict are seemingly bickering over the issue of "who owns what" in the company and that is not a ground to remove the chairman of the company and appoint receivers at this interim stage. This capricious ruling of the court largely borders on judicial rascality and cannot be supported as it lacks any legal validity. One does not need to be a Professor of Commercial Law or Company Law to know that a Receiver in its proper context is a person who is appointed by or on behalf of a creditor to realise security, such as a charge or series of charges. His principal duty is owed to the party who appointed him, that is, the charge-holder. While receivers may also be appointed by the court in some circumstances, in practice nearly all appointments are made by the charge-holder. The question which we find difficult to answer remains whether the parties on whose behalf some local attorneys obtained this order of receivership were bona fide charge-holders or debenture holders. They may be complainant within the context of the provisions of sections 285, 286, and 287 of the Companies Act 1992 who will bear the onus probandi of alleging and proving unfair, oppressive and prejudicial conduct against them sufficient to warrant and justify an order of receivership against the company. If they are not as it would seem but persons or complainants who are either shareholders or claiming beneficial entitlements in the company, then Her Ladyship, Hon. Justice Jeane Thompson erred fundamentally in not only removing the chairman of the Port Authority but in the appointment of receivers to take over the affairs of the company. Alternatively stated, Her Ladyship allowed herself to be brazenly misled by seemingly seasoned, experienced and competent attorneys who ought to know better by using legal casuistry or sophism to mislead the court as to the true purport of the operation of the provision of section 287(3)b of the Companies Act 1992. Note further that receivers can be divided into two broad categories – i.e. (i) receivers appointed under charges over specific assets and (ii) administrative receivers who are receivers and managers of the whole or substantially the whole of a company’s property appointed on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities. Suffice it to say that both categories assume the existence of some debt, security or debenture. However, it cannot be overemphasised that in practice, the person who holds such security will usually be a bank. The bank will also likely have fixed charges over land owned by the company and certain other assets e.g. book debts and all these will entitle the bank as a secured creditor to seek appointment of administrative receivers. See for example the provisions of section 29(2) Insolvency Act 1986 (U.K.).
The parties who are claiming to be part owners of the Port company can only base claim on direct beneficial interest as shareholders or some other equitable interest or entitlements in the company, but none of these will ordinarily entitle them to an order of receivership being made against the company or the removal of a duly appointed chairman of the company. Their lawyers must have used legal casuistry or sophistry to persuade or convince the judge to obtain an order of receivership against the Port Authority. We do not imply that the shareholders or those claiming any equitable or beneficial entitlement in the Port Authority do not have remedies. They might have remedies but it is for the court to determine but that does not necessitate or justify the removal of the Port Authority’s chairman and appointment of receivers in his stead. This is tantamount to judicial usurpation of the functions and powers the company’s executive/management organ – the Board – who has the power to appoint and remove the chairman and/or any directors. In dealing with shareholders remedies reference must be made to some of the most fundamental principles of Company Law in order for one to understand the nature of remedies / and rights associated with shareholding in a company context. First and foremost, it is settled law that once incorporated a company acquires its own existence and personality independent of its human protagonists. This is exemplified in the case of Salomon v Salomon (1997) AC 22. It necessarily follows from the Salomon principle that if a wrong is done to a company it alone can sue for redress. It is also important to note that by virtue of the unique statutory contract created by section 11 of the Companies Act 1992, Statute Laws of the Bahamas and as a consequence of the principle of majority rule enunciated in the case of Foss v Harbottle, every member is contractually bound by the articles and memorandum both to the company and to the shareholders. See the lucid provision section 11 of the Companies Act 1992. Hence, the fundamental principle of Company Law is that the majority rules and this may mean that the interests of the minority may be sacrificed. However, if this sacrifice becomes brazenly unacceptable, the Law may intervene. Has any such thing happened in the matter involving the Port Authority and the claimants? It must also be noted that minority shareholders are not always the oppressed group – they may be oppressors themselves if the balance of the Law swings too far in their direction. It follows from the principle of majority rule that if, for instance, the majority of members decides that the company should not initiate legal proceedings, that is an end of the matter, for if the law permitted minority shareholders to sue on behalf of the company there could be a multitude of different actions in respect of the same wrong. Further, if the minority were permitted to disregard majority decisions, business could not be effectively carried on by the company. The rule in Foss v Harbottle is a procedural device which seeks to accommodate these concerns and basic principles. Without going into detail into the actual decision in Foss v Harbottle, it is sufficient to point out here that Jenkins LJ in Edwards v Haliwell (1950) 2 ALL ER 1064 explained the rule as having two limbs, viz: (1) That the proper plaintiff in an action in respect of a wrong done to a company is prima facie the company itself. (2) That where the alleged wrong is a transaction which might be made binding on the company and all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter "for the simple reason that, if a mere majority of the members of the company … is in favour of what has been done, then cadit quaestio (in other words, the majority rule)". The fact of the matter is that this is recognised as trite and settled in Company Law. Authorities or decided cases on this are legion, see the witty and epigrammatic formulation of the rule by Lord Davey in Burland v Earle (1902) AC 83 to the effect that …
"It is an elementary principle of Law relating to Joint Stock Companies (precursors of modern companies) that the court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear Law that, in order to redress a wrong done to the company or to recover money or damages alleged to be due to the company, the action should prima facie be brought by the company itself." See also Mozley v Alston (1847) 1 Ph 790, Gravy v Lewis (1873) 8 Ch. App 1035.
However, the rule does admit of some qualification because if it were to operate as an absolute prohibition on minority suits, then the company would never obtain redress where the directors, holding or controlling the majority of shareholders votes, committed a wrongful act against the company e.g. by selling to themselves company property at an undervalue – because they would be able to use their voting power to block any resolution of the minority to bring proceedings for breach of fiduciary duty. In effect, the Rule would operate to grant the directors immunity from the consequences of their fraudulent conduct. Thus, under certain circumstances a shareholder can sue to vindicate a wrong to the company. There are also statutory remedies or rights available to a shareholder, especially those in a minority in the company. It is under any of these rights and/or remedies that a shareholder or a person claiming some beneficial or equitable entitlements in the company may ground his action or petition. In the Bahamas, these are more sufficiently provided under sections 285, 286, 287, and 290 of the Companies Act 1992. However, judicial circumspection is required in granting these remedies. But note however that the outcome of such an action does not and cannot warrant the kind of receivership order granted by Her Ladyship Hon. Justice Jeane Thompson in the Port Authority’s matter. Neither could it have led to the removal of the chairman of the company. In Edwards v Haliwell, Jenkins LJ itemised the four exceptions to the proper claimant rule as follows: -
- Where the act complained of is illegal or is wholly ultra vires the company;
- Where the matter in issue requires the sanction of a special majority, or there has been non-compliance with a special procedure;
- Where a member’s personal rights have been infringed;
- Where a fraud has been perpetrated on the minority and the wrongdoers are in control.
We cannot owing to space explicate all these exceptions suffice it to say that the only true exception is the fourth ground stated by Jenkins LJ. The number one rule dealing with ultra vires transactions merely restates what was trite and settled as far back as 1860 in Simpson v Westminster Palace Hotel Co. (1860) 8 HLC 712 to the effect that a shareholder may bring proceedings for an injunction to restrain a proposed ultra vires transaction but note that this right is lost once the contract is concluded and the rule in Royal British Bank v Turquand seems to have been designed to protect third persons dealing with the company from outside, or more appropriately outsiders, against defects and irregularities in the internal management of the company’s affairs. See also section 24(3) of The Companies Act 1992, Statute Laws of The Bahamas.
Thus, if shareholders or those who are claiming some equitable and beneficial entitlement or interest in the Port Authority want to pursue actions against the Port Authority, the following actions or remedies/rights may be available to them but not the right to have an order of receivership gratuitously granted by the Justice of the Supreme Court of the Bahamas on a Sunday evening in Nassau – surprisingly not in Freeport –
Remedies under sections 285, 286, 287, and 290 of the Companies Act 1992:
- Derivative action
- The representative action
- The remedy of winding up on the just and equitable ground
- Unfair prejudice/oppressive conduct
- Valuation of Shares
We will examine the above seriatim –
Note that as previously adumbrated a receiver is normally appointed by the court when a floating charge (which is a type of debenture) crystallises or by the lender or creditor under a power contained in the instrument creating the charge. See the case of Re Panama, New Zealand and Australian Royal Mail Co. (1870) 5 Ch. App 318. See also Re Florence Land and Public Works Co, ex p. Moore (1870) 10 ChD 530. None of the above was the basis of Justice Jeane Thompson’s erroneous ruling in the Port Company matter save and except that she may have misconstrued the efficacy and utility of the provisions of section 287(3)b of the Companies Act 1992. Again, the abovementioned provisions/remedies can only be invoked in circumstances of exceptionality as previously adunmbrated. The other occasion the court may appoint a receiver apart from in insolvency circumstances is where the board is unable to act because the directors, or those who can vote on a particular matter, are so few that a quorum cannot be formed, or where there is dissension between the directors which effectively disables the Board from acting – the court in these impasse/deadlock or inquorate circumstances may appoint a receiver of the company’s business to manage it until a competent Board can be constituted. There is a plethora of decided cases on the above. See, for example, the case of Trade Auxiliary Co. V Vickers (1873) LR 16 Eq 298, 303. See also Stanfield v Gibbon (1925) WWII and Re a Company (No. 00596 of 1986 (1987) BCLC 133. Even in the above context, the court’s power is discretionary and it is likely to exercise the power judiciously and only in exceptional circumstances. With profound respect, the Court acted frivolously in the instant matter and ought not to have appointed a receiver and removed the chairman. We are not aware of any settled principle of Company Law upon which Her Ladyship can justify her ruling of removing the Board appointed Port Chairman and replacing him with a receiver save and except that she may have been misled as to the circumstances in which the provisions of section 287(3)b may be appropriately invoked by complainants. As far as we are aware the Port Authority is currently not facing insolvent liquidation. Neither has there been a provable allegation of outrageous, oppressive, unfair and prejudicial conduct on the part of the company in general or the chairman in particular against the complainants. Issues ought to be tried. Briefly, we now refer to remedies that may be available to shareholders…
On Derivative action – Where an action is brought to enforce the company’s rights it is termed a derivative action because it derives from the company. See Wallersteiner v Moir (No 2) (1975) 2 QB 273. A shareholder on behalf of the company and its shareholders, other than the wrongdoers who are in control and thus preventing the company from suing, will initiate the action. The company is joined as a defendant because, in order to be a claimant, it has to come to court voluntarily, which it is plainly prevented from doing. The wrongdoers will also be joined as defendants. By being joined as a party to the action the company will be bound by the judgement and can enforce any remedy awarded. The procedure is laid down by the English Civil Procedure Rules, rule 19.9. The company must be joined as a defendant to the claim. See CPR 19.9(2). After the claim form has been issued the claimant may apply to the court for permission (leave) to continue the claim, see CPR 19.9(3).
Representative action - A derivative action should be distinguished from a representative action. A representative action is brought by a shareholder on behalf of himself and all other members who have an interest in the litigation, for example, where a class of shareholders alleges that a class right has been infringed. It therefore avoids the waste and costs of multiple suits. The courts judgement will be binding on those represented, see Quin & Axtens Ltd v Salmon (1909) 1 Ch 311.
Note also the personal rights of shareholders and the section 11 contract i.e. statutory contract created by section 11 of the Companies Act 1992. Note also that minority shareholders in a listed public company, who have essentially a financial investment, are in a very different position from a minority shareholder in a small or owner-managed private company who depends upon the way the company is run for his living, possibly even for his job.
Winding up on the just and equitable ground. A company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. When a minority shareholder finds out that he has been effectively ousted from the enterprise by the majority, this remedy might be most efficacious but the complexity of winding up proceedings may deter a minority shareholder from pursuing this remedy. The leading decision on the just and equitable winding up remedy is the case of Ebrahimi v Westbourne Galleries Ltd (1973) AC 360. But again the winding up remedy is viewed as a matter of last resort.
Unfair Prejudice - A member of a company may apply to the court by petition for an order on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interest of its members generally or some part of the members (including at least himself) or that any actual or proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial. Under this ground, the petitioner must establish that his interests as a member have been unfairly prejudiced, see sections 285, 286, and 287 of the Companies Act 1992.
Valuation of his/her shares. A member might seek that the company purchase his shares i.e. "being bought out". For quoted companies, valuing shares is a fairly straightforward exercise because reference can be made to their market price. But for unquoted companies, and the vast majority of petitions will likely be under this category, the valuation exercise is a far more difficult undertaking. If it is a small private company, the company can simply allege that they have not been making profits and as such a share being held by a shareholder in that regard may even be valueless and the shareholder might even be called upon to contribute in payment of the liability or debt of the company since he who takes the benefits (dividends) must also take the burden (loss/debt/liability). The court has a wide discretion to do what is fair and equitable in all the circumstances of each case and under the new CPR in the United Kingdom the court is expected to adopt a vigorous approach towards share valuation, see North Holdings Ltd v Southern Tropics Ltd. (1999) BCC 746.
In conclusion, we implore all who are interested in destroying the Port Authority to take into consideration that the Bahamian people and economy will suffer if the Port is undermined by all these cantankerous litigations foisted on her. We also call for judicial circumspection when it comes to issues like injunction and other interim measures. It is high time the government looked into the possibility of creating a Commercial court to be presided by judges well-versed in complex commercial matters. It is not impossible that a judge may be sound, experienced and competent in Divorce, Family and Estate matters but may not have the grasp on Commercial/Company and Admiralty or Capital Market matters. Since the Bahamas is a world-class investment/financial centre, the need of having a specialist Commercial/Corporate Court in this jurisdiction cannot be overemphasised.
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