ANGLO-EASTERN (1985) LTD AND ANOTHER v. KARL KNUTZ AND OTHERS

IN THE COURT OF APPEAL

1987, No.100
(Civil)

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BETWEEN

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J U D G M E N T

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Silke, V.-P.:

1.  On 6th October we dismissed these appeals, stated we would give our reasons in writing later and this we now do.

2.  The 1st Plaintiff, Anglo-Eastern (1985) Limited – “AE1985” - and the 2nd Plaintiff, Mineral Carriers Inc., which sued on behalf of itself and all other shareholders of Anglo-Eastern Tankers Limited, are beneficially owned by one Mr. Peter Nash.

3.  Anglo-Eastern Tankers Limited, the 4th Defendant -“AET”- is beneficially owned as to 50% by the 1st Defendant, Karl Knutz and 50% by Mr. Nash through holding companies. Everton Maritime Services Limited, the 2nd Defendant, is beneficially owned by Karl Knutz. Marsina Shipping Inc. is a company having a registered address in Liberia.

4.  On 24th July 1986, AE1985 and Mineral Carriers Inc. issued a writ directed to the 1st, 2nd, 3rd and 4th Defendants. That writ gave the address of Marsina as “80 Broad Street, Monrovia, Liberia.” It alleged that Marsina was at all time controlled or beneficially owned by Karl Kuntz. It alleged that Karl Kuntz was employed by AE1985 as a shipbroker; it alleged that Mr. Kuntz owed a duty of good faith and fidelity to AE1985; it alleged that he had a fiduciary position in relation to AE1985; and it alleged that he was transferred and/or seconded to AET about 11th October 1985 and that he owed a fiduciary duty to AET or was trustee of the assets of AET within his control.

5.  The gravamen of the Plaintiffs’ complaints were set out in paragraph 16 ofthe Statement of Claim which reads :

“In the conduct of such business [the tanker broking business of AET] the 1st Defendant wrongfully made use of and/or exploited his position to interpose into tanker fixtures the 3rd Defendant company as a vehicle for paying freights and/or commission by reason whereof the 3rd Defendant company has derived profit and/or earned commission (which might otherwise have been earned by the 4th Defendant company) which profit and/or commission has benefited the 1st Defendant by virtue of his control and/or beneficialownership of the 3rd Defendant company. The Plaintiffs are unable to give particulars of the exact relationship between the 1st Defendant and the 3rd Defendant company until after discovery and/or interrogatories.”

6.  Paragraph 18 of the Statement of Claim pleads a breach of Mr. Kuntz’s contract of employment with AE1935 and/or a breach of his duty of good faith and fidelity and/or a breach of his fiduciary duty owed to AE1985.

7.  Paragraph 19 categorized Mr. Kuntz’s conduct as a breach of his fiduciary duty as a director of AET and/or a breach of trust.

8.  On the same day, AE1985 and Mineral Carriers Inc. obtained from Bewley J. an ex parte injunction. There was a Plaintiffs’ undertaking to file the writ of summons, to which we have referred, and grounding affidavit, that is the affidavit of Mr. McGuinness which constitutes the only evidence that was then before the Court. The order made was:

“(1) The 1st and 3rd Defendants and each of them be restrained until after the hearing of an inter partes summons returnable on Tuesday, the 29th day of July 1986 before Deputy Judge Sharwood at 9:30 a.m. and an injunction is hereby granted restraining them, whether by themselves, their servants or agents or otherwise howsoever, from removing from the jurisdiction of this Honourable Court, disposing of, charging, or otherwise dealing with all or any profits, commissions or other monies received by the 1st and/or 3rd Defendants from charter fixtures effected by the 1st Defendant or under his supervision whilst employed by the 1st Plaintiff and/or the 4th Defendant and/or whilst seconded to the 4th Defendant, and any accured interest or profit derived therefrom

(2) In particular and without prejudice to the generality of the foregoing, the 1st and 3rd Defendants be so restrained from drawing from, charging or otherwisedealing with any monies in the 3rd Defendant’s account No. 002-4-822504 with The Hongkong and Shanghai Banking Corporation.

9.  On 28th July 1986, Marsina issued a summons inter parts under 0.12 r.8 seeking (a) for a declaration that the writ had not been properly served upon it; (b) for an order to discharge the ex parte injunction granted on 26th June. It was contended that Marsina was a foreign corporation not having a place of business in Hong Kong and not registered under Part XI of the Companies Ordinance.

10.  The summones came on for hearing on 29th July 1986 before His Honour Judge Sharwood, sitting as a Deputy Judge of the High Court. He heard the solicitors for the Plaintiffs and counsel for Mr. Kuntz, Everton Maritime and Marsina. There was an order stated specifically to be a consent order. Its terms were:

“(1) That the 1st and 3rd Defendants and each of them be restrained until trial or further order and an injunction is hereby granted restraining them .....”

and then continuing in the same terms as the ex parte order granted by Bewley J.; that Marsina was at liberty to effect two payments fromthe embargoed account amounting to some US$500,000; there was liberty to apply; the Plaintiffs’ summons of 24th July and Marsina’s summons of 28th July were adjourned sine die with liberty to restore.

11.  That restoration took place before Wong J. on 2nd July 1987 - more than eleven months later. There was also before Wong J. a further summons issued by Marsina of 12th June 1987 seeking a discharge of the injunction. At the hearing that additional summons and Marsina’s summons of 28th July 1986 was dismissed with costs and it was ordered that the injunction granted by Bewley J. on 24th July 1986 do continue in force. This last has given rise to some difficulty and is a matter referred to in the fifth ground of appeal, Marsina now seeking to appeal the orders made by Wong J.

12.  Grounds one and two of the Notice of Appeal concerned themselves with the issue of “good arguable case”. The third and fourth grounds concerned themselves with the issue of “real risk of dissipation of assets”. The fifth ground,as I have said, deals with the apparent dichotomy in the final paragraph of Wong J.’s order and raises the issue of whether it was the order of Bewley J. of 24th July or the order of Deputy Judge Sharwood of 29th July which was to be continued in force.

13.  Grounds six and seven take the jurisdiction point contending that Marsina, a foreign corporation, had never submitted to the jurisdiction of these Courts. The eight ground alleges a material non-disclosure at the ex parte stage in that Bewley J. was not informed that Marsina was a foreign company having no place of business in Hong Kong.

14.  The jurisdiction points were abandoned before this Court. It is of interest to note that Marsina of itself has placed no evidence before this Court. There are, however, affirmations or affidavits sworn by persons stating themselves to be the Secretary (Miss Lee) and the Treasurer (Mr. Chan) of that company and resident in Hong Kong.There is no dispute that the company’s bank account is the only one it has in Hong Kong and is the one referred to in the injunction order. Two acknowledgements of service were filed on behalf of Marsina. One after the originalwrit had been serveupon it at Mr. Kuntz’s place of business in Hong Kong from which its Secretaryand Treasurer also operate. The second after an ex abuntanti cautela application by the Plaintiffs for service outside the jurisdiction, made at a very late stage, had been granted and acted upon, the service being effected in Liberia. There were two applications to which Marsina consented for payments out to them from the account.

15.  I referred to these matters in so far as they have general application to the issue of credibility in the other matters which lie for consideration. The total absence of any direct evidence from Marsina or, indeed, from Mr. Kuntz, despite Miss Lee having stated that she was in possession of documents which could show the composition of Marsina but which no one has thought fit to place before the Court, is also a matter for comment.

16.  In the course of the “good arguable case” submissions, Mr. Barlow who appears here for the Appellants has advanced to us the proposition that this action is wrongly constituted. It cannot be a derivative action and it fails in limine. No allegations of fraud are contained in the Statement of Claim and, further, there is no“control” of AET. AET, he says, is a deadlocked company.Therefore, there is no minority who can bring such an action and no majority to be sued.

17.  On the issue of fraud and control.

18.  Mr. Barlow places great reliance on Burland and Others v. Earle and Others⁽¹⁾, a decision of the Privy Council. It is generally his submission in relation to this and one other Privy Council case which he has brought to ourattention, that we are bound by them and not by any domestic decisions of the English Courts. In Burland v. Earle⁽¹⁾at page 83 Lord Davey delivering the advice of the Judicial Committee said:

“It is an elementary principle of the law relating to joint stock companies that the Court will not interferewith the internal management of companies acting within their powers, and in facthas no jurisdiction to do so. Again, it is clear law that in order to redress awrong done to the company or to recover moneys or damages alleged to be due to the company, the action should primafacie be brought by the company itself.”

This is, of course, Foss v. Harbottle⁽²⁾.

19.  Lord Davey went on to consider an exception to the rule in Foss v. Harbottle⁽²⁾:

“... where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of thecompany. In that case the Courts allowthe shareholders complaining to bring an action in their own names. This,however, is mere matter of procedure inorder to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action theplaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff, and cannotcomplain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of beingconfirmed by the majority. The cases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained of are of a fraudulent character or beyond the power of the company.”

20.  I would interpose here that it has now been settled by Rolled Steel Products (Holdings) Ltd. v. BritishSteel Corporation and Others⁽³⁾ that “ultra vires” is tobe construed in its narrow sense, that is ultra vires the powers of the company itself not the powers of the directors.

21.  Mr. Barlow argues that the use of the phrase “fraudulent character” must mean fraud in the true common law sense. We seeks support for that proposition from Wallersteiner v. Moir (No.2)⁽⁴⁾, Dominion Cotton Mills Company Limited and Others v. Amyot⁽⁵⁾ and Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No.2)⁽⁶⁾;this last a decision of the English Court of Appeal who were considering judgment at first instance of Vinelott J..

22.  In the course of the debate, the Court drew to Mr. Barlow’s attention Daniels v. Daniels⁽⁷⁾, a case in

23.  which Templeman J. (as he then was) reviewed the authorities on derivative actions and the issue of fraud, and Estmanco Ltd. v. G.L.C.⁽⁸⁾ where Sir Robert Megarry V.C. also considered those issues applied Daniels v. Daniels⁽⁷⁾, and in addition, made reference to the Court of Appeal decision in Prudential Assurance Co. Ltd.⁽⁶⁾.

24.  In Daniels v. Daniels⁽⁷⁾, Templeman J. set out, in rather greater detail then we have done, the judgment of Lord Davey in Burland v. Farle⁽¹⁾ and said of the decision generally that that case turned on the fact that those against whom allegations were made were not, in fact, in control of the company. While he made no direct reference to it, nevertheless Dominion Cotton Mills⁽⁵⁾ had beencited to him.

25.  Counsel for the defendants in Daniels⁽⁷⁾ relied very strongly on Pavlides v. Jensen⁽⁹⁾ to show that whatever exemptions there may be to the rule in Foss v. Harbottle⁽²⁾ mere gross negligence is not actionable.Ithad been argued that all that was pleaded in Daniels v. Daniels⁽⁷⁾ was gross negligence. Templeman J. accepted the Pavlides⁽⁹⁾ proposition as being in line with the existing authorities and then went on at page 413:

“The authorities which deal with simple fraud on the one hand and grossnegligence on the othr do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of a breach of duty which they owe to the company, and that breach of duty not only harms thecompany but benefits the directors. In that case it seems to me that different considerations apply.If minorityshareholders can sue if there is fraud, I see no reason why they cannot suewhere the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves. Itwould seem to me quite monstrous - particularly as fraud is so hard to plead and difficult to prove - if the confines of the exception to Foss v. Harbottle, 2 Hare 461, were drawn so narrowly that directors could make a profit out of their negligence.”

26.  Templeman J. found it unnecessary to go on toconsider, though he clearly thought it to be of doubtfulprovenance, the proposition that any breach of duty may bemade the subject of aminorityshareholder’s action.

27.  The net result of that case is that the necessaryfraud need not be the common law fraud for which Mr. Barlowcontends and of which Templeman J. said, words echoed in thecourse of this debate, was “so hard to plead and difficultto prove.”

28.  In Estmanco⁽⁸⁾, the Vice-Chancellor in referenceto Foss v. Harbottle⁽²⁾ doubted whether Sir James Wigram V.C. when he decided that case foresaw:

29.  “the vigorous and active life which his decision would lead, or the many controversial obscurities that would arise about actual or possibleexceptions from the rule that he was laying down.”

30.  He went on that if the rule remained unqualified, the way would have been open for the majority to stultify and proceedings which were for the benefit of the minority and to the disadvantage of the majority. Therefore, exceptions arose and have been established. We did not think that there was an exception to the rule on the basis “whenever the justice of the case required it” and accepted that that seemed to have been part of the ratio of Prudential Assurance Co. Ltd. v. Newman Industries Ltd.(No.2)⁽⁶⁾. He agreed with the Court of Appeal’s statement that this was not a practical test . At page 12, theVice-Chancellor referred to the firmly established exceptions of “fraud on a minority” and while the word “fraud” in that rubric has not been fully clarified, he thought it plainly wider than fraud at common law in the sense of Derry v. Peek⁽¹⁰⁾. It was at this point that the Vice-Chancellor made reference to and adopted Daniels v. Daniels⁽⁷⁾ and then went on:

“Apart from the benefit to themselves at the Company’s expense, the essence of the matter seems to be an abuse or misuse of power. ‘Fraud’ in the phrase‘fraud on a minority’ seems to be being used as comprising not only fraud at common law but also fraud in the widerequitable sense of that term, as in the equitable concept of a fraud on a power.”

31.  In our judgment the phrase “of a fraudulent character” in Burland v. Earle⁽¹⁾ forshadowed in 1902 the words of the Vice-Chancellor in 1982. We do not think that Dominion Cotton Mills⁽⁵⁾ in any way derogated from that.

32.  We reject the contention that Prudential Assurance Co. Ltd.⁽⁶⁾ directly, or impliedly, overruled Daniels v. Daniels⁽⁷⁾. Templeman L.J., as he then became, was a

33.  member of the Court in Prudential Assurance⁽⁶⁾. That Court expressly refused to consider the Foss v. Harbottle⁽²⁾ issue, and any exceptions to it,. for they declined to hear argument on the topic. It would appear that in the first instance decsion of Vinelott J., the judge had found actual fraud - a conspiracy to defraud. True, the Court of Appeal’s judgment in Prudential⁽⁶⁾ which was delivered in turn by Cumming Bruce, Templeman and Brightman L.JJ., being of very great length, was not before the Vice-chancellor as a full report - he had referred to the Report contained in “The Times” - but we do not think,, and would be very hesitant indeed to suggest, the Vice-Chancellor to have erred in principle. Nor do we think the use of the word “defraud” by Lord Denning in Wallersteiner v. Moir⁽⁴⁾ to assist the Appellants’ case.

34.  The allegations here and, the fight is really between Mr. Nash and Mr. Kuntz, are that Mr. Kuntz interposed, without Mr. Nash being in any way aware of it, a third party whose provenance is doubtful. From the evidence contained in Mr. McGuinness’ affidavit substantial commission found its way into the account of this third party without being accounted for. This through the activities of Mr. Kuntz who signed for Marsina as their agent and sole authorised signatory. Whether or not he is in fact in control of Marsina would be a matter to be decided after discovery and investigation and at trial but there is sufficient on the pleadings to give rise to an issue of “fraud on a power”.

35.  Now we accept that Mr. Nash is not, factually, a minority. Mr. Barlow suggests that there were many other methods that could have been used to investigate this matter in particular by the application of the provision of the Companies Ordinance such as Winding-Up procedure. It may bethat there are alternatives. But here there had been, againon the evidence in Mr. McGuinness’ affidavit, failures to explain exactly what was going on. Whether Marsina wasbeing used as a device to pay secret commissions to its China trading partners or whether it was being used to pay secret commissions to Mr. Kuntz is open to question. In his affidavit Mr. McGuinness said at page 26 paragraph 10:

“I asked Mr. Kuntz who Marsina was. He replied that it was a company used by him as a vehicle on behalf of Mainiand Chinese interests whereby freights and commissions were paid in respect of vessels chartered by Mainland Chinese Corporation. I asked why he was a soleauthorized signatory. He replied thathis contacts in Mainland China had complete trust in him and permitted him this liberty.”

36.  When Mr. Kuntz was asked for the names of any other authorized signatories, for Mr. Kuntz frequently travelled away from Hong Kong and Mr. McGuinness envisaged his absence creating difficulties as regards business transactions, Mr. Kuntz declined to give any other information concerning Marsina.

37.  The taking of these proceedings was a justifiable step provided that a derivative action could be mounted. Wethink it could. How else were the Plaintiffs to bring Marsina and the other Defendants before the Court other thanby making AET a defendant. It could not be made aplaintiff. While strictly speaking there are no minorities in a deadlocked company, we can see no good reason why the procedure employed here should not be countenanced by this Court.

38.  The action does not fail in limine.

39.  On the general evidential issue of a “good arguable case” and “Real risk of dissipation”.

40.  In Ninemia Corporation v. Trave⁽¹¹⁾ it was heldthat the jurisdiction to grant Mareva injunctions was exercisable in cases where it appeared just and convenient to the Court to grant the injunction. The plaintiff had to show, on the evidence as a whole, that there was at least a good arguable case that he would succeed at trial and further, that a refusal of an injunction would involve a real risk that a judgment or award in his favour wouldremain unsatisfied.

41.  Mr. Barlow has criticized that passage in the judgment of Wong J. which stated:

“There are clearly issues to go to trial. The affidavit of Kevin Philip McGuinness which is prima facie evidence supports, in my view, what is alleged in the Statment of Claim. Of course, whether the plaintiffs actually succeed at the trial is a different matter.”

We suggests that that last sentence shows an error in law for the judge must consider whether there is a good arguable case which “would succeed at trial”. We do not agree withthe criticism. The judge was clearly considering theevidence that was then before him. Mr. McGuinness’affidavit clearly supports a good arguable case. If it is agood arguable case then it could well succeed at trial but it was not for the judge to forecast the outcome of this litigation. We do not think the headnote in Ninemia⁽¹¹⁾purports to go further then that. Kerr L.J. at page 1417said:

“It follows that the evidence, including the evidence on the second question posed by the judge to which we turn in a moment, must be looked at as a whole. A ‘good arguable case’ is no doubt the mininum which the plaintiff must show in order to cross what the judge rightly described as the ‘threshold’ for the exercise of the jurisdiction. But at the end of the day the court must consider the evidence as a whole in deciding whether or not to exercise this statutory jurisdiction.”

42.  Mr. Barlow in support of the no “good arguable case” submission argued that there was no evidence of the employment of Mr. Kuntz in the manner alleged in the Statement of Claim. On this it is, we think, sufficient to simply refer first to two of Mr. Kuntz’s own documents exhibited by Mr. McGuinness. First : the letter of 4th June 1986 where Mr. Kuntz made reference to his employment with AE1995 and its possible termination, while he would continue his activities as managing director of AET. Second : the memorandum of 1st July 1986 from Mr. Kuntz to Mr. Nash and others which referred to an employment contract with AE1985 being invalid from the date of the memorandum. Then there is the acceptance by Mr. Kuntz on 2nd November 1985 of the entension of his contract of employment with AE1935 and, lastly, the Technical Assistance Agreement between AET and AE1985 which would not have been workable unless Mr. Kuntz were an employee of AE1985. We think these are ample grounds to underline the allegations of employment.

43.  Without going into further details of the evidence of Mr. McGuinness we think a good arguable case to have been made out for the purpose of these applications.

Risk

44.  We accept that by itself the fact that a defendant is a foreign company may well not be sufficient to show a real risk of dissipation of assets. Here Marsina gives all the appearance of business activities being carried out in Hong Kong. It has a bank accoount and it has its agent, its sole signatory, its treasurer and its secretary all resident within this jurisdiction. In this electronic age bank accounts can be voided in a very short time indeed. Marsina’s case as far as it is known is that the monies are payable to persons outside the jurisdiction. There is not, we accept, a “claimed sum" in the prayer in the Statement of Claim. We do not see how at this present stage there could be.

45.  Lloyd J. in P.C.W. Ltd. v. Dixon^{( 12)} at 164, referred to the purpose of the Mareva jurisdiction as one which:

“ ….. is not to provide the plaintiffs with any form of pre-trial attachment. It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.”

We think those words to be applicable here.

46.  In addition, as no one has seen fit to bring evidence of the actual contents of the bank account, it prima facie can be treated as a “trust fund”. The Plaintiff is entitled to protect what may well turn out to be his legitimate interests and treating whatever may be in the account as a trust fund.

47.  The trial judge is criticized for stating in his judgment on this aspect of the matter:

“As to the dissipation of assets, the fact that the 3rd defendant is a foreign corporation with no established place of business here speaks for itself.”

Mr. Barlow would have it that that was the only test applied by him arid that in so doing he was in error. We do not agree. He had earlier considered, and stated himself so to have done, the pleadings and the affidavits and had come to the conclusion that the two questions be posed to himself, that is “good arguable case” and “risk of dissipation of assets” should be answered in the affirmative. There was ample substance in the generality of the evidence as it stood before him to come to the conclusions he did and we would, in no way, disturb them.

48.  The matter of the misleading of Bewley J. was abandoned. We are not surprised. The order of Bewley J. makes specific reference to service upon Marsina. The address given for Marsina was the Liberian one. We do not see how the judge could have failed to have been aware that Marsina was a foreign company.

49.  It is complained that the scope of the injunction is too wide. That it is a form of tracing injunction which should not be permitted and that to embargo the “trust fund” contents of the bank account is improper.

50.  It is submitted that, if we are against the general argument, we should delete paragraph 2.

51.  We disagree.

52.  Paragraphs 1 and 2 of the order run together one is necessary to the other. The order is sustainable both as a tracing injunction as well as an ordinary Mareva.

53.  The final matter for consideration is the actual form the order took. In his judgment Wong J. had stated :

“I would have thought that the injunction granted by Mr. Justice Bewley is no longer in existence as it is not part and parcel of the consent order approved by Deputy Judge Sharwood which the 3rd defendant is seeking to discharge.

In the Order, it was the injunction granted by Bewley J. which was directed to continue in force.

54.  We do not think that anything material turns upon this. The injunction is in force until, as the Order of Deputy Judge Sharwood put it, “further order or trial”. That remains the position. Both injunction Orders are in precisely the same terms.

55.  There will be an order nisi as to costs. The Plaintiffs to have their costs of the appeal and their costs before Wong J. and before Deputy Judge Sharwood to be taxed if not agreed.

(1) [1902] A.C. 83

(2) (1843) 2 Hare 461

(3) [1986] Ch. 246

(4) [1975] Q.B. 373

(5) [1912] A.C. 546 (Privy Council)

(6) [1982] 2 W.L.R. 31

(7) [1978] Ch. 406

(8) [1982] 1 W.L.R. 2

(9) [1956] Ch 565

(10) (1899) 14 App. Cas. 337

(11) [1983] 1 W.L.R. 1412

(12) [1983] 2 All E.R. 158