Gamlestaden Fastigheter AB v Baltic Partners Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judge | Lord Scott of Foscote |
| Judgment Date | 25 April 2007 |
| Neutral Citation | [2007] UKPC 26 |
| Court | Privy Council |
| Docket Number | Appeal No 56 of 2005 |
| Date | 25 April 2007 |
and others
[2007] UKPC 26
Present at the hearing:-
Lord Scott of Foscote
Lord Phillips of Worth Maltravers
Lord Rodger of Earlsferry
Lord Brown of Eaton-under-Heywood
Lord Mance
Privy Council
[Delivered by Lord Scott of Foscote]
This is an appeal from the Court of Appeal of Jersey, given on 10 February 2005, dismissing the appeal of Gamlestaden Fastigheter AB ('Gamlestaden'), the appellant before the Board, from the judgment of Royal Court of 22 July 2004 striking out Gamlestaden's application under Article 141 of the Companies (Jersey) Law 1991. Article 141(1), in terms substantively identical to those of section 459(1) of the Companies Act 1985, enables a member of a company to apply to the court for a remedial order under Article 143 (section 461 in the 1985 Act) on the ground that "the company's affairs are being and have been conducted in a manner which is unfairly prejudicial to the interests of …. some part of its members (including at least the [applicant] member) …".
Gamlestaden's unfair prejudice application relates to the conduct of the affairs of Baltic Partners Ltd ('Baltic'), a company incorporated in Jersey in April 1989 with 5,000 issued shares of which 1,100 shares (22 per cent) were held by Gamlestaden and the remaining 3,900 shares were held partly directly (1500 shares) and partly indirectly (2400 shares) by Hengoed Ltd (also incorporated in Jersey). Hengoed Ltd was owned and controlled, partly directly and partly indirectly, by a Mr Karlsten. The directors of Baltic at the relevant time were Mr Boleat, Mr de Figueiredo and Mr Bailey, the 2nd, 3rd and 4th respondents to this appeal. Each was a chartered accountant and a partner in or employee of Cooper & Lybrand. It is their conduct of the affairs of Baltic that is criticised by Gamlestaden. Mr Boleat died on 6 September 2000, some two years after the Article 141 application had been commenced. Their Lordships have not been addressed on any procedural consequences for these proceedings of Mr Boleat's demise and will assume that the consequences have no relevance to any issue that arises on this appeal.
Baltic is insolvent and the main issue for decision is whether it is open to a member of a company to make an unfair prejudice application for relief in circumstances where, as here, the company in question is insolvent, will remain insolvent whatever order is made on the application and where the relief sought will confer no financial benefit on the applicant qua member. The main relief now sought by Gamlestaden on its Article 141 application is an order under Article 143(1) ordering the directors to pay damages to Baltic for breaches of the duty they owed to Baltic as directors. But it is accepted that the damages, assuming the claim succeeds, will not restore Baltic to solvency. It will, however, if it does succeed, produce a considerable sum which will be available to Baltic's creditors. Gamlestaden, either itself or as representing its parent company Gamlestaden AB, is a substantial creditor. The indebtedness in question was a major part of Gamlestaden's investment in Baltic's business ventures. So, it is said, Gamlestaden has a legitimate interest, in the particular circumstances of this case, justifying the making of the Article 141 application.
The directors, however, applied to have the application struck out on the ground that it was bound in law to fail. They contended before the Bailiff of the Royal Court and before the Court of Appeal, and have repeated the contention before the Board, that the alleged improprieties in the management of Baltic of which Gamlestaden complain cannot be shown to have caused Gamlestaden any financial loss in its capacity as shareholder. Its loss, if any, is suffered as a creditor. An application under Article 141 (or under section 459 of the 1985 Act) is, it is argued, a shareholder's remedy, not a creditor's remedy. Once it becomes clear that the only benefit to be derived from the relief sought in an unfair prejudice application would be a benefit to the company's creditors, and that no benefit would be obtained by the company's shareholders, it becomes clear that the application is an abuse of process, cannot succeed and should be struck out. The learned Bailiff agreed and struck out the application. The Court of Appeal dismissed Gamlestaden's appeal. The point is now before the Board for a final decision. It must be emphasised that, since this appeal arises out of a strike out of the Article 141 application, the facts pleaded in support of the application must be taken as true (save for any that can be shown by incontrovertible evidence to be untrue). The Bailiff and the Court of Appeal approached the case on that footing and so must their Lordships.
The point at issue (identified in para.3 above) depends, first, upon the scope of the power of the court under Articles 141 and 143, properly construed, in dealing with the unfair prejudice application and, secondly, upon the particular circumstances that are relied on for bringing this application within that scope. It is convenient to begin by outlining the circumstances that prompted Gamlestaden to launch its unfair prejudice application.
The Facts
Gamlestaden is a member of a group of companies, the Gamlestaden group. Both it and its parent, Gamlestaden AB, are incorporated in Sweden. In neither of the courts below has any distinction been drawn between Gamlestaden, the holder of shares in Baltic, and its parent, Gamlestaden AB (see e.g. para.1 of the Bailiff's judgment and para.1 of the judgment of Clarke JA in the Court of Appeal). This was no doubt realistic and their Lordships will for the time being do likewise. But the distinction between the two companies may become relevant later.
In 1989 Gamlestaden decided to invest in commercial property in Germany in partnership with a Mr Karlsten. Broadly speaking Mr Karlsten was to provide the expertise and Gamlestaden was to provide the funds. Baltic was the corporate vehicle through which this business venture was to be pursued. In April 1989, Baltic, Mr Karlsten and a Mr Hansen established a limited partnership under the laws of Germany, Scandinavian Partners Karlsten & Co. KG ("SPK"). Baltic's interest in SPK was its only asset. Under SPK's Articles Baltic was a limited partner with a limited capital contribution of DM85 million (later increased to DM150 million). Mr Hansen was a limited partner with a limited capital contribution of DM650,000. Mr Karlsten was a general partner without any capital contribution. Apart from the introduction of Mr Hansen, this arrangement was consistent with the understanding that Mr Karlsten was to provide the expertise for the joint venture and Gamlestaden, via Baltic, the funding.
Under article 2 of the SPK Articles three accounts were to be maintained – first, an Equity Account 1, to which the capital contributions of Baltic and Mr Hanson (which had been fully paid: see article 2.3) and any other capital contributions were to be credited; second, an Equity Account 2, to which the respective profit shares of the three partners would be credited as and when net profits accrued; and (3) a "loss carried forward" account to which the pro rata losses of the partners were to be charged (see article 2.4). Profits were to be applied in discharging existing losses before any credits to Equity Account 2 could be made (see article 2.4 and 2.5) and profits could only be drawn (i.e. from Equity Account 2) "so far as they exceed existing losses carried forward …" (article 2.5). Credits on Equity Account 2, but not credits on Equity Account 1, were to bear interest (see section 2.6).
Article 3 said that Mr Karlsten and Mr Hansen "shall be in charge of the management of the partnership" and that Mr Karlsten "shall be authorised to solely represent the partnership". Article 6.2 set out the profit shares to which the partners would be entitled, namely, Mr Karlsten 73 per cent, Baltic 22 per cent and Mr Hansen 5 per cent.
In paragraph 12 of the Statement of Facts and Issues agreed between the parties for the purposes of this appeal it is stated that under the Articles of SPK Baltic was entitled to repayment of the amount standing to its credit on its equity accounts in preference to the other two shareholders. Article 15.4, which deals with the dissolution of SPK, is said to produce this effect.
Interests in two properties in Hamburg were acquired by SPK. One of the properties was called Chilehaus, the other Sprinkenhof. SPK acquired a 95 per cent interest in Chilehaus but acquired Sprinkenhof outright. The acquisition of these interests required substantial funding and, at Gamlestaden's request, its parent company, Gamlestaden AB made advances of some DM72 million over the period April 1992 to April 1994. This money, treated as loans to Baltic, was paid to SPK as capital contributions made by Baltic. In addition Baltic obtained loans from two Swedish banks, DM37.5 million from Skandinaviska Enskilda Banken ("SEB") and DM56 million from Sparbanken Sverige ("Sparbanken"), repayment of which was guaranteed by Gamlestaden AB. In total, therefore, Gamlestaden AB, at the request of Gamlestaden, made available loans and guarantees of some DM165.5 million. By 30 June 1993 a total amount of over DM128 million was standing to Baltic's credit with SPK, DM120.9 million on its Equity Account 1 and over DM7 million as an additional capital contribution.
In January 1993, SPK obtained a revaluation of Sprinkenhof that valued the property at DM280 million. This valuation was made on the express assumption that the property would, within a period of 20 months, be refurbished. The estimated net cost of the refurbishment was over DM43 million. The value of...
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