Hague v Nam Tai Electronics Inc. and Others
| Jurisdiction | UK Non-devolved |
| Judge | Lord Scott of Foscote,Lord Hoffmann |
| Judgment Date | 21 February 2008 |
| Neutral Citation | [2008] UKPC 13 |
| Court | Privy Council |
| Docket Number | Appeal No 16 of 2005,Appeal No 77 of 2006 |
| Date | 21 February 2008 |
Present at the hearing:-
Lord Bingham of Cornhill
Lord Hoffmann
Lord Rodger of Earlsferry
Lord Walker of Gestingthorpe
Lord Mance
Privy Council
[Delivered by Lord Hoffmann]
The chief point in this appeal concerns the construction of a provision in the articles of association of Nam Tai Electronics Inc ("Nam Tai"), a company incorporated in the British Virgin Islands, listed on the New York Stock Exchange and carrying on business in China. Mr Robert Yuen, a resident of Hong Kong, and Tele-Art Inc ("TAI"), a BVI company with which he was associated, were respectively the registered owners of 122,727 and 700,908 shares in Nam Tai. On 10 November 1993, by two separate deeds, each charged their shares to the Bank of China ("the Bank") in support of a guarantee of the repayment of advances by the Bank to Tele-Art Limited ("TAL"), a Hong Kong subsidiary of TAI.
TAI seems to have been in some financial difficulties at the time when it charged its shares to secure TAL's indebtedness, because on the very same day as the charges were executed an Irish government agency obtained a judgment against TAI in the BVI High Court for US$799,079. In 1996 TAL defaulted on its payments to the Bank and on 5 August 1996 the Bank called TAI on its guarantee.
Events then took an unusual turn. Nam Tai took an assignment of the judgment debt, which had become vested in Forfás, another Irish government agency, and on 27 June 1997 presented a petition to the BVI Court to wind-up TAI on the grounds of insolvency. On 17 July 1998 the court made a winding up order. The appellant Mr David Hague was appointed liquidator. The position was therefore that both the Bank and Nam Tai were creditors of TAI, the Bank holding security over its shares in Nam Tai and Nam Tai itself being unsecured.
Nam Tai then devised a scheme to destroy the Bank's security. On 16 October it altered its articles of association to create a special power to redeem the shares of judgment debtors. The International Business Companies Ordinance 1984, under which Nam Tai is registered, provides in section 9 that "subject to any limitations or provisions to the contrary in…this Act" a company may "purchase, redeem or otherwise acquire and hold its own shares". There is a limitation on this power in section 33(1A), which provides that a company may not redeem its own shares "without the consent of the member whose shares are to be…redeemed" unless the company is permitted by its articles to do so "without that consent". Regulation 13 of Nam Tai's articles, as it stood before amendment, provided in general terms that, subject to the provisions of the Act, any shares might be redeemed "on such terms and in such manner as the directors may determine". But it said nothing which could be construed as permitting redemption without the consent of the member. The directors of Nam Tai resolved to add such a power as regulation 13.1. Paragraph (a) of this new regulation contains definitions and the substantive power is contained in paragraph (b):
"Without limiting the generality of Regulation 13 of these Articles, in the furtherance thereof and in addition to any other rights or remedies available to the Company at law or in equity, the Company may at any time and from time to time redeem, at the Redemption Price per share, all or any of its outstanding shares beneficially owned by any Person or registered in the name of any Person whose name is entered as a member in the share register, against whom the Company has a judgment. At least 30 calendar days before the date fixed for redemption as determined by the resolution of the directors (the "Date Fixed for Redemption"), a written redemption notice ("the Notice") shall be sent to each beneficial owner and registered holder (if different from the beneficial owner) whose shares are to be redeemed by first-class mail, postage prepaid, at the address of the beneficial owner and registered holder (if different from the beneficial owner) as shown on the records of the Company, stating: (i) the class(es) of shares and the number of shares in each such class to be redeemed from the beneficial owner, (ii) the Date Fixed for Redemption, (iii) information on the method to be used to determine Redemption Price in accordance with Regulation 13(1)(a) of these Articles, (iv) the Judgment Amount and (v) the address of the place where the certificates for the shares to be redeemed shall be surrendered for redemption. On or before the Date Fixed for Redemption, each beneficial owner and registered holder (if different from the beneficial owner) of the shares to be redeemed shall surrender the certificates representing these shares to the Company at the place so designated therefore in the Notice unless the judgment amount has theretofore been satisfied in full. On the Date Fixed for Redemption the Company shall pay the Redemption Price for the shares redeemed by offsetting the Fair Market Value of the shares redeemed against the Judgment Amount. If the Fair Market Value of the shares redeemed exceeds the Judgment Amount, then new certificates representing the number of shares determined by dividing such excess by the Redemption Price (and rounding the quotient down to the nearest whole share) shall be issued to the Person whose shares were redeemed. In lieu of any fractional shares otherwise issuable, the Company shall pay an amount equal to the Redemption Price multiplied by the fraction. If the Fair Market Value of the shares is insufficient to fully satisfy the Judgment Amount, the Company shall retained the right to pursue all of its rights and remedies otherwise available to satisfy the deficiency. If the Notice is given in the manner provided in this Regulation, whether or not the certificates covering these shares are surrendered, all rights with respect to the redeemed shares shall terminate except for the right of the Person whose shares are so redeemed to receive credit by offset against the Judgment Amount as herein provided. Unless the certificates covering these shares are received by the Company at the place so designated the Judgment Amount will not be deemed to have been satisfied in full."
On 18 December 1998 Nam Tai gave TAI notice of a resolution to redeem 138,500 of the shares registered in its name to satisfy the Forfás debt, which (with interest and costs) was said to amount to US$1,617,083. Nam Tai determined the Redemption Price at US$11.188 a share, resulting in a Redemption Price for the shares of US$1,549,538, rather less than the amount alleged to be owing. On 22 January 1999, pursuant to this notice, Nam Tai purported to cancel the redeemed shares and to treat the Redemption Price as set off against the Forfás debt.
Mr Hague, the liquidator of TAI, applied to court for a declaration as to the priorities of Nam Tai and the Bank in respect of TAI's shares in Nam Tai and an order setting aside the redemption and restoring TAI to the register. At the hearing before d'Auvergne J, counsel for Nam Tai contended that TAI held the shares subject to the articles of association as they might be amended from time to time. Regulation 13.1 conferred a right of redemption and TAI therefore held the shares subject to that right. The Bank derived its security interest from TAI and could be in no better position. d'Auvergne J rejected this argument, set aside the redemption and ordered that the shares be restored to the liquidator.
Nam Tai appealed. The Court of Appeal distinguished between the validity of the redemption and the set-off of the Redemption Price against the Forfás debt. The set-off was ineffective but that did not affect the validity of the redemption. The result was that TAI's shares had been converted into a right to receive the Redemption Price. Nam Tai had no right of set-off but had to prove in the liquidation for the Forfás debt. The Court of Appeal also declared that the liquidator was entitled to any dividends declared on the shares before redemption (or in respect of unredeemed shares) and that the Bank was a secured creditor.
There is no appeal against the decisions of both the judge and the Court of Appeal that the attempt to recover the Forfás debt in full by redemption of TAI's shares and set-off against the the Redemption Price was ineffective. The scheme failed for at least two separate and sufficient reasons; possibly there are more. First, Nam Tai was not entitled, after the commencement of the liquidation, to convert TAI's shares into a debt for the purpose of setting it off against the Forfás debt. Set-off is allowed only in respect of mutual debts which existed before the company went into liquidation. To allow Nam Tai to create a set-off in this way would infringe the paramount principle of pari passu distribution of the insolvent company's assets: see British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758. Secondly, Nam Tai had notice of the Bank's charge and any rights it acquired over the shares (whether by way of redemption and set-off or any other form of interest) were subject to the rights of the Bank: see Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd (1886) 12 App Cas 29.
There is however an appeal by Mr Hague against the ruling of the Court of Appeal that the actual redemption was valid and had the effect of converting TAI's interest from ownership of the shares to a right to be paid the Redemption Price. Their Lordships should mention that Mr Hague is no longer liquidator, having resigned with the leave of the BVI court on 17 December 2002, but there has been no objection to his locus standi to pursue this appeal. His successor as...
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