HSBC Bank Middle East v Clarke
| Jurisdiction | UK Non-devolved |
| Judge | Lord Walker of Gestingthorpe |
| Judgment Date | 21 June 2006 |
| Neutral Citation | [2006] UKPC 31 |
| Court | Privy Council |
| Docket Number | Appeal No 60 of 2004 |
| Date | 21 June 2006 |
[2006] UKPC 31
Privy Council
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Steyn
Lord Hutton
Lord Walker of Gestingthorpe
Sir Martin Nourse
[Delivered by Lord Walker of Gestingthorpe]
Oracle Fund Ltd ("the company") was incorporated on 3 May 1995 under the International Business Companies Act 1989 (No. 2 of 1990 – "IBCA"). It was licensed as a mutual fund under the Mutual Funds Act 1995 (No. 6 of 1995 – "MFA"), which came into force on 1 March 1995. It did business as a mutual fund until July 1999 when it was suspended by the Securities Board. It was put into voluntary liquidation on 12 July 2000. This was overtaken by winding-up by the court under an order of the Supreme Court made on 11 September 2000.
On 16 May 2001 the joint liquidators took out a summons asking the court to determine various questions, the first being as to the rights attaching to the various classes of shares issued by the company. Representative holders of Class A Investor Shares and Class B Investor Shares were added as parties to argue these questions. On 2 October 2002 Small J decided the first issue in a way which (in view of the state of the company's finances) was favourable to the holders of Class B Investor Shares. The other issues raised by the summons were adjourned. On 27 October 2003 the Court of Appeal (Churaman, Ganpatsingh and Ibrahim JJA) unanimously allowed an appeal by holders of Class A Investment Shares and decided that both classes of shares ranked pari passu in the winding-up. The representative holders of Class B Investor Shares now appeal to the Board.
This appeal does not turn solely on fine questions of construction of the company's constitutional documents. There certainly are some questions of construction to be decided. But the Board has (with the ready assistance of counsel) had to hack their way through some tangled thickets in order to identify what are the relevant questions. It is common ground that the company's constitutional documents have been in disarray from the first. When the problems were finally recognised, insufficient thought was given as to how to solve them.
It is therefore necessary to set out the facts in some detail. But there are severe limits on the use of evidence of surrounding circumstances as an aid to the construction of a company's constitutional documents: see Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, in which Steyn LJ said at p698:
"I will readily accept that the law should not adopt a black-letter approach. It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into articles of association from extrinsic circumstances.
"Here, the company puts forward an implication to be derived not from the language of the articles of association but purely from extrinsic circumstances. That, in my judgment, is a type of implication which, as a matter of law, can never succeed in the case of articles of association. After all, if it were permitted, it would involve the position that the different implications would notionally be possible between the company and different subscribers."
Similarly, Sir Christopher Slade observed at p699:
"I accept that, in construing the articles of association of a company, evidence of surrounding circumstances may be admissible for the limited purpose of identifying persons, places or other subject matter referred to therein. [Counsel], however, has not invoked extrinsic evidence of surrounding circumstances in the present case for that limited purpose. He has sought to invoke it for the purpose of imposing additional financial obligations on the members far beyond those which the language of the articles of association of the company, read fairly on its own, would impose on them, because, he says, such an implication is required to give the articles business efficacy. No authority has been cited to us which begins to support the proposition that extrinsic evidence is admissible for that wide purpose in construing the statutory contract created by the articles of association of a company. In my judgment, the admission of such evidence for such purpose would be quite contrary to the principles governing this type of statutory contract."
The same principle must apply even more strongly to a company's memorandum of association. The factual summary which follows provides at least a partial explanation of how the problems facing the liquidators have arisen. But the surrounding circumstances can assist on issues of construction only to the very limited extent indicated in Bratton Seymour Service Co Ltd v Oxborough.
The incorporation of the company
The persons who promoted the company had originally intended its mutual fund business to be that of a company (also called Oracle Fund Ltd) incorporated in the Cayman Islands on 22 February 1993. The plan was for this company, which already had an established business, to become an international business company under Part VIII of ICBA (Continuation). But (as Ibrahim JA records in paragraph 19 of his judgment) the promoters made the mistake of deregistering the Cayman company before making their application to the Registrar General in The Bahamas, and the application was refused for that reason. Instead the company was incorporated as a new company, and the assets of the Cayman company were in due course transferred to it.
That is the explanation of why Cantrade Privatbank AG (now, under its new name of Ehinger & Armand von Ernst AG, one of the representative holders of Class A Investor Shares) is shown (on a printout supplied to the Board by the liquidators) as having become a shareholder on 1 November 1993, long before the company was incorporated. It is also the explanation of why a table of net asset values (NAVs) of the company's Class A Investor Shares begins (at $100) in March 1993. It may also be the explanation of the egregious errors, mentioned below, in a succession of offering documents prepared in order to meet the requirements of section 3 (9) of MFA and Regulation 17 of the Mutual Funds Regulations ("MFR"). The first of these offering documents was prepared in March 1995 when the plan was for the Cayman company to continue by registration under ICBA. But the Board has not seen any company documents or accounts relating to the Cayman company. Moreover for what it is worth (which unfortunately may not be very much) the secretary of the company stated in a fax sent on 12 February 1997 that according to the company's memorandum of association its capital was "the same as it was in Cayman."
The factual summary which follows must be preceded by a word of caution. The Class B Investor Shares referred to in the orders of Small J are not the same as the Class B Ordinary Shares referred to in the original memorandum and articles. Arguably they are the same as, or closely similar replacements for, the Class C Redeemable Non-Voting Preference Shares referred to in the original memorandum and articles (with the original Class B Ordinary Shares coming to be called Management Shares). That is an important element (although by no means the only element) in the corporate disarray already referred to. In what follows their Lordships will (except in direct verbatim quotations) refer to the shares mentioned in the orders as A Investor Shares and B Investor Shares, and to the non-voting shares referred to in the original memorandum and articles as A Preference Shares and C Preference Shares, without any implicit adjudication as to the identity or non-identity of the shares in question.
The company's memorandum (in its original form) contained the following provisions that are material:
"CURRENCY
5. Shares in the Company shall be issued in the currency of the United States of America.
6. The authorised capital of the Company is Nine Hundred Thousand Dollars (US dollars $900,000) divided into 9,000,000 Shares of $0.10 per share.
CLASSES OF SHARES
7. The Shares shall be divided into 4,495,000 Class "A" Redeemable Non-Voting Preference Shares of a nominal or par value of US$0.10 each, 10,000 Class "B" Ordinary Shares of a nominal or par value of US$0.10 each and 4,495,000 Class "C" Redeemable Non-Voting Preference Shares of a nominal or par value of US$0.10 each provided always that subject to provisions of The International Business Companies Act 1989 (as amended) and the Articles of Association the Company shall have power to redeem or purchase any or all of such shares and to sub-divide or consolidate the said shares or any of them and to issue all or any part of its capital whether original, redeemed, increased or reduced with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions whatsoever and so that unless the conditions of issue shall otherwise expressly provide every issue of shares whether stated to be Ordinary Preference or...
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