Zavarco Plc v Tan Sri Syed Mohd Yusof
| Jurisdiction | England & Wales |
| Judge | Chief Master Marsh |
| Judgment Date | 17 July 2019 |
| Neutral Citation | [2019] EWHC 1837 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2018-002192 |
| Date | 17 July 2019 |
[2019] EWHC 1837 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Rolls Building, Fetter Lane,
London EC4A 1NL
Chief Master Marsh
Case No: BL-2018-002192
Patrick Lawrence QC (instructed by Needle Partners Limited) for the Claimant
Robert-Jan Temmink QC (instructed by Teacher Stern LLP) for the Defendant
Hearing dates: 30 May 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The claimant seeks to recover from the defendant €36 million as a debt together with interest. The claimant's case in outline is that (i) the defendant formerly held shares in the claimant, (ii) he was required to pay for the shares in cash, (iii) he has failed to pay for them and (iv) he is, despite the shares having been forfeited, liable to the claimant as a debtor for the nominal value of the shares which is €36 million.
This claim was issued on 11 October 2018 and permission to serve the claim on the defendant in Singapore was given by an order made by Master Price on 15 October 2018. The defendant disputes that the court has jurisdiction to try the claim against him, or alternatively, that if the court has jurisdiction the court should not exercise it. He issued an application dated 22 November 2018 under CPR 11.1 which was heard on 30 May 2019. The defendant's principal contention is that the determination of an earlier claim (“the 2016 proceedings”) by a judgment of Mr Martin Griffiths QC, sitting as a Deputy High Court Judge, dated 14 November 2017 and the order made on that date, has the effect that the doctrine of merger, which is a species of res judicata, applies.
The defendant's case is summarised succinctly in paragraphs 14 and 15 of the witness statement of Lee Donoghue, a solicitor with Teacher Stern LLP, made in support of the application:
“14. I believe that the facts pleaded in both proceedings are identical; the parties are identical and the causes of action are identical. Although the present proceedings are said to be a claim for a debt, the cause of action remains precisely the same as the [2016 proceedings]. This statement does not attempt to address the law on res judicata by merger, but I understand that, as a matter of law, the Claimant's cause of action in the present claim has merged with the judgment in the [2016 proceedings] and was thereby extinguished. Accordingly, the Court has no jurisdiction to try the present claim.
15. If the Court were to find that despite the merger the Court does have jurisdiction, then the Defendant will say that the Court should decline to exercise such jurisdiction as it may have:
a. because of res judicata by merger; alternatively
b. because of the operation of the doctrine of the principles in Henderson v Henderson.”
The claimant was incorporated in England and Wales on 29 June 2011. On incorporation the defendant was allotted 30% of the claimant's shares and Mr Ranjeet Singh Sidhu was allotted the remaining 70% of the shares.
Zavarco Berhad (“ZB”) is a Malaysian company. ZB's principal business was in a subsidiary called V Telecoms Berhad (“VTel”) which has, or had, licences to develop a fibre optic telecommunications network in Malaysia that could not be established without major capital investment. The claimant was incorporated in England with a view to flotation on the Frankfurt Stock Exchange so as to attract shareholder investment for the VTel business. The whole of the ordinary share capital in ZB was transferred to the claimant on 25 July 2011 and it was listed on the Frankfurt Stock Exchange on 23 August 2011.
The Deputy Judge summarised the nature of the 2016 proceedings in the first three paragraphs of his judgment:
“1. The central dispute in this case is whether [Mr Nasir] is or was obliged to pay up the 360 million shares he received on the incorporation of Zavarco Plc (“Z”) 1 in cash, or whether it was agreed or arranged that the par value would be satisfied by the transfer to Z of shares in another company “ZB” and, if it was, what the legal consequences of that might be. The par value was 10 Euro-cents per Z share, and so the total amount in dispute is 36 million euros in respect of Mr Nasir's 360 million shares in Z.
2. It is common ground that Mr Nasir's shares were never paid up in cash. Z served a call notice on Mr Nasir on 5 June 2015 for payment. Mr Nasir has not paid, disputing his liability to do so, and Z served a Notice of Intended Forfeiture on 15 June 2016. No action has been taken on that, pending the outcome of these proceedings.
3. Both parties have brought claims and submitted their dispute to this Court. The first in time is a Part 8 claim by Mr Nasir against Z but, since the matter was clearly unsuited to summary proceedings, another action was brought under Part 7 by Z (as Claimant) against Mr Nasir (as Defendant). Both actions are listed before me, but the trial has proceeded on the second action, which encompasses the issues in the first action. This judgment will decide both.” [my emphasis]
Later in the judgment, the Deputy Judge observed in relation to the claimant's business:
“114. This business was being ramped, offering unrealistic hope of future profit based on very little, in order to get a short term listing which would not truly reflect the value that a detailed audit or careful valuation would produce.
…
This was a business that had no value unless it could secure substantial capital investment. I have been shown no evidence that this was in place on 29 June 2011.”
It is necessary to consider the way claim is put forward in the particulars of claim in both proceedings and to review the authorities on the subject of merger. A convenient starting point, however, is the provisions of the claimant's articles of association dealing with call notices and forfeiture of shares.
Articles of association
Article 69.1 permits the directors to send a “call notice” to a member requiring the member to pay a specified sum (“the call”), subject to the restriction in Article 69.2
limiting the amount of the call to the sum unpaid on the member's shares. Article 69.3 specifies that a member must comply with the requirements of a call notice save there is no liability to pay any sum claimed before 14 days after service of the call notice have passedArticle 72 describes the “automatic consequences” if there is a failure to comply with a call notice. The failure to pay the call sum triggers an entitlement to issue a “notice of intended forfeiture” of the shares. The formal requirements for a notice of intended forfeiture, which are not of concern, are set out in Article 73.
Article 74 gives the directors power to forfeit shares if the notice of intended forfeiture is not complied with before the date for payment of the call that is specified in the notice.
Under the Articles there are distinct steps that must be followed. The service of a call notice equates to a demand for payment and is a pre-requisite for a claim by the company to seek payment of the call. Shares cannot be forfeited without two prior steps; first the service of a call notice and secondly the service of a notice of intended forfeiture. How these steps, that are specified by the Articles, are part of a cause of action giving rise to a claim is a matter that requires further analysis because at common law, if shares are forfeited, the company's right to receive payment for the shares is extinguished. By virtue of the forfeiture, the company holds the shares and is free to allot them to other persons. Absent saving provisions in the Articles, the directors must elect between forfeiting the shares, or pursuing payment. However, it is common for the Articles to contain provisions that abrogate the common law position and that is the case with the claimant.
Article 75 provides that forfeiture extinguishes all interests in the share and all other rights relating to them. It goes on:
“75.3 If a person's shares have been forfeited:
…
75.3.4 that person remains liable to the Company for all sums payable by that person under the Articles at the date of forfeiture in respect of those shares, including any interest (whether accrued before or after the date of forfeiture) in the same manner in all respects as if those shares had not been forfeited, and to satisfy all (if any) claims, demands and liabilities which the Company might have enforced in respect of the shares at the time of forfeiture:
…”
The rationale for this provision is clear. The directors will wish to prevent a shareholder who has not paid for shares from participating in the company and exercising rights that accrue by virtue of being a shareholder by forfeiting the shareholding. However, it is useful for the company to retain flexibility about what further steps it may wish to take. If the company is able, due to market conditions, to allot the shares to a person willing to pay the par value, or more, it need not rely on its right to require payment by the original shareholder. Indeed, it is common ground that the claimant's right to recover from the defendant the sum claimed in the call notice is subject to the principle of double recovery. Where disposal of the forfeited shares at par value is not an option, the right to recover under Article 75.3 may be exercised.
Palmer's Company Law provides a commentary on the standard provisions for forfeiture of shares. There are two passages that are of significance:
(1) “6.225 The forfeiture of a share ends the membership of the shareholder. It becomes the property of the company and all interests in that...
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