N5881
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NO. 397 OF 2014

BETWEEN:

SHELLY LAUNA KUPO
First Plaintiff

AND:

WILSHEL LIMITED
Second Plaintiff

AND:

WESTPAC BANK-PNG-LIMITED
First Defendant

AND:

WILLIE KUPO
Second Defendant

Waigani: Kariko, J
2014: 19th & 20th June

Cases cited:
Papua New Guinea cases

Barava Ltd v Buidal (2009) N3759
Credit Corporation (PNG) Limited v David Nelson (2011) N4368
John Momis v Attorney-General [2000] PNGLR 109 
NCDC v Yama Security Services Pty Ltd (2003) SC707 
Wara v Kipa (2008) N3402 

Overseas cases:

Foss v Harbottle (1843) 2 Hare 461; 67 ER 189

Counsel:

Mrs E Galmai, for the plaintiff
Mr N Kopunye, for the first defendant
Mr J Sebby, for the second defendant

RULING

20th June, 2014

1. KARIKO, J: Husband and wife Willie and Shelly Kupo are the directors and equal shareholders of Wilshel Limited ("Wilshel") which owns the property described as Allotment 3 Section 86 Boroko, National Capital District and contained in State Lease Volume 12 Folio 2919 ("the Property"). Upon application by the Company in January 2011, Westpac Bank-PNG-Limited ("Westpac") agreed to loan it the amount of K1.7m. As security for the loan, the Property was mortgaged to Westpac. Upon default in repaying the loan in accordance with the terms of the loan agreement, Westpac has taken steps to exercise its rights over the Property as mortgagee and sell the Property to recover the outstanding on the loan. 

2. Both Mr and Mrs Kupo are presently involved in divorce proceedings and while Mr Kupo has no issue with Westpac selling the Property, Mrs Kupo has filed this suit seeking several orders but mainly for her to redeem the Property for and on behalf of Wilshel. As a shareholder and director of Wilshel, she has applied for leave of the Court to commence proceedings for and on behalf of the company as a derivative action pursuant to s. 143 Companies Act. In order to initiate such proceedings, leave of the court must be first obtained; see Wara v Kipa (2008) N3402 and Barava Ltd v Buidal (2009) N3759. 

3. In the relevant notice of motion, Mrs Kupo also seeks other interlocutory orders including interim injunctions, but it was agreed to first decide on the question of leave.

4. In response to the application, Mr Kopunye of counsel for Westpac has asked the Court to dismiss the motion on the basis that relevant notice of motion is seeking the same relief as those sought in the substantive proceedings, rendering the motions incompetent.

Issues

If the motions are competent, I must then determine:

Whether Mrs Kupo's claim constitutes a derivative action?; and
If so, should leave be granted? 

Competency of motions

5. Order 4 Rule 49(9) National Court Rules states that except as otherwise expressly provided by the Rules motions shall be for relief on interlocutory matters only and not for the substantive relief claimed in the originating process. It is a well-settled rule of practice and procedure that the notice of motion procedure should not be used as a vehicle to obtain substantive relief. This rule was codified as a result of the National Court decision of Kapi, DCJ in John Momis v Attorney-General [2000] PNGLR 109 and the Supreme Court decision in NCDC v Yama Security Services Pty Ltd (2003) SC707.

6. There are two relief sought in the notice of motion which are the same as the relief claimed in the originating summons:

(1)	Leave to institute a derivative action; and

(2)	An order that the first plaintiff (Mrs Kupo) is allowed to redeem the Property on behalf of Wilshel. 

7. While I agree that the second order cannot be granted pursuant to O.4 r.49(9), I am of the opinion that I ought to hear the application for leave as it is must be first obtained before any derivative action is commenced. 

Derivative action

8. Directors traditionally owe their duties to the company rather than the shareholders and when those duties are breached, the company has a right of action against the directors. This principle is known as the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. This rule posed a number of difficulties for shareholders, for instance: 

(1)	What if the directors who are in control of the company do not want to take action against one of their own?; or 

(2)	What if the majority shareholders pass a resolution that is very prejudicial to the interests of the minority shareholders? 

9. A derivative action is a suit by a shareholder or director (usually in the minority) for a wrong done against a company (for example, a breach of duty by a director) and the action is taken because those in control of the company do not wish to take any action against the wrong-doing. Derivative action is a remedy for shareholders and directors that has been developed by the common law and now provided by statute and in the case of Papua New Guinea, section 143 Companies Act. 

10. What is clear is that derivative action does not apply to a wrong done by a person outside of the company. This is indeed confirmed by the submission of counsel for Mrs Kupo. Mrs Galmai referred to the definition of derivative action found in the Oxford Dictionary of Law (7th Edition), stating that a derivative action is a claim brought by a member on behalf of the company for a wrong done to it, and that the member must establish that there has been an actual or proposed act or omission involving negligence, fraud, breach of trust, or breach of duty by a director and that the company has a cause of action arising from that act or omission.

Conclusion

11. In the present matter, the claim is against Westpac, a party outside of Wilshel Limited – a party that is not a shareholder, a member or a director of that company. This claim therefore cannot amount to a derivative action and so the obligatory requirement for leave under section 143 the Companies Act must be refused.

12. Before concluding I make these short remarks in respect of the claim that Wilshel ought to be allowed time to redeem the Property: While Westpac as mortgagee is exercising its right of sale of the Property, Wilshel's right to redeem as mortgagor continues to exist until Westpac and a third party enter into a contract of sale for the Property; see Credit Corporation (PNG) Limited v David Nelson (2011) N4368.

Orders

13. I order that the first plaintiff's application for leave pursuant to s.143 Companies Act is refused. I will now hear parties on the balance of the notice of motion. 
___________________________________________________
Saulep Lawyers: Lawyers for the Plaintiff
Bradshaw Lawyers: Lawyers for the First Defendant
Jopo Lawyers: Lawyers for the Second Defendant