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Supreme Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]
SCA NO 56 OF 2019
BETWEEN
TOM MAIP
First Appellant
AND
MCQUEENIE WAIA
Second Appellant
AND
MOGE NAMBUGA MILIMB INVESTMENT LIMITED
First Respondent
AND
PALAWA NINJI
Second Respondent
Waigani: Manuhu, Makail & Thompson JJ
2019: 16th December
2020: 20th January
SUPREME COURT APPEAL –Appeal from discretionary judgment –Grant of interim injunction –Exercise of discretion based on relevant principles – Whether there is serious question to be tried –Whether balance of convenience favour grant of interim injunction – Whether damages are an adequate remedy
COMPANY LAW – Doctrine of separate legal entity – Shareholders and directors of company – Trustee shareholders – Company Act, 1997 – Section 16
LAW OF TRUST – Creation of trust – Trust created only by express appointment or by implication – Implied trust – Proof of – Lack of
Facts
This is an appeal from a discretionary judgment of the National Court granting an interim injunction. The interim injunction was sought by the respondents pursuant to a motion filed in proceedings OS No 502 of 2018. It restrained the second appellant from disposing, encumbering or in any way dealing with shares in a company called Palimp Limited which was then the second plaintiff in the proceedings OS No 502 of 2018. The proceedings were commenced about seven years after a purported unauthorised transfer of shares by the shareholders and directors of Palimp Limited.
Held:
Cases cited:
Papua New Guinea Cases
Blassius Reu v. William Meta (2014) N6534
Curtain Bros (PNG) Ltd v. UPNG (2005) SC788
Manum Investment Limited v. Onda Koim & Ors (2015) SC1409
Maru Guia v.Inabi Arua (2016) N6184
Mathew Poia v. ANZ Bank (2001) N2049
Polti Wara v. Sapom Kipa (2008) N3402
Overseas cases
Australia Coal and Shale Employees’ Union v. The Commonwealth [1953] HCA 25; (1956) 94 CLR 621
Foss v. Harbottle [1843] EngR 478; (1843) 67 ER 189
Counsel:
Mr. N. Tame, for Appellants
Mr. H. Pora, for Respondents
JUDGMENT
20thJanuary 2020
1. BY THE COURT: This is an appeal from a discretionary judgment of the National Court sitting at Mt Hagen on 5th April 2019 granting an interim injunction. The interim injunction was sought by the respondents pursuant to a motion filed in proceedings OS No 502 of 2018.It restrained the second appellant from disposing, encumbering or in any way dealing with shares in a company called Palimp Limited which was then the second plaintiff in the proceedings OS No 502 of 2018. Meanwhile, the appellants’ motion seeking an order for dismissal of the proceedings OS No 502 of 2018 was not heard and had been adjourned to another date for hearing. That motion is still pending.
Principles of Appeal
2. The Supreme Court will not interfere with a discretionary judgment unless it is shown that an identifiable error has occurred in the primary judge’s exercise of discretion. Even if there is no identifiable error, the judgment may be set aside if it is so unreasonable or plainly unfair that such an error can be inferred: Australia Coal and Shale Employees’ Union v. The Commonwealth [1953] HCA 25; (1956) 94 CLR 621,adopted by the Supreme Court in Curtain Bros (PNG) Ltd v. UPNG (2005) SC788.
Principles of Injunction
3. As to the motion for interim injunction, the hearing before the primary judge was confined to whether the respondents were able to meet the relevant tests for grant of an interim injunction, these being whether the respondents had delayed in bringing the application, if there was a serious question to be tried, the balance of convenience, whether damages would not be an adequate remedy, and if all else is equal, if the status quo should be preserved.
Primary Judge’s Findings
4. On the issue of a serious question to be tried, the primary judge received submissions from the respondents in relation to how the various clans of the Moge Nambuga Milimb tribe from the Western Highlands Province had structured their business enterprise. They had financial members of the various clans appointed as directors to each company representing each clan. The directors were also shareholders of these companies. There were a total of ten companies, one of which was Palimp Limited which represented the Palimp clan. These companies held shares in the first respondent.
5. Prior to 26th October 2011, Palimp Limited’s directors were the first appellant and one Thomas Ulg. It was said that Thomas Ulg passed away and in around 26th October 2011 the second appellant became a director and shareholder.
6. According to the primary judge, Palimp Limited held 2,400 shares in the first respondent whose total shareholding was 49,584. The second appellant paid K1.00 for the deceased’s one share in Palimp Limited. According to Mr Jacob Kop, Palimp Limited and other companies were incorporated as shelf companies purposely to receive and channel dividends paid by the first respondent to the financial members of the clans as beneficiaries.
7. The respondents disputed the second appellant’s directorship and shareholding in Palimp Limited by advancing two grounds before the primary judge. These matters led him to conclude that there was a serious issue to be tried. First, the second appellant was not a member of the Palimp clan and second, the second appellant was a trustee shareholder of Palimp clan and it was necessary for him to consult and obtain approval from the members of the Palimp clan before transferring the shares to him.
8. However, the primary judge did not give due consideration to four significant matters which were raised by the appellants in their submissions and also formed the basis of this appeal. If they were given due weight, they would have led him to find otherwise on this question.
Locus standi
9. First, as the company extract showed, the first respondent is not a director or shareholder of Palimp Limited and has no interest or control over Palimp Limited. Consequently, it lacked standing to sue the appellants over a purported unauthorised appointment of a director and transfer of shares in Palimp Limited.
Consent and authority to sue
10. Secondly, none of the shareholders or directors of Palimp Limited have consented to or authorised Palimp Limited to sue or be named as a party (second plaintiff) in the proceedings OS No 502 of 2018. Neither is the proceeding a derivative action under Section 143 of the Companies Act, 1997. As it was, the proceeding was riddled with these legal and procedural defects which in turn raised serious questions as to the propriety of the authority and engagement of the current lawyers of the respondents to commence proceedings on behalf of Palimp Limited.
Breach of trust
11. Thirdly, the finding that the second appellant is a trustee shareholder of Palimp Limited and holds shares in trust for the members of Palimp clan, was unsubstantiated. A useful definition of a trust was given by Sevua J in Mathew Poia v. ANZ Bank (2001) N2049 as being “.....an obligation contained in a relationship whereby a person called the Trustee holds property transferred by another person called the settler, for the benefit of, or in trust for other persons known as beneficiaries”.
12. A trust is created in two ways. One is by express appointment. For this, there was no evidence in the form of trust documents to substantiate this finding. The other is by implication. It is referred to by many as an implied trust. Implied trust is imposed by law to situations either by presuming an intention of the parties to create a trust or simply because of the facts at hand.
13. In the former case, the intention to create a trust must be sufficiently established by evidence and in the latter, a trust is created by conduct of the parties having regard to all the circumstances.
14. It is apparent from the primary judge’s reasons for judgment that the respondents gave him the impression that a trust relationship was created from the structure of the business enterprise between the members of the Palimp clan and the first respondent through Palimp Limited where the members of the Palimp clan had appointed shareholders and directors in Palimp Limited. They submitted that the trust relationship was not documented, but was an oral arrangement.
15. However, according to the definition of a trust, appointment of persons to be shareholders and directors is only one aspect. The other aspect is what they are supposed to do or not do that is contrary to their duties as trustees. Here, the purpose is unclear and conflicting. This is because from the evidence of Jacob Kop and the second respondent in support of the motion, if the persons were appointed as shareholders and directors to hold shares in trust of, or for the benefit of the members of the Palimp clan, it is not the same thing as receiving, holding and distributing dividends received from the first respondent to the financial members of the Palimp clan.
16. Another instance of lack of clarity and conflicting evidence is that, if the complaint by the respondents is about the second appellant’s ineligibility for appointment as a shareholder and director of Palimp Limited on membership grounds, it is not the same complaint as a breach of a shareholder or director’s duty to exercise care and diligence and to act in the best interests of the company. It may assist if the Court were to ask this question: Is the purpose of the trust for the trustees to hold shares and not to dispose of them or are they appointed to receive, hold and distribute dividends received from the first respondent to the financial members of the Palimp clan?
17. If it is the latter, except for a vague reference to “the change would affect the interest of the First Plaintiff company [first respondent] wherein the Second Plaintiff [Palimp Limited] has shares and that it would affect the payment of dividends by the First Plaintiff [first respondent] to the financial contributors through the Second Plaintiff [Palimp Limited]”,in their respective affidavits Jacob Kop and the second respondent do not depose that the appellants had failed to pay dividends to the financial members of the Palimp clan and how much is outstanding, and that based on that, they had failed in their duty as shareholders and directors of the company to act in the best interests of the company. This is another example of lack of clarity in the respondents’ case on breach of trust. In addition, the statement by Mr. Kop is speculative.
18. It is important to show how a trust is created and the nature of its breach because of the doctrine of separate legal entity where the members of a company are separate from the company. See also Section 16 of the Companies Act, 1997 on the doctrine of separate legal entity which is traced back to the famous case of Foss v. Harbottle [1843] EngR 478; (1843) 67 ER 189 and consistently applied by the Courts in this jurisdiction in many cases, some of which are Polti Wara v. Sapom Kipa (2008) N3402, Blassius Reu v. William Meta (2014) N6534 and Maru Guia v. Inabi Arua (2016) N6184.
19. As a matter of evidence, a trust cannot be inferred from the facts at hand because the respondents’ evidence is insufficient and conflicting. As a matter of law, it has led the primary judge to misapply the principles of trust and doctrine of separate legal entity. This constitutes an error of law and fact which is an identifiable error in the exercise of discretion by the primary judge.
Articles of Association
20. The third significant consideration which was not given due weight and constituted an identifiable error, is the reference to the Articles of Association. In the Court below the respondents relied on the Articles of Association of the first respondent and said that Palimp Limited’s Articles were the same. The Articles of Association are an important document which determine if the first respondent can place restrictions on its shares and do not allow the public to subscribe to its shares .
21. The respondents alleged that pursuant to the Articles of Association, the second appellant is not a member of the Palimp clan and thus, not eligible to subscribe to shares of Palimp Limited in the first respondent. However, the first respondent’s Articles do not apply to Palimp Limited, and do not regulate the issue of shares in Palimp Limited.
22. In any event, the first respondent’s Articles of Association had initially been adopted, accepted and executed under the then existing Companies Act, Ch 146. This Act was repealed by Section 440 of the Companies Act, 1997 which is the current Act. By virtue of the transitional provision under Section 441 of the current Act, an existing company is deemed to be registered as a company under the current Act in accordance with Section 443.
23. Turn to Section 443(1) and it will be noted that “An existing company which has not registered as a company under this Act under Section 442 is deemed, on and from the day that is six months after the commencement of this Act, to be registered as a company under Part II on the terms and conditions set out in Schedule 14.....”.
24. Schedule 14 states “In any case where a company is deemed to be registered under this Act pursuant to section 443 or is registered after submitting an application under section 442, in this schedule referred to as deemed to be registered – the memorandum and articles, if any, of the company ceases to have effect”.
25. The first respondent was an existing company at the material time, and it did not register under Section 442 of the current Act when the then Act was repealed and replaced with the current Act. By virtue of Schedule 14 the first respondent’s Articles of Association had ceased to have effect.
26. Consequently, the primary judge erred when he failed to find that the Articles of Association had ceased to have effect and could not be relied upon by the respondents to restrict the shares in Palimp Limited from being dealt within the manner as contended by the respondents. This is another identifiable error.
Laches
27. Finally, the grant of the relief is defeated by laches because there had been a delay of about seven years since the purported unauthorised transfer of shares to the second appellant in October 2011. Moreover, irrespective of the recent knowledge of the purported unauthorised transfer of shares and where the cause of action is based on the common law tort of fraud and the relief sought being mere declarations, the cause of action is statute-barred pursuant to Section 16 of the Frauds and Limitations Act, 1988. See also Manum Investment Limited v. Onda Koim & Ors (2015) SC1409.
Balance of convenience
28. As to the question of balance of convenience, the primary judge held that as there was no evidence of the amount that was paid for the shares that were transferred to the second appellant and to “minimise the loss that may be suffered [by the respondents] between the grant of the relief and the determination of the proceedings” an interim injunction should be granted.
29. However, there had been more than seven years of inaction by the respondents, apparently due to being unaware of the purported unauthorised transfer of shares to the second appellant. Be that as it may, the appellants had enjoyed more than seven years of uninterrupted business operation with no complaints of loss by the respondents until the respondents brought up the issue of unauthorised transfer of shares.
30. It is contrary to the purpose of an injunction to grant it when the alleged wrong had occurred more than seven years ago and there is no evidence of any immediate loss to be stopped from occurring and to preserve the status quo. If proper weight is given to this consideration, the undue delay must surely outweigh the respondents’ claim of being prejudiced by the purported unauthorised transfer of shares.
Damages as an adequate remedy
31. Moreover, the primary judge formed the view that as the first respondent is the proprietor of a piece of State lease land situated opposite the Highlander Hotel where Puma Service Station operates, the respondents would suffer monetary loss if an interim injunction is not granted. This is because of the fear that the shares had been undervalued at K1.00 each and might be disposed of by the second appellant at a much higher price. This will result in substantial loss to the respondents.
32. Except for a vague reference to the members of the Palimp clan likely to miss out on receiving dividends from the first respondent, the respondents have not been able to show what might be their loss which must be prevented by an injunction. In any case, seeking damages is a better option to pursue than an injunction, as it would adequately compensate the respondents for their loss. In short, on a proper exercise of discretion, the application for interim injunction should have been declined.
Breach of principles of natural justice
33. There is a further ground of appeal. It is based on a breach of principles of natural justice. The appellants argue that they were denied natural justice when they were not given the opportunity to address the primary judge on the order that was made, when it was not pleaded and sought in the motion filed by the respondents. In our view, it is not necessary to address it because our consideration of the other grounds of appeal sufficiently covered the contentious issues between the parties.
Conclusion
34. The identifiable errors give the Supreme Court reason to interfere with the discretionary judgment of the primary judge and it is not necessary to consider whether the judgment is unreasonable or plainly unfair. However, it is necessary to point out that the grounds constituting these identifiable errors also formed the core of the appellants’ application to the primary judge to have the proceeding dismissed because they demonstrated that the proceeding disclosed no reasonable cause of action, or were frivolous, or vexatious, or an abuse of process. As the hearing was confined to the motion for interim injunction, it remains open to the appellants to raise these grounds when they have the opportunity to move their outstanding motion for dismissal.
35. For the present purpose, a case has been made out for us to invoke Section 16 powers of the Supreme Court and order that the appeal be allowed, the interim injunction be set aside and the respondents to pay the costs of the appeal, to be taxed, if not agreed.
Order
36. The final orders of the Court are:
1. The appeal is allowed.
2. The interim injunction of 5th April 2019 is set aside.
________________________________________________________________
Nicholas Tame Lawyers: Lawyers for Appellants
Simon Norum & Co. Lawyers: Lawyers for Respondents
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