Hilary Term
[2017] UKPC 9
Privy Council Appeal
No 0044 of 2014
JUDGMENT
Archer and another (Appellants) v Fabian
Investments Limited and others (Respondents) (Bahamas)
From the Court of Appeal
of the Commonwealth of the Bahamas
before
Lord Mance
Lord Kerr
Lord Sumption
Lord Reed
Lord Hughes
JUDGMENT GIVEN ON
10 April 2017
Heard on 22 February 2017
|
Appellants
Paul Wallace
Whitfield
(Instructed by
Wallace Whitfield & Co)
|
|
Respondents
(not
participating)
(Instructed by
Maurice O Glinton & Co)
|
LORD REED:
1.
These proceedings, which began in 1994, are brought in the name of
Petroleum Products Limited (“Petroleum”), a company incorporated under the law
of the Bahamas, and four individual plaintiffs, whom I shall refer to as the
individual plaintiffs. They are the appellants Mr Oswald Archer and Mr Rupert
Watkins (now deceased: the appeal has however been pursued by his estate), and
two other individuals. The defendants include Gulf Union Bank (Bahamas) Ltd
(“Gulf”), Mr Rawle Maynard, Fabian Investments Ltd (“Fabian”) and Mr Maurice
Glinton. The relief sought in the statement of claim includes, amongst other
orders, an order declaring that the shares in Petroleum are beneficially owned
by the individual plaintiffs.
2.
In 2007 the Supreme Court ordered that the question of the ownership of
the shares should be tried as a preliminary issue. After a trial at which the
defendants did not appear, Adderley J held on 26 February 2009 that the
individual plaintiffs were the holders of the shares, but were not their
beneficial owners. The action was therefore dismissed. On appeal, the Court of
Appeal held on 3 April 2013 that the shares were owned both beneficially and
legally by Fabian, and made a declaration to that effect. The appeal was
therefore dismissed. The appellants now appeal against that decision. The
defendants have not taken part in the appeal.
3.
The points to be decided in the appeal are quite short, and the answers
to them are clear. They arise, however, against a background of events which
are complicated and to some extent obscure, not least because some of the
documents which are central to those events are not before the Board.
4.
In addition to being addressed by counsel, the Board was also addressed
by Mr Archer in person. Although it was apparent that he has a strong sense of
grievance, and has felt frustration over the protracted history of these and
related proceedings, Mr Archer addressed the Board with moderation and courtesy.
Their Lordships thought it right to permit Mr Archer to address them on factual
matters which are not directly relevant to the legal issues arising in the
appeal, but form part of the background history. In order to understand the
context in which the legal issues arise, it is necessary to make some reference
to that history. It should however be emphasised that the Board cannot and does
not make any findings of fact, and that it has heard only one side of the
story.
The factual background
5.
Petroleum was incorporated in 1958. In 1984 the individual plaintiffs
purchased its issued share capital with a loan of $300,000 from Canadian
Imperial Bank of Commerce (“CIBC”). The shares were held in their names, apart
from one share which was held in the name of a nominee. CIBC required as
security the hypothecation of the shares. The share certificates were deposited
with CIBC, with endorsed forms of transfer executed in blank. The individual
plaintiffs became the officers and directors of Petroleum.
6.
In 1986 Petroleum found alternative financing with Gulf. In that regard,
Adderley J found that Petroleum borrowed $537,000 from Gulf. As security for
the borrowings, Gulf obtained a mortgage over certain land owned by Petroleum,
a debenture, and personal guarantees from Mr Archer and Mr Watkins, all dated
12 December 1986. Gulf then paid in full the debts owed to CIBC by Petroleum
and the individual plaintiffs. On 13 February 1987 the share certificates were
delivered by the attorneys acting for CIBC to Mr Maynard, who (as Mr Archer
confirmed) was the attorney acting on behalf of Gulf.
7.
Before the Board, it was maintained on behalf of the appellants that the
mortgage deed dated 12 December 1986, in which the loan agreement was recorded,
was a fraud: the amount of the loan as stated in the document had been altered
from $537,000 to $437,000. This fraud, it was argued, vitiated everything which
happened subsequently. In his submissions to the Board, Mr Archer explained
that he had expected Gulf to repay debts to CIBC totalling $337,000, and to
grant Petroleum overdraft facilities up to a total limit of $200,000, on the
basis that repayments would be made in monthly instalments of $13,500. In other
words, the “loan” stated in the agreement was an overdraft limit, rather than
an advance, beyond the $337,000 used to repay CIBC. The amount of the actual
borrowings would depend on the extent of the overdraft from time to time. If
that is so, then it would follow that neither $437,000 nor $537,000 represented
the amount actually lent. Mr Archer identified his signature on the agreement,
in which the amount of the loan is stated as $437,000, repayable in monthly
instalments of $13,500. The document bears no sign of the amount having been
altered. He also identified his signature on another document, in generally
similar terms to the agreement just mentioned, in which the amount of the loan
is stated as $537,000. He could not recall why two documents had been signed,
stating the loan at different amounts. Only the first document was stamped and
registered.
8.
The allegation of fraud was unequivocally rejected by the judge, and was
implicitly rejected also by the Court of Appeal. There is no basis on which the
Board could properly interfere with that finding of fact. As will shortly be
explained, it appears that the 1986 agreement was in any event superseded, so
far the issues in this appeal are concerned, by a rescheduling agreement
entered into in 1988. It is the latter agreement which is the source of the
obligations which Gulf sought to enforce against the individual plaintiffs.
9.
The payments due to Gulf fell into arrears, and on 8 August 1988
Petroleum and the individual plaintiffs entered into a rescheduling agreement
with Gulf. That agreement is not among the papers before the Board. Their
Lordships must therefore rely on the judge’s findings as to the relevant terms.
As the judge found, Petroleum covenanted to bring its payments up to date
within six months from 24 July 1988, that is to say by 23 January 1989, and the
individual plaintiffs bound themselves as primary debtors. In consideration of
the agreement, the individual plaintiffs executed a guarantee in favour of Gulf
(also not among the papers before the Board) which, as the judge found,
provided that “in support of such guarantee [the individual plaintiffs] shall
assign to [Gulf] their certificates of shares in [Petroleum] by way of
deposit”. The judge found that the nominee share was intended to be included as
well. The share certificates were already in the possession of Gulf’s attorney,
Mr Maynard, as explained earlier. As the Board held in related proceedings:
“Such a deposit, with endorsed
transfers in blank, would have created an equitable mortgage with an implied
power of sale: Stubbs v Slater [1910] 1 Ch 632, 639.”
(Archer v Registrar General [2004] UKPC 31, 24
June 2004, unreported).
10.
Petroleum defaulted in its obligations under the rescheduling agreement,
and in February 1989 Gulf appointed Mr Maynard as receiver, exercising a power
under the 1986 debenture. On 14 February 1990 Gulf agreed to sell the shares to
Fabian. The sale was completed between 23 February and 13 March 1990. On the
latter date the share certificates were sent by Mr Maynard’s firm to Mr
Glinton, who was Fabian’s attorney. The covering letter recorded that it had
been agreed that Mr Glinton would “do all further corporate work to effect the
transfer of shares”. On 5 December 1990 an annual statement was lodged with the
Registrar General purportedly on behalf of Petroleum, stating that the
individual plaintiffs and their nominee had been replaced as shareholders by
Fabian and four nominees. A similar statement was lodged in at least one
subsequent year.
11.
In 1994 the plaintiffs brought the present proceedings. As explained
earlier, they seek an order declaring that the individual plaintiffs are the
beneficial owners of the shares.
The judgments below
12.
The judge proceeded on the assumption that the plaintiffs were correct
in their submission that the share certificates had been delivered to Mr
Maynard in error in February 1987. Under the 1988 agreement, however, the
individual plaintiffs agreed to assign their shares to Gulf. Since Gulf was
entitled to specific performance of that obligation, the judge concluded that a
beneficial interest in the shares passed to Gulf on 8 August 1988, with the
consequence that from that date Mr Maynard, who was Gulf’s attorney, held the
share certificates to their order.
13.
Following Stubbs v Slater, Gulf was entitled to exercise its
implied power to sell the shares after the expiration of the date fixed for
payment under the 1988 rescheduling agreement. The judge rejected a submission
that Gulf had to give notice before exercising its power of sale: as he noted,
such a sale must be on reasonable notice unless, as in this case, a fixed date
for repayment has passed. He also rejected a submission that the sale was
invalid because it had been effected by Mr Maynard as receiver of Petroleum’s
assets. As he found, the sale was by Gulf itself: the shares did not form part
of Petroleum’s assets, and were therefore not within the ambit of the
receivership. Mr Maynard’s involvement in the sale was therefore in the
capacity of agent for Gulf, rather than receiver of Petroleum’s assets.
14.
The judge accordingly concluded that the individual plaintiffs had
granted Gulf an equitable mortgage of the shares on 8 August 1988, that Gulf
had lawfully sold the shares to Fabian and its nominees in early 1990, and that
the effect of the sale was to transfer to them a beneficial interest in the
shares. He also concluded, however, that a complete legal title to the shares
could not be acquired without registration in accordance with Petroleum’s
articles of association.
15.
The articles of association are not before the Board, but the articles
which appear to be relevant are set out in the judgment:
“Transfer of Shares
13. The instrument of
transfer of any share in the company shall be executed both by the transferor
and the transferee and the transferor shall be deemed to remain the holder of
such share until the name of the transferee is entered in the register thereof.
14. No transfer of any share
shall be recorded, nor shall the same be valid or permitted to be entered in
the register unless or until the share certificate has been surrendered and
cancelled by one of the officers of the company.”
The judge found that there was no evidence that such
registration had occurred. In particular, the Registrar General’s receipt and
stamping of the annual statements could not serve as verification of their
accuracy (Archer v Registrar General). It followed that the individual
plaintiffs still held the legal title to the shares.
16.
The Court of Appeal upheld the judge’s reasoning on all issues other
than the legal title to the shares. In relation to that issue, Blackman JA,
with whose judgment Allen P and John JA agreed, considered that it followed
from the principles set out in Stubbs v Slater at p 639 that Fabian had
acquired both the legal and the beneficial interest in the shares. He described
the judge as having strayed from the issue for determination when he concerned
himself with the mechanics of share transfers.
The present appeal
17.
A number of points have been raised in the present appeal. First, it was
argued that since the defendants had not taken part in the appeal, the
appellants were entitled to succeed by default. The case is however one in
which the appellants seek a declaration that the shares are beneficially owned
by the individual plaintiffs. In such a case, the court cannot make the order
sought by default: it has to be satisfied that the order is one which it would
be proper to make.
18.
Secondly, as already mentioned, it was argued that the 1986 mortgage
deed was fraudulently altered, and that the result was to vitiate all
subsequent arrangements. As previously explained, however, the allegation of
fraud was rejected by the courts below, and there is no basis on which the
Board could properly interfere with their finding. Furthermore, as previously
explained, whether the amount stated in the mortgage deed should properly have
been $537,000 or $437,000 is in any event of no apparent significance to the
present issue. What is significant is that there was a default in payment under
the 1988 agreement, entitling Gulf to exercise the implied power of sale
conferred upon it under the arrangements entered into at that time, in
accordance with the principle in Stubbs v Slater.
19.
Thirdly, emphasis was placed, as it had been below, on the facts that
there had not been a formal assignment of the shares to Gulf, and that they
were not in Gulf’s physical possession. The agreement to assign them by way of deposit
(and thereby create a mortgage with an implied power of sale, following Stubbs
v Slater) was, however, sufficient to transfer to Gulf a beneficial
interest in the shares by way of security, as the judge rightly held. As was
said in Palmer v Carey [1926] AC 703, 706-707, “a contract for
valuable consideration to transfer or charge a subject matter passes a
beneficial interest by way of property in that subject matter if the contract
is one of which a court of equity will decree specific performance.” Since the
agreement was specifically enforceable, it conferred on Gulf a beneficial
interest in the shares by way of security, in accordance with the agreement. On
the expiry of the period fixed for payment, Gulf was then entitled to realise
its security, by selling the shares to Fabian. Gulf did not require a legal (as
distinct from beneficial) title to the shares in order to exercise a power of
sale. Nor was Gulf’s physical possession of the shares essential, but in any
event they were in the possession of its agent, Mr Maynard.
20.
Fourthly, it was argued that the courts below could not override an
earlier decision of the Court of Appeal in these proceedings in 2005, in which
it had allowed an appeal against a decision that the action should be struck
out on the ground that the statement of claim disclosed no reasonable cause of
action. There is, however, no inconsistency between that decision and the
decision now under appeal. The Court of Appeal’s decision that the action
should be allowed to proceed to trial did not entail that it should succeed at
trial.
21.
Fifthly, it was argued that the shares could not be sold by the receiver
of Petroleum’s assets, since they did not form part of those assets. That is
true, but it is not inconsistent with the decision under appeal. As the judge
held, the shares were sold by Gulf. The involvement of Mr Maynard’s office in
the delivery of the shares could only have been in the capacity of agents
acting on behalf of Gulf.
22.
On the other hand, their Lordships have concluded that the judge was
correct to hold that the individual plaintiffs remained the legal owners of the
shares, in the absence of any evidence that the transfer of title to Fabian and
its nominees had been registered in accordance with Petroleum’s articles of
association. What Cozens-Hardy MR said in Stubbs v Slater, in the
passage cited by Blackman JA, was that a deposit of shares in security was “a
transaction of mortgage, in which there was no express power of sale given, but
which by law involves and implies a right in the mortgagee to sell after giving
reasonable notice”. But the person to whom the shares are sold takes them
subject to the articles of association of the company in question. If the
articles require the change in ownership to be registered before it can be
recognised and given effect, then a complete legal title to the shares cannot
be acquired without registration (Société Générale de Paris v Walker (1885)
11 App Cas 20, 28, where the Earl of Selborne contrasted “a merely inchoate
title by an unregistered transfer” with “a legal estate in the shares”).
Conclusion
23.
The result is that the Board will humbly advise Her Majesty that the
appeal should be dismissed, with the qualification that the declaration made by
the Court of Appeal that Fabian was both the legal and the beneficial owner of
the shares should be limited to refer only to its being the beneficial owner.
