Stena Finance BV and Temple Holdings Ltd v Sea Containers Ltd and Others

• Jurisdiction: Bermuda
• Judgment Date: 27 November 1989
• Date: 27 November 1989
• Docket Number: Civil Jurisdiction 1989 : No. 178
• Court: Supreme Court (Bermuda)

In the Supreme Court of Bermuda

Astwood, CJ

Civil Jurisdiction 1989 : No. 178

BETWEEN :

1. Stena Finance BV

2. Temple Holdings Ltd. (each suing personally and on behalf of themselves and all other shareholders in Sea Containers Ltd. (save and except for any such shareholder who is a Defendant) and on behalf of Sea Containers Ltd. as the person entitled (by itself or nominees) to the entire issued share capital of each of the Defendant subsidiaries)

Plaintiffs

-and-

1. Sea Containers Ltd.

2. Sea Containers House Limited (sued on behalf of itself and each of the subsidiaries of Sea Containers Ltd. except the 3rd and 4th Defendants)

3. The Marine Container Insurance Co. Ltd.

4. Strider 8 Ltd.

5. James Sherwood

6. Templeton, Galbraith & Hansberger Limited

Defendants

Mr David Oliver, Q.C., Mr Richard Sykes, Q.C., Mr Philip L. Heslop, Q.C., Mr Jonathan Crow, Mr Robert Hildyard, Mr John Riihiluoma and Mr Kim White for the Plaintiffs

Mr Robin Potts, Q.C., Mr Allan Steinfeld, Q.C., Mr Michael Todd and Mr Andrew Martin for the First Defendants

Mr Gavin Lightman, Q.C., Miss Elizabeth Gloster, Q.C., Mr Leslie Kosmin and Mr Alan Dunch for the Second through Fourth Defendants

Mr Kieron Unwin for the Fifth Defendant

Miss Mary Arden, Q.C., Mr Edward Bailey and Mr Arthur Hodgson for the Sixth Defendants

Trevor v Whitworth (1887) 12 AC 409

Sparkes v SparkesUNK (1980) 119 DLR (3d) 330

In re ThomasELR [1916] 2 Ch 331

R v Board of Trade ex parte St Martin Preserving Co LtdUNK [1964] 2 All ER 561

Howard Smith Ltd v Ampol PetroleumELR [1974] AC 821

Moran v Household International Inc 5 Atl Rep (2d) 1346

Prudential Assurance v Newman Industries (No. 2)ELR [1982] Ch 221

Stroud v LawsonELR [1898] 1 QB 44

Foss v HarbottleENR (1843) 2 Hare 461

Great Western Railway Co v RushoutENR (1852) 5 De G & Sm 290

Wedell v JA Pearce & MajorELR [1988] 1 Ch 26

Companies Act 1981 s. 2(1), 4(1), 13, 39, 86

Rules of the Supreme Court Order 18 rule 19

Company law — Preliminary issues — Whether shareholders' rights plan valid — Whether subsidiary can purchase for its own account shares in its parent — Whether share purchases amounted to unlawful reduction of capital — Financial assistance under s 39 must be given to third party, not subsidiary — Whether company bye-laws gave directors power to create rights plan — Application by defendants to have plaintiffs' statement of claim struck out — Whether plaintiffs could sue in both personal and derivative capacities

JUDGMENT

The statement of claim as filed on the 25th May, 1989, contained as paragraph 25 the following provision:

‘25. Such matters as are described in paragraph 24 (a), (b) and (c) above raise the following matters of law which, if answered in the negative sense in each case would be determinative of the validity of the transaction to which they respectively relate:—

• (a) Whether the Poison Pill purportedly adopted by the board of directors of SCL on 8th May 1988 and/or the issue of rights purportedly by way of dividend to holders of record of “outstanding” common shares in the capital of SCL pursuant thereto could as a matter of law be valid and/or constitute a proper and constitutional exercise of (i) the fiduciary power to declare dividends vested in the directors by Bye-law 34 of the Bye-laws of SCL or (ii) any other power vested in such directors;

• (b) Whether as a matter of Bermudian law it is lawful for a subsidiary to purchase for its own account shares in its parent;

• (c) Whether, if the answer to question (b) is that such a purchase could be lawful, such a purchase by Sea House was nevertheless, as a matter of construction of its Memorandum of Association, ultra vires.’.

On the 1st June, 1989, the Court made an order by consent of the parties that:—

• ‘1. The following issues shall be determined as preliminary issues at a hearing to commence on 3rd July 1989:

  • (i) Whether the “shareholders rights plan” purportedly adopted by the board of directors of Sea Containers Ltd. on 8th May 1988 purportedly for the reasons stated in a letter to shareholders dated 9th May 1988 and/or the issue of rights purportedly by way of dividend to holders of record of outstanding common shares in the capital of Sea Containers Ltd. pursuant thereto could as a matter of law be valid and/or constitute a proper and constitutional exercise of (a) the fiduciary power to declare dividends vested in the directors by By-law 34 of the Bye-laws of Sea Containers Ltd. and/or (b) any other power vested in such directors;

  • (ii) Whether as a matter of Bermudian law it is lawful for a subsidiary to purchase for its own account shares in its parent;

  • (iii) Whether, if the answer to question (ii) is that such a purchase could be lawful, such a purchase by Sea Containers House Limited was nevertheless, as a matter of construction of its Memorandum of Association, ultra vires.

• 2. That the costs of this application be reserved.’.

On the 11th July, 1989, having dismissed the Plaintiff's summons seeking a representation order against the 6th Defendants and having made the order sought by the 6th Defendants that the Plaintiffs be not allowed to continue the action against the 6th Defendants in a representative capacity, it became necessary for the Plaintiffs to amend their statement of claim. In subsequent days, after discussion and submissions by counsel for the Plaintiffs and counsel for the 1st to 4th Defendants, the Plaintiffs produced a ‘working’ definition of the word ‘subsidiary’ to be used when interpreting their Amended Statement of Claim and this definition was referred to when the Plaintiffs made their submissions on the preliminary issues. On the 19th July, 1989, the Plaintiffs served an Amended Statement of Claim on the Defendants containing the definition as a schedule to the Amended Statement of Claim.

Preliminary Issue No.3

Preliminary Issue No. 3 was abandoned by the Plaintiffs since certain facts would have to be determined by the trial judge before the Preliminary Issue could be resolved.

Preliminary Issue No. 2

Preliminary Issue No. 2 was presented first by counsel as a matter of convenience. Mr Sykes, Q.C., for the Plaintiffs, submitted that subsidiaries cannot lawfully purchase shares in their parent company and he relied, for this proposition, on the principle encapsulated in what is generally known as the Rule in Trevor v. Whitworth, a leading company law case reported at (1887) 12 Appeal Cases at p.409. Mr Sykes contended that he is supported in his proposition by the provision at section 39 of the Companies Act, 1981, (‘the Act’) which prohibits the giving of financial assistance by a subsidiary to its holding company for the purpose of or in connection with a purchase or subscription made or to be made for any shares in the company.

It is at this point that it becomes important in the trial to know how the terms used in the Amended Statement of Claim are defined. This action is a company law action governed by the Act. The parent company, the 1st Defendant (SCL) is a Bermuda Exempted Company and the subsidiaries named in the suit are Bermuda Exempted Companies and are wholly-owned subsidiaries of, and controlled by, SCL. However, the Plaintiffs contend that a subsidiary, incorporated outside Bermuda, of a parent company, which is a Bermuda company, cannot purchase the shares of its parent and is governed by the same Bermuda law as the Bermuda incorporated subsidiary.

The case of Trevor v. Whitworth was a case concerned with the construction of the Companies Act, 1862, of England. The headnote of the case reads, at p.409:

‘A limited company was incorporated under the Joint Stock Companies Acts with the objects (as stated in its memorandum) of acquiring and carrying on a manufacturing business, and any other businesses and transactions which the company might consider to be in any way conducive or auxiliary thereto or in any way connected therewith. The articles authorized the company to purchase its own shares. The company having gone into liquidation a former shareholder made a claim against the company for the balance of the price of his shares sold by him to the company before the liquidation and not wholly paid for:—

Held, reversing the decision of the Court of Appeal, that such a company has no power under the Companies Acts to purchase its own shares, that the purchase was therefore ultra vires, and that the claim must fail.’.

Lord Herschell had this to say in his judgment at p.414:

‘I pass now to the main question in this case, which is one of great and general importance, whether the company had power to purchase the shares. The result of the judgment in the Court below is certainly somewhat startling. The creditors of the company which is being wound up, who have a right to look to the paid-up capital as the fund out of which their debts are to be discharged, find coming into competition with them persons who, in respect only of their having been, and having ceased to be, shareholders in the company, claim that the company shall pay to them a part of that capital. The memorandum of association, it is admitted, does not authorize the purchase by the company of its own shares. It states, as the objects for which the company is established, the acquiring certain manufacturing businesses and the undertaking and carrying on the businesses so acquired, and any other business and transaction which the company consider to be in any way auxiliary thereto, or proper to be carried on in connection therewith.

It cannot be questioned since the case of Ashbury Railway Carriage and Iron Company v. Riche[Law Rep. 7 H.L. 653], that a company cannot employ its funds for the purpose of any transactions which do not come within the objects specified in the memorandum, and that a company cannot by its articles of association extend its power in this respect. These propositions are not and could not be...