Thomas and Swan v Fort Knox Bermuda Ltd and Others

• Jurisdiction: Bermuda
• Judgment Date: 26 February 2014
• Date: 26 February 2014
• Docket Number: Companies Winding-Up Jurisdiction 2008 No 162
• Court: Supreme Court (Bermuda)

[2014] Bda LR 14

In The Supreme Court of Bermuda

Companies Winding-Up Jurisdiction 2008 No 162

Between:

Allison Thomas

and

Ricardo Swan

Petitioners

and

Fort Knox Bermuda Ltd

and

Troy Symonds

and

Shari Poe

Respondents

Mr M Diel for the Petitioners

Mr B Adamson for the Respondents

The following cases were referred to in the judgment:

In re DNick Holdings plcWLR [2013] 3 WLR 1316

MFP-2000 LP v Viking Capital LtdBDLR [2014] Bda LR 6

DE Shaw Oculus Portfolios LLC v Orient-Express Hotels LtdBDLR [2010] Bda LR 32

Re Saul D Harrison & Sons plcUNK [1995] BCC 475

O'Neill v PhillipsWLR [1999] 1 WLR 1092

In re Westbourne GalleriesELR [1973] AC 360

Stack v DowdenELR [2007] 2 AC 432

Third v North East Ice & Cold Storage Co LtdUNK [1998] BCC 242

Jugnauth v RingadooUNK [2008] UKPC 50

Thomas v Fort Knox Bermuda LtdBDLR [2010] Bda LR 65

Shareholder dispute — Oppressive or prejudicial conduct — Share register not properly maintained — Rectification of share register — Conversion of debt into equity — Termination of employment — Deferral of salary

JUDGMENT of Hellman J

Introduction

1. The First Petitioner is a founder, shareholder, and former director of the First Respondent (‘the Company’). In his capacity as a member of the Company he has issued a petition in which he applies for relief pursuant to section 111 of the Companies Act 1981 (‘the 1981 Act’). This is on the ground that the affairs of the Company are and have been conducted in a manner oppressive or prejudicial to his interests as a member.

2. The Second Petitioner is also a founder member of the Company, of which he is a director. However he took no part in the hearing.

3. The Company takes a neutral position as regards the petition. However the petition is opposed by the Second and Third Respondents. They are both directors of the Company, in which they hold a majority of the shares. The Second Respondent was another founder member. There was a fourth founder, Hugh Hollis. He remains a director and shareholder of the Company but has taken no part in this dispute.

History

4. The Company was incorporated as a telecoms start up on 25^th June 1999. It was, on the First Petitioner's account, his idea. He left his job with BELCO to set it up and recruited the other three founders. The Company took out a bank loan of $275,000 as start-up capital, for which the founders all provided security: eg the First Petitioner supplied the Bank with the deeds to his house.

5. Shares were issued in 2 tranches in July 1999 and December 1999. They were allotted at their par value of $0.10 per share as follows: 400,000 to both the First Petitioner and the Second Respondent, 300,000 to Mr Hollis and 200,000 to the Second Petitioner. The allotments were recorded in the Company's register of members.

6. A share option agreement dated 1^st September 1999, signed by all four members of the Company, provided that no member should hold more than one million shares or 25% of the Company.

7. On 9^th December 1999 the Board formally appointed roles to the Company members. The Second Respondent was made President and Chief Executive Officer; the First Petitioner was made Vice President and Chief Operating Officer; the Second Petitioner was made Vice President and General Manager; and Mr Hollis was made Chief Information Officer.

8. The Petitioners and the Second Respondent had been working for the Company since its inception. At a directors' meeting on 13^th September 2000 it was resolved to issue in lieu of salary further shares at the rate of $0.10 per share as follows: 300,000 shares to the First Petitioner, 180,000 to the Second Petitioner, and 140,000 to the Second Respondent. The allotments were recorded in the Company's register of members.

9. From an early stage, the Company sought to bring in additional investment and expertise. Indeed this was discussed at a shareholders general meeting as far back as 2^nd February 2000. Accordingly, on 10^th May 2000 two additional directors were appointed: Raymond Dill and Phillip Butterfield.

10. A detailed private placement memorandum was prepared by a local law firm. This offered 1 million common shares in the Company at a price of $2.45 with a minimum subscription of $30,000 per shareholder. The closing date was 30^th September 2000.

11. An offering memorandum for the Company was also prepared. This offered 1 million shares of common stock at $2.45 per share with a minimum subscription of 12,245 shares per shareholder. The offering period was stated to end on 30^th November 2000.

12. The Board discussed potential investors. They approached one such investor, Credit Union with an investment pitch. Credit Union was interested in investing, but not on terms which were acceptable to the Company.

13. It was in September 2000, at the invitation of the Second Respondent, that the Third Respondent became involved with the Company. This was on the basis that she was someone with business experience who would help run the Company and would be prepared to invest in it.

14. On 24^th October 2000 the Third Respondent purchased 60,000 shares at a rate of $2.45 per share at an overall price of $147,000. The purchase was recorded in the Company's register of members.

15. On 13^th December 2000 the Third Respondent was appointed to the position of manager, human resources and administration, at a salary of $70,000 per annum, part of which, her written offer of employment stated, would be deferred. There was an option to convert deferred payments after 12 months of employment to common shares at a rate of $2.15 or less, to be determined by the Board, up to a maximum of $40,000. In fact the Third Respondent took none of her salary in cash for the first 20 months of her employment.

16. Shortly after her employment began it became clear to the Third Respondent that the Company needed additional cash on an on-going basis in order to remain viable. She was prepared to lend it the money. She therefore permitted the Company, largely through the agency of the Second Petitioner, to use her credit card to fund its operating expenses, and made various bank transfers for its benefit. I am satisfied that all the directors were aware, at least in general terms, of these arrangements.

17. The Third Respondent required some form of security for the loan monies. On 10^th May 2001 the Second Respondent as CEO therefore wrote to her as follows (‘the 10^th May 2001 letter’):

‘Dear Mrs. Poe

The purpose of this letter is to set out the terms agreed for the convertible debenture to be purchased by you from time to time from Fort Knox Bermuda Ltd.

Interest rate: Bank rate plus four percent (4%) payable semi-annually

Conversion: The principle sum of the debenture must be converted to common equity at a rate of $2.45 per share.

Term: The conversion of the debenture to equity can only be completed with the consent of the company.

If you consent to these terms, please so indicate where indicated below.

Sincerely

[Signature]

Troy E. Symonds

CEO

Agreed this 10^th day of May 2001:

[Signature]

Shari L. Poe’

18. Neither the 10^th May 2001 letter nor its terms were recorded at the next directors' meeting, which took place on 17^th May 2001, or at any subsequent directors' meeting. The First Petitioner submits that this is evidence of a sinister ulterior purpose. The legal effect of the letter was in dispute before me and I shall consider that question later.

19. In February 2002 the Third Respondent in her capacity as ‘Manager, Administration’ wrote to the First Petitioner setting out the terms of his employment. His salary was expressed to be $90,000 per annum, which equated to $7,500 per month. Of this sum, $3,000 was actually payable monthly, with a deferred monthly payment of $4,500.

20. Attached to the letter was a copy of the Company's employee manual. The letter stated that the manual contained those terms of the First Petitioner's employment that were not included in the letter, eg as to notice periods. On that point, the manual stated:

‘Should it become necessary for the company to terminate employment for reasons other than cause, … monthly paid employees will receive one month's notice or payment in lieu of notice.’

21. The First Petitioner signed an acknowledgment as follows:

‘I have read and understand the terms of employment set out in the above letter. I have also been given a copy of the Fort Knox Bermuda handbook, which covers in detail all areas of my employment with Fort Knox Bermuda. I have read the Handbook and agree to the terms and conditions stated therein.’

22. It is curious that the letter is dated 27^th February 2002 whereas the acknowledgment is dated 14^th February 2002. However the point was not explored before me and is most likely due to a clerical error. There was no suggestion that in being supplied with written terms of employment the First Petitioner was treated any differently to the other shareholder employees. They were no doubt issued in order to help ensure that the Company was run in a more professional manner.

23. Deferred payment and compensation packages for the Petitioners and the Second Respondent were approved by resolution of a directors' meeting on 15^th February 2002. They provided that, for the period 1^st September 2000 to 31^st August 2001, deferred payments due to the Petitioners and the Second Respondent should be converted into shares at a rate of $1.25 per share as follows: 49,600 shares to the First Petitioner, 43,600 shares to the Second Petitioner, and 57,600 shares to the Third Respondent. Those allotments have not been entered on the Company's register of members due to confusion as to whether they were approved by the directors – as stated above, I am satisfied that they were approved.

24. The directors' meeting further resolved that, for the period 15^th March 2001 to 14^th March 2002, deferred payments due to the Third...