M. A. OMISADE AND 3 ORS (APPELLANT)
v.
HARRY AKANDE (RESPONDENT)
(1987) All N.L.R. 285
Division: Supreme Court of Nigeria
Date of Judgment: 10th April, 1987
Case Number: (SC. 74/1984)
Before: Bello, C.J.N. Aniagolu, CokerKaribi-Whyte, Kawu, Oputa; JJ.S.C
The present Respondent, herein after referred to as the plaintiff instituted the suit against the present appellants hereinafter referred to as the Defendants. The plaintiff and the 1st defendant are the only shareholders and Directors of the 4th defendant, a limited liability company incorporated under the companies Act 1968 in which both hold equal shares.
On 23rd January 1976 the 4th Defendant entered into an agency agreement with the 3rd defendant which is an American Corporation based in Oakland, United States of America. Under the agreement, the 3rd defendant appointed the 4th defendant as its sole and exclusive agent in Nigeria for any Nigerian Pilgrims Hajj movement in 1976 on Commission basis. The 4th defendant would represent the 3rd defendant in any negotiation in that respect with, the Nigerian Pilgrims Board. Since the execution of the agreement, the working relationship between the plaintiff and the 1st defendant began to deteriorate and culminated in a final breakdown by the middle of the year. On that accounts, the 1st defendant incorporated together with the other person the 2nd defendant company for the purpose of retrieving and salvaging his good name in the 4th defendant company, which company was being manoeuvred and manipulated by the plaintiff for acts and purposes actually embarrassing to the 1st defendant.
After the 1st defendant had incorporated the 2nd defendant, he went to Oakland in July 1976 where at in his capacity as the Chairman of the 4th defendant company, he informed one Mr O. Brien, a director of the 3rd defendant Company, that the 4th defendant company was being dissolved. He request the 3rd defendant company to switch its agency agreement to his newly formed company, the 2nd defendant. As a result of this representations, the 3rd defendant entered into a news agency agreement with the 2nd defendant Company in identical terms with the agreement between the 3rd defendant Company and 4th defendant Company.
In consequent of the foregoing, the plaintiff instituted the suit against the defendants claiming for a declaration that all sums of money payable by the 3rd defendant to the 2nd defendant under any commission agreement between the said defendants are for the benefit of the 4th defendant, an order of Court restraining the 2nd defendant from being paid any portion of such sums and N200,000.00 damages against the 3rd defendant for breach of contract.
The main issue for determination at the Supreme Court is whether having regard to the fact that the suit primarily involved a dispute between the directors of a Company in connection with the affairs of their Company, the matter was within the exclusive jurisdiction of the former Federal Revenue Court and the High Court of Lagos State had no jurisdiction to adjudicate on it. The issue was neither raised in the High Court, nor in the Court of Appeal. It was taken for the first time in the Supreme Court.
HELD:
(1) From the facts and circumstances of the case on appeal, I find that the plaintiff's claim arose from the control and operation of the 4th defendant Company and, consequently, from the operation of the Companies Act 1968. I hold the claim to be a matter within the jurisdiction of the Federal Revenue Court and the State High Court had no jurisdiction to entertain the suit by virtue of sections 7(1)(c) and 8(1) of the Federal Revenue Court Act 1973.
APPEAL allowed
Chief Dele Awoniyi for the 1st and 2nd Appellants
A.O. Sogbesan, S.A.N., with him E. Rewane for the 3rd Appellant
Chief F.R.A. Williams, S.A.N. with him T.E. Williams for the Respondent
Cases Referred to
1. Abubakri v. Smith (1973) 5 S.C. 31
2. Burland v. Earle (1902) A.C. 83, 93
3. Edwards v. Halliwell (1950) 2 ALL E.R. 1064
4. Foss v. Harbettle (1843) 2 Hare 461
5. Jammal Steel Structures Ltd. v. African Continental Bank (Ltd) (1974) 1 N.M.L.R.
6. Keech v. Sandford (1726) Sel. Ca. t. King 61
7. Nasr v. Berini Bank (1968) 1 ALL N.L.R. 274 at 293
8. Phipps v. Boardman (1965) Ch. 992
9. Pinney v. Hunt 6 Ch. 98
10. Regal Hastings Ltd. v. Gulliver (1967) 2 A.C. 134
11. Skenconsult Ltd & Anor. v. Ukey (1981) 1 S.C.6
12. Spekes v. Governors East End (1897) Q.B. 124
13. The Recepta (1893) 235
14. Waltersterner v. Moin No. 2 (1975) 2 W.L.R. 389
Statutes Referred to
1. Constitution of the Federal Republic of Nigeria 1979
Companies Act 1968
Federal Revenue Court (Amendment) Act 1975
Supreme Court Act 1960
Bello, C.J.N. The suit culminating in this appeal was tried by the High Court of Lagos State. The first important issue for determination in the appeal is whether, having regard to the fact that the suit primarily involved in a dispute between the directors of a company in connection with the affairs of their company, the matter was within the exclusive jurisdiction of the former Federal Revenue Court and the High Court of Lagos State had no jurisdiction to adjudicate on it. The issue was neither raised in the High Court, nor in the Court of Appeal. It has been taken for the first time in this Court.
It is relevant to point out that the writ of summons in the suit was dated 22nd October 1976. The appeal must therefore be determined in accordance with the law relating to the jurisdictions of the Federal Revenue Court and the State High Court as it was in 1976 and not on the law as it is today.
The salient facts giving rise to the case may now be stated. The present Respondent, hereinafter referred to as the Plaintiff, instituted the suit against the present Appellants, hereinafter referred to as the Defendants. The plaintiff and the 1st Defendant are the only shareholders and directors of the 4th Defendant, a limited liability company incorporated under the Companies Act 1968, in which both hold equal shares.
On 23rd January 1976 the 4th Defendant entered into an agency agreement with the 3rd Defendant which is an American corporation based in Oakland, United States of America. Under the agreement, the 3rd Defendant appointed the 4th Defendant as its sole and exclusive agent in Nigeria for any Nigerian Pilgrims Hajj Movement in 1976 on commission basis. The 4th Defendant would represent the 3rd defendant in any negotiation in that respect with the Nigerian Pilgrims Board. It appears that since the execution of the agreement the working relationship between the Plaintiff and the 1st Defendant began to deteriorate and culminated in a final break down by the middle of the year. On that account as averred in paragraph 7 of his Statement of Defence, the 1st Defendant incorporated together with other person the 2nd Defendant company "for the purpose of retrieving and salvaging his good name in the 4th Defendant company, which company was being manoeuvred and manipulated by the plaintiff for acts and purposes acutely embarrassing to the 1st Defendant."
After the 1st Defendant had incorporated the 2nd Defendant, he went to Oakland in July 1976 whereat in his capacity as the chairman of the 4th Defendant company, he informed one Mr O'Brien, a director of the 3rd Defendant company, that the 4th Defendant company was being dissolved and also some legal problems had rendered the agency agreement between the 3rd Defendant company and the 4th Defendant company unenforceable. He requested the 3rd Defendant company to switch its agency agreement to his newly formed company, the 2nd Defendant. As a result of these representations, the 3rd Defendant entered into a new agency agreement with the 2nd Defendant company in identical terms with the agreement between the 3rd Defendant company and the 4th Defendant company.
In consequent of the foregoing, the Plaintiff instituted the suit against the Defendants claiming for:
"(1) A declaration that all sums of money payable by the 3rd Defendants to the 2nd Defendants under any commission agreement between the said Defendants are for the benefit of the New Africa Technical and Electrical Company Limited:
(2) an Order of Court:
(a) restraining the 2nd Defendants from being paid any portion of such sums.
and
(b) directing the 3rd Defendants to pay all such sums of money (or whatever portion thereof as remains payable) to the 4th Defendant.
(3) (if the 2nd Defendants have received the said sums or any portion thereof) an order of Court directing the said 2nd Defendants to pay over to the 4th Defendants any sum which it may have received;
and
(4) N200,000.00 damages against the 3rd Defendants for breach of the Agreement referred to in paragraph 4 of the Statement of Claim annexed herewith."
I think it is germane to the jurisdiction issue to point out that in the trial court learned Counsel for the 1st and 2nd Defendants relying on the rule in Foss v. Harbottle challenged the standing of the Plaintiff to institute the suit on the ground that, since the wrong complained of was alleged to have been done to the 4th Defendant company, only the latter could sue. The trial Judge rejected that submission and accepted the submission of Chief Williams for the Plaintiff that the Plaintiff properly instituted the action as a minority shareholder in these terms:
"The next question is whether the action is properly constituted as a minority Shareholder's action to seek redress for wrongs done to his Company. Chief Williams also referred to Spokes v. Governors East End (1897) Q.B.124 to illustrate that a minority shareholder can bring such an action in the event of fraud on it. The latest illustration of what now ranks as an exception to the rule in Foss v. Harbottle is to be found in Wallersterners v. Moir No. 2(1975)2 W.L.R. 389, where the judges sitting on Appeal in the matter were prepared to treat a director's breach of duty as a wrong on a company in respect of which a minority shareholder could bring a derivative action for redress in Court. This new exception to the Rule in Foss v. Harbottle embraces "fraud on minority" and comes close to an exception which may be made where interest of justice so required. (See Gower's Modern Company Law page 585), of the rule itself, Lord Denning said as (1975) 1 A.E.R.849, 857;
"It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrong doer, the company itself is the one person to sue for damage. Such is the rule in Foss v. Harbottle. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs by directors who hold a majority of the shares who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise proceedings to be taken by the company against themselves. If a general meeting is called, they will note down any suggestion that the company should sue themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress."
On these points, Mr Braithwaite for the Defendants submitted that apart from establishing that the wrong complained of comes within the exception to the rule, a Plaintiff should distinctly allege the true nature of the act complained of and the impossibility of getting the company to impeach. In Orojo's Company Law at page 314 the point is put in these words:
"It must be shown that the alleged wrongdoers control the company and will not allow the company to sue. It is not necessary to convene a meeting of the Company to ascertain this provided this can be inferred from the circumstances. (Italics are ours).
It seems to me clear that both the endorsement on the Writ as well as the statement of claim make clear the true nature of the acts complained, that the 1st Defendant as the Director of the 4th Defendant/Company falsely represented to the 3rd Defendant/Company that the 4th Defendant/Company was being dissolved and had such legal problems which made an agreement which it has entered into null and void. That is the nature of the complaint. It is clear that the disagreement between the two equal shareholders was such that it would be impossible to get the Company to sue. The Plaintiff got his Solicitor to write to the 1st Defendant on the 10th August, 1978-Exhibit D that it has become impossible for them to work together and there was a threat of physical confrontation. He also complained that he was barred from entering the Company's office. All these were accepted by the Defence. In the circumstances there is no wonder that it would have been impossible for the Company to take any decision to sue."
The same point was canvassed in the Court of Appeal which endorsed the decision of the trial Judge on the matter as follows:
"I think it is necessary that before I can properly consider the real issues that have arisen in this appeal which, as I see them, are of a very narrow compass, I recapitulate the main findings and conclusions of the learned Judge against which there is no appeal.
1. On the competence of the action and proper constitution of the action as a minority shareholder's action to seek redress for wrongs done to the 4th defendant company he said:
"It is clear that the disagreement between the two equal shareholders was such that it would be impossible to get the company to sue."
Thus he found that this was a case of an exception to the rule in Foss v. Harbottle (1843) 2 Hare 461, which has been applied in Abubakri v. Smith (1973) 5 S.C. 31. He stated that a breach of a director's fiduciary duties is one of the recognized exceptions. It is of material significance that in the 3rd arm of the claim the appellant did not ask for payment over to himself but to the 4th defendant. The gist of the actions is relief on behalf of the 4th defendant, which on the above finding cannot sue by itself."
For reasons which I do not consider relevant for the purpose of determination of the jurisdiction issue the trial Judge dismissed the items of claim against the Defendants other than the claim for damages against the 3rd Defendant company in respect of which he awarded N10,000 to the Plaintiff. The Court of Appeal in a well considered and meticulous judgment reversed the decision of the trial court other than the award of N10,000 against which the appeal was abandoned. It made the declarations and orders sought by the Plaintiff. I do not intend to set out the reasons for judgment of the Court of Appeal because I do not also consider them pertinent to the issue on jurisdiction.
Now, the jurisdiction issue been predicated by parts of the provisions of sections 7 and 8 of the Federal Revenue Court Act 1973, which provide:
"7. (1) The Federal Revenue Court shall have and exercise jurisdiction in civil causes and matters
(e) arising from
(i) the operation of the Companies Decree 1968 or any other enactment regulating the operation of companies incorporated under the Companies Decree 1968.
8. (1) In so far as jurisdiction conferred upon the Federal Revenue Court in respect of the causes or matters mentioned in the foregoing provisions of this Part the High Court or any other court of a State shall, to the extent that jurisdiction is so conferred upon the Federal Revenue Court, cease to have jurisdiction in relation to such causes or matters."
Mr Awoniyi for the 1st and 2nd Appellants contended that, since the suit was founded on the breach by the 1st Defendant, as a director, of his fiduciary duties to the 4th Defendant's company and the composition of the company is such that neither director constitutes the majority, both the trial court and the Court of Appeal were right in holding that the suit falls within one of the exceptions to the rule in Foss v. Harbottle (1843) 2 Hare 461 which accorded the minority shareholder the right to sue for the wrong committed on the company. He submitted that the rule and its exceptions are purely matters of company law within the jurisdiction of the Federal Revenue Court by virtue of the provisions of the section 7(1)(c)(i) of the Act.
In associating himself with the submission of Mr Awoniyi, Mr Sogbesan for the 3rd Appellant, further contended that the case was concerned with dispute between the shareholders of the 4th Defendant company over its control and management and hence falls within the provisions of the said subsection of the Act. He stated that the State High Court had ceased to have jurisdiction over the matter, its jurisdiction having been oustered by section 8(1) of the Act.
Responding, Chief Williams contended that the wording of section 7(1)(c)(i) make it clear that the jurisdiction conferred in the Federal Revenue Court is not intended to embrace causes and matters arising from all the activities of a body incorporated under the Companies Act or of its directors, officers or other agents. He further submitted, however, that causes and matters arising from such activities will come within the scope of the jurisdiction of the Federal Revenue Court if they concern or are done pursuant to the operation of Companies Decree 1968 or any other enactment regulating the operation of companies incorporated under that Decree. In a nutshell, according to Chief Williams, the jurisdiction covers causes or matters arising out of the whole range of Company Law; but it does not cover causes and matters arising outside the Law in which incorporated companies or their directors or agents are somehow or otherwise involved.
While conceding that there was a practical impossibility of suing the name of the 4th Defendant's Company because the shares were held 50-50 between the only two shareholders, Chief Williams further contended that even if the Plaintiff had been a minority shareholder, the fact remains as laid down in Wallersteiner v. Moir (1975) Q.B. 373 at 390A to 391D that a "minority shareholder's action" is merely a procedural device for suing on behalf of the company; that what determines whether or not the Federal Revenue Court has jurisdiction is the subject matter of the claim and not the procedure adopted in commencing the action.
Finally, Chief Williams contended that the action was not based on the provisions of the Companies Act and the Court of Appeal did not decide any issue or issues arising from the operation of the Act but the Court simply enforced "the broad principle of equity developed to ensure that trustees, agents or persons standing in such legal relationship shall not retain a profit made in the course of or by means of their office:" see Nasr v. Berini Bank (1968) 1 All N.L.R. 274 at 293.
The learned Senior Advocate of Nigeria further reinforced his argument by referring to Phipps v. Boardman (1965) Ch. 992 at 1020 wherein Lord Denning stated:
"This species of action is one action for restitution such as Lord Wright described in the Fibrosa case. The gist of it is that the defendant has injustly enriched himself, and it is against conscience that he should be allowed to keep the money."
As regards the rule in Foss v. Harbottle which necessitated the derivative action procedure, the learned advocate submitted that the rule is not limited in its application to incorporated bodies alone but it also applies to unincorporated associations. He referred us to Edwards v. Halliwell (1950) 2 All E.R. 1064. He urged us to hold the state High Court had jurisdiction to deal with the matter.
In his reply to the submissions of Chief Williams, Mr Sogbesan conceded that minority shareholders actions or derivative actions are procedural devices but, nevertheless, contended that on the facts of the case the dispute before the trial court was really one about the operation of the 4th Defendant's company and consequently of the Companies Act. Recalling the genesis of the dispute, the learned Senior Advocate reiterated the break down of the cordial relation between the Plaintiff and the 1st defendant over the management and operation of the 4th Defendant Company; the diversion of the Hajj contract by the Defendant in his capacity as the director of the company. The learned Senior Advocate argued that if the Plaintiff had had control over the 4th Defendant Company, he would have cause the company to sue the 1st Defendant for the wrong done to it. He said the Plaintiff had sued because he had had no control over the company. Accordingly, learned Counsel concluded the dispute was essentially one about the operation of a company incorporated under the Companies Act. Consequently, the State High Court had no jurisdiction.
Now, both the trial court and the Court of Appeal held that the action herein was a minority shareholder's action. There may be some force in the submission of Chief Williams that the action may not be strictly so having regard to the share holding structure of the company in that, since there is no evidence that the chairman had a casting vote, neither director could command majority or a minority of the company, then the Plaintiff has the right to sue as a minority shareholder: see Buckley On The Companies Acts, Vol. 1, 13th Ed. p.199.
Accordingly, I am inclined to agree with the conclusion of the trial court and of the Court of Appeal that the action is a minority shareholder's action.
However, I agree with the submission of Chief Williams that a minority shareholder's action or derivative action is a procedural device by means of which on the principle of equity a relief, such as restitution of injust enrichment by its director, is sought on behalf of a company. The procedural aspect of the action was stated by Lord Davey in Burland v. Earle (1902) A.C. 83 at 93 thus:
"It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prime facie be brought by the company itself. These cardinal principles are laid down in the well-known cases of Foss v. Harbotte (1) and Mozely v. Alston (2), and in numerous later cases which it is unnecessary to cite. But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company. In that case the Courts allow the shareholders complaining to bring an action in their own names. This, however, is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have it were plaintiff, and cannot complain of acts which are valid if done with the approval of the majority of the shareholders,or are capable of being confirmed by the majority. The cases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate."
However, the substantive aspect of the minority shareholder's action is an action for restitution based on the principle of equity which prohibits a trustee from making profit by his management either directly or indirectly. The principle extends to all fiduciaries who in breach of fiduciary duties to their beneficiaries unjustly enriched themselves: Phipps v. Boardman (1965) 1 ch. 992; Regal (Hastings) Ltd. v. Gulliver (1967) 2 A.C. 134; Nasr. v. Berini Bank (1968) 1 All N.L.R. 274 and Wallersteiner v. Moir (1975) 2 W.L.R. 389.
It now remains to consider the gravamen of the contention of Chief Williams that the State High Court had jurisdiction over the matter because the substance of the Plaintiff's case has been founded on the principle of equity and not on the provision of the Companies Act that being the case, according to Chief Williams, the matter was not within the jurisdiction of the Federal Revenue Court.
The question then for determination is whether the Plaintiff's case was "a cause or matter arising from operation of the Companies Act or the operations" or the 4th Defendant company as contempted by section 7(1)(c)(i) of the Act to bring the case within the jurisdiction of the Federal Revenue Court. It if was not connected with such operations, then it is within the jurisdiction of the State High Court.
It is pertinent to point out that the several decisions of the courts in England referred to us would hardly offer direct solution to the resolution of the dichotomy of jurisdiction between the Federal Revenue Court and the State High Court.
It is pertinent to point out that the several decisions of the courts in England referred to us would hardly offer solution to the resolution of the dichotomy of jurisdiction between the Federal Revenue Court and the State High Courts. There is only one High Court in England and the jurisdiction vested in it belongs to all its three Divisions and any Judge has jurisdiction to deal with any action which has been assigned, even if wrongly, to the Division in which he cites: Pinney v. Hunt, 6 ch. 98. The Recepta (1893) p. 235 and section 4(4) of the Supreme Court of Judicature Act, 1925. Nevertheless, I find some of the cases shed some light showing the connection of the minority shareholders' action with the operation of the Companies Act and of the operation of the minority's company.
The Courts have realised since Spokes v. The Grosvenor Hotel (1897) 2 Q.B. 124 at 128 that the "voting power" of the directors of a company at a board meeting or of its majority shareholders at a general meeting is the very foundation of the minority shareholder's action. In his characteristic graphic manner, Lord Denning M.R. aptly stated the premise on which derivative action was based in Wallersteiner v. Moir (No.2) 2 W.L.R. 389 at 395 in these t