Shihab Khalil v Shuaa Capital psc  DIFC CFI 017
Claim No: CFI 017/2009
THE JUDICIAL AUTHORITY OF THE DUBAI INTERNATIONAL FINANCIAL CENTRE
In the name of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai
IN THE COURT OF FIRST INSTANCE
SHUAA CAPITAL psc
Hearing Date: 21 October 2009
Counsel: Mr Tony Maalouli (ProConsult Advocates & Legal Consultants) for ClaimantMichael Black QC and Mr Ashad Ghaffar (instructed by Hadef & Partners) for Defendant
REASONS FOR JUDGMENT
1. This is an application to strike out a claim for breach of the Defendant’s duty of care pursuant to Art 18. of the Law of Obligations 2005 and/or for breach of the Defendant’s fiduciary duty pursuant to Art.159(2) of The Law of Obligations 2005. The Claim is also put on the basis of breach of a contract dated 7 February 2008.
2. It is submitted on behalf of the Defendant that the Court has no jurisdiction over the claim on whatever basis it is put. It is further submitted that the claim ought to be struck on the ground that it has no realistic prospect of success, whether in respect of breach of duty of care or breach of fiduciary duty. It is further submitted that the claim is an abuse of process and ought to be struck out on that ground alone.
3. Although the factual background is somewhat complex, the essential parts of it can be refined down to the following.
4. On 7 February 2008 various owners of shares in Orion Holding Overseas Ltd (“OHO”), a holding company which makes investments in financial services companies, and which was registered in the DIFC, entered into a Subscription and Share Purchase Agreement (“SSPA”) and a Shareholders Agreement (“SHA”) with the Defendant, a company not registered in the DIFC. The effect of the SSPA and SHA was that the Defendant acquired 20 per cent of the issued share capital of OHO. Further, the Defendant was given management control of OHO. The SSPA contained detailed provisions giving effect to such management control by means of provisions as to representation on the board of directors of OHO and as to how voting was to be conducted upon different kinds of management resolutions and in particular as to the minimum number of the Defendant’s appointed directors required to constitute a quorum. A new subsidiary of OHO, known as Orion Capital (“OCL”) was to be created and registered within the DIFC as a management hub company.
5. In April 2008 the Claimant entered into a so-called Swap Agreement with OHO under which the Claimant was to exchange shares in Orion Trade Soft FZC (“OT”), of which he was the beneficial owner, to the value of US$5.24 million for 2 per cent of the share capital of OHO. Pursuant to the Swap Agreement the shares in OHO were transferred to the Claimant on 28 August 2008.
6. The Defendant’s management control of OHO was effected through the persons of its Chief Executive Officer, one Mohammad Khalil (“MK”) and its Chief Financial Officer, both of whom were appointed by the Defendant.
7. It is apparently alleged that in breach of a duty of care owed by the Defendant to the Claimant as a minority shareholder, the Defendant caused or permitted the following acts of mismanagement of OHO and thereby caused the directors and officers to fail to act in such manner as to ensure that the objects of OHO were fulfilled:-
9. The second basis for the claim is breach of fiduciary duty. The Claimant contends that he and the Defendant were de facto partners in the ownership of OHO and that accordingly the Defendant owed a fiduciary duty to him as defined by section 159(2) of the DIFC Law of Obligations (Law No. 5 of 2005) and Schedule 3 to the effect that:
“A fiduciary’s obligation of loyalty comprises such of the duties as set out in Schedule 3 as are appropriate in all the circumstances of the relationship between the fiduciary and his principal.”
Schedule 3 provides that:
A fiduciary must act in good faith in what he considers to be the interests of the principal without regard to his own interests.”
10. The breaches of fiduciary duty relied upon are that:
“19.2 In failing to ensure that there were sufficient Board members of OHO and OCL appointed by the Defendant at all times, and in seeking a motion at the Extra Ordinary general Assembly of OHO held on 22 May 2009 that the business of OHO and its subsidiaries be scaled down and in dismissing the offer to acquire a 100% stake in the Company made by Mr Mohamed Abdel-Khaleq Mohamed, the Defendant failed to act in good faith in what could reasonably have been considered to be the interests of The Claimant.”
11. On the grounds that the conduct of the Defendant relied upon demonstrated deliberate and egregious behaviour in the running down of the business of OHO it is submitted that an order for triple damages should be made under Section 40(2) of the DIFC Law of Damages and Remedies (Law No. 7 of 2005).
12. Finally, there is a claim based on the failure of the Defendant to transfer to OHO 7 percent of the issued shares in SHUAA Securities in breach of the SHA. It is submitted that since the value of that number of shares was US$12million, the Claimant, as a 2 per cent shareholder in OHO, has suffered loss of US$240,000.
13. The Defendant submits that this whole claim should be struck out because:
14. JurisdictionThe relevant provisions of DIFC Law identifying the scope of the Court’s jurisdiction are set out in Article 5(A) of the Judicial Authority Law (No. 12 of 2004) which provides as follows:
“(1) Without prejudice to paragraph 2 of this Article, the Court of First Instances shall have the exclusive jurisdiction over:
and Article 19(1) of DIFC Law No 10 of 2004 which provides as follows:
“The DIFC Courts of First Instance has original jurisdiction pursuant to Article 5(A) of the Judicial Authority Law to hear any of the following:
“21. Jurisdiction of the DIFC CourtsThe DIFC Courts of First Instance has original jurisdiction to hear civil or commercial cases and disputes arising from or related to a contract that has been concluded, in whole or in part, in the DIFC, or an incident that has occurred in the DIFC, or civil or commercial cases and disputes arising from or related to a contract concluded or a transaction concluded by any of the Centre’s Establishments or the Centre’s Bodies.The DIFC Courts of First Instance has original jurisdiction to hear the matters in dispute.PARTICULARS
21.2 The Claim is further based on the breach of the duty of care and the fiduciary duty owed by the Defendant to the Claimant.
21.3 The above incidents of mismanagement of Orion Holdings Overseas Limited and the breach of the duty of care and the fiduciary duty owed by the Defendant to the Claimant have occurred in the DIFC where Orion Holdings Overseas Limited is licensed and operating.”
17. Since neither the Claimant nor the Defendant company are one of the Centre’s Bodies or Establishments, Article 5(A)(1)(a) cannot found jurisdiction.
18. In order to bring himself within Article 5(A)(b) the Claimant would have to establish that his claim arose from or related to a contract that had been executed in the Centre or arose from or related to a transaction that had been concluded in the Centre or from an incident that had occurred in the Centre. In order to establish that the claim “arose from” or “related to” such a contract or transaction the claimant must, in my judgment, be a party to any such contract or transaction and further the contract or transaction must form an essential part of his cause of action. Moreover, in the context of “civil or commercial cases and disputes” the natural meaning of “transaction” is wide enough to include a range of deals including, but not confined to, a contract, and the word “concluded” in that context obviously does not mean “completely performed.” So it must therefore mean concluded in the sense of “entered into”. Accordingly, the more specific phrase “contract that has been executed” must in, my judgment, refer to a contract that has been performed within the Centre. The words “in whole or in part” separated by parenthetic commas, must be available to qualify “executed” as well as “concluded” and therefore have the effect of covering a claim relating to a contract which has been wholly or partly executed, in the sense of performed, within the Centre.
19. The final eventuality covered by Article 5(A)(1)(b) is “an incident that has occurred in the Centre”. This takes one outside the scope of “contract” or “transaction” and into the ambit of tort. What is clear is that the incident relied upon must provide at least one of the essential foundations for the claim. Take, for example, the tort of negligence. The claimant can make good a cause of action only if he pleads and proves both (i) want of due care in the defendant’s conduct and (ii) that such carelessness has caused loss to the claimant. If he omits (ii), his claim can be struck out. The impact on the Claimant of the defendant’s negligent conduct is thus as essential a part of the cause of action as the conduct itself.
20. In construing this part of Article 5(a)(1)(b) it is pertinent to observe that it uses the word “incident” and not “tort” or “wrong”. The concept of an “incident” or “event” imports, no more than that an essential part of the cause of action occurred within the DIFC. It matters not which part. By “essential” I refer to a part which would have to be pleaded if the pleading were not to be struck out. In the context of the tort of negligence it can be either the defendant’s conduct or the claimant’s resulting damage. As a basis for founding jurisdiction this is a matter of practical good sense and one finds it deployed in the English CPR at Part 6.20(8) ? leave to serve proceedings outside the jurisdiction of the English Courts can be given when a claim is made in tort where ? (a) damage was sustained within the jurisdiction; or (b) the damage sustained resulted from an act committed within the jurisdiction.”
21. Does the claim fall within Article 5(A)(1)(b)? The only connection which any of the corporate entities have with the DIFC is that OHO is the holder of a DIFC licence as well as its subsidiary, Orion Capital Ltd. They are therefore within DIFC for jurisdictional purposes. However, neither company brings any claim in these proceedings. It is the claimant as a shareholder in OHO who deploys the damage to that company and its subsidiary said to have been caused by mismanagement of it as the basis for his own loss and damage. But the claimant is a distinct legal person from OHO in which he is a shareholder. His claim is brought only in his personal capacity. Although the loss which he claims to have suffered is derived from the fall in value of shares in a company within the DIFC, it is he alone who claims damages to the extent to which that fall in value has caused loss to him personally, as distinct from the loss to the company as a whole.
22. The contracts under which the Defendant acquired management control over OHO and its subsidiaries, namely the SSPA and SHA, were entered into on about 7 February 2008 between the then shareholders and owners of 20 per cent of the share capital of OHO and the Defendant. The Claimant was not such a shareholder and indeed did not become a registered shareholder in OHO until the execution of the Swap Agreement in August 2008. However, the Swap Agreement and its execution by the transfer of shares to the value of US$5.24 million did not amount to, and is not said by the Claimant to have constituted, an assignment to him of any interest in the SSPA or the SHA. It follows that at no relevant point of time was he a party to either contract or entitled as an assignee to enforce either contact against the Defendant. His closest relationship with the Defendant was as 2 per cent shareholder in OHO. It further follows that, even if the managerial activities in relation to OHO over which the Defendant assumed control under those contracts could be said to have been carried out in the DIFC, they could not amount to breaches of any contract to which the Claimant was a party and on the basis of which the Claimant was entitled to found a cause of action against the Defendant.
23. Two consequences follow from this analysis.
24. The claim based on the tort of negligence on the part of the Defendant involves consideration of the applicability of the words “civil or commercial cases and disputes arising from or related to . . . an incident that has occurred in the Centre” in Article 5(1)(b). For the purpose of testing the issue of jurisdiction of this court it is necessary to assume (contrary to the Defendant’s submission) that the allegation of a duty of care is at least of sufficient substance not to be struck out. The Claim based on that breach of duty then involves the failure of the Defendant (outside the DIFC) to manage with due care the business of OHO located inside the DIFC in consequence of which that business became unprofitable, possibly insolvent and had to be closed down. Accordingly, the events giving rise to the assumed cause of action are spread between the Defendants’ conduct from outside DIFC to the effect of that conduct inside the DIFC. Both the conduct of the Defendant and its effect on OHO would have to be pleaded to make good a viable cause of action. Applying the construction of Article 5(1)(b) in paragraph 20 above, one of the essential incidents therefore occurred within OHO which was within the DIFC. In this connection I am unable to accept Mr Michael Black’s submissions that no relevant incident happened within the DIFC, the only occurrence within the DIFC being in the nature of the damage by loss of value of the business. In reality the whole exercise in mismanagement, initiated as it was from outside the DIFC, was brought to bear on the operation of OHO within the DIFC. That latter fact was an essential component of the Claimant’s assumed cause of action.
25. I therefore hold that, if there were a duty of care, the claim in negligence falls within the jurisdiction of this court for such claim would be based on an incident or incidents which had occurred within the DIFC.
26. The claim for breach of fiduciary duty is based on the allegation of a de facto partnership between the Claimant and the Defendant in the ownership of OHO.
27. Although the basis for the de facto partnership is not properly pleaded by the Defendant in words which make the Defendant’s case on this point readily comprehensible, in the course of argument Mr Maalouli, on behalf of the Defendant, told me that the de facto partnership arose from the negotiations between the Claimant and the Defendant which had led up to the Swap Agreement whereby the Claimant had agreed to exchange his shares in OT for 2 per cent of the share capital of OHO. The breaches of fiduciary duty consisted of some of the Defendant’s acts of mismanagement of OHO.
28. If the allegation of a de facto or quasi-partnership is to be made good, regard must be had to the words of Lord Wilberforce, in considering in that case the court’s discretion to wind up a company on the grounds that it would be “just and equitable to do so,” in Ebrahimi v. Westbourne Galleries Ltd  A.C. 360 at pages 379-380:
“The foundation of it all lies in the words “just and equitable” and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectation and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligations he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to “quasi-partnerships” or “in substance partnerships” may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words “just and equitable” sum these up on the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.”
In Strachan v. Wilcock  2 BCLC 555 Arden L.J., having cited Lord Wilberforce in Ebrahimi v Westbourne Galleries supra, said this at p 562.
“In general, the relationship between shareholders is governed exclusively by the terms of the memorandum and articles of association of the company of which they are shareholders. Their rights and obligations are derived from those documents and those documents alone. In some circumstances, however, equitable obligations will arise between shareholders. The relationship where such equitable obligations exist is often labelled, not always helpfully, as a ‘quasi-partnership’.
The classic statement of the law as to when such a relationship will arise is set out in the speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd  2 All ER 492 at 500,  AC 360 at 371. Although this was a case involving the court’s discretion to order the winding up of a company on the ‘just and equitable’ ground (now s 122(1)g) of the Insolvency Act 1986), the same principles apply to claims for relief from unfair prejudice under s 459 of the 1985 Act.”
At p. 563 she said this:
29. It has to be said that the Particulars of Claim do not begin to plead explicitly those facts in reliance on which the Claimant asserts that a quasi-partnership exists so as to give rise to a fiduciary duty owed by the Defendant to the Claimant personally, as distinct from the duty which a manager owed to OHO. All one is told is that which is to be found in paragraphs 1 to 16 of the Particulars of Claim. From these pleaded facts it may be that the Claimant seeks to extract a relationship having characteristics sufficient to give rise to a de facto partnership. In the course of argument emphasis was placed on the Swap Agreement and negotiations which preceded it but is unclear where those negotiations took place or where that Agreement was entered into. In paragraph 21.3 of the Particulars of Claim it is pleaded that the breach of the fiduciary duty occurred in the DIFC.
30. In my view, in the case of a claim for breach of fiduciary duty based on a quasi-partnership relationship this court should apply Article 5(1)(b) to the following effect. If the facts from which the relationship was derived occurred within the DIFC they should be treated as a “transaction” concluded in the DIFC. If those facts included as an essential component a specific contract performed within the DIFC, the relationship itself should be treated as falling within Article 5(1)(b), notwithstanding that the cause of action is based not on breach of that contract as such but on breach of the fiduciary duty to which the relevant relationship gave rise.
31. In the present case the negotiations which preceded the Swap Agreement were conducted between the Claimant and Mohammed Khalil and Ziad Abu Jeb, respectively the CEO and Vice Chairman of OHO. It is not pleaded where those negotiations took place. OHO was registered in DIFC, but there is no evidence that the negotiations took place at OHO’s premises and I cannot infer that they did. However, the Swap Agreement was partly performed by the transfer of the shares in OHO to the Claimant at the DIFC registry on 28 August 2008. That Agreement and its performance is an essential component of the alleged quasi-partnership and therefore of the fiduciary relationship relied upon. Accordingly, on that assumed basis, this court does have jurisdiction to hear the claim for breach of fiduciary duty.
32. The Claim in NegligenceThe proposition that the manager or officer or another shareholder of a company can be sued in negligence by a minority shareholder for negligent mismanagement of the company’s affairs which has caused the value of the shares to fall and thereby has caused damage to a claimant is novel, unprecedented and contrary to principle. In Barrett v Duckett  1 BCLC 243 the English Court of Appeal set out the following general principles:
“161. In Barrett v Duckett  1 BCLC 243, Court of Appeal (Civil Division), where a 50% shareholder (B) commenced an action against another 50% shareholder (D) (her former son-in-law) owing to the underlying divorce, it was held that “a shareholder would be allowed to bring a derivative action on behalf of a company where the action was brought bona fide for the benefit of the company for wrongs to the company for which no other remedy is available and not for an ulterior purpose. Conversely, if the action was brought for an ulterior purpose or if another adequate remedy was available, the court would not allow the derivative action to proceed. On the facts, the opportunity to put the company into liquidation provided an alternative remedy to the derivative action. In addition, B was not pursuing the action bona fide in the interests of the company but was pursuing it for personal reasons associated with the divorce of her daughter from D. Accordingly, the derivative action was struck out.” The court in that case set out a clear summary of the applicable principles …
“The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs are not in dispute:
33. It is further necessary to take into account the application of the rule in Foss v Harbottle (1843) 2 Hare 461 and in particular the explanation of it given by Jenkins L.J. in Edwards v Halliwell  2 All ER 1064 in the Court of Appeal which can be summarised as follows:-
34. Indeed Article 134 of the DIFC Companies Law 2006 reflects these general principles:
35. It follows that the remedial regime available to a minority shareholder who alleges that the conduct of another shareholder is unfairly prejudicial to the interests of himself and shareholders of the company generally is to bring a derivative action in the name of and on behalf of the company, a course which can be challenged in court whereupon the priority shareholder has the burden of establishing that he should be permitted to bring proceedings on behalf of the company. This regime has been established for many years.
36. The claimant relies as the basis of his allegation of a duty of care on paragraph 18.1 of the Particulars of Claim:-
“Having assumed responsibility for the management of OHO through the directors, CEO and CFO appointed and controlled by it, the Defendant owed a duty to OHO and to the Claimant as a 2% shareholder in OHO to act with the degree of skill, care and diligence which would have been exercised by a person of ordinary skill and care engaged in the management of a business of the nature of the Business acting reasonably, in ensuring that the directors, CEO and CFO appointed and controlled by the Defendant managed the Business in a proper and in that respect. The relationship between the Claimant and the Defendant is sufficiently proximate for such duty to exist. It is fair, just and reasonable in the circumstances that the Defendant should owe to the Claimant such a duty. In permitting the directors, CEO and CFO appointed and controlled by it to act in the manner averred in the aforementioned paragraphs the Defendant breached that duty.
37. In support of that allegation the Defendant refers to the approach to duty of care as analysed by Lord Bridge in Caparo Industries plc v. Dickman  2 A.C. 605 at p 617-618 as replicated in Article 18 of the Law of Obligations 2005 under which there must be established that:
38. There appears to be no case in which the English or other Common Law courts have held that the directors or managers of a company owe a duty of care to a shareholder to exercise proper skill and care in managing the affairs of the company. Indeed, in an unreported judgment in Eric Kohn v Graham Meehan and Pettmond Investments Ltd (31 January 2003) Mr L Henderson QC (later Mr Justice Henderson) rejected a submission that a duty of care was owed by one director to a co-director to disclose certain information material to the management of the company. He observed also that he had never heard of such a liability being imposed. That is not surprising. Mismanagement of a company by a co-director would normally be remedied by a minority shareholder by means of a derivative action by the shareholder in the name of the Company itself. Because of the availability of this well-established remedial regime it is virtually impossible to envisage circumstances where it would be fair, just and reasonable for a duty of care to be recognised which would enable minority shareholders to sue members of a board of directors or other officers or managers for negligently damaging the Company. Damage to a company by reason of breaches of duty by directors or managers must be remedied either by a majority of the board members or shareholders taking action or by a minority shareholder bringing a derivative action in the interests of the company as a whole, as distinct from his own personal interest.
39. In the present case the Claimant has not sought to bring a derivative action but invites this court to extend the application of the law of negligence so as to invade a well-established remedial principle of company law in circumstances where the Claimant puts forward no explanation for his failure to take the normal course of a derivative action appropriate to these facts.
40. For these reasons I have no doubt that the claim for breach of the Defendant’s duty of care is bound to fail. Although it is clear law that claims involving difficult issues of law should not be struck out, particularly where those issues are fact-sensitive, the fact that a claim attempts to extend the law of negligence into an area far outside anything previously contemplated by Common Law courts does not provide a licence for pursuing heavy commercial litigation in cases where the court concludes that the attempt has no realistic chance of success. That is this case.
41. The claim for breach of the Defendant’s duty of care must therefore be struck out.
42. The Claim for Breach of Fiduciary DutyI have already considered the general principles applicable to the existence of a fiduciary duty arising from a relationship describable as a quasi or de facto partnership: see paragraphs 27 to 28 above. Further, as indicated in paragraph 29, the Particulars of Claim do not identify the relationship between the Claimant and the Defendant which is said to give rise to a fiduciary duty. One is therefore left to search amongst the pleaded facts for indicia of such a relationship.
43. The key facts from the Particulars of Claim are that:
44. It is to be observed that at no time did the Claimant have any contractual relationship with the Defendant. Nor, indeed, did he have any relationship in the nature of a joint venture with the Defendant or any relationship otherwise analogous to a partnership. He became an employee of OHO under a contract of employment. He became a minority shareholder in OHO. But that contract and the Swap Agreement resulted from negotiations with the CEO and Chairman of OHO acting on behalf of OHO, not with the Defendant. The fact that the Defendant controlled the management of OHO as from February 2008 could not create any joint venture or any similar kind of relationship between it and the Claimant. It is not suggested that any such relationship began after the Claimant became an employee or after the Swap Agreement.
45. I conclude that the pleaded facts come nowhere near founding a de facto or quasi partnership and that there is no other basis upon which there could exist a fiduciary relationship between the Claimant and Defendant. Accordingly this part of the claim has no realistic prospect of success and must be struck out.
46. It follows that the whole of the claim must be struck out. Accordingly, the Defendant’s application succeeds in full.
Justice Sir Anthony Colman
7 December 2009