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CFI 012/2010 – Reasons for judgment

CFI 012/2010 – Reasons for judgment

September 11, 2014

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Claim No CFI 012/2010

 

THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS

 

In the name of His Highness Sheikh Mohammad bin Rashid Al Maktoum, Ruler of Dubai

 

IN THE COURT OF FIRST INSTANCE

 

BEFORE JUSTICE SIR JOHN CHADWICK

 

BETWEEN

 

SMARTPAPER COMPUTER SOFTWARE LLC Claimant
and

(1) KEROSS LLC
(2) FAROUK SAID

Defendants
Hearing: 22 February 2012
Counsel: Mr Sami Caracand, a Director of SmartPaper Computer Software LLC, represented the Claimant

Mr Kaashif Basit and Mr Seth Cummings of KBH Kaanuun appeared for the Second Defendant, Farouk Said

 

REASONS FOR JUDGMENT

 

1. The First Defendant, Keross LLC (“Keross”), was incorporated in November 2006 under the laws of the Dubai International Financial Centre. The first members were Mr Sami Caracand and the Second Defendant, Mr Farouk Said. Subsequently, during 2007 or 2008, they were joined by Mr Khaled Fouad and Mr Cyril Simonnet.

 

2. On 1 March 2009 the four shareholders entered into an agreement, described as a “Final and Binding Shareholder Agreement for Selling Membership Interests of Keross LLC” (the “Shareholder Agreement”), for the stated purpose of working together “in an orderly and transparent way to effectuate the sale of all membership interests owned by Sami and Khaled, respectively, to Farouk”. It was provided that “in consideration for Sami and Khaled selling their respective interests to Farouk, Keross LLC shall transfer the ownership of specific assets and liabilities (the “Consideration”) to a new legal company (the “New Entity’) to be incorporated by Sami and Khaled”.

 

3. The Claimant, SmartPaper Computer Software LLC (“SCS”), was incorporated in June 2009 by Mr Sami Caracand and Mr Khaled Fouad. It is claimed that SCS is the “New Entity” to which reference is made in the Shareholder Agreement.

 

4. On 24 March 2010 the continuing members of Keross, Mr Farouk Said and Mr Cyril Simonnet, purported to pass a resolution that that the company “be voluntarily dissolved in the Dubai International Financial Centre”. Keross has taken no part in these proceedings.

 

5. These proceedings were commenced by the issue of a Claim Form on 26 April 2010. SCS claims to enforce against Keross and Mr Farouk Said obligations said to arise under the Shareholder Agreement. The relief sought is “damages for breach of contract in the sum of AED 219,729.29. That sum is said to be the value of certain contracts (the “TECOM contracts”) which, under the terms of the Shareholder Agreement, Keross was to transfer to the New Entity.

 

6. SCS served Particulars of Claim dated 10 November 2010. Mr Farouk Said served a Defence dated 7 July 2011. On 10 January 2012 an application was issued on behalf of Mr Farouk Said seeking an order that the proceedings be struck out on the grounds that the statements of case disclosed no reasonable grounds for bringing the claim; alternatively that the statements of case were an abuse of process and likely to obstruct the just disposal of the proceedings. The application to strike out came before Justice Sir David Steel on 25 January 2012. He struck out paragraphs 19 to 27 of the Particulars of Claim (which contained allegations of malice); but otherwise dismissed the application.

 

7. The proceedings came before me for trial on 22 February 2012. I formed the view that there were a number of hurdles which SCS needed to overcome if its claims were to have any prospect of success. These included:

 

1. That SCS was not, itself, a party to the Shareholder Agreement which it was seeking to enforce.

 

2. That Keross was not a party to the Shareholder Agreement.

 

3. That the transfer of assets and liabilities owned by Keross to the New Entity under the Shareholder Agreement, as consideration for the sale to Mr Farouk Said of the “membership interests” of Mr Sami Caracand and Mr Khaled Fouad, is, plainly, the provision of financial assistance for the purposes of Article 46 of the DIFC Companies Law and so unlawful unless the case can be brought within one of the exemptions under Article 46(1).

 

4. That, the allegations in paragraphs 19 to 27 of the Particulars of Claim having been struck out by the Order made on 25 January 2012, it is impossible to identify (in the statement of case) what act or omission on the part of Mr Farouk Said is alleged to constitute a breach of his obligation (alleged at paragraph 3 of the Particulars of Claim) to “assist with the transfer of these assets [meaning the assets to be transferred by Keross as consideration for the sale to him of the membership interests of Mr Sami Caracand and Mr Khaled Fouad], including by issuing official Keross LLC letters endorsing the transfers”.

 

Accordingly, I invited Mr Sami Caracand, who represented SCS at the trial, to address me on those matters before calling evidence. In effect, the question whether SCS had any prospect of overcoming those hurdles was treated as a preliminary issue at the trial.

 

8. After hearing argument on that question, I concluded that the claims advanced by SCS in these proceedings had no prospect of success. Accordingly, I gave judgment against the Claimant, pursuant to RDC Part 24, dismissing those claims. I indicated that I would put my reasons into writing.

 
SCS is not a party to the Shareholder Agreement

 

9. It is accepted that SCS is not a party to the Shareholder Agreement. It relies on the provisions of Article 104(1) and (3) of the Contract Law (DIFC Law No.6 of 2004):

 

“104 Right of third party to enforce contractual term

 

(1) Subject to the provisions of this Law, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if
 

(a) the contract expressly provides that he may; or

 

(b) subject to Article 104(2), the term purports to confer a benefit on him.

 

(2) Article 104(1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

 

(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.
…”

 

10. The term which SCS seeks to enforce in these proceedings can be identified in the Shareholder Agreement as that to which I have referred earlier in these Reasons:

 

“In consideration for Sami and Khaled selling their respective interests to Farouk, Keross LLC shall transfer the ownership of specific assets and liabilities (the ‘Consideration’) to a new legal company (the ‘New Entity’) to be incorporated by Sami and Khaled.”

 
In that context, the “Consideration” is “composed of a set of assets (‘the Consideration Assets’) and a set of liabilities (the ‘Consideration Liabilities’), each defined below”. “Consideration Assets” are “composed of cash flow, customer contracts, equipment and the keross.ae domain.” “Customer Contracts” are defined as:

 

“…all contracts closed by either Sami or Khaled on or after 1 March 2009, in addition to the following customer contracts:

 

Ajman Free Zone, referred to as contract 01103

Dubai Silicon Oasis: contracts 01152 and 01266

Tecom Investments: contracts 00379 and 01187

Drake & Scull: contract 01165

Dubai International Financial centre: contract 00173

 
All invoices related to the customer contracts shall be part of the Consideration.”

The obligations, in respect of “Customer Contracts”, are set out in the Shareholder Agreement in the two paragraphs which immediately follow that definition:

 

“Keross LLC, including Farouk and Cyril, shall assist the New Entity, including Sami and Khaled, in transferring the customer contracts from the corresponding customers to the New Entity. Such assistance shall include issuing official Keross LLC letters endorsing this transfer, appointing the New Entity as agent for Keross LLC on SmartPaper, and/or other measures to help the New Entity successfully transfer the customer contracts.

 
Should there be a risk that a particular client of the New Entity may terminate his contract or refuse to novate his contract to the New Entity, then Keross LLC shall keep this particular contract under the name of Keross LLC, will invoice this client on behalf of the New Entity, will collect all amounts due from the client on behalf of New Entity, and will promptly pay those amounts to the New Entity.”

 

11. It seems to me reasonably clear that the “New Entity” is a person on whom the relevant term purports to confer a benefit within the meaning of Article 104(1)(b) of the Contracts Law; and that it cannot be said – for the purposes of Article 104(2) – that the parties did not intend that that term should not be enforceable by the New Entity. It is also clear that SCS is not “expressly identified” in the Shareholder Agreement by name or as a member of a class for the purposes of Article 104(3). The question is whether SCS is expressly identified “as answering a particular description”: that is to say, whether SCS can be identified as the “New Entity”?

 

12. In the circumstances that I have reached the conclusion, on other grounds, that the claims advanced by SCS in these proceedings have no prospect of success and should be dismissed, I am content to assume (without deciding) that SCS can be identified as the “New Entity” for the purposes of article 104(3) of the Contracts Law.

 
Keross LLC is not a party to the Shareholder Agreement

 

13. The Shareholder Agreement is expressed to “a final and binding agreement between the four shareholders (the ‘Shareholders’) of Keross LLC … as at the date of the Agreement (the ‘Current Shareholders’)”. The Current Shareholders are identified by name and passport number. The Agreement continues, as I have said, with the recital that:

 

“The Current Shareholders have agreed to work together in an orderly and transparent way to effectuate the sale of all membership interests owned by Sami and Khaled, respectively, to Farouk.”

Keross is not named as a party to the Shareholder Agreement; and the recital which I have just set out does not suggest that it was intended that it should be a party to that agreement. Nor does the recital suggest that Keross was party to any antecedent agreement. But, as I have said, the Shareholder Agreement goes on to provide that:

 

“In consideration for Sami and Khaled selling their respective membership interests to Farouk, Keross LLC shall transfer the ownership of specific assets and liabilities (the ‘Consideration’) to a new legal company (the ‘New Entity’) to be incorporated by Sami and Khaled.”

 
And the obligations in respect of Customer Contracts, which I have set out, include obligations of Keross “to assist the New Entity, including Sami and Khaled, in transferring the customer contracts from corresponding customers to the New Entity”; and, in case a client should refuse to novate its contract, “to keep this particular contract under the name of Keross LLC … invoice this client on behalf of the New Entity …collect all amounts from the client on behalf of the New Entity … and promptly pay those amounts to the New Entity”.

 

14. It is alleged, in paragraph 2 of the Particulars of Claim, that:

 

“In March 2009 the Keross LLC and its four members [naming them] came to an agreement …”

In support of that allegation it might be said that the intention of the four Current Shareholders was that Keross (of which they were, together, the only members and the only Directors) should undertake the obligations which the Shareholder Agreement purported to impose upon it; and that effect should be given to that intention by treating the Agreement as made on behalf of Keross through the agency of the Current Shareholders.

 

15. Given that Keross has taken no part in these proceedings – and in the absence of any allegation of agency to support the assertion in the Particulars of Claim that it “came to an agreement” – I would be reluctant to hold that Keross must be treated as a party to the Shareholder Agreement. In the circumstances that I have reached the conclusion that, having regard to Article 46 of the DIFC Companies Law, the claims in these proceedings have no prospect of success, it is unnecessary to decide the agency point; and I do not do so.

 
Provision by Keross of financial assistance to acquire shares in the company

 

16. Article 46 of DIFC Law No.9 of 2009 (formerly Article 46 of DIFC Law No 3 of 2006) (the Companies Law) is in these terms (so far as material):
 

“46 Prohibition on financial assistance to acquire Shares

 

(1) A Company shall not provide financial assistance for a person to acquire Shares, or units of Shares, in the Company or a holding company of the Company, unless:

 

(a) the giving of the financial assistance does not materially prejudice the interests of the Company or its Shareholders or the Company’s ability to discharge its liabilities as they fall due; and the financial assistance is approved by a resolution of Shareholders holding not less than 90 per cent in value of the Shares giving a right to attend and vote at any Shareholders’ meeting; or

 

(b) …; or

 

(c) ….

 

(2) In this Article a reference to ‘financial assistance’ is a reference to financial assistance of any kind …”

 

Sub-paragraphs (b) and (c) of Article 46(1) are not in point in the present case.

 

17. As I have said, the transfer of assets owned by Keross (including, in particular, the benefit of the Customer Contracts) to the New Entity in circumstances where Keross is to receive nothing in return for that transfer (other than the assumption by the New Entity of the liabilities related to those contracts) is, plainly, the provision of financial assistance for the purposes of Article 46 of the Companies Law. And it is equally plain that the provision of that financial assistance as consideration for the sale to Mr Farouk Said of the membership interests of Mr Sami Caracand and Mr Khaled Fouad is the provision of financial assistance “for a person to acquire Shares” within the meaning of that Article. In those circumstances, the transfer of assets by Keross as consideration under the Shareholder Agreement is prohibited by Article 46(1) of the Companies Law unless that transfer (i) does not materially prejudice the interests of Keross or its Shareholders (at the time of the transfer), (ii) does not materially prejudice the ability of Keross to discharge its liabilities as they fall due (at the time of the transfer) and (iii) was approved by a resolution of the Shareholders holding not less than 90 per cent in share value of the shares in Keross.

 

18. In the present case it is not alleged in the Particulars of Claim – and there is no evidence before the Court which could support such an allegation – that the transfer of assets owned by Keross to Mr Sami Caracand and Mr Khaled Fouad as consideration for the acquisition by Mr Farouk Said of their shares in the company was approved by a resolution of the Shareholders. It may be said that a formal resolution was unnecessary in the circumstances that the Shareholder Agreement was signed by all the persons who were the members of Keross. But there is nothing to suggest that, in signing the Shareholder Agreement, the Shareholders gave any thought to the interests of Keross or to the effect that the transfer of the customer contracts to the New Entity would have on the ability of Keross to discharge its liabilities as they fell due. Nor is there any allegation in the Particulars of Claim – or any evidence to support such an allegation – that the transfer of the Customer Contracts to SCS (at the time when it is said that those contracts should have been transferred) would not have materially prejudiced the interests of Keross, or would not have materially prejudiced the ability of Keross (at that time) to discharge its liabilities as they fell due.

 

19. In those circumstances, it is impossible to avoid the conclusion that these proceedings are brought to enforce obligations for the provision by Keross of financial assistance for a person (Mr Farouk Said) to acquire shares in that company, contrary to Article 46 of the Companies Law. Proceedings brought to enforce obligations the performance of which would be contrary to Law have no prospect of success and must be dismissed.

 
Failure to identify in the statement of case what act or omission on the part of Mr Farouk Said is alleged to constitute a breach of his obligation to assist with the transfer of the Customer Contracts

 

20. Paragraph 14 of the Particulars of Claim contains the allegation that Mr Farouk Said “failed fully to perform [his] obligations under the March 2009 Agreement”. Particulars of that allegation are that he:

 

“(a) …failed to transfer two contracts with Tecom Investments worth AED 219,729.29 annually (the ‘Tecom Contracts’) (as required by page 2, section ‘Customer Contracts’ of the March 2009 Agreement);

 

(b) …failed to appoint SmartPaper Computer Software LLC as agent for Keross LLC on the Tecom Contracts …;

 

(c) …failed to collect amounts due from Tecom Investments on behalf of SmartPaper Computer Software LLC …;

 

(d) …failed to pay those amounts to SmartPaper Computer Software LLC …”

 
At paragraph 18 it is alleged that, on 16 May 2010 Tecom Investments sent Keross a Letter of Termination for Contract 01223 “which is one of the two Tecom Contracts”. Paragraphs 19 to 27 (which were struck out by the Order of 25 January 2012) contained allegations of failure, by Mr Farouk Said in June 2010, to execute a compromise agreement (for signature by Mr Sami Caracand and Mr Farouk Said) relating to Contract 01223.

 

21. Contract 01223 is not one of the Tecom Investments contracts specifically identified as a “Customer Contract” in the Shareholder Agreement. But there is material before the Court which suggests that it was a contract “closed”, by way of renewal of an earlier contract, by Mr Sami Caracand on 6 September 2009; and so is within the definition of “Customer Contracts in that agreement. The second Tecom contract is not identified in the Particulars of Claim.

 

22. As I have pointed out, earlier in these Reasons, the obligations of Mr Farouk Said under the Shareholder Agreement were “to assist the New Entity … in transferring the customer contracts from the corresponding customers to the New Entity”. Such assistance was to include “issuing official Keross LLC letters endorsing this transfer, appointing the New Entity as agent for Keross LLC on SmartPaper and/or other measures to help the New Entity successfully transfer the customer contracts”.

 

23. There is nothing in the Shareholder Agreement or in the Particulars of Claim to suggest that the benefit and burden of the Tecom contracts could be transferred from Keross to the New Entity (or SCS) without the consent of the other party to those contracts, Tecom Investments. It is plain that the Shareholder Agreement contemplated that the New Entity (or SCS) would seek the agreement of Tecom Investments to a novation of those contracts, under which the New Entity (or SCS) would take the place of Keross. There is force in the criticism, made on behalf of Mr Farouk Said, that it is impossible to ascertain from the statements of case what assistance he was asked to give in pursuit of that object; or in taking any of the other steps, by way of assistance, for which the Shareholder Agreement provided. And it is impossible to ascertain what he failed to do in response to such a request (if any). But it is unnecessary to decide whether that omission, of itself, would have led to the conclusion that the claims in the proceedings had no prospect of success. As I have said, the claims fail because they seek enforcement of obligations the performance of which would be contrary to Article 46 of the Companies Law.

 
Justice Sir John Chadwick

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