Sally Ann Fulton v Chas E Ramson Ltd

• Jurisdiction: Jamaica
• Judge: Sykes J
• Judgment Date: 27 May 2016
• Neutral Citation: [2016] JMSC Comm 14
• Docket Number: IN THE COMMERCIAL DIVISION CLAIM NO. 2015CD00107
• Court: Supreme Court (Jamaica)
• Date: 27 May 2016

Between

Sally Ann Fulton

Claimant

and

Chas E Ramson Limited

Defendant

[2016] JMSC COMM 14

IN THE COMMERCIAL DIVISION CLAIM NO. 2015CD00107

IN THE SUPREME COURT OF JUDICATURE OF JAMAICA

COMPANY LAW — APPLICATION TO COMMENCE DERIVATIVE ACTION — SECTION 212 OF THE COMPANIES ACT

Lord Anthony Gifford QC, Randolph Cheeks instructed Levy Cheeks for the claimant

Ransford Braham QC, Georgia Gibson Henlin QC and Jeffrey Foreman for the defendant

IN CHAMBERS

Sykes J

The Ramsons

1 Mrs Sally Ann Fulton is a member of the Ramson family. The family owns Chas E Ramson Ltd (“Chas E”). All the shares are privately held. Mrs Fulton is the sister of Mr John Ramson, the managing director. She was not involved in the operation of Chas E. She pursued a career in the travel industry. According to her it was only in 2014 she realised that she owned 25.25% of the shares in Chase E. The context of this discovery was the deaths of her father, Mr Lauritz Ramson, who died in 2011, and her step-mother, Mrs Janet Ramson, the second wife, of Mr Lauritz Ramson. Mrs Janet Ramson died in 2014.

2 There are many Ramsons and so to avoid misidentification or confusion in the narrative the court needs to refer to them by their first names. No disrespect is intended. Mr Lauritz Ramson will be referred to as Lauritz. Mr John Ramson will be referred as John. Mrs Sally Ann Fulton as Sally. Miss Anne Fulton as Anne. Mrs Janet Ramson as Janet.

3 According to Sally it was the subsequent administering of the estates of her father Lauritz and her step mother that she came to appreciate that she owned shares in Chas E. John disputes this and says that Sally must have known or ought to have known that she held shares in the company because she was one of the original subscribers to the memorandum of association in 2001 when the company made the transition from an Industrial and Provident Society (“IPS”) to a limited liability company. This was the second time that the entity became a limited liability company. The first time was in 1934. The entity commenced business in 1922 but was incorporated in 1934. It became an IPS in 1984 and continued as an IPS until 2001. Sally was a member of the IPS.

4 After Sally's “discovery” or more accurately “reminder” of her shareholding she began to take a deeper interest in the affairs of the company and needless to say began asking all sorts of questions. In her view not all the answers were satisfactory. She advised the directors that she is prepared to take legal action if necessary. She has.

5 She has made this application under section 212 of the Companies Act asking that she be permitted to bring an action in the name of the company against the directors for what she believes are breaches of fiduciary duty. Her ire is directed primarily at what she considers to be the following unsatisfactory state of affairs. She claims that a property known as Coconuts, owned by the company, was and is being used as if it were the private property of John and his family to the detriment of the company. She also believes that another property, Sharrow Drive, where John lives has been and is being misused to the company's detriment. She believes that the properties could have been used to generate income for the company.

The derivative claim

6 This type of action is derived from the status of the person seeking to bring the claim. Section 212 (1) states that a complainant may apply for leave to bring a derivate action in the name of and on behalf of the company. Section 212 (2) states that no action may be brought unless the court is satisfied that (a) reasonable notice has been given to the directors of the company; (b) the complainant is acting in good faith; and (c) it appears to be in the interests of the company that the action be brought. Section 212 (3) of the Companies Act states who can apply to bring a derivative action. 1

7 The derivative claim is an action brought by a person who comes within the category of persons who are permitted to bring such an action, in the name of the company, against the directors for wrongs done to the company. It used to be thought of

as an action brought by minority shareholders against the directors who may either be the majority shareholders or command the support of the majority. The directors who either controlled the company by majority share ownership or who were supported by the majority of shareholders would not take any action to correct the alleged wrongs committed against the company because they may themselves be the wrong doers or enablers of the wrong doers. At common law permission had to be sought to bring the claim. Under the statute permission is still required to bring the action. This procedural requirement was the practical outcome of two interrelated rules: (a) generally at common law only the person wronged could bring a claim and since a company was a separate legal entity from the humans who operated it only the company could sue; and (b) the courts did not readily interfere in the management of a company. The view was that management of the company was best left to the shareholders and directors.

8 The derivative action is now on a statute footing. The remedy in the Companies Act of Jamaica has completely replaced the common law in this area. One of the drawbacks of the common law derivative action was that the person seeking to bring the claim had to be a member of the company. Another drawback was that if the conduct complained of could be legitimised by a vote of shareholders then that possibility was an effective bar to bringing the claim. The consequence of this was that, at common law, the person who wanted to bring the derivative claim had to show that the conduct complained of was ultra vires and could not be ratified or that the conduct in question had to be approved by a special procedure or special majority and that had not happened in the particular circumstance. In practice the person had to establish that what happened could not be rectified by the majority of shareholders. The logic of this position was simple: why permit such a claim to begin when it was possible that the conduct in question may be legitimised by a majority of the shareholders while the claim was going on?

9 This court wishes to cite in full a passage from the elegant and simple judgment of Blair JA from the Court of Appeal of Ontario in Rea v Wildeboer 37 BLR (5th) 101; 384 DLR (4th) 747. It sets out in comprehensible language the background to and the reason for the derivative action; it explains the difference between a derivative action and the oppression remedy. This distinction is important in this case because one of Chas E's submission is that the oppression remedy can be used to rectify the alleged wrongs complained of in this case. His Lordship stated at paragraphs 14–20:

14 At common law, minority shareholders in corporations had very little protection in the face of conduct by the majority (or by directors controlled by the majority) that negatively affected either the corporation itself or their interests as minority shareholders. This handicap was due to two well-entrenched common law principles of corporate law: the notion of a ‘corporate personality’ and the ‘indoor management rule’. Both of these principles can be traced back to a decision of now almost mythical stature — that of ViceChancellor Wigram in Foss v. Harbottle (1843), 67 E.R. 189, 2 Hare 461 (Eng. V.-C.).

15 In law, a corporation is a legal entity distinct from its shareholders. It followed from this that shareholders were precluded from bringing their own action in respect of a wrong done to the corporation. Except as modified by the derivative action, the oppression remedy, and winding-up proceedings, this remains a governing principle in Canadian corporate law: see Hercules Management Ltd. v. Ernst & Young, 19971 2 S.C.R. 165 (S.C.C.), at para. 59; Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 61 O.R. (3d) 786 (Ont. C.A.). As Laskin J.A. put it, in Meditrust, at paras. 12–14:

The rule in Foss v. Harbottle provides simply that a shareholder of a corporation — even a controlling shareholder or the sole shareholder — does not have a personal cause of action for a wrong done to the corporation. The rule respects a basic principle of corporate law: a corporation has a legal existence separate from that of its shareholders. See Salomon v. Salomon & Co. (1896), [1897] A.C. 22 , 66 L.J. Ch. 35 (U.K. H.L.) A shareholder cannot be sued for the liabilities of the corporation and, equally, a shareholder cannot sue for the losses suffered by the corporation.

The rule in Foss v. Harbottle also avoids multiple lawsuits. Indeed, without the rule, a shareholder would always be able to sue for harm to the corporation because any harm to the corporation indirectly harms the shareholders .

Foss v. Harbottle was decided nearly 160 years ago but its continuing validity in Canada has recently been affirmed by the Supreme Court of Canada in Hercules Management Ltd. v. Ernst & Young , [1997] 2 S.C.R. 165 (S.C.C.) and by this court in Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639 (Ont. C.A.).

16 The companion indoor management rule has also played a significant role in restricting minority shareholders' rights to redress. At common law, if an act that was claimed to be wrongful could be ratified by the majority at a general meeting of shareholders, neither the corporation nor an individual shareholder could sue to redress the wrong. The rationale for this was that courts were reluctant to interfere in the internal management affairs of the corporation .

17 It took over a century for legislative reforms to be put in place to temper the restrictive effect of these principles on minority shareholder rights. In the latter part of the 20th century, however, the two statutory forms of...