B e f o r e :
CHIEF MASTER MARSH ____________________
____________________
Patrick Lawrence QC (instructed by Needle Partners Limited) for the Claimant Robert-Jan Temmink QC (instructed by Teacher Stern LLP) for the Defendant Hearing dates: 30 May 2019 ____________________
HTML VERSION OF JUDGMENT ____________________
Crown Copyright ©
Chief Master Marsh:
The claimant seeks to recover from the defendant €36 million as a debt together with interest. The claimant's case in outline is that (i) the defendant formerly held shares in the claimant, (ii) he was required to pay for the shares in cash, (iii) he has failed to pay for them and (iv) he is, despite the shares having been forfeited, liable to the claimant as a debtor for the nominal value of the shares which is €36 million.
This claim was issued on 11 October 2018 and permission to serve the claim on the defendant in Singapore was given by an order made by Master Price on 15 October 2018. The defendant disputes that the court has jurisdiction to try the claim against him, or alternatively, that if the court has jurisdiction the court should not exercise it. He issued an application dated 22 November 2018 under CPR 11.1 which was heard on 30 May 2019. The defendant's principal contention is that the determination of an earlier claim ("the 2016 proceedings") by a judgment of Mr Martin Griffiths QC, sitting as a Deputy High Court Judge, dated 14 November 2017 and the order made on that date, has the effect that the doctrine of merger, which is a species of res judicata, applies.
The defendant's case is summarised succinctly in paragraphs 14 and 15 of the witness statement of Lee Donoghue, a solicitor with Teacher Stern LLP, made in support of the application:
The claimant was incorporated in England and Wales on 29 June 2011. On incorporation the defendant was allotted 30% of the claimant's shares and Mr Ranjeet Singh Sidhu was allotted the remaining 70% of the shares.
Zavarco Berhad ("ZB") is a Malaysian company. ZB's principal business was in a subsidiary called V Telecoms Berhad ("VTel") which has, or had, licences to develop a fibre optic telecommunications network in Malaysia that could not be established without major capital investment. The claimant was incorporated in England with a view to flotation on the Frankfurt Stock Exchange so as to attract shareholder investment for the VTel business. The whole of the ordinary share capital in ZB was transferred to the claimant on 25 July 2011 and it was listed on the Frankfurt Stock Exchange on 23 August 2011.
The Deputy Judge summarised the nature of the 2016 proceedings in the first three paragraphs of his judgment:
Later in the judgment, the Deputy Judge observed in relation to the claimant's business:
It is necessary to consider the way claim is put forward in the particulars of claim in both proceedings and to review the authorities on the subject of merger. A convenient starting point, however, is the provisions of the claimant's articles of association dealing with call notices and forfeiture of shares.
Articles of association
Article 69.1 permits the directors to send a "call notice" to a member requiring the member to pay a specified sum ("the call"), subject to the restriction in Article 69.2 limiting the amount of the call to the sum unpaid on the member's shares. Article 69.3 specifies that a member must comply with the requirements of a call notice save there is no liability to pay any sum claimed before 14 days after service of the call notice have passed.
Article 72 describes the "automatic consequences" if there is a failure to comply with a call notice. The failure to pay the call sum triggers an entitlement to issue a "notice of intended forfeiture" of the shares. The formal requirements for a notice of intended forfeiture, which are not of concern, are set out in Article 73.
Article 74 gives the directors power to forfeit shares if the notice of intended forfeiture is not complied with before the date for payment of the call that is specified in the notice.
Under the Articles there are distinct steps that must be followed. The service of a call notice equates to a demand for payment and is a pre-requisite for a claim by the company to seek payment of the call. Shares cannot be forfeited without two prior steps; first the service of a call notice and secondly the service of a notice of intended forfeiture. How these steps, that are specified by the Articles, are part of a cause of action giving rise to a claim is a matter that requires further analysis because at common law, if shares are forfeited, the company's right to receive payment for the shares is extinguished. By virtue of the forfeiture, the company holds the shares and is free to allot them to other persons. Absent saving provisions in the Articles, the directors must elect between forfeiting the shares, or pursuing payment. However, it is common for the Articles to contain provisions that abrogate the common law position and that is the case with the claimant.
Article 75 provides that forfeiture extinguishes all interests in the share and all other rights relating to them. It goes on:
The rationale for this provision is clear. The directors will wish to prevent a shareholder who has not paid for shares from participating in the company and exercising rights that accrue by virtue of being a shareholder by forfeiting the shareholding. However, it is useful for the company to retain flexibility about what further steps it may wish to take. If the company is able, due to market conditions, to allot the shares to a person willing to pay the par value, or more, it need not rely on its right to require payment by the original shareholder. Indeed, it is common ground that the claimant's right to recover from the defendant the sum claimed in the call notice is subject to the principle of double recovery. Where disposal of the forfeited shares at par value is not an option, the right to recover under Article 75.3 may be exercised.
Palmer's Company Law provides a commentary on the standard provisions for forfeiture of shares. There are two passages that are of significance:
The editors of Palmer do not cite authority for the proposition that a claim under a provision such as Article 75.3 after forfeiture has taken place is a new obligation. The logic is, presumably, that prior to forfeiture, the shareholder's relationship with the company is that of contributor whereas after forfeiture, the shareholder is no longer a contributor and has no further relationship with the company qua shareholder. Nevertheless, the former shareholder remains bound by the provisions of the Articles and the right to recover is a contractual right arising from the provisions of the Articles.
It is not in doubt that the service of a valid call notice gives the company the right to recover payment of the amount of the call. The cause of action is complete once the notice is served and the minimum period of 14 days has elapsed. There is no obligation to take steps to forfeit the shares. Forfeiture is a distinct step which the directors may, or may not, consider to be appropriate in the circumstances. If the shares are forfeited, following service of notice of intention to forfeit, article 75.3 applies. It is notable that it is drafted in terms that the person whose shares are forfeited "remains" liable to the Company. This suggests that the Articles preserve the cause of action arising from the call notice, which would otherwise be extinguished, rather than create a new cause of action. However, the editors of Palmer suggest otherwise. I will return to this subject later in this judgment.
The 2016 proceedings
The defendant commenced proceedings by way of a Part 8 claim. It was followed shortly by the claimant's Part 7 claim. For all practical purposes, as the Deputy Judge indicates, the Part 8 claim ceased to be of relevance. The claimant's particulars of claim, having set out the background alleged:
The claimant sought the following relief:
There was no claim for payment of the sum claimed to be due pursuant to the call notice; and no step had been taken to forfeit the shares. I do not consider the prayer for "further or other relief as appropriate" is material. There are three connected reasons for this conclusion:
There are other elements of the particulars of claim which explain why the claim was brought as a claim seeking only declarations. Paragraphs 12 and 13 refer to letters from solicitors acting for the defendant dated 2 June and 29 June 2016 setting out the basis upon which they denied that the claimant was entitled to forfeit his shares. Amongst other grounds, it was asserted on behalf of the defendant that the claimant would be acting fraudulently "by taking steps to forfeit the Defendant's shares". It was not expressly part of the claimant's case that it was entitled to be paid pursuant to the call notice. However, a right to forfeit could only arise if a valid call notice had been served; or, put more accurately, unless the defendant was liable to pay for the shares in cash, the claimant had no entitlement to serve a call notice.
Paragraph 14 asserts the claimant's right to forfeit the defendant's shares and this is followed by a concluding paragraph:
Judgment in the 2016 proceedings
It is unnecessary to refer to the judgment handed down by the Deputy Judge on 14 November 2017 in detail. It is however instructive to set out the issues dealt with by the Deputy Judge as he formulated them although bearing in mind that many of the issues arose on the defendant's counterclaim:
Taking the issues in turn:
The Deputy Judge's conclusions are reflected in the order dated 28 November 2017. The claimant was wholly successful. Mr Nasir's Part 8 claim and his counterclaim were dismissed and two declarations were made on the claimant's claim:
Mr Temmink who appeared for the defendant placed reliance in particular on the second declaration which confirmed that Mr Nasir had failed to pay for the shares and the claimant was entitled to forfeit the shares. The right to forfeiture could only arise if the claimant had served a valid call notice; and a valid call notice could only be served if the claimant was entitled to be paid the amount that remained unpaid on the defendant's shares. In addition, the defendant relies on the terms upon which a stay was ordered:
It is clear from the sentence in paragraph 2 of the judgment to which I drew attention earlier in this judgment that the parties and the court were well aware of the limited relief the claimant sought in the 2016 proceedings. The proceedings cleared the way for the claimant to forfeit the defendant's shares. Two points bear emphasis:
This claim
This claim is drafted in a very similar form to the 2016 proceedings. Apart from minor differences of layout, the differences of substance are:
The Law
The doctrine of merger was considered by the Court of Appeal in Clark v In Focus Asset Management [2014] 1 WLR 2502 . The claim concerned an award by the Financial Ombudsman Service, which had been accepted by the complainant. The principal issue before the Court of Appeal was whether the award was a judicial decision capable of giving rise to res judicata. At [3 – 12] Arden LJ discusses the meaning of res judicata and merger, and the differences between them. It is helpful to set out the passage in full.
Merger was also considered by the House of Lords in Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd [2014] AC 160 which was heard a few months before Clark v In Focus Asset Management although oddly Lord Sumption's observations on the subject of res judicata do not appear to have been cited to the Court of Appeal. At [17] Lord Sumption provided a summary of the general principles of res judicata. He described res judicata as a "portmanteau term which is used to describe a number of different legal principles with different juridical origins." After dealing with cause of action estoppel, he continued:
Both Lord Sumption and Arden LJ treat merger as the automatic consequence of a judgment on a cause of action. Although this is undoubtedly right, when considering whether merger has taken place, it is necessary to examine the context in which the judgment is given. A judgment given after a trial of all the issues in a claim will lead to merger but, by contrast, a judgment of a preliminary issue will not.
Neither party referred me to Spencer Bower & Handley, Res Judicata, 4 th ed which contains an extended discussion of "Merger in Judgment" which is also described in the text as "Former Recovery". (The authors appear to have treated the two concepts as broadly interchangeable.) The 4 th edition pre-dates the two cases to which I have referred. However, Arden LJ relied on the analysis in Spencer Bower & Handley in relation to res judicata and it is reasonable to suppose that the author's analysis of the constituent elements of merger is equally worthy of consideration. I provided a first draft of this judgment to Mr Lawrence and Mr Temmink and invited them to provide any further submissions they felt to be helpful. Both took the opportunity to provide further submissions and I have had regard to them when finalising this judgment.
Merger is described in Spencer Bower & Handley at 19-01 in the following way:
At paragraph 19-03 the constituents of a good plea of former recovery are summarised:
Subsequently, at para 20.01, in considering what amounts to a judgment for the purposes of merger, the following passage appears:
Finally, at para. 21.13 it is suggested that a later claim will not be barred if the causes of action are cumulative unless the claimant has obtained full satisfaction.
This extract from Spencer Bower & Handley suggests that not all judgments are capable of supporting a plea of merger. Three examples are given. First, a judgment granting a declaration on the basis that it is the nature of the relief that is granted, it is not a judgment capable of supporting a plea of merger. Secondly, where the former judgment is not final. Thirdly, a judgment where the causes of action are cumulative.
It is notable that the definition of merger given by Spencer Bower & Handley is not entirely on all fours with the descriptions of the doctrine given by Lord Sumption and Arden LJ. The passage at paragraph 19-01 cited above places some reliance on the second proceedings being pursued for the same relief. If this is right, the automatic application of merger solely because the facts that support a cause of action are repeated in a second claim may be doubtful.
Plainly it is right that a judgment that is not final will not support a plea of merger. However, it seems to me that the notion of finality does not suffice to explain some obvious examples of judgments that, although final, do not lead to merger. It is a commonplace that the court may try a claim on the basis that preliminary issues are determined first. Merger can only occur when all aspects of the cause of action have been dealt with. If a party commences a claim seeking declaratory relief to establish whether it has a cause of action, does it necessarily follow that the claimant must pursue within that claim the relief that may flow from obtaining a declaration that is favourable?
It is also right that there are examples of causes of action, in the sense of sets of facts that constitute a cause of action, being cumulative. The same set of facts may entitle the claimant to bring different claims for different causes of action. Spencer Bower & Handley instances a beneficiary with a claim in personam against a defaulting trustee being entitled to bring a later claim for a proprietary tracing remedy. Another example is a beneficiary applying to remove a trustee of a trust on the basis there has been a breach of trust and later bringing a separate claim for relief arising from the breach of trust. These examples suggest that the doctrine of merger is not quite as absolute as might appear from the judgments I have cited.
It is notable that at para. 20-01 of Spencer Bower & Handley a judgment for a declaration is identified as a judgment which is not to be treated as "a judgment granting relief" for the purposes of merger. No authority for this proposition is cited. It is therefore useful to consider why declaratory relief might have been singled out in that way. In Zamir & Woolf The Declaratory Judgment 4 th ed the authors at para. 1-02 say this about the nature of declaratory relief:
This description of declaratory relief is not controversial. Clearly there is a real difference between a judgment that may lead to enforcement and a judgment that merely declares what the parties' legal position is. However, there is nothing to stop a claimant seeking both declaratory and coercive relief in the same claim. Indeed, section 49(2) of the Senior Courts Act 1981 encourage the court to " …so exercise its jurisdiction in every cause or matter before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to those matters is avoided." CPR 40.20 makes it clear that the court has power to make "…binding declarations whether or not any other remedy is claimed."
It seems to me that section 49(2) amounts to no more than an exhortation directed to the court and it has no direct effect upon the parties to a claim if the parties choose to litigate in a cumulative manner. CPR 40.20 clarifies that other remedies may be claimed with a prayer seeking a declaration. Neither provision takes matters any further.
The emphasis in Spencer Bower & Handley is that for merger to take effect there must be a judgment granting relief . This can be seen from the passages cited from paragraph 19-01 and from the later passage at paragraph 20-10. The author goes on to opine that a declaration does not qualify as a judgment granting relief. I am bound to say I find this view to be difficult to follow. It may be that the author's opinion has been expressed too widely. The fact that declaratory relief is discretionary cannot of itself be sufficient to take it into a category of relief on its own because other forms of relief, such as injunctions, are discretionary. The grant of a final injunction following a trial, without other relief, would not be a bar to merger taking place because the court has made a determination on the cause of action.
However, declaratory relief arises in many different circumstances and in some cases it is not obviously based on a readily recognisable cause of action (in the Letang v Cooper sense). For example, a declaration as to status, the lawfulness of a decision or a future course of conduct are rather different to a declaration that a debt is due under a contract. By contrast, for the court to grant a declaration that a liquidated sum is due under a contract, it must have considered and determined all the facts that form the cause of action. The exercise the court has undertaken to reach the judgment is the same as if the claim had sought judgment for the liquidated sum. The position might be different if a declaration were to be sought in terms that the defendant was in breach of the provisions of a contract, without seeking further relief, even if damages are not an essential part of the cause of action. The point does not arise here because the claim is for a liquidated sum, the essential elements of the cause of action being the obligation to pay and non-payment.
The essence of the doctrine of merger is that the cause of action merges in the judgment. The cause of action is thereby extinguished by a combination of the judicial determination of the facts forming the cause of action and manifestation of that determination in the order, or judgment, of the court that follows. Even accepting that a declaration does not have any executory or coercive effect, a declaration that is based upon findings of fact that relate to a recognisable cause of action, still determines the issue and it is hard to see why it should not have the effect of extinguishing the cause of action. It is after all a matter for the claimant to decide whether additional relief may be needed. A determination and grant of declaratory relief followed by a second stage when the court is asked to consider additional claims for relief is clearly unobjectionable if it is made within the same claim based on prayers for relief sought in the claim form.
It seems to me, with respect to the author of Spencer Bower & Handley, that whether the grant of declaration will lead to merger depends upon the nature of the claim and the declaration that is granted.
The other essential element for the doctrine of merger to apply in this case is for the cause of action in both claims to be matched. The cause of action relied on by the claimant in both claims derives from its Articles. It is common ground that they are to be treated as a contract between the claimant and the defendant. Section 33 of Companies Act 2006 provides:
The leading authority on the subject of merger arising in connection with a contract is Republic of India & another v India Steamship Co Ltd ("The Indian Grace") [1993] AC 410 at 415. The claim concerned a fire on board The Indian Grace. Part of the cargo was jettisoned as a result of the fire and part was damaged by it. A claim in personam was brought in India for the undelivered cargo and judgment was obtained for about £6,000. A claim in rem was then brought in London claiming damages of £2.6 million. An application was made to strike out the claim relying on section 34 of the Civil Jurisdiction and Judgments Act 1982. Lord Goff gave the leading speech. He rejected the submission that there was a lack of identity between the cause of action in India (damage to cargo) and the cause of action in the claim brought in London (short delivery). Lord Goff concluded that it was "… wholly unrealistic to regard the cause of action as being other than a cause of action arising under the contract, which provides for the relevant duties of the shipowners, regarding the seaworthiness of the ship and the care of the goods." [420 C – D]
Lord Goff then considered Brunsden v Humphrey (1884) 14 Q.B.D. 141 and Conqueror v Boot [1928] 2 KB 336. He accepted when considering Brunsden v Humphrey that, in the case of a claim in negligence, it is theoretically possible to segregate different causes of action by reference to the different heads of damage. However, as Conquer v Boot shows a claim under a contractual promise to complete the building of a bungalow involved one contractual promise, that is to complete the bungalow. Further claims for different damage did not prevent merger applying. Lord Goff went on [421 C- F]:
Discussion
The defendant says that the facts alleged in the claim amounted to a cause of action entitling the claimant to recover the unpaid amount due for the shares and cause of action merges with the judgment and the order and is thereby extinguished. Mr Temmink invites the court to have closely in mind the exhortation of Lord Atkin in Workington Harbour and Dock Board v Trade Indemnity Co Ltd (1938) 60 Lloyd's Rep 209 at 219:
The focus of the 2016 claim was upon establishing that the claimant was entitled to forfeit the defendant's shares. However, in order to be entitled to do so, the claimant had to establish that the shares were unpaid and a valid call notice had been served which was a prerequisite for serving a notice of intended forfeiture, itself a prerequisite for forfeiture. There is no doubt that the cause of action pursued by the claimant is based upon successfully establishing that the defendant was a contributory, the shares were unpaid and a valid call notice had been served. These are the same facts that are relied on in this claim as forming a basis for the claim in debt. As can be seen from section 33 of the 2006 Act, money due from a member is a debt due from him to the company.
It is uncontroversial that when the claimant issued the 2016 claim, it was entitled to pursue a claim in debt for €36 million on the basis of the facts that were pleaded as a basis for obtaining declaratory relief. The claimant would have been entitled to include a prayer for relief seeking judgment for that sum. The claimant did not to do so. Whether that was an oversight, or a deliberate choice, is not known. It is, in any event, not to the point.
Mr Lawrence submits that on the facts of this case merger has not taken place. He says the claimant adopted an entirely conventional approach when faced with a shareholder who had intimated grounds upon which he would contend that the shares should be treated as paid up, or relief should be granted. He says the claimant entirely properly and reasonably chose to seek only declarations with a view to establishing the legal position before taking steps to forfeit the shares registered in the defendant's name.
It can also fairly be said that the claimant's approach was transparent. This is shown by the remark in paragraph 2 of the judgment to the effect that nothing had been done in relation to forfeiture pending the outcome of the proceedings. The shares were forfeited not long after the defendant's application for permission to appeal was dismissed and subsequently this claim was issued. The possibility of a claim being made for €36 million will have been obvious to the defendant after the judgment and forfeiture of the shares. The public policy reason for res judicata is on one view not engaged. However, merger is a principle of law that does involve the court undertaking an evaluation of the merits and exercising a discretion. The doctrine of merger applies as a function if the doctrine's relevant criteria are met.
Mr Lawrence, in his further submissions, accepts that there is no authority in this jurisdiction which either supports or contradicts the view expressed in Spencer Bower & Handley. He submits that the court should, however, give considerable weight to their view and that to take a different view would make radically new law and be wrong.
Mr Temmink submits that the authors of Spencer Bower & Handley do no more than express an opinion of the law. He points to the importance and economic value that attached to the declaration the claimant obtained. It enabled the claimant to forfeit shares with a par value of €36 million. Although no money changed hands as a consequence of the determination, it enabled the claimant to pursue its remedy through the operation of the Articles. Mr Temmink submits that it is not right to analyse the outcome of the 2016 proceedings, as Mr Lawrence proposed, as not providing the claimant with a remedy in the sense of something it could enforce against the defendant. However, this is to approach the matter without regard to what the claimant was able to achieve with the benefit of the declaration. Armed with the declaration the claimant could safely operate the provisions of the Articles and forfeit the shares. Forfeiture was not a remedy the court was able to offer. The declaration supported the self-help remedy agreed in the contract between the parties
Although proper consideration should of course be given to the view expressed by the authors of Spencer Bower & Handley it is unsupported by authority and I consider it is expressed too widely. The grant of a declaration may not lead to merger in every case. That will depend upon the nature of the claim and the terms of the declaration. For the reasons I have given earlier in this judgment, I consider that in this case the mere fact of the claimant seeking declarations, taken in isolation, does not prevent the doctrine of merger applying because of the effect of the declaratory relief I have described. The doctrine of merger will only apply, however, if the cause of action in both claims is the same.
I consider that it is not appropriate to strive to find differences between the facts that form the cause of action in two claims. It is right, as in The Indian Grace , to look at the substance of the claims and to consider whether they arise from the same breach. It is not an oversimplification to say that the claim arises from the defendant's failure to pay for his shares. €36 million was due when the 2016 proceedings were issued. At that time the defendant was a contributor. After forfeiture of his shares, his relationship with the claimant changed although the sum that was due to be paid remained the same. It seems to me that, with respect to the editors of Palmer, by virtue of section 33(2) of the Companies Act 2006, the payment that was due to be made for the shares was always a contractual debt. It is not right to see a liability of a contributor as being converted to a different liability.
The defendant was liable to pay for his shares and a valid call notice was served pursuant to Article 69. Article 75.3.4 provides that following forfeiture of the shares the defendant remained liable to pay that sum. In other words, the basis of liability was preserved by virtue of the consensual arrangement that is reflected in the rticles; but it is the same liability as before. Preservation of liability following forfeiture does not create a new liability. It follows, in my judgment, that although some additional facts are pleaded in this claim, they are merely part of the narrative explaining how the claim came into being and not new facts signifying a new cause of action.
Conclusion
I am satisfied that all the essential elements for merger are made out. The claimant's cause of action merged in the judgment of the court and the order made in the 2016 proceedings, and it has been extinguished.
It follows that the court has no jurisdiction to deal with this claim and I will make a declaration accordingly. It is unnecessary to deal with the alternative limb of the application.
Note 1 The Deputy Judge referred to the claimant as Z. [Back]
Note 2 Here “coercive” is being used in a narrower way than para. 20-01 of Spencer Bower & Handley: Res Judicata. [Back]