[1] Staray Capital Ltd [2] Marlon Ray Chen Appellants v Cha, Yang (also known as Stanley) Respondent [ECSC]

• Jurisdiction: British Virgin Islands
• Judge: Thom JA,Justice of Appeal [Ag.],Chief Justice,Gertel Thom,Dame Janice M. Pereira, DBE,Louise E. Blenman,Justice of Appeal
• Judgment Date: 14 July 2014
• Neutral Citation: VG 2014 CA 11
• Judgment citation (vLex): [2014] ECSC J0714-2
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: BVIHCMAP2013/0009
• Date: 14 July 2014

[2014] ECSC J0714-2

THE EASTERN CARIBBEAN SUPREME COURT IN THE COURT OF APPEAL

Before:

The Hon. Dame Janice M. Pereira, DBE Chief Justice

The Hon. Mde Louise E. Blenman Justice of Appeal

The Hon. Mde. Gertel Thom [Ag.] Justice of Appeal [Ag.]

BVIHCMAP2013/0009

Between:

[1] Staray Capital Limited

[2] Marlon Ray Chen

Appellants

and

Cha, Yang (also known as Stanley)

Respondent

Appearances:

Mr. Stephen Atherton, QC and Mr. Oliver Clifton for the Appellants

Mr. Matthew Collings, QC and Mr. Jeremy Child for the Respondent

Amendment to company's articles of association by shareholders' resolution — Compulsory redemption of shares pursuant to shareholders' resolution — Whether resolution in interests of company — Applications to adduce fresh evidence

The second appellant, Mr. Chen, is a Chinese national and an entrepreneur with expertise in the coal mining industry. Mr. Chen met the respondent, Mr. Cha, in 2005 and some years later, the two decided to participate in a coal mining project ("the Project") in British Columbia, Canada. The first appellant, Staray Capital Limited ("Staray"), was incorporated for the purpose of being used as a vehicle to facilitate Mr. Chen and Mr. Cha's participation in the Project. When Mr. Chen first discussed the Project with Mr. Cha, Mr. Cha told him that he was a partner at the law firm King & Wood in the People's Republic of China ("PRC"), and that he was qualified to practise both in the PRC and the USA. It was agreed that 80% of the shares in Staray would be issued to Mr. Chen and the remaining 20%, to Mr. Cha. Staray was incorporated in the British Virgin Islands on 22 ^nd March 2010, with Mr. Chen and Mr. Cha as the only directors.

On 9 ^th June 2011, Staray and the owners of the Project signed a shareholders agreement. A separate company, HD Mining International Limited, was incorporated to execute the Project and Staray was granted 5% of the shares of this company.

The relationship between Mr. Chen and Mr. Cha began to deteriorate after Mr. Chen tried to get Mr. Cha to transfer some of his (Mr. Cha's) shares to Mr. Chen so that they could be passed on to one Mr. Kong, and Mr. Cha refused to do so. Mr. Chen had claimed that Mr. Kong was instrumental in bringing them into the Project. On 8 ^th September 2011, Mr. Cha was removed as a director of Staray by a shareholders' resolution passed by Mr. Chen and on 26 ^th October 2011, the Memorandum and Articles of Association of Staray were amended by Mr. Chen by a shareholders' resolution, Mr. Chen being the 80% shareholder. This resolution inserted a sub-regulation 3.8 into the Staray's Articles of Association, which stated that the company may compulsorily redeem any or all shares held by a shareholder who has been found to have either made material misrepresentations in the course of acquiring its shares, or committed an act that may result in the company incurring or suffering any pecuniary, legal, regulatory or administrative disadvantage or liability or negative publicity, which it might not otherwise have suffered. Mr. Chen alleged that Mr. Cha had made material misrepresentations at their first meeting when the Project was discussed, with regard to his position in the law firm King & Wood, as well as his eligibility to practise law in the PRC and the USA. Accordingly, pursuant to the shareholders' resolution, Mr. Chen sought to have Mr. Cha's shares in Staray redeemed. A redemption notice was sent to Mr. Cha notifying him that his shares would be redeemed as at 11 ^th November 2011. Mr. Cha sought and obtained an injunction on 9 ^th November 2011, preventing the redemption of the shares. He subsequently filed a claim in which he sought, inter alia, an order that the amendment to the Articles of Association of Staray made by the resolution be removed, and such orders as may be made pursuant to section 184I of the BVI Business Companies Act, 20041 as the Court thought fit.

In the court below, the learned judge found that: (1) the shareholders' resolution to amend the Articles of Association of Staray was in the interests of the company; (2) the redemption notice issued pursuant to the amended articles to redeem the respondent's shares was invalid; and (3) the respondent was not entitled to relief under section 184I of the BVI Business Companies Act, 2004. The appellants appealed the second of these findings while the respondent filed a counter notice of appeal, challenging the first and the third findings.

Held: dismissing both the appeal and counter appeal and ordering that the appellants pay the respondent's costs of the appeal fixed at two-thirds of the costs in the court below, that:

• 1. The learned judge correctly applied the relevant legal principles in coming to a determination on whether the amendment to Staray's articles of association was

  valid. Even if an amendment to a company's articles of association operates to the disadvantage of a minority shareholder, this does not automatically mean that the resolution which amended the articles was passed in bad faith. The learned judge considered whether the amendment was so oppressive as to cast doubt on the bona fides of Mr. Chen and found that it was not. This was a finding which was open to the learned judge on the facts, having regard to the nature of the amendment and the fact that Mr. Cha could only be affected by it if he had acquired his shares by making material misrepresentations which were fraudulent or negligent or had committed some act that may have resulted in Staray suffering detriment which it might not otherwise have suffered. Further, the amendment did not only apply to Mr. Cha, but equally to all shareholders of Staray.

  Citco Banking Corp NV v Pusser's Ltd and another [2007] UKPC 13 applied; Allen v Gold Reefs of West Africa, Limited [1900] 1 Ch 656 applied; Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others [1927] 2 KB 9 applied.

• 2. The learned judge's finding that Mr. Chen did not rely on the representations made by Mr. Cha in agreeing for Mr. Cha to acquire shares in Staray was a finding of fact and thus, an appellate court would only interfere with such a finding in special circumstances, such as where it was based on a misapprehension of the evidence. The learned judge having heard all of the evidence and having had the distinct opportunity to observe the witnesses, it was open to him, on the evidence which was before him, to make the findings that he made. No compelling grounds have been shown to justify reversing these findings of the learned judge.

  Chiverton Construction Limited et al v Scrub Island Development Group Limited Territory of the Virgin Islands High Court Civil Appeal BVIHCVAP2009/0028 (delivered 19th September 2011, unreported) followed.

• 3. For Staray to redeem its shares held by Mr. Cha under the new Article 3.8 which had been inserted by the shareholders' resolution, the appellants would have been required to show firstly, that Mr. Cha committed an act; secondly, that that act may have resulted in the company suffering one or more of the consequences outlined in the article; and thirdly, that Staray might not otherwise have suffered or incurred such consequences. The appellants were required to adduce evidence to discharge this burden; it was not sufficient for them to simply state an act or acts committed by Mr. Cha. They needed to go further and show that the act or acts of Mr. Cha may have resulted in Staray suffering one or more of the consequences and also that Staray might not otherwise have suffered the consequences. The learned judge found that there was no evidence sufficient to show this. There is therefore no basis to interfere with the findings of the learned judge on this issue.

• 4. The appellants' failure to prove all of the requirements of Article 3.8 does not amount to a breach of the terms of Staray's articles of association, nor does it amount to using the provisions of the articles in a manner which equity would regard as contrary to good faith. The redemption notice issued pursuant to Article 3.8(b), being an invalid notice, was of no effect and therefore, Mr. Cha would not have suffered any prejudice. In such circumstances, a court would not exercise its discretion under section 184I(2) of the BVI Business Companies Act, 2004, to grant any of the reliefs outlined in that subsection. The role of the section 184I jurisdiction is to protect shareholders against the breach of the terms on which they agreed the affairs of the company should be conducted, and against inequity resulting from the exercise of strict legal power of those conducting the affairs of the company. Neither of these two situations were present in this case. There is therefore no basis to interfere with the finding of the learned judge that Mr. Cha had failed to establish that service of an invalid notice was unfair within the meaning of section 184I.

1 Thom JA [Ag]: This is an appeal against orders made by Bannister J [Ag.] on 13 ^th February 2013 and 25 ^th April 2013 in which he found that a resolution to amend the Articles of Association of the first appellant ("Staray") was in the interest of Staray, a redemption notice issued pursuant to the amended Articles of Association was invalid, the respondent was not entitled to relief under section 184I of the BVI Business Companies Act, 2004, 2 and ordered the appellants to pay 40% of the respondent's costs.

Background

2 Mr. Cha, Yang ("Mr. Cha"), a Chinese national by birth, was admitted to practise law in the State of New York ("New York") in 1997. On 11 ^th September 2001 he became a United States citizen. In December 2001 he obtained the People's Republic of China ("PRC") Law Certificate which permitted him to practise law in the PRC. He practised law in the PRC at various law firms including the law firm of King & Wood.

3 Mr. Marlon Ray Chen ("Mr. Chen") is a Chinese national and an...