Fifth Avenue Capital Inc. v Julian Michael Edward Lee and another

• Jurisdiction: British Virgin Islands
• Court: High Court (British Virgin Islands)
• Judge: HARIPRASHAD-CHARLES J
• Judgment Date: 25 May 2005
• Neutral Citation: VG 2005 HC 10
• Docket Number: Claim No. BVIHCV2004/175
• Date: 25 May 2005

IN THE MATTER OF THE INSOLVENCY ACT 2003

AND

In the Matter of Fifth Avenue Capital Inc.

and

In the Matter of a Petition Brought By (1) Julian Michael Edward Lee and (2) Kettering Services Limited

Claim No. BVIHCV2004/175

THE EASTERN CARIBBEAN SUPREME COURT

IN THE HIGH COURT OF JUSTICE (CIVIL)

Appearances:

Mr. Mark Cunningham QC, Mr. Christopher Young and Mr. Phillip Kite with him for the Petitioners

Mr. Paul A. McGrath and Ms.. Dawn Smith for Fifth Avenue Capital Inc. and Mr. Stephen Morris

Introduction

HARIPRASHAD-CHARLES J

1 The key question in this Petition is whether or not it is just and equitable for Fifth Avenue Capital Inc (‘the Company’) to be wound up by the court pursuant to section 162 (1) (b) of the Insolvency Act 2003 (‘the Act’).

2 By Petition filed on 1 ^st December 2004, Julian Michael Edward Lee (‘the First Petitioner’) and Kettering Services Limited (‘the Second Petitioner’) apply to the Court for the Company to be wound up and liquidators to be appointed on the ground that it is just and equitable for the Company to be placed into liquidation.

The status of Kettering and Mr. Lee in relation to the Company

Kettering Services Limited (‘Kettering’)

The status of Kettering and Mr. Lee in relation to the Company

3 Mr. McGrath appearing as Counsel for the Company and Mr. Morris conceded that Kettering Services Limited (‘Kettering’), an offshore Company owned and controlled by Mr. Lee is a shareholder of the Company and as such, would have the standing to present this Petition.

4 The issue of whether Kettering is a creditor of the Company is however disputed. Mr. Cunningham, QC appearing as Counsel for the Petitioners contended that Kettering provided $170,000 to the Company in or around October 1998 solely for the purpose of acquiring shares in it and unless and until shares were validly issued to Kettering, the money would be held on trust for it by the Company.

5 Appearing to act in compliance with these terms, the Company purported to allot 170,000 shares to Kettering. In fact, the shares did not exist since the Company's authorized share capital was held in its entirety at that time by Mr. Morris. The terms upon which the Company received the money were therefore never satisfied.

6 On behalf of Kettering, it was argued that the money continued to be held on trust for Kettering. Further:

• (i) This money or its substitute might still be identifiable, in which case the Company is a trustee with respect to it 1 and is under an obligation to preserve it in order to return it to Kettering.

• (ii) Alternatively and more probably, the money might now have been dissipated. In such a case, the Company, controlled by Mr. Morris has committed a breach of trust by failing to use the money for the purpose for which it was provided, and by failing to preserve it in order for it to be returned to Kettering. As such, it is therefore liable to account to Kettering for this breach of trust.

7 It was further argued that there is a breach of contract entitling Kettering to damages. Kettering is, therefore, a creditor of the Company and accordingly, has standing to bring this Petition.

8 Mr. McGrath contended that the reality is that in return for its subscription of $170,000, Kettering obtained 170,000 shares in the Company on 19 ^th May 1999. (‘Exhibit SPM 2’). Therefore, Kettering is a shareholder but not a creditor. I agree with Mr. McGrath.

Mr. Julian Lee

9 Mr. Julian Lee was employed by the Company pursuant to a contract of employment dated 25 ^th November 1998 (‘Exhibit SPM 4’). His employment with the Company was terminated amicably with the signing of an agreement entered into on 28 ^th September 2001 (‘Exhibit SPM 5’). Under the terms of the agreement, the company promised to allot shares equal to its indebtedness to Mr. Lee which amounted to US$139,191 and £39,000.

10 Mr. McGrath submitted that notwithstanding Mr. Lee's assertion to the contrary, this was in fact done, with the shares being registered, as Mr. Lee desired, in the name of Kettering (Exhibit ‘SPM 7’ as well as paragraph 7 of second affidavit of Mr. Morris).

11 Mr. Lee alleges that in breach of its obligations under the agreement, the Company acting by Mr. Morris only caused shares worth US$139,191 to be issued to him and no shares were issued in consideration of the discharge of the Company's indebtedness to Mr. Lee of £39,000 (page 50A of Exhibit JMEL 2). Mr. Lee asserts that this constitutes a breach of contract by the Company which therefore owes him a sum required to put him in the position he would have been, had the additional shares been issued in September 2001. Alternatively, he is a creditor of the Company for £39,000 together with reasonable interest thereon.

12 Mr. Lee next asserts that in breach of its obligations under the agreement, the Company, acting by Mr. Morris, caused 196,856 ordinary shares in the Company to be issued to Kettering, as opposed to him on 14 ^th December 2001. 2 This, he argues, constitutes a breach of contract by the Company, which therefore owes him a sum required to put him in the position he would have been, had the shares been issued in September 2001. Mr. Lee maintains that he is a creditor of the Company for the sums of US$139,191 and £39,000 together with reasonable interest thereon.

13 It cannot be denied that the sums of US$139,191 and £39,000 represent certain monies owed by the Company to Mr. Lee and not to Kettering. The share register (‘Exhibit SPM 8’) shows that Kettering held 391,856 ordinary shares in the Company after the 2002 Rights Issue. These shares comprised:

• • 170,000 shares issued on 21 ^st May 1999.

• • 196,856 shares issued to Kettering on 14 ^th December 2001 (in respect of expenses and salary due to Mr. Lee).

• • 25,000 ordinary shares subscribed for by Kettering on 1 ^st August 2002 (‘Exhibit SPM 7’).

14 When one scrutinizes the evidence as well as the contemporaneous documentary evidence, there appears to be some uncertainty as to the present shareholdings in the Company due to the failure to maintain or keep proper records and books including an accurate register of members. 3 It also seems to me that the names Kettering or Julian Lee (Kettering Services) were used interchangeably. However, it is clear that Mr. Lee is entitled to the sums of US$139,191 and £39,000 in respect of salary and expenses due to him. Accordingly, he is a creditor of the Company and has locus standi to present this Petition.

The Company

15 The Company was incorporated in this island under the provisions of the International Business Companies Act, Cap. 291 on 29 ^th May 1998. Its principal object, among other things was to carry on the business of an investment company.

16 The initial authorized share capital of the Company on incorporation on 29 ^th May 1998 was US$50,000 comprising 50,000 shares with a par value of US$1 each. By resolution of the sole director passed on 29 ^th April 1999, the authorized share capital of the Company was increased by the sum of US$3,950,000 above the original authorized share capital of US$50,000, leading to a new authorized share capital of US$4,000,000 comprising 1,500,000 ordinary shares with a par value of US$1 each and 2,500,000 Class A’ preference shares with a par value of US$1 each.

17 The Company's main business was intended to be the investment of money in new businesses (‘the Portfolio Companies’) and the Company's investments in the Portfolio Companies was to be managed by Fifth Avenue Capital Advisors Inc (‘FACAI’) and Fifth Avenue Capital Advisors Limited (‘FACAL’), associated companies beneficially owned by Mr. Stephen Morris which entities would take management fees in return for providing operating and advisory services.

Background: The Business Relationship between Mr. Lee and Mr. Morris

18 The genesis of the unhappy sequence of events involving Mr. Lee and Mr. Morris, as narrated by Mr. Lee started in August 1998. Mr. Lee met Mr. Morris at a mutual friend's wedding. It appears that Mr. Morris told Mr. Lee that he had just formed a company called Fifth Avenue Capital Inc (‘the Company’) as an investment company. Mr. Morris described the Company as a “venture capital fund company” that would acquire large stakes in “early stage companies.” He said that he was looking to recruit a senior executive for the Company to assist him in setting up the business. Mr. Lee was very interested. After all, he was looking for an executive role in the venture capital industry.

19 In or about September 1998 in the course of several meetings in New York and London, they agreed orally on the terms of a business partnership agreement (‘the Business Partnership Agreement’) as follows:

• (i) Mr. Lee was to hold the position of Senior Vice President of the Company with a salary of US$5,000 per month to be paid in cash with a further US$5,000 deferred remuneration to be paid in the future after the Company's investment business had become more established.

• (ii) Mr. Morris had been and was to continue to be the President and sole director of the Company and he was to receive an identical remuneration package.

• (iii) Mr. Lee was to invest in the Company and was to market the Company to third party investors, in order to attract a minimum of US$100,000 of investment capital into the Company.

• (iv) Mr. Lee and Mr. Morris were to be the two senior executives of the Company, each holding ‘partner’ shares in the Company of 1 ordinary share per US$1 investment. All other external investors were to receive 1 ordinary share and 9 ‘class A’ preferred shares for each US$10 investment carrying a 15% dividend return on the class A preferred shares. No other investor/shareholder apart from Mr. Lee and Mr. Morris were to receive 1 ordinary share per US$1 investment.

• (v) Mr. Morris was to market the Company to third party...