Henderson J
IN THE GRAND COURT OF THE CAYMAN ISLANDS
CAUSE NO. 509 OF 2003
IN THE MATTER OF KOSMO CORPORATION
AND IN THE MATTER OF SECTION 94(d) OF THE
COMPANIES LAW (2003) REVISION
Ruling delivered by
The Honourable JUSTICE HENDERSON
on the 9th day of March 2004,
in George Town, Grand Cayman.
APPEARANCES:
MR. R. Gardner: For the petitioner
MR. M. Terziano: For the respondent
Ruling
TUESDAY, MARCH 9, 2004
RULING
HENDERSON, J.
This petition for the winding up of Kosmo Corporation is presented by Mr. Duncan Ritchie. The petition does not clearly and unequivocally allege that he is a contributory to the company but proceeds largely on the assumption that he is. The company itself takes the position that he is not.
In light of this situation, the Chief Justice, by order made November 18th, 2003, directed that there be a trial in open court of a preliminary issue to determine whether or not the petitioner has locus standi to bring the petition on the basis of being a "shareholder of the company". His locus standi would really have to depend, because of the terms of the Companies Law (2003 Revision), on whether or not he is a "contributory" within the meaning of that Law.
Standing to bring a winding up petition is governed by section 96 of the Companies Law which in its material parts reads as follows:
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"Any application to the Court for the winding up of a company shall be by petition which may be presented by the company or by any one, or more than one, creditor or contributory of the company or by all or any of the above parties together or separately."
In my view, anyone bringing a petition under section 96 on the footing that he is a contributory or, alternatively, a creditor, should clearly say so in the petition itself. In other words, the justification for standing to bring the petition should be alleged unequivocally in the originating process.
"Contributory" is a defined term. Section 89 of the Companies Law says this:
"The term 'contributory' means every person liable to contribute to the assets of a company in the event of the same being wound up under this Law and, for the purpose of any proceedings for determining the persons who are to be deemed contributories and of any proceedings prior to the final determination of such persons, includes any person alleged to be a contributory."
The first part of the definition must be understood as meaning that a "contributory" includes every person who would be liable to
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contribute to the assets of the company if the sum he has agreed to contribute has not yet been fully paid up, as well as those whose agreed contributions are fully paid up.
Mr. Ritchie is an investment banker of considerable experience. Kosmo was, in its early stages at least, personified by Mr. Chwoon Ang Lim, a corporate and banking solicitor of considerable experience.
Kosmo had an ambitious and apparently somewhat novel business plan. It intended to market in China, and elsewhere, coffee in a way that that product had not previously been presented to the public.
Mr. Lim was enthused about the prospects of Kosmo. In February, 2002, he encountered Mr. Ritchie, who was a business acquaintance, and invited him to dinner. Just the two of them were present. This dinner, which was held towards the end of February 2002, is the occasion upon which Mr. Ritchie says an enforceable contract was entered into. He says that the company, in the person of Mr. Lim at this stage, agreed unequivocally and unconditionally to issue shares to Mr. Ritchie
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in return for Mr. Ritchie's promise to devote his energies to the management of Kosmo and to take a leading role in it.
Mr. Ritchie says that, agreement having been reached during the dinner, the subject was thereafter never discussed.
Mr. Lim denies that any enforceable contract was reached on that or any other occasion. He says there was an understanding between the two men; in effect, an agreement to agree. He says that Mr. Ritchie's commitment to the company was always conditional.
Mr. Ritchie was investing a large proportion of his personal net worth and mortgaging his residence to do so. Mr. Lim says that Mr. Ritchie had not decided whether this would be an equity purchase or simply a loan to the company, and did not wish to decide that until after he had been given a management role which would permit him to exercise a large measure of control over Kosmo's affairs.
Mr. Lim also says that the understanding involved fundamental conditions on Kosmo's part. The company (in the person of Mr. Lim) did not wish to commit unequivocally to the
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issuance of shares to Mr. Ritchie until after it was satisfied that his efforts would benefit the company and that trust and confidence, which the company proposed to place in Mr. Ritchie, was justified. Mr. Lim says that the involvement of Mr. Ritchie in the affairs of the company was a "trial and error" period. There was no agreement on how long this trial would go on for. He says that Mr. Ritchie never succeeded in gaining the trust and confidence of Mr. Lim and Mrs. Fion Lin, another leading member of management.
At the time of the dinner, Mr. Ritchie was employed at S.G. Asia. He was in the process of leaving that organization, so he agreed to work part time for Kosmo Corporation until the severance could be completed. Apparently he had a reduced workload at S.G. Asia, which enabled him to devote part of his energies to Kosmo.
Until November 2002, Mr. Ritchie was spending part of his time working on the establishment of Kosmo Corporation and at the same time arranging the termination of his employment at S.G. Asia.
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There is no memorandum or letter evidencing the February dinner discussion. Both witnesses were, for the most part, credible when cross-examined on its terms. There is no independent evidence of what each said to the other during dinner.
This state of the evidence does not permit a conclusion on the balance of probabilities that an enforceable agreement was reached on that occasion. I find it was, at best, as Mr. Lim argues, an understanding or an agreement to agree.
That, however, is not the end of the analysis.
Within the next eight weeks or so after the dinner, Mr. Ritchie provided the sum of $175,000 US to the company. If he was, as he says, making an equity investment, this would have represented $700,000 of the seed shares issued to the founding shareholders.
As I have found, he was not a shareholder or entitled to be registered as a member during this period of time as there had not yet been a meeting of the minds between Kosmo and Mr. Ritchie. His subscription was still viewed
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on both sides as conditional during this trial period. He had not yet committed his full time efforts to the company and Mr. Lim had not yet made any unconditional commitment to him.
In November and December of 2002, the position changed. Mr. Ritchie resigned from S.G. Asia and took up full-time duties with Kosmo on November 18th, 2002 as its chief financial officer.
Around November 25th, 2002, a share certificate was prepared. Mr. Lim was the sole director of Kosmo at that time. The share certificate is dated November 25th, 2002 and is certificate number 3. It is in the name of the petitioner and it is for 700,000 shares. That certificate was signed by Mr. Lim, who describes himself on it as a director and secretary of the company. Mr. Ritchie also signed it, ostensibly as a director, although there is little concrete evidence that he had been appointed to that position.
The original certificate was delivered to Mr. Ritchie, apparently by covering letter dated December 10th, 2002. That letter was signed by Mr. Lim; he describes himself in the
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letter as company secretary.
There was nothing accidental or unconditional about this act, despite Mr. Lim's evidence to the contrary. He now says the issuance of the certificate "was more in the nature of the shares being reserved for the petitioner" pending agreement on Mr. Ritchie's ultimate role with the company. I noted earlier that Mr. Lim was an experienced corporate solicitor. He was the sole director of the company at the time, by the general acquiescence of the shareholders.
By placing a signed share certificate in the hands of Mr. Ritchie, I am of the view that Mr. Lim crossed a legal Rubicon. He must have known that at the time. A reasonable and objective observer would conclude nothing from this other than a binding and enforceable agreement between the company and Mr. Ritchie to make Mr. Ritchie a contributory and a member. That observer would readily infer that the company no longer had any reservations about Mr. Ritchie's performance. He had been working for them part time for some six months.
Mr. Ritchie, by accepting the certificate
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and by signing it, indicated his own lack of reservations about making an equity purchase rather than advancing a loan to the corporation.
The earlier conditions and reservations which each party harboured and sought to impose on the share subscription were swept away. What was conditional became unconditional on November 25th or, at least, by December 12th. I am satisfied that Mr. Ritchie became a contributory to Kosmo at that point.
The share certificate was and is prima facie evidence of Mr. Ritchie's status as someone entitled to be registered on the Register of Members. He was entitled to rely upon that evidence not only against third parties but against the Company itself.
An alternate way of looking at the situation is this - a valid share certificate creates a rebuttable presumption of membership in the Company. The evidence I have heard and described does not succeed in rebutting that presumption. There is no documentation contemporaneous with the issuance of the share certificate which seeks or purports to impose
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any condition upon its issuance.
These findings are sufficient to dispose of the preliminary issue.
Under section 112(1) of the Companies Law, if a winding up order is made, I am then required to settle a list of contributories and to rectify the register as needed.
These findings of fact are sufficient to entitle Mr. Ritchie to rectification with respect to the shares represented by the certificate.
I have decided not to make further findings regarding Mr. Ritchie's claims in connection with the second and third tranches of shares purportedly issued by Kosmo. That question can and should be addressed when it is necessary to do so.
My order is an order declaring that Mr. Ritchie has locus standi to proceed with the petition as a contributory of $175,000 representing 700,000 shares.