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THE BATTLE FOR THE PERSIAN (CARPET) EMPIRE

 

Sharon Chong explains a landmark company law case

Persia is as much known for its great empire in ancient history as for its fine carpets. Ebrahimi v Westbourne Galleries Ltd and Ors [1973] AC 360 is a story of three protagonists of Persian origin, namely, Asher Nazar Achoury ("Nazar") and his son, George Alexander Nazar Achoury ("George) and Shokrollah Ebrahimi ("petitioner") and their battle over a Persian carpet empire.

THE FACTS

Nazar and Fahimian were partners of the Oriental Carpet Company, a business in Nottingham which dealt in Persian and other carpets. In 1945, the petitioner joined them as an equal partner. A year later, Fahimian left the partnership and Nazar and the petitioner continued in the business as equal partners.

The business relocated to London in 1956 and continued to prosper. In December 1958, the partners incorporated a company, Westbourne Galleries Ltd ("Company"), which took over the carpet dealership business from the partnership.

The Company was incorporated with an issued share capital of £1,000, of which Nazar and the petitioner each subscribed for 500 shares of £1 each. Shortly thereafter, Nazar and the petitioner each transferred 100 shares to George, and appointed him as a director of the Company. At all material times thereafter, Nazar held 400 shares in the Company, the petitioner 400 and George 200.

No dividends were ever paid even though the Company made good profits. Instead, the profits were distributed by way of directors' remuneration. On 12 August 1969, Nazar and George exercised their majority voting power and removed the petitioner from the office of director. Thereafter, they excluded the petitioner altogether from the conduct of the Company's business.

The petitioner petitioned, inter alia, to wind up the Company under section 222(f) of the English Companies Act, 1948 ("English Act") which enables the court to make a winding up order if it is of the opinion that it is 'just and equitable' to do so.

The trial judge granted a winding up order but the decision was overturned by the Court of Appeal. The petitioner appealed to the House of Lords.

THE DECISION OF THE HOUSE OF LORDS

The House of Lords, by a unanimous decision of the five judges, allowed the appeal. Lord Wilberforce, who delivered the leading judgment, held that the foundation lies in the words 'just and equitable' in section 222(f) of the English Act. According to His Lordship, these words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged into the company structure.

The House of Lords acknowledged that there are many instances where the association, though a private company, is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles of the company.

However, their Lordships opined that the phrase 'just and equitable' enables the court to subject the exercise of legal rights to equitable considerations; considerations of a personal character arising between one individual and another, which may make it unjust, or inequitable, for one to insist on its legal rights, or to exercise them in a particular way. According to Lord Wilberforce, the superimposition of such equitable considerations requires one, or probably more, of the following elements:

  1. an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;
  2. an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders are to participate in the conduct of the business; and
  3. restriction upon the transfer of the members' interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

Their Lordships found that the facts showed that, after a long association in partnership during which he had an equal share in the management, the petitioner joined in the formation of the Company. This gave rise to an indisputable inference that he and Nazar did so on the basis that the character of the association would, as a matter of personal relationship and good faith, remain the same.

Although there was no doubt that the removal of the petitioner as a director had been carried out in accordance with the English Act and the articles of association of the Company, the Court held that Nazar and George were not entitled, in justice and equity, to use their powers to expel the petitioner. Accordingly, their Lordships held that the only just and equitable course was to dissolve the association for two reasons.

First, the refusal by Nazar to recognise the petitioner as a partner, despite overwhelming evidence, amounted to a repudiation of the relationship. Secondly, upon his removal as a director, the petitioner had lost his right to share in the profits through directors' remuneration, retaining only the chance of receiving dividends as a minority shareholder which, based on the Company's previous practice of not paying dividends, left the petitioner at the mercy of Nazar and George as to what he should receive out of the profits and when.

Further, the Court noted that the petitioner was unable to dispose of his interest without the consent of Nazar and George.

The Court reiterated that all these led only to the conclusion that the right course was to dissolve the association by winding up.

THE POSITION IN MALAYSIA

In Malaysia, a company may be wound up under section 218(1)(i) of the Companies Act, 1965 ("Malaysian Act") which is substantially similar to section 222(f) of the English Act.

The first reported case in Malaysia where the court applied the principles laid down in Ebrahimi is In the Matter of Tahansan Sdn Bhd [1984] 1 MLJ 204. This decision of N.H. Chan J was subsequently upheld by the Privy Council in Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 MLJ 433.

Subsequently, in Tien Ik Enterprise Sdn Bhd & Ors v Woodsville Sdn Bhd [1995] 1 MLJ 769, the Supreme Court held that it is not essential, and is therefore not a condition, that all or at least one of the three elements mentioned by Lord Wilberforce must be present before the Ebrahimi principles can be applied. In this case, the Court held that the agreement by the parties to wind up the companies voluntarily was clear evidence that they no longer enjoyed the confidence of each other and provided convincing evidence of the breakdown of mutual confidence among the parties to justify the winding up on the just and equitable ground.

The Supreme Court in Tien Ik also held that, unlike the English Act which requires the court to consider whether there are alternative remedies available before making a winding up order, there are no provisions in section 218 of the Malaysian Act which impose a corresponding obligation on the Malaysian courts. Accordingly, the Supreme Court held that it is not obligatory for the court to consider the availability of alternative remedies before making a winding up order under section 218(1)(i) of the Malaysian Act.

Another noteworthy Malaysian case is Re Lo Siong Fong [1994] 2 MLJ 72. In this case, three families, namely the Lo, How and Foong families, had incorporated a company, Federal Paint Factory Sdn Bhd ("Federal Paint"). The Lo family initially held more than 50% of the issued share capital in Federal Paint and it was contended that there was an understanding among the shareholders that a member of the Lo family would always be the managing director of Federal Paint. Subsequently, the Lo family disposed of all but 296 of the 10,296 shares held by them in Federal Paint, resulting in more than one-half of the share capital being held by persons who were not members of any of the founding families.

V.C. George J (as he then was) held that a legitimate expectation to manage a company or a quasi-partnership formed originally between the parties may be altered and disappear lawfully with the passage of time. According to the learned Judge, the courts are bound to assess the reality of the situation to determine whether the original expectations of the quasi-partnership still existed between the parties. Based on the facts described above, George J concluded that the relationship of the parties "had altered beyond recognition" and that the quasi-partnership "had re-metamorphosed to being an incorporated company." Thus, it was held that the reliance by the petitioner in this case on a legitimate expectation was clearly misplaced.

CONCLUSION

The battle of Westbourne Galleries in Ebrahimi did not cause loss of life as the pitched battles fought by the great Persian kings, Cyrus the Great, Darius and Xerxes at Media, Thermopylae, Marathon, Salamis and Plataea did. Nevertheless, it leaves an indelible mark in English law as it was the first time that the House of Lords had to consider whether quasi-partnership principles could be applied within the framework of an incorporated company. This decision is the locus classicus on the subject and remains relevant to this day.

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