Gigi Osco-Bingemann and others v John Paul Jones De Joria and another CLAIM NO. AXAHCV/2004/0011

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1 Page 1 Eastern Caribbean Supreme Court Reports/ 2006 / Anguilla / Gigi Osco-Bingemann and others v John Paul Jones De Joria and another - [2006] ECSCJ No. 169 [2006] ECSCJ No. 169 Gigi Osco-Bingemann and others v John Paul Jones De Joria and another CLAIM NO. AXAHCV/2004/0011 EASTERN CARIBBEAN SUPREME COURT; HIGH COURT OF JUSTICE; TERRITORY OF ANGUILLA George-Creque, J. 25 April May 2006 Mr. Kenneth MacLean, Q.C. and Ms. Jenny Lindsay for the Applicants/ Defendants Mr. Mark Brantley and Mrs. Chanelle Petty Barrett for the Respondents/ Claimants RULING 1 GEORGE-CREQUE, J.: The substantive action in this matter commenced by a Fixed Date Claim whereby the court was asked to interpret a document called "Unanimous Shareholders Agreement" and to say whether same entered into by Mr. Martin Crowley on the one hand and Mr. John Paul DeJoria ("DeJoria") on the other in their personal capacity, was valid and enforceable as against or in relation to Caribbean Distillers Corporation ("CDC"), a company in which the estate of Crowley (deceased) are the ultimate beneficial shareholders in equal shares, has been winding its way through the court system. The High Court delivered Judgment on the substantive matter on 11 th January, The Court of Appeal on April 25 th 2006 delivered its Judgment. The matter now appears to be heading to the final appellate court, the Judicial Committee of the Privy Council. 2 In the meantime, interim relief had been sought and obtained by the Claimants without notice, in a related action by way of petition for the winding up of CDC, with a view to preserving the status quo particularly as it related to the

2 Page 2 operations of CDC which company is by far the key (and from all accounts most successful entity) within the corporate group. On 15 th June, the exparte order was discharged but the parties gave to the court their mutual undertakings which undertakings were couched in terms virtually similar to the terms of the exparte order and said to endure until further order of the Court. These undertakings are contained in fourseparate paragraphs as noted in the Order of the court made on the said date in this action. 3 Ms. Bingemann was appointed to the board of directors of CDC pursuant to the first undertaking as a representative of the Claimants. Nothing further turns on this. 4 The remaining undertakings ("the Undertakings") are the ones germane to the Applications subsequently made to the court - one made on behalf of the Claimants ("the Executors") filed on 28 th November, 2005, which sought in their words to modify the undertakings so as to strengthen them based on the Executors' complaint that subsequent to the giving of the undertaking the remaining two (2) directors of the board, namely, DeJoria and Mr. Ajendra Singh, who is also the president of CDC, were taking decisions in respect of CDC which had the effect of breaching The Undertakings and was causing, inter alia, oppression and unfair prejudice to the Executors. Earlier in October, CDC had itself made application to the Court seeking to be joined as a party to the proceedings for the purpose of seeking a declaration that CDC was not bound by the Undertakings or alternatively seeking the Court's approval for certain actions by CDC in light of the Undertakings. On 26 th February, 2006, DeJoria also made Application seeking, in essence, similar relief as was being sought by CDC in relation to the actions being undertaken on behalf of CDC. 4 The court saw a flurry of affidavits and counter affidavits emanating from all sides, prompting ancillary strike out applications in their wake. On 3 rd March, 2006, the Court refused CDC's Application to be joined as a party to the action. This then left the opposing Applications of the Executors and Dejoria which then came on for hearing on 25 th April, At that hearing the Executors withdrew their November 28 th Application in respect of The Undertakings which then left the court to deal with DeJoria's Application as the substantive Application. 5 I now set out the Undertakings as set out in the Order of 15 th June 2004 (each of which will be on occasion be referred to as the second, third and fourth Undertaking) : "2. (Whether by themselves their servants or agents) not to take any action or omit to take any action on behalf of the company 1 other than in the ordinary course of its past business practices; 3. (Whether by themselves their servants or agents) not to take or omit to take any action that would be detrimental to the interests of the company and/or the interests of the shareholders of the company; 4. (Whether by themselves their servants or agents) not to make or cause to be made any distribution of assets, dividend or other payment from the company or any of its subsidiaries or affiliates to the Claimants, the Defendants or any companies owned or controlled by any of them" 6 DeJoria, in his Application, seeks, in essence, the following: (1) A Declaration that the mutual undertakings given to the Court on 15 th June 2004 by the 'Executors' and 'DeJoria 2 ' do not have the effect of preventing any of the following namely: (a) The acquisition of the assets of a business in Mexico called Tequila El Viejito ("TEV") which has been used in the production of tequila for CDC for many years ("the Acquisition") (b) The replacement of CDC's Secretary and Registered Agent ("the Formalities") (2) Further, or alternatively, an Order that the Undertakings be discharged or varied to the extent necessary and as the court thinks fit, so as to permit the Acquisition, the Formalities, and the payment of a US$20 Million dividend ("the Dividend") to each of CDC's shareholders as approved by the Board of CDC on 8th June, 2005.

3 Page 3 Release or discharge from undertakings 7 It is not challenged on either side that the Court has an inherent discretion to release or discharge undertakings given by a party to the Court to the extent that it is just to do so. Indeed, both sides (prior to the withdrawal of the Executor's Application) were seeking some form of discharge or variation to the extent they considered just albeit for different reasons. In Kensington Housing Trust -v- Oliver 3 the Court of Appeal stated the relevant principles thus: "(1) An undertaking is a solemn promise made to the court and not to the other party to the proceedings; a breach of that promise is a matter which affects the court itself and may be enforced by committal; the court must, therefore, in a proper case have the power to release the person giving the undertaking from the promise made to the court where, for instance, through no fault of the giver, the undertaking cannot be subsequently complied with; (2) To record an undertaking in an order does not prevent the court from dealing with it as an undertaking; it is not necessary to expressly include in the order a term that the parties may have liberty to apply to the court for the person giving the undertaking to make an application to be released from it; the court has the jurisdiction to discharge an undertaking at any stage if it is just to do so. (my emphasis) 8 It is with the last statement contained in the principles as set out in subparagraph (2) as highlighted on which both sides place heavy reliance in support of and in opposing the Application. It is not being advanced nor, in my view, could it be, based on the evidence before the court, that the Undertakings cannot be complied with. The applicant seeking the release or variation must show that "circumstances have arisen which make that course a proper one in the interest of justice" 4 The power is therefore a discretionary one. 9 Guided by these principles, I must look at the circumstances which have arisen in determining whether the course of releasing or discharging DeJoria from the Undertakings mutually given, or varying them in any way, would be a proper one in the interest of justice. DeJoria by his counsel contend that the court, in order to make this determination, may look at the context in which the Undertakings were given or their underlying purpose, and also consider whether there has been a sufficient change of circumstances. Counsel for the Executors, Mr. Brantley, adds that account must also be taken, in essence, of the conduct of the parties. The nub of the Executors' complaint may be summed up as being the Estate's representative on the board, Ms. Bingemann, being shut out of the decision making process coupled with a failure to disclose relevant information enabling her to participate in a full and informed manner, in the affairs of CDC to the ultimate detriment of the Estate. 10 Against this background, I propose to deal with each of the proposed actions in turn. The Acquisition 11 For DeJoria it is said: (a) (b) (c) The acquisition is in fact undertaken by CDC Mexico, a subsidiary of of CDC (and not CDC itself) and therefore falls outside the scope of the Undertakings. A Letter of Intent dated 3 rd May 2004, as well as a Sale Agreement dated 21 st July, 2005 (translated to English) exhibited shows the contracting party with TEV to be CDC Mexico and was an action commenced even prior to giving the Undertakings. The Executors do not dispute that the Acquisition is in the best interest of CDC. This is clear from the form of "Stipulation Among Parties" which was proposed by the Executors to be presented to the court in light of the Undertakings. This document recites in part as follows: "CDC and / or its affiliates have conducted business with the El Viejito Tequila... factory in Mexico for many years through the purchase of various goods and services for use in the production of CDC's Patron brand of ultra premium Tequila and because such goods and services have become an integral part in the production process, the board of directors of CDC has unanimously resolved that it is in the best interests of CDC to pursue

4 Page 4 the acquisition of the business assets of "TEV" (my reference) in order to ensure the continued supply of such goods and services." (d) (e) (f) (g) It also went on to recite that the Acquisition was to be for a price of approximately US$3.5 million. In Ms. Bingemann's letter of 5 th July, 2005 to Mr. Singh in respect of the Board minutes of CDC in respect of a June 8 th meeting, she stated that she was generally in favour of the Acquisition but expressed the view that the court's approval was needed in light of the Undertakings. The said board minutes of CDC of 8 th June, 2005, records that a unanimous resolution for the Acquisition by CDC for approximately US$3.5 million was adopted. Ms. Bingemann did not raise any issue with regard to information, financial or otherwise, pertaining to the acquisition until much later in November, 2005, after CDC had sought to be joined as a party to the proceedings. CDC has been 'wildly successful' 5 and its production capacity must expand to meet demand and it is more beneficial to bring TEV 'in house'. 12 The Executors maintain that they are not opposed in principle to the Acquisition but that Ms. Bingemann has not been furnished with adequate information in relation to its purchase so as to make an informed assessment thereon. Counsel for the Executors contend that as matters stand it is not clear whether the Acquisition is to be approximately 3.5 million or whether funds in excess of 20 million have already been spent given the apparent conflicting statements made by Mr. Singh. 13 I must confess that given this state of affairs it is difficult to say which entity is in effect undertaking the Acquisition or precisely how the same is being funded. Suffice it to say that on the evidence what is clear is that the companies are all intimately related to the point where the business of the subsidiary can only be viewed as the business of the parent company, CDC, the central organ. I am also satisfied on the evidence produced, that the funds for and in respect of the operation of the various entities flow into and out of CDC. Accordingly, I do not accept that by reason of the fact that the Acquisition may be by CDC Mexico that it thus falls outside of the scope of the Undertakings. 14 It is urged by Counsel for DeJoria that in any event, the Acquisition would not be in breach of the Undertakings, in particular the first Undertaking, as such an activity is in the ordinary course of CDC's business as contemplated by the Undertakings. 6 Having perused the transcript of the proceedings which was then before my brother judge, as well as from my own observations in respect of the proceedings with which I am familiar, having had virtually continuous conduct of the matter, I am satisfied as to two matters in respect of the Undertakings: (a) (b) Their purpose and intent was so as to ensure that no action was undertaken which would deplete or destroy CDC's assets which would in turn have an adverse impact on shareholder value or adversely affect any shareholder. It is in that sense that the status quo was to be maintained; CDC was to be permitted to carry on business in the normal way as a successful spirits company in its production and sale of Tequila, the ultimate goal being to preserve shareholder value and not, as it were, to have in any way, the effect of freezing in time or suspending the growth of CDC's business. 15 This, in my judgment, would include any activities associated therewith for achieving this end. The acquisition of plant and equipment by way of purchase, as contemplated by the Acquisition, (as opposed to the previous arrangements in place under leasing arrangements) which would enable CDC to more effectively or successfully carry on its business as such a company, cannot, in my view, be reasonably considered as being outside the ambit of CDC's normal course of business or 'its past business practices'. I do not consider that the phrase "the ordinary course of CDC's past business practices" in the context of the Acquisition and its purpose is an action which would be caught or prohibited by virtue of the Undertakings. To say otherwise would be to place too strict an interpretation on this expression which may give way to a commercially unsound approach to the business of a successful trading company which both sides say has enjoyed phenomenal growth in its business enterprise which it has been carrying on over the years thus fulfilling the very purpose for which it was established.

5 Page 5 16 Even were I of the view that the Acquisition was caught by the Undertakings, I would have been minded, subject to the caveat expressed hereafter, in light of the fact that it is accepted by both sides that the Acquisition is in the best interest of CDC, that it would have been just so to do so as to ensure that the purpose of the Undertakings and the business purpose of CDC were being effectively achieved. It must be noted that the Undertakings not only cover actions but also omissions. Were the company not to take steps which would ensure its success in its business operations where the necessity to expand became integral to such success, such an omission may give rise, in my view, to the potential of running afoul of the third Undertaking. 17 Having said this, I must, however, express concern that the financial and other pertinent information is not being shared with Ms. Bingemann in her capacity as a director of CDC. She was not appointed to this position as a mere figurehead, and ought to be accorded the same treatment as any other director of CDC. She has every right to be furnished with this information, all the more so in light of the apparently conflicting sums of money which has either been or is to be expended. Whilst it may be that she has not addressed her request specifically to the board of directors, the evidence bears out that she has made requests of Mr. Singh copied to DeJoria, and or to Mr. Edward Brown, (president of a subsidiary of CDC) copied to DeJoria and Mr. Singh who are the remaining directors of CDC. 7 The responses to her requests particularly by Mr. Singh are, in my view, unhelpful and most certainly unfriendly in their tone. It appears to me necessary to register the Court's strong disapproval of this conduct towards a fellow director. Were it not for the conclusions arrived at as set out above, I may not have been as ready to yield to the request for a relaxation of the Undertakings at it relates to the Acquisition. The Replacement of CDC's Secretary and Registered Agent. 17 It is also contended by DeJoria that the replacement of the secretary and registered agent of CDC is an act which falls within the ordinary course of CDC's business. This action may be taken under CDC's constitution and By-Laws by its directors by majority resolution. 8 He also contends that CDC has in the past already undergone two changes of registered agent and secretary and further that it has not been shown that such a change would in any way be detrimental to CDC's interests or its shareholders. The revised board minutes of CDC of 8 th June state that it was unanimously resolved to remove Mr. Joseph Brice as Secretary of CDC and appoint Mr. Singh. Ms. Bingemann refutes this and says it agreed that Mr. Singh act as Secretary for the purposes of the 8 th June meeting only for the purpose of recording the minutes of the meeting. 18 The minutes record, by majority resolution, the removal of Intertrust (Anguilla) Limited as registered agent and same being replaced by CDC acting from its own offices at Meads Bay Anguilla as registered office. This was made subject to the approval of the court. Whilst the appointment and removal of a secretary does not attract compliance provisions under The International Business Companies Act 10 ("The Act") to which CDC is subject, the same does not hold true in respect of its registered office and registered agent. Sections 36 and 37 of The Act say, in essence, that CDC must at all times have a registered office and a registered agent in Anguilla who must be the holder of a relevant licence 11. It is to be noted that breach of these provisions attracts criminal sanctions under The Act. 12 It has not been asserted that CDC is the holder of a relevant licence. What DeJoria now says is that the registered office and agent of CDC will not be effectively removed until a registered office and agent in compliance with The Act has been appointed and that in any event such changes are not effective until notice has been registered by the Registrar. 13 Mr. Singh complains, in essence, that his relationship with Mr. Brice is not a good one and cited three instances: (i) (ii) (ii) Mr. Brice's attempt to remove him as a director of CDC; refusal or failure to communicate and to provide corporate documents when requested; and ignoring his request in 2005, for copies of minutes of a prior board meeting of CDC but instead delivering same to the 2 nd Claimant who is no longer a board member. It has not been stated when the instances referred at (i) and (ii) occurred. 19 DeJoria also contends that Mr. Brice (through Intertrust) having been appointed to serve on the Advisory Panel for

6 Page 6 the administration of the Children of Anguilla Educational Foundation, as announced on 8 th November, 2005, is in a position of conflict given this obvious connection to the Windsong Trust which is the beneficiary of Crowley's Estate. 20 For the Executors, it is contended that Intertrust and Mr. Brice served in the respective capacities since 1997 and there is no good reason advanced for removal, save for Mr. Brice's refusal to engage in inappropriate actions at Mr. DeJoria's behest to the detriment of the other shareholder of CDC. Both sides are ad idem in acknowledging that the person acting as registered agent or office or as secretary bears no relationship to CDC's success, such offices being, in essence, in the nature of formalities. 21 To my mind, whilst the replacement of corporate secretary is one which falls within the scope of CDC's ordinary course of business, the position with regard to its registered office and registered agent, requires more formalities to be undertaken and may not be treated the same way. The mere passing of the board resolution is not the end of the matter. Additional steps must be taken to ensure due compliance with The Act. In this regard, I hold that such an act would require approval in relation to the Undertakings. The most serious aspect of the complaint against Mr. Brice and Intertrust, in my view, relates to his conflict of interest position as a member of the Advisory Panel to the Children of Anguilla Education Foundation which is related indirectly to the Estate of Crowley and his duties as secretary; and Intertrust as registered office and agent. These positions, to my mind, create a serious conflict of interest particularly in view of the adversarial positions now engaging the shareholders of CDC. He and or Intertrust would be privy to the minutes and internal affairs of CDC in respect of its books and records. Human nature being what it is, this knowledge can very well affect what advice he gives in respect of the Foundation. In saying this I am in no way attributing any improper motives or actions to Mr. Brice or Intertrust. But it would seem to me however, that the perception of neutrality would be equally as important. I accordingly hold that it would be more appropriate in the circumstances, that some neutral third party be appointed provided there is full compliance with the provisions of The Act. The Dividend 22 As earlier said, both sides say that CDC has been extremely successful. DeJoria says that CDC has amassed a surplus in the region of US$90 million and thus payment of a dividend to each shareholder in the amount of US$20 million each is conservative. It is not asserted that by these payments CDC will incur any difficulties of meeting any of its obligations or liabilities as and when they fall due. He also says that when he gave the Undertakings he had no idea that the profits of CDC would be so huge, and that the litigation would have taken this long. He further contends that the dividend payment to Pendragon 14 should be subject to conditions of payment so as to be credited towards the purchase price of Pendragon's shares should DeJoria ultimately prevail on appeal. 23 Counsel for DeJoria contends that the purpose of CDC is to make profit so that its shareholders enjoy a return on their investments which is a legitimate expectation. 15 Provision is also made for payment of dividends in the CDC's By-Laws, The Act and CDC's Articles of Association to which I will revert a bit later. 24 The Executors contend that: (i) (ii) (iii) (iv) (v) It is DeJoria who is prolonging the litigation and thus preventing a final outcome. Seeking to impose any conditions on the payment of a dividend to Pendragon is not permissible under CDC constitution or the Act. Payment of a dividend to Pendragon would cause a tremendous income tax problem for the Estate and the charitable Trust whereas a sale of the Pendragon shares would not. Ms. Bingemann has in essence been deprived of the relevant financial information or only given same at the last minute thus preventing her from carrying out her duties as a director. In reality, there are no changed circumstances as the success of CDC was in the contemplation of the parties. 25 In answer to the Executor's position in relation to the Estate's tax consequences, Counsel for DeJoria suggests that

7 Page 7 the court imposes a term for the payment of Pendragon's dividend into court or into a joint account. 26 It is not contended by DeJoria, (nor could it be) that the payment of a dividend is not expressly caught by the terms of the fourth Undertaking. Counsel for the Executors also say that such a payment, given the drastic tax consequences which Pendragon will suffer, will amount to a violation of the third Undertaking which is not only designed to protect the interest of CDC but also of its shareholders. It is also contended that despite the fact that two courts have now ruled against DeJoria, he advocates a dividend for his company (Island) free and clear, but still insists upon a claw back provision in relation to Pendragon's and that such a stance is in all the circumstances unjust. 27 I now revert to the relevant provisions of The Act, and CDC's By-Laws and Articles in relation to dividends: (a) Section 32 (1) of The Act states thus: "Subject to its articles or by-laws, (my emphasis) an international business company may, by a resolution of its directors, declare and pay dividends in money, shares or other property." (b) Article 128 of CDC's Articles of Association says this: "The company in general meeting (my emphasis) may declare dividends, but no dividend shall exceed the amount recommended by the directors." (c) Section 3.1 of CDC's By- Laws states as follows: " The directors may from time to time by resolution declare and the company may pay dividends on the issued and outstanding shares... subject to the provisions (if any) of the Articles and section 30 of the Ordinance16. (my emphasis) 28 Construing those provisions each in relation to the other it would seem to me, by way of observation (the point not having been raised by the Executors), that the overriding applicable provision is that contained in CDC's Articles as both the Act and the By-Laws are said to be subject to the provisions in the Articles. It would appear to me then that it is CDC in a general meeting who has the power to declare dividends - the directors to recommend the amount. There is no evidence that any general meeting of CDC has occurred in which any dividend has been declared. 29 I am persuaded by the arguments for the Executors that no good or justifiable reason has been put forward by DeJoria for relaxing the Undertaking to permit the payment of a dividend. There is no evidence that the non payment of a dividend to him at this time will be detrimental to him. The Executors pointedly say it will be detrimental to the Estate. At the time of the giving of the Undertakings, CDC was a growing and profitable company. Merely because it has been very profitable does not, to my mind, strike me as the sort of change in circumstances which the authorities on this issue were addressing. Whilst the principle as established in Glossop's case is accepted, the fact is that in the case at bar, the Undertakings expressly forbid the payment of a dividend. Further, I am of the view that DeJoria, in exercising his rights (which he is entitled to do) but which prolongs the final outcome of the matter, must have appreciated at the time of giving the Undertakings that were such a course undertaken, same would involve some time and that profits would undoubtedly accumulate. Further, the mere fact that dividends are not paid out now does not deprive either party from the benefit thereof later. Whilst the litigation is still ongoing coupled with the conditions which DeJoria seeks to have imposed as it relates to a dividend to Pendragon, I see no good reason for relaxing the Undertakings and allowing any dividend payments. In all the circumstances, I am of the view that it would simply not be just to do so. The Strike Out Applications

8 Page 8 30 I have decided there is no need to consider the Strike Out Applications filed by either side as both sides at various stages relied on and referred to portions in the respective affidavits to which the applications referred. Conclusion 31 Based upon the reasons given, I make the following Declarations: (1) The Undertakings do not have the effect of preventing any of the following, namely: (1) The acquisition of the assets of a business in Mexico called El Viejito, which has been used in the production of tequila for Caribbean Distillers Corporation (CDC) for many years; (2) The replacement of CDC's secretary; (2) In addition, I make the following orders: (1) The Undertakings be relaxed to the extent of permitting CDC to replace its registered office and registered agent provided same is replaced in full compliance with the provisions of the International Business Companies Act. (2) The part of the application seeking a variation to the extent necessary so as to permit the payment of a US$20 million dividend to each of CDC's shareholders is refused. Costs 32 There now remains one final aspect of this matter for consideration, namely, the matter of costs. DeJoria has not been wholly successful on his application. I am guided by CPR 2000 Part 64.6 (3)(c) and 64.6(6)(c) and order that the Claimants bear two thirds (2/3) of DeJoria's costs to be assessed unless agreed within twenty one (21) days. Janice George-Creque High Court Judge 1 the "company" refers to CDC as defined in paragraph 1 of the undertakings. 2 (my nomenclature substituted solely for the purposes of identification and consistency herein) 3 (1997) 30 HLR Per Jenkins LJ - Russell -v-russell [1956] P pg: an expression used by the Executors.

9 Page 9 6 See: paragraph 2 of The Undertakings. 7 See: Exhibits GV10, GV28, GV 30, GV 37 8 See: CDC By- Law No 1 ss.12.1, ss20.1 CDC- Articles of Association ss. 121, ss See: Exhibit GV18 10 RSA Cap. I The Act ss. 1 - "relevant licence" means - (a) (b) a licence issued under the Company Management Act; and a licence issued under the Trust Companies and Offshore Banking Act; 12 See: International Business Companies Act Cap. I 20 ss. 36 (1), 36(5), 36(7) and 36(8) ss. 37(1), 37(5), 37 (7) and 37(8) 13 See; ss. 36(4) and 37(4) - The Act. 14 Pendragon International Ltd. is owned by Estate of Crowley and the 50% shareholder of CDC. whilst The Island Company Ltd, mainly owned by DeJoria is the other 50% shareholder 15 See: In re A Company Exparte Glossop [1988] 1WLR Section 30 of The Act in essence deals with treasury shares.