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IN THE SUPREME COURT OF BELIZE A.D.2006

CLAIM NO. 334 OF 2006

BETWEEN: PROVIDENT BANK & TRUST CLAIMANT OF BELIZE LIMITED

AND

1. AUGUST TABONY DEFENDANTS 2. JADE TRUST INC.

Mr. Dean Barrow SC for the claimant. Ms. Lois Young SC for the defendants.

AWICH J.

20.12.2010 J U D G M E N T

1. Notes: Company Law – the position of directors of a limited company; fiduciary duty of a director not to put himself in a position where his personal interest will conflict with his duty to the company and interest of the company that he is a director of; whether the defendant director put himself in a position where his duty to the claimant company conflicted with his personal interest; liability for breach of fiduciary duty of a director does not depend on fraud or on whether the company lost or benefited; articles of association may permit a director to do personal

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business with the company; whether articles of association of the claimant company permitted directors to do personal business with the company; whether there has been proof that the defendant was a director of the claimant company at the time when Santa Rita, a company in which he had interest contracted with and sold shares of another company to the claimant company; whether the contract had been made before the defendant became a director; whether in the circumstances the defendant director was liable to account for profit or money received by him or his agent in circumstances of conflict of interests or of non­disclosure of interest; when will a third person be liable to pay over money in his possession which had been obtained out of breach of fiduciary duty of a director. Statutory duties of a director of a bank or financial institution under ss: 24 and 31 of International Banking Act, Cap. 267 and ss: 16 and 17 of Banks and Financial Institutions Act, cap. 263.

2. This case file was misplaced after the hearing. Many searches were

made and it was finally found. It is regretted.

3. The claimant, Provident Bank & Trust of Belize Ltd, (PBTB) is an

international bank, (off shore bank) doing business in Belize. The

first defendant, Mr. August Tabony, is a director on the board of

PBTB. He is an attorney. His address is: Boulevard del Ejercito

Soyapang, El Salvador. PBTB claimed that Mr. Tabony, through

Santa Rita Holdings Limited (Santa Rita), a company controlled by

him, sold 610,000 shares in Alliance Bank of Belize Limited (Alliance

Bank) to PBTB at a profit, and that the sale was unlawful because Mr.

Tabony was a director of PBTB, he had not disclosed to PBTB his

interest in Santa Rita, and thus in the shares sold.

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4. The claim against the second defendant, Jade Trust Inc., (Jade Trust),

is that it is also a company controlled by Mr. Tabony, and that the

proceeds of the sale, the subjects of this claim, were paid into a bank

account of Jade Trust for the benefit ultimately of Mr. Tabony. It is

claimed that Jade Trust held the proceeds in trust for PBTB.

5. PBTB grounded its claim for unlawfulness of the sale of the shares

on: (1) breach of fiduciary duty owed to PBTB by Tabony, a director

of PBTB; and (2) breach by him as a director of a bank, of s: 24 of

International Banking Act, Cap. 267, and ss:16 and 17 of Banks and

Financial Institutions Act, Cap. 263.

6. The claim against Jade Trust was grounded on constructive trust in

equity. PBTB claimed that the proceeds of the sale of the shares to

PBTB, US$670,000.00 (equivalent to BZ$1,340,000.00), were paid

into the bank account of Jade Trust on the instruction of one Eugene

Zabaneh, who acted as agent for Santa Rita in the sale of the shares,

and that, Jade Trust did not provide any consideration for the money,

and so the court should deem Jade Trust to have held the money in

constructive trust for PBTB.

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7. For reliefs, PBTB claimed against “Tabony as director”: (1) an order

requiring Tabony to account to PBTB for monies he received for the

sale of the shares; or (2) in the alternative, a court order requiring him

to pay over to PBTB what is said to be “secret profit”, in the sum of

BZ$1,220,000.00 that he is said to have made through Santa Rita,

from the sale of Alliance Bank shares to PBTB; (3) “interest at

commercial rate” on the profit sum; and (4) costs.

8. Against Jade Trust, the reliefs claimed were: (1) a court order

requiring “Jade Trust as a transferee and trustee”, to account for

monies received by it from the sale and purchase of the shares; or (2)

in the alternative, to pay to PBTB the profit part, BZ$1,220,000.00, of

the purchase price deposited in the bank account of Jade Trust; (3)

“interest at commercial rate” on the profit sum; and (4) costs. The

reliefs were substantially the same as those claimed against Mr.

Tabony.

9. I have to mention here that PBTB did not plead fraud as a ground of

its claim, although some attempt was made to argue fraud as part of

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the claim. I mention further that, fraud is not necessary in a claim

based on fiduciary duty.

10. The defendant Tabony admitted that he owned controlling shares in

both Santa Rita and the second defendant, Jade Trust, and that Jade

Trust had shares in PBTB. He also admitted that he had interest, but

only in some of the Alliance shares held by Santa Rita and sold by

Zabaneh as agent, to PBTB. Mr. Tabony further admitted that, he was

a director of PBTB, he was elected director on 24.9.2005, and the

Central Bank of Belize (CBB) approved his appointment as director

on 30.9.2005. He denied that he breached the fiduciary duty of a

director, or obligations of a director of a bank or financial institution,

under s: 24 of the International Banking Act, and under s: 16 of Banks

and Financial Institutions Act.

11. In addition to the admissions, Mr. Tabony testified that, he

incorporated Santa Rita on 2.6.1994, and thereafter in the year 2003,

Santa Rita bought 300,000 shares in Alliance Bank at $2.00 each, but

that he had interest in 200,000 of the shares, not in all the 300,000.

He testified further that, on 13.9.2005, Santa Rita bought another

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360,000 Alliance Bank shares at $1.00 per share, but he Tabony, had

interest in only 180,000 shares of the 360,000. He testified on that, on

20.9.2005, Zabaneh acting for Santa Rita, signed a sale agreement

with PBTB for the sale of the shares which included shares that he

Tabony, had interest in. The shares were sold at $3.00 per share; and

15% deposit of the proceeds was paid by PBTB on the same day.

12. Further in his testimony, Mr. Tabony explained that the board of

PBTB passed a resolution on 10.9.2005, authorizing the purchase of

Alliance Bank shares, and that was followed by the signing of the sale

agreement and payment of 15% deposit of the purchase price on

20.9.2005. He accepted that the balance of the purchase price was

paid on 28.12.2005, into the bank account of Jade Trust, on the

instruction of Zabaneh acting as agent of Santa Rita.

13. Regarding the claim of breach of fiduciary duty, and breach of s:24 of

the International Banking Act and s: 16 of the Banks and Financial

Institutions Act that, Mr. Tabony did not disclose his interest in part

of the block of shares sold to PBTB, learned counsel Ms. Lois Young

S.C., for Mr. Tabony, contended that Mr. Tabony was not a director of

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PBTB on 10.9.2005, when the board of directors of PBTB passed the

resolution approving the purchase of the shares, he did not participate

in the resolution; and he was not a director on 20.9.2005, when the

shares were sold to PBTB and 15% of the purchase price was paid.

Counsel submitted that, Mr. Tabony was elected a director later on

24.9.2005, and on 30.9.2005, was approved as a director, by CBB, so

he owed no fiduciary or statutory duty to PBTB to disclose his interest

in the shares, at the time the resolution was passed, and at the time the

sale of the shares was agreed.

14. Ms. Young submitted further, in the alternative I suppose, that Mr.

Tabony did not fail to disclose his interest in the shares, his interest

was not a secret, PBTB through its directors individually, in particular

through Mr. Alvaro Alamia, the managing director, knew since 2004,

when negotiations for the sale of the shares began, and all through the

negotiations, that Tabony through Santa Rita, had interest in part of

the shares to be sold. Further more, the submission continued, Mr.

Zabaneh, the agent who negotiated the sale of the block of shares,

verbally informed Mr. Alamia about the persons who owned the

shares in the block, and in particular that Mr. Tabony owned some of

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the shares shown as Santa Rita’s; and Mr. Zabaneh also showed to the

managing director the notice of sale of their shares given by the

owners of the shares to Alliance Bank. Further more, the submission

continued, PBTB knew of Mr. Tabony’s interest in the shares anyway,

because it was Mr. Tabony who on 20.12.2005, signed on behalf of

Santa Rita, the memorandum of transfer of the shares to PBTB, in the

presence of three directors and the secretary of PBTB.

15. Counsel also raised two rather general contentions, namely, that:

PBTB did not immediately seek to rescind the contract of sale of the

shares, it regarded the sale as beneficial to it, and did not suffer any

loss as a result of the sale; and secondly that the chairperson of PBTB

board, Joy Godfrey, had interest in even a larger part of the block of

shares sold by Zabaneh to PBTB, her husband Glen Godfrey, owned

the shares.

16. Determination

The last two submissions are respectfully summarily rejected. First,

whether or not the chairperson of the board of directors, Mrs. Joy

Godfrey, or indeed any other director had interest in the shares sold by

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Zabaneh, or other shares sold by someone else to the claimant

company, is not material to this claim against Mr. Tabony. A separate

claim would have to be brought against Mrs. Godfrey or the other

director, and evidence would have to be led to prove any breach of

fiduciary duty on the part of Mrs. Godfrey or the other director. It

will be no justification for breach of fiduciary duty by Mr. Tabony if

proved, that another or other directors also breached their fiduciary

duty.

17. Secondly, it is not the law that, a claim will not lie, and relief will not

be ordered against a director, if the consequence of his breach of

fiduciary duty is beneficial to the company. The contrary is the law.

In the case of Regal (Hastings) Ltd. v Gulliver and Others [1967] 2.

A. C. 134, the House of Lords in deciding the scope of the fiduciary

duty of the directors of the claimant company and the reliefs available

against four of the five directors for breach of their individual

fiduciary duty, stressed the position of a director as a fiduciary

whether viewed as a trustee or an agent. They all took the view that

the liability of a director did not depend on fraud, and that liability

arose whether or not the claimant company lost or benefited from the

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wrongful acts of the directors. Their lordships then applied the reliefs

available in equity.

18. Lord Russel of Killowen summed up the scope of the liability of a

director at page 144 in these words:

“My Lords, with all respect, I think there is a

misapprehension here. The rule of equity which insists

on those who, by use of a fiduciary position make a

profit, being liable to account for that profit, in no way

depends on fraud or absence of bona fides; or upon such

questions of considerations as whether the profit would

or should otherwise have gone to the plaintiff, or whether

the profiteer was under a duty to obtain the source of

profit for the plaintiff, or whether he took a risk or acted

as he did for the benefit of the plaintiff, or whether the

plaintiff has in fact been damaged or benefited by his

action”.

19. Another case in which it was said that it was not relevant, and the

court will not inquire into whether the company has or has not lost as

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a consequence of the wrongful act of the director is, Parker v

McKenna [1874] 10 Ch. App. 96. In the case, all the company’s new

shares issued pursuant to a resolution to increase capital were in the

end paid for at the price fixed in the resolution. The company did not

lose, but four of the directors were ordered to account for profit they

made individually in the purchase and sale of some of the shares in

circumstances which did not involve fraud, but which were regarded

as breach of fiduciary duty.

20. The brief facts were these. The company passed a resolution to

increase the share capital of the company. Existing shareholders were

to be allotted one new share for one old share. Shares not taken by the

existing shareholders were to be disposed of by the directors. The

shareholders did not take up all the new shares. The directors

arranged with someone who took all the remaining new shares. He

was unable to pay up some of the shares. He applied to the directors

to relieve him of those shares. They severally took up the shares and

sold them at a profit. The shares were paid up at the price stipulated

in the resolution. It was held that as a fiduciary each director was

liable to account for the profit he made.

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21. This claim is about the fiduciary duty that a director owes to the

company. Those duties arise from the position of a director in relation

to the company. The first principle to remember in the determination

of the claim is that, directors of a company together are the managers

of the company; they act as a board of directors, and carry out their

functions by their resolutions; and may by their resolution authorize

one or some of them to perform particular tasks. Directors are

sometimes referred to as managing partners.

22. The position of an individual director may be viewed as that of a

quasi – trustee on the one hand, and an agent of the company, on the

other hand. He is a quasi­trustee of the money and other properties

of the company, that is, of the shareholders as a whole; and also a

quasi – trustee of the management powers of the company. That was

the principle that emerged in the early case of Tyrell v Bank of

London 10. H.L.C 26 – see also Great Eastern Railway Co v Turner

(1872) L. R. 8 Ch. 149.

23. A director is not a complete trustee because the legal title to the

property that he exercises power over jointly with other directors is

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not vested in him, it is vested in the company – see Smith v Anderson

(1880) 15 CH. D. 247(CA), and In re Forest of Dean Coal Mining

Co. [1878] 10 Ch . D 45. Moreover, a director’s management powers

are restricted to the terms of the memorandum and articles of

association of the company and provisions in the Companies Act, cap.

250.

24. A director is an agent of the company in the transactions, the

contracts, that he enters into on behalf of the company – see Turner’s

case, Aberdeen Railway Co. v Blaikie Bros (1854) 1 Macq. 461; and

generally the view of Bowen L.J in Imperial Hydropathic Noted Co,

Blackpool v Hampson 23 Ch D.1, at page 12, that the position of a

director is identified according to the problem at hand.

25. In both capacities as quasi trustee and agent, a director of a company

is a fiduciary; he owes fiduciary duty to the company. As a fiduciary

he must exercise his powers for the purposes for which they were

conferred, and he must act bona fide, that is, in good faith, and for the

benefit of the company, the shareholders as a whole. From that, the

rule was established that, a director must not put himself in a position

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in which his duty to the company and therefore interest of the

company, and his personal interest may, or are likely to conflict. The

claim of PBTB is based on that rule.

26. The purpose for which the powers of directors are conferred are found

in the memorandum and articles of association of the company, and of

course in the Companies Act. Illustration of the rule that directors

must exercise their powers for the purposes for which the powers are

conferred and in good faith, is in Piercy v Mills & Co. Ltd. [1920] 1

Ch. 77. In the case, the directors issued unissued shares of the

company to themselves and their supporters, with the object of

maintaining majority votes and control of the company and resisting

election of three new directors. It was held that the issuing of the

shares was “invalid and void” because it was not done for the purpose

of the power to issue shares, which was to raise capital for the

company.

27. More Illustrations of the duty to act in good faith are in the cases of

Lee v Chou When Hsier [1985] BCL 45 PC; Gwembe Valley

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Development Company and Another v Thomas Koshy and Others

[2003] EWCA Civ 104; and of course in the Regal (Hastings) case.

28. The consequence of a breach of his fiduciary duty is that a director

will be held liable to the company even if he did not act fraudulently,

and even if the company has not suffered loss. He will be liable to

render account of the transaction which is the result of his abuse of, or

failure in his fiduciary duty. If he has made profit, the director will be

required to surrender the profit to the company. Moreover, the

company does not have to show that it suffered loss as a consequence,

or that the profit would have been made for the company; and it is not

a defence that the company had no capacity to make the profit – see

Boston Deep Sea Fishing Co v Ansell [1889] 39 Ch. D.339 (CA). If

the breach of duty is in the form of a contract that the director has

entered into, it will generally be treated as voidable as in Transvaal

Lands Company v New Belgium (Transvaal) Land and Development

Company [1914] 2 Ch 488 (C.A.) and in Hely – Hutchinson v

Brayhead Ltd., and Another [1968] 1Q.B.549 C.A. Sometimes the

contract is treated as void as was the case in Piercy’s case above.

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29. As mentioned above, the Regal (Hastings) case illustrates in

particular, irrelevance of fraud, and generally that the liability of a

director arises regardless of the benefit to the company, of the

unlawful transaction by the director. In the case, Regal (Hastings)

Ltd. owned a cinema. It formed a subsidiary company with a view to

buying two smaller cinemas and the leases owned by the cinemas, and

selling the company and subsidiary hopefully at a good profit. The

company was able to raise £2,000.00 which was less than one half of

the capital required in the subsidiary company. With that knowledge,

four of the directors agreed to apply for, and had allotted to them

shares in the same proportions, each worth £500.00. The fifth

director, the chairman, found other persons to take his proportion of

the shares. The company solicitor was invited to apply and was also

allotted the same proportion of shares. The two cinemas and the

leases were bought. Then the shares of Regal that became the holding

company, and of the subsidiary company were sold at substantial

profit. The four directors and solicitor personally made profit on their

£500.00 worth shares each.

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30. Once the shares were owned by some other persons and new directors

came into office, Regal made a court claim to recover the profits made

by the former directors and the solicitor on the grounds that: (1) the

five directors and the solicitor obtained the profits they made in the

sale of their shares by use of knowledge they had acquired in their

positions as directors and solicitor of Regal, so as to acquire the shares

for themselves with a view to at once selling them at substantial

profit; and (2) the principle of equity regarding the position of a

trustee applied to a director or a solicitor of a company so that the

profit made should be recovered by Regal.

31. Although fraud was not pleaded, Regal at trial put forward fraud as

part of the case. The trial judge accepted fraud as an issue, although

he found that Regal failed to prove that the defendants, “acted in ill

faith”. The judge dismissed the claim on the ground that Regal failed

to prove fraud. The Court of Appeal upheld the decision and

dismissed the appeal of Regal on the ground that the directors and

solicitor acted “bona fide” in deciding that they were unable to comit

more money of Regal into investment in the subsidiary, and therefore

the directors made the personal investments to raise the remainder of

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the required capital “bona fide”, and did not act in breach of fiduciary

duty to Regal.

32. The House of Lords disagreed and allowed the further appeal of Regal

against the four respondents­directors. Their lordships held that the

four directors were in a fiduciary position and were liable; their

liability to account did not depend on fraud. Viscount Sankey stated

at page 137 this:

“In my view, the respondents were in a fiduciary position

and their liability to account does not depend upon proof

of mala fides. The general rule of equity is that no one

who has duties of a fiduciary nature to perform is

allowed to enter into engagement in which he has or can

have a personal interest conflicting with the interest of

those whom he is bound to protect”.

33. Their lordships dismissed the appeal against the fifth director, holding

that he made no profit for which he was liable to account. They also

dismissed the appeal against the solicitor.

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34. The law is that where the breach of fiduciary duty is fraudulent, the

company will in addition be entitled in common law to damages

occasioned. A third party who receives property of the company with

knowledge of the fraudulent breach of fiduciary duty will, as a

constructive trustee in equity, also be liable to the company.

35. Apart from the duties of a fiduciary, a director owes to the share­

holders as a whole, the general duty of care in tort. A case in point is

Re City Equitable Fire Insurance Co Ltd. [1925] Ch. 407. In the

present case, there has been no claim that the defendants breached

their general duty of care; that point is therefore not for consideration

in this judgment.

36. The general rule that a director must not put himself in a position in

which his duty to the company and his personal interest may conflict

is often relaxed by articles of association of the company authorizing

that a director on the one part, may do business with the company that

he is a director of, on the other part – see Costa Rica Ry v Forwood

[1901] 1Ch. 746 (C.A.); and Imperial Mercantile Credit Association

v Coleman [1871] 6 Ch. 558. In my view, that follows logically from

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the nature of articles of association as a contract which binds the

company and shareholders – compare Albion Steel and Wire

Company v Martin [1875] 1 Ch. D 580.

37. It is almost always the case that articles of association will relax the

rule of no conflict between duty and personal interest, where a

company is formed by shareholders (including companies) who are

already carrying on the same or related businesses separately, with a

view that the new company may better or more profitably carry on a

related business as a joint venture business of those who formed the

new company. It is also permissible that a director who has entered

into a transaction in circumstances of conflict of interests, may

subsequently obtain a waiver by the shareholders as a whole, of

breach of fiduciary duty, or even obtain prospective waiver. Three

cases in point are: N.W. Transportation Co. v Beatty [1887] 12 App.

Cas 589 P.C; Bamford v Bamford [1970] Ch. 212 C. A; and Wintrop

Investments Ltd. v Winns Ltd. [1975] 2 N.S W.L.R 666 (C.A.).

38. Mr. Tabony admitted that he was a director of PBTB, but from a

specific date. It was also a common fact that Jade Trust, a company

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controlled by Mr. Tabony, owned shares in PBTB, and based on that,

he was elected on 24.9.2005, by the shareholders of PBTB to be a

director of PBTB. Accordingly Mr. Tabony would, in the period that

he was a director, have to live up to the duties of a fiduciary outlined

above, except to the extent that the articles of association of PBTB

may have exempted directors. The date on which Tabony became a

director is therefore crucial to the determination of this claim, in my

view.

39. It is common ground that exhibit D(AT) 8 is the Memorandum and

Articles of Association of PBTB. The articles permit at articles 89

and 90, a director to do business in circumstances that otherwise

would be regarded as creating conflict of duty and self­interests, or

likely to put a director of PBTB in a position of conflict of interests.

The two articles state as follows:

“89. A director may hold any other office or place of profit under

the company (other than the office of the auditor) in conjunction

with his office of director for such period and for such terms (as to

remuneration or otherwise as the director may determine, and no

director or intended director shall be disqualified by his office from

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contracting with the company either with regard to his tenure of

any such other office or place of profit or as a vendor, purchaser or

otherwise, nor shall any such director contracting, or any contract

or arrangement entered into by or on behalf of the company in

which any director is in any way interested, be liable to be avoided,

nor shall any director so contracting or being so interested be liable

to account to the company for any profit realized by any such

contract or arrangement by reason of such director holding that

office or of the fiduciary relation thereby established.

90. Any director may act by himself or his form in a professional

capacity for the company, and he or his form shall be entitled to

remuneration for professional services as if he were not a director;

provided that nothing herein contained shall authorize a director or

his form to act as auditor to the company.”

40. So, the articles permitted Mr. Tabony or any other director, whether

by himself or by a company that he had control over, or by a human

agent, to do business with PBTB for personal profit or other gains.

Accordingly when Mr. Tabony allowed Santa Rita to sell shares that

he had interest in to PBTB, he was exempted from his fiduciary duty

not to place himself in a situation of conflict of duty and self­interest,

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he had been permitted in the articles. He was, however, limited by

article 88, in that he was required “to declare”, that is, to disclose to

the other directors the nature of his interest if he was to participate in

the decision of the directors in regard to the transaction that he had­

self interest in. The limiting words of article 88 are the following:

“88. A director may vote in respect of any contract or proposed

contract or arrangement with the company, notwithstanding that he

may be interested therein, provided that before the same is put to a

vote, he shall fully declare to the directors the nature of his

interests.”

41. The alternative submission for Mr. Tabony was that his interest was

disclosed, in that the managing director Mr. Alamia, was told about

Mr. Tabony’s interest in Santa Rita, the seller of the shares, and other

directors were otherwise aware of the interest, and further, Mr.

Tabony was the one who signed the share transfer memorandum in

the presence of three directors so that the transfer of Alliance Bank

shares to PBTB could be effected. Those are attractive logical

arguments, however, they are not the law.

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42. Under the general principle of company law, unless it is provided

otherwise in the articles of association, disclosure of interest by a

director need not be made formally to a board of directors, but the

director must make “full disclosure of all the material facts, regarding

the nature and extent of his interest to all the shareholders, and they

must approve of the transaction”, in which there is the self­interest of

the director. The purpose is to inform the shareholders of the real

state of things. That was restated in the Gwembe case. In this claim,

there has been no defence that Mr. Tabony made full disclosure to the

shareholders as a whole.

43. Where articles of association have made provisions replacing the

general principle, the law is that when directors are required by

articles of association to disclose their interests in transactions with

the company, they must do so “in strict compliance with the

provisions of the articles, and must disclose the full nature and extent

of the interests”. In this claim, articles 89 and 90 provide very wide

permission to directors to take up employment, or do personal

business with PBTB. The articles do not require a director to disclose

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his interest before he acts in his self­interest in a transaction with the

company.

44. It is article 88 that requires disclosure by a director, but the article

requires disclosure only if the director intends to vote in a meeting of

the board of directors at which his self­interest will be discussed. In

this claim Mr. Tabony did not attend the meeting of the board on

10.9.2005, when the sale was approved by the board of directors. He

could not attend because he was not a director. He did not then fail on

that occasion to make disclosure according to the articles of

association of PBTB or under the general principle.

45. In the Gwembe case it was held that, the informal and self knowledge

of the other directors, of the interest of the appellant director was not

sufficient disclosure under the articles of association of Gwembe, or

under the general law. The lords of appeal (UK) held that the proper

interpretation of the articles of association was that the appellant

director was required to formally inform the other directors in a board

meeting, of the nature and extent of the loan transactions the subject

matter in the case, and his interest and profit. The court of Appeal

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(UK) explained that the articles required that the directors be informed

in a meeting of the board so that the board would have opportunity to

debate the matter.

46. The facts of the Gwembe case were long and complicated. A basic

outline is this. Several foreign investors made investments in

Gwembe Valley Development Company Ltd., a joint venture

company in Zambia, Africa. I shall refer to the company simply as

Gwembe. The business intended was the development of agriculture,

namely, cotton and wheat farming in Gwembe Valley area in Zambia.

The largest investment came from Lummus Agricultural Services

Company Ltd., (Lasco), a British company controlled by one Thomas

Koshy, the appellant and also respondent in the cross­appeal. He was

also a director. All the investors had directors on the board of

Gwembe in the proportions of their investments. Lasco had the most

directors on the board. Mr. Koshy became the Managing Director of

Gwembe. Lasco also secured a management contract for managing

Gwembe. Mr. Koshy was the person in charge of the management.

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47. Lasco’s investment in Gwembe was said to be US $5.8 million. It was

an aggregate of several loans in the local currency, the Kwacha. The

Kwacha equivalence was 56.4 million. The actual cost to Lasco of the

aggregated loans to Gwembe was US$1.04 million, not US$5.8

million. Gwembe acknowledged the sum of US$5.8 million as a debt

owed to Lasco.

48. The Kwacha had depreciated massively and continued to depreciate,

so that its real value against hard foreign currencies in the open

market was much smaller than its artificially fixed value at the Central

Bank of Zambia. The Central Bank could release to a trader a hard

foreign currency for Kwacha at an official favourable rate of exchange

for Kwacha, for certain officially approved transactions. So a sum in

Kwacha could buy more hard foreign currency from the Central Bank

than from the open market. This was the centre­piece of the

arrangement referred to as the pipeline loans or pipeline transactions,

from which Mr. Koshy profited.

49. Mr. Koshy obtained foreign currencies from the Central Bank at the

favourable artificial rates of exchange for the Kwacha, based on the

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agricultural business of Gwembe. He provided Kwacha sums to

purchase the hard foreign currencies. Then he sold at higher rates,

some of the hard foreign currencies he obtained from the Central

Bank, to other companies that could not obtain hard foreign currencies

for Kwacha at the favourable rates. He made huge profits, and made

loans in Kwacha to Gwembe aggregating 56.4 Kwacha. The actual

cost of the loans to Mr. Koshy was US$1.04 million. The figure

shown as the overall total loan owed by Gwembe was US$5.8 million.

50. When Gwembe was placed into court receivership, the official

receiver made a claim against Lasco and Mr. Koshy for, “equitable

compensation for breaches of fiduciary duty, and for damages for

deceit”. The details of the equitable compensation or relief were

given as: (1) account of profit made by a director, and (2) return of

monies held by Lasco as a constructive trustee. The official receiver

alleged that Mr. Koshy breached fiduciary duty of a director, he

deliberately never disclosed to the board of directors or members of

Gwembe the true cost to Lasco of the Kwacha loans to Gwembe or

the extent of the profit made, or the extent of Koshy’s interest in

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Lasco. The liquidator alleged further that, the board never passed any

resolution authorizing the pipeline loan transactions.

51. Lasco, originally cited together with Mr. Koshy as defendants, was

placed into liquidation after the claim was commenced, the claim then

proceeded against Mr. Koshy alone. He contended that: (1) he owed

no fiduciary duty to Gwembe because according to the several

investment agreements, parties understood that in transactions

between Gwembe and each investor, the person nominated by each

investor to be a director on the board of directors of Gwembe owed

fiduciary duty to his principal the investor, not to Gwembe; (2)

according to the articles of association there was no duty on a director

to disclose interest; and (3) in any case, there had been disclosure

because the other directors had knowledge that Koshy had interest in

Lasco, and knowledge of the negotiations that Koshy had with the

Central Bank of Zambia.

52. Apart from the question of time limitation of action, the trial court in

the UK held that, Koshy dishonestly and in breach of fiduciary duty,

procured Gwembe to enter into loan transactions with Lasco, without

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making proper disclosure to the other directors or shareholders, of the

existence and extent of his personal interest and that of his company,

Lasco. The judge made an order for Koshy to account to Gwembe for

the profit made. But the judge also held that Gwembe did not satisfy

him that the dishonest breach of fiduciary duty by Koshy caused

Gwembe loss, and the judge did not make an order for damages for

the dishonesty, the deceit or fraud.

53. Koshy appealed to the Court of appeal (UK) on the ground that, the

trial judge erred, there was no evidence to support the finding of

dishonesty, and therefore to make the order that Koshy ought to

account to Gwembe for the profit he made. Gwembe cross­appealed

on the ground that the trial judge erred in limiting the order to account

for profit to what belonged to Gwembe, the order to account should

have included all unauthorized profits made by Koshy.

54. The Court of Appeal (UK) dismissed the appeal of Koshy. The Lords

of Appeal decided that Koshy owed a fiduciary duty to Gwembe and

that on the true construction of the articles of association, the

provisions did not relax the duties of the directors of Gwembe to the

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extent urged by Koshy; (2) the articles did not exclude the duty of a

director to disclose self­interest; (3) the articles required that

disclosure must be made, “at a meeting of directors”, informal

piecemeal disclosure or proof of knowledge by individual directors

was not sufficient. The court explained that disclosure at a meeting of

the board of directors would provide the necessary opportunity for

consideration of the matter by the board. The Court of appeal upheld

the finding of dishonesty, and held that Koshy as a fiduciary was to

account for all profits made.

55. In this claim, it was submitted that informally informing individual

directors of PBTB, and knowledge by individual directors, were

sufficient disclosure. In my view, all that would not be sufficient

disclosure if Tabony was a director of PBTB at the material time. As

I have stated earlier, article 88 requires disclosure “at a meeting of

directors”, if the transaction under discussion and vote was one in

which the director had self interest and wished to vote. Moreover,

non­disclosure merely disqualified a director from voting, so that a

resolution authorizing a transaction in which the director had interest

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would be avoided, that is, rescinded if the director participated in

voting.

56. The determinant question in this claim is really whether Tabony was a

director at the material time. In my respectful view, the material time

was from 10.9.2005, when the board of directors of PBTB passed a

resolution that PBTB would buy Alliance Bank shares, upto

20.9.2005, when the contract of sale was signed and a deposit of the

purchase price was paid. In that period Tabony was not a director of

PBTB. He was elected director subsequently on 24.9.2005, and

confirmed by CBB on 30.9.2005. That the balance of the purchase

price was paid on 28.12.2005, after Tabony had become a director did

not affect the fact that the sale had already been agreed to by the board

of directors who did not include Tabony. Tabony was not a party

acting on the one side as a director of PBTB, the buyer, and on the

other side acting as the seller through Santa Rita. He was the seller at

all the material time, in his personal interest through Santa Rita.

57. A similar situation arose in Albion Steel and Wire Company v Martin

[1875] 1 Ch. D 580. The defendant had been doing the business of

buying and selling steel with F&B. He agreed to become a director of

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a proposed limited company intended to buy off the business of F&B.

He attended a meeting of intended directors at which shares were

allotted. In the meantime he carried on doing business with F&B,

entering contracts with F&B until the new company was incorporated,

and thereafter he entered contracts with the new company for a short

time. In a claim by the company for profit made by the defendant, it

was held that he was liable to account only for profit made after the

company was incorporated, and he become a director.

58. Section 24 of the International Banking Act and s: 16 of the Banks

and Financial Institutions Act, cited as grounds for this claim, merely

record into a statutory form, the fiduciary position and duty of a

director of any company. The sections are simply statutory emphasis

in respect to directors of banks and financial institutions. Section 24

of the International Banking Act states:

“(3) Every director and officer of a licensee, in exercising the powers

and discharging the duties of that person’s office, shall:

(a) act honestly and in good faith with a view to securing

the best interest of the licensee; and

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(b) exercise the care, diligence and skill that a reasonably

prudent person would exercise in comparable

circumstances”.

Section 16 of the Banks and Financial Institutions Act states:

“Every director and officer of a licensee, in exercising the

powers and discharging the duties of that person’s office, shall:

(c) act honestly and in good faith with a view to securing

the best interest of the licensee; and

(d) exercise the care, diligence and skill that a reasonably

prudent person would exercise in comparable

circumstances.

So, what I have stated in regard to directors of companies generally,

apply to directors of Banks and Financial Institutions as well.

59. The claim of Provident Bank and Trust of Belize Limited against Mr.

August Tabony is dismissed. As the liability of Jade Trust Inc.

depends on whether Mr. Tabony is liable for breach of his fiduciary

duty, the claim against Jade Trust Inc. is also dismissed.

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60. Provident Bank and trust of Belize limited shall pay the costs of Mr.

August Tabony, and Jade Trust Inc. The costs are prescribed costs.

61. Delivered this Monday the 20 th day of December 2010 At Belize City

Sam Lungole Awich J. Acting Chief Justice Supreme Court