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Vs
Respondents
1 Serene Pavilions Pvt Ltd., (formerly known as Serene Villas Pvt Ltd), 40/2 Lake Gardens Rajagiriya and/or 20 Upali Mawatha, Wadduwa
2 Anura Samarawickrama Lokuhetty, 40/2 Lake Gardens Rajagiriya
3 Dishan Amrit Jitendra Kumar Warnakulasuriya, 345, R.A. de Mel Mawatha, Colombo 3.
4 Menaka Dilani Lokuhetty, 40/2 Lake Gardens Rajagiriya
5 Clive William Leach, White House, Barkstone-Ash, North Yorkshire, LS249TT, England
6 Stephanie Miriam Leach, White House, Barkstone-Ash, North Yorkshire, LS249TT, England
7 Business Management House Pvt Ltd., No. 70/B/8/SP, Old YMBA Building, Colombo 8
8 Don Gamini Chandrathilake Nethicumara, 466 Union Place, Colombo 2
9 Wasantha Kumara Galagoda, No. 9/31E, Perera Mawatha, Divulapitiya
10 Nipuna Devinda Samarawickrama Lokuhetty, No. 40/2, Lake Gardens, Rajagiriya
11 Chart Business Systems Ltd., No. 141/3, Vauxhall Street, Colombo 2
12 Dilith Jayaweera, 4/6 Jeswel Place, Mirihana
13 Gazali Hussain, 30 Jaya Road, Colombo 1
Before Mahinda Samayawardhena, High Court Judge
Date: 23.12.2013
Order
The petitioner instituted this action in terms of section 233 read with section 521 of the Companies Act No 7 of 2007 naming 13 respondents and seeking several declaratory and interim reliefs against some of the respondents – particularly against the 8th (Mr. Netticumara), the 9th (Mr Galagoda) and the 10th (Mr. Nipuna Lokuhetty) respondents on the premise that their appointments to the Board of Directors of the 1st respondent company (Serene Pavilions Ltd) at the behest of the 2nd respondent (Anura Lokuhetty) is illegal.
Upon an application made ex parte by the petitioner, the Judge in Court No 3 has issued an interim order preventing the 8th, 9th, and 10th respondents from exercising any powers as directors of the 1st respondent company. The said respondents together with some other respondents lead by the 2nd respondents have thereafter made applications to vacate the interim order already issued and to refuse the other interim orders sought in the prayer to the petition of the petitioner on several preliminary and substantive grounds. Hence this order.
This case is directly connected to Case No 42/2013/CO
The 1st respondent company has been formed to run the super luxury (7 star) boutique hotel in Wadduwa, Sri Lanka – Serene Pavilions. According to the petitioner, prior to the main dispute arose on 16.08.2013, the shareholders and directors of the company are as follows:
Shareholders with the percentage of shareholding:
1 Clive Leach 37.78
2 Anura Lokuhetty 30.10
3 Ashyaki Holdings Ltd 15.00
4 Jit Warnakulasuriya 12.12
5 Gautam Radia 05.00
The Board of Directors
consisted of
1 Clive Leach (Chairman),
2 Stephanie Leach
3 Anura Lokuhetty (CEO)
4 Dilini Lokuhetty
5 Jit Warnakulasuriya
6 Sumith Guruge
It is common ground that there are two competing camps at present in the Board of Directors of the 1st respondent company – one led by the largest shareholder Mr. Clive Leach and the other by the second largest shareholder Mr. Anura Lokuhetty. Notwithstanding the fact that Mr. Lokuhetty was the second largest individual shareholders, he had been in the minority camp with his wife Mrs. Lokuhetty (the 4th respondent). The other 4 directors are in the opposite side.
There had been a move in January 2013 to sell the shares of the company (the hotel) to outsiders to a handsome price by the camp led by Mr. Leach, which has been opposed to by Mr. Lokuhetty who apparently wanted to buy the shares of others for a lesser price. In fearing that the view of the majority would prevail as it should be, Mr. Lokuhetty has in an unusual great hurry maneuvered his way to take control of the 1st respondent company (Serene Pavilions) by altering the share structure of the company.
South West Holdings Pvt Ltd., is a company controlled by Mr. Lokuhetty1. Originally South West Holdings Pvt Ltd had been a shareholder of Serene Pavilions. As far back as in 2007, Mr. Lokuhetty has transferred 308,550 shares of South West Holdings Pvt Ltd in Serene Pavilions to Mr. Leach for a valuable consideration. However, after a lapse of more than 6 years, on or around 17.07.2013 Mr. Lokuhetty has taken up the position that the said share transfer was done for no consideration and therefore could be revoked and did the same unilaterally by way of a Board resolution of the said South West Holdings Pvt Ltd.2, and immediately thereafter on the same day i.e. 17.07.2013 proceeded to meet the Company Secretaries (the 11th respondent) and coerced them to cancel the said share transfer in the books of the company including the Share Ledger (which has subsequently been reversed).
Mr. Lokuhetty admits that this high-handed act was done to change the share structure of Serene Pavilions to prevent selling shares of Serene Pavilions to outsiders. This is how Mr. Lokuhetty confesses to it to the President, Sri Lanka Association of Inbound Tour Operators in his letter dated 17.09.2013.3
“Due to the above reasons Mr. Clive Leach decided to sell his shares, for which the 02 other minor shareholders were also joined. I have offered to buy those shares as in keeping with the private policy of the company. They did not give a positive response to my offer and decided to sell the shares to an outsider. So I consulted my Lawyers…. And we have revoked some of the shares issued to Mr. Clive Leach as there was no consideration. This changed the share structure of the company and prevented selling shares of the company to outsiders. However we have informed all the shareholders that we are interested in buying the shares.”
Thereafter Mr. Lokuhetty through his Lawyers has informed Mr. Leach that shareholding of Mr. Leach in Serene Pavilions has depleted by 308,550 shares4. This letter dated 31.07.2013 has been addressed to the England address of Mr. Leach, and obviously even before he received this letter, the following day i.e. on 01.08.2013 Mr. Lokuhetty has nominated 8th respondent (Mr. Nethicumara), the 9th respondent (Mr. Galagoda) and 10th respondent (Mr. Nipuna Lokuhetty) as directors of Serene Pavilions by sending two letters to the Company Secretaruies.5
Thereupon, Mr. Lokuhetty has informed the Company Secretaries to call for an Emergency Board Meeting on 16.08.2013 and when it was conveyed to the other members of the Board by the Company Secretaries, they, except Mrs. Lokuhetty have requested to reschedule it for 21.08.2013 giving valid reasons such as being overseas etc.6 However Mr. Lokuhetty had persisted to hold the Board Meeting and when reminded about the quorum of 3 members for a valid Board Meeting according to Article 33 of the Articles of Association, Mr. Lokuhetty has browbeaten the Company Secretaries with also a touch of sarcasm stating that quorum cannot be predetermined.7
Purported Board Meeting has been held on 16.08.2013 with 8th, 9th, and 10th respondents (Nethukumara, Galagoda and Nipuna Lokuhetty) in attendance apart from 2nd and 4th respondents (Mr and Mrs Anura Lokuhetty) all as directors of Serene Pavilions, and purportedly passed a resolution to remove the 11th respondent Chart Business Systems Ltd as Company Secretaries.8
"Mr. Lokuhetty has in an unusual great hurry maneuvered his way to take control of the 1st respondent company (Serene Pavilions) by altering the share structure of the company… Mr. Lokuhetty admits that this high-handed act was done to change the share structure of Serene Pavilions to prevent selling shares of Serene Pavilions to outsiders
In the instant case before me, the reprehensible conduct of the 2nd respondent (Anura Lokuhetty) is quite manifest with regard to revocation of shares and followed up actions which are patently tainted with mala fide on the part of the 2nd respondent.
Even if the proper notice is given about “nomination” of directors, they shall formally be “appointed” as directors at a properly constituted Board Meeting. This requirement has been accepted by Mr. and Mrs. Lokuhetty and in fact “appointed” Mr. Nethukumara, Mr. Galagoda and Mr. Nipuna Lokuhetty as new directors of Serene Pavilions at a purported Board Meeting held subsequent to the aforementioned impugned Board Meeting at which Company Secretaries were removed. The Board Meeting at which Company Secretaries were removed by way of a resolution was held at 9.00 a.m. on 16.08.2013, and the Board Meeting at which Mr. Nethukumara, Mr. Galagoda and Mr. Nipuna Lokuhetty were “appointed” by way of a formal resolution as “new directors” was held at 11.30 a.m. on 16.08.2013.10 There is no provision in the Articles of Association to appoint directors with retrospective effect. This goes to prove that there was no quorum at both the said meetings held on 16.08.2013 at 9.00 a.m. and at 11.30 a.m. to resolve (a) to remove Company Secretaries and (b) to appoint new directors.
Given the complexities and the magnitude of the vexed problems involved in this case, I have no scintilla of doubt that an arbitrator has no powers to deal with this kind of a complex and complicated situation, and I would therefore follow the local case of Aitken Spence and Co Ltd v The Garment Services Group Ltd et al in which it has been held that: “Even if there is an arbitration clause incorporated into the articles of association it will not exclude the extraordinary jurisdiction of the court under sections 2010 and 211 of the Companies Act,” which has been affirmed by the Supreme Court. Moreover, several cases were also cited to say that when serious fraud is alleged and prima facie proved, there is no room for arbitration. Hence I overrule the preliminary objection for the maintainability of this action based on arbitration."
At present, the main issue of this case revolves round the validity of this Board Meeting held on 16.08.2013. It is my considered view that this Board Meeting is unlawful and the resolutions passed are invalid ad initio for want of quorum. As I stated earlier Article 33 of the Articles of Association mandates to have a minimum number of 3 directors for a valid Board Meeting. However in this Board Meeting held on 16.08.2013 mentioned above, there had been only 2 legally appointed directors. They are Mr and Mrs. Lokuhetty – the 2nd and 4th respondents to this action.
In terms of the Article 26 (1)(b) of the Articles of Association of Serene Pavilions, a shareholder who has not less than 10% of the issued shares is entitled to “nominate” one director and also has the right to appoint one director for each multiple of 10% shares “subject to not less than two weeks prior notice in writing to the Board of Directors.”
Admittedly, two weeks prior notice in writing to the Board of Directors has not been given either by Mr. Lokuhetty or Company Secretaries on his behalf. If Mr. Lokuhetty says that he gave notice of nomination of 8th, 9th and 10th respondents (Nethukumara, Galagoda and Nipuna Lokuhetty) as directors to the Company Secretaries instead of the Board of Directors, he must see to it that the Company Secretaries in turn inform it to the other directors two weeks prior to the formal appointment. This has not happened.
In any event, even if the proper notice is given about “nomination” of directors, they shall formally be “appointed” as directors at a properly constituted Board Meeting. This requirement has been accepted by Mr. and Mrs. Lokuhetty and in fact “appointed” Mr. Nethukumara, Mr. Galagoda and Mr. Nipuna Lokuhetty as new directors of Serene Pavilions at a purported Board Meeting held subsequent to the aforementioned impugned Board Meeting at which Company Secretaries were removed. The Board Meeting at which Company Secretaries were removed by way of a resolution was held at 9.00 a.m. on 16.08.2013,9 and the Board Meeting at which Mr. Nethukumara, Mr. Galagoda and Mr. Nipuna Lokuhetty were “appointed” by way of a formal resolution as “new directors” was held at 11.30 a.m. on 16.08.2013.10 There is no provision in the Articles of Association to appoint directors with retrospective effect. This goes to prove that there was no quorum at both the said meetings held on 16.08.2013 at 9.00 a.m. and at 11.30 a.m. to resolve (a) to remove Company Secretaries and (b) to appoint new directors.
Before I part with order, I must mention about the jurisdictional objection taken up by Mr. Anura Lokuhetty and his camp on the basis of the arbitration clause found in Article 47 of the Articles of Association of the 1st respondent company. Counsel for Mr. Leach and his camp have cited several authorities to say that company disputes especially based on oppression and mismanagement are not arbitrable, whereas counsel for Mr. Lokuhetty and his camp have cited several authorities to say that they are arbitrable.
Given the complexities and the magnitude of the vexed problems involved in this case, I have no scintilla of doubt that an arbitrator has no powers to deal with this kind of a complex and complicated situation, and I would therefore follow the local case of Aitken Spence and Co Ltd v The Garment Services Group Ltd et al in which it has been held that: “Even if there is an arbitration clause incorporated into the articles of association it will not exclude the extraordinary jurisdiction of the court under sections 2010 and 211 of the Companies Act,” which has been 
affirmed by the Supreme Court11. Moreover, several cases were also cited to say that when serious fraud is alleged and prima facie proved, there is no room for arbitration. In the instant case before me, the reprehensible conduct of the 2nd respondent is quite manifest with regard to revocation of shares and followed up actions which are patently tainted with mala fide on the part of the 2nd respondent. Hence I overrule the preliminary objection for the maintainability of this action based on arbitration.
Accordingly the application for revocation of the interim order already issued as prayed for in paragraph (h) of the prayer to the petition dated 13.09.2013 is refused and the interim order as prayed for in paragraph (j) of the prayer to the petition is issued. In the result, 8th, 9th, and 10th respondents (Mr. Nethicumara, Mr. Galagoda and Mr. Nipuna Lokuhetty) cannot act as directors of the 1st respondent company and the 11th respondent (Chart Business Systems Ltd), can continue to act as Company Secretaries to the 1st respondent company until the final determination of this action.
This does not prevent Mr. Anura Lokuhetty (2nd respondent) to appoint/get appointed Mr. Nipuna Lokuhetty (10th respondent) as a Director of the 1st respondent company on the strength of his admitted shareholding of 30.10% in the 1st respondent company by following the proper procedure in due course.
However, insofar as 8th and 9th respondents are concerned they cannot be appointed as directors on the basis that South West Holdings is the owner of 308,550 shares in Serene Pavilions after the unilateral revocation of shares, unless and until the matter is decided by a competent court.
Let the books of the company be released to the 11th respondent – the Company Secretaries if they are in the Court custody.
The petitioner is entitled to costs of this inquiry from the 2nd, 4th, 8th, 9th and 10th respondents.
Signed Mahinda Samayawardhena, High Court Judge, Commercial High Court, Colombo 12.
Footnotes:
1 The directors/shareholders of this company are Mr and Mrs Lokuhetty
2 Vide X19 (a) in the connected case No 42/2013/CO
3 Vide X21 in the connected case No 42/2013/CO
4 Vide P10(i)
5 Nipuna Lokuhetty has been nominated on the basis that Anura Lokuhetty has admittedly 30.10% shares in Serene Pavilions (vide X3), and Mr. Nethicumara and Mr Galagoda have been nominated on the basis that South West Holdings is the owner of 308,550 shares in Serene Pavilions after the unilateral revocation of shares (vide P11). It must be observed that Nipuna Lokuhetty’s appointment as a director on the above basis is possible in terms of the Articles of Association provided the proper procedure is followed; but definitely not the other two unless the issue of transfer of shares is first decided by a competent court
6 Vide P12-P14
7 Vide P15
8 Vide P16
9 Vide P16
10 Vide X29 (b) in the connected case No 42/2013/CO
11 Vide Arbitration Law in Sri Lanka, edited by K. Kanag-Isvaran, PC and S.S. Wijeratne, pp. 361-372
