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SC upholds Commercial HC ruling in Aitken Spence case
View(s):The Supreme Court has upheld a 2005 ruling of the Commercial High Court in favour of the Aitken Spence Group in a case filed against Garment Services Group Ltd (GSGL) incorporated in Britain and its directors on the grounds that they had sabotaged the business operations of a subsidiary company called Aitken Spence Garments Ltd (ASGL).
The dispute arose after GSGL, which was in management control of ASGL under a joint venture agreement, ran the company to suffer huge losses. Aitken Spence and Company Ltd (ASCL) filed action before the Commercial High Court of Colombo in April 2003 against GSGL.
In terms of the joint venture agreement, ASGL should have nine directors, of whom three were nominated by ASCL and three by GSGL. The agreement also provided for the nine-member Board of Directors to appoint the Chief Executive Officer (CEO) to manage ASGL.
ASCL petitioned the Commercial High Court that after M. Gabay was appointed as CEO of ASGL, the company suffered losses continuously. By March 2000, these amounted to Rs 84,810,445. An internal audit of the ASGL accounts revealed that the respondents were in fraud and making financial irregularities. Opportunities given to correct the situation were not made use of. Mr. Gabay was found guilty and his services terminated, the petition said.
Problems had then started between the four companies to the joint venture agreement: ASCL, GSGL, Denis Day Ltd (a wholly-owned subsidiary of GSGL) and ASGL. From May 2002, the AGSL’s voting directors nominated by the GSGL regularly failed to attend board meetings and refused to sign board resolutions. This led to meetings not being held due to lack of quorum.
After the removal of the respondent CEO, AGSL had been recovering from its position of losses, it was contended to Court. ASCL complained that the problems which hindered the function of AGSL were a result of three voting directors, appointed by GSGL abetted by GSGL, DDL and the CEO, endeavouring to bring the affairs of the company to a halt.
At the end of the submissions made by the parties, the Commercial High Court judge, in February 2005, ruled in favour of Aitken Spence and Company. GSGL, DDL and two of the voting directors then appealed to the SC to set aside or vacate and dismiss the application of ASCL.
“It should be stressed and understood that the Order made by the Commercial High Court was done after an analysis of the factual material before Court,” held Justice Eva Wanasundera, PC, with Justices L.T.B. Dehideniya and Murdu Fernando, PC, agreeing. “Therefore, the said order was based on the facts before court.”
The appellants challenged ASCL on the grounds that it had failed to abide by a clause in the joint venture agreement and a section of the Arbitration Act binding them to refer the matter for arbitration before making an application to court. They held, therefore, that the Commercial High Court had no jurisdiction to hear the matter. The SC dismissed this submission.
The appellants also argued that, just because 50% of the shares of AGSL are owned by ASCL, it did not mean ASCL is in control and, therefore, ASCL could not maintain an action before the High Court.
“That argument does not hold water,” the SC held. ASCL had the status to come before court in the interest of AGSL which had to be saved from falling down in business and also in the interests of the employees of AGSL.
“I find that the learned High Court Judge has analysed each and every aspect of all matters before making the order,” the SC stated. It dismissed the appeal and affirmed the judgment of the Commercial High Court.
Aruna de Silva with Sakshini Haren appeared for GSGL and its directors. V.K. Choksy with L.D.S.D. Dissanayake and Sherine Gomez appeared for the ASCL.