Vol 5 (2008) - Issue 1

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Gamlestaden Fastigheter AB v Baltic Partners & Others [2007]

The decision of the Privy Council in the Gamlestaden case marks the end of attempts to strike out a very substantial claim against professional directors, emphasises the breadth of the unfair prejudice jurisdiction and clarifies the law in three important respects. First, the case makes clear that the insolvency of the company is not necessarily a bar to the grant of relief. Secondly, once a member has brought himself within the scope of the jurisdiction by establishing that the affairs of the company have been carried on in an unfairly prejudicial manner, it is not necessary for the relief granted to enhance the value of his shares. Thirdly, the scope of the unfair prejudice jurisdiction is wide enough to allow for an holistic approach to the nature of a member’s investment in a joint venture company which may often be made partly in the form of equity and partly in the form of loans.

In 1989 Tryggwe Karlsten wanted a partner to provide funding for investment in German commercial property and in two projects in particular, both located in Hamburg’s Kontorhaus district, claimed to be the first dedicated office district on the continent of Europe, namely Chilehaus, and Sprinkenhof, two massive prewar Fritz Höger buildings. There is plenty of material, including photographs, of these important buildings available on the internet for any reader sufficiently interested in German expressionist architecture.

Karlsten persuaded a consortium of Swedish banks to form a joint venture company with him and his associate Mr Hansen and to fund the development. The parties chose Jersey as the jurisdiction in which to incorporate the joint venture company and Coopers & Lybrand, as they then were, to provide professional directors to run it. Baltic Partners Limited was duly incorporated; its only asset was an interest in a German limited partnership, Scandinavian Partners Karlsten & Co KG (SPK). Baltic contributed all the capital to the partnership, save for a token amount contributed by Karlsten’s associate Mr Hansen. Karlsten contributed no funds at all.

The articles governing SPK provided that each partner was to have three accounts: first, an equity account 1, to which the capital contributions of Baltic and Mr Hansen were credited and which had to be repaid before profits could be distributed, second, an equity account 2, to which the respective profit shares of the three partners would be credited (Karlsten 73%, Baltic 22% and Hansen 5%) and a loss carried forward account to which any losses were to be charged. Profits were to be applied in discharging losses before credits could be made.

SPK acquired Sprinkenhof and a 95% interest in Chilehaus. The acquisition necessitated heavy borrowing, much of which came from Gamlestaden’s parent company and substantial sums from two Swedish banks, Skandinaviska Enskilda Banken and Sparbanken Sverige, repayment of which was guaranteed by Gamlestaden’s parent.

In January 1993 SPK obtained a valuation of Sprinkenhof based on assumptions that it would be refurbished. In or about May 1993, unknown to Gamlestaden, Karlsten and Hansen withdrew over DM 112 million from SPK on the signed authority of the three partners. The directors of Baltic signed the authority for the withdrawal. Although Chilehaus was sold successfully in June 1993, the effect of these large withdrawals was to leave SPK without cash to refurbish Sprinkenhof. A few months later, again without the knowledge of Gamlestaden, the three SPK partners agreed to convert SPK into a limited liability company, Scandinavian Partners Grundstücksgesellschaft mbH; in the course of the conversion the debit balances represented by the withdrawals were eliminated from the accounts of SPK/SPG. Once again, this was done with the consent of the Baltic directors. Ignorant of these transactions, Gamlestaden had difficulty understanding why the refurbishment of Sprinkenhof was not proceeding as planned. Eventually Sparbanken, as creditor, sought to have Baltic placed en désastre so that the Viscount might investigate what had happened within Baltic and SPK; thus the events described above came to light. The désastre was appealed by the directors in Baltic’s name, contesting the Sparbanken debt, and was subsequently set aside by the Court of Appeal so the Viscount’s investigations came to nothing. The validity of the debt was successfully established in proceedings in the Swedish courts, which concluded in March 2002. Baltic appealed that decision but in 2003 the directors withdrew the appeal.