Liu Jinjing, The Administratrix of the Estate of Leung Wing Keung, Deceased and Another v. Wai Hing Enterprises Ltd

HCMP 2915/2014

MISCELLANEOUS PROCEEDINGS NO2915 OF 2014

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DECISION
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1.This is an application by the plaintiffs for an order requiring the defendant to register them as shareholder.

Undisputed facts

2.The plaintiff, Madam Liu Jinjing (“Madam Liu”), sues in 2 capacities (i) as Administratrix (with the will annexed) of the estate of one Leung Wing Keung (“the Deceased”); and (ii) in her personal capacity as the sole beneficiary to the residuary estate under the will.  She was the cohabitant of the Deceased.

3.The defendant (“the Company”) is a private company limited by shares.  It was founded by one Leung Chik Wai (“Leung Senior”), the father of the Deceased, in 1969.  All the shares were allotted to Leung Senior and his 8 children, including the Deceased. 

4.Since its incorporation, all the shares have been held either by members of the Leung family or Liberian or BVI corporate vehicles beneficially owned by or under the full control of the Leung family members.

5.The Deceased became a shareholder since 1970.  Until his death, he had been a director from 1986 and a secretary from 1999.  All of the transfers to Liberian and BVI companies took place during the terms of his office.

6.The Deceased died on 13 June 2011.  He had remained unmarried and had no issue.  As at the date of his death, the Deceased held 3,900 shares (“the subject shares”) out of the 45,900 ordinary shares in the Company.

7.On 26 August 2014, Madam Liu (through her solicitors) requested the Company to register her as the owner of the subject shares. That was declined by the Company pursuant to a board resolution on 2 September 2014. 

8.The Company informed Madam Liu’s solicitors of the resolution on 11 September 2014.  The Company relied on Article 5(a) of the Articles of Association of the Company (“the AA”), stating that Madam Liu was not a member of the Company.  The Company invited her to consider selling the subject shares to existing members.

9.On 11 November 2014, Madam Liu took out the present originating summons, seeking a determination of whether the Company was obliged to register her as a shareholder in either of her capacities.

10.Counsel have agreed that this case is about the proper construction of the relevant Articles of the Company and Table A; the factual disputes are irrelevant.  However, in my view, some factual disputes are relevant, which I shall specify where necessary below.

Relevant Articles of the Articles of Association of the Company

11.The relevant Articles of the AA are as follows:

“5. The right of members to transfer their shares shall be restricted as follows:-

(a) No share shall be transferred to a person who is not a member, so long as any member, or any person selected by the directors as one whom it is desirable in the interests of the company to admit to membership, is willing to purchase the same at the fair value herein provided. (underline added)

(b) The directors may in their absolute and uncontrolled discretion, and without assigning any reason, refuse to register any transfer of shares, but this provision shall not apply where the proposed transferee is already a member or to a transfer pursuant to Article 12 hereof. (underline added)

6. Except where the transfer is made to a member of the Company or pursuant to Article 10 or 12 hereof, the person proposing to transfer any share (hereinafter called “the proposing transferor”) shall give notice in writing (hereinafter called “a transfer notice”) to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as the fair value, and shall constitute the Company his agent for the sale of the share to any member of the Company or person selected as aforesaid willing to purchase the share (hereinafter called the “purchasing member”) at the price so fixed, or, at the option of the purchasing member, at the fair value to be fixed in accordance with Article 8 hereof. … (underline added)

12. Any share may be transferred by a member to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife or husband of such member, and any share of a Deceased member may be transferred by his executors or administrators to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, widow or widower of such Deceased member, to whom such Deceased member may have specifically bequeathed the same, and shares standing in the name of the trustees of the will of a Deceased member may be transferred upon any change of trustees to the trustees for the time being of such will and the restrictions in Article 5 hereof shall not apply to any transfer authorised by this Article.”

The relevant provisions of Table A

12.There is no dispute that it is the 1964 version of Table A in the First Schedule to the Companies Ordinance (Cap 32) that is applicable by virtue of Article 2 of the AA.

13.The relevant Articles of Table A are as follows:

“20. The legal personal representatives of a Deceased sole holder of a share shall be the only personsrecognized by the company as having any title to the share…

21. Any person becoming entitled to a share in consequence of the death or bankruptcy of a member shall, upon such evidence being produced as may from time to time be properly required by the directors, have the right, either to be registered as a member in respect of the share or, instead of being registered himself, to make such transfer of the share as the Deceased or bankrupt person could have made (which I will call “the 1^st limb”); but the directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by the Deceased or bankrupt person before the death or bankruptcy (which I will call “the 2^nd limb”).

22. A person becoming entitled to a share by reason of the death or bankruptcy of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company.”

A.  Whether Madam Liu is entitled to be registered as a shareholder in her capacity as Administratrix

14.There is no dispute over the status of Madam Liu as administratrix and that she is the only person having title over the subject shares pursuant to Article 20 of Table A.  Mr Chong and Ms Lau (counsel for Madam Liu) rely wholly on the Companies Ordinance, Cap 622 (“CO”) to establish her right to be registered.  The Company relies on Articles 5(a), 6 and 12 of the AA to refuse registration.

A1.  Statutory right to be registered

15.Within 2 months of receipt of written notice, a company must either register a person entitled by operation of law to be registered as a shareholder or to give notice of refusal to register: s 158 CO (formerly s 69(1A) of Cap 32).

16.If the company refuses to register, the person to whom shares were transmitted may apply for an order to be so registered.  The court will make the order if it is satisfied that his application is well-founded: s 159 CO.

17.S 160 CO (formerly s 69(1A) of Cap 32) provides as follows:

“(1) This section applies if a company’s articles give a member or class of member of the company a right of pre-emption or right to purchase shares in the company on the occurrence of an event that constitutes a transmission of the right to the shares by operation of law.

(2) If this section applies, the registration as a member of the company of the person to whom the right to the shares is transmitted is subject to the right of pre-emption or right to purchase shares contained in the articles and that right may be enforced against the person.”

A2.  Legal principles

18.The principles distilled from the authorities cited to me can be summarized as follows:

(a) At common law, the court has been reluctant to interfere with the directors’ discretion which can be as wide as the articles may permit.

(b) However, courts expect directors to exercise their discretion bona fide in what the directors consider – not what the courts consider – is in the interests of the company and not for any collateral purpose.  They must have regard to those considerations which the articles on their true construction permit them to take into consideration.  In re Smith and Fawcett Ltd [1942] 1 Ch 304, at 306, 308, Lord Greene MR.

(c) In the case of refusal to register as a member, the question for the court was whether the directors believed in good faith that it was in the interests of the company: Village Cay Marina Ltd v Acland and ors (Barclays Bank plc third party) [1998] 2 BCLC 327, PC.

(d) Ss 158 and 159 CO (and their predecessors in 1984) were introduced to mitigate the strictness of re Smith and Fawcett: Hong Kong Company Law: Legislation & Commentary, [955-1001].

(e) Despite having the predecessors of ss 158 and 159 CO, the HK courts have followed the English common law approach (which did not have these statutory provisions).  The court was not entitled to interfere with a decision with which it merely disagrees: Simon Fireman v Golden Rice Bowl Ltd [1987] 5 HKLR 981, Jones J.  The tests in sub-paragraphs (b) and (c) continued to apply.

(f) The directors are not required to give reasons for their refusal but, if they do, the court is entitled to consider them to see if the application under s 159 is well-founded: Re Yuen Kiu Kwan [2009] 3 HKLRD 371, §35,Kwan J; Roberts v Coussens (1991) 6 ACSR 44, Rolfe J, at p 53, lines 45-47.

(g) The burden of proving that the directors’ refusal to register is not bona fide lies on the applicant. If there is no evidence that there has been no exercise of the discretion, the mere fact that directors have refused to give any reason for the exercise of the power and for the manner in which they have exercised it, throws no suspicion on them or shifts the onus on them to justify what they have done.  Duke of Sutherland  v British Dominions Land Settlement Corporation Ltd [1926] Ch 746, 756, Tomlin J; cited in Charles Forte Investments Ltd v Amanda [1964] Ch 240, 253 (CA).

A3.  Contentions for Madam Liu

19.Mr Chong, however, submits that whether Madam Liu’s application is well-founded depends on whether her office as an administratrix was challenged on valid grounds.  He submits that since her office is no longer challenged, Madam Liu is the only person having title over the shares by operation of law.  She is entitled to be registered as a member.  The only reason given by the Company to decline registration was pursuant to Article 5(a) of the AA that she was not a member of the Company.  But the AA were irrelevant. He relies on Re Yuen Kiu Kwan, §33.

20.In Re Yuen Kiu Kwan, all the 8 companies contained articles identical to Articles 20 and 21 of Table A (§32(2) of the judgment).  Despite the existence of Article 21, Kwan J held that there was no valid legal basis for disputing P1’s entitlement to be registered as a member as the administrator of the estate of the deceased.  He was the only person having title to the deceased’s shares in the respondents during the administration of the estate, as established by the well settled principles of law.  There is no question of conflicting claims of beneficial interests over the shares of the deceased vis-à-vis P1 as administrator.  (§36 of the judgment)

21.To determine if Mr Chong’s interpretation is correct, it is appropriate to set out the relevant parts of Kwan J’s judgment: 

“33. Mr Remedios has referred the Court to a provision in the articles of association of each of the respondents providing that the directors may, in their absolute discretion, decline to register any transfer of shares without assigning any reason. I do not think this provision is of relevance. (underline added)

34. First, there is the provision in s.69(1A) of Cap.32, the effect of which, as mentioned earlier, is that as no statement of reasons for refusal to register the transfer of the Deceased’s shares to the applicant was received by the expiry of the 28-day period on 27 January 2009, on the expiration of that period, each of the respondents is obliged to register the transfer forthwith.

35. Secondly, the directors of all of the respondents have since disclosed their reasons for refusing to register the applicant in the minutes of the board meetings held on 2 and 16 April 2009.  The court is entitled to take those reasons into account….”

22.Apparently,Kwan J’s reason for holding the equivalent of Article 21 of Table A to be irrelevant was that the directors did not provide a statement of reasons for refusal within the statutory 28 days under the equivalent of s 158 CO. Hence the administratrix had the right to be registered.  Despite that, Kwan J still considered the reasons given by the directors beyond the 28-day period.  She held that the directors’ decision not to register the plaintiff as a member until after the beneficiary’s claim to beneficial ownership was decided in another action was not reached bona fide or with good grounds.  She held that the application was well-founded.

23.The reasons for refusal of the directors in Re Yuen Kiu Kwan and Roberts v Coussens did not turn on interpretation of any articles of the company.  To the contrary, those reasons for refusal in Re Joris (International) Ltd & ors [2014] 4 HKC 38 (also given out of the statutory time frame) did and so the Court of Appeal proceeded to consider the relevant articles.  I therefore reject Mr Chong’s submission that the AA are irrelevant once the Administratrix’s capacity is proved.

24.Mr Chong further disputes the applicability of the common law principles.  He submits that CO was based on Australian legislation (s 186 of the Companies Code) although the test for granting an order is whether the refusal to register was “without just cause”.   He relies heavily on the case of Roberts v Coussens.

25.In that case, Rolfe J was of the view that s 186(1) “does not seem to incorporate the previously accepted common law requirements.  The matter, which calls the section into operation, is the refusal or failure to register, not the refusal or failure to register in the exercise of the discretion recognized at common law …”  (p 57, lines 30-33).  He stated:

“[Section 1094] must be construed against the background of the general law, which gave directors the powers, if the appropriate article existed, to refuse registration or consent or approval to registration without assigning a reason. In my opinion the intendment of the section is to give effect to the prima facie right of the owner of the share to transfer that share and, if the court is of the opinion that the refusal ‘was without just cause’ to make the appropriate order. If this be correct, then I do not consider that the legislative intent was to circumscribe the power of the court in determining whether there was ‘just cause’ by reference to the prima facie unexaminable reasons of the directors for so refusing. If the legislature had intended to leave the general law provisions in place, it is difficult to see any reason why it was necessary to enact ss 186 and 1094. Once it is established, as is undoubted the position in the present case, that there has been a relevant refusal, the question to determine is whether that was “without just cause”. (underline added)

26.The only literature on the history of CO that Mr Chong cited was a brief reference in Hong Kong Company Law, Legislation and Commentary.  It stated that s 152 (and ss 158, 159) appeared to be derived from Australian legislation without being considered in the 1973 report of the Companies Law Revision Committee and without appearing in the 1981 Companies Ordinance White Bill. 

27.Assuming that Mr Chong is correct in saying that the Hong Kong legislation was based on Australia legislation and that Roberts v Coussens apply, the principles in paragraphs 18(e) to (g) above would equally apply.  In fact, Kwan J had applied the test of “bona fide in the interests of the company”: Re Yuen Kiu Kwan, §38.  I reject the contention in paragraph 19 above.

A4.  Application of the legal principles in section A2

28.As Administratrix, Madam Liu would be entitled to be registered as a member: Article 20 and 1^st limb of Article 21.  However, due to the operation of the 2^nd limb, the directors were entitled to invoke Article 5 to decline registration as in the case of the Deceased transferring shares to a non-family member before his death. 

29.Since reasons for refusal have been given by the Company, this court can consider Article 5 of the AA (reason given within the statutory timeframe) and Articles 6 and 12 of the AA related to it. 

30.Under Article 5(a), as Madam Liu is not an existing member, the directors have absolute and unfettered discretion to refuse to register her. This reason for refusal was apparently to uphold the intention of Leung Senior to run a private company only by family members and their issues.  That could not be said to be lacking in good faith, not in the interests of the Company or having a collateral purpose.   

31.Further, Article 5(a) of AA is a pre-emption rights clause: Re Joris.  (Re Yuen Kiu Kwan did not appear to have this article.)  S 160(1) CO expressly preserves such rights of pre-emption. 

32.The provision “no share shall be transferred to a person who is not a member” must be given a business meaning.  A “transfer of a share” in the ordinary sense of that expression is “a transfer of the legal title to the share with the rights and liabilities attached to it”.  (Re Joris, §7.2, Cheung JA)

33.In Re Joris, the intended transferor was transferring the legal title of the shares to the transferee in her capacity as the administratrix of the deceased member.  Once the transfer was effected, the administratrix would become the legal owner of the shares.  The Court of Appeal held that such a transfer must be one within the meaning of the pre-emption provision (§7.2).  Accordingly, the requirement of serving a transfer notice as stipulated by the pre-emption provision must be observed (§7.3).

34.In the present case, the vesting of the subject shares in Madam Liu, whether as adminisitratrix or in her personal capacity, similarly involves a transfer of the legal title to her.  However, she failed to comply with Article 6 of the AA in that her written notice to the Company did not specify the sum she fixes as the fair value for existing members to exercise their rights of pre-emption.

35.Mr Chong seeks to distinguish Re Joris as a case involving transfer by a trustee and not an administratrix to a non-member.  I can see no difference in substance.  Madam Liu cannot have better rights than if the Deceased were transferring the shares in his lifetime.

36.Mr Chong further contends that Madam Liu is applying for herself and not another person to be registered as a shareholder.  Hence, the restriction against transfer to a member imposed by Article 5 of the AA does not apply.  The restriction may be applicable if Madam Liu is asking for the shares to be transferred to another person within the meaning of Article 21 of Table A.

37.With respect, an administratrix should not be allowed to circumvent the pre-emption provision by simply transferring the shares to herself.  In fact, an argument similar to Mr Chong’s has been rejected in Lee Chee Ngor Moreta v Prudential Enterprises Ltd [1991] 2 HKC 299. 

38.In that case, the administratrix transferred the shares of her deceased husband to herself and contended that the transfer was not bound by the pre-emption clause.  The court rejected that argument and held that a person entitled to shares by virtue of the death of a member must offer them to the other members unless there has been a transfer or specific bequest by will.  It was held that the directors had not acted with improper motiveand the application was not well-founded.

39. Mr Chong rightly agreed that Lee Chee Ngor fell within s 160(2) CO but, in my view, wrongly submitted that the Company’s AA do not confer pre-emption rights on the existing shareholders.  

40.Further, the directors’ absolute discretion to refuse to register does not apply if the transfer is pursuant to Article 12 of the AA which is referred to in Article 5(a).  Article 12 deals with 3 scenarios:

(a) Transfer by a member during his lifetime to a family member (broadly defined), which is not applicable here;

(b) Transfer by an executor/administrator to such a family member pursuant to a specific bequest; but the subject shares form the residuary estate under the will;

(c) Transfer by one administrator/executor to another in their offices as trustees, which is not applicable here.

Article 12 does not apply to Madam Liu but the directors’ absolute discretion still does.

41.The Company’s reliance on Articles 5, 6 and 12 of the AA and s 160 CO is justified.  Its reasons for refusal are in good faith, in the interests of the Company and not for a collateral purpose.  Madam Liu’s application as the Administratrix is not well-founded. 

B.  Whether Madam Liu is entitled to be registered as the shareholder in her personal capacity

42.There is no dispute that Madam Liu in her personal capacity is the sole beneficiary under the will.  Mr Chong relies on 3 grounds for her entitlement to be registered as a shareholder:

(1) Articles 20-22 of Table A;

(2) Estoppel by convention; and

(3) The effect of Clause 3(cc) of the Company’s Memorandum of Association (“Clause 3(cc)”).

B1.  Articles 20-22 of Table A

43.Article 20 does not apply to Madam Liu in her personal capacity.  As beneficiary, she has no right to be registered as a member, although she has a right to the dividends and other advantages under Article 22.  As for Article 21, paragraphs 28-41 equally apply to her as a beneficiary.

B2.  Estoppel by convention

44.Mr Chong submits that, in the context of a contract, estoppel by convention arises under common mistake in the manner described in Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank [1982] QB 84 CAat 121H-122A, 122C-D, Lord Denning MR:

“… When the parties to a contract are both under a common mistake as to the meaning or effect of it – and thereafter embark on a course of dealing on the footing of that mistake – thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them.

… When the parties to a transaction proceed on the basis of an underlying assumption – either of fact or of law – whether due to misrepresentation or mistake makes no difference – on which they have conducted the dealings between them – neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so.  If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands.”

45.Mr Chong submits that the AA is a contract among the shareholders (including the Deceased) of the Company and there has been a common mistake as to the meaning or effect of the AA.  His also submits that holding shares of a corporate member does not mean holding a share interest in the Company. 

46.Mr Chong relies on the fact that for a continuous period of not less than 28 years, the directors have permitted shares to be transferred to Liberian and BVI companies (“the convention”).  In fact, some of the shares in the Company still remain registered in the name of a BVI corporation as of today.  BVI company shares are bearer shares transferable by mere delivery.

47.As those transfers were in fact approved whilst the Deceased was a director, Mr Chong submits that the Deceased must have realized, from such convention, that any prohibition under the AA against transfer to non-family members had been waived.  In reliance upon the convention, he made his will leaving the subject shares to Madam Liu, thereby irreversibly changing his position.  Mr Chong submits that it would therefore be inequitable, unjust and not bona fide for the Company to enforce such prohibition after the death of the Deceased.

48.There is no dispute that those transfers to corporations were permitted so as to avoid estate duty upon death of a personal shareholder. 

49.The dispute is whether, in the mid-1980s, there was consensus among members of the Leung family that there should be transfers of beneficial interest in shares without the need for complying with the AA.

50.Madam Liu relies on what she was told by the Deceased.  On the other hand, Elaine Leung (grand-daughter of Leung senior who has made an affirmation on behalf of the Company) claims that relevant family members had given oral warranties and undertakings that all those shares to be transferred to corporations would continue to be held within the Leung family.  It was on that basis that the board exercised its discretion to approve the registration of the Liberian and BVI Companies as members.  In fact, the Liberian company subsequently re-transferred the Company shares to the Leung family member who originally held them.  The Deceased was one of the board members passing the relevant resolutions approving the transfers.

51.Neither Madam Liu nor Elaine Leung could provide documentary proof of their respective hearsay evidence of what the Deceased or the relevant family members said.  However, the burden of proof is on Madam Liu.  She had been contradicted by documentary evidence from Elaine Leung that payment of the purchase price for some of the Deceased’s shares in the past was not done by instalments as alleged by Madam Liu.  I decline to rely on the hearsay evidence from Madam Liu.

52.Looking at the undisputed documentary evidence before me, there is nothing to persuade me that, in those 28 years, it was more probable that the board of directors were acting under a common “mistake” as to the effect of Articles 5(a) and 12 of AA than exercising its discretion to register a corporation as member on a case by case basis.  There is nothing to show that the Company has waived its rights under those 2 Articles.  Nor could Madam Liu contradict Elaine Leung’s evidence that the beneficial owners of the Liberian or BVI companies were people within the Leung family.   

53.There was evidence that the Deceased had said that he could give the subject shares to anyone he liked.  It was in the context of a response to his sister’s suggestion that he should not make gifts of his assets (in the general sense) to others.  There was nothing to show that the directors had notice of or were otherwise bound by the Deceased’s remark.  There was no basis to show the Deceased’s reliance, if at all, on the Company’s mistake or waiver to make his last will. His decision not to marry Madam Liu does not affect the position.  I am not satisfied that there is estoppel by convention.

B3.  Clause 3(cc)

54.Clause 3(cc) provides that the Company may:

“… support or aid in the establishment and support of … trust … calculated to benefit … ex-employees of the Company … or the dependents … of such persons …”

55.There is evidence that the Deceased was a paid director and I am prepared to find that he was an employee of the Company.  Clause 3(cc) merely gives a power but not an obligation to the Company.  The trust (if at all) arose under the will and could not be for the benefit of ex-employees (the Deceased who had died) or Madam Liu (where there was no evidence of her dependency status).  Ground B3 is totally unmeritorious.

56.In summary, Madam Liu has no right to be registered in her personal capacity.

Conclusion

57.The directors have refused to register Madam Liu as member in both capacities under Articles 5, 6 and 12.  That decision was made in good faith, in the interests of the Company and not for a collateral purpose.  The application under section 159 is not well founded and I dismiss it.

58.In principle, costs should follow the event and be to the Company.  I make an order nisi that costs of the originating summons and costs of and incidental to its amendment (for which I have given leave) shall be borne by the plaintiffs.  Such costs are to be summarily assessed on 30 December 2015 on the papers without the need for attendance. Thedefendant do file and serve its costs statement by 21 December 2015.  The plaintiffs do file and serve their grounds in opposition by 28 December 2015.  The plaintiffs’ own costs as administratrix shall, on a nisi basis, be borne out of the Deceased’s estate.

59.I thank counsel for their assistance.

Mr K M Chong and Ms Karen Lau, instructed by Au, Thong & Tsang, for the 1st and 2nd plaintiffs

Mr William Wong SC and Ms Ebony Ling, instructed by Fred Kan & Co, for the defendant