Komal Patel and Others v. Chris Au and Others

HCA 183/2014 &
HCA 2063/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 183 OF 2014

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2063 OF 2015

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D E C I S I O N

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1.This is yet another application between the warring parties in this long-running civil dispute. The parties are the investors in a highly successful restaurant and bar business operating in Singapore. After a majority stake in the business was sold to an outside interest, a dispute erupted between the investors that were to remain in the business (the plaintiffs (by original action) and the plaintiffs (by counterclaim to counterclaim)) and the investor who was to leave the business (the 1^st defendant (by original action)). In general terms, there are two key aspects to the dispute between the parties. The first concerns allegations by the remaining investors that the leaving investor misappropriated and misapplied funds of the business. The second concerns an issue over the percentage interests that the investors hold in the business and their entitlement to the funds of the business and to the funds of the acquisition by the outside interest for the majority stake in the business.

2.This Court has sought through a number of decisions granting injunctive relief to keep the parties at bay in order to prevent them from attacking each other and destroying the goose that laid the golden egg, the highly successful restaurant and bar business in Singapore.  I regret say that the Court’s orders are like a water filled balloon: when you push down on one end and another end pops up.  So it is the case in the present application.

3.The application as amended by the plaintiffs is for an order that the 1^st and 2^nd defendants forthwith remove, Casey Au (the brother of the 1^st defendant), from the Board of Directors of the 3^rd defendant; that the following be set aside (a) the shareholders resolution dated 27 January 2016 regarding the appointment of Casey Au as director of the 3^rd defendant, (b) the shareholders resolution dated 28 January 2016 regarding the resignation of the 2^nd defendant as director of the 3^rd defendant, and (c) the minutes of meeting of the Board of Directors on 29 January 2016; and that the 3^rd plaintiff be authorised on behalf of the 3^rd defendant to instruct solicitors on its behalf in relation to HCA 3030/2015.

4.On 28 July 2015, this Court granted a mandatory injunction to the plaintiffs whereby the 1^st and 3^rd plaintiffs were to be appointed directors of the 3^rd defendant (by original action), the corporate entity through which the 1^st, 2^nd and 3^rd plaintiffs, the 1^st defendant and others, supposedly hold their interests in the business.  It was basically granted because at that stage the 3^rd defendant was controlled by the 1^st defendant and his nominee, the 2^nd defendant (by original action) and there were issues and disputes between them and the plaintiffs in relation to the affairs of the 3^rd defendant, which is holding a substantial portion of the funds paid by the outside interest for the majority stake in the business and is itself subject to litigation, both as a party to these proceedings and in relation to other actions.  By the arrangement put in place under the mandatory injunction order, the plaintiffs were in a position to be appraised of and involved in the affairs of the 3^rd defendant and to that extent their alleged interests in the company would, in the meantime, be protected.  Prior to this order, on 26 March 2014, the Court granted a prohibitory injunction order which included conditions that the 1^st defendant not act in a manner contrary to the interests of the 3^rd defendant and not in accordance with the written intentions and instructions of all the beneficial shareholders of the 3^rd defendant, including the 1^st to 3^rd plaintiffs. 

5.The impetus for this application seems to come from the mandatory injunction order applied for by the plaintiffs and granted by this Court, where as a result the Board of Directors of the 3^rd defendant consisted of the 1^st and 2^nd defendants, on one side, and the 1^st and 3^rd plaintiffs, on the other side.  Because of this even split between them, it was agreed by the parties that a legal opinion be obtained as to who was entitled to be Chairman and have the casting vote in the case of a deadlock.  I am informed that the legal advice was provided by Mr Richard Morgan QC, an English Senior Counsel conversant in the laws of the British Virgin Islands (BVI), where the 3^rd defendant was incorporated.  Under Articles 62 and 63 of the Memorandum and Articles of Association of the 3^rd defendant, if at a Board meeting the directors are unable to choose a Chairman for any reason, then the “oldest director present” at the meeting shall preside as Chairman and in case of an equality in votes the Chairman shall have a second or casting vote.  The legal opinion was that in accordance with BVI law the “oldest director present” means the oldest director by age.  

6.It is submitted by the plaintiffs that this application is justified because the 1^st defendant has attempted to subvert the Court’s order dated 26 March 2014 by failing to notify and obtain the written consent of all of the beneficial shareholders of the 3^rd defendant in relation to the 2^nd defendant being replaced as a director of the company by Casey Au. 

7.It is argued that the 1^st defendant has procured the appointment of his brother as a director of the company solely because he is, according to his date of birth, the oldest person by age amongst the directors of the company, and would therefore be appointed as the Chairman of the Board of Directors of the company and have a casting vote in the event of a deadlock.  It is complained that instead of liaising with the 1^st and 3^rd plaintiffs as to how best to protect the company in HCA 3030/2015, an action commenced by Herbert Smith Freehills in relation to outstanding costs which the plaintiffs claim was solely incurred by the 1^st defendant and in which the company is a defendant, the 1^st defendant instead focused on how best to obtain control of the company so as to continue to use it for his own gain. 

8.Whilst it is acknowledged by the plaintiffs that there is nothing wrong with the director wanting to resign from her position as a director of a company, they alleged that this is a prime example of a blatant manipulation of the current status quo in relation to the 3^rd defendant as evidenced by the following two key facts.  First, the 2^nd defendant’s resignation as a director occurred only after the receipt of a binding legal opinion confirming that the correct interpretation of Article 62 of the company’s Memorandum and Articles of Association was that the oldest director by age would be appointed the Chairman and who would therefore have a casting vote in the event of a deadlock.  Secondly, the 1^st and 2^nd defendants’ failure to comply with the prohibitory injunction order by failing to notify and seek the written consent of the beneficial shareholders of the company before removing the 2^nd defendant as a director of the company and appointing Casey Au as a director in her stead. 

9.It is complained by the plaintiffs that they were only notified of this purported change in directorship during the company’s Board meeting on 29 January 2016 when the 1^st defendant’s BVI lawyers attended the meeting and handed to the 1^st plaintiff and the plaintiffs’ solicitor, Mr Barry Hoy of Robertsons, a set of documents purportedly notifying of the change of directorship.

10.In response, the 2^nd defendant argues that there is no juridical basis for the application.  The 2^nd defendant submits that there is nothing wrong in her resigning from the Board of the 3^rd defendant and appointing Casey Au in her stead.  It is also argued that the application seeks to regulate the internal affairs of the 3^rd defendant which is a BVI entity and accordingly the application is misconceived as it relates to matters to be dealt with under BVI law. 

11.The 1^st defendant who appears in person in response to the application submits that the current application is an example of the plaintiffs attempting to manipulate the Court for their own ends.  The 1^st defendant submits that the application would not be made if his brother was younger than the 3^rd plaintiff who is currently the oldest by age on the Board of Directors.  He also submits as to whether this is an appropriate matter for the Court to entertain, given that there is concern with the composition of a legally appointed Board done in compliance with BVI law.  He states that the 2^nd defendant communicated with him that she no longer wished to be a director because of concerns of future conflict between the parties which she is currently imbued in which has caused her considerable amount of distress.  The plaintiffs on the other hand argue this is all part of a scheme to take control of the company and point to the suddenness and timing of the 2^nd defendant’s resignation and the replacement of her by the 1^st defendant’s brother who would be the oldest director by age on the Board. 

12.The 1^st defendant submits that the 2^nd defendant appointed his brother to replace her as a director which she was legally entitled to do as the sole legal shareholder of the 3^rd defendant and his brother had previously been an employee of the business and was well qualified to perform the duties as a director of the 3^rd defendant. 

13.The 1^st defendant states that what took place on 29 January 2016 was as follows.  During the Board meeting, his BVI lawyers, Mr Ray Ng and Mr Nathan Powell of Ogier, a firm that specialises in BVI law, were in attendance at the meeting.  Both he and his brother called into the meeting by teleconference and at the outset he advised the parties that the 2^nd defendant had resigned as a director and appointed his brother in her place.  He instructed his BVI lawyers to pass on his brother’s appointment papers to the solicitor for the plaintiffs, Mr Hoy, for review.  His BVI lawyers advised the meeting that the appointment of the 1^st defendant’s brother as a director was in accordance with the company’s Memorandum and Articles of Association and in compliance with BVI law.  He says that at this stage, which had not been alluded to in the material submitted by the plaintiffs, Mr Hoy commented that subject to verification of the documents, it appeared that all was in order and that they accepted the appointment of Casey Au as a new director, and the meeting then proceeded as there was a quorum. 

14.The first item of business was the tabling and acceptance of the legal opinion of Mr Richard Morgan QC who advised that the oldest director by age would be appointed Chairman of the meeting which all parties in attendance were in agreement.  It was at that stage the appointment of Chairman was raised that a dispute arose because the oldest by age was Casey Au and not the 3^rd plaintiff. 

15.The 1^st defendant points out that the plaintiffs are not objecting to the appointment of Casey Au on grounds of competence or conflict, or to the 2^nd defendant, as the legal shareholder, having the right to appoint a new director to replace herself.  He notes that they are solely objecting because they claim not to have received proper notice under the prohibitory injunction order.  He argues that even if the plaintiffs were given notice, they have not put forward any argument as to why this appointment could not proceed, and in any event the requirement for notice and consent from the plaintiffs under the prohibitory injunction order was only for matters in relation to the best interest of the 3^rd defendant.  He submits that this matter did not fall within that ambit of the terms of the prohibitory injunction order. 

16.The BVI lawyer for the 1^st defendant, Mr Ray Ng, in his affirmation acknowledged his attendance at the Board meeting of the 3^rd defendant on 29 January 2016.  He confirms the account by the 1^st defendant as to what took place at the meeting.  He states that Mr Hoy, the solicitor for the plaintiffs, reviewed the documentation in relation to the resignation of the 2^nd defendant and the appointment of Casey Au as a director, whereupon he stated that subject to verification of the documentation it would be assumed that Casey Au was appointed a director and entitled to attend, and that the meeting had a quorum.  He points out that at that stage no one objected to Casey Au’s appointment as a director, or to the meeting proceeding on basis as declared by Mr Hoy.  He states that no point was taken as to whether prior notification of the change of directorships was required or as to the timing of such notification.  He also states that it was only when it was pointed out that Casey Au was the oldest director present and therefore should be appointed the Chairman in accordance with the legal advice that had been tabled that objection was raised by the plaintiffs to Casey Au’s appointment as a director.  It was then he states that Mr Hoy raised a series of objections to the appointment of Chris Au and allegations of non-compliance of the Court’s injunction order.  He states the meeting came to an end when the telephone conference line was terminated and they then left and returned to the offices of Ogier, where the meeting was resumed by the 1^st defendant and Casey Au (via telephone conference link) without the 1^st and 3^rd plaintiffs present (via telephone conference link). 

17.Both Mr Hoy and the 1^st plaintiff in the evidence that they filed, did not mention the apparent initial acceptance of the resignation of the 2^nd defendant and the appointment of Casey Au as claimed by the 1^st defendant and Mr Ng, although in response they take issue with the accounts given by the 1^st defendant and Mr Ng as to what happened at the meeting. 

18.Mr Hoy in his affidavit takes issue with Mr Ng’s account of the sequence of events.  He states that when the resignation of the 2^nd defendant and the appointment of Casey Au were mentioned, he immediately stated that the plaintiffs had not been given prior notification of the purported change in directorship of the 3^rd defendant.  He states that he briefly reviewed the documents and stated that “subject to verification of the accuracy and/or validity of the alleged resolutions” Casey Au could be assumed to be a director for the purposes of the Board meeting.  He states that this did not constitute an acceptance of Casey Au’s appointment as a director as being valid and binding, and that he clearly raised reservations on behalf of the plaintiffs as to the validity and timing of Casey Au’s appointment.  He said that the Board meeting had been convened to resolve pressing matters facing the 3^rd defendant, in particular to resolve the appointment of legal representatives on behalf of the 3^rd defendant in HCA 3030/2015 to prevent the entering of judgment in default against the 3^rd defendant in the action.  He also takes issue with the contentions of Mr Ng in relation to the Board meeting that subsequently took place in the offices of Ogier which he complains was not validly convened. 

19.The 1^st plaintiff in his affirmation reiterates that the issue at hand in relation to the present application concerns the removal and appointment of a director that affects the interests of the 3^rd defendant and therefore violated the terms of the prohibitory injunction order.  He points out that the 3^rd defendant is facing litigation in HCA 3030/2015 over substantial legal fees incurred by the 1^st defendant and therefore has a conflict of interest as a result.  He also expresses concern about the appointment of Casey Au and queries whether he is able to exercise an independent mind in relation to the affairs of the 3^rd defendant, but the same complaint was previously made when the 2^nd defendant was a director.  He also takes issue with the accounts given by the first defendant and Mr Ng as to what took place at the meeting.  He states that at no stage was the appointment of Casey Au accepted without question and complains about the lack of notification of the change of directorship.  He also expresses concern that the company is being manipulated in order to bear the liability of the legal fees incurred by the 1^st defendant and of possible future action by the 1^st defendant to the detriment of the 3^rd defendant.  He explains that the plaintiffs are keen to ensure that the interests of the 3^rd defendant are protected and that there is no abuse or misuse of the company and the funds under its control.

20.I am not in a position to resolve on the papers the factual disputes between the parties, in particular between the lawyers, but from what I have before me, there is not a sufficient basis to warrant my intervention in this matter by the orders sought in the plaintiffs’ application.  I make no ruling in relation to the events that took place at the meeting and the subsequent meeting, they are not matters for me to decide in addressing this application, and I express no view in relation to them.  I have set out what has taken place and what is alleged by the parties.  They are separate and distinct matters for the relevant party to pursue and take the appropriate action.  What this matter highlights, is the extent of the squabbling and manoeuvring that is taking place between the parties that has unfortunately spawned a lot of unnecessary litigation.

21.The application is refused and I make an order nisi that the plaintiffs pay the 1^st and 2^nd defendants’ costs, to be taxed if not agreed. 

22.I should sound a cautionary note about the involvement of lawyers in their client’s affairs.  Lawyers acting for a party in a dispute should be mindful of their professional responsibilities and be very careful not to get embroiled in their client’s dispute, as it could have serious professional ramifications. 

In respect of HCA 183/2014:

Mr Barry Hoy of Robertsons, for the plaintiffs (by original action) and the 1^st to 4^th defendants (by counterclaim)

The 1^st defendant (by original action) and the plaintiff (by counterclaim) appeared in person

Mr Martin Ho, instructed by Au & Vrijmoed, for the 2^nd defendant (by original action) and the 2^nd defendant (by counterclaim to counterclaim)

The 3^rd defendant (by original action) and the 7^th defendant (by counterclaim) was not represented and did not appear

The 5^th and 6^th defendants (by counterclaim) and the plaintiffs (by counterclaim to counterclaim) were excused from attendance

The 3^rd defendant (by counterclaim to counterclaim) was not represented and did not appear

In respect of HCA 2063/2015:

The application did not concern the parties in this action