Pilot International Investment Ltd v. Ingredients Plus Holdings (Pte) Ltd and Others

HCMP 2454/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2454 OF 2015

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D E C I S I O N

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1.This was an application by the 3^rd defendant (“the company”) by summons dated 24 November 2015 to strike out the originating summons by Pilot International Investment Ltd (“the plaintiff”) for declarations relating to the validity of (1) the AGM of the company held on 21 August 2014 and resolutions passed thereat; (2) the allotments of 2.73 million shares in the company to Ingredients Plus Holdings (PTE) Ltd (“IP Singapore”) on 29 May 2015; and (3) the transfer of one share in the company from IP Singapore to Rodney Edward Darryl Oppy (“the 2^nd defendant”). At the conclusion of the hearing judgment was reserved which I now give.

PROCEDURAL BACKGROUND

2.The plaintiff’s originating summons was supported by an affirmation of Ng Chi Hung (“Mr Ng”) dated 7 September 2015.  In that affirmation, Mr Ng outlined the company’s history:

(i) On 8 July 2005 the company was incorporated with Mr Ng and Ingredients Plus Pty Ltd (“IP Australia") as the first subscribers respectively holding 2500 shares and 7500 shares.

(ii) In 2007, IP Australia sold some of its shares to Mr Ng and two of Mr Ng’s associates Sally Wong and David Chow such that IP Australia came to hold 5000 shares, Mr Ng 3000 shares and each of Sally Wong and David Chow 1000 shares.

(iii) As a result of further restructuring, on 25 June 2009, IP Australia’s shares were transferred to IP Singapore and the remaining shares to the plaintiff and after additional shares were allotted, IP Singapore and the plaintiff were the only shareholders respectively holding 4.2 million shares and 1.8 million shares.

(iv) On 30 March 2012, Mr Ng resigned as a director of the company and IP Singapore continued to control the company.

(v) From about October 2013 differences emerged between the company and the plaintiff over the company’s proposals to raise finance from shareholders.

(vi) On 31 July 2014, the plaintiff received a notice of AGM dated 31 July 2014 convening an AGM for 21 August 2014 (“the AGM Notice”) proposing a resolution for a general mandate to be given to the directors of the company to allot shares under section 141 of the Companies Ordinance, Cap 622 (“the Resolution”).

(vii) On 6 August 2014, IP Singapore transferred one share in the company to the 2^nd defendant.

(viii) On 21 August 2014, Mr Ng representing the plaintiff arrived at the venue of the 2014 AGM but declined to attend the AGM.

(ix) At the 2014 AGM, the Resolution was passed.  Although the plaintiff refused to attend the AGM, it was made quorate by the attendance of IP Singapore and the 2^nd defendant.

(x) After receiving the minutes of the 2014 AGM in early September, the plaintiff challenged the transfer of the one share to the 2^nd defendant.

(xi) On 29 May 2015, pursuant to the Resolution, the company allotted 2.73 million shares in the company to IP Singapore.

3.On the basis of the facts as set out, the plaintiff took out an originating summons on 2 October 2015 seeking orders that:

(1) the 2014 AGM be declared invalid and all resolutions passed thereat declared null and void;

(2) allotments of 2.7 million shares to IP Singapore made 29 May 2015 be declared invalid and the share register rectified accordingly; and

(3) the transfer of one share in the company from IP Singapore to the 2^nd defendant be declared invalid and the share register rectified accordingly.

4.On 24 November 2015 the company took out the summons to strikeout the originating summons pursuant to Order 18, rule 19(1)(a) of the Rules of the High Court.

5.On 18 February 2016, the company lodged its written submissions for the then impending hearing.  One of the grounds for striking out was the non‑existence of any pre‑emptive right.  It is common ground that company’s articles do not contain pre-emption provisions.  While in §27 of Mr Ng’s 1^st affirmation dated 7 September 2015 he asserted that the transfer of IP Singapore’s one share in the company to the 2^nd defendant infringed the plaintiff’s pre‑emptive right, no basis for that assertion was provided.

6.On the same day Mr Ng filed his 2^nd affirmation which sought to flesh out the pre‑emptive rights asserted, inter alia, by producing minutes of the shareholders meeting held on 11 May 2012.

7.The plaintiff’s written submissions were lodged on 19 February 2016.

THE PLAINTIFF’S CASE

8.The minutes of the shareholders’ meeting held on 11 May 2012 read:

“Shareholders Agreement

It was agreed that [IP Singapore] would be offered first right to purchase the shares held by [the plaintiff] in [the company] if they wished to sell and should [IP Singapore] refuse then [the plaintiff] was at liberty to sell to whom they desired and the same applies to any sale of [IP Singapore’s] shares in the company — [the plaintiff] would have the first right of purchase.”

9.Mr Siu counsel for the plaintiff submitted that the plaintiff has pre‑emptive rights under that collateral shareholders agreement made orally and has an arguable claim to rectification; the transfer of the share to the 2^nd defendant being in breach of those rights is invalid and should be set aside with the consequence of rendering the 2014 AGM inquorate and so invalid.

10.In addition, Mr Siu also contended that the 2014 AGM was invalid because first, the AGM Notice was deficient in not adequately describing the nature of the business of the meeting and, second, the length of notice was inadequate.

WHETHER THE FACTS DISCLOSE A REASONABLE CAUSE OF ACTION

11.As the proceedings were commenced by way of originating summons rather than by writ of summons, the facts are those to be found in the supporting affirmations.  

(A) The right of pre‑emption and rectification of the register

12.Mr Yu counsel for the company highlighted the fact that at the time the originating summons was issued, there was nothing to support the assertion that the plaintiff was entitled to a pre‑emptive right.  It was only in Mr Ng’s 2^nd affirmation (filed after Mr Yu had been briefed) that the pre‑emptive right was said to arise from an oral collateral shareholders agreement that the plaintiff maintains is evidenced by the minutes of a shareholders meeting of the company held on 11 May 2012 which were exhibited for the very first time.  

13.Be that as it may, the company’s position is that even if a pre‑emptive right existed which was breached, it would not assist the plaintiff in the present application.  For present purposes, the hearing proceeded on the basis that the plaintiff does have a pre‑emptive right. 

14.It was submitted that:

(i) a transfer of shares in breach of a pre‑emptive right is not null and void and wholly without effect.  Once the transferee’s name is entered in the company’s register of members, legal title passes;

(ii) the plaintiff has a right to damages or specific performance against IP Singapore, the transferor, but it has no right to set aside the transfer on the basis that it is void, unlawful or invalid;

(iii) as the plaintiff only has a prospective claim against the company dependant on the conversion of an equitable right to a legal title by an order for specific performance of a contract, the proceedings for rectification ought to be struck out.

15.In support of those propositions, Mr Yu relied heavily on Nilon Ltd and another v Royal Westminster Investments SA and others [2015] UKPC 2, a recent Privy Council authority.  Nilon itself concerned the scope of the jurisdiction conferred by a BVI statute on the BVI courts relating to service out.  The principal issue before the Board was whether permission to serve the sole shareholder (V) outside the BVI should have been given and central to the question was whether there was a cause of action against the company (N).

16.In that case P alleged that he had an oral agreement with V for a joint venture to be carried out through a new BVI company to be established in which 37.5% of the shares would be allotted to V and 57.5% to P, the remaining 5% to a third party investor.  V who is resident in London duly incorporated a new company (N) in the BVI.  V was registered in the company’s register as the sole shareholder of the issued shares.  P brought an action in the BVI against V claiming damages for breach of contract to procure the issue of the shares in N to P and against N for rectification of its register to show P as shareholders.

17.Lord Collins in delivering the judgment of the Board stated at §51 as follows:

“… proceedings for rectification can only be brought where the applicant has a right to registration by virtue of a valid transfer of legal title, and not merely a prospective claim against the company dependant on the conversion of an equitable right to a legal title by an order for specific performance of a contract.”

18.On that analysis, it was held that P had no such present right, which could only arise after it had been successful in its principal claim against V, and only after V had been ordered to procure the issue and allotment of the shares to them.  Since P had no arguable case to a present right to rectification, there was no claim against N to which V could be a necessary and proper party.

19.Applying that reasoning to the present case, it was submitted that the plaintiff’s claim to rectification should be struck out.

20.Mr Siu disagreed.  He submitted that even if the legal title is vested in the 2^nd defendant, the plaintiff who has a pre‑emptive right could seek rectification of the register.  He referred to Cottrell v King and another [2004] EWHC 397, a decision of Kevin Garnett QC (sitting as a Deputy Judge of the High Court) where it was held that a transferee under a transfer of shares made in breach of a pre‑emptive right took subject to the equitable interest of the other members that arose when the transfer was executed.  In that case, as the plaintiff was not a purchaser for value, an order for rectification was made against the 2^nd defendant, the company.

21.The reasoning the judge applied followed from his analysis of Hunter v Hunter [1936] AC 222 where the House of Lords seems to have regarded the Court of Appeal’s decision in that case (to the effect that a transfer made in contravention of pre-emption rights is inoperative) as correct (eg the speech of Viscount Hailsham LC at 248) and Tett v Phoenix Property and Investments Co Ltd [1984] BCLC 599.

22.In Tett the articles provided that no shares were to be transferred to a person not already a member if any member or a relation of his was willing to purchase them.  A transfer was made without observing the pre‑emption provision and the directors refused to register the transfer.  Vinelott J’s analysis of the legal effect is set out in §23 of Cottrell:

“… the other members’ rights to require [the deceased’s] executors to offer the shares to them before transferring them to the plaintiff matured into an option to purchase the shares at the fair value to be determined by the auditors when the transfers were executed and that … option created an equitable interest prior in time to the interest taken by the plaintiff under the transfer. Until registration the equitable interest of the other members in the shares would prevail over the subsequent interest of the plaintiff whether the members had notice of his interest or not … After the registration of the plaintiff as the holder of the shares in question the priority of the option would depend on whether the plaintiff had actual or constructive notice that the pre‑emption provisions had not been complied with at the time the transfer was executed …”

23.I respectively agree with that analysis. (Although Tett was reversed on appeal it was not on this point.) Applying the principles derived from Tett and Cottrell to the present case, upon execution of the transfer to the 2^nd defendant the plaintiff’s pre‑emptive right matured into an option to purchase that share.

24.I will now address Mr Yu’s submissions set out in §14 above:

(i) I accept that the legal estate passed to the 2^nd defendant upon the entry of his name on the company’s register. As Vinelott J observed in Tett, the majority of the House in Hunter did not accept Lord Atkin’s view that the transfer made in breach of pre‑emption rights is a nullity (see Cottrell at §22).  In Cottrell, the judge held that legal title became vested in the plaintiff once her name was entered in the register.  More recent support can be found in Re Coroin, McKillen v Misland (Cyprus) Investments Ltd (No. 2) [2014] BCC 14 at §§ 89 and 143.

(ii) I do not accept that the plaintiff has no right to set aside the transfer on the basis that it is unlawful or invalid.  See Cottrell, Hunter and Tett considered in §§ 21‑23 above.

(iii) The issue is whether the plaintiff has a claim vis‑a‑vis the company for rectification.Implicit in the decision in Cottrell is the recognition and acceptance that a shareholder whose pre‑emptive right has been infringed may seek rectification of the register against the company and in fact an order for rectification was made against the company in that case.  In other words, he has the locus to do so.  In Coroin, Rimer LJ opined (at §165) that members (whose pre‑emptive rights have been breached) would in principle be entitled to ask for the register to be rectified so as to restore the prior position.  This is exactly what the plaintiff is seeking to do and reflects the current practice in Hong Kong for disputes of that nature.  I also note that Cottrell, Hunter and Tett were not cited to the court in Nilon and hence not considered.

25.It is to be noted that in Cottrell, the 2^nd defendant (the company) did not take part in the proceedings and was not represented.  It is usual in disputes of that kind that the company would not take an active part in the proceedings but await the outcome.  Nevertheless, it is a necessary and proper party to the proceedings for otherwise the outcome would not be binding on the company. 

26.Approaching the matter from the perspective of the administration of justice in Hong Kong the present practice promotes procedural efficiency and the economic use of judicial resources in the resolution of disputes.  As Nilon is not binding on this court and that case had the scope of the service out jurisdiction central to its focus, I am not prepared to follow Nilon given the considerations set out above.

27.In the event that the 2^nd defendant does not have priority because he cannot show that he is a bona fide purchaser for value, a possible consequence is that it would invalidate the 2014 AGM either because the meeting would be rendered inquorate or because equity would not countenance or tolerate acts that have the effect of nullifying or neutralizing the plaintiff’s pre‑emptive rights. 

28.On the question whether the 2014 AGM would be rendered invalid, Mr Yu submitted that it is not open to the court to say that the 2014 AGM was rendered inquorate because the 2^nd defendant was a registered member at the time and even if he was not a member, a minority shareholder cannot block an AGM because the Ordinance mandates the holding of an AGM.

29.I can see the force of those submissions but I cannot see the court condoning acts that effectively nullify or neutralize existing pre‑emptive rights. 

(B) Validity of the 2014 AGM

30.There are two additional matters to be considered: whether the AGM Notice sufficiently stated the purpose of the resolution and whether the length of notice given was sufficient.

(i) Sufficiency of the AGM Notice  

31.The resolution was to give a general mandate to the directors of the company to allot shares under section 141 of the Companies Ordinance.  The criticism is that the purpose of the resolution was not sufficiently stated.

32.I confess I have difficulty in seeing what additional information was to be given.  There was a specific reference to section 141 of the Ordinance.  Anyone reading the AGM Notice together with section 141 could not be under any misapprehension as to its purpose.

(ii) Length of notice

33.21 days notice is required under the Ordinance.  The plaintiff was given such notice.

34.Mr Siu submitted that because the 2^nd defendant only became a member two days after service of the notice, 21 days notice could not have been given to him with the consequence that the 2014 AGM not being quorate was not validly held.

35.Mr Yu made the obvious point that what the Ordinance requires is for 21 days notice to be given to the members and that must mean the members appearing on the register on the date of the notice rather and not to some unknown and unidentifiable person(s) who may become a member or members prior to the date of the AGM.

36.Mr Siu while acknowledging the possibly “unattractive” proposition he was putting forward submitted that in the case of a private company where there are restrictions on the transfer of shares, it should not give rise to any practical difficulties save in cases such as the present where the transfer has been “clandestine”.

37.While I have considerable reservations as to the correctness of Mr Siu’s approach regarding the length of notice, in the absence of authority, whatever I think of its prospects of success, it is a matter that is not wholly unarguable for the purposes of a strikeout.  Accordingly, I do not consider that that claim should be struck out on that basis.

(C) Validity of the allotment

38.Mr Siu submitted that if the 2014 AGM were invalid, it would render invalid the resolution purportedly passed at that AGM. That must be correct. No valid business could be transacted at an AGM that is itself invalid. While neither party has cited any case law on this aspect, it appears to be the logical result.

CONCLUSION

39.For the reasons stated above, the strikeout summons is dismissed.

40.On the question of costs, Mr Siu submitted that there should be no order as to costs because the company must know about the minutes.  However, Mr Yu invited attention to the fact it is not suggested in the evidence that the documents (ie the May 2012 minutes) had to be obtained from the company.  It remains a mystery why the plaintiff failed to provide Mr Ng with the minutes at the time the originating summons was issued.  The fact remains that the company did not know what point was being taken until 18 February.

41.I make the following costs order:

(1) costs of the strikeout summons up to and including 18 February 2016 be paid by the company to the plaintiff to be taxed if not agreed on an indemnity basis;

(2) there be no order as to costs in respect of costs incurred thereafter.

Mr Patrick Siu, instructed by Y H Yeung and Associates, for the plaintiff

Mr Jason Yu, instructed by F Zimmern & Co, for the 3rd defendant