Lam Hon Keung Keith v. Dalny Estates Ltd and Others

HCMP 182/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 182 OF 2016

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HCMP 183/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 183 OF 2016

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(HEARD TOGETHER)

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D E C I S I O N

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Applications

1.The Plaintiff has issued two originating summonses seeking declarations that shareholders’ resolutions appointing in the case of (a) General Target Development Limited (“GT”) the 2^nd Defendant, who is his daughter in law (“Cana”), as a director and in the case of (b) Dalny Estates Limited (“Dalny”) appointing Cana and his daughter Kathleen as directors and MC Yip Secretarial Limited as company secretary, are invalid.

Background

2.The registered shareholders of Dalny are Genius Villa Limited (“Genius Villa”) (480 shares), Cynthia Lam (who is the Plaintiff’s daughter) (360 shares) and Anthony Lam (240 shares).  Anthony has control of Genius Villa.  It is the Plaintiff’s case that Anthony holds the shares registered in his name and also his shares in Genius Villa on resulting trust for the Plaintiff.

3.Prior to the disputed appointments the directors of Dalny were the Plaintiff, Cynthia and Anthony.

4.The registered shareholders of GT are Genius Villa (120 shares), Dalny (60 shares), Cynthia (60 shares) and Anthony (60 shares).  Prior to the disputed appointment the directors of GT were the Plaintiff and Anthony.

5.If the Plaintiff is correct and Anthony holds the shares registered in his own name and that of Genius Villa on resulting trust for the Plaintiff, it follows that he, rather than Anthony, has control of Dalny and GT.

6.It is Anthony’s case that in the case of Dalny he drafted (Anthony is a solicitor) and sent to the Plaintiff at House A7, Manly Villa, 38 Ocean Park Road and to Cynthia at 3B Splendour Villa, South Bay Road, requisitions by Genius Villa for general meetings to be convened to consider resolutions reconstituting the boards of the Companies.  There was no response to the requisitions and consequently Genius Villa itself served notices convening general meetings of both Companies at the same addresses.

7.On 24 April 2015 Anthony caused a shareholder’s resolution to be passed adding Cana and Kathleen to the board of Dalny.  The resolution was passed, so Anthony says, in the afternoon of 24 April by his voting the shares registered in his name and also those of Genius Villa.  The notice convening the meeting states that it would take place at 1pm, but there is no dispute that it did not do so because at that time Anthony was having lunch with his sister Cynthia in Lan Kwai Fong.  In practice what appears to have happened is that Anthony prepared the necessary resolution and signed it after he returned to his office in Stanley Street.  He also caused a directors’ resolution replacing Kathleen as secretary with MC Yip Secretarial Ltd to be passed at about the same time.

8.Similarly, Anthony, who as a consequence of his control of Genius Villa could determine the constitution of the board of GT, had caused Cana to be appointed to its board by a shareholder’s resolution passed on 15 April 2015.  The meeting was convened by Genius Villa and Anthony serving a notice on the board to convene a meeting, and when this failed to occur serving notices convening a shareholders’ meeting.  The notices were served at the same addresses as those served to convene the meeting of Dalny.

The Plaintiff’s Complaint

9.The Plaintiff seeks by his originating summonses to set aside the resolutions I have referred to.  Mr Walter Lau, who appeared for the Plaintiff, explained that the Plaintiff does not seek to set aside the resolutions on the grounds of irregularity in giving notice of the two general meetings (although the Plaintiff says he did not receive the notices and that Anthony would have anticipated this because they were sent to a post box to which he did not have access), but on the narrower ground that no meetings took place.  The basis of this complaint in the case of Dalny, as I understand it, is that the minutes of the meeting describe the meeting of Dalny as taking place on 24 April 2015 at 12^th Floor, Pearl Orient House, 60 Stanley Street, but that in his evidence Anthony says that at 12:30pm he had lunch with Cynthia.  Anthony also says that he told her about the meeting, which she said she would not attend.  She also told Anthony that she did not want to sign any documents and make her Father unhappy.  In fact Cynthia can prove by a transcript of the conversations that took place at lunch that the meeting was never raised.  Mr Lau argued that the reality was that no meeting took place and consequently the resolution is a fiction and is invalid.

10.In the case of General Target the Plaintiff’s case is easiest to explain by quoting from Mr Lau written submissions:

“5. In the case of General Target (HCMP183/2016), the Plaintiff’s case that no meeting passing the purported resolution appointing Cana as director was held can be substantiated by:

(1) Cynthia not having seen the purported resolution or informed of the passing of the resolution until enquiries were made by Messrs. Kam and Fan, she being a shareholder of General Target and also a director of Dalny, one of the shareholders of General Target; and

(2) the circumstances surrounding the production of the documents relating to the convening of the meetings and the passing of the purported resolutions.

6. The non receipt of the notice of meeting of Dalny and General Target by Keith and Cynthia is not the central issue in these 2 cases, but just one of the pointers to infer that the documents relating to the passing of the resolutions are fabrications and false.  It is too much of a co-incidence that none of the documents relating to the calling of meeting of Dalny and General Target alleged to have been posted had been received by Keith or Cynthia in the mail, but recent notices sent by registered post (mentioned below) were delivered.  Keith and Anthony lived in the same house.  The notices could have been more conveniently delivered to him personally.”

Strike-out applications

11.The Parties did not address me on the principles that apply on strike out applications, but from my questions to Mr Khaw I do not understand it to be in issue that the Court only strikes out applications in plain and obvious cases and that unless clearly unsustainable an applicant’s factual case is assumed to be correct.

Irregularity Principle

12.The Defendants’ basis for striking out is that even if the way in which the resolutions came to be made is procedurally flawed as they were passed by shareholders who hold sufficient shares to convene unimpeachable meetings and pass the resolutions the “irregularity principle” applies and the court will not set the resolutions aside.

13.The irregularity principle has been explained by Le Pichon J (as she then was) in the case of Yip Peter v Asian Electronics Ltd [1] as follows:

“The irregularity principle really comes to this: the lawfulness of a decision taken by a meeting of members or board cannot be questioned if the only facts alleged to make it unlawful is a mere informality and irregularity and the intention of the meeting is clear. This is particularly so if there is no evidence that the decision of the meeting would have been different if the correct procedure had been observed.”

14.Yuen J (as she then was) is to similar effect in Re Green Valley Investment Ltd [2]:

“... It has been well-established since MacDougall v Gardiner [1875] 1 Ch D 13 that the majority shareholders are the only persons who can complain about a technical miscarriage of a meeting.”

15.Mellish LJ and James LJ explain the reasons why in their view only the majority shareholder can complain about irregularities in the conduct of shareholder meetings in the following passages of their respective judgments in MacDougall v Gardiner [3].  Mellish LJ at page 25:

“... if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed? If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that the thing which they are entitled to do has been done irregularly; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston 1 Ph. 790 and Foss v. Harbottle 2 Hare, 461. In my opinion that is the rule that is to be maintained...”

James LJ at page 23:

“... I cannot conceive that there is any equity on the part of a shareholder, on behalf of himself and the minority, to say, ‘True it is that the majority have a right to determine everything connected with the management of the company, but then we have a right – and every individual has a right – to have a meeting held in strict form in accordance with the articles.’ Has a particular individual the right to have it for the purpose of using his power of eloquence to induce the others to listen to him and to take his view? That is an equity which I have never yet heard of in this Court, and I have never known it insisted upon before; that is to say, that this Court is to entertain a bill for the purpose of enabling one particular member of the company to have an opportunity of expressing his opinions viva voce at a meeting of the shareholders. If so, I do not know why we should not go further, and say, not only must the meeting be held, but the shareholders must stay there to listen to him and to be convinced by him. The truth is, that is only part of the machinery and means by which the internal management is carried on. The whole question comes back to a question of internal management; that is to say, whether the meeting ought or ought not to be held in a particular way, whether the directors ought or ought not to have sanctioned certain proceedings which they are about to sanction, whether one director ought or ought not to be removed, and whether another director ought or ought not to have been appointed.”

16.The import of these authorities would appear to be that the majority shareholders can conduct the affairs of the company in breach of the articles and the Companies Ordinance and that a minority shareholder’s only remedy is an unfair prejudice petition.  It seems to me that this probably overstates the position particularly as regards the rights of a shareholder to attend a meeting and ask questions and debate a resolution.  I would be reluctant to find, for example, that a shareholder could not enjoin a company from holding a meeting in clear breach of its articles because, as Mellish LJ and James LJ suggest in the passages I have quoted, meetings are purely a formal mechanism for the majority to pass a resolution.  This seems to be inconsistent with the fundamental requirement of the Companies Ordinance and articles that certain business of a company must be undertaken by the company in general meeting.  However, what is clear is that a procedural failure alone in convening a meeting and putting a resolution to shareholders will not justify the court after the event setting aside a resolution that the requisite majority of shareholders wish to have passed.

17.Mr Lau argued that the irregularity principle did not apply in the present case, because there were no meetings at all and the resolutions were a sham.  Even assuming, as the Plaintiff’s case invites the court to do, that Anthony did no more than produce the resolutions in his office at a time convenient to himself and that in no sense can there be said to have been a meeting, it does not seem to me that the irregularity principle is circumvented.  On the assumption that Anthony and Genius Villa were able to convene general meetings and pass the resolutions then in my view the irregularity does apply.

18.What has given me pause for thought is a point that arose during my questions to Mr Lau.  It seems to be the Plaintiff’s case that if he had had notice of the meetings then he could have taken action to enjoin Anthony from causing the resolutions to be passed pending determination of the dispute about ownership of the shares in the companies registered in Anthony and Genius Villa’s names.  However, Mr Lau expressly disavowed reliance on any irregularity in service of the notices.  If the notices were served properly, which Mr Lau’s concession requires me to assume, then the only irregularity was in the way the resolution was passed.  That issue does not turn on the question of beneficial ownership of the shares and who was entitled to decide how the shares were voted.  If Anthony had caused meetings, albeit as formalities, to take place in accordance with the articles and the requirements of the Companies Ordinance, it necessarily follows that the Plaintiff’s complaints would fall away.  It, therefore, seems to me that the Plaintiff’s case is unsustainable and should be struck out.

Conclusion

19.I order that both originating summonses be struck out and make a costs order nisi that the Plaintiff pays the Defendants’ costs with a certificate for two counsel.

Mr Walter Lau, instructed by Kam & Fan, for the plaintiff (in both actions)

Mr Richard Khaw SC and Mr Keith Lam, instructed by King & Co, for the 1^st to 4^th defendants (in HCMP 182/2016) and the 1^st and 2^nd defendants
(in HCMP 183/2016)

Attendance of the 5^th defendant (in HCMP 182/2016) was excused

Attendance of the 3^rd defendant (in HCMP 183/2016) was excused