Cheng Chien Kuo v. New Resources Holdings Ltd
Read the full judgment text of HCMP 2985/2014 on BabelCite. This High Court CFI judgment was delivered on 8 June 2017.
1. The dispute in this case is whether a transfer of shares in the defendant company (“ the Company ”) to the plaintiff should be ordered to be registered by the board of directors. At the end of the hearing, I dismissed the originating summons. These are my reasons for doing so. I also make a costs order nisi at the end of these reasons.
Cited by 2 cases · Cites 5 cases
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HCMP 2985/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 2985 OF 2014 ____________________
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________________________________ REASONS FOR DECISION ________________________________ Introduction 1.The dispute in this case is whether a transfer of shares in the defendant company (“the Company”) to the plaintiff should be ordered to be registered by the board of directors. At the end of the hearing, I dismissed the originating summons. These are my reasons for doing so. I also make a costs order nisi at the end of these reasons. 2.The issues that arise are: (i) whether a transfer had been lodged; (ii) whether the board validly refused to register it; (iii) whether the plaintiff has standing to apply for an order; and (iv) whether the directors’ refusal was made honestly in what they considered to be the best interests of the Company. Background 3.The Company was incorporated as a private company limited by shares in Hong Kong in 1977 and changed its name to the present name in 1991. At all material times the shareholders were and are:
4.There are 4 directors, namely, the first 4 of the shareholders above. Together they hold 79.5% of the issued share capital. 5.The Company has been involved in the business of property development in the Mainland. 6.The plaintiff used to be resident in Taiwan but has emigrated to Australia for some years. In 2005, when he was apparently still living in Taiwan, the plaintiff entered into a written agreement with Chang Yue Tien (“Chang”) to acquire his 60,000 shares (representing 6% of the issued share capital) in the Company for US$10 million. The plaintiff says that this agreement was made on the basis of the acknowledgment by Chang of certain debts owed to him and the result of an amicable arrangement between them. 7.On or about 30 April 2007, Chang and the plaintiff further executed: (i) a document to certify that the 60,000 shares had been sold to the plaintiff on 1 January 2005 and that all rights and obligations relating to the shares from that date onwards belonged to the plaintiff and not to Chang; (ii) an undated instrument of transfer of the 60,000 shares; and (iii) bought and sold notes for the transfer. 8.By a letter dated 30 April 2007 written by a firm of Hong Kong accountants on behalf of Chang to the board of the Company, it was stated:
None of the documents referred to in §7 above were enclosed with the letter. 9.On 30 May 2007, the solicitors firm, P C Woo & Co, replied on behalf of the board that:
10.There then followed apparently some negotiations which ultimately did not resolve the matter. Three years after the first exchange of letters, on 12 July 2010, a Hong Kong solicitors firm, Hon & Co, wrote on behalf of both Chang and the plaintiff to the board of the Company, stating:
Again, no document was enclosed with this letter. 11.On 9 September 2010, P C Woo & Co replied for the board as follows:
12.Despite this response, no meaningful discussions between the parties ensued. Three and a half years later, on 21 March 2014, Hon & Co wrote to P C Woo & Co as follows:
Still, no document for any share transfer was attached to this letter. 13.P C Woo & Co wrote a holding reply on 27 March stating that they had not yet been able to contact anyone from the Company. According to the affirmation of Mr Yang Kuang Yu (“Yang”) filed on behalf of the plaintiff, he managed to approach members of the board and was given to understand that while they objected to a transfer of the shares to the plaintiff, there would be no objection to a transfer to his nominee. When the plaintiff and Yang proposed that the transfer be made to Yang, however, the board did not agree. 14.On 20 June 2014, Hon & Co wrote to the Company asking for the reasons for their refusal within 28 days. A statement of reasons was eventually provided, but not until 13 January 2015, after the plaintiff had begun proceedings by the originating summons herein on 14 November 2014. The reasons given were as follows:
Power to order registration of transfer 15.A share in a company is a form of personal property and is ordinarily transferable, but it also confers membership in the company and is only transferable in accordance with the company’s articles: s 134(2) of the Companies Ordinance (Cap 622). The articles may, and in the case of a private company, must (because of s 11(1)(a)(i) of the Ordinance) contain restrictions on a member’s right to transfer shares. A common form of restriction is a right for the directors to refuse to register a transfer of shares. 16.In the present case, Article 26 of the Company provides:
It can be seen that the first clause in Article 26 is similar to the article in In re Smith and Fawcett Ltd referred to below. 17.The part of Article 26 that provides no reason need be given for a refusal must now be read subject to s 151(3) of the Ordinance[1] which provides that the transferee or transferor may request a statement of reasons, which has to be provided within 28 days under s 151(4). Further, s 152 enables the court to override the company’s refusal by ordering registration of the transfer if it is satisfied that the application is “well‑founded”. 18.S 152 came from s 69(1B) of the previous Companies Ordinance (Cap 32), which was added in 1984. There is a suggestion in C Bates, The Companies (Amendment) Ordinance 1984 in Perspective (1985) 15 HKLJ 167 at 191 that this was enacted following the recommendation of the Company Law Revision Committee in its Second Report published in 1973 (at §3.52), which in turn was based on a recommendation of the UK’s Company Law Committee (better known as the Jenkins Committee) in their report published in 1962.[2] But it seems to me that both committees’ recommendation was primarily concerned with delayed registration of share transfers rather than refusal of registration. The recommendation was that an order might be made for the transfer to be registered forthwith “on the showing of good cause”. It is unlikely that the Jenkins Committee intended this recommendation should extend to a case where the directors have refused registration, given that it also recommended against requiring directors to give reasons for refusal to register generally because to do so “would limit a discretion which may be essential to preserve the character of a private company”.[3] 19.There is a suggestion that s 69(1B) was modelled on a New South Wales provision — s 186 of the NSW Companies Code 1981. The language used there, however, refers to the refusal to register being “without just cause”, whereas the condition adopted by the Hong Kong legislation is if the court is “satisfied that the application is well‑founded”. Since the decision in Simon Fireman v Golden Rice Bowl Ltd [1987] HKLR 981 the courts in Hong Kong have approached this power on the basis of English common law principles set out in cases such as In re Smith and Fawcett Ltd [1942] 1 Ch 304, in accordance with which the court will not interfere unless the discretion to refuse to register a transfer was not exercised by the directors bona fide and honestly in what they considered to be the best interests of the company, or was exercised for collateral purposes: see Choy Bing Wing v Max Share Ltd (unrep, HCMP 1096/1993, 31 August 1993); Re Hansby Co Ltd (unrep, HCMP 4610/2003, 12 May 2004); Liu Jinjing v Wai Hing Enterprises Ltd (unrep, HCMP 2915/2014, 2 December 2015). No argument has been advanced in this case that any different test should be applied, whether because of the new requirement of reasons under s 151(3) & (4) or otherwise. Whether transfer was lodged 20.With reference to the three letters mentioned in §§8, 11 and 14 above, there is an issue whether there was actually a transfer lodged with the Company. 21.The scheme of the statute is as follows. S 150(1) provides:
22.Its predecessor is s 66 of the Companies Ordinance (Cap 32), which provided:
23.The equivalent section in England was s 63 of the Companies Act 1929 which was enacted to scotch the practice of providing for the oral transfer of shares and thus to ensure that a transfer is made only by a document on which stamp duty may be charged: Re Greene [1949] Ch 333. The phrase “proper instrument of transfer” means not necessarily a document complying with the formalities prescribed by the articles but an instrument such as will attract stamp duty: In re Paradise Motor Co Ltd [1968] 1 WLR 1125, 1141B. 24.S 151(1) provides either the transferee or transferor of shares in a company may “lodge the transfer with the company”. S 151(2)–(4) stipulate that the company must, within 2 months, either register it or give notice of refusal to register. This period is highly significant because the power to refuse has to be positively exercised by the board of directors (see Moodie v W & J Shepherd (Bookbinders) Ltd [1949] 2 All ER 1044) and if the company does nothing within the period, first, an offence is committed (see s 151(4)) and, secondly, the company may find that it has lost the right to refuse to register the transfer: Re Swaledale Cleaners Ltd [1968] 1 WLR 1710. 25.If the company refuses to register, the transferee or transferor may request a statement of reasons. If such a request is made, the company must, within 28 days, give the reasons or register the transfer. In the case of a refusal to register, s 152 provides that the court may order registration. S 155 provides that a company must, within 2 months after the transfer is lodged with the company, have share certificates ready for shares that are transferred. 26.Apart from the provisions of the statute there are also requirements prescribed by the articles of the Company. Articles 27 and 28 stipulate that every transfer must be (i) in writing; (ii) in the usual common form or in any other form which the directors may approve; (iii) left at the registered office of the Company; (iv) accompanied by the certificate of the shares to be transferred; and (v) signed by both the transferor and transferee. 27.Mr Chain, who appeared for the Company, submitted that, by virtue of s 150(1), an instrument of transfer is a mandatory requirement when lodging a transfer of shares within the meaning of s 151. Mr Phang, who appeared for the plaintiff, submitted that an instrument of transfer is only required before the Company actually registers the transfer. 28.Irrespective of this it seems to me clear that s 151 envisages the lodging of a transfer and is not triggered by simply sending a letter of request. None of the three letters sent on the plaintiff’s behalf in 2007, 2010 and 2014 mentioned above can in my view be regarded as a transfer lodged with the Company. In fact the first letter said Chang proposed to transfer his shares and the second said he intended or planned to transfer his shares. The third letter referred to the second and demanded that the Company “consent” to the “arrangement” for a transfer of the shares to Yang, without saying whether the transfer had taken place (subject to registration) and if so when. None of them attached any agreement, notes or instrument for the transfer or containing the particulars of the transfer. 29.Nor is it in dispute that none of the three letters was in the usual common form of a transfer of shares, or accompanied by any share certificate, or signed by the transferor and transferee as required by the articles. 30.Mr Phang argued that these requirements had been waived by the Company; alternatively, it was estopped from insisting on their compliance. I fail to see how P C Woo’s response of 30 May 2007 can be said to be a waiver of the requirements. It was simply a letter saying the transfer was refused, without giving any reasons. It is impossible to distil from it any unequivocal representation that the Company would not require compliance with the articles and would treat the first letter of request as a “transfer” under s 69(1B) of the then Companies Ordinance, or a representation that any transfer lodged in future would not need to comply with the formalities prescribed by the articles. The same may be said of the second response of P C Woo & Co in September 2010. 31.As to the third request made by Hon & Co in 2014, arguably the contractual formal requirements were waived by P C Woo & Co on behalf of the Company in their statement of reasons for refusal and the cover letter dated 13 January 2015 which stated it was supplied pursuant to s 152 of the Companies Ordinance (Cap 622). Mr Chain pointed to the fact that by then, a copy of the signed instrument of transfer had been produced on behalf of the plaintiff as an exhibit in these proceedings. Be that as it may, such waiver, if any, only took effect on 13 January 2015. Until the formal requirements were waived, the plaintiff could not say that there was a valid transfer lodged with the Company. Whether there was a timely refusal to register 32.It follows in my view that it was not open to the plaintiff to argue that because the refusal to register came more than 2 months after the request dated 21 March 2014, the Company had lost the right to refuse to register. The plaintiff’s standing 33.Further, the request in 2014 was a request for consent to a transfer of the shares to Yang as a nominee of the plaintiff, not to the plaintiff himself. Even if this was treated as a “transfer” lodged with the Company, the transferee was Yang, not the plaintiff. While it might have been intended that the beneficial interest in the shares would lie with the plaintiff, it is the legal holder of shares who would become a member of the Company upon registration. 34.S 152 enables the court to make an order on the application of the transferor or the transferee, not the new beneficial owner of the shares who is not to be registered as member. Insofar as the third request is concerned, therefore, the plaintiff has no standing to bring this application. Bona fides of the directors 35.Although the plaintiff, on record, challenged the bona fides of the directors in relation to all three refusals, Mr Phang submitted that he could only realistically attack the bona fides of the directors in 2007. He referred to the statement of reasons given in 2015 quoted above (which, according to the directors, had been their reasons since 2007), and submitted that all the newspapers and other materials adduced by the Company in these proceedings on the background of the plaintiff post‑dated May 2007 and could not have been available as a reason for the refusal then. The short answer to this is that the directors relied on what they perceived to be the notoriety and their general knowledge of the background of the plaintiff, rather than specific news reports of anything novel. 36.I have no doubt that, if the articles so permit, it is open to a board of directors to refuse to register a transfer of shares if they bona fide believe that the proposed transferee is an undesirable or objectionable person to admit to membership of the company. In Re Bede Steam Shipping Co Ltd [1917] 1 Ch 123, 128, where the articles enabled the directors to refuse to register the transfer of any share if “in their opinion it is contrary to the interests of the company that the proposed transferee should be a member thereof”, Eve J (whose decision was affirmed by the Court of Appeal) said:
37.In my view, the articles of the Company in the present case equally permit the directors to refuse to register a transfer of any share to a person if they bona fide believe it would be against the interests of the Company to do so. The affirmation evidence is that the directors did consider, based on their own belief which they regarded as general knowledge in Taiwan, that the plaintiff was a member of or connected with a criminal syndicate called the Four Seas Gang, and that on this basis they considered it would not be in the interests of the Company to admit him as a member. In fact, in the latter part of 2007, Taiwanese newspapers reported certain alleged criminal activities of the Four Seas Gang and that the plaintiff, among others, had been charged with offences in connection with those activities. There is also evidence that the plaintiff was a wanted person in Taiwan. In these proceedings I need make no finding of these matters as facts. It is sufficient to say that, on the evidence, the plaintiff has failed to show that the reason given by the directors was perverse. 38.Further, the plaintiff alleged, but in my judgment failed to prove, that the directors’ decision was in fact based on some other reason and that the reasons they gave were not genuine. This is a serious allegation of bad faith which the plaintiff has come nowhere near to substantiating. No application has been made for the deponents of the affirmations to be cross‑examined. In this context the following words of Lord Greene MR in In re Smith and Fawcett Ltd, supra, at p 308 bear repetition:
39.Mr Phang relied on Re Yuen Kiu Kwan [2009] 3 HKLRD 371 but that seems to me to be a wholly different case, where the reason for refusal to register as disclosed by the directors was a legal ground which the court held to be invalid. There was no suggestion that the reason given by the directors was not actually their real reason for the refusal. 40.The directors’ position with regard to the refusal to register in 2010 and 2015 is, as Mr Phang accepted, even stronger because by then there had been formal publicity of the matters adverse to the plaintiff’s reputation. 41.It is unnecessary to deal with the other reasons for the refusal to register or the issue of the stamping of the instrument of transfer which Mr Chain raised as a discretionary factor why the court should not make an order under s 152. 42.For the above reasons the originating summons was dismissed. Costs 43.I make the following costs order nisi: (i) the costs of the defendant’s summons filed on 9 May 2017 (for leave to adduce two late affirmations) be to the plaintiff; (ii) the plaintiff do pay the defendant the costs of these proceedings (excluding the costs of Tsao’s affirmation); (iii) upon the expiry of 14 days, if there is no application to vary the costs order nisi, the defendant be at liberty to apply for summary assessment.
Mr Roger Phang, instructed by Hon & Co, for the Plaintiff Mr Christopher Chain and Mr Tom Ng, instructed by Li & Partners, for the Defendant [1] This is a new provision introduced in the Companies Ordinance (Cap 622) and applies to transfers lodged on or after its commencement date: see Schedule 11, s 22. Previously, under s 69(1A) of the Companies Ordinance (Cap 32), only a transmittee of shares by operation of law could demand a statement of reasons for refusal to register. [2] Cmnd 1749. See paras 476 and 483(e) of the report. [3] See para 211 of the report. | ||||||||||||||||||||||||||||||||||||||||||
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