Lee Yan Yan Anka v. The Pun U District Association of Hong Kong

HCA 2516/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2516 OF 2016

________________________

________________________

________________________

REASONS FOR DECISION

________________________

Introduction

1.On 28 July 2017, I granted the Defendant’s application by summons dated 6 June 2017 as amended on 3 July 2017 for an order that it be allowed to operate its bank account with Bank of China by certain designated signatories; and to grant, renew or terminate the tenancy relating to three of its specified properties.  The background leading to the application and reasons for my decision are as follows.

2.The Defendant is a company limited by guarantee with substantial assets comprising of cash deposits in accounts with different banks and at least 15 landed properties.  The Plaintiff is a member of the Defendant.  In this action, she challenges the validity of the election of members of the Defendant’s election committee (termed as “Balloting Committee” in the Articles of Association of the Defendant) held on 17 September 2016.  In turn, the Balloting Committee elected the Executive Committee of the Defendant.  As result of the institution of this action, the Defendant’s banks either froze or threatened to freeze the Defendant’s bank accounts; and three of the Defendant’s tenants refused to negotiate renewal of their tenancies with the Defendant.  To ensure that its daily activities could be carried on, the Defendant made the above application.  It is believed that the banks’ reaction and the tenants’ attitude were instigated by a member or members of the outgoing Executive Committee, which may not have anything to do with the Plaintiff.

3.The Plaintiff’s professed stance to the Defendant’s application is neutral.  She has not filed any evidence in opposition, or asserted that she will suffer any prejudice if the application is granted.  She has also not contested the choices of the identity of the persons to operate the business of the Defendant proposed in the summons.  Mr Yip, counsel for the Plaintiff, said the purpose of his appearance was to assist the court by making submissions on the law and on the evidence.

The factual background

4.The Defendant’s major source of revenue is rental income from its landed properties.  It also has regular items of substantial expenditures.  Its quarterly expenditure forecast was around $4.5 million.

5.Pursuant to article 47 of the Defendant’s Articles of Association, its bank accounts have all along been operated by three signatories with one from each of the groups, viz, chairperson group, the treasurer group and the secretary group.  However, the previous Executive Committee had resolved to change the mandate of its account with Bank of China so that it may be operated by any three signatories from the three groups. 

6.The Defendant’s tenancy matters have all along been managed by the Tenancy Affairs Committee with tenancy agreements signed by three members of that committee.

7.After the election held on 17 September 2016, the elected Balloting Committee elected forty new members to the Executive Committee, ie directors of the Defendant.  However, when the Defendant attempted to file the Notice of Change of Directors with the Companies Registry, the staff of the Companies Registry refused to file the Notice.  A caution had also been entered in the Defendant’s file in the Companies Registry warning the public of the dispute over directorship of the Defendant.  Obviously, the Registrar of Companies had been alerted of the present action by some undisclosed person.

8.As a result, all the banks, with the exception of Bank of China, with which the Defendant is currently maintaining its major account, withheld the change of signatories pending the conclusion of the present action.  Effectively those bank accounts have been frozen.

9.The Defendant has since been able to maintain its essential daily and usual business by operating its bank account with Bank of China only.  The bank only allows the Defendant to operate the account “subject to special approvals by the bank on every instruction given”.  But recently, Bank of China intimated that it would review the situation and limit the operation of or even freeze the Defendant’s account by 15 July 2017 unless and until the present proceedings are resolved.  The Defendant’s position became precarious.  The sudden suspension of its bank account with Bank of China would completely paralyze the daily and essential operations of the Defendant’s business since it would not be able to pay any of its expenses.  It would not be able to even draw its own funds to pay salaries of its employees and tax. 

10.At the same time, at least three of its tenants refused to enter into new tenancy agreements with the Defendant represented by its new Executive Committee.

Jurisdiction and the law

11.The Defendant’s application was made pursuant to section 21L of the High Court Ordinance, Order 29, rule 1 and Order 30, rule 1 of the Rules of the High Court and the court’s inherent jurisdiction.  In the majority of cases, it is the plaintiff who seeks an interlocutory injunction against the opponent to maintain the status quo pending trial.  However, in the present case, the Defendant is in effect seeking injunctive relief against itself for the purpose of maintaining the status quo so that it could carry on its normal business.  Mr Yip does not dispute that the court has jurisdiction to grant injunctive relief or to appoint receiver or manager in this case.  Being a superior court of record, the Court of First Instance of the High Court has unlimited jurisdiction under section 12 of the High Court Ordinance to grant such relief.   In Smith v Peters[1], Jessel MR, when granting the interim order, held that there is no limit to the practice of the court with regard to interlocutory applications so far as they are necessary and reasonable applications ancillary to the due performance of its functions, namely, the administration of justice at the hearing of the cause.  As was held by Mimmie Chan J in Re Tysan Holdings Ltd[2], the court’s power and jurisdiction to grant interlocutory relief is not limited to granting of relief in aid of the final relief sought in the same proceeding.

12.The leading authority on the legal principle applicable to interlocutory injunction is American Cyanamid Co v Ethicon Ltd[3]. The Plaintiff has not filed any evidence to dispute the factual background I set out above.  She has made no claims against any of the elected members of the Balloting Committee or the Executive Committee, other than disputing the validity of the election.  She has also made no allegation of fraud, dishonesty or impropriety conduct against those members.  If indeed Bank of China freezes the Defendant’s only operating account, it will cause serious and irreparable damage to the Defendant’s business and reputation, which may adversely affect the interest of all members including the Plaintiff.  While Bank of China has not yet done so, there is no doubt that the Defendant’s position is precarious and its business is at risk of paralysis.  There is a serious question to be tried.  The only other remaining question for the court is to determine where the balance of convenience lies.  Mr Shum, counsel for the Defendant, has referred me to the following passages from the recent Privy Council decision in National Commercial Bank of Jamaica Ltd v Olint Corp Ltd[4], which I think is particularly apposite for assessing the of balance of convenience in the present factual situation:

“ It is often said that the purpose of an interlocutory injunction is to preserve the status quo, but it is of course impossible to stop the world pending trial. The court may order a defendant to do something or not to do something or not to do something else, but such restrictions on the defendant’s freedom of action will have consequences, for him and for others, which a court has to take into account. The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial. At the interlocutory stage, the court must therefore assess whether granting or with- holding an injunction is more likely to produce a just result. …

…the court has to engage in trying to predict whether granting or withholding an injunction is more or less likely to cause irremediable prejudice (and to what extent) if it turns out that the injunction should not have been granted or withheld, as the case may be. The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. This is an assessment in which, as Lord Diplock said in the American Cyanamid case …

…

… What is required in each case is to examine what on the particular facts of the case the consequences of granting or withholding of the injunction is likely to be. If it appears that the injunction is likely to cause irremediable prejudice to the defendant, a court may be reluctant to grant it unless satisfied that the chances that it will turn out to have been wrongly granted are low; ….

…

… What matters is what the practical consequences of the actual injunction are likely to be.”

The bank mandate

13.Mr Yip argues that what was said in Law’s affirmations filed on behalf of the Defendant about Bank of China’s threat to freeze its account is self-serving and unsupported by documentary evidence. He complains that despite the Plaintiff’s solicitors’ repeated call for documentary proof from the bank confirming its stance, the Defendant was unable to produce any such proof.  According to Law’s affirmation, the Defendant had asked but the bank did not respond.  It is notable that Bank of China is the only bank which continued to operate the account with the Defendant.  It is understandable that the bank would not wish to reduce the threat into writing leaving no wriggle room with this major client; and on the other hand, the staff would wish to cover themselves in case the Plaintiff successfully challenged the validity of the election. If the bank declined to produce written confirmation, there is nothing the Defendant could do to compel it.  The question is really whether Law was telling the truth about the bank’s threat and not whether there is a written confirmation from the bank.  If Bank of China had not so intimated and if the Defendant was not taking that threat seriously, why should it take all the trouble and incur expenses in making the application?  I accept Law’s assertion.

14.Mr Yip argues that there is no evidence that the Defendant had attempted to approach the existing authorized signatories and request them to sign cheques for the Defendant and there is no evidence that those signatories will not assist.  With respect, this argument is misconceived.  The term of office of the previous Executive Committee had expired.  The signatories of the previous Executive Committee are no longer effective to operate the account.  If the present Executive Committee should do so, they are practising a fraud on the Defendant.

15.Mr Yip refers to a cheque of $4 million drawn by the Defendant dated 20 March 2017, which was one day after the Plaintiff had taken out these proceedings against the Defendant.  He submits that it is obvious that the Defendant must have encountered no difficulty to cause the cheque to be drawn.  Hence, the relief sought is unnecessary.  With respect, that was 20 March 2017.  Bank of China only intimated that it may limit the operation of or even freeze the Defendant’s account by 15 July 2017.  The Defendant’s application was made not on the basis that the account had been frozen, but in anticipation that such risk will occur any time after 15 July 2017 and cause the Defendant irreparable damage.

16.I think there is no realism in Mr Yip’s argument.  In the face of the caution placed in the Defendant’s file in the Companies Registry, any prudent banker would have frozen the Defendant’s bank account.  The mandate of the signatories from the outgoing Executive Committee expired and the validity of the appointment of the new Executive Committee is in dispute.  All the other banks have frozen the Defendant’s account with them.  Bank of China was the only bank prepared to allow the Defendant to operate its account “subject to special approval by the bank on every instruction given” basis. Perhaps that was because Bank of China considered the Defendant an important and long standing client and that the risk was worth taking.  But eventually, it has sounded its warning.  The risk that it will carry out its threat is a real one.  If that materialises, the damage to the Defendant will be irremediable.  On the other hand, there is no allegation of prejudice which will likely be suffered by the Plaintiff if the application is granted. The Plaintiff has not even contested the choice of the identity of the persons to operate the account or business of the Defendant.  Particularly, she is not accusing any member of the new Executive Committee, from among whom the signatories will be selected, of dishonesty; and has made no allegation of risk of misappropriation of the Defendant’s funds by those members.  Applying the test in National Commercial Bank of Jamaica Ltd v Olint Corp Ltd, I think the Defendant will suffer more or irremediable damage if the application is refused than will the Plaintiff if it is allowed.  The scope of the order sought by the Defendant is very restrained.  It is limited to the operation of the bank account maintained with only one bank, namely, Bank of China, and for usual business purposes only.  It is the minimal necessary for the purpose of preserving the status quo so as to keep the Defendant’s essential business alive pending trial.  I shall allow this application.

The tenancy matters

17.The tenancy matters of the Defendant have at all times in the past been handled by the Tenancy Affairs Committee.  However, since commencement of the present action, three of the Defendant’s tenants became difficult.  They are related to one dissatisfied member of the outgoing Executive Committee who was not re-elected. Upon expiry of their tenancy, they refused to enter into new tenancy agreements with the Defendant represented by the new Executive Committee.

18.In respect of the property stated in paragraph 2(c) of the summons, Mr Yip refers to an email from the tenant’s solicitors to the Defendant’s solicitors retained to deal with the Defendant’s tenancy matters. In that email, the tenant’s solicitors cited article 40 of the Defendant’s Articles of Association which provided that any matter relating to the asset of the Defendant shall be discussed and resolved in a meeting of the board of directors attended by more than half of all the directors, and asked the Defendant’s solicitors to provide them a certified copy of the relevant board minutes proving compliance with that article.  Mr Yip submits that that was a reasonable requisition which the Defendant’s solicitors should have answered and should not have put forward as evidence in support of the application for an order sought under paragraph 2(c) of the summons.  While that is a reasonable requisition, answering that requisition cannot cure the tenant’s refusal to recognise the New Committee’s authority to represent the Defendant in entering into the tenancy agreement.

19.Mr Yip next refers to articles 40 and 46 of the Defendant’s Articles of Association which provide that the Tenancy Affairs Committee is the body to deal with the Defendant’s properties.  He argues that there is no evidence from the Defendant’s affirmation showing that the Defendant has exhausted all other means before taking out this application.  But Mr Yip does not say what other means could have been used to deal with the tenant’s refusal to recognise the New Committee’s authority. 

20.Mr Yip also refers to a tenancy agreement between the Defendant and Bonjour Cosmetic Wholesales Centre Limited dated 21 April 2017 at a substantial monthly rent of $1.2 million.  That tenancy agreement was entered into after the Plaintiff had commenced the present action.  He argues that the Defendant has no difficulty entering into tenancy agreement if the tenant does not ask question in relation to the authority of the agent acting for and on behalf of the Defendant.  But the problem facing the Defendant is that the three tenants did ask and did refuse to recognise the authority of the New Committee.

21.Lastly, Mr Yip further submits that the Defendant ought reasonably have been advised by its solicitors that the Defendant could take separate legal action against the tenants.  That may well be so, but litigation is expensive and takes time.  It may also result in loss of rental income if the property is left vacant. 

22.With respect, all the points raised by Mr Yip are frivolous and fault finding.  I even think he is being obstructive and not assisting the court.  The points he raised do not address the problem in issue, which is the tenants’ refusal to recognise the authority of the new Executive Committee to represent the Defendant in tenancy matters. While the tenancies could be allowed to continue upon expiry as month to month tenancies, that will result in loss of revenue to the Defendant.  This is not anything which cannot be compensated for by the Plaintiff.  But why should the Plaintiff be made to compensate for the tenants’ unreasonable behaviour in trying to take advantage of the Plaintiff’s dispute, if the Plaintiff fails in this action? Why should the Defendant suffer loss of rental income, even if it succeeds in resisting the Plaintiff’s claim?  Why should the tenants stand to gain whatever the outcome of this litigation?  And why should Mr Yip force his own client down that path?  Indeed, not only that the Plaintiff would suffer no damage at all if the order is granted, she would stand to gain indirectly through the Defendant by way of increased rental income.  Balance of convenience clearly lies in favour of granting the order than refusing it.

Locus standi

23.Mr Yip makes the point that the Plaintiff has no locus standi to appear at this hearing.  He submits that the Plaintiff, being a member of the Defendant, has no right to take part in the usual business of the Defendant or to handle its tenancy matters, and is in no position to consent or to object to the application.  He further submits that as there is no counterclaim by the Defendant against the Plaintiff, the Plaintiff should not have been made a party to the application.

24.Mr Yip is right that the Plaintiff may not take part in the usual business of the Defendant, cannot handle its tenancy matters, cannot cause Bank of China to allow the Defendant to operate its account and cannot cause the tenants to acknowledge the new Executive Committee’s authority to bind the Defendant.  But be that as it may, she is a proper party in this application. She challenged the validity of the election and sought to revoke the appointment of the new Executive Committee.  The order which the Defendant sought has the opposite effect of requiring Bank of China and the three tenants to acknowledge the authority of the new Executive Committee in representing the Defendant, albeit for a very limited scope.  She must be informed of the application and the possibility that such an order would be made so that she may voice her opinion.  She may contest or consent to the application, if she has a view one way or the other.  She may remain neutral with or without making any submission on the law or on the fact to assist the court.  She may also let the application go by default to save costs.  She is a proper party and has locus standi to appear.

Conclusion

25.For the above reasons, I grant the order sought under paragraphs 1, 2 and 3 of the Defendant’s amended summons and order that costs be in the cause of this action.

Mr Bowie Yip, instructed by M C A Lai Solicitors LLP, for the Plaintiff

Mr Erik Shum, instructed by S K Wong & Co, for the Defendant