Lam Hon Keung Keith v. Dalny Estates Ltd and Others

CACV 105/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 105 OF 2017

(ON APPEAL FROM HCMP NO 182 OF 2016)

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CACV 106/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 106 OF 2017

(ON APPEAL FROM HCMP NO 183 OF 2016)

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____________

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Before: Hon Lam VP, McWalters JA and G Lam J

Date of Hearing: 15 November 2017

Date of Judgment: 15 December 2017

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J U D G M E N T

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Hon G Lam J (giving the judgment of the Court):

Introduction

1.The issue in these appeals is whether the plaintiff’s two originating summonses that seek, inter alia, declarations of invalidity of the appointments of directors and company secretary said to have been made at meetings of two companies should be struck out by virtue of what has been called the “irregularity principle”.

2.The first company is Dalny Estates Ltd (“Dalny”).  Its shareholders are the plaintiff’s son Anthony Lam (“Anthony”), the plaintiff’s daughter Cynthia Lam (“Cynthia”), and a company controlled by Anthony and his wife (“Cana”) or by Cana only, named Genius Villa Ltd (“Genius Villa”), holding 240, 360 and 480 shares respectively.

3.The second company is General Target Development Ltd (“GT”).  Its shareholders are Anthony, Cynthia, Genius Villa and Dalny, holding 60, 60, 120 and 60 shares respectively.

4.At all material times prior to the resolutions in question, the directors of Dalny had been the plaintiff, Anthony and Cynthia; the company secretary had been Kathleen Lam (“Kathleen”), another daughter of the plaintiff.  The directors of GT had been the plaintiff and Anthony.

5.The plaintiff’s case is that both companies were acquired with his money and that the shareholders hold their shares on trust for him.  The relationship between him on the one hand and Anthony and Cana on the other turned sour in about 2012.  He had since repeatedly asked them to transfer the shares in the companies back to him but they refused, as a result of which he instituted an action (HCA 726/2015) in April 2015 against, among others, Anthony, Cana, Genius Villa and Dalny to recover the shares in GT, and another action (HCA 2426/2015) in October 2015 to recover the shares in Dalny from Anthony and Genius Villa.  Anthony does not dispute that the plaintiff provided the money for the initial acquisition of the companies.  His case is that further shares were subsequently allotted as distribution of family assets or gifts from the plaintiff.

The disputed resolutions of GT

6.In late 2014, the plaintiff became aware that a Form ND2A had been lodged with the Companies Registry in relation to GT indicating that the plaintiff had resigned and that Cana had been appointed as a director in October 2014.  The plaintiff said he had never resigned and, following the plaintiff’s complaint to the Registrar of Companies, Anthony withdrew that notice but lodged another Form ND2A stating that Cana had been appointed a director of GT on 15 April 2015.

7.In his affirmation, Anthony said that in March 2015, he and Genius Villa jointly requisitioned that a general meeting be called for the purpose of considering a resolution to appoint Cana as a director of GT and that, having received no reply from the plaintiff or GT, Anthony and Genius Villa issued a notice of general meeting to be held on 15 April 2015.  He posted the notice to the plaintiff and Cynthia and delivered it to Dalny.  He said that the general meeting of GT was held as scheduled on 15 April 2015 and attended by himself and by Genius Villa through Cana, at which the resolution was passed that Cana be appointed a director.  The plaintiff and Cynthia denied there was any such requisition, notice or meeting.

The disputed resolutions of Dalny

8.In the case of Dalny, the plaintiff said that in about October 2015, he discovered that a Form ND2A had been lodged with the Companies Registry reporting that Cana and Kathleen had been appointed directors of Dalny and that one M. C. Yip Secretarial Ltd (“MCYS Ltd”) had been appointed company secretary on 24 April 2015 in place of Kathleen.

9.In his affirmation, Anthony said that in March 2015, he and Genius Villa jointly made a requisition for a general meeting for the purpose of considering a resolution to appoint Cana and Kathleen as directors of Dalny and that, having received no reply from the plaintiff, Cynthia or Dalny, on 9 April 2015 Anthony and Genius Villa issued a notice of general meeting to be held on 24 April 2015 at 1pm.  He posted the notice to the plaintiff and Cynthia.  He said that on 24 April 2015 he had lunch with Cynthia at 12:30pm during which Cynthia told him she would not be attending Dalny’s registered office for the meeting but that Anthony could treat her as present since she had lunch with him.  He said that the general meeting of Dalny was held as scheduled on 24 April 2015 and attended by himself and by Genius Villa through Cana, and Cynthia was deemed to be present as a result of her conversation with him.  A resolution was passed that Cana and Kathleen be appointed directors.  It was said that immediately afterwards, a board meeting was held among Anthony, Cana and Kathleen at which MCYS Ltd was appointed company secretary in place of Kathleen.  It was accepted that no notice of this board meeting was given to the plaintiff and Cynthia.

10.The plaintiff and Cynthia denied there were any such requisition, notice or meetings.  Further, Cynthia stated that during the lunch on 24 April 2015 from about 12:30pm to 2pm, Anthony made no mention of any general meeting of Dalny to be held.  She denied having said what Anthony claimed she said.  She produced an audio recording of the lunch meeting which, she said, showed that the alleged lunch conversation about Dalny’s general meeting simply did not take place.

The originating summonses

11.In January 2016, the plaintiff issued an originating summons in each case against the alleged appointees, the company, and the Registrar of Companies, seeking declarations of invalidity in respect of the appointments of Cana, Kathleen and MCYS Ltd, on the ground that neither the plaintiff nor Cynthia was given notice of the relevant meetings and no such meetings had been held, and the appointments were therefore not valid or effective.

12.In July 2016, the defendants (other than the Registrar of Companies who took a neutral stance) applied by summons to strike out the originating summonses on the ground that, in relation to the resolutions for the appointment of directors, even if no proper notice of general meeting had been given, the resolutions are “not open to challenge” by the plaintiff as they “can always be confirmed by a majority vote by Anthony and Genius Villa at a meeting called with proper notice”, and that in relation to the board resolution for the appointment of company secretary, even if no proper notice of meeting had been given, the appointment “could always be confirmed by a majority vote by Anthony and [Cana and Kathleen] at a meeting called with proper notice …, or by a members’ resolution by Anthony and Genius Villa, as the majority shareholders”.

The judgment below

13.The judge, Harris J., considered that a procedural failure in convening a meeting and putting a resolution to shareholders would not justify the court setting aside a resolution that the majority of shareholders wished to have passed.  He concluded that, assuming Anthony and Genius Villa were able to convene general meetings and pass the resolutions, the irregularity principle did apply.  The judge noted the plaintiff’s argument that if he had had notice of the meetings, 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.  He said this gave him “pause for thought” but in the end he rejected the argument because he understood the plaintiff’s counsel to have conceded that proper notice of the meetings had been given.  Accordingly, he considered the position clear and ordered the originating summonses to be struck out.

The appeals

14.On this appeal, the plaintiff contended that the judge should not have struck out the proceedings essentially because (i) the irregularity principle was not engaged in the absence of any meeting at all, irregular or otherwise; (ii) the plaintiff was bona fide disputing the status of the “majority” both in these proceedings and in separate actions; (iii) the evidentiary basis advanced by Anthony on affirmation was fabricated and calculated to deceive the court; and (iv) it was overall not an appropriate case to exercise the court’s discretionary power to strike out the proceedings.

Discussion

15.The principles governing strike‑out applications are well established.  Actions should only be struck out in plain and obvious cases, where the claim is incontestably bad and obviously unsustainable.  There should be no trial upon affidavit, and disputed facts are to be taken in favour of the party sought to be struck out.  Nor should the court decide difficult points of law in such applications.  If the Court is left in doubt the jurisdiction to strike out should not be exercised: Ha Francesca v Tsai Kut Kan [1982] HKC 382 per Silke JA at 392; Hong Kong Civil Procedure 2018, para 18/19/4.

16.It should be noted at the outset that the plaintiff did not in fact concede that notice of the meetings was duly given. Mr Khaw SC, who appeared for the defendants both here and before the judge, fairly accepted that counsel for the plaintiff before the judge did not make any concession which required the court to assume proper notice had been given.  The judge might have read counsel’s emphasis on the absence of any meeting as suggesting that notice was not disputed, but the relevant passages in the skeleton argument (quoted in the judgment below at para 10) do not, in our respectful opinion, unequivocally indicate such a concession.  Accordingly, we proceed, as we should on a strike out, on the basis averred by the plaintiff, that there was neither any notice given nor any meeting actually held.

17.It follows from that assumption that the resolutions were made in breach of the articles[1] and the provisions in the Companies Ordinance (Cap 622) (s 571) that require notice to be given of general meetings.

18.Notwithstanding a breach of the articles, however, there is no dispute that in general, the court may refuse to intervene in an internal dispute and set aside the proceeding in question as null and void merely because of an irregularity such as in the conduct of a general meeting, if the same result would have obtained had the correct procedure been followed.  Thus the irregularity principle has been applied in Hong Kong in relation to an inquorate general meeting, so that the court refused to declare that the directors there elected were invalidly appointed: Lim Jonathan v She Wai Hung [2011] 1 HKLRD 305; to a general meeting of which requisite notice had not been given, so that the court refused to strike down resolutions passed there to authorise specified directors to handle legal proceedings against the plaintiff: Re Green Valley Investment Ltd [2003] 2 HKLRD 915; to a general meeting where the chairman wrongly called for a poll a day before the meeting, so that the court refused to declare void the resolutions passed there: Re Hong Kong Sailing Federation [2010] 1 HKLRD 801.[2]

19.Several inter‑related reasons of legal policy can be discerned from the cases as underlying the principle.  First, there is the notion that if there was an irregularity in the making of decisions for the company, it is the company which has been done a wrong and the company alone who is the proper plaintiff to bring a suit for redress: MacDougall v Gardiner (1875) 1 Ch D 13, 21–22[3]; Mozley v Alston (1847) 1 Ph 789.  In spite of legislation such as s 86 of the Companies Ordinance (Cap 622)[4] which provides that the articles of a company are enforceable, inter alia, by a member against the company and against each other member, the proper plaintiff rule remains relevant for complaints about breaches of articles: see eg Devlin v Slough Estates Ltd [1983] BCLC 497.

20.As explained by Kwan JA in Re Hong Kong Sailing Federation, supra, at paras 41–50, this has spawned a great many authorities falling on either side of the line holding certain matters are for the company to complain of and certain other matters may properly be the subject of a personal action by an aggrieved shareholder.  From this perspective the respective leading cases of MacDougall v Gardiner, supra, and Pender v Lushington (1877) 6 Ch D 70 have been said to be “ultimately irreconcilable”: Gower’s Principles of Modern Company Law (10^th ed, 2016), para 3–27.

21.Another rationale is the courts’ traditional policy, from the earliest days of company law that, generally, matters of internal management should be left to the company to be dealt with by its proper organ: see Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd [2009] 2 HKLRD 11, §§19–20, citing Carlen v Drury (1812) 1 Ves & B 154; Burland v Earle [1902] AC 83, 93.

22.Thirdly, in exercising its equitable jurisdiction the court generally follows the maxim that a court of equity does not act in vain.  If what has been done irregularly is capable of being and will inevitably be confirmed by the majority, the court will not interfere.  In MacDougall v Gardiner, supra, at p 25, Mellish LJ put it thus:

“… 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. …”

23.In a similar vein, in Browne v La Trinidad (1888) 37 Ch D 1 at p 17, Lindley LJ said:

“… the most that can be said here is that there is or may be some irregularity, but an irregularity (if such it be) which can be cured at any moment. In such cases the Court never interferes. I think it is most important that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of can be set right at any moment.”

Cotton LJ stated at p 10 to like effect that there exists the principle that

“a Court of Equity refuses to interfere where an irregularity has been committed, if it is within the power of the persons who have committed it at once to correct it by calling a fresh meeting and dealing with the matter with all due formalities.”

24.Likewise, in Bentley‑Stevens v Jones [1974] 1 WLR 638, Plowman J refused to grant an interlocutory injunction to prevent a resolution removing the plaintiff as a director from being acted upon, because “the irregularities can all be cured by going through the proper processes and the ultimate result would inevitably be the same” (p 641A).

25.Fourthly, there is the concern that if each and every breach of articles in the conduct of the affairs of a company may be the subject of an action by any shareholder, the courts would be unnecessarily inundated with internal disputes of companies.  The principle exists therefore to prevent what Mellish LJ called “cantankerous” litigation in MacDougall v Gardiner, supra, at p 25:

“Looking to the nature of these companies, looking at the way in which their articles are formed, and that they are not all lawyers who attend these meetings, nothing can be more likely than that there should be something more or less irregular done at them — some directors may have been irregularly appointed, some directors as irregularly turned out, or something or other may have been done which ought not to have been done according to the proper construction of the articles. Now, if that gives a right to every member of the company to file a bill to have the question decided, then if there happens to be one cantankerous member, or one member who loves litigation, everything of this kind will be litigated; whereas, if the bill must be filed in the name of the company, then, unless there is a majority who really wish for litigation, the litigation will not go on. Therefore, holding that such suits must be brought in the name of the company does certainly greatly tend to stop litigation.”

26.Despite the breadth of the language in which the principle has sometimes been expressed, however, the defendants have not been able to refer to us any case in which it was applied to save a resolution where no meeting had been held at all.  The defendants contend that it matters not that Anthony had (on the plaintiff’s case) simply produced pieces of paper with his and his wife’s signatures and in bad faith put them forward as minutes of meetings.  The logical conclusion of the defendants’ argument seems to be that a written resolution by a simple majority of the shareholders, labelled as minutes of general meetings, would be unchallengeable by the minority, even though the articles (as in the case of GT and Dalny) and the Companies Ordinance (ss 556(1) & 561(3)) require a written resolution to be unanimously passed by all eligible members to be effective.  Whether this is indeed the effect of the irregularity principle is not a question to be decided here.  Suffice it to say that it seems to us to be a matter that merits fuller consideration at the trial of the originating summonses rather than summary determination based on brief citation of authorities at this stage.

27.Furthermore, the passages quoted from the authorities above suggest, arguably, that the application of the principle is dependent upon it being established that the majority would inevitably be in a position to call and hold a meeting properly and regularise the decision if necessary.  In the present case the plaintiff has claimed to be the beneficial owner of the shares held by Anthony and Genius Villa.  If the plaintiff is right then these registered holders are bare trustees who may be enjoined from voting against the will of the plaintiff as the cestui que trust: Butt v Kelson [1952] 1 Ch 197.  This had indeed given the judge pause, and it seems to us he might well for that reason have decided not to strike out the proceedings but for his (mistaken) belief that the plaintiff had conceded the point.

28.In this court Mr Khaw submitted that the plaintiff’s claim of beneficial ownership is irrelevant because in company law “the courts do not look behind the shareholding of a company to see who are beneficially interested in the shares”, relying on Re Universal Horizon Investment Ltd [2000] 3 HKC 627, 630D; Re Perkins (1890) 24 QBD 613, 616.  Although there was no respondent’s notice, Mr Barlow (who appeared for the plaintiff here but not before the judge) did not object to the point being taken and we would deal with it.  It is unnecessary, however, to say anything more than that this argument seems to us to be insufficiently conclusive for the purpose of a strike‑out.  As To J said in Qiyang Ltd v Mei Li New Energy Ltd [2016] 4 HKLRD 790 at para 40, the purpose of that principle is to protect a company from liability towards owners of equitable interests in its shares and to protect third parties dealing with the company on the basis of the particulars entered in the register.  It can be argued – and we need put it no higher than that – that this does not extend to the situation where the alleged nominee who has procured an irregular resolution, urges the court to refuse any invalidating remedy in its equitable jurisdiction, on the basis that he can do what he wishes with the shares and will in any event be able to call and hold a proper meeting to rectify the irregularity if necessary.

29.It may be relevant to examine the case of Musselwhite v C H Musselwhite & Son Ltd [1962] Ch 964, which was not cited by counsel.  There two brothers, Ross and Kenneth, each together with his wife held 50% of the shares in the company.  By an agreement dated 21 May 1958, Ross and his wife agreed to sell their shares to Kenneth and his wife for £10,000, of which £2,500 was paid at once and the balance of £7,500 was to be paid by instalments over 5 years.  The share transfers were executed but they were to be deposited with the company’s solicitors until payment had been made in full.  On 30 December 1958, a general meeting of the company was held but no notice was given to Ross or his wife as the directors were under the erroneous impression that they, having executed the share transfers, were no longer members of the company.  In January 1960, Ross and his wife brought an action for a declaration that the meeting and resolutions passed thereat were invalid.

30.It was therefore a case where the legal shareholder contended that an irregular meeting was invalid — the converse of the present case.  Kenneth and his wife, in defence, argued that while the plaintiffs could assert as against the company that they were entitled to receive notice and that the meeting was a nullity, they could not do so effectively in an action to which Kenneth and his wife were parties, because the plaintiffs as legal holders had to exercise any right attached to the shares in compliance with the wishes of Kenneth and his wife as purchasers and beneficial owners (see pp 977 & 979). 

31.On the question of the substantive right as between the vendors and purchasers, Russell J held that an unpaid or partly paid vendor of shares remaining on the register of members retained the right to decide how to vote the shares (p 987).  What is of interest for present purposes, however, is what Russell J said at p 981:

“The question really, for the purpose of this case, is whether, as between the plaintiffs and the individual defendants, the plaintiffs have the prima facie right to decide how to exercise the voting rights in respect of the shares, or whether the defendants have the prima facie right to direct in all cases how those votes are to be cast. If the former, then there is no justification for not holding a proper meeting: if the latter, there is no point in holding a proper meeting and no justification for this action …”

32.In this passage the learned judge seems to have recognised the force of the defendants’ position, if they were right on the question of substantive right.  In particular, he did not dismiss the defendants’ argument outright on the simple ground that the plaintiffs were members on the register beyond which the courts would not look. 

33.There is of course a further complication in the present case, in that the plaintiff’s beneficial ownership is disputed as a matter of fact, which is indeed the subject matter of separate actions.  How the irregularity principle should interact with a plaintiff’s asserted beneficial ownership of the majority shareholding and the relationship between these proceedings and the two actions were not considered by the judge, for the reason already explained.  In our view these are again matters that merit consideration at the trial of the proceedings rather than being summarily dealt with on these strike out applications.

34.For these reasons we would allow the appeal and substitute an order that the defendants’ strike‑out summonses be dismissed.  There will be an order nisi that the defendants do pay the plaintiff the costs here and below.

Mr Barrie Barlow SC and Mr Walter Lau, instructed by Kam & Fan, for the Plaintiff in both cases

Mr Richard Khaw SC and Mr Keith Lam, instructed by King & Co., for the 1^st to 4^th Defendants in CACV 105/2017 and the 1^st and 2^nd Defendants in CACV 106/2017

The Registrar of Companies was not represented and did not appear