So Kuen Kwok v. Pearl Oriental Oil Ltd and Others

HCMP 1912/2018

[2018] HKCFI 2559

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1912 OF 2018

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Before: Mr Recorder Stewart Wong SC in Chambers

Date of Hearing: 14 November 2018

Date of Judgment: 19 November 2018

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J U D G M E N T

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1.On 31 October 2018, the plaintiff issued an Originating Summons against the Pearl Oriental Oil Limited (“the Company”) as the 1^stdefendant and its seven directors as the 2^nd to 8^thdefendants. The plaintiff was and is a 10.01% shareholder of the Company, which is a company incorporated in Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong Limited (“HKEX”).

2.By the Originating Summons, the plaintiff seeks the following substantive reliefs:

“ (1) The 1^st Defendant’s directors (including but not limited to the 2^nd to 8^th Defendants) be ordered to pass a board resolution within 3 business days from the date of order to approve the amendment of the Bye-laws of the 1^stDefendant by deleting Bye-Law 86(4) in its entirety and replacing it with the following as new Bye-law 86(4): [the proposed new Bye-law is set out];

(2) The 2^nd to 7^th Defendants and any of the 1^stDefendant’s directors appointed to the board after 3 September 2018 be restrained from acting as the chairman of any special general meeting(s) of the 1^stDefendant or any adjourned meeting(s) in which the proposed resolutions for removal of directors as set out in the Plaintiff’s requisition dated 3 September 2018 (‘Requisition’) are to be considered.”

3.The plaintiff was (and presumably still is) not satisfied with the way the Company has been managed, and had in August 2018 raised various complaints with its board, which at the time consisted only of the 2^nd, 3^rd and 8^th defendants.  Not receiving any response, on 3 September 2018, the plaintiff’s solicitors, Nixon Peabody CWL (“Nixon”), wrote to the Company with a requisition (“the Requisition”) requesting the Company to convene a special general meeting (“SGM”) to consider and, if thought fit, to pass the following resolutions:

(1) That the 2^nd and 3^rd defendants, and any directors appointed after 3 September 2018, be removed as executive directors or directors, and any positions in any committees of the board, of the Company.[1] The 2^nddefendant is to be removed as the Chairlady of the board as well.  These are the proposed resolutions (1) to (3) and are called the “Removal Resolutions”; 

(2) That Bye-law 86(4) be amended.  This is the proposed resolution (4) and is called the “Amendment Resolution”.  Theeffect of the proposed amendment is that under Bye-law 86(4) as amended, a director of the Company can be removed by shareholders in a general meeting by ordinary resolution rather than by special resolution, bringing that Bye-law in line with the Listing Rules.

4.On 28 September 2018, the Company made the following announcement:

“ … The Company has obtained legal advice from Bermuda counsel in respect of the legality and procedural regularity of theRequisition. Bermuda counsel is of the opinion that resolutions (1) to (3) in the Requisition can be properly moved in a SGM. As to resolution (4) in the Requisition, Bye-law 169 provides that no Bye-law shall be rescinded, altered or amended and no new Bye-Law shall be made until the same has been approved by a resolution of the Board and confirmed by a special resolution of the Shareholders. Therefore, the Board’s prior approval of resolution (4) in the Requisition is required for the same to be properly moved at a SGM.

The Board will take steps to call a SGM in respect of resolution (4) in the Requisition to amend Bye-law 86(4) to be in accordance with the requirements of the Listing Rules. For details regarding the proposed amendment of Bye-law 86(4), please refer to the announcement of even date of this announcement.

As the Requisition does not set out any reasons, information and/orgrounds in respect of the proposed resolutions in the Requisition, and the Board is of the view that it is important to retain the existing directors in place for existing operation and management of the Company, the Board considers that it is inappropriate and not in the best interest of the Company to convene a SGM pursuant to the Requisition for resolutions (1) to (3) in the Requisition at this stage.”

5.The aforesaid announcement referred to another announcement of the same date.  That announcement stated that:

“ The board of the directors of the Company (the ‘Board’) proposes to amend (the ‘Proposed Amendment’) the bye-laws of the Company (the ‘Bye-laws’) in order to bring the Bye-Laws in alignment with paragraph 4(3) of Appendix 3 of the Listing Rules.”

The announcement then set out the proposed new Bye-law 86(4), which is (subject to one minor and immaterial difference) identical to the one proposed in the Amendment Resolution.

6.No date for the SGM was set in the announcements. 

7.In fact, on 28 September 2018, at a meeting attended by all three of its then directors, the board of the Company had approved the proposed amendment of Bye-law 86(4) and to convene a SGM for shareholders to approve the same.  According to Mr Yu Ngai, the financial controller of the Company, at the same meeting, the board decided not to call a SGM to consider the Removal Resolutions for various reasons (essentially those stated in the announcement of 28 September 2018 (§4 above)).  However, that discussion and decision were not recorded in the minutes of that board meeting. 

8.The plaintiff claims that he did not know that the resolution approving the proposed amendment had been passed by the board on 28 September 2018 until Mr Yu filed his affirmation on 13 November 2018, one day before the hearing before me.

9.On 2 October 2018, the HKEX sent a fax to the solicitors actingfor the Company, copied to the 2^nd and 3^rd defendants.  The HKEX referredto the Company’s view that it was inappropriate and not in the best interest of the Company to convene a SGM to consider the Removal Resolutions.  The HKEX queried whether under the Bye-laws the Company had a choicewhether to call a SGM upon receipt of a requisition from a shareholder, and whether the Company’s decision was “legal and appropriate”.

10.On 4 October 2018, the Company, in a letter signed by the 3^rddefendant, replied to the HKEX as follows:

“ Enquiry 1: whether the Company’s Decision complies with all relevant requirements under the Bye-Laws. If appropriate, please provide a legal opinion to support your view

Pursuant to section 74(3) of the Bermuda Companies Act 1981 and Bye-Law 58, if the Board does not within 21 days from the date of deposit of the requisition proceeds to convene a meeting, the requisitionist may himself convene a meeting, but such meeting so convened shall not be held after the expiration of three months from the date of deposit of the requisition. The requisitionist may also apply to the Bermuda Court for an order requiring the Company to comply with the requisition.

Legal opinion from Conyers Dill & Pearman, the Bermuda counsel, dated 2 October 2018 (the ‘Bermuda Legal Opinion’) is attached.”

11.The enclosed opinion from Conyers Dill & Pearman (“Conyers”), which is dated 2 October 2018, says:

“ Having considered the resolutions set out in the Requisition Notice, we consider that resolutions (1) to (3) can be properly moved at a SGM …

… in the absence of a resolution of the Directors approving the same, Resolution (4) is not capable of being properly moved at an EGM.

The Board shall within 21 days from the date of the deposit of theRequisition Notice proceed to convene a meeting.  The meetingshall be held within two months after the deposit of the requisition.  If the Board do not within 21 days from the date of the deposit of the requisition proceed to convene a meeting, the requisitionist may themselves convene a meeting, but such meeting so convenedshall not be held after the expiration of three months from the date of the deposit of the requisition (Section 74(3) of the Bermuda Companies Act 1981, also Bye-law 58).”

12.In answering the HKEX, the 3^rddefendant had left out the firsttwo sentences of the third paragraph of the opinion of Conyers I quoted above.  Those sentences suggest that the Company had no discretion whether to convene a SGM or not.

13.In the meantime, on 3 October 2018, the board of the Company appointed four new directors, namely the 4^th, 5^th, 6^th and 7^th defendants (“the new directors”).  The 4^thdefendant was appointed as an executive director, while each of the 5^th, 6^th and 7^th defendants was appointed as an independent non-executive director (“INED”).  The plaintiff challenges the qualifications and experience of those defendants as directors of a listed company but this is not an issue before me.

14.On 5 October 2018, the Company in a letter to Nixon reiterated that it would not be convening any SGM to consider the RemovalResolutions.  While the Company stated that it would take steps to convene a SGM to consider the Amendment Resolution, it did not specify a date.

15.The plaintiff then exercised his right under section 74(3) of the Bermuda Companies Act 1981 to convene a SGM.  The Company then wrote to Nixon on 16 October 2018 asking if the plaintiff would agree to allow the board to convene a SGM.

16.Nixon wrote back on 19 October 2018 and inter alia stated that irrespective of who convene the SGM:

(1) The directors the subject of the Removal Resolutions should not chair the SGM and they should undertake not to do so;

(2) The board should pass the resolution approving the proposed amendment to Bye-law 86(4).

17.The Company did not respond.  Mr Yu alleges that it was because the Company and its directors and officers were busy dealing with a severe financial crisis and was fighting for the Company’s survival, and had to deal with a winding-up petition and application for appointment of a provisional liquidator, as well as an application by another shareholder for leave to commence a derivative action against the 2^nd and 3^rddefendants.  However, on 30 October 2018 the Company announced that a SGM would be held on 29 November 2018 to consider all the resolutions proposed in the Requisition, ie the Removal Resolutions and the Amendment Resolution.  On 31 October 2018, the Company issued a notice convening the SGM for 29 November 2018 and a circular regarding the SGM.  Those documents did not expressly mention the two matters referred to in §16 above. 

18.On 31 October 2018, the plaintiff issued this Originating Summons.

19.Regarding the new directors, the Originating Summons and the plaintiff’s affirmation in support (with the exhibits) were delivered to them by Nixon on 1 November 2018 at the office of the Company in Hong Kong.  However, on 7 November 2018, the Company returned the documents, saying that:

“ We return you the documents attention to [the new directors], asthe documents are appropriate to send to the respective recipient’s home address instead of the office address of [the Company].”

20.On 8 November 2018, Nixon returned the documents to the Company at its office, saying that since the Company had not made the requisite corporate filings regarding those directors, Nixon regarded the Company’s address as their correspondence or last known address, and took the view that the documents had been properly served on those directors.  There is no service issue regarding the other defendants.  It is the plaintiff’s case that such conduct of the new directors shows that they were evading proper service of the Originating Summons.

21.Regarding the Amendment Resolution and the order sought under §(1) of the Originating Summons, Mr Yu says:

“ As mentioned above, the Board had on 28 September 2018 passeda board resolution to approve the Proposed Amendments. While there was a delay in responding to the Plaintiff, I verily believe that the wording of the announcements and circular issued on 28 September 2018 and 30 and 31 October 2018 made it clear that the Board had and has every intention to table the Amendment Resolution at the upcoming SGM and that there is no need for an application for the [order in §(1) of the Originating Summons] the day after the Company made the relevant announcement.”

22.The application for the order sought under §(1) of the Originating Summons is therefore overtaken by this disclosure that the board had already approved the amendment.  There is no need for me to deal with it further save for the question of costs.

23.Regarding the injunction sought under §(2) of the Originating Summons, Mr Yu produces the minutes of a board meeting by conference call held on 5 November 2018, attended by all seven directors of the Company.  The minutes recorded that the following resolution was proposed and approved:

“ In relation to the request of [the plaintiff] on the arrangement of SGM. The Chairman will not be selected from the current Directors but rather, the Board will appoint an independent third party to act as the Chairman.”

24.Mr Yu then says in his affirmation:

“ If required, the directors named as Defendants to this application are willing to give an undertaking that they would decline to act as the chair at the upcoming SGM.”

25.At the hearing before me, counsel for the 1^st, 2^nd and 3^rd defendants give undertakings on behalf of their respective clients in the terms as I set out in the Annex hereto.  Mr Anson Wong SC, for the plaintiff, confirms that he is not seeking any injunction against the 8^thdefendant.  That leaves the application for injunction as against the new directors, which the plaintiff is still pursuing.  Despite what Mr Yu says, there is no one in Court with the authority to give me an appropriate undertaking on their behalves.

26.Before I deal with the application for injunction against the new directors, I need to deal with whether there has been proper service ofthese proceedings on them, because if there is no proper service I do not seehow I can, or should, deal with this application for injunction against them,as no ground is advanced as to why I should exercise any jurisdiction I mayhave over a defendant not properly served with an originating process (such as in an application for a Mareva injunction).  By reason of the act of the Company returning the documents, the plaintiff himself recognises that there may be an issue as to whether there was proper service.  He issued a Summons dated 12 November 2018 seeking the following orders:

“ 2. Service of a sealed copy of the Originating Summons dated 30 October 2018 and the Affirmation of [the plaintiff] dated 30 October 2018 (‘Documents’) be effected on [the new directors] by delivery the Documents to the 1^st Defendant address at Suite 1905–07, 19^thFloor, Tower 6, The Gateway, Harbour City, Kowloon.

3. Service pursuant to paragraph [2] above shall be deemed to be good and sufficient service of the Documents on [the new directors] in these proceedings.”

27.The drafting of the Summons and the plaintiff’s second affirmation in support appears to me that he is seeking a prospective order for substituted service, rather than seeking a confirmation or ruling by me that the service on 1 November 2018 is proper service, even though his primary position is that the service on 1 November 2018 is proper service.  It is therefore necessary for me to deal first with the question of whether theservice on 1 November 2018 is proper service of the Originating Summons on the new directors.   

28.The rules for service are as follows:

(1) The Originating Summons must be served personally on the new directors (Order 10, rules 1(1) and 5(1));

(2) Order 10, rule 1(2), provides for exceptions to personal service, on a defendant within the jurisdiction, by sending a copy of the Originating Summons by registered post at the defendant’s usual or last known address, or by inserting the same through a letter box for that address;

(3) There are other exceptions to the requirement of personal service of an originating process: see §10/1/5 of Hong Kong Civil Procedure 2019;

(4) Ordinary service, that is, leaving a copy of the document at theproper address of the person to be served, is not authorised forthe service of an Originating Summons (see Order 65, rule 5(1)).

29.According to the Affirmation dated 8 November 2018 of Mr Poon Wai Ki, a litigation clerk of Nixon, on 1 November 2018, he served the four new directors with the Originating Summons and other documents:

“ by sending the same by leaving at Suites 1905–07, 19^th Floor, Tower 6, The Gateway, Harbour City, Kowloon, Hong Kong, being the address of the registered office of the 1^stDefendant and the last known address of the 4^th, 5^th, 6^th, 7^th Defendants.”

30.This mode of service, ie leaving the Originating Summons at the said address, does not comply with the terms of Order 10, rule 1(1) or (2).  That was ordinary service which does not apply to the service of an originating process (Order 65, rule 5(1)).  None of the other exceptions apply.

31.In my judgment, the Originating Summons and the other documents would have come to the notice of the new directors by the delivery on 1 November 2018 at the Company’ address, which given the fact that the new directors are being sued in their capacity as directors of the Company, is clearly a last known address of theirs.[2] It seems to me farfetched to say that the Company would simply return the documents to Nixon, seven days later, without taking instructions from the new directorsas to what to do with the documents addressed to them.  More importantly, according to the minutes produced by Mr Yu (§23 above), between delivery and return of the documents, the board, including the new directors, did on 5 November 2018 discuss the request of the plaintiff that they do not chair the SGM.  This is one of the two subject matters of the Originating Summons, delivered to the Company and the directors a few days earlier.  Itwould be incredible, in my judgment, for the Originating Summons not to bementioned or discussed at the said board meeting, or that the new directors not been sent or notified of the same for the purpose of the meeting.

32.As Stone J said in Transamerica Occidental Life Insurance Co (Hong Kong Branch) v King Sound Industry Co Ltd [3] :

“ The object of service of process upon a party is to bring the process to the notice of the party to be served, and such manifestly has occurred. The manner in which service has been effected has caused no prejudice, and none is alleged.”

His Lordship exercised his discretion to cure the defect in service under Order 2, rule 1, if and in so far as it is necessary.

33.I respectfully agree.  I can see no prejudice to the new directors if I exercise my discretion under Order 2, rule 1, to cure any defect in service.  For reasons stated below, I do consider the new directors to be evading service and this is a factor I also take into account.  I do exercise my discretion under Order 2, rule 1.  The service of the OriginatingSummons and other documents on the new directors on 1 November 2018 is good and proper service.

34.The next question is whether I should grant any injunction against the new directors.  Notwithstanding what Mr Yu says and the board resolution (§§23 and 24 above), Mr Wong submits that there is still a risk that, without an injunction, one of the new directors may act as chairman at the SGM.  He relies on two matters which he says show that the new directors are not to be trusted to act properly, and to follow the board resolution:

(1) the reply to HKEX dated 4 October 2018 (§10 above), which Mr Wong says “twisted” the effect of Conyers’ opinion by omitting important sentences; and

(2) their evasion of service of the Originating Summons.

35.Regarding the reply to the HKEX, I do not think that I can attribute knowledge or involvement to any of the new directors.  The letterfrom HKEX was sent on 2 October 2018, one day before their appointment, and addressed only to the 2^nd and the 3^rd defendants.  Conyers’ opinion is also dated 2 October 2018. It is true that the reply to the HKEX, signed only by the 3^rddefendant, was sent one day after their appointments, but in my judgment it is quite a big jump, which I decline to take, to say that the new directors must therefore have known of or been involved in the drafting or final form of the reply, when they had just been appointed.  Mr Wong argues that as INEDs whose role is mainly to ensure compliance, at least the 5^th, 6^th and 7^th defendants ought to know about a HKEX enquiry. But the fact remains they were appointed just one day earlier and one cannot expect them to be aware of every matter which an INED should within one day. 

36.However, I do accept Mr Wong’s submissions that, in all the circumstances, there is sufficient basis for me to find that the new directors were evading service of the Originating Summons.  The act of returning the documents, seven days after delivery and two days after the board had discussed the issue raised in the same, shows to me an intention to resort to technical arguments to defeat the plaintiff’s attempt to obtain appropriate reliefs against them.  There is simply no rational or proper reason for the Company and the new directors to require the plaintiff to serve the documents on their home addresses (when there is no basis to suggest that the plaintiff knew where those addresses were at the time as no statutory filing of their appointments had been effected) two days after the board meeting when, as I find, the new directors must have had notice of those documents.  It is most unlikely that the Company would not have taken instructions from them as to what to do with the documents delivered and addressed to them.

37.Under sections 728(1)(a)(iii) and (4)(b), and 729(1)(a),of theCompanies Ordinance[4],I have the jurisdiction to grant an injunction against directors of a company (including a non–Hong Kong company such as the Company[5]) restraining a threatened breach of fiduciary duties.  What the plaintiff is asking for is a final quia timet injunction and in Billion Star Development Ltd v Wong Tak Chuen [6], Fok JA (as he then was) said:

“ The principles governing the grant of quia timet (literally ‘since he fears’) injunctions were not in dispute below, nor are they disputed on appeal. These are conveniently set out in Spry(supra) and Mr Benjamin Yu SC, leading counsel for the plaintiff, summarised the relevant principles as follows:

(1) The plaintiff has the burden of proving that it is reasonably certain that what the defendant is threatening and intending to do will cause imminent and substantial damage to him (p.379);

(2) The criterion by which the degree of probability of future injury must be established depends on all the relevant circumstances and are not fixed. The greater the prejudice or inconvenience that may be caused by the apprehended injury (if it occurs), the more readily will the Court intervene despite uncertainties and deficiencies of proof (p.380);

(3) In ascertaining that probability, one of the most important indications of the defendant’s intentions is ordinarily found in his own statements and actions (p.380);

(4) Even in the absence of an express threat, the actions of the defendant may give a sufficiently clear indication of an intention to act unlawfully, and if the defendant has undertaken not to commit a breach, that is an evidentiary matter that weighs against the need for an injunction (p.381);

(5) Likewise, even if there is no express threat, it may be of importance that the defendant has stated that it is within his rights to do the particular acts complained against (p.381).”

38.Applying the aforesaid, I do find that, in the light of their evasion of service of the Originating Summons seeking inter alia an injunction restraining them from acting as chairman of the SGM, there is a probability that one of the new directors may, notwithstanding the board resolution of 5 November 2018, do seek to so act.  To do so, when they are faced with a proposal to remove them, would have put themselves in a position of conflict with the interest of the Company and not in the best interest of the Company, and would be a breach of fiduciary duties.[7]Balanced that against the potential substantial prejudice against the interestof the Company and of the plaintiff, in the light of the sweeping powers thechairman of the meeting would have under Bye-laws which may potentiallyinfluence the voting results, in my judgment an injunction ought to be granted.   On the other hand, there is no prejudice to the new directors if they are ordered not to do something which prima facie they have agreed not to.

39.I order that each of the 4^th, 5^th, 6^th and 7^th defendants be restrained from acting as the chairman of the special general meeting(s) of the Company or any adjourned meeting(s) in which the proposed resolutions for removal of directors as set out in the plaintiff’s requisition dated 3 September 2018 are to be considered.

40.There is no need to consider the Summons dated 12 November 2018 in the light of my decision above.  I formally dismiss it.  Although it is addressed to all the defendants, it only concerns the new directors, and as they are not present, I make no order as to costs in relation thereto.

41.As between the plaintiff and the 1^st, 2^nd, 3^rd and 8^th defendants, I note and accept the undertakings of the 1^st, 2^nd and 3^rd defendants as stated in the Annex.  I direct the plaintiff and the 1^st, 2^nd, 3^rd and 8^th defendants to make submissions as to what formal orders I shall make on §§(1) and (2) of the Originating Summons as between them, as well as the question of costs of this Originating Summons.  The plaintiff is to file and serve his submissions within 14 days of the date of this Order, each of the 1^st, 2^nd, 3^rd and 8^th defendants is to file and serve his, her or its submissions in answer within 14 days thereafter, and the plaintiff is to file and serve his reply (if so desired) within 14 days thereafter.

42.As between the plaintiff and the new directors, I direct the plaintiff to serve a copy of this Judgment on them, within two days of the date of this Judgment.  Any submissions of the plaintiff regarding costs of this Originating Summons (including a statement that he is not seeking any costs against them if that should be his position) are to be filed and served within 14 days of the date of this Order, each of the new directors is to file and serve his or her in answer within 14 days thereafter, and the plaintiff is to file and serve his reply (if so desired) within 14 days thereafter.  All service of documents by the plaintiff on each of the new directors is to be effected by leaving the same in an envelope addressed to each of them at the office of the Company at Suite 1905–07, 19^thFloor, Tower 6, The Gateway, Harbour City, Kowloon, Hong Kong.  Service is deemed to be effected on the next business day.

43.I thank all counsel for their assistance.

Mr Anson Wong SC and Mr Terrence Tai, instructed by Nixon Peabody CWL, for the plaintiff

Mr Val Chow, instructed by Dentons Hong Kong LLP, for the 1^st defendant

Ms Chelsea Ma, instructed by David Lo & Partners, for the 2^nd and 3^rd defendants

Mr Patrick Hui of Kenneth Sit Solicitors, for the 8^th defendant

The 4^th to 7^th defendants were not represented and did not appear

Annex

(1)   From the 1^st defendant

The 1^st defendant undertakes that the 2^nd to 7^th defendants and any of the 1^stdefendant’s directors appointed to the board after 3 September 2018 will not act as chairman of any special general meeting(s) of the 1^st defendant or any adjourned meeting(s) in which the proposed resolutions for removal of directors as set out in the plaintiff’s requisition dated 3 September 2018 are to be considered (including but not limited to the special general meeting scheduled to be convened by the 1^st defendant on 29 November 2018 and the special general meeting scheduled to be convened by the plaintiff on 30 November 2018).

(2)   From the 2^nd and 3^rd defendants

The 2^nd and 3^rd defendants undertake that they will not act as chairman of any special general meeting(s) of the 1^st defendant or any adjourned meeting(s) in which the proposed resolutions for removal of directors as setout in the plaintiff’s requisition dated 3 September 2018 are to be considered (including but not limited to the special general meeting scheduled to be convened by the 1^stdefendant on 29 November 2018 and the special general meeting scheduled to be convened by the plaintiff on 30 November 2018).