Shenzhen Honeycomb System Co Ltd v. Hct Technologies (Hong Kong) Co Ltd

HCCT 20/2019

[2020] HKCFI 822

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 20 OF 2019

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Before: Hon Mimmie Chan J in Chambers (open to public)

Date of Hearing: 21 January 2020

Date of Decision: 20 May 2020

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D E C I S I O N

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Background

1.On 27 March 2019, the Applicant (“SHS”) commenced these proceedings and applied for leave to enforce an arbitral award (“Award”) made in arbitration proceedings which had been commenced by SHS against the Respondent (“HCT”) on the Mainland, pursuant to an arbitration clause contained in an agreement between SHS and HCT for the sale of products (“Agreement”). The Award was for HCT’s payment to SHS of US$2,295,496.75, interest and costs. This was after the leave granted by the Court, to enforce the Award in separate proceedings between SHS and HCT (“HCCT 47/17”), was set aside on 9 August 2018 on the ground of material non-disclosure on the part of SHS in its ex parte application.  Pursuant to Order 73 rule 10 (1) (e) RHC, and in view of the issues which had been raised in HCCT 47/17, the Court in these proceedings directed SHS on 2 April 2019 to issue a summons for the leave now sought, to enforce the Award.

2.On 14 May 2019, SHS issued the inter-partes summons, as directed.  The application for leave to enforce the Award is opposed by HCT, on the ground that these proceedings have not been commenced with due authority on the part of SHS, and that the action should be struck out and dismissed.

3.SHS is a Mainland company, the shares of which are held by Mr Jin Zhe (“Jin”) (and his nominees) as to 45.3%, with the remaining 53.7% being held collectively by Qu Zeyang (“Q”), Wang Guiying (“W”) and He Tingzhou (“H”).  It is not disputed in these proceedings that Jin, Q and H are currently the 3 registered directors of SHS, with Jin being the Chairman of the board of directors.

4.There is dispute between Jin on the one side and Q, H and W on the other side, as to whether Jin had been removed as a director at a shareholders’ meeting of SHS purportedly held on 23 August 2017 (“Shareholders Meeting”). After Jin’s purported removal as a director, a directors’ meeting was held on 4 September 2017 by Q, H and W (“Board Meeting”), whereby Jin was removed as the Legal Representative of SHS, as registered in the records of the relevant statutory authority on the Mainland (“Registry”), and Q was appointed in his place.

5.On 10 April 2018, the Shenzhen Bao’an District People’s Court ruled that the resolutions passed at the Shareholders Meeting and the Board Meeting were lawful and valid, such that Jin had been removed as a director and as the Legal Representative of SHS (“Judgment”).  On appeal, the Shenzhen Intermediate People’s Court overturned the Judgment on 25 December 2018, ruling instead that the Shareholders Meeting had not been validly convened and held, and that the resolutions passed at the Shareholders Meeting and the Board Meeting were invalid, or of no effect and should be set aside (撤銷) (“Appeal Judgment”).

6.Jin maintains that by virtue of the Appeal Judgment, he remains a director and the registered Legal Representatives of SHS, and had the authority to instruct solicitors to commence these proceedings in the name of SHS.

7.On the part of Q, H and W, they applied for retrial of the Appeal, which application was rejected by the Guangdong Higher People’s Court on 30 July 2019. They further applied to the Shenzhen People’s Procuratorate for supervision of the Appeal Judgment (“Supervision Proceedings”), and on 21 October 2019, the application was accepted.  Q, H and W claim therefore that the Appeal Judgment on the invalidity of the subject resolutions (and hence the validity of Jin’s position as director and Legal Representative) is not final or conclusive, as enforcement of the Appeal Judgment would be suspended if the Appeal Judgment is found to be erroneous.

8.It is not alleged by Q, H and W that before a decision is made in the Supervision Proceedings, the Appeal Judgment is of no effect, or that there is an interim stay of the Appeal Judgment.  Their experts agreed that there is no such stay.  Q, H and W accept for the purposes of these proceedings that as at the date of the hearing of the summons, Jin is a director and the chairman of SHS and remains registered as its Legal Representative.

9.In gist, HCT claims that Jin had no authority to commence these proceedings to seek leave to enforce the Award, in reliance on his status as the registered Legal Representative, when in fact the directors and shareholders had not authorized Jin to make claims on behalf of SHS.  They argued, on the basis of Kammy Town Ltd v Super Glory Corporation Ltd, HCA 3524/2003, unreported, 14 January 2005 that since the point of lack of authority must be taken at the earliest opportunity, the Court should strike out SHS’s claims in these proceedings for leave to enforce the Award in their entirety.

10.On behalf of HCT, it was emphasized that the burden is on those suing in the name of a plaintiff to prove authorization, such that in this case, Jin has to prove, on a balance of probabilities, that he had the authority to commence these proceedings against HCT.  This, it was argued, Jin has failed to do, when Q, who is one of the directors of HCT and also a shareholder of SHS, has filed affirmations to claim that Q, H and W as shareholders of SHS, and Q and H as directors of SHS, had never agreed to appoint the solicitors to initiate and proceed with these proceedings on behalf of SHS.  Q claims that these proceedings were accordingly against the intention of the majority of the board of directors and majority of the shareholders of SHS.

11.HCT claims that notwithstanding the challenges it made, and the challenge by Q on behalf of himself, H and W as shareholders and directors of SHS, Jin and SHS as Applicant initiating these proceedings failed to produce any evidence of Jin’s authorisation to instruct the solicitors and to commence these proceedings in the name of SHS - whether by production of a resolution passed at a meeting of the directors, or otherwise.  The only assertion maintained is the record at the Registry of Jin’s registration as the Legal Representative of SHS.

12.On behalf of SHS, Counsel accepted that SHS has the burden to prove that these proceedings were commenced with the proper authority.  However, it was argued that under Mainland law, Jin as the registered Legal Representative has the power and authority to act on behalf of SHS and to commence these proceedings on behalf of SHS.  Counsel argued that there is no authority to support the claim made by Q, H and W that as majority shareholders, they can control the action of the Legal Representative and override the wishes and decisions of the Legal Representative, in the absence of evidence in the form of a resolution of the shareholders or directors, declaring their stated intention or decision on behalf of the company.

13.In short, each side relies on the lack of evidence in the form of a duly convened meeting of either the shareholders or of the directors of SHS, as to the authority, or lack of authority, of Jin and the solicitors he instructed in the commencement of these proceedings.  On behalf of HCT, it was argued that Jin has failed therefore to discharge his burden of proof.  On behalf of SHS, it was argued that Jin’s registration as Legal Representative is sufficient and conclusive evidence, particularly against HCT, as such evidence has not been refuted.

14.Kammy Town is the authority for the proposition that the burden of proof of authorization to bring suit is on Jin in this case.  As can be seen from the decision in Kammy Town itself, and from cases such as Daimler Company Limited v Continental Tyre and Rubber Company (Great Britain) Limited [1916] 2 AC 307, no distinction is made between a case in which action is brought in the name of a company against its own shareholders and/or directors, and one in which the action is brought by a company against a third party unrelated to the company and its shareholders.  The defendant is entitled to challenge the authority of the bringing of proceedings, and the question is decided by the court on the evidence adduced. 

15.On behalf of HCT, it was argued that for a Mainland company such as SHS, whereas the records in the Registry of a person’s status as legal representative may be conclusive as against third parties in the case of “external disputes” of the company, in relation to “internal disputes”, the registered legal representative cannot override the objections of the shareholders and directors of the company in relation to the authority of the legal representative to commence proceedings in the name of the company. 

16.The PRC law expert who gave evidence on behalf of HCT relies on the articles of association of SHS and the Company Law of the PRC. 

17.Article 4 of the articles of SHS states that a meeting of shareholders comprises all the shareholders, and such meeting is the highest organ of power of the company, with the duty and power of electing and changing the directors of the company.  Article 22 states that in general circumstances, a resolution of the shareholders is valid upon approval by over 50% of all the shareholders, who represent half of the shareholders voting on the resolution.

18.Article 29 of SHS’ articles provides that one-third or more of the directors can convene a board meeting, that the quorum for a board meeting is two-thirds of the total number of directors, and that a resolution passed by more than half of the total number of directors is valid.

19.Article 36 of the Company Law provides that a meeting of the shareholders is the organ of power of a company, and that the shareholders at such meeting exercise their duties and powers in accordance with the Company Law.  Article 46 of the Company Law provides that the board of directors shall be responsible to the meeting of shareholders, and should execute the resolutions of the meeting of shareholders.  According to HCT’s expert, the meeting of shareholders and the meeting of the directors are the organs which formulate the intentions of the company.

20.In relation to the legal representative, HCT’s expert refers to Article 13 of the Company Law, which states that the legal representative shall be the chairman, executive director or manager of the company, and shall be registered in accordance with the law.  The expert also refers to Article 61 (2) of the General Rules Of the Civil Law of PRC, which states that where the legal representative engages in civil activities in the name of the legal person, the legal consequences incurred shall be undertaken by the legal person.

21.In the opinion of HCT’s expert, and based on the above provisions of PRC law, a legal representative of a company is merely the representative and spokesperson of the company, and not an individual decision maker.  The intention of the company is formulated by the shareholders or the board of directors authorized by the shareholders, and expressed by or through the legal representative.  The expert states that the legal representative must comply with and implement the decisions of the shareholders and directors of the company, so long as they do not violate the law and the articles of the company.

22.HCT’s expert concluded that for internal disputes of the company, the legal representative of the company cannot act contrary to the intention and decision of the majority of the shareholders and directors, in the institution of legal proceedings.  Where there is conflict between the intentions of the majority shareholders and directors of the company and the intentions of the legal representative, the court should find that proceedings instituted by a legal representative contrary to the decision of the shareholders and directors do not represent the true intent of the company, and are invalid.  In support of his contention, the expert referred to and relies on the decision of the Mainland court in a case involving Sino-Environment Technology Limited as claimant and 大拇指環保科技集團（福建）有限公司 as defendant (“Thumb”).

23.The Thumb case was one in which a company (Thumb) brought proceedings against its shareholder for outstanding capital contribution, and the defendant shareholder disputed the authority of the legal representative of Thumb in its commencement of proceedings.  The court referred to Article 47 of the Company Law, which provides that the board of directors of a company is the organ which has the duty to execute the resolutions of the shareholders, and stated that the dispute as to the identity of the legal representative resulted from the failure of the directors to implement the resolution of the shareholders.  The court stated that registration of the legal representative with the relevant registry has effect against the public, and in the event of an external dispute involving third parties outside the company, the registration at the registry should be the determining criteria, but as against internal disputes between shareholders, the criteria should be an effective resolution of the shareholders’ meeting.  On the facts of the case, the court found that the resolution of the shareholder of Thumb in the choice and appointment of legal representative was binding on the company.  As the legal representative appointed by the shareholder was opposed to the commencement of proceedings, the institution of such proceedings did not represent the true intent of the company and the claims were dismissed.

24.On the basis of the decision in Thumb, the expert of HCT considered that where the institution of legal proceedings is challenged and opposed by the majority of the shareholders and directors, and the legal representative of a company fails to produce the relevant resolution to prove that the legal representative has the authorization of the shareholders or directors, the court should accept that the institution of proceedings does not reflect the true intent of the company.

25.The PRC law expert evidence adduced by SHS is to the effect that even for the majority shareholders, they can only express their intent and will by and through a duly convened shareholders meeting, and that they cannot directly instruct the legal representative as to how he should act in the absence of a resolution of the shareholders.  To avoid confusion to the public and third parties dealing with the company, the registered status and position of the legal representative is recognized by law, such that as against external parties, the actions of the registered legal representative bind the company, and third parties need not enquire into any internal disputes or conflicts amongst the shareholders.  So far as third parties are concerned, the registration of a person at the Registry as the legal representative of the company is conclusive.  The expert’s conclusion is that the commencement of these proceedings by Jin as legal representative of SHS against HCT is valid and authorized, notwithstanding the objections by the directors and majority shareholders of SHS.

26.In dealing with the Thumb decision, SHS’ case is that these proceedings do not represent an “internal” dispute within the meaning of Thumb. HCT is not a shareholder of SHS, but a third party.  The “exception” to and the disapplication of the rule that registration of a person as legal representative is conclusive, as found in Thumb, does not apply.

27.The cited provisions of the PRC Company Law are clear and are not disputed by the experts. Their effect is that the legal representative of a company has to implement and execute the expressed intent of the company acting through its shareholders and/or board of directors.  Article 36 of the Company Law refers to the company’s “organ of power” as being the “股東會” (the meeting of shareholders), or the shareholders acting collectively.  Article 46 likewise refers to the powers and duties of the directors acting collectively as a board (“董事會”).  The bodies which formulate the “intention” of the company, as referred to in Article 46, are the shareholders at their meetings, and the directors at their meetings, by the resolutions decided at such meetings.

28.It is for SHS as claimant in these proceedings to prove that the action was duly authorized.  Its proof is the fact that Jin was at the commencement of the proceedings, and remains today, the registered Legal Representative of SHS, with the legal power and authority to act for the company.  Such authority would usually include the institution of legal proceedings on behalf of the company.  The registered status of Jin is not disputed by either HCT, or Q, H and W in these proceedings.  As Counsel for SHS emphasized, Q, H and W could have called for a meeting of the directors in accordance with the articles of SHS, to remove Jin as Legal Representative, but they have not done so after the Appeal Judgment.  That may be due to the fact that one or more of them is incarcerated, or otherwise unavailable, but the fact remains that Jin stays as a director, and Legal Representative of SHS, whatever may be the sentiment of the majority shareholders. 

29.It appears from the facts recited in the Thumb judgment that there was evidence produced to the court of resolutions duly passed at meetings of the shareholder, whereby the directors and legal representative were changed, and from which evidence the court was able to conclude that the proceedings instituted by the company against the shareholder was opposed by the legal representative appointed, such that the proceedings no longer represented the true intent of the company.

30.I accept that in the evidence filed on behalf of HCT, Q as director of HCT deposed, on behalf of HCT, and allegedly on behalf of H and W, to the fact that he, H and W as shareholders and directors of SHS did not approve the institution of these proceedings.  However, they stop short of convening a meeting of the shareholders of SHS in accordance with the articles of the company, to remove Jin as director, or otherwise to resolve to terminate or withdraw these proceedings.  They had held a purported directors’ meeting in February 2019, and had resolved that these proceedings were commenced by Jin and the solicitors he instructed without their knowledge or approval, and should be halted.  The validity of that meeting was not maintained after the Appeal Judgment, but for reasons unexplained, Q, H and W did not convene any other meeting to take matters forward with regard to their disavowal of these proceedings.  This court cannot have regard to the resolutions passed by Q, H and W at the meeting held in February 2019, when their meetings have no legal effect as declared by the Mainland courts.

31.Absent any evidence of any meeting of the shareholders or directors of SHS having been held, to collectively express their “intent” (as emphasized by HCT’s expert) to revoke Jin’s authority as Legal Representative, as provided for and contemplated by Article 46 of the Company Law, I cannot but hold that on a balance of probabilities, these proceedings were instituted with the authority of SHS acting by Jin, and that vis a vis HCT, the institution of such proceedings was valid and effective.

32.As for the claim by HCT that Jin and SHS had failed to disclose the fact that proceedings had been commenced by SHS against Q, W and H on the Mainland on 29 March 2018 (“788 Action”), when they filed the affirmation of Jin in support of the initial ex parte application made on 27 March 2019, I find that there was no material non-disclosure. The 788 Action were proceedings instituted by SHS against Q, H and W as individual directors of SHS, to seek damages against them, on the basis that they were in breach of their duties owed to SHS, by taking steps to prevent compliance or to procure SHS not to comply with the Award.  The cause of action is distinct from SHS’ cause of action against HCT for the sums due under the Award, and is not material to SHS’ application for leave of this Court to enforce the Award.  The institution of the 788 Action is not for enforcement of the Award against HCT on the Mainland, and does not fall within section 93 of the Arbitration Ordinance, for disclosure to be made when seeking leave for enforcement in Hong Kong.

33.The claim for dismissal of the action is dismissed, with costs to be paid by HCT to SHS. 

34.No arguments have been made at the hearing on the merits of the application for leave to enforce the Award, and the hearing was treated as the application for dismissal for want of authority.  With the dismissal of that application, parties are at liberty to proceed with the hearing on the merits of the summons issued on 14 May 2019, if the opposition is pursued, or unless the parties had agreed otherwise.  If there is no opposition on the merits, parties should apply by consent for the order for leave to be made.  If the summons is opposed on the merits, a hearing should be fixed forthwith, as the directions made in the Order of 13 June 2019 were for the filing of all the evidence on the summons, and all the evidence have in fact been filed as directed.

Mr Paul Wong, instructed by LIMS Solicitors, for the applicant

Mr Chase Pun, instructed by Yan Lawyers, for the respondent