To Sai Tak and Another v. Registrar of Companies and Others

HCMP 1529/2019

[2020] HKCFI 1615

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1529 OF 2019

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R E A S O N S  F O R  D E C I S I O N

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1.This is an application brought by Mr To Sai Tak (杜世德) (“P1”) and Mr Zhou Qingchun (周青春) (“P2”) (together “Ps”) for an order under section 42 of the Companies Ordinance (Cap 622) (“Ordinance”) to remove or, alternatively, to rectify the information contained in the following documents:

(1)    the Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed on 25 April 2018 (Document Reference No 22701709481) (“2018 1^st ND2A”);

(2)     the Amended Annual Return (Amended Form NAR1) made up to 26 April 2017 and filed on 25 April 2018 (Document Reference No 22701709482) (“Amended 2017 NAR”); 

(3)     the Notice of Change of Address of Registered Office (Form NR1) filed on 25 April 2018 (Document Reference No 22701709484) (“2018 NR1”);

(4)     the Annual Return (Form NAR1) made up to 26 April 2018 and filed on the same day (Document Reference No 23401500266) (“2018 NAR”); and

(5)    the Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed on 14 May 2018 (Document Reference No 22701709483) (“2018 2^nd ND2A”)

(collectively “Impugned Documents”).

2.At the hearing, I granted declarations that the Impugned Documents are null and void and ordered their removal from the Companies Register with detailed reasons to be handed down.  These are the reasons.

A.      Background fact

3.The following fact is not in dispute.

4.China Crown Holdings Limited (“Company”) was incorporated in Hong Kong on 26 April 1999 as a private company limited by shares with 5,000,000 issued shares.  Until 15 June 2016, Mr Li Kin Keung (李建強), the 3^rd defendant herein (“D3”), was the sole shareholder and sole director of the Company.  The Company was set up to hold all the equity in 東莞華盛塑膠有限公司, a company established in the Mainland (“Subsidiary”) which, in turn, holds the land use right of 9,300 square metres of land located at Baini Keng, Jinxiatang Village, Zhutang Management Zone, Fenggang Town, Dongguan City (東莞市鳳崗鎮竹塘浸校村白泥坑) (“Land”) together with the buildings thereon (“Buildings”). 

5.By a 土地使用權及地上建築物所有權轉讓合同書dated 6 October 2015 (“Transfer Agreement”) made between the Subsidiary and 東莞市德懷投資管理有限公司, a company established in the Mainland and wholly owned by Ps (“Ps’ Vehicle”), the Subsidiary agreed to sell the Land and the Buildings to Ps’ Vehicle for RMB 15.5 million.  Under the Transfer Agreement, the parties agreed, inter alia, that:

(1)  RMB 7.75 million will be paid upon signing the Transfer Agreement and the balance to be paid by 30 August 2017 (clauses 2.1, 2.6);

(2)  upon receiving the 1^st payment, the Subsidiary will deliver the originals of the title documents to the Land and the Buildings to Ps’ Vehicle for its safekeeping.  The Subsidiary will take steps to transfer title of the Land to Ps’ Vehicle within 3 months (clauses 3.1, 3.2);

(3)  if by 30 August 2017 the consideration has not been fully paid, the Subsidiary will be entitled to occupy (including to collect rent) 50% of the Buildings (clause 3.4);

(4)  neither party can amend or vary the terms without the written consent of the other party (clause 9);

(5)  the Subsidiary shall deliver the originals and copies of its business licence, the land grant contract in respect of the Land and the construction application materials and construction information of the Buildings to Ps’ Vehicle (clause 13.2);

(6)  Ps’ Vehicle warrants that it will pay the consideration to the Subsidiary in full, and Ps agree to act as its guarantors (clause 13.4); and

(7)  any dispute shall be resolved by mediation failing which the case shall be submitted to No. 3 People’s Court of Dongguan City (clause 14.3).

6.By a 補充協議made in May 2016 (but subsequently dated 13 June 2016) between D3 (as vendor), Ps (as purchasers) and the Subsidiary and Ps’ Vehicle (as third parties) (“SA”), the parties agreed to replace the Transfer Agreement with an agreement whereby D3 would sell and Ps would purchase 100% shares in the Company (“Shares”) for RMB 14.8 million.  Under the SA, the parties agreed, inter alia, that:

(1)  D3 has transferred about half of the Buildings to Ps on 16 October 2015.  The remaining Buildings will be gradually transferred to Ps for their use by 30 August 2017 (clause 2.3);

(2)  D3 will transfer the Shares to P1 and P2 as to 50% each (clause 3.1);

(3)  Ps have paid RMB 7.75 million after execution of the Transfer Agreement (clause 4.2(1));

(4)  Ps shall pay RMB 1 million to D3 after the parties completed and delivered the transfer documents of the Shares to Ps.  Ps shall pay RMB 1 million to D3 after the parties have completed the change in legal representative and deliver all the documents and agreements to the designated law firm (clause 4.2(2));

(5)  the remaining balance of the price shall be paid by Ps as to RMB 1.5 million whenever D3 transfers a Building to Ps until it is fully paid (clause 4.2(3));

(6)  D3 shall gradually transfer the remaining Buildings to Ps for their use by 30 August 2017.  If the transfer of the Buildings to Ps is not completed by 30 August 2018, D3 shall be deemed to have breached the SA and shall pay liquidated damages of RMB 7.75 million to Ps according to the Transfer Agreement (clause 5.1);

(7)  if Ps fail to pay the relevant amounts in accordance with the agreed time frame, they shall pay penalty at 0.1% of the overdue price for each day of delay.  If payment is overdue for 30 days, D3 is entitled to rescind the SA and asks Ps to pay a sum equivalent to 30% of the transfer price and any transfer price which has been paid shall not be returned (clause 6.2); 

(8)  any dispute arising from the implementation of the SA shall be resolved through friendly negotiations, failing which the case shall be submitted to No. 3 People’s Court of Dongguan City (clause 7);

(9)  the SA prevails over any prior agreement negotiated between the parties.  The terms of the SA can only be altered upon the written agreement of the parties (clause 8.1); and

(10)  if the share transfer formalities are not completed within 90 days after execution of the SA, the SA shall be terminated automatically (clause 8.5).

7.Pursuant to the SA, the parties signed the instruments of transfer and bought and sold notes dated 15 June 2016 to transfer the Shares from D3 to P1 and P2 as to 2,500,000 shares each.  These transfer documents were stamped on 23 June 2016. 

8.By a written resolution passed by D3 as sole director of the Company, it was resolved that (1) Ps were appointed as directors of the Company with immediate effect; (2) D3 resigned as director of the Company with immediate effect; and (3) the transfers of the Shares from D3 to Ps were approved for registration (“14/6/2016 Resolutions”).

9.Pursuant to the 14/6/2016 Resolutions, on 15 June 2016, Ps’ names were entered in the register of members of the Company as shareholders, and share certificates were issued to Ps.  The resignation and appointment of directors were recorded in the register of directors of the Company.   

10.To reflect the changes in directors, a Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) was filed on 23 June 2016, which recorded the resignation of D3 as director with effect from 15 June 2016 and the appointment of Ps as directors with effect from 14 June 2016 (“2016 ND2A”). 

11.A Notice of Resignation of Company Secretary and Director (Form ND4) was also filed on 23 June 2016 to report the resignation of D3 as director of the Company with effect from 15 June 2016 (“2016 ND4”).

12.Thereafter, on 12 May 2017, the Company filed an Annual Return (Form NAR1) made up to 26 April 2017 which showed that (1) D3 had transferred the Shares to Ps on 14 June 2016^[1], and Ps were the only shareholders of the Company; (2) Ps were the only directors of the Company; and (3) Everford Comsec Limited was the secretary (“2017 NAR”). The information in 2017 NAR about the secretary was a mistake, as Everford had already resigned on 3 January 2017 and was replaced by Luis Asset Management Limited (“Luis”) on the same date.  The change in secretary was stated in the Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed on 9 January 2017.

13.In March 2017, D3 discovered that on 16 January 2017, the legal representative and authorised signatory of the Subsidiary had been changed to P1.  In his demand letter dated 28 March 2017 to Ps, D3 referred to Ps’ payment obligations under the SA, the recent change in legal representative and demanded Ps to deliver all original documents to the designated law firm and pay the balance of the price in accordance with clause 4.2(2) of the SA (“Demand Letter”).

14.Without any notice to Ps or any resolutions having been passed by the Company, on 25 April 2018, D3 filed the following documents at the Companies Registry:

(1)  the 2018 1^st ND2A stating that he had been appointed as a director of the Company on 25 April 2017;

(2)  the 2018 NR1 stating that with effect from 15 April 2018, the registered office of the Company was changed to Unit A1, 16/F, Success Commercial Building, Wanchai (“Wanchai Address”); and

(3)  the Amended 2017 NAR stating that as at 26 April 2017, D3 was a director of the Company (in addition to Ps) and that he held all the Shares in the Company.  The previous descriptions on the transfers of the Shares from D3 to Ps were removed and replaced by the word “N/A.

15.On 26 April 2018, D3 filed the 2018 NAR stating that as at 26 April 2018, the registered office of the Company was the Wanchai Address, the secretary was Superior Sourcing Limited (“Superior”) and D3 was the sole shareholder and sole director.

16.On 14 May 2018, D3 filed the 2018 2^nd ND2A at the Companies Registry stating that on 15 April 2018, Ps had resigned as directors, Luis had resigned as secretary and Superior had been appointed as secretary.    

17.The Impugned Documents were all signed by D3 as “director” of the Company and presented by him to the Companies Registry.    

18.Upon discovering the filing of the Impugned Documents, Ps made reports to the Hong Kong Police on 15 June 2018.  Follow up letters were issued by Ps’ former and current solicitors to the Police on 26 June 2018 and 22 August 2018. 

19.By letter dated 22 August 2018 to D3, Ps through their solicitors complained about the Impugned Documents and requested him to take action to rectify the incorrect information therein but to no avail. 

20.Despite Ps’ complaints made to the Companies Registry about the Impugned Documents, the Registrar of Companies stated that she was unable to follow up the matter and return the amended 2017 NAR and 2018 NAR previously submitted by Luis on behalf of Ps for registration. 

21.Against the above background, Ps commenced these proceedings for relief under the Ordinance with a view to remove the above documents from the Companies Registry. 

B.      Discussion

22.It is Ps’ case that the Impugned Documents were filed without the Company’s authority and the information contained therein is false given that:

(1)  D3 resigned as director of the Company on 15 June 2016, and has never been re-appointed as director;

(2)  Ps never resigned as directors of the Company.  Nor has the Company passed any resolution to remove them as directors;

(3)  Ps never authorised the change of the registered address to the Wanchai Address;

(4)  Luis never resigned as secretary of the Company. Nor has the Company passed any resolution to replace Luis as secretary;

(5)  Superior has never been appointed as secretary of the Company;

(6)  the Shares had been transferred from D3 to Ps on 15 June 2016 and, as such, Ps were the only shareholders of the Company as at the dates of the Amended 2017 NAR and the 2018 NAR; and

(7)  the information contained in the 2018 1^st ND2A is inconsistent with the information recorded in the register of members and register of directors of the Company.

23.Section 42(1) of the Ordinance provides as follows:

“The Court may, on application by any person, by order direct the Registrar to rectify any information on the Companies Register or to remove any information from it if the Court is satisfied that -

(a) the information derives from anything that -

(i) is invalid or ineffective; or

(ii) has been done without the company’s authority; or

(b) the information -

(i) is factually inaccurate; or

(ii)   derives from anything that is factually inaccurate or forged.”

24.Section 42(4) provides:

“The Court must not order the removal of any information from the Companies Register under subsection (1) unless it is satisfied that -

(a) even if a document showing the rectification in question is registered, the continuing presence of the information on the Companies Register will cause material damage to the company; and

(b) the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the Companies Register.”

25.The principles governing an application under section 42 of the Ordinance have been sufficient stated by Godfrey Lam J in Re China Nice Education Research Publishing Investment and Management Co Ltd [2016] 3 HKLRD 525 at §§15 – 20, and may be summarised as follows:

(1)     Section 42(4) prescribes and restricts how the Court’s power to order removal of information may be exercised.  Removal is to be ordered only if (i) the plaintiff has shown that registration of a document showing the rectification is not good enough; the continuing presence of the incorrect information will cause material damage to the company; and (ii) the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the register (§§16 – 17).

(2)     The fact that the information is incorrect, or relates to an invalid or ineffective transaction, or has been filed without proper authority of the company in question or that a document is a nullity or is one that should never have been registered, is not in itself a sufficient reason for removing it as opposed to rectifying it (§18).

(3)     The order made by the Court is to be registered, so that the basis of the rectification (or removal) ought to be apparent from an inspection of the record (§20).

26.The issues I have to decide in the application are (1) whether D3 had the authority to file the Impugned Documents on behalf of the Company; (2) whether the information stated in the Impugned Documents is false; and (3) if the answer to (1) or (2) is in the affirmative, whether the Impugned Documents should be removed or the information contained therein be rectified.   

27.Mr Gary Lam, counsel for D3, opposes the application on the following grounds:

(1)  Ps’ application is based on the outcome of a judgment given by the Dongguan court on 21 August 2019 in a case between (inter alios) Ps and D3 whereby the court held in favour of Ps in respect of their claims over the Shares (“Mainland Judgment”), which is now under appeal. There is no evidence that the Mainland Judgment is final and conclusive.  The outcome of the appeal “clearly will have an impact on the present application”.

(2)  It is D3’s case that he would only transfer the “true ownership” of the Shares to Ps upon full payment of the price stated in the SA (i.e. RMB 14.8 million), but Ps only paid RMB 7.75 million to D3.  Since Ps have not gained “true ownership” of the Shares, “[Ps] are not entitled to file the forms with the Companies Registry, but [D3] is so entitled.”  This is a factual dispute which cannot be resolved without cross-examination of Ps and D3. 

28.Neither contention has any merit. 

29.As is clear from P1’s first affirmation, the application is based on the grounds summarised in §22 above, not the Mainland Judgment.  In any event, it seems to me that the Mainland Judgment is irrelevant to the issues raised in this application, which concern the validity of the Impugned Documents filed by D3 at the Companies Registry. 

30.As for the alleged intention of D3 when he transferred the Shares to Ps, not only is it a bare assertion unsupported by any document, it is inconsistent with:

(1)  the express terms of the SA (in particular clauses 3.1, 4.2(2), 8.5 and 8.5);

(2)  D3’s own conduct in signing the transfer documents and the 14/6/2016 Resolutions without any qualification or condition;

(3)  D3 allowed Ps to update the register of members and register of directors of the Company, and filed the 2016 ND2A and 2017 NAR with the Companies Registry to reflect the changes in shareholders and directors, again without any qualification or condition; and

(4)  the contents of the Demand Letter in which D3 only complained about Ps’ failure to pay the balance of the price for the Shares, but did not mention the alleged intention.

31.In any event, the alleged intention of D3 in transferring the Shares to Ps is irrelevant to the application.  There is no dispute that as a result of the transfer documents and the 14/6/2016 Resolutions signed by D3, since 15 June 2016, Ps have been the only shareholders and directors of the Company and, they alone could exercise the powers qua shareholders and directors.

32.D3 contends that despite having transferred the Shares to Ps and resigned as director of the Company on 15 June 2016, he somehow had the right to reinstate himself as holder of the Shares and a director of the Company.  To make good this contention, it is incumbent upon D3 to establish that (1) he was properly re-appointed as a director of the Company on 25 April 2017; (2) the Shares were transferred from Ps to him on 25 April 2017; (3) Ps resigned as directors of the Company on 15 April 2018; and (4) even if (which I do not think is the case) D3 were re-appointed as director on 25 April 2017, he alone could pass any resolution to remove Ps as directors of the Company on 15 April 2018.  However, D3 has not articulated any basis, let alone adduced any evidence to show that he had the right or authority to do any of these acts.  There is therefore nothing to dispute the factual matters identified by Ps (as summarised in §22 above).  It follows that the information contained in the Impugned Documents is false as D3 has never been re-appointed as director of the Company, whether on 25 April 2017 or on any other date, and he has no authority to remove Ps as directors, transfer the Shares from Ps to himself, replace the secretary, change the registered office of the Company or file the Impugned Documents on behalf of the Company at the Companies Registry. 

33.As regards relief, I am satisfied that this is a case which warrants removal of the Impugned Documents from the Companies Registry for the following reasons:

(1)  The Impugned Documents were filed by D3 without the authority of the Company and, as such, are null and void. 

(2)  All the salient information contained in the Impugned Documents is false. If the Impugned Documents were allowed to remain in the Companies Registry, even with the false information crossed out or rectified, there is a real risk that the persons dealing with the Company may question the identity of the shareholders and directors and insist that the Company should provide further evidence to put the matter beyond doubt.  This will only impede the normal operation of the Company and add to the time and expenses of Ps in dealing with the Company’s affairs.   

(3)  The Company holds all the equity in the Subsidiary, which has ongoing business in Dongguan City.  There are bound to be persons and entities dealing with the Subsidiary, such as tenants and the Mainland authorities, who may need to ascertain the identity of the shareholders and directors of the Company so as to satisfy themselves that they are dealing with the right persons.  The continuing presence of the incorrect information in the Impugned Documents will create uncertainty and confusion over the identity of the shareholders, directors and secretary of the Company as well as the location of the registered office.  It is not in the Company’s interest to be left in such a confusing and uncertain state.   

(4)  There is a real risk that D3 may use the Impugned Documents to mislead others into believing that he has been reinstated as the sole shareholder and sole director of the Company and, hence, has the authority to deal with the Company’s assets including the Subsidiary.  It will cause material damage to the Company if the Subsidiary is disposed of by D3 who, as matter now stands, is neither a shareholder nor director and has no right or power in the Company. 

34.As for costs, the Registrar of Companies has submitted a statement to the Court pursuant to section 43(2) of the Ordinance and taken a neutral stance. She does not seek costs in this application.  As D3 was the person who filed the Impugned Documents and the only party opposing the application, it is appropriate to order the costs of and occasioned by the application to be paid by D3 to Ps, to be assessed by way of gross sum assessment.