Ho Yu Shun v. Project Space Ltd and Others
Read the full judgment text of HCMP 1927/2020 on BabelCite. This High Court CFI judgment was delivered on 21 March 2022.
1. I have two originating summons before me concerning Project Space Limited (“ Company ”). The Applicant in HCMP 1927/2020 (issued on 30 October 2020) is Ho Yu Shun, who contends that he is a member and a director of the Company. Yau Ka Lok, Chan Lok Tung and Ngai Wing Yee, the 2 nd to 4 th Respondents who also contend that they are directors of the Company. So Kit Wai, the 5 th Respondent, is not, and has never been a member or director of the Company. He is, apparently, a volunteer who wo
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HCMP 1927/2020 & HCMP 2045/2020 [2022] HKCFI 742 HCMP 1927/2020 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1927 OF 2020 ____________________
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IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 2045 OF 2020 ____________________
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Before: Hon Harris J in Court Dates of Hearing: 15 – 17 February 2022 Date of Decision: 21 March 2022 _________________ D E C I S I O N _________________ The Application 1.I have two originating summons before me concerning Project Space Limited (“Company”). The Applicant in HCMP 1927/2020 (issued on 30 October 2020) is Ho Yu Shun, who contends that he is a member and a director of the Company. Yau Ka Lok, Chan Lok Tung and Ngai Wing Yee, the 2nd to 4th Respondents who also contend that they are directors of the Company. So Kit Wai, the 5th Respondent, is not, and has never been a member or director of the Company. He is, apparently, a volunteer who works at the Company, which runs a charity. This should have been clear to Mr Ho by the end of November 2020 when the evidence of the 2nd Respondent was served explaining this. I dismiss the Originating Summons against the 5th Respondent. Mr Ho will pay the 5th Respondent’s costs. The Registrar of Companies has been added because of the relief that is sought, which is as follows:
2.In HCMP 2045/2020, which was issued on 11 November 2020 (two weeks after HCMP 1927/2020), the Plaintiffs are the Company, Mr Yau, Ms Chan and Ms Ngai. Mr Ho and the Registrar of Companies are the Defendants. The Plaintiffs seek the following relief:
3.As the timing of the issue of the two originating summons suggest the substance of the applications are closely related. Essentially they involve a dispute between Mr Ho and Mr Yau. The other parties have only a peripheral involvement in the factual issues that the applications require the court to determine. For ease of description I shall, therefore, refer only to Mr Yau when referring to the Respondents in HCMP 1927/2020 and the Plaintiffs in HCMP 2045/2020 unless the context requires me to distinguish between them. Background 4.The Company was incorporated as a non-private company limited by guarantee on 8 March 2012 pursuant to the Companies Ordinance, Cap 32. It has charitable purposes. Those purposes broadly involve promoting and supporting the construction of better living accommodation for deprived people. On 9 August 2018 it was granted charitable status by the Inland Revenue Department. The Company changed its name to Project Space Limited on 13 December 2019 and became incorporated under the Companies Ordinance, Cap 622 (“Ordinance”). On the form NC1G filed at the Companies Registry on 24 February 2012, two founding members are recorded: Cheung So Han and Mr Yau, who are also the signatories to the Memorandum of Association. Ms Cheung is shown as the first company secretary and the first, and only, director. 5.In 2016 Cheung Kat Fu replaced Cheung So Han as a director. On 21 February 2018 Mr Ho became a member and a director of the Company. I have not been told the mechanism by which he did so. The Company has, and has had, few members. The following is recorded in the Register of Members:
6.As can be seen Mr Ho is shown as resigning as a member on 29 January 2020. It is common ground that he did not resign. In 2019 Mr Ho and Mr Yau fell out. By the time the matter came on for trial the dispute between them had largely been reduced to the following issues. Whether either of them were deemed to have vacated their position as a director by virtue of the operation of Article 38 of the Articles of Association. Mr Yau advanced an alternative argument, the thrust of which is that if his primary case is unsuccessful Mr Ho was removed as a director at an extraordinary general meeting (“EGM”) on 29 January 2020. This alternative argument is misconceived for reasons I explain later. It seems to me clear that each parties’ case stands or falls depending on whether or not they can demonstrate that Article 38 applies. I will start by dealing with the Articles and more generally the ways in which a director can be removed from office, which goes to the reasons why the alternative argument advanced by Mr Yau is misconceived. 7.However, before doing so I have the following introductory observations about the management of the Company and the evidence of Mr Ho and Mr Yau. Ms Chan (2nd Plaintiff) also filed an affirmation and was called, but not cross-examined, probably because she says nothing of any significance. 8.Clearly Mr Yau and Mr Ho had no interest in corporate governance and managed the Company informally. The consequence of this is that proper regard was never given to the requirements of the Articles or the Ordinance. This has had a number of consequences for the way in which both parties’ cases have been formulated and presented to the court. First, both parties wish the court to assess each other’s conduct by reference to sophisticated legal rules and concepts, which is an artificial exercise given the way in which they chose to conduct the Company’s affairs. Secondly, general information about the nature of the Company’s activities and how it did conduct its corporate affairs, which was necessary in to provide some kind of context in which to assess the parties’ cases, has not been adduced in evidence. It appears to me that both parties’ legal teams did not appreciate what was missing. They have simply put before the court what their unsophisticated clients have told them rather than independently determined what the court would need to know and obtain from their clients, tedious and onerous as the exercise may have been, the additional information that was required to provide the necessary context. The case before me is like a badly formulated exam question, which does not really make sense. 9.It is unclear from the affirmation evidence what it was, which has caused Mr Ho and Mr Yau to fall out. It remained unclear to me after their cross-examination, but I think it reasonable to assume that it had to do with the fact that Mr Yau’s sister worked at the Company as did Mr Ho’s partner, Ms Cheng Yu Ting. It would appear that Mr Ho was dissatisfied with Mr Yau’s sister’s performance and pay and Mr Yau became unhappy with Ms Cheng’s performance. Nothing, however, turns on this. 10.What was clear after cross-examination was that neither Mr Yau nor Mr Ho had made any effort to comply with the procedures required by the Articles and the Ordinance for convening general meetings or Council meetings. My impression was that Mr Yau equated a meeting with Mr Ho to discuss some business or administrative matter with a Council meeting. They are not the same thing. Mr Ho did not seem to have given any thought to such distinctions or for that matter the need for the Company to adopt any formal procedures or practices at all. My impression was that his involvement in the Company’s affairs was largely peripheral, the Company largely being Mr Yau’s project, which he manages while make a living independently doing interior design like work. Mr Ho has a full-time job as a project manager for a curtain-walling contractor. These shortcomings do not go to the integrity of either Mr Yau or Mr Ho, but they do make their complaints rather artificial for reasons I discuss in more detail later. The Articles 11.The Articles is a flawed and confusing document. It contains a definitions article, (1), which refers to “The Council”, which means “the administrative body of the Company composed of members of Council for the time being”. The Articles envisage the Council being the board of directors (Article 32) and the Council members having the status of directors of the Company. In this judgment I shall refer to Council members, but they have the legal character of directors. Article 30 says that the first members of the Council shall be the signatories to the Memorandum of Association, namely, Ms Cheung and Mr Yau. The Articles does not provide for the election of Council members, but purports to provide in Article 40 that a member of the Council may be removed by special resolution. This Article is unenforceable. By virtue of section 157B of the Companies Ordinance, Cap 32 and subsequently section 462 of the Ordinance, a director can be removed by an ordinary resolution. 12.Article 60 provides that all notices must be given either to a member personally or by sending it by post. Article 11, although, not well drafted in my view requires 21 days’ clear days’ notice of all general meetings of the Company to be given to members. 13.Article 5 gives the Council a power to expel a member. It provides the following procedure, which must be complied with before this can be done:
14.Neither Mr Ho nor Mr Yau has purported to use this procedure to expel the other. In fact it could never have been used at the material time. Article 5(c) could not be satisfied as on both parties’ case they were the only two Council members on 29 January 2020 (the date by which both Mr Ho and Mr Yau contend the other had ceased to be a member). 15.It is Mr Yau’s case that Mr Ho ceased to be a member of the Council by virtue of Article 38, which provides that “The Office of member of Council shall be vacated if the member of Council- …… (e) Absents himself without leave first obtained from four consecutive meetings of the Council.” As it was a requirement of the Articles (31) that a Council member had to be a member of the Company, it is the Respondents’ case that if Article 38 applied it follows that Mr Ho ceased to be a Council member. Mr Ho argues that Article 38(g) applied to Mr Yau and this is the reason why Mr Yau ceased to be a member and a Council member. Article 38(g) provides that the office of Council member is vacated if the Council member “Is directly or indirectly interested in any contract or proposed contract with the Company but does not disclose the nature of his interest in manner required by Section 162 of the Ordinance.” 16.Articles 7 to 28 deal with general meetings and voting at them. The material Articles are Articles 11, 16, 17 and 21:
17.It follows that for a meeting conducted on 29 January 2020 the notice had to be served not later than 9 January 2020. Companies Ordinance 18.Directors have a central role to play in the management of a company. Consistent with this the Ordinance gives them some protection from arbitrary removal. Section 462(4) requires special notice to be given to remove a director. Section 578 requires 28 days’ notice of the intention to move the resolution. Section 578(2) requires, if practicable, members to be given notice of the resolution at the same time that they are given notice of the meeting. 19.Section 460(2) provides that in the case of a company limited by guarantee a motion for the appointment of two or more persons as a director cannot be voted by a single resolution, unless a resolution that it may be so made has first been passed at the meeting without any vote against it. Section 460(3) provides that a resolution moved in contravention of sub-section (2) is void. Convening General Meetings 20.Section 572(1) requires a notice of a general meeting to be given either in hard copy, electronic form or by making the notice available on a website. It cannot be given orally. Section 576 specifies the contents of a notice of a general meeting:
21.Article 10 allows the Council to convene an EGM. Section 565 of the Ordinance allows “the directors” to call an EGM. This means the board (in the present case the council) not an individual director. Meetings of Directors 22.Neither the Articles nor the Ordinance require notice of a board meeting (Council meeting) to be given in a particular form or for a particular period. Section 481 of the Ordinance requires minutes of all board meetings to be kept by a company, which serves to demonstrate that a board meeting is a relatively formal event and is different from a business meeting of a number of directors to discuss a company’s affairs; for example, a finance sub-committee of a board discussing financial matters. Clearly notice has to be given and this will involve specifying that a formal board meeting is to take place at a particular time and location and for the notice period to be practical. If it is manifestly too short whatever meeting may occur will not be a board meeting. Notice should be given in writing specifying as a minimum date, time, place and the general purpose of the meeting[1]. 23.Unusually the Articles do not include the standard article that allows the board to pass written resolutions without a board meeting. Rectification of the records at the Companies Registry 24.Both originating summons are issued under section 42 of the Ordinance. The two sub-sections which are relevant to are (1) and (4):
25.Broadly speaking the section is engaged if the court is satisfied that (1) information recorded on the Companies Registry is incorrect, for example, it records a person as being a director, who had not been validly appointed, and (2) even if a new document, which has the effect of correcting the information on the Companies Registry is registered, for example, showing correctly the validly appointed directors, allowing the earlier incorrect information to remain on the Companies Registry will cause material damage to the company and “the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the Companies Register.” 26.This has been explained more fully recently by Linda Chan J in Sterling Payment Services Limited v the Registrar of Companies[2]:
27.The court has, therefore, two courses available if it finds that the information registered at the Companies Registry is incorrect. It can simply make an order directing a notice correcting the information to be filed. If the court finds that section 42(4) is satisfied it can also order the original incorrect information to be removed. The Irregularity Principle 28.Both parties advance alternative arguments that involve the irregularity principle. The principle explained comprehensively in [18]–[25] of Godfrey Lam J’s judgment in Re Dalny Estates Ltd[3]. The principle is summarised in [18]:
The Dispute 29.It is easiest to address the dispute by dealing with the issues in the following order:
Has Mr Ho ceased to be a Council member by virtue of Article 38(e)? 30.A meeting of the Council is a meeting of the directors of the Company, as I explain in [22] the Articles do not require any particular form of notice to be given, but some degree of formality is required. 31.Mr Yau has adduced a written resolution dated 9 July 2019 recording that the Council passed a resolution that it should hold monthly meetings. The first point that arises is that the Council could not pass written resolutions. The second point is that there is no evidence of a board meeting at which the resolution was passed and Mr Ho disputes he ever agreed the resolution. The third point is that Mr Yau has failed to produce any documents, which demonstrate that the Council was convened in the subsequent months. He has not, for example, produced notices and minutes of the four consecutive meetings he says Mr Ho missed. He has not stated the dates on which he asked for meetings to take place. Despite Mr Yau’s assertion in [18] of his 2nd affirmation in HCMP 2045/2020 that Mr Ho does not dispute that he missed four consecutive meetings, this is incorrect. Mr Ho does deny it in [16] of his 1st affirmation in HCMP 2045/2020. Mr Yau’s case is that there should have been Council meetings but there were not held because Mr Ho was not available. Mr Yau has plainly failed to prove on the balance of probabilities that Mr Ho missed four consecutive Council meetings. Therefore, Mr Ho did not cease to be a Council member on some unspecified date by virtue of Article 38(e). Was Mr Ho removed as a director at the EGM on 29 January 2020? 32.Mr Yau says in [22] of his 1st affirmation in HCMP 2045/2020 that out of an abundance of caution the Council (in practice him) decided to convene a meeting on 29 January 2020 to note the cessation of Mr Ho’s directorship (not membership). He then says that the Company gave notice of an EGM, which was sent to Mr Ho by email on 9 January 2020. It is not clear from the agenda for the general meeting emailed to Mr Ho, whether or not it was intended that the Company pass a resolution to remove him as a director. If it was so intended the notice was clearly defective and ineffective. The notice not only failed to specify the business to be considered with sufficient specificity it also failed to comply with Articles 11 and 60 and sections 462(4) and section 578 of the Ordinance; the latter requiring 28 days’ notice to be given to a director, who it is sought to remove at a general meeting. 33.Mr Yau also seems to be confused in his evidence about the procedure for expulsion of a member. This could be done by the Council pursuant to Article 4, not by the members at a general meeting. 34.It also seems clear that Article 14, which required two members to be present for there to be a quorum, had not been complied with as on Mr Yau’s own case he started the EGM without Mr Ho’s (or his intended proxy Wong Wing Hau) presence. 35.It follows that Mr Ho will only have been removed if Mr Yau can demonstrate that the irregularity principle applies. This requires Mr Yau to demonstrate that if he had served a valid notice of the EGM the resolution would have been passed by an ordinary resolution. It is Mr Yau’s case that it would have been because he would (as President of the Council) presided as Chairman (Article 16) of the meeting and he would (Article 21) have a casting vote. Accordingly, if, as one would expect, Mr Ho voted against the resolution and Mr Yau voted for the resolution, Mr Yau could have cast his additional vote and the resolution would have been passed. 36.Even assuming that the correct approach to assessing the application of the irregularity principle is to assume that proper notice had been given for the meeting that took place on 29 January 2020 it does not seem to me that it follows, as is Mr Yau’s case, that he would have had a casting vote. Article 16 provides that the President of the Council shall chair general meetings. If there is no President Article 17 is applicable and the meeting has to elect a chairman. In the event of equality of votes the resolution will not have been passed. That consequence would be that even if it was possible to carry on with a meeting without a formal chairman Article 21 would never be available as method for solving a tie when a resolution was put to the meeting for voting. 37.The issue, therefore, becomes was Mr Yau the President of the Council for the purposes of Article 17? This requires either Mr Yau to establish that he was appointed pursuant to Article 44 as a consequence of an election by the Council, alternatively that he was treated as the President and the Duomatic Principle[4]applies, namely, that if there is unanimous consent amongst shareholders failure to comply with formalities specified in articles and the Ordinance does not render a corporate act invalid. As clearly there was a dispute amongst the two members the Duomatic Principle has no application. 38.Article 44 provides as follows:
39.Mr Yau has provided no evidence that he was elected as President at a general meeting or, for that matter, at a Council meeting. His evidence in his 1st affirmation in HCMP 2045/2020 on this issue is as follows:
40.Mr Yau has exhibited 15 resolutions to try and establish this. Twelve are written resolutions. Nine Mr Yau signed as chairman. Many of them appear to be formal resolutions drafted by the auditors. Two other minutes, which are not described as a written resolution, approving audited financial statements for the years ending 30 June 2017 and 2018, also look like documents drafted by the auditors and this Mr Ho said he thought was the case in cross-examination. The thrust of Mr Ho’s evidence was that there was no discussion between himself and Mr Yau about Mr Yau being the President of the Council. Mr Yau simply signed some of the resolutions as chairman because this was how they were drafted. It seems to me that what probably happened was that Mr Yau having been a director of the Company from inception and the person who the auditors were used to dealing with was named by the auditors in the standard resolutions that they produced for the Company, which in my experience is the way in which auditors and company secretaries routinely provide auditing and basic secretarial services for small companies. 41.It does not seem to me that Mr Yau has established that he was either elected as President in accordance with Article 44 or that a practice has arisen between members that he be treated as having the status and rights of President. 42.It follows that the irregularity principle does not apply to regularise the purported removal of Mr Ho at the EGM. Consequently, Mr Ho remains a member of the Company and a Council member. It follows that the form ND2A filed on 29 January 2020 ref: 70001669016 showing Mr Ho as having resigned on 29 January 2020 is incorrect and misleading. The most straightforward way of rectifying this is to order that the form be removed from the Companies Registry. 43.Paragraph 2 of Mr Ho’s originating summons seeks a similar order in respect of the form ND2A filed at the Companies Registry dated 29 February 2020 ref: 70001683620, which shows the appointment of Chan Lok Tung and Ngai Wing Yee as directors on 29 January 2020. Mr Ho’s originating summons does not seek an order that Mr Yau has ceased to be either a member or a director of the Company, although the form ND2A filed on 14 February 2020 ref: 22101495251 by Mr Ho recording Mr Yau as ceasing to be a director on 29 January 2020 is challenged by [1] of Mr Yau’s originating summons, which seeks the form’s removal from the Companies Registry and a declaration that he did not resign as a member. I note at this juncture that it is not Mr Ho’s case, and the form ND2A that he filed does not suggest, that Mr Yau did resign. As I have already explained it his case that Mr Yau’s position as a director ceased by virtue of Article 38(g). The real issue is whether Mr Yau was “directly or indirectly interested in any contract or proposed contract with the Company but does not disclose the nature of his interest in manner required by section 162 of the Companies Ordinance”, Cap 32, which provides:
44.Initially, Mr Ho relied on two matters to establish that Article 38(g) applies. First, that the Company employed Mr Yau’s sister as a Project Designer without Mr Ho being told about it. Secondly, that Mr Yau caused a company he owned rather the Company (Frankino Limited) to establish a pop-up store although the intention was that the pop-up store carried out a retail business to raise money for the Company. At trial the first complaint was abandoned. 45.Mr Ho’s evidence on this issue is contained in his 1st affirmation filed in HCMP 2045/2020. It is Mr Ho’s own evidence that on 17 July 2019 Mr Yau told him that he was going to rent a pop-up store to carry out some retail business in order to fulfil his proposal made to the Company’s funders. Mr Ho does suggest that he did not know what proposal or funders were being referred to or that he objected. He then describes how Ms Cheng checked with the Company’s auditors and was told that because of its charitable status it was inappropriate for the Company to conduct a retail business. As a consequence, it is Mr Yau’s case that he decided to use Frankino. I do not read Mr Ho’s evidence as suggesting that this is not true. Mr Ho then goes onto complain that although the Company paid for certain expenses, receipts were credited to Frankino’s bank account and not transferred to the Company until Mr Ho questioned Mr Yau about the retail business. 46.It maybe that Mr Yau did not deal with this matter properly, but the issue is a rather narrow one. It is engaged if Mr Yau had a direct or indirect interest in a contract entered with the Company. However, on the evidence before the court there was no contract between Frankino and the Company. I note that I have not seen whatever contract does exist involving Frankino. It did not occur apparently to Mr Ho’s legal team to seek discovery of it. As I understand Mr Yau’s evidence, which was not challenged, Frankino entered into an agreement with premises known as Youth Square to operate a pop-up store for a period. I do not know how long that period was for. It would appear that Frankino entered into what I assume was probably a licence to use the space, because Mr Yau understood it was better that the Company, being a charity, did not do so. 47.Ms Mok, who appeared for Mr Ho, argued that the correct analysis of the arrangement was that Frankino entered into an agreement with Youth Square as the Company’s agent. Mr Yau was not cross-examined on how he viewed the arrangement between the Company, Frankino and Youth Square, but I accept that this is possibly the correct legal analysis. However, if this is the case it seems to me that it would be artificial to treat Article 38(g) as applying in these circumstances, particularly when the Company has been run in such a casual way and Mr Ho’s partner worked at the Company and there is no suggestion Mr Ho ever complied with Article 38(g)—I assume that Mr Yau simply knew who Ms Cheng was and did not object. In my view Article 38(g) was not engaged and Mr Yau also remains a director of the Company. Who is currently a member and a member of the Council? 48.It follows from what I have found that both Mr Ho and Mr Yau remain a member and a member of the Council. In my view Ms Chan and Ms Ngai were not properly appointed. Ms Ip, who appeared for Mr Yau, sought to argue that notwithstanding the procedural objections that Article 4 gave the Council the power to approve new members, in the event of a deadlock at Board level, the Company in general meeting could do so. I accept that this is the case if there is deadlock and the necessary ordinary resolution can be passed Article 4 would not be an absolute bar to members appointing new members or for that matter directors[5]. However, the necessary resolution could not be passed, because I have found that Mr Yau did not have a casting vote. It follows that in my view neither Ms Chan nor Ms Ngai were properly appointed. Conclusion 49.I will make an order of that:
50.It seems to me that in the circumstances the fairest and most straightforward way to deal with costs given the outcome is to make no order.
Ms Tina Mok, instructed by Alex To & Co Solicitors, for the applicant (in HCMP 1927/2020) and the 1st defendant (in HCMP 2045/2020) Ms Lilian Ip, instructed by Liu, Chan & Lam, for the 1st to 5th respondents (in HCMP 1927/2020) and the 1st to 4th plaintiffs (in HCMP 2045/2020) The attendance of the 6th respondent (in HCMP 1927/2020) and the 2nd defendant (in HCMP 2045/2020) were excused | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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