Huangfu Chuangxin v. Ni Yongkang and Others
Read the full judgment text of HCMP 1259/2021 on BabelCite. This High Court CFI judgment was delivered on 16 June 2022.
1. By an Originating Summons dated 31 August 2021 (the “ OS ”), the Plaintiff (“ P ”) seeks declaratory and other consequential reliefs that the following resolutions concerning Vogsun International (HK) Co., Limited (the “ Company ”) are invalid and of no legal effect:-
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HCMP 1259/2021 [2022] HKCFI 1721 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1259 OF 2021 ________________
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_____________________________ DECISION ON COSTS _____________________________ 1.By an Originating Summons dated 31 August 2021 (the “OS”), the Plaintiff (“P”) seeks declaratory and other consequential reliefs that the following resolutions concerning Vogsun International (HK) Co., Limited (the “Company”) are invalid and of no legal effect:-
2.The P’s complaint, in gist, concerned various alleged irregularities affecting the notices of the respective meetings for the Director Removal Resolution and the Articles Amendment Resolution. 3.Subsequently, P discontinued the present proceedings under Order 21 Rule 3. The only outstanding matter between the parties is the costs of these proceedings. 4.As P has applied to discontinue the present proceedings without going to trial, both counsel agreed that this Court will not be asked to determine disputes of fact at the present hearing. I will therefore merely set out a brief background. Background 5.the shareholding and corporate structure of the Company may be summarized in table form below:
6.The Company has a wholly-owned subsidiary, Hangzhou Wushang Biotechnology Co. Ltd. (“Wushang Biotechnology”), a company incorporated in the PRC. Wushang Biotechnology in turn wholly owns Hangzhou Wushang Food Co. Ltd. (“Wushang Food”), also a company incorporated in the PRC. 7.The following is a chronology of key events:-
8.Against the above background, P’s case against Ds is as follows:-
9.P applies for costs against Ds on the following grounds[3]:
10.On the other hand, Ds insisted that P should pay for the costs of discontinuance. Applicable legal principles 11.Generally speaking, upon an application for leave to discontinue, the discontinuing party will be required to pay the costs of the other party. 12.Whilst costs is ultimately within the discretion of the Court, there are well established principles governing the award of costs in the context of discontinuance of proceedings. As summarized in Hong Kong Civil Procedure 2022 at §21/5/12A:
13.In China Baoli Technologies Holdings Ltd. v. Orient Equal International Group Ltd. & ors.,CACV 34/2018, [2021] HKCA 1609, at §17, the Court of Appeal held that “exceptional circumstances” need to be shown to justify a departure from the general rule. The fact that the discontinuance was caused by the issues becoming academic does not by itself justify departure from the general rule. The dicta of Recorder Shieh SC in Anmol Kumar Sawlani v. Yeshma Gobindram Sawlani, unreported HCA 2231/2011, 9 May 2013, at §§10 to 15 were approved. 14.In the Anmol case, Recorder Shieh SC quoted the dictum of Mortimer VP in Ta Chung China and Arts Limited v. Fontana Restaurant Limited [1999] 1 HKLR 404, at 406:-
There was an attempt on the part of counsel to argue that the above dictum of Mortimer VP did not survive after the CJR. At §14, the learned Recorder rejected such argument. Then the learned Recorder concluded in §15:-
15.Mr Mok for P argued, similar to counsel in Anmol’s case, that the dictum of Mortimer VP in Ta Chung’s case did not survive the CJR. I reject Mr Mok’s argument in the same way as Recorder Shieh SC did in Anmol. I am comforted by the fact that the dicta of Recorder Shieh SC had received endorsement by the Court of Appeal by which I am bound. In any event, the basis of P’s application for costs is that the subject resolutions were “indeed invalid”. In my view, in order to persuade this Court to exercise its discretion to order costs of discontinuance in P’s favour, P has to satisfy me that it is bound to win in the first place. 16.Mr Mok relies on Re Peaktop Technologies (USA) HK Ltd. [2007] 4 HKLRD 207. In that case, the plaintiffs (directors) applied for leave to discontinue the originating summons which sought inspection of books and records of the Company. The plaintiffs applied for discontinuance because subsequent to the originating summons, they were removed from directorship and hence lost locus. Barma J (as he then was) granted leave and awarded costs in favour of the plaintiffs. His Lordship said:-
17.Mr. Mok seemed to read Re Peaktop as saying that once the situation mentioned by Barma J in §8 has arisen, the party seeking discontinuance is automatically entitled to a costs order in its favour. With respect, that is an erroneous reading of the case. It is important to note that in Re Peaktop, Barma J was satisfied, based on the materials and arguments before him, that but for the removal of the applicants as directors of the Company, it would have been appropriate to make an order substantially in terms sought (see §37). In other words, there is no real conflict between the Anmol’s case and Re Peaktop. 18.Finally, in respect of the analysis as to whether a plaintiff or a defendant is bound to win in a postulated trial, both counsel agreed that this court can and should take a broad brush approach as enunciated by To J in Re Fook Lam Moon Restaurant Ltd. (unreported HCMP 438/2010, 8 December 2015) at §41. Discussions The Director Removal Resolution 19.Mr Mok submitted that P was bound to succeed (but for the Subsequent Director Removal) since Ds had admitted that there was flaw in the procedure adopted. In D1’s affirmation[4] , he effectively admitted that no notice of shareholders’ meeting was given to P. 20.Firstly of all, Mr Lai, Counsel for Ds submitted and I accept that the Defendant’s letter dated 18 Oct 2021[5] does not constitute admission that the Director Removal Resolution was invalid. It was made clear in the said letter that the Notice for EGM dated 8 Oct 2021 (seeking ratification of the earlier removal) was issued with a view to avoiding further dispute. 21.Secondly, Mr Lai submitted that even if there were flaw in the procedure, P’s case is not bound to win (but indeed doomed to fail) because of the “irregularity principle”. Mr Lai relied on Lam Hon Keung Keith v. Dalny Estates Ltd & ors [2018] 1 HKLRD 409 at §18 per G Lam J (as he then was):-
22.Mr Mok then submitted that the “irregularity principle” cannot apply in this case because the irregularity was one of “substance” instead of a mere procedural irregularity. Mr Mok relied on sections 462(1) and (4) of the Companies Ordinance (Cap. 622) which provides that a company may by an ordinary resolution remove a director, and a special notice is required for such a resolution. Section 463 further provides that the company must send a copy of such notice to the director concerned who is entitled to be heard on the resolution at the said meeting and to make representations. Mr Mok further relied on Yeung Bing Kwong Kenneth v Mount Oscar Ltd [2019] 3 HKLRD 575 to demonstrate that section 463 guaranteed certain protections to a director who faces removal. Mr Mok submitted that the failure to give notice of the Shareholders’ Meeting to P was an irregularity of substance for which the “irregularity principle” could not apply. 23.When being challenged by Mr Lai as to the lack of authority to support his limitation of the application of the “irregularity principle”, Mr Mok relied on one paragraph in Law of Companies in HK, 3rd ed, Lo and Qu, pg. 414, where the author said "Where the matter in question is not merely an irregularity in the internal management of the company but one of substance, and tintured with oppression, the irregularity principle does not apply." The case of Baillie v. Oriental Telephone and Electric Co Ltd [1915] 1 Ch 503 was quoted in support of that proposition. 24.In Baillie, company X wholly owned a subsidiary Y. In 1907, directors of X (in exercise of the voting powers of X in Y) obtained the passing of resolutions whereby the articles of Y were altered so as to increase the fixed remuneration of the directors. In 1913, an EGM of X was convened by the directors with the object of passing special resolutions ratifying what had been done by the directors in 1907, authorizing them to retain all remunerations received and to be received by them as per the 1907 articles modification. The notice convening the EGM and an attached circular set out the proposed resolutions but did not give particulars as to the amount (which was very large) of the remunerations which had been received by the directors. The resolutions were passed by the requisite majority and subsequently confirmed. A shareholder (by way of a derivative action) sought a declaration that the resolutions were not binding on the ground of insufficient notice of the meeting. The evidence revealed that at the meeting, the chairman gave no detailed information as to the directors’ remunerations from Y but merely stated that the directors’ fees had averaged since 1881 the sum of £320 per annum for each director. No statement was made at the meeting by the chairman as to the amount of the sums of the payment of which was proposed to be confirmed by the resolutions. In fact, some shareholders had previously made objections and sought for information. One of them even wrote to the directors complaining that no full disclosure had been made and that the real amount of the remunerations asked to be voted was so concealed and wrapped up that no one could know what it really was. The chairman did not in his reply disclosure the figures, but informed the meeting that he had sufficient proxies to carry the resolutions and proceeded to put them to the meeting. 25.In the judgment of Lord Cozens-Hardy MR, his Lordship held[6], that if any attempt is to be made by the directors to get the sanction of the shareholders, it must be made on a fair and reasonably full statement of the facts upon which the directors are asking the shareholders to vote. On the facts of that case, his Lordship held that the notice and the accompanying circular was “not open, not clear and not in any way satisfactory”. His Lordship even described the notice and the circular as “tricky” by reason of its suppression of information. His Lordship then held that the resolutions, obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported. 26.It can be seen from all 3 judgments given in Baillie’s case that there was no discussion at all on the irregularity principle let alone the proper limits of such a principle. It was simply a case on whether a shareholders’ resolution, obtained through trickery or suppression of relevant information by the directors, can be sustained. When I put this observation to Mr Mok, he fairly accepted that. In my judgment, Baillie’s case does not support the aforesaid proposition made by the learned authors. Having said that, I of course agree with the proposition that if the effect of applying the irregularity principle (i.e. by the majority shareholders) amounts to an oppression of the minority shareholders, the court will not uphold its application. This will be incidental to the court’s equitable jurisdiction of protecting minority shareholders from oppressions by the majority, see Re Green Valley Investment Ltd. [2003] 2 HKLRD 915, §49-53. Yet, this was neither the argument of Mr Mok nor the case of P. Mr Mok argued that the irregularity principle has no application simply on the basis that the irregularity was a matter of “substance”. In my view, there is no basis for such a distinction. I agree with the submission of Mr Lai, who relied on the Dalny’s case, that the sole question is whether the same result would have been obtained had the correct procedure been followed. The majority shareholders can validly exercise their voting powers to ratify an irregularity, whether or not it is trivial or of substance, so long as they exercise their voting power fully aware of the nature of that irregularity and in circumstances that do not involve an oppression on the minority. 27.Mr Lai further relied on Tam Tak Yam v. Man Shing Textiles Ltd. [2019] HKCFI 1449 which is a case specifically on the application of the irregularity principle in a situation where no special notice of EGM was given in relation to a resolution to remove a director. It was also argued in that case that such irregularity deprived the said director of his right to protest against removal under section 463. DHCJ Patrick Fung SC rejected the argument that the irregularity principle only applies to “a mere formality and irregularity” (see §§53-55) which I respectfully agree. 28.In any event, Mr Mok has failed to persuade me that P is bound to succeed on its argument that the irregularity principle has no application to the facts of this case. On the contrary, I agree with Mr Lai that P’s case is bound to fail by reason of the irregularity principle. The events leading to the 21 Febuary 2021 Director Removal Resolution were explained in §60-68 of the D1’s affirmation[7]. D1 described the various disruptive conducts of P since around May 2019. These allegations are of course denied by P[8]. I am in no position to resolve such factual disputes. Yet, it is clear that the schism between P and his fellow directors were open, full blown and had lasted for quite some time. There were a number of direct altercations or clashes between them. It is inconceivable that either side would not have known exactly the differing points of view of the other. It must have been apparent to P that his fellow shareholders were determined to remove him from the board. P should have realized that even if he could point to some irregularities in the process, that could not alter Ds’ determination to remove him. Consequently, at the 10 Nov 2021 Shareholders’ Meeting, P did attend the meeting to fully make his case opposing his removal and the majority shareholders nonetheless ratified the 21 Feb 2021 Director Removal Resolution. 29.In the circumstances, Mr Lai reminded me of the following dictum of Keith J in Trend Publishing (HK) Ltd. v. Vivien Chan & Co. [1996] 2 HKLR 227 at 231:-
The Articles Amendment Resolution 30.In the OS, P relied on 3 grounds to attack the validity of this resolution. The first ground is the “Unanimous Consent Argument”. This argument is based on P’s factual assertion that there was all along an agreement and/or mutual understanding of the shareholders of the Company that the Articles may only be altered with the unanimous consent of all the directors-cum-shareholders. Ds’ case is that factually, there was never such agreement or mutual understanding. This is a dispute that can only be resolved after trial. P has chosen not to take the matter to trial. I agree with Mr Lai that this issue has simply not been rendered academic. Mr Mok tried to argue that the Subsequent Director Removal rendered this issue academic in that P is no longer a director and he is no longer concerned with the amendments to the Articles. I agree with Mr Lai that this argument is unmeritorious. Although P has been removed as a director, he is still affected by the Articles Amendment Resolution as a shareholder. Therefore, P’s unilateral decision to discontinue these proceedings should be regarded as “having been made out of his private pragmatic consideration”. This is insufficient to displace the normal incidence of costs (see Re China Solar Energy Holdings Ltd., HCCW 108/2015, 1 March 2016, per DCHJ Le Pichon at §17). 31.As for the other 2 arguments, i.e. the “Lack of Specification Argument” and the “Lack of Text Argument”, they are equally covered by the irregularity principle. The fact is: given that the Articles Amendment Resolution was passed as a special resolution by 75% of shareholders, the result of the Articles Amendment Meeting would be the same if the alleged proper procedure was followed. P has thus wholly failed to demonstrate that he is bound to win. In fact, there is positive evidence that P clearly knew that Ds were seeking to revert to the majority rule (the situation prior to the 2015 change). At B2/608 is an explanatory letter circulated to all shareholders including P. This letter, though dated 24 January 2021 (the intended date of the meeting) was in fact circulated on 4 January 2021 as shown by a WeChat record at B2/598-599). D1’s Affirmation at §§43-44[9] also deposed that this explanatory letter was actually sent out to shareholders including P together with the Notice of EGM. This has not been disputed in P's reply affirmation. It is also clear from the Minutes of the meeting on 24 January 2021[10] that the resolution sought to revert the Articles back to original position and so as to conform with the Companies Ordinance. It was recorded that P disagreed with the amendment. 32.These reasons are sufficient to dispose of the matter and it is unnecessary for me to resolve those other arguments arising out of certain emails exchanged in relation to the 2015 Amendment Meeting Notice which involve disputed issues of fact. It is obvious that in the light of the factual disputes, P cannot possibly demonstrate that he is bound to win. Disposition 33.In the premises, P has failed to persuade me to depart from the general rule that P, being the party seeking to discontinue these proceedings, should pay costs to Ds. There is nothing unreasonable in Ds’ rejection of P’s offer of “no order as to costs”. Neither do I find that Ds’ refusal to provide a statement of costs has any material bearing. 34.I therefore order that P do pay Ds costs of the action, including the costs of discontinuance and the costs of this hearing, to be taxed if not agreed.
Mr Billy Mok, instructed by Grandall Zimmern Law Firm, for the Plaintiff Mr Lai Chun Ho, instructed by Nixon Peabody CWL, for 1st to 4th Defendants The 5th Defendant: Vogsun International (HK) Co. Limited, was not represented and did not appear The attendance of the 6th Defendant was excused [1] This is the case of the Defendants. The Plaintiff’s case is that he was entitled to do so because there was a common understanding that the Company would be run collectively. This is thus a matter in dispute if the matter goes to trial. [2] In §70 of his affirmation [A/78] [3] As stated in §4 of P’s Skeleton [4] §§68 to 70 at A/78 [5] C/1062 at 1064 [6] At page 514 [7] A/75 [8] A/135 [9] A/70 [10] B1/330 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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