Samuel Tak Lee v. Chou Wen Hsien and Others

CACV000064/1982

BETWEEN

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Coram: Hon. Cons, Zimmern, JJ.A. & Hooper , J.

Date: 9 July 1982

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JUDGMENT

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Cons, J. A. :

1. Ocean Land Development Ltd is a public company incorporated in Hong Kong in August 1972. The persons who were the first to seventh defendants in the proceedings below were then appointed directors and have remained so ever since, the first defendant Mr. Chou Wen Hsien being the Chairman and the Managing Director. The Plaintiff Mr. Samuel Tak Lee was also appointed a director at the same time.

2. The principal business of the company appears to be in the development of real estate and in shipping. The plaintiff concedes that he has little knowledge of shipping affairs but as an experienced architect he is keenly interested in the real estate side and it was in this field that earlier this year he began to feel concern as to the way in which the business of the company was being run, in particular as to the disposal of certain assets of the company, and of its subsidiaries, some three years before. He tried to delve deeper but found his enquiries blocked at almost every turn. He took this to be part of a deliberate policy by the management and accordingly exercised his right as a director to summon a board meeting at which he proposed to express his anxiety and the reasons upon which it was based. The meeting was originally fixed for the 11th May, but this appearing to be inconvenient to many of the directors, was re-fixed for the 17th May, which happened to be a Monday.

3. The plaintiff's fears that the management were trying to muzzle his criticism were in his own mind confirmed when, on the Saturday morning preceding the meeting, he was handed a letter signed by all the other directors requesting him to resign. This situation is provided for in Article 73.

"73.     The Office of an Ordinary Director shall be vacated: -

4. Much incensed by this the plaintiff hurriedly consulted his legal advisers, and by 7:30 the same evening he had obtained ex parts injunctions from the Chief Justice, which in effect required the other directors to treat him as still being a member of the board, and in particular restrained them from interfering with the meeting called for the following Monday. The affidavit in support alleged that each of the directors had, for various reasons which were there set out, acted otherwise than bona fide in what they believed to be the best interests of the company and that their actions were therefore of no effect in law. The accompanying writ was endorsed for a number of declarations in addition to the injunctions, but all were dependent upon the principal claim that the notice under Article 73(d) was null and void.

5. The plaintiff was thus able to attend the meeting on the Monday morning. It availed him nothing however, for he was the only director to turn up.

6. The inter partes summons to continue or discharge the injunctions had been set down for the Wednesday morning, that is the 19th May, before Fuad, J. In the meantime however other summonses had been taken out, and made returnable on the same day, by the first and second defendants on the one hand and the third to eighth defendants, the eighth being the company itself, on the other. The summonses were identical and issued under Order 18 r. 19, asking that the plaintiff's writ be struck out on the grounds that:

7. The defendants summonses were heard first, the proceedings continuing into the following day when Fuad J. found in their favour. He concluded that the action was frivolous and vexatious. He took the view that the plaintiff was not entitled t go behind the letter or to investigate the reasons or motives which led the directors into making their decision. The judge added that in any event the matters disclosed in the plaintiff's affidavit were not sufficient to support the allegations of bad faith.

8. The plaintiff now appeals. The submissions of his counsel can I think be fairly put as follows:

9. It may be most convenient to deal with the second point first. With respect to counsel it seems to me impossible to maintain that the request has not taken effect. The language of the article leaves no room for doubt or uncertainty. The office shall be vacated once any event therein mentioned occurs. That vacation must take place immediately. The position would otherwise be intolerable. No one would know who really constituted the board.

10. Farwell J. took the same view in In re. The Bodega Company Ltd.⁽¹⁾ The relevant article there provided that "The office of any director shall be vacated - if he becomes bankrupt, if he becomes lunatic ........if he be concerned in or participate in the profits of any contract with the company not disclosed to and authorised by the board". It was the last mentioned situation that occurred. The learned judge said this ⁽²⁾ :

"In my opinion it is quite plain on the words of the article that he ipso facto, or automatically, vacates his office on the act being done; there is no distinction between this and the other events mentioned in the article, e.g. bankruptcy, and in none of them is there any locus poenitentiae for him, or any means by which the directors can condone the offence or the act which causes the vacation. The office is vacated automatically, .........."

11. There may be occasions when the act which has vacated the office is subsequently nullified. That would happen for example in a case like ours if a director convicted of a indictable offence is acquitted on appeal or if a court subsequently sets aside a request made under paragraph (d). The conviction or request will then be considered as never having taken place. But that result is not achieved until the subsequent reversal. In the meantime the conviction or vacation of office holds good. There is authority for this. Gaiman and others v. National Association for Mental Health⁽³⁾ was concerned with the articles of an association without share capital but limited by guarantee. One article provided that a member should cease to be a member of the association if he were requested by resolution of the council to resign. It was alleged that the council had acted under that article in breach of its fiduciary duty to act for the benefit of the association as a whole and that the expulsion of the plaintiffs was therefore invalid. Megarry J. as he then was, said this ⁽⁴⁾ :

"If the council had acted in breach of its fiduciary duty towards members of the association, this could hardly mean that the council's acts were invalid. A breach of trust is not a nullity, but a ground for complaint."

12. A similar opinion had been expressed a few months earlier in Bamford v. Bamford⁽⁵⁾ where the question was whether a company could in general meeting ratify an allotment of shares assumed, for the purposes of the argument, to have been made by the board not acting bona fide in the best interests of the company. Russel L.J. (at 241) said :

"But unless the allotment is avoided in proceedings it is effective."

And again (at 242):

"Basically the argument treats an allotment by directors otherwise than bona fide in the interests of the company as a nullity, which it is not."

13. It is suggested that from its very own wording the letter in the instant case could not be effective, for it requires the plaintiff to resign his office "with effect from the date of this notice", that being expressed as the 12th May, yet was not delivered until the 15th. A director, it is said, cannot resign retrospectively.

14. This point was not taken below and objection is taken to our receiving it now. But apart from that I do not think it is well founded. The effective date of a request can only be that on which it is actually communicated.

15. For these reasons I am satisfied that the plaintiff ceased to be a director of the company as from the 15th May.

16. I turn then to the first submission, that the power given by Article 73(d) is a fiduciary power. It is not disputed that if so it must be exercised bona fide in the interests of the company. The defendants say that it is simply not a power at all, or that if it is, then it is not of the kind that has to be exercised in the interests of the company.

17. Their principal argument, if I understand it correctly, is that because most, if not all, of the other events specified in Article 73 as bringing about the vacation of the office of director, can in no way be said to be the exercise of a power by directors the same must apply to paragraph (d). With respect, that sounds to me very much like an allegation of guilt by association, which I am not prepared to accept. I do not say that juxtaposition can never be of assistance in the construction of a document. Words, like men, may sometimes be judged by the company they keep. An example is the ejusdem generus rule. But the present situation is far from that. I can discern no common thread running through the six paragraphs of Article 73, other than the effect they have.

18. The alternative argument is that powers need only be exercised in the best interests of a company if they are exercised by directors qua directors and not as private individuals; that the capability of asking a director to resign is not exclusive to persons who are directors of companies, it exists in every individual; that in the present case the directors have acted as individuals; and that therefore no question of a power is involved.

19. The short answer to this point is that the directors did not in fact act as individuals. They acted qua directors. They were careful to point this out in their letter, because otherwise it would have had no effect, except perhaps by way of moral persuasion. It is the fact of their being directors that gives the letter its force. In my view they clearly acted under directors' powers.

20. Yet not every such power is subject to the restriction that it can only be exercised for the benefit of the company. The House of` Lords case of Bersel Manufacturing Co. v. Berry ⁽⁶⁾ contains an example of one that was not. There power was given to two permanent life directors "to terminate forthwith the directorship or any of the ordinary directors of the company by notice in writing". Their Lordships found it not intended for the benefit of the company, but for the benefit of the two life directors themselves "in order that it might serve their own interests in preserving their position in the company" ⁽⁷⁾. As Diplock L.J. had apparently observed in the Court of Appeal "the special powers given to the two directors are not director's powers in the ordinary sense. They are not exercised in directors' meetings but as special powers simply to appoint and dismiss other directors"⁽⁸⁾ .

21. The nature of the power must be a question of construction in each individual case. In Bersel ⁽⁶⁾ that came before the House as a preliminary point of law. Lord Wilberforce criticised the procedure. He said ⁽⁹⁾ :

"This, in my opinion, is unfortunate. Documents, including articles of association, ought to be interpreted in the light of the circumstances in which they were drawn up. To require the court to construe them in isolation, purely as words printed on paper, as this procedure does, is to out the court in blinkers and to deprive it of legitimate and necessary assistance."

22. We labour under the same handicap, although we do not need to come to a final conclusion if we think there may be some force in the plaintiff's submission. Perhaps however it makes no difference. It is acknowledged that a provision of this kind is by no means uncommon in companies incorporated in Hong Kong and we may fairly safely assume that no particular circumstances dictated its inclusion in the Articles of Ocean Land Development Ltd.

23. Taking paragraph (d) then simply as it stands it seems to me that a particular director is to be expelled from the board if each and every other director is sufficiently of the opinion that the particular director is no longer suitable to be a director that he is willing to put that opinion in the form of a written request. That is to say that each director has an individual power, although it can only be effectively exercised with the express concurrence of all the other directors. It is like that in Bersel ⁽⁶⁾, not a director's power in the ordinary sense that it is to be exercised by resolution of the board. On the other hand it is not thereto serve the private interests of the individual directors. There would seem to be no reason for that. It is there to cater for circumstances in which it is desirable for the sake of the company that one director should relinquish his office but which may be so unusual or particular that the articles cannot be expected to provide for them in advance. Counsel suggests, by way of illustration, that a similar power given by articles to say the Chairman of the Hong Kong stock Exchange, could not possibly be construed as a fiduciary power, only to be exercised for the benefit of the company. With respect I would take the opposite view. Unless the Chairman had some particular interest in the company I can conceive of no other purpose.

24. I would then agree with counsel for the plaintiff that if any one of the directors could be shown in signing the letter to have acted from some private ulterior purpose the court would set the vacation aside, assuming of course that the action in which that was requested was properly brought. That is the next question to be considered.

25. It is a well settled rule, I think, that in general circumstances an action can only be brought by the person who has himself suffered the injury. In Prudential Insurance Co. Ltd. v. Newman Industries Ltd.⁽¹⁰⁾ the English Court of Appeal referred to :

"...the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the course of action is vested. This is sometimes referred to as the rule in Foss v. Harbottle (1843) 2 Hare 461 when applied to Corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence."

26. There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. The rule is then relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders action on behalf of themselves and all others. That has not happened here.

27. What the plaintiff argues is that in the present instance wrongs have been done to him personally, as well as to the company. He relies principally on two cases, Pulbrook v. Richmond Consolidated Mining Co. ⁽¹¹⁾ and Hayes v. Bristol Plant Hire Ltd.⁽¹²⁾

28. In Pulbrook ⁽¹¹⁾ the qualifying shares of director were by mistake transferred out of his name. He took a successful action in the Common Pleas Division to have the register rectified and the order of that court was confirmed upon appeal. Nevertheless the other directors refused to hermit him to act as such, whereupon he moved in the Chancery Division for an injunction to restrain them from thus interfering with his rights. It was argued that the action ought to have been brought in the name of the company. Jessel M.R. did not agree. He said (at page 612):

"Now it appears to me that this is an individual wrong, or a wrong that has been done to an individual. It is a deprivation of his legal rights for which the directors are personally and individually liable. He has a right by the constitution of the company to take a part in its management, to be present, and to vote at the meetings of the board of directors. He has a perfect right to know what is going on at these meetings."

..................

"It appears to me that for the injury or wrong done to him by preventing him from attending board meetings by force, he has a right to sue. He has what is commonly called a right of action, and those decisions which say that, where a wrong is done to the company by the exclusion of a director from board meetings, the company may sue and must sue for that wrong, do not apply to the case of a wrongdone simply to an individual."

29. Hayes ⁽¹²⁾ was a case where one director had been expelled by resolution of the board at a meeting when he was not present. He sought declarations that the resolution was invalid and consequential injunctions. The preliminary point was taken that he had not a sufficient proprietary interest in the company to maintain the action. Wynn-Parry J., following Pulbrook ⁽¹¹⁾, took the view that he did.

30. At first sight these cases appear to be authorities strongly in favour of the plaintiff, but the distinction is simply this. The plaintiff in each had his own personal cause of action, unlawful force. In Hayes ⁽¹²⁾ it was not expressly put that way, but it follows from the assumption made, for the sake of deciding the preliminary point, that he was and had been a director of the company at all material times. Thus in neither case did the plaintiff need to rely on a cause of action given to someone else. In the present he does. There is a great temptation to re-phrase the words of Jessel M.R. to read "it appears to me that for the injury or wrongdone to him by preventing him from attending board meetings by an abuse of power, he has a right to sue". But that cannot be, for the first part of the sentence then becomes incorrect. The wrong is not "done to him", it is done to the company. His injuries are coincidental by-products of that wrong and for which he has no cause of action.

31. Two other cases put forward by the plaintiff take the matter no further. Edwards v. Halliwell ⁽¹³⁾ was an action brought by members of a trade union seeking to set aside an increase in subscriptions imposed by a resolution passed, so the plaintiffs alleged, without the authority of a sufficient proportion of members present. It was not however an action by the plaintiffs, "... in the right of the Union", i.e. relying on a cause of action given to the union "but in their own right to protect from invasion their own individual rights as members."⁽¹⁴⁾

32. Stuart v. Mansion House Chambers Co. Ltd. ⁽¹⁵⁾ is a briefly reported case from 1866. Kay J. refused to interfere where a director had been dismissed by a special resolution of the company, as provided for in the article. He commented:

"The law was settled that even where a director was removed, under such a power as existed here, for reasons which the court would not have thought sufficient for removing him, yet the court would not interfere. The only ground for interference was where the removal was something quite improper and almost, if not quite, fraudulent."

33. It is suggested that if the court will interfere where the company itself has removed a director in a way that is almost, if not quite, fraudulent, a fortiori will it interfere where only the directors have done so. That may be so. But I do not take Kay J. as conferring upon the unfortunate director a cause of action not otherwise available to him. He was merely emphasising the need to establish a strong case before the court would even consider interfering in the interval affairs of a limited company. The facts before him were not of that order and he did not have to go further. Indeed, he did not even call upon counsel for the defendant company.

34. For these reasons I think the judge's order was correctly made. I appreciate that in this particular instance it does stop the plaintiff in limine, that in the well known words of Fletcher-Moulton L.J. in Dyson v. Attorney-General ⁽¹⁶⁾ the plaintiff is '" driven from the judgment seat' without any court having considered his right to be heard". But as in that case, the matter has been "elaborately argued" before us - I respectfully think that it could not have been argued with greater clarity or wisdom - and I have come to the conclusion that it is within the exception to those well known words, namely that the cause of action is obviously and almost uncontestably bad.

35. I do not therefore propose to consider whether the facts put forward by the plaintiff were sufficient, at least prima facie, to maintain the cause of action had it been open to him, although I would add, in deference to counsel, that there seems to me to be considerable force in his argument that in this respect the judge did omit to consider what was put forward as the history and background of the events. I would dismiss the appeal.

Zimmern, J. A. :

36. I have had the benefit of reading a draft of the judgment of my brother Cons and respectfully agree with it save for one matter which does not affect the decision. It is the quality of the power, if any, given to the co-directors under Article 73(d).

37. Mr. Ching for two of defendant directors contended that no power is vested in the co-directors at all for under Article 73 as a whole the office of an ordinary director is vacated upon the occurrence of an event set out and in the case of (d) the event is the request in writing. I cannot accept this "birds of a feather" argument. If under the Article, co-directors may by their conduct bring about a state of affairs, in this case the ousting of a fellow director, it cannot be said that they have not been vested with rowers to bring this about. In my view, the promoters of the Company in so framing Article 73(d) had been careful in avoiding any suggestion that such powers are to be exercised by committee at a board meeting. There is no mention of any resolution, notice or agenda for a board meeting. All that is required in the clearest possible language is for all the co-directors to sign a request in writing and the requested director is out of office. I agree with the learned judge in the Court below that the exercise of the rower under this sub-article cannot be challenged by the ousted director either personally or in a derivative action, save in instances of actual fraud. An aggrieved ousted director can have no conceivable cause of action against the Company. Each director accepted appointment with full knowledge of Article 73(d) which binds him. The co-directors when exercising that power do not act collectively as a board nor do they act on behalf of the Company which in turn has no cause of action against the co-directors. I am of the opinion that the power is vested in each director personally to be exercised in that very limited way as he thinks fit without being tied by fiduciary duties owed to the Company. If it were otherwise there would be uncertainties about the composition of the board and this case is an example. Such uncertainties are rarely in the best interests of the Company.

38. I also agree that the appeal be dismissed.

Hooper, J.:

39. I have had the benefit of reading a draft of the judgment of my brother Cons and respectfully agree with it in its entirety. I had in fact prepared a draft judgment myself reaching the same conclusion but do not propose to read it out as it would to a large extent be repetitious and time consuming and would serve no useful purpose.

(1)     [1904] 1 Ch. 276

(2)     at 283

(3)    (1970) 3 W.L.R. 42

(4)    at 54

(5)    (1970) 1 Ch. 212

(6)    (1968) 2 A.E.R. 552

(7)    at 555 E

(8)    at 555 C

(9)    at 557 A

(10)    (1982) 2 W.L.R. 31 at 37

(11)    (1878) 9 Ch. D. 610

(12)    (1957) 1 W.L.R. 499

(13)     1950) 2 A.E.R. 1064

(14)    at page 1067 H

(15)    (1866) 2 T.L.R. 761

(16)    (1911) 1 K.B. 410

Representation:

Michael Sherrard, Q.C., Simon Goldblatt, Q.C., Henry Litton, Q.C. & John Bleach (M/S Peter Mark & Co.) for Appellant/Plaintiff.

Charles Ching, Q.C., A. Sakhrani, Q.C. & Ronny Wong (M/S Robert W.H. Wang & Co.) for 1st and 2nd Respondent/Defendant.

Richard Sykes, Q.C., Denis Ching, Q.C. & Robert Kotewall (M/S J.S.M.) for 3rd to 8th Respondents/Defendants.