Chan Kam Yau and Another v. Chan Hui Ki Tup and Others
Read the full judgment text of HCMP 693/2018 on BabelCite. This High Court CFI judgment was delivered on 29 December 2023.
1. There is before the court a petition presented by the 1 st and 2 nd petitioners (“ P1-P2 ”) under s.724 of the Companies Ordinance (Cap 622) (“ CO ”) seeking buy-out relief against the respondents on the ground that the affairs of Promising Securities Company Limited (“ Company ”) have been conducted in an unfairly prejudicial manner.
Cited by 3 cases · Cites 3 cases
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HCMP 693/2018 [2023] HKCFI 3367 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 693 OF 2018 ________________________
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_______________ J U D G M E N T _______________ 1.There is before the court a petition presented by the 1st and 2nd petitioners (“P1-P2”) under s.724 of the Companies Ordinance (Cap 622) (“CO”) seeking buy-out relief against the respondents on the ground that the affairs of Promising Securities Company Limited (“Company”) have been conducted in an unfairly prejudicial manner. 2.The Company engages in provision of brokerage services for securities traded on The Stock Exchange of Hong Kong Limited (“SEHK”). It has since 2004 been registered with the Securities and Futures Commission (“SFC”) with a Type 1 Licence for dealing in securities. 3.Except the Company (the 7th respondent) and Ms Chan Chi Fuk (陳子福), the 6th respondent (“R6”), the parties to the Petition are shareholders of the Company and their shareholdings are as follows:
4.Before the trial, P1-P2 reached settlement with R1, R4-R5 and the claims were stayed as against R1 and discontinued as against R4-R5. On Day 2 of the trial, P1-P2 reached settlement with R3 and the claim against her was discontinued. Accordingly, this judgment only concerns P1-P2’s claims against R2 and his daughter (R6). 5.It is P1-P2’s case that the shareholders and directors of the Company have all along been divided into 2 camps:
6.P1-P2 complain that R1-R6 have conducted the affairs of the Company in an unfairly prejudicial manner by:[3]
A. FACTUAL BACKGROUND 7.Unless otherwise stated, the following facts are taken from the Statement of Agreed Facts, the Agreed Chronology of Events or facts which are not in dispute. A1. Promising Securities Company 8.P1 and Hing Sum were long-time friends which went back to 1965. 9.On 11 April 1987, P1 and Hing Sum established Promising Securities Company (“PSC”) to carry on the business of provision of financial services including securities brokerage services to clients. 10.PSC was an exchange participant and held 2 Stock Exchange Trading Rights when SEHK was incorporated. 11.Although PSC was registered as a sole proprietorship under the name of Hing Sum, it was in substance a partnership business between members of 2 families who contributed the following amounts as capital of PSC[4]:
12.In 1990, PSC acquired Unit C, 14/F, Wing Cheong Commercial Building, 19-25 Jervois Street (“Property”) at HK$885,000 and used it as office. In 1993, Hing Sum used Promising Trading Company (a company owned by him and R2) to acquire another property at 22/F Chun Wo Commercial Centre, 23-27 Wing Wo Street, Hong Kong (“22F Office”) and leased it to PSC and subsequently the Company as their office. 13.In 2000, SEHK was listed. PSC was awarded 1,610,000 shares in SEHK. In the same year, Hing Sum sold 410,000 shares and used the proceeds to acquire 10,000 shares in Cheung Kong (stock code 001); 10,000 shares in Hutchison (stock code 013) and 31,367 shares in HSBC (stock code 005) all of which were registered in his name (collectively “Stocks”). 14.PSC was in operation until 31 December 2003 when its trading licence expired. A2. Establishment of the Company 15.On 2 February 2001, the Company was incorporated with a view to take over the business of PSC so as to comply with the forthcoming securities trading regulations. Except the Property and the Stocks which remained in the name of Hing Sum, all the assets of PSC including the accumulated profits of HK$73 million were injected into the Company. 16.Hing Sum, Hing Ting, R2 and P1 each subscribed for one share in the Company and were appointed as its first directors. Hing Ting was also appointed as company secretary. 17.After several increases of capital and allotments of shares, by October 2008, the authorised and issued share capital of the Company was HK$30 million divided into 30,000,000 ordinary shares of HK$1 each. 18.Since 2 January 2004, the Company has been an exchange participant under Hong Kong Exchanges and Clearing Ltd in place of PSC and has taken over all the business of PSC. 19.The composition of the Company’s board from 2002 is as follows:
20.Amongst the shareholders:
21.On 15 September 2013, Hing Sum passed away whereupon R1 was appointed as administratrix of his estate. The shares in the Company together with the Property and the Stocks were transferred to R1 qua administratrix of Hing Sum’s estate. A3. Missing Stock Incident 22.In September 2014, a staff of the Company, Ms Chan Bun Yu (“Chan BY”), sold 1,600 HSBC shares belonging to a client without the latter’s authorisation and knowledge (“Missing Stock Incident”). On 8 November 2014, the client found out about the missing stock. 23.On 23 December 2014, the SFC and the Company jointly appointed Mazars Corporate Recovery & Forensic Services Ltd (“Mazars”) to conduct an independent review in relation to the Missing Stock Incident. 24.On 27 May 2015, Mazars delivered its Independent Investigation Report on the Missing Stock Incident. A4. Requisition 25.On 21 May 2016, Hing Ting passed away[6], leaving P1 as the only director of the Company. P1 procured the appointments of P2 to the following positions in the Company:
26.By letter dated 14 October 2016, R1-R5 (holding 72% shareholding) requisitioned the board to convene an Extraordinary General Meeting (“EGM”) pursuant to s.566 of the CO for the purpose of passing the following resolutions (“Requisition”):
27.No EGM was convened by P1-P2 in response to the Requisition. 28.In the meantime, on 19 October 2016, P2 notified the SFC that R2 and Ms Shum Yan Yee Marceline had ceased to be licensed representatives of the Company, citing “dismissal” in relation to an investigation of a theft case as reason. 29.On 23 October 2016, P1’s wife passed away[8]. A5. 2016 AGM 30.On 10 November 2016, P1-P2 approved the appointment of R3 and R6 as additional directors of the Company. On the next day, R6 filed a Form ND2A at the Companies Registry regarding the appointments. 31.On 18 November 2016 at 4:30pm, R6 gave 2 hours’ notice to P1-P2 to hold an Annual General Meeting (“AGM”) at 6:30pm on the same day (“2016 AGM”) for the purpose of considering the following matters[9]:
32.At the 2016 AGM, which was attended by P1-P2, R1-R3 and R4-R5[10]:
33.It is R2/R6’s case that all shareholders of the Company agreed to hold the 2016 AGM on short notice, evidenced by the consent form signed by each of them on 18 November 2016 (“Consent Form”). 34.It is P1-P2’s case that the 2016 AGM and the resolutions passed thereat were invalid in that (1) insufficient notice was given to the shareholders, in breach of article 52 of the Articles of Association of the Company (“AA”); (2) no notice was given in respect of the proposed re-election of directors, in breach of article 52 of the AA and s.462(4) of the CO; (3) no 28-days’ notice as required by s.578(1) of the CO had been given to P2. The removal of P2 as director is the tipping point of the deterioration of the relationship between the two camps that led to the presentation of the Petition. 35.After the 2016 AGM, the following events occurred:
A6. Proposed Allotment 36.Meanwhile, by letter dated 4 November 2016, the SFC informed the Company that it was of the view that the Company had been guilty of misconduct and/or was not a fit and proper person to remain licensed in that (1) it allowed Chan BY, an unlicensed person, (a) to perform regulated functions including opening accounts and placing orders for clients; (b) to steal 1,600 HSBC shares from client and caused the proceeds be paid into her husband’s account; and (c) to misappropriate the shares in 24 clients’ accounts which worth HK$8 million and caused the proceeds be transferred to her husband’s account (HK$5.19 million) and the balance to the accounts of 9 clients during the period from 1 January 2011 to 30 November 2014; and (2) it did not have any internal control policy in place until 2015, and proposed to order the Company to pay a fine of HK$14 million. 37.At the board meeting held on 28 February 2017, it was resolved that a provision in the amount of HK$14 million be reserved for the possible SFC’s disciplinary action in relation to the Missing Stock Incident[18]. 38.On 3 March 2017, R6 on behalf of the board issued a notice to convene an EGM to be held on 20 March 2017 for the purpose of considering a resolution to increase the share capital of the Company[19]. 39.At the EGM held on 20 March 2017, the following resolutions were passed by the majority of the shareholders (with P1-P2 voting against) (collectively “Proposed Allotment”):
40.On 28 April 2017, the SFC notified the Company that a fine of HK$3.5 million would be imposed[21]. 41.At the meeting held on 4 May 2017 (“May 2017 Meeting”), it was resolved inter alia that the Company would accept the SFC’s proposed fine of HK$3.5 million. There is a dispute as to whether this was a shareholders’ meeting (as P1-P2 claim) or a board meeting (as R2/R6 claim). 42.It is R2/R6’s case that as the fine was much lower than anticipated, there was no need to implement Resolutions 1 to 3[22], but they did not inform P1-P2 of the same. A7. Payment to P.H. Chin & Co. (“PHC”) 43.At the May 2017 Meeting, a resolution was passed by all directors unanimously (P1, R2’s wife and R6) that the Company would instruct PHC “for the ongoing legal work and pay on account for the additional legal fees in the amount of HK$4,000,000”. 44.On 9 May 2017, a cashier order in favour of PHC in the sum of HK$4 million was issued. The amount paid to PHC was in addition to the HK$600,000 which had already been paid to PHC in settlement of their costs. A8. 2017 AGM 45.At the AGM of the Company held on 1 September 2017 (“2017 AGM”) at which P1-P2 were absent, R1-R5 voted against the re-election of P1 as a director of the Company. 46.On 27 October 2017, P1-P2 through their solicitors, Messrs. Simon CW Yung & Co, sent a pre-action letter to R1-R6 and Walter complaining that the affairs of the Company had been conducted in a manner unfairly prejudicial to the interests of the Company and P1-P2, and requiring them to confirm within 28 days their agreement to purchase P1-P2’s shares at a “consideration satisfactory” to them failing which proceedings would be commenced against them. On the same day, P1 resigned as director, Licensed Representative and RO of the Company. 47.R1-R6 did not respond to the pre-action letter. P1-P2 presented the Petition on 9 May 2018. B. ISSUES 48.Taking into account the settlement reached between P1-P2 with R1, R3-R5 and the Agreed List of Issues prepared by counsel, the issues which require determination of the court are:
C. DISCUSSION C1. Relevant Principles 49.Generally, shareholders are entitled to exercise their legal rights in accordance with the articles of association and the agreement reached between them unless the exercise of legal rights are subject to equitable constraints. The principle has been explained by Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 at 379B–G in the context of a “just and equitable” winding up petition:
50.The same principle applies in the context of an “unfair prejudice” petition under s.724 of the CO. In O’Neill v Phillips [1999] 1 WLR 1092, 1101D – 1102B, Lord Hoffmann explained the circumstances which would give rise to an equitable constraint in this way:
51.The concept of fairness must be applied judicially and the content which it is to be given by the court must be based upon rational principles. The context and background are very important (O’Neill v Phillips, at 1098D – 1099F; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§43 – 45, per Ma CJ and Lord Millett NPJ). 52.As to what may constitute considerations of a personal character involving mutual confidence, “this may come in the form of mutual understandings between members of a company or what may have been ‘an accepted course of conduct between the parties whether or not cast into the mould of a contract.’” (Kam Leung Sui Kwan v Kam Kwan Lai at §46). 53.A useful summary of the principles can be found in Grace v Biagioli [2005] EWCA Civ 1222, §61:-
54.The above authorities illustrate that, in the context of a “just and equitable” petition or an “unfair prejudice” petition, the petitioner needs to show that the respondents have acted in breach of (1) what the parties agreed in contract (including the articles of association which is a statutory contract binding upon all shareholders) such that there was a breach of his legal rights (legal rights); or (2) what the parties have accepted to be the practice or the manner in which the affairs of the company should be conducted, even though such practice or manner is inconsistent with the terms of the contract or articles (accepted practice). However, the court expects a petitioner who relies on accepted practice to demonstrate that there has been a relatively long period of acceptance of the practice in question by the shareholders concerned such that they cannot insist on their strict legal rights. Further, even if there was no breach of legal rights on the part of the respondents, if the conduct complained of involved the respondents having exercised their legal rights in breach of the equitable constraint on such rights, it may warrant the court exercising its equitable jurisdiction and grant the relief sought by the petitioner. A typical case is where the petitioner has the right to participate in, but has been excluded from, the management by the respondents exercising their voting rights to remove him as a director. 55.It is necessary to state the principle as very often, the parties and their legal representatives do not really appreciate the true principles and seem to think that by calling a company a quasi partnership, the petitioner can complain about the conduct of the respondents even though the conduct did not involve any breach of legal rights or accepted practice and there was no equitable constraint on the exercise of legal rights on the respondent. A typical example is where the company is the vehicle through which the commercial parties cooperate with each other and their rights and obligations are set out in the articles of association and shareholders’ agreements. C2. Issues 1 & 2: Basis of Operating PSC 56.In my view, it is indisputable that PSC was in substance a partnership between members of the families of Hing Sum and P1 and was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding. This is amply borne out by the following evidence, which are not in dispute:
57.It is not clear how R2/R6 can dispute the existence of the Fundamental Relationship and Fundamental Understanding when:
58.Nevertheless, Mr Vincent Lam (appearing with Mr Kurt Ng), counsel for R2/R6, submits that Issues 1 and 2 should be answered in the negative because:
59.I do not think it is open to Mr Lam to dispute Issues 1 and 2, when P1’s evidence on the manner of cooperation including the Fundamental Understanding goes unchallenged. In any event, there is no merit in the submissions. 60.As regards the first point, the partners’ motive in joining PSC is irrelevant. The fact that R2 decided to join the partnership in order to support his brother is consistent with PSC being founded and operated on the basis of the Fundamental Relationship and Fundamental Understanding. 61.In respect of the second point, Trademore was a different business and the partners were different. More importantly, the fact that P1 and Hing Sum decided to form another business and invited their respective family members to invest in the business shows that P1 and Hing Sum trusted and had confidence in each other, and they wanted to continue their cooperation in the form of PSC. 62.As for the third point, the crux of the matter is that despite the existence of other partners and their substantial capital contribution, P1 and Hing Sum were the only persons who managed the business of PSC and they made all decisions jointly. As submitted by Mr Patrick Siu (appearing with Mr Rex Yam), counsel for P1-P2, this indicates that P1 and Hing Sum represented their respective family members in the partnership and that they operated PSC on the basis of the Fundamental Relationship and Fundamental Understanding. 63.In respect of the last point, I am unable to see how P2’s appointment negates the existence of the Fundamental Understanding. The appointment was made following the demise of Hing Ting, which left the Company with P1 as its only director. It was necessary to appoint an additional director to the Company and no other shareholder had indicated their willingness to be so appointed. I will deal with this contention in more detail under Issue 5. C3. Issue 3: Basis of Operating the Company 64.In my judgment, the undisputed facts support P1-P2’s case that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding until the demise of Hing Sum:
65.The fact that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding until the parties’ dispute began in 2016 is consistent with, and corroborated by, the following facts and matters. 66.First, no formal meetings, be it board meeting or general meeting, were ever convened or held by the Company prior to the 2016 AGM. Instead, only “paper minutes” were prepared and signed by the directors or shareholders, and there was no fixed pattern as to how such “minutes” were to be signed. For example, R2 signed the “board minutes” dated 27 April 2016 for the purpose of approving the audited financial statements of the Company even though he was not a director. 67.Second, as R2 fairly accepts at trial, the two camps did not follow the AA or the CO when dealing with the affairs of the Company. Apart from not holding an AGM every year as required by the CO, the directors did not retire or stand for re-election at an AGM, as required by the AA. 68.Third, the conduct of R1-R6 after the demise of Hing Sum in 2016 shows that the Fundamental Understanding was something known to and accepted by all shareholders in that:
69.As stated above, Mr Lam does not challenge P1’s evidence that the Company was formed on the basis of the Fundamental Relationship and Fundamental Understanding. In his cross-examination, Mr Lam only challenges P1’s evidence that the Fundamental Understanding continued to exist during the period from 2001 and 2013 when Hing Ting was also a director of the Company. In response to those lines of questions, P1’s evidence is that:
70.I accept P1’s evidence, which is consistent with and corroborated by the undisputed facts discussed in §§64-68 above. 71.R2/R6’s case is that the Company was not a quasi-partnership and the shareholders’ rights were governed strictly by its constitution. In light of the undisputed facts set out in §§56 and 64 above, I do not think that there is any evidential basis for R2/R6 to advance such a case. It is clear from the evidence that until Hing Sum Camp sent the Requisition to P1-P2 in October 2016, no one in the Company had ever considered, let alone acted in accordance with, the AA. 72.Nevertheless, for completeness, I will explain why I consider the submissions advanced by Mr Lam to be wholly without merit. 73.Mr Lam submits that the existence of the Fundamental Relationship and Fundamental Understanding is contradicted by the following facts and matters:
74.As regards the first point:
75.In respect of the second point, as can be seen from the facts set out in §35(3) above, it was R2/R6’s decision to change the email address which the Company had been using to communicate with the SFC without consulting P1 or P2. I accept P2’s evidence that he submitted the 19 Dec Notification because the RO of the Company had always used the Outlook Address to communicate with the SFC, but someone had changed the Company’s email address without informing him or P1. During cross-examination, R6 accepts that by changing the email address, P2 was merely trying to revert to the email which the Company had been using to communicate with the SFC. In other words, in submitting the 19 Dec Notification P2 was only seeking to restore the status quo ante, rather than making a decision on behalf of the Company without consulting Hing Sum Camp. 76.As for the third point, I do not regard P1’s absence from the board for a period of 3 months would undermine the existence of the Fundamental Understanding. This is particularly so when the evidence shows that since the inception of the Company, P1 was involved in the management of the Company and he made all decisions for the Company jointly with Hing Sum. 77.The fourth point does not avail R2/R6, in light of my acceptance of P1’s evidence that Hing Sum and P1 had been the decision makers of the Company. 78.For the above reasons, I find that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding, which were accepted by all shareholders. This creates an equitable constraint in the exercise of legal rights on the part of R1-R5 such that they could not exercise their voting rights to remove P1 as director or to exclude P1 from the management of the Company in the absence of any misconduct (none has been suggested prior to or at the 2017 AGM). C4. Issue 4 – Minimum Commission 79.P1-P2 complain that Hing Sum Camp has unilaterally abolished the minimum commission requirement without consulting them. 80.P1-P2’s pleaded case is as follows:[41] (1) It has been the policy and practice of the Company that the Company should charge at least 0.2% (“Minimum Commission”) on every trade of listed shares carried on for the clients. (2) In June 2016, it was discovered that without the knowledge and approval of P1-P2 or the board, R1-R3 caused a change to the computer settlement system whereby the Minimum Commission was changed from 0.2% to 0.1-0.15% for those trades concluded “in the securities accounts of the Hing Sum Camp and those of their clients”, resulting in serious loss and damage to the Company. (3) Such unilateral change of the Minimum Commission was in breach of the Fundamental Relationship and Fundamental Understanding. 81.At trial, Mr Siu clarifies that P1-P2’s complaints are confined to those trades conducted by Hing Sum Camp for their clients, but not the trades conducted by shareholders in Hing Sum Camp themselves (i.e. R1-R5).[42] 82.R2/R6’s pleaded defence[43] is that there was “no reason” and “it would make no business sense” for the Company to maintain any Minimum Commission following the abolition of the minimum commission rules in April 2003, and no approval by the board or any person was required before reducing the commission rate. 83.There is no dispute that:
84.There is no merit in P1-P2’s complaint. 85.First, the reduction of commission charged for the trades carried on through the accounts of P1 and Hing Sum and their respective family member clients was a matter decided by P1 and Hing Sum, and they themselves benefitted from the reduction. I am unable to see how P1 can complain about a decision made by him and Hing Sum. 86.Second, as can be seen from the undisputed facts summarised in §83 above, the reduction in commission had been in place before 2013 (i.e. the demise of Hing Sum), it is inconceivable that P1, who was all along in charge of finance and accounting matters, would not know about the change.
87.It is not open to P1-P2 to complain about the reduction in Minimum Commission, which was known to and accepted by (at least) P1, as I so find. 88.Third, the complaint as pleaded is that the reduction of the Minimum Commission only applied to Hing Sum Camp and their clients. However, it is clear from the evidence that the reduction applied to the accounts of all shareholders and their family members. Although Mr Siu tries to salvage the complaint by saying that it is only directed to those trades carried on by Hing Sum Camp’s clients, no such clients have been identified or put to R2/R6 during cross-examination. 89.Fourth, I do not consider the reduction in Minimum Commission for some clients (even if made out) to be unfair, still less prejudicial to the interests of the Company. P1-P2 have not adduced any evidence to show that the interests of the Company has been prejudiced in any way. 90.I reject P1-P2’s complaint about the reduction of the Minimum Commission. C5. Issue 5 – Appointment of P2 91.The next issue concerns the effect of P2’s appointment as a director on 26 May 2016, 5 days after the demise of Hing Ting. 92.R2/R6 contend that by unilaterally appointing P2 as a director, P1 has wrongfully excluded R1-R5 from management, and should be denied of any relief for unfair prejudice. Reliance is placed on Harbour Front Ltd v Leung Yuet Keung & Others [2018] HKCFI 358, where Harris J held (§§42, 44) that if a shareholder acts in such a way as to destroy the mutual trust which was central to any agreement that he could take part in management, “he loses the right to argue that his exclusion alone justifies the court making a winding-up order on the just and equitable ground or granting relief for unfair prejudice”. 93.The contention is wholly devoid of merit. 94.First, it is clear that P2 was only appointed as a director to fill the vacancy after the demise of Hing Ting, rather than to exclude or oust R1-R5 from management of the Company:
95.Second, I accept P1’s evidence that he had consulted R2 before appointing P2 as a director. Although R2’s evidence is that P1 only consulted him on whether to appoint R2 as RO (which position was also vacated upon Hing Ting’s death, and had to be filled as required by the Securities and Futures Ordinance (Cap 571)), rather than as director, it is inherently unlikely that P1 would only mention to R2 the appointment of RO, but not the appointment of director given that both positions were important and had to be filled after the death of Hing Ting. 96.Third, as R2 accepts under cross-examination, after the passing of Hing Ting, P1 had not refused any request from Hing Sum Camp to be represented in the board of directors. 97.Fourth, not long after P2’s appointment, on 10 November 2016, P1-P2 passed a board resolution appointing R2’s wife and R6 as additional directors of the Company. Subsequently, at the 2016 AGM held on 18 November 2016, P1-P2 qua shareholders voted in favour of appointing R2’s wife and R6 as directors. This shows that, far from excluding Hing Sum Camp from management, P1-P2 took step to ensure that R1-R5 had representation at the board. This alone is sufficient to negate any suggestion that P1-P2 had the alleged intention to exclude R1-R5 from management. 98.For the above reasons, I hold that in appointing P2 as a director, P1 did not act in breach of the Fundamental Understanding and, in any event, P1-P2 did not exclude R1-R5 from management of the Company. C6. Issue 6 – Exclusion of P1-P2 from management 99.The next issue is whether R2/R6 have unfairly prejudiced P1-P2 by excluding them from the management of the Company. 100.In light of my finding that the Company was formed and operated on the basis of the Fundamental Relationship and the Fundamental Understanding, there was an equitable constraint on the shareholders not to exercise their voting right in a way which would constitute a breach of the Fundamental Understanding. The right to participate in the management of the Company applied to both P1-P2 as Hing Sum Camp had 2 directors (R2’s wife and R6) at the relevant times. 101.In exercising their voting right at the 2016 AGM and the 2017 AGM in such a way which led to P2 and P1 not being re-elected as directors, R1-R5 acted in breach of the Fundamental Understanding. Such act was unfairly prejudicial to the interests of P1-P2 as they have been denied of the right to participate in the management of the Company, which was an important right upon which the Company had hitherto been formed and operated. 102.For completeness, I will deal with the other contentions raised by the parties under Issue 6. 103.In the Agreed List of Issues, various acts of exclusions are identified[44] but they may be dealt with under 3 heads of complaints:
C6.1 Failure to elect P2 at 2016 AGM 104.Regulation 52 of Table A provides that:
105.Under common law, a matter cannot be deliberated upon at the meeting if it is outside the scope of the business that is specified in the notice of that meeting. A notice that makes reference to, but fails to state with sufficient particularity, the general nature of the business to be transacted at the proposed meeting is inadequate and may render the meeting and hence the resolution passed thereat invalid (Law of Companies in Hong Kong, 3rd ed, §§9.053 – 9.054). 106.Adequacy of notice helps to ensure that the decisions of the company in general meeting on matters relating to the interests of the company and members are made on an informed basis. The question is whether the information contained in the notice fully and fairly informs the shareholder about the matter upon which he or she will have to vote (Law of Companies in Hong Kong, §§9.057 – 9.058). 107.A notice of meeting must not be “tricky”, “misleading” or “inadequate”. Directors have a duty in equity to give shareholders sufficient information for them to make an informed decision about proposals to be put to them at meetings. A lack of information may constitute misrepresentation by omission. It is a matter of sensible judgement by the directors in each case and ultimately by the court if complaint is made to it (Company Meetings and Resolutions: Law, Practice, and Procedure, 3rd ed, §§3.22 – 3.23). 108.The requirement for adequate notice is now enshrined in s.576(1) of the CO, which requires inter alia a company to ensure that a notice of a general meeting “states the general nature of the business to be dealt with at the meeting” and, if a resolution is intended to be moved at the meeting, “includes notice of the resolution” and “includes or is accompanied by a statement containing the information and explanation, if any, that is reasonably necessary to indicate the purpose of the resolution”. 109.In the present case:
110.Even if, contrary to my view, proper notice regarding the retirement and re-election of directors at the 2016 AGM had been given to P1-P2, it seems to me that R2/R6’s conduct in seeking to remove P2 as director at the 2016 AGM was unfairly prejudicial to the interests of P1-P2 for the following reasons:
111.For the above reasons, the resolution against the re-election of P2 as director (with R1, R2 and R4-R5 voting against) was invalid. Further, R2/R6’s conduct in seeking to remove P2 as director at the 2016 AGM was unfairly prejudicial to the interests of P1-P2. C6.2 Failure to elect P1 at 2017 AGM 112.In R2/R6’s Closing, they rely on the following matters to justify their act in voting against the resolution to elect P1 as director at the 2017 AGM:
113.The above matters are based on R6 Aff §§66-91 where she devoted 13 pages to describe a series of alleged “misconduct” on the part of P1 including the event leading to suspension of P1’s licence for one month in August 1997, almost 20 years prior to her involvement in the Company and of which she has no personal knowledge. There is no evidence to suggest that in voting against the appointment of P1 as director, R1-R5 had in fact taken into account any of these alleged “misconduct” referred to by R6. It seems to me that these allegations are no more than ex post facto justifications introduced by R6 to justify the act of R1-R5 in voting against the resolution for appointing P1 as director. 114.In any event, I do not think that any of the alleged “misconduct” justify R1-R5’s decision in removing P1 as director. 115.As regards the Missing Stock Incident, I accept Mr Siu’s submission that there was no basis for R2/R6 to put the blame on P1 when (1) the relevant cheque involved in the Missing Stock Incident was not signed by P1, but by R2 and Hing Ting; (2) the fact that (on R2/R6’s case) the Missing Stock Incident was reported to Hing Ting suggests that it was Hing Ting, not P1, who should be primarily responsible for the Incident; (3) the Independent Investigation Report prepared by Mazars did not identify any negligence on P1’s part; and (4) as evidenced by the SFC’s letter dated 4 November 2016, the Company had told the SFC that it was Hing Sum and Hing Ting who had failed to implement the policy of ensuring only fit and proper persons could perform the relevant duties. 116.In relation to the filing of the Form ND2A, as stated in §74 above, P1 was merely seeking to reverse what he considered to be an invalid resolution purportedly resolved upon by R1, R2 and R4-R5 at the 2016 AGM. It was not a “misconduct”. 117.As regards the short sell incident, I accept P1’s evidence that he oversold 60 shares in CRLL (which were script shares) due to an oversight, and be immediately took remedial measure by borrowing 60 shares from Luk Siu Lan after obtaining her consent to do so. Despite R6 reporting the matter to the SFC, no action has been taken by the SFC. I am unable to see how R2/R6 can elevate the incident as a “misconduct”. 118.As for the disclaimer of opinion in the 2016 auditors’ report:
119.In respect of the transfer of clients’ shares to Afflux:
120.For the above reasons, even if R1-R5 had taken into account the alleged “misconduct” when exercising their right to vote against the re-election of P1 as director at the 2017 AGM, I do not consider that their act could be justified by the alleged “misconduct”. C6.3 Appointments of Mak and Shum 121.There is no dispute that the appointments of Mak and Sum as ROs were made by R2/R6 and without consulting Kam Yau Camp. During cross-examination, R6 admits that the appointments were made without consulting P1. 122.In my view, the appointments were made by R2/R6 in breach of the Fundamental Understanding as the decisions were not ones which could be made by R2/R6 acting unilaterally and without consulting Kam Yau Camp. 123.The breach is unfairly prejudicial to the interests of P1-P2 having regard to (1) the importance of the role to the Company; (2) the fact that the role has always been assumed by members of the 2 camps; and (3) Mak and Shum are employees and their salaries have to be paid by the Company. C7. Issue 7 – Denial of financial information 124.Although the Company paid a total sum of HK$4.6 million to PHC, Mr Siu in his closing submissions only focuses on the payment of HK$4 million made on 9 May 2017. 125.P1-P2’s case is that R2/R6 have failed to give any proper account for the HK$4 million payment. P1’s evidence is that:
126.The defence of R2/R6 is twofold:
127.I reject the first point. The Company was operated on the basis of the Fundamental Understanding, Kam Yau Camp had the right to request for information about the payment, particularly when it involved a significant amount. In any event, as a director of the Company, P1 had the right to request for the same information so as to satisfy himself that the payment should be made. 128.The second point is well founded. The evidence shows that P1-P2 have not been denied information relating to the HK$4 million payment:
129.Mr Siu invites the Court to draw adverse inference against R2/R6 for their failure to disclose the fee notes issued by PHC. I reject this submission. It is not clear to me, and Mr Siu has not articulated, exactly what inference the court should draw. I do not see any reason for R2/R6 to disclose the fee notes when P1-P2 did not ask for such documents after having seen the explanation provided by PHC. 130.I reject P1-P2’s complaint regarding the payment of HK$4 million to PHC. C8. Issue 8 – Proposed Allotment 131.Where, as here, the petitioner complains that a rights issue is unfairly prejudicial to his interest, the court will be guided by the following principles (Tong Yuen Man v China Habit Ltd [2018] HKCFI 1703, §§194–196, per DHCJ Blair):
132.Even if the company has a genuine need to raise capital, it is incumbent upon the directors to set the price at a level which is fair to all (Re Sunrise Radio [2010] 1 BCLC 367, §§76–95). 133.Mr Siu submits that the Proposed Allotment was totally inexplicable in commercial terms and was designed by R2/R6 to dilute P1-P2’s shareholding, having regard to the following matters:
134.Mr Lam submits that:
135.In my view, the Proposed Allotment is unfairly prejudicial to the interests of P1-P2 and should be set aside. 136.First, the evidence does not support R2/R6’s contention that the Company had a genuine need to raise new capital of HK$35 million at the time Resolutions 1 to 3 were passed:
137.During cross-examination, R6 says, for the first time, that HK$35 million was needed as the Company had made a representation to the SFC on 23 January 2017 that it would increase its capital by HK$35 million, and fund proofs were provided to show that R1 and R2 had the financial means. I am unable to accept her evidence, which has not been pleaded in R2/R6’s Defence or mentioned in any of the affirmations filed by them. Nor is it supported by any document. When asked by this Court as to why the representation letter was never disclosed to P1-P2 given its importance to the Company, the only explanation given by R6 is that she did discuss the matter with other shareholders who said that they would support the increase in capital, and she did not discuss the matter with P1-P2 because she believed that they did not care as neither of them had asked about the matter. Her evidence, if true, only highlight the fact that R6 was only willing to discuss the matter of raising capital with Hing Sum Camp and had no wish to keep P1-P2 informed of the matter. 138.Second, even if, contrary to my view, R1-R6 genuinely believed that there was a need to raise fund, given the importance of the matter, the obvious thing to do would be for R6 (who chaired the EGM) to explain all options available to the Company for raising funds. The obvious options available were (1) to ask if any shareholders were willing to advance loans to the Company; (2) to use the Property (held by R1 on trust for the Company) as security to borrow loan from banks; (3) to borrow loans from banks; and (4) to raise new capital by way of a right issue, so that all shareholders could consider whether or not to subscribe for the shares offered to them. None of these options were considered, even after P1-P2 challenged R6’s proposal and the need to raise new capital. Instead, R6 simply rushed through the proposal and asked the shareholders to vote on Resolutions 1 to 3. The only inference I can draw is that R6 had no wish to explore other means to raise capital, and only wanted to ensure that the Proposed Allotment could be approved at the EGM. 139.Third, shortly after the EGM, on 28 April 2017, the SFC notified the Company that a fine of HK$3.5 million would be imposed. If, as R6 claims, the only reason for the Proposed Allotment was to raise fund to pay the fine which would be imposed by the SFC, she should convene another general meeting for the shareholders to consider whether or not to cancel or revoke Resolutions 1 to 3. At the minimum, she should inform the shareholders that in view of the substantially lower fine imposed by the SFC, the board would not proceed with the increase in capital and the Proposed Allotment. This was never done and no explanation has been provided by her. 140.Fourth, there was no explanation at the EGM as to why R6 proposed that 3,650,000 shares should be allotted to her and her brother. Under cross-examination, R6 says that the shares were allotted to her and Walter because no other shareholders would subscribe for additional shares in the Company. I reject this evidence, which does not feature in her affirmation or R2/R6’s Defence. It can be seen from the minutes of the EGM that P1 did object to the Proposed Allotment on the ground that it would dilute the shareholding of the shareholders, while P2 objected on the ground that the Company did not need any new shareholder. 141.Fifth, it is clear that in proposing the price of HK$0.25 per share, R6 did not consider whether the price truly reflected the value of the shares to be issued or whether the price was a fair price, particularly when it was offered to 2 new shareholders who had no interest and no contribution to the Company. Instead, R6 simply fixed the price at the level she considered appropriate without regard to the interests of the shareholders, in particular P1-P2. 142.Lastly, the price of the Proposed Allotment at HK$0.25 per share was clearly at an undervalue. If one just takes the net asset value of the Company as stated in the 2016 audited accounts, the value of the issued share was HK$0.7 per share. This has not taken into account (1) the value of the Stocks and the Property held by R1 on trust for the Company, which has not been reflected in the audited accounts; and (2) the value of the Company’s business as a going concern, which was also not reflected in the audited accounts. 143.For the above reasons, I hold that the Proposed Allotment was put forward by R2/R6 and approved by R1-R5 for the improper purpose of diluting P1-P2’s shareholding in the Company. 144.Although R2/R6 have not implemented the Proposed Allotment, I agree with Mr Siu that it would be open to R1-R6 to allot the shares at any time as the Resolutions 1 to 3 have not been cancelled or revoked in any way. C9. Issue 9 – Remedies 145.In light of my conclusions on the Fundamental Relationship and Fundamental Understanding (Issues 1-3), exclusion from management (Issue 6) and the Proposed Allotment (Issue 8), I find that the affairs of the Company have been conducted by R2/R6 in an unfair manner and the interests of P1-P2 have been prejudiced. 146.Although R1, R3-R5 have also participated in the exclusion from management and the Proposed Allotment, P1-P2 have settled with them and they ceased to be parties to the proceedings without any objection from R2/R6. Mr Siu submits that the appropriate relief is for the court to make an order requiring R2/R6 to buy out the shares of P1-P2 in the Company. He cites Apex Global Management v FI Call Ltd [2014] BCC 286, §125 where Vos J (as he then was) observed that ss.994-996 of the Companies Act (equivalent to ss.724-726 of CO) provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members. Non-members who are alleged to have been responsible and have been made parties to the petition can be made primarily or secondarily liable to buy the petitioners’ shares. 147.In any event, as R1-R5 approved the Proposed Allotment to R6 (and Walter), I do not think that they would have any objection to R6 becoming a shareholder of the Company by purchasing the shares held by P1-P2. 148.Mr Lam submits that a buy out order would be “unfair” as R2 only holds 16% shareholding in the Company, and he would be “stuck” with the Company whose value has now been diminished as a result of the diversion of business by P1-P2. 149.It seems to me that having conducted the affairs of the Company in the manner unfairly prejudicial to the interests of P1-P2, it is not open to R2/R6 to say that it would be unfair for them to buy out the shares of P1-P2. There is no other way to remedy P1-P2 having been excluded from management, and none has been suggested by Mr Lam. 150.As to Mr Lam’s submission that the value of the Company has been diminished, it is not in dispute that after P1-P2 have ceased to be directors of the Company, they engage in securities brokerage business through another company, which inevitably have a negative impact on the business and hence the profits generated by the Company. It seems to me that it would be fair in the circumstances for the court to order R2/R6 to buy out P1-P2 shares on the date at which the shares are to be sold and transferred to them. The reduction in revenue and profits would be reflected in the valuation of the Company. 151.The buy out order will be on the following bases:
152.I direct the parties to submit proposed directions on assessing the Value by a Court-appointed expert following the standard directions on valuation set out in Appendix B to PD 3.4 within 21 days of this Judgment. This notwithstanding, I direct the parties to make open offers to the other on the price at which R2/R6 are to purchase P1-P2 shares within 14 days of this Judgment with a view to obviate the need for the parties to incur further costs in determining the Value and the Price. The party which fails to “beat” the offer made by the other party may expect to pay all the costs occasioned by the valuation to be taxed on a higher scale. 153.As for costs, I make a costs order nisi that R2/R6 should pay 50% of the costs of and incurred by P1-P2 in the Petition including all costs reserved, to be taxed if not agreed. I do not think this is a case which warrant a certificate for 2 counsel. 154.The apportionment of costs have already taken into account (1) the fact that P1-P2 fail on Issues 2 and 4 and should pay the costs incurred by R2/R6 in defending the same; (2) P1-P2 have abandoned their claims against R1 and R3-R5; and (3) P1-P2 are entitled to recover 70% of the costs of the trial.
Mr Patrick Siu and Mr Rex Yam, instructed by Simon C.W. Yung & Co., for the 1st – 2nd Petitioners Mr Vincent Lam and Mr Kurt Ng, instructed by Ho & Ip, for the 2nd and 6th Respondents Mr Tony Ko, instructed by Chiu, Szeto & Cheng, for the 3rd Respondent (on 26 September 2023 only) Rebecca V.I. Ho & Co, for the 7th Respondent is excused [1] Who passed away on 21 May 2016 [2] Who passed away on 23 October 2016. P1 Aff §78 [3] Ps Opening §27 [4] P1 Aff §17 [5] POC §36.1; R2/R6 RAPOD §27 [6] Letters of Administration in respect of Hing Ting’s estate was granted to R3 on 26 October 2016 [7] P1 Aff §73 [8] P1 Aff §78 [9] P1 Aff §88 [10] R4-R5 were represented by R6 [11] P1 Aff §89 [12] P1 Aff §95; R6 Aff §55 [13] R6 Aff §58 [14] R6 Aff §60 [15] P1 Aff §91 [16] R6 Aff §60 [17] R6 Aff §60 [18] R6 Aff §72 [19] R6 Aff §73 [20] P1 Aff §§114-117; R6 Aff §74 [21] R6 Aff §76 [22] R6 Aff §76 [23] As pleaded in §26 of POC [24] P1 Aff §§14-15 [25] P Aff §16 [26] R2/R6 Closing §24 [27] P1 Aff §18 [28] P1 Aff §20 [29] On R2’s case, he injected HK$400,000 into PSC as start-up capital, for 16% interest in the partnership: R6 Aff §11 [30] R6 Aff §10 [31] R6 Aff §10 [32] P1 Aff §§13-20 [33] R2/R6 Closing §§25, 28 [34] R2/R6 Closing §§26-27 [35] R2/R6 Closing §31 [36] R2/R6 Closing §§34-36 [37] R2/R6 Closing §42(1) [38] R2/R6 Closing §42(2) [39] R2/R6 Closing §44(1) [40] R2/R6 Closing §44(2) [41] POC §35 [42] Ps Opening §55 [43] R2/R6 RAPOD §20 [44] The alleged acts of exclusion are (1) the Requisition; (2) convening the 2016 AGM, and not re-electing P2 as director; (3) procuring the appointment of Mak and Shum as Licensed Representatives and ROs of the Company, and attempting to revoke and cancel P1’s capacity as RO; (4) keeping P1 under the surveillance of the CCTVs, causing the Company not to pay commission to P1, locking P1’s computer, and preventing P1 from having free access to 22F Office; (5) at the 2017 AGM, voting against the re-election of P1 as director; and (6) removing P2 as Licensed Representative and RO of the Company. [45] R2/R6 Closing §99 [46] R2/R6 Closing §100 [47] R2/R6 Closing §§101-104 [48] R2/R6 Closing §105 [49] R2/R6 Closing §§106-112 [50] R2/R6 RAPOD §43 [51] R2/R6 accept that P2’s employment was already terminated by 19 July 2017: see R2/R6 Closing §112 [52] R2/R6 Closing §§126-127 [53] POC §38. [54] R2/R6 Closing §146 [55] R2/R6 RAPOD §3(a) |
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