Zhong Da Mining Holding Ltd v. Lam Wo Ping and Others

HCMP 1405/2022

[2024] HKCFI 1613

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1405 OF 2022

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DECISION

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A.  INTRODUCTION

1.This is the application by the Plaintiff (“P”) by Originating Summons filed on 23 September 2022 (“OS”) under section 42 of the Companies Ordinance (Cap. 622) (“CO”) for (i) a declaration that the documents submitted for filing on 30 April 2021, 3 May 2021 and 15 July 2021 at the Companies Registry (“CR”) in respect of Hong Kong Tainpeng Mining Limited (the 3^rd Defendant herein) (“Company”) as set out in the Schedule of the OS (“Subject Documents”) are null and void and of no legal effect or in any event unenforceable against P and/or the Company; (ii) an injunction to restrain the 2^nd Defendant (“D2”) from claiming to be a director and/or shareholder of the Company; (iii) an injunction to restrain the 1^st Defendant (“D1”) and/or D2 from submitting any documents for filing at the CR in respect of the Company; and (iv) an order that the 4^th Defendant (“Registrar”) be directed to forthwith remove the Subject Documents.

2.The Subject Documents include the following:

(1)  Form ND2A -Notice of Change of Company Secretary and Director (Appointment/Cessation) (Ref. No.: 23002041648) filed on 30 April 2021;

(2)  Form ND2A – Notice of Change of Company Secretary and Director (Appointment/Cessation) (Ref. No.: 23002041649) filed on 30 April 2021;

(3)  Form NR1 - Notice of Change of Address of Registered Office (Ref. No.: 22101646653) filed on 3 May 2021;

(4)  Form ND2A "Notice of Change of Company Secretary and Director (Appointment/Cessation) (Ref. No.: 23401903979) filed on 15 July 2021; and

(5)  Form NSC1 – Return of Allotment (Ref. No.: 23401903980) filed on 15 July 2021.

3.D1, D2 and the Company also issued the following summonses in relation to the further conduct of this action:

(1)  The Company’s Summons filed on 21 December 2022 (“Company’s Summons”) for (i) an order that this action against the Company be a stayed in favour of the High Court of Justice of the British Virgin Islands (“BVI Court”) pending final determination by the BVI Court of Claim No. BVIHCOM2022/0096 (“BVI Action”) on case management grounds; or (ii) alternatively, an order that this action be continued as if begun by Writ, and directions for filing of pleadings; and

(2)  D1 and D2’s Summons filed on 29 August 2023 (“D1/D2’s Summons”) for (i) an order that this action against D1 and D2 be a stayed in favour of the BVI Court pending final determination by the BVI Court the BVI Action on case management grounds; or (ii) alternatively, an order that this action be continued as if begun by Writ, and directions for filing of pleadings.

4.At the substantive hearing before this Court, the 1^st to 3^rd Defendants agreed not to pursue the Company’s Summons and sought leave to withdraw the same. This Court granted leave to withdraw with costs of the application to paid by the Company to the Plaintiff, to be taxed if not agreed.

5.Pursuant to the Order of the Court dated 8 March 2023, the parties filed an Agreed List of Issues (“Agreed Issues”) which require determination by the Court, and the contentions of the parties in respect of each of the Agreed Issues.

6.The Agreed Issues include the following:

(1)  Issue 1 : Is D1 entitled to remove Chen Jian Yun (“Chen”) as the director of the Company based on the written  resolution of the sole shareholder of the Company dated 21 April 2021 and/or is this written resolution valid?

(2)  Issue 2 : Is D1 entitled to (i) remove Conpak Management Consultants Limited (“Conpak”) and appoint KV Pro Services Limited (“KV”) as the company secretary of the Company and/or (ii) change the Company’s registered address based on the written resolution of the sole shareholder of the Company dated 21 April 2021 and/or is this written resolution valid?

(3)  Issue 3 : Is D1 entitled to appoint D2 as the director of the Company based on the written resolution of the sole shareholder of the Company dated 14 July 2021 and/or is this written resolution valid?

(4)  Issue 4 : Is the allotment of 1,000,000 additional shares of the Company to D2 valid and/or is the written resolution of the sole shareholder of the Company dated 14 July 2021 to allot additional 1,000,000 shares in the Company at HK$1,000,000 to D2 thereby increasing the total number  of shares of the Company to 1,010,000 valid?

(5)  Issues 5 and 6: Whether the injunctions against D1 and D2 sought in the OS (see paragraph 1 above) should be granted?

(6)  Issue 7 : Whether this action should  be stayed on case management grounds?

(7)  Issue 8 : Whether D1 and D2 are entitled to rely on the legal memorandum issued by issued by Conyers on 8 June 2023 in relation to certain British Virgin Islands (“BVI”) law issues (“BVI Legal Memo”)?

(8)  Issue 9 : Whether this action should be ordered to continue as if begun by Writ?    

7.At the hearing, Mr Kenneth Chan (Counsel for P)[1] confirmed to the Court that P no longer challenges the admissibility if the BVI Legal Memo, and hence Issue 8 falls away.

8.On 15 November 2022, the Registrar filed a statement setting out (inter alia) the history of the filings in relation to the Company with the Companies Registry, and stated that the Registrar has annotated in the various forms listed in Schedule to the OS that the Companies Registry received a complaint on the validity of the information reported in the documents, and that the reader should exercise caution. The Registrar takes a neutral stance in the proceedings, and asked to be excused from attending the substantive hearing of the OS.     

B.  BRIEF FACTUAL BACKGROUND

9.The facts relevant to the applications before the Court are briefly stated below.

10.P was incorporated in the BVI on 20 August 2010. Upon incorporation, D1 was appointed as its sole director and its registered shareholder.  P and D1/D2 have, in their respective affirmations filed herein, put forward different accounts of how P came to be established and the agreement between them as to P’s ownership and control.

11.In gist, on D1/D2’s case, P was established as the holding company to operate a mining business (“Mining Business”) which he agreed to invest in on the suggestion of Chen Jian Yun (“Chen”), and D1 was the sole legal and beneficial shareholder of P at the time of its incorporation.  P disputes this, and alleges that P was jointly owned by Chen and D1 at the time of its incorporation, and that it was set up as a foreign entity to hold the Mining Business in the PRC which they agreed to jointly participate in. P further alleges that D1 became the sole director of P only because he handled the administrative arrangements in relation to the setting up of P.

12.On 14 December 2010, the Company was incorporated in Hong Kong. The Company was at all material times (and still is) wholly-owned by P.  P was the Company’s sole shareholder holding 10,000 shares (being its entire issued share capital at the time), and D1 was appointed as its sole director.

13.On 28 June 2011, Chen was appointed as an additional director of the Company.

14.In the subsequent years, the Company set up various PRC subsidiaries (“PRC Subsidiaries”) engaged in Mining Business.

15.According to D1/D2 (but disputed by P):

(1)  In 2016, D1’s family business (“Family Business”) went into bankruptcy in the PRC and D1 wanted to pass the Mining Business to D2 (being the son of D1) as his successor and was worried that it would be targeted as a source of debt recovery for the debts of the Family Business.

(2)  On 1 March 2017, (i) D1 and D2 signed an instrument of transfer for the transfer of D1’s 1 share in P for US$1 from D1 to D2 (“1.3.2017 Instrument of Transfer”); and (ii) D1 (as sole director of P) signed a written resolution of P to approve the aforesaid share transfer from himself to D2 (“1.3.2017 Resolution”).  

(3)  D1/D2 did not take immediate steps to register the aforesaid transfer in the register of members of P as they were unfamiliar with the formal registration requirements and were also preoccupied with financial problems of the Family Business at the time.

16.On 9 March 2017, D1 and Chen signed an instrument of transfer for the transfer of D1’s 1 share in P to Chen for US$1 (“9.3.2017 Instrument of Transfer”), which was approved by a written resolution of P signed by D1 as its sole director.  

17.On P’s case, the circumstances in which the 9.3.2017 Instrument of Transfer was signed were in gist that D1 expressed to Chen in around early 2017 that due to the heavy debts of the PRC Subsidiaries, he wanted to absolved himself from the Mining Business, and hence Chen and D1 came to an agreement that Chen would take over the entire beneficial ownership of P.

18.D1/D2’s disputes this, and allege that:

(1)  D1 decided to transfer his 1 share in P to avoid it being targeted as a source of debt recovery in respect of the Family Business which entered into bankruptcy in the PRC at the time.

(2)  The 9.3.2017 Instrument of Transfer was subject to the common understanding (inter alia) that (i) the beneficial interest in the 1 share in P would not pass to Chen; (ii) the 9.3.2017 Instrument of Transfer would only be registered if P was actually impacted by the debts of the Family Business and with D1 and D2’s prior approval; (iii) even in such case, Chen would only hold the legal title of the share on trust for D1 and would transfer the same back to D1 upon request (“Alleged Common Understanding”).

(3)  Subsequently, Chen procured the registration of the 9.3.2017 Instrument of Transfer without D1/D2’s prior approval, in breach of the Alleged Common Understanding.

19.On 21 April 2021:

(1)  D1 (as sole director of P) signed a written resolution of P to remove Chen as the director of the Company. On P’s case, the resolution was signed by D1 without P’s authorization; no shareholders’ resolution was passed and no prior notification was given to Chen for his removal.

(2)  D1 signed Form ND2A removing Chen as the Company’s director.

(3)  D1 (as sole director of P) signed a written resolution of P to appoint KV as the Company’s company secretary and to remove Conpak as the company secretary and to change the Company’s registered address to the address of KV. On P’s case, Conpak did not tender any resignation and no prior notification was given to Conpak for its removal.

(4)  D1 signed Form ND2A appointing KV as the Company’s company secretary.

(5)  D1 signed Form NR1 recording the change in the Company’s registered office.

20.On 14 July 2021:

(1)  D1 (as sole director of P) signed a written resolution of P to acknowledge D1’s resignation as director of the Company and to appointed D2 as director of the Company.  P disputes this resolution, and alleges that no proper shareholders’ resolution was passed.

(2)  D1 signed Form ND2A recording D1’s resignation and D2’s appointment as the Company’s director.

(3)  D1 (as sole director of P) signed a written resolution of P to allot an additional 1,000,000 shares of the Company at HK$1,000,000 to D2 (thereby diluting the shareholding of P in the Company to 0.99%). P disputes this resolution, and alleges that no proper shareholders’ resolution was passed.

21.On 3 September 2021, Chen signed a written resolution purportedly as sole member of P to appoint himself as P’s director and to remove D1 as P’s director.

22.On 12 May 2022, D1 and D2 commenced the BVI Action against Chen and P in the BVI Court seeking inter alia: (i) declaration that 1.3.2017 Instrument of Transfer is valid; (ii) declaration that 9.3.2017 Instrument of Transfer is null, void or without legal effect; and (iii) consequential orders for rectification of P’s register of members.

23.On 13J anuary 2023, Chen applied to strike out BVI Action on grounds of, inter alia, forum non conveniens, which was heard on 19 April 2023.  On 25 April 2023, the BVI Court made an order to strike out BVI Action (“BVI Order”).

24.On 10 May 2023, D1 and D2 applied for leave to appeal the BVI Order.  On 27 June 2023, BVI Court granted leave to appeal against the BVI Order. D1/D2’s  appeal (“BVI Appeal”) was heard on 12 February 2024 and judgment was reserved.

25.This Court requested the parties to inform the Court of the decision in the BVI Appeal as and when it becomes available.  However, as of the date of this Decision, this Court has not heard from the parties in this regard.

C.  THE PARTIES’ POSITIONS ON THE RELEVANCE OF BENEFICIAL OWNERSHIP

26.Section 42 of the CO empowers the Court to direct the Company Registrar to rectify any information on the Companies Registry or to remove any information from it. The Court may do so if it is satisfied that (i) the information derives from anything that is invalid or ineffective or has been done without the company’s authority, or (ii) the information is factually inaccurate or derives from anything that is factually inaccurate or forged: see Re China Nice Education Research Publishing Investment and Management Company Limited [2016] 4 HKLRD 525 at §§11, 13.

27.Mr Chan submits that as a general proposition, in cases where there is a dispute on beneficial ownership of a company’s shares, the Court need not resolve the issue of beneficial ownership before making an order under section 42 of the CO, citing Noble Crest Limited v Chan Yuet Ching Brenda [2023] HKCFI 115 at §24 (per Cheng J).  However, if one reads §24, it is clear that Cheng J did not lay down any such general proposition. 

28.Whether beneficial ownership may be a relevant consideration for the purpose of the Court’s determination of an application under section 42 of the CO must be fact specific. For example, in Li Ngan Kwan v Registrar of Companies [2020] HKCFI 2230, the Court considered that the determination of the application under section 42 of the CO should properly await the resolution of the dispute of beneficial ownership of the company’s holding company, which was the subject matter of a pending high court action (see §78). 

29.In this case, there is clearly a dispute between the parties as to the beneficial ownership of P and consequently the beneficial ownership of the Company (being P’s wholly-owned subsidiary).

30.As mentioned above, the beneficial ownership of P’s shares was the subject of the claim in the BVI Action. If the BVI Appeal is allowed, the BVI Action would likely proceed in the BVI. If the BVI Appeal is dismissed, the BVI Action would remain struck out.

31.Counsel for the parties accept that the Court cannot determine the question of beneficial ownership of P summarily on the affirmations filed herein given the substantial disputes of fact, which include (inter alia) the parties’ agreement as to P’s ownership and control at the time it was established, the circumstances under which the 1.3.2017 Instrument of Transfer and 9.3.2017 Instrument of Transfer were executed, and the existence of the Alleged Common Understanding.

32.However, P’s position is that this Court does not need to determine the question of beneficial ownership of P in order to decide whether to grant the reliefs sought in the OS.  Mr Chan’s arguments can be summarized as follows:

(1)  The written resolutions of P signed by D1 on 21 April 2021 and 14 July 2021 (“Purported Written Resolutions”) purportedly approving (i) the removal of Chen as director of the Company; (ii) the change of company secretary and registered office of the Company; (iii) the appointment of D2 as director of the Company; and (iv) the allotment of shares in the Company are irregular/defective by reason of non-compliance with the requirements of the Company’s articles and association (“Articles”) and/or requirements under the relevant provisions of the CO. 

(2)  Insofar as D1/D2 seek to rely on the irregularity principle (“Irregularity Principle”) or the duomatic principle (“Duomatic Principle”) to cure any such irregularities/defects, such principles do not apply to the present case by reason that the irregularities/defects in the present case are “substantive” and not “minor” (such that the Irregularity Principle has no application), and/or pertain to non-compliance with procedural provisions set out in the CO or the Articles which are “mandatory” in nature (such that the Duomatic Principle has no application).   

(3)  In any event, D1/D2’s reliance on such principles hinges on a contingency, namely, D1/D2’s success in the BVI Action as regards their beneficial ownership of P, which action was struck out.

(4)  Further, D1/D2’s allegation of beneficial ownership does not pass the relevant merits threshold. Mr Chan submits that a “compelling” case of beneficial ownership must be shown by D1/D2 to warrant any stay of this action pending the BVI Action, and a mere allegation would not suffice.

33.On the other hand, Ms Deanna Law (counsel for D1-D3)[2] submits that question of beneficial ownership of P is relevant to the determination of the OS.  Ms Law’s arguments are as follows:

(1)  D1/D2 accept that the Purported Written Resolutions are irregular/defective and would not be valid in themselves for the purpose of validly approving the Company’s actions in question, except that D1/D2 contends the written resolution of P approving the appointment of D2 as director of the Company is valid and not defective.

(2)  D1/D2 rely on the Irregularity Principle or the Duomatic Principle to cure any such irregularities/defects, which do apply to the facts of the present case.

(3)  However, Ms Law accepted that D1/D2’s reliance on the Irregularity Principle or the Duomatic Principle is premised on the assumption that D1/D2 are the beneficial owner(s) of P, and hence the question of beneficial ownership is relevant to the Court’s determination of whether to grant the reliefs sought in the OS.

(4)  The proper course would thus be for this Court to stay the OS pending the outcome of the BVI Appeal or alternatively to convert the present action to a Writ action given the disputes of facts as to beneficial ownership of P.

D.  THE IRREGULARITY PRINCIPLE

34.P’s position is that the Irregularity Principle does not apply to the present case as it only applies to cure “minor” irregularities and not “substantive” defects.  D1/D2’s position is that on close analysis of the case authorities, and as a matter of principle, there should be no such distinction when applying the Irregularity Principle.

35.A leading authority in Hong Kong on the Irregularity Principle is the Court of Appeal decision in Re Dalny Estates Ltd[2018] 1 HKRLD 409:

(1)  The plaintiff was purportedly removed as director of two companies.  He sought declarations of invalidity in respect of the appointments of new directors and company secretary, contending that he and one of the shareholders were not given notice and that no meetings were held (§11). 

(2)  The plaintiff argued in other proceedings that the shareholders held their shares of the two companies on trust for him (§5).  The defendants applied to strike out the plaintiff’s claim on the basis that even if no proper notice had been given, he could not challenge the resolutions since they could be confirmed by a vote of the majority shareholders (§12).

(3)  G Lam J (as he then was, delivering the Judgment of the Court of Appeal) noted that despite a breach of the articles the Court may refuse to intervene in an internal dispute and set aside the proceeding as null and void merely because of an irregularity such as in the conduct of a general meeting, if the same result would have been obtained had the correct procedure been followed (§18).

(4)  This was because equity does not act in vain; if what has been done irregularly is capable of being and will inevitably be confirmed by the majority, the Court will not interfere (§§22-23) (“Inevitability Requirement”).

(5)  While the Court was not referred to a case where the Irregularity Principle was applied to save a resolution where no meeting was held at all, it was arguable that the application of the principle was dependent on it being established that the majority would inevitably be in a position to call and hold a meeting properly and regularise the decision if necessary (§§26-27).

36.Mr Chan relied on 3 first instance decisions in Hong Kong where the Court declined to apply the Irregularity Principle to what is said to be a “substantive defect”.

(1)  First, P referred to Lohas Holding Ltd [2022] 5 HKLRD 653, where Linda Chan J held that the Irregularity Principle did not apply to cure defects in the appointment of the director since, inter alia, the lack of notice to shareholders regarding his appointment was not a mere irregularity but a substantive defect (§§21, 24, 31(1)).

(2)  Her Ladyship noted that the court may not interfere if the challenge only goes to “minor irregularities”(as opposed to one of substance) or if the defect in notice could be remedied by issuing another notice and that a majority of members would support the resolution that has been passed (§23), citing Kosmin & Roberts, Company Meetings and Resolutions (3^rd ed.,) at §§2.130 & 2.132, Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171 (CA)and Bentley-Stevens v Jones [1974] 1 WLR 638 as supporting authorities.

(3)  Second, P referred to Re Bluetroz Technology Limited [2022] HKCFI 3645,in which Linda Chan J held that failure to give notice of general meetings meant that the meetings and the resolutions passed to purportedly appoint and remove directors were invalid and of no legal effect.  Her Ladyship considered that the Irregularity Principle did not apply because the failure to give notice was a substantive defect, not a minor irregularity (§13).  The same authorities as those cited in Lohas were cited in support (see sub-paragraph (2) above). 

(4)  Third, P referred to Cyntia Hendrayani v Oligo Asia Environmental Group Limited [2023] HKCFI 3080 at §39, where it was held (per DHCJ Le Pichon) that the failure to give a valid notice for an EGM was a substantive defect which the Irregularity Principle could not cure, citing Re Bluetroz (supra) as supporting authority.  

37.However, on closer examination of the aforesaid three cited authorities in Lohas and Re Bluetroz, those authorities do not support the principle that there ought to be a distinction between “substantive” and “minor” defect/irregularity in applying the Irregularity Principle.  As pointed out by Ms Law:

(1)  The learned authors of Kosmin & Roberts (supra) at §2.130 put forward the purported principle that the court may not interfere where there is a challenge to minor irregularities and will only intervene if the challenge to the notice is one of substance.  It is further stated that this reflects the court’s reluctance to get involved in factional shareholder disputes and because it is illogical to intervene if a defect can be easily rectified.  The only authority cited in the footnote is Re Legal Costs Negotiators Ltd(supra).

(2)  However, Re Legal Costs Negotiators Ltd (supra), a case on unfair prejudice, did not in fact refer to, nor did it discuss, the Irregularity Principle or any distinction between minor and substantive defects at all.

(3)  Kosmin & Roberts(supra) at §2.132 further stated that if, considering the evidence, a court concludes that a defect in the notice could be remedied by issuing another notice and that a majority of members support the resolution that has been passed, the court may be reluctant to make an order restraining persons from acting on that resolution.  The authority cited is Bentley-Stevens v Jones.

(4)  However, in Bentley-Stevens (supra) (also cited in Re Dalny Estates Ltd (supra) at §24), no mention was made of any distinction between a substantive defect and a minor irregularity, nor any characterization of what type of irregularity there was. Plowman J dismissed the plaintiff’s claim, stating that even if his complaint of irregularities is correct (where the plaintiff was removed as a director at an EGM convened by another director purportedly acting by order of its board, though no board meeting authorizing the EGM had been held (639A-C)), all of them could be cured through the proper processes and the ultimate result would inevitably be the same (640H-641A). 

38.Therefore, I agree with Ms. Law’s submission that on proper analysis, the aforesaid three authorities relied on in the Hong Kong cases of Lohas, Re Bluetroz and Cyntia Hendrayani do not support the principle that there should be a distinction between “substantive” or “minor” defects/irregularities in applying the Irregularity Principle.

39.To the contrary, there are other cases decided by the Hong Kong courts that recognised the correctness of applying the Irregularity Principle to the removal of directors in situations where on P’s case, would amount to a “substantive defect”.  Ms Law referred to two such cases.

40.First, in Tam Tak Yam v Man Shing Textiles [2019] HKCFI 1449:

(1)  The applicant made an application under section 42 CO for the removal of the ND2A recording his removal as director (§§1,3).  His main contention was that since special notice of the EGM had not been given to the company in accordance with s.578 CO, he was deprived of exercising his right to protest under s.463 CO (§36).

(2)  The Court observed that the director’s’ right to protest it was to give the director an opportunity and sufficient time to make representations to the company and to persuade all other members of the company not to remove him.  However, it was obvious that in the context of the company in that case, that even if the applicant ex-director had made his representations, it would not have made any difference to the result (§§39-41).  The only other shareholders, Tang and Yeung, who were majority shareholders, were the ones who requisitioned the EGM and passed the resolution for his removal (§§4,15, 21, 31).

(3)  While DHCJ Patrick Fung SC dismissed the application on the basis that there was no non-compliance with the provisions of the CO (§49), he observed that the respondents, being majority shareholders, were entitled to rely on the Irregularity Principle (§53). 

41.Second, in Huangfu Chuangxin v Ni Yongkang & Ors [2022] HKCFI 1721,Recorder Jason Pow SC held that the plaintiff’s claim for a declaration that an ordinary resolution removing him as director was invalid due to lack of special notice (cf. s.462 CO) was doomed to fail because of the Irregularity Principle: -

(1)  The plaintiff had discontinued the proceedings, but sought costs on the basis that, inter alia, the resolution was invalid (§§1-3, 9(1)).

(2)  Referring to ss.462 and 463 CO, the plaintiff argued that the latter guaranteed certain protections to a director who faces removal and that the Irregularity Principle did not apply since failure to give notice was an irregularity of “substance” (§22).  However, the Court found that this was unsupported by authority (§§23-26).

(3)  The Court held that there is no basis for a distinction based on whether the irregularity was one of “substance”.  Applying Re Dalny Estates(supra), 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 (§26).  The Court agreed with DHCJ Patrick Fung SC’s rejection of the argument that the Irregularity Principle only applies to a mere formality and irregularity (§27).

(4)  The Court held that the plaintiff’s case was bound to fail due to the Irregularity Principle – that it must have been apparent to him that his fellow shareholders were determined to remove him from the board and he should have realised that even if he could point to irregularities in the process, that could not alter the defendants’ determination to remove him (§28).

42.This Court agrees with the analysis in Huangfu Chuangxin that there should be no proper basis for the distinction between minor and substantive irregularity/defects in the application of the Irregularity Principle.

43.Rather, the correct legal position should be that set out by the Court of Appeal in Re Dalny Estates Ltd(supra) which does not draw any distinction between minor and substantive irregularity/defects in the application of the Irregularity Principle, and the only question for the Court when considering whether the Irregularity Principle applies is whether the same result would inevitably have been obtained had the correct procedure been followed. Notably:

(1)  At §18 of Re Dalny, the case of Re Green Valley Investment Ltd [2003] 2 HKLRD 915 and its brief facts were cited by G Lam J (as he then was) as an example of the application of the Irregularity Principle in Hong Kong.  In that case, the Court refused to strike down resolutions passed at the EGM even though no valid notice of the EGM had been given because only majority shareholders can complain about technical miscarriage (§§48-49). His Lordship made no criticism that the Irregularity Principle was used in that case to cure what would be a “substantive” defect.

(2)  The only test his Lordship stated at §22 of Re Dalny was “if what has been done irregularly is capable of being and will inevitably be confirmed by the majority, the Court will not interfere”. 

(3)  The Court of Appeal did not distinguish between different types of irregularities. The three cases cited in support at §§22-24 of Re Dalny, i.e. MacDougall v Gardiner (1875) 1 Ch D 13 at p.25, Browne v La Trinidad (1887) 37 Ch D 1 at p.17 and Bentley-Stevens v Jones (supra) at p.641A, in discussing the Irregularity Principle, also do not refer to any distinction between substantive and minor irregularities. The cited passage of MacDougall v Gardiner at p.25 (see §22 of Re Dalny) states “… if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end which is only that a meeting has to be called, and then ultimately the majority gets its wishes” (emphasis added).

44.I am therefore of the view that the Irregularity Principle can apply to the irregularities in the present case (regardless of whether they are to be characterised as “minor” or “substantive”) provided that the Inevitability Requirement is satisfied.

E.  THE DUOMATIC PRINCIPLE

45.As regards the application of the Duomatic Principle, Ms Law accepted that (i) if D1/D2 is entitled to rely on the Irregularity Principle, there is no need for them to rely on the Duomatic Principle; and (ii) if D1/D2 is not entitled to rely on the Irregularity Principle, then they also would not be entitled to rely on the Duomatic Principle.

46.Given such position taken by D1/D2, there is no need for this Court to decide whether the Duomatic Principle applies to each of the defects/irregularities in the present case, save as to say that (as Mr Chan contends and Ms Law accepts) there are authorities which cast doubt on whether the Duomatic Principle applies to non-compliance with procedural requirements (whether in statute or the company’s articles) which are “mandatory” on their true construction: see Hollington on Shareholders’ Rights (10^th ed.) at §5-13; Dashfield v Davidson [2008] BCC 222.   

47.I will now turn to each of the issues requiring the Court’s determination.

F.  ISSUES 1 TO 4 (validity of the Purported Written Resolutions)

48.Issues 1-4 concern whether the Purported Written Resolutions are sufficient for the purpose of validly approving (i) the removal of Chen as director of the Company; (ii) the change of company secretary and registered office of the Company; (iii) appointment of D2 as director of the Company; and (iv) the allotment of shares in the Company.

49.D1/D2 accepts that the Purported Written Resolutions are insufficient in themselves for the purpose of validly approving (i), (ii) and (iv) (but they seek to rely on the Irregularity Principle to cure any defects), but contend that there is no defect in the approval of (iii).

50.The BVI Legal Memo (which is not challenged by P) also states that according to the Register of Directors of P, D1 was the sole director of P from 20 August 2010 (P’s date of incorporation) to 3 September 2021; and that as sole director of P, D1 had at the material time (i.e. on 21 April 2021 and 14 July 2021) all the necessary power and authority to sign the Purported Written Resolutions on behalf of P (as the Company’s sole shareholder) and affix P’s company chop.   

51.However, the effect and sufficiency of the Purported Written Resolutions in validly approving the Company’s affairs is a matter of Hong Kong law, which will be discussed briefly below.

52.First (Issue 1), as regards the removal of Chen as director of the Company, there are the following requirements in the CO and the Articles that has to be satisfied:

(1)  The Company may remove a director by ordinary resolution subject to s.157B Companies Ordinance (Cap. 32) (“Cap.32”): Articles §95.

(2)  The need to provide (i) special notice to the Company of the intention to move the resolution to remove Chen as director (i.e. at least 28 days before the meeting) and (ii) notice to the Company’s members (i.e. P) of the resolution at the same time/at least 14 days before the meeting: ss.462(4), 578 CO.

(3)  On receipt of notice of the resolution, the Company must send a copy to Chen and Chen is entitled to be heard on it at the meeting it is voted on and may make representations: s.463 CO. 

(4)  The ordinary resolution to remove Chen as a director should not be done by way of written resolution: s.548(6) CO.

53.D1/D2 accept that Chen’s removal is only supported by the Company’s shareholder resolution (i.e. P’s written resolution executed by D1 dated 21 April 2021). 

54.However, as D1/D2 submit, and to which I agree, the Irregularity Principle can apply to cure the defects as the Inevitability Requirement is satisfied in that, assuming D1/D2 are the beneficial owners of P, even if the relevant procedural requirements have been met, the same result would inevitably have been obtained.  

55.Even if the requisite notices have been given and Chen is given an opportunity to be heard on his removal, D1/D2 will still be able to procure an ordinary resolution of the Company to remove Chen as director of the Company.

56.Second (Issue 2), as regards removal of Conpak and appointment of KV as the Company’s company secretary and the change of the Company’s registered office address, the power is vested in the directors of the Company: Articles 4,122(b).

57.Unless otherwise determined by the Board, two directors constitute the quorum.  If the Company only has one director, that director shall constitute a quorum. Matters arising at any meeting shall be decided by a majority of votes: Article 109.

58.D1/D2 accept that the changes to the Company’s company secretary and change of the Company’s registered office address are supported only by the Company’s shareholder resolution (i.e. P’s written resolution executed by D1 dated 21 April 2021) rather than a board resolution of the Company.

59.However, as D1/D2 submit, and to which I agree, the Irregularity Principle applies to cure the defects, assuming D1/D2 are the beneficial owners of P.  The Inevitability Requirement is satisfied in that if the Court applied the Irregularity Principle to Issue 1 above, Chen’s removal as the Company’s director would be valid, and D1 (as sole director of the Company) would have inevitably made the same changes via a board resolution of the Company.

60.Third (Issue 3), as regards the appointment of D2 as director of the Company, as D1/D2 rightly submit, there is no defect as all procedural requirements have been met:

(1)  The Company may appoint directors by way of ordinary resolution: Article 94.  D2’s appointment is supported by the Company’s shareholder resolution (i.e. P’s written resolution executed by D1 dated 14 July 2021).

(2)  Section 548(1) CO states that anything that may be done by a resolution passed at a general meeting may be done, without a meeting and without any previous notice being required, by a written resolution of the members of the company.

61.Fourth (Issue 4), as regards the allotment of shares in the Company, should be done by way of (i) ordinary resolution or (ii) prior approval by the Company via ordinary resolution and a board resolution: Articles 48, 49; s.141(1) CO.

62.Article 49 provides that the company “may” direct existing shareholders have a right of first refusal regarding new shares, failing which new shares shall be at the disposal of the directors and Article 6 would apply.  Article 6 gives the directors absolute discretion as to who, when and on what terms and conditions new shares should be allotted, save and except that shares issued at a discount should comply with s.50 of Cap.32.

63.In the present case, the allotment was not carried out at a discount.  The capital of the Company was HK$10,000, which was originally divided into 10,000 shares of HK$1 each: Article 4.  On 14 July 2021, the allotment of an additional 1,000,000 of the Company’s shares at HK$1,000,000 to D2 was carried out.

64.The approval of the allotment is supported by the Company’s shareholder resolution (i.e. P’s written resolution executed by D1 dated 14 July 2021).  D1/D2 accept that since no direction for right of first refusal was given to P, Article 6 applies and such shares are at the disposal of the directors, and who should comply with s.141 CO.  

65.As D1/D2 accepted, there is no board resolution in respect of the allotment. However, D1/D2 submits, and to which I agree, the Irregularity Principle applies to cure the defect, assuming D1/D2 are the beneficial owners of P.  The Inevitability Requirement is satisfied in that if the Court applied the Irregularity Principle to Issue 1 above, Chen’s removal as the Company’s director would be valid, and D1 (as sole director of the Company) would have passed the required board resolution in respect of the allotment.

66.As regards P’s submission that the Irregularity Principle cannot apply because the said allotment was a breach of fiduciary duty on the part of D1, I also accept Ms Law’s submissions that:

(1)  There is insufficient evidence to demonstrate that the allotment was for an alleged improper purpose of diluting P’s shareholding in the Company.  An allegation of willful misconduct by a director of a power for an improper purpose is a serious one; the necessary inference can only be drawn from proven facts which make the inference compelling Chinaculture.com Ltd v Lam Ting Ball, Paul & Ors [2022] HKCFI 1114 at §23 per Harris J. 

(2)  Further and in any event, even if the Court finds that the allotment was in breach of D1’s fiduciary duties owed to the Company, the unanimous decision of shareholders (i.e. P in this case) will render what would otherwise be a breach of fiduciary duty, not so: Shun Hing Holdings Company Limited & Ors v Li Kwok Po David & Ors [2020] HKCA 309 at §§45-46 per Lam VP (as he then was) citing Jackson LJ in Sharma v Sharma [2014] BCC 73 at §§47-49; Hollington (supra) at §5-13.

67.For the reasons above, I am of the view that although the Purported Written Resolutions are insufficient in themselves for the purpose of validly approving the removal of Chen as director of the Company, the change of company secretary and registered office of the Company, and the allotment of shares in the Company, any defects/irregularities can be cured by the application of the Irregularity Principle. 

68.But whether the Irregularity Principle applies depends on whether D1/D2 is the beneficial owner of P, which is not a matter that this Court can determine summarily on affirmations alone (see further Section H below).   

G.  ISSUES 5 and 6 (injunctions against D1 and D2)

69.In light of this Court’s conclusions stated in Section F above and Section H below, the question of whether the injunctions sought against D1 and D2 should be granted would depend on (inter alia) the beneficial ownership of P (and in turn the Company), which cannot be determined summarily on affirmations.  In the circumstances, it is premature to grant any injunctive relief at this stage.

H.  ISSUES 7 and 9 (stay / conversion to Writ action)

70.For the reasons stated in Section F above, whether the Irregularity Principle applies (and whether the Inevitability Requirement can be satisfied) to cure the defects/irregularities in the purported approvals of the removal of Chen as director of the Company, the change of company secretary and registered office of the Company, and the allotment of shares in the Company depends on whether D1/D2 is the beneficial owner of P.  

71.Hence, I am of the view that the question of beneficial ownership of P and in turn the Company is relevant to the determination of the OS, and given the substantial disputes of facts on such question, the Court should either (i) stay the proceedings pending the determination of the BVI Appeal, and if the appeal is allowed, the determination of the BVI Action; or alternatively (ii) order that this action to be continued as if it had begun by Writ.

72.In this case, all the purported filings with the Company Registry procured by D1/D2 (which P seeks to remove) are aimed to gain control over the Company. Whether it was legitimate for D1/D2 to do so would depend on whether D1/D2 is and was at the material time the beneficial owner of P and consequently the Company.

73.If D1/D2 is and was at the material time the beneficial owner of P and consequently the Company, then there is no reason why they should not be entitled to take the steps they did to recover control over the Company.  Put differently, if Chen is not, and was not at the material time, the beneficial owner of P or the Company, there is no reason why he should be entitled to insist on remaining as the Company’s director and to control its affairs.

74.This Court cannot accept Mr Chan’s submission that D1/D2’s case on beneficial ownership is a mere assertion or otherwise so incredible that it can be dismissed summarily on affirmations alone without a trial.  D1/D2 has adduced the 1.3.2017 Instrument of Transfer and the 1.3.2017 Resolution in support of their case.  They have also adduced the BVI Legal Memo which states that the 1.3.2017 Instrument of Transfer (albeit not registered) created an equitable interest of P’s share in D2’s favour which (assuming Chen had actual, constructive and/or imputed notice of D2’s interest) would rank above any interest of Chen pursuant to the 9.3.2017 Instrument of Transfer executed later in time.    

75.Nor is it correct to say that D1/D2 must show a “compelling” case on beneficial ownership at this stage.  Given the existence of two instruments of transfer executed in 2017, the parties’ different version of events as to how they came to be executed should be tested in cross-examination at trial.

76.In the premises, contrary to Mr Chan’s submissions, this Court simply cannot disregard the question of beneficial ownership in deciding the present application under section 42 of the CO and the appropriateness of the reliefs sought in the OS. 

77.I also do not consider that this Court should stay these proceedings pending the determination of the BVI Action (which is, at present, already struck out on forum non conveniens grounds), despite the pending BVI Appeal.  As matters currently stand, there are no proceedings on foot in the BVI, and it is also unclear when the decision in the BVI Appeal would be forthcoming. 

78.In any event, P has chosen to commence these proceedings in Hong Kong and to seek relief from the Hong Kong court. There is at present no dispute between the parties as to the appropriateness of Hong Kong as the forum to decide the issues herein.

79.As and when the result of the BVI Appeal is known, the parties can then agree amongst themselves how this action should proceed, and make any further applications for case management directions as they may consider appropriate. 

80.In the circumstances, as a matter of proper case management, and in light of the relevance of the issue of beneficial ownership of P and the Company to the determination of the OS in respect of which there are substantial disputes of fact, I am of the view that this action should be ordered to continue as if begun by Writ, with directions for the parties to file their respective pleadings.

I.   DISPOSITION AND COSTS

81.For the reasons above, the following Orders are made:

(1)  This action shall be continued as if begun by Writ;

(2)  P do file and serve its Statement of Claim within 28 days from the date hereof;

(3)  D1 and D2 do file and serve their Defence(s) within 28 days thereafter;

(4)  P do file and serve its Reply, if any, within 28 days thereafter; and

(5)  There be a costs order nisi that the costs of D1/D2’s Summons and costs of the hearing on 19 and 20 March 2024 be in the cause of this action, with certificate for two counsel. 

Mr Kenneth CL Chan and Mr Edward Lun, instructed by Messrs Au, Thong & Tsang, for the Plaintiff

Ms Deanna Law and Ms Nicole Chui, instructed by Messrs Poon Lawyers, for the 1^st to 3^rd Defendants

The 4^th Defendant’s attendance excused