Ng Yat Chi v. Max Share Ltd and Another
Read the full judgment text of on BabelCite. was delivered on 18 May 1998.
1. The question in this appeal is whether a bankrupt registered shareholder, who holds fully paid shares in trust for another, loses the right to petition for winding up and relief under section 168A of the Companies Ordinance if his trustee in bankruptcy disclaims the shares.
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FACV No. 3 of 1997 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 3 OF 1997 (CIVIL) (ON APPEAL FROM CACV No. 252 OF 1996) _____________________
-------------------- Court : Chief Justice Li, Mr Justice Bokhary PJ, Mr Justice Nazareth NPJ, Mr Justice Mortimer NPJ and Lord Hoffmann NPJ Date of hearing: 13 May 1998 Date of judgment: 18 May 1998 ----------------------- J U D G M E N T ----------------------- Chief Justice Li: The issue 1. The question in this appeal is whether a bankrupt registered shareholder, who holds fully paid shares in trust for another, loses the right to petition for winding up and relief under section 168A of the Companies Ordinance if his trustee in bankruptcy disclaims the shares. The facts The respondent Mr Ng Yat Chi ("Mr Ng") is an undischarged bankrupt. He is the registered holder of 98,000 shares of $1 each in the 1st appellant Max Share Limited ("the Company"), a private company. His holding originally represented 49% of its issued share capital. The majority shareholder is China Resources (Holdings) Company Limited ("China Resources"). 2. On 9 April 1992, Mr Choy Bing Wing ("Mr Choy") obtained a charging order absolute over the shares. It was to secure a sum due from Mr Ng under an order for costs in Mr Choy's favour. On 13 August 1992, the shares were sold by public auction pursuant to a court order. Mr Choy bought them. 3. By this time, a receiving order had been made on 29 July 1992 against Mr Ng and the Official Receiver was constituted receiver. On 28 August 1992, Mr Ng was adjudged bankrupt and the Official Receiver became his trustee. The act of bankruptcy had been committed on 17 June 1992 when Mr Ng failed to comply with a bankruptcy notice served by another creditor who then petitioned for his bankruptcy. This was well after the charging order absolute in Mr Choy's favour. (The Court of Appeal was wrong to say that the charge in favour of Mr Choy was subsequent to the act of bankruptcy.) 4. During the time when Mr Choy was enforcing the charging order, the majority shareholder was consolidating its control of the Company. In May 1992, a resolution for a substantial increase in capital was passed and a substantial number of shares was allotted to the majority shareholder. Mr Ng's interest was reduced from 49% to less than 1%. 5. Following the public auction on 13 August 1992, the Official Receiver executed transfer documents and delivered them to Mr Choy on 21 August 1992. It is not disputed that Mr Ng thereafter held the shares in trust for Mr Choy absolutely. As already mentioned, Mr Ng was adjudicated bankrupt on 28 August 1992. 6. Following receipt of the transfer documents, Mr Choy applied to the Company for registration. The directors exercised their discretion under the articles of association to refuse. (Subsequently, Mr Choy attempted unsuccessfully to challenge the refusal in legal proceedings.) Mr Choy then persuaded the Official Receiver to apply for registration. But the Official Receiver's application to be registered in place of Mr Ng was also refused. 7. Mr Choy pressed the Official Receiver to do more to protect his interest. But the Official Receiver did not want to be involved further. On 28 January 1993, he wrote to Mr Choy's solicitors stating:
Section 59 of the Bankruptcy Ordinance The material part provides:
The Petition On 10 June 1996, Mr Ng and Mr Choy petitioned against the Company and China Resources for winding up and for an order under section 168A of the Companies Ordinance that his shares be purchased at a fair value. Various complaints are relied on, including the dilution of his shareholding. These allegations have yet to be tried and the proceedings have not proceeded beyond the Petition. This is because the Company and China Resources then applied to strike it out on the ground that neither Mr Ng nor Mr Choy had locus standi to present it. The courts below Rogers J agreed and struck out the Petition. 8. The Court of Appeal agreed that Mr Choy, not being a registered shareholder, had no locus standi. Mr Choy has not sought to challenge this further and this is no longer in dispute. But the Court of Appeal allowed Mr Ng's appeal on the ground that Mr Ng was entitled to present the petition as a contributory and member though acting as trustee for Mr Choy. Against that decision, the Company and China Resources appeal to the Court. Leave to appeal This is done with leave of the Appeal Committee exercising the powers of the Court, the Court of Appeal having refused leave. In the written decision granting leave, I urged the Official Receiver to instruct senior counsel to assist us. Both Mr Choy and Mr Ng had appeared in person in the courts below. In response, the Official Receiver instructed Geoffrey Ma SC and Yvonne Cheng to put in a written case and to appear as amicus curiae. We are grateful and are indebted to them for their assistance. Further, a complete bundle of correspondence has been put before the Court. 9. So, we have had the benefit of fuller documentation and fuller arguments than were before the lower courts. Before us, Mr Ng appeared in person and at his request, we allowed Mr Brumen Li to address us on his behalf. The locus standi provisions 10. By section 179(1), a petition for winding up may be presented by, amongst others, a contributory. It provides:
11. A contributory is a person "liable to contribute to the assets of the company in the event of its being wound up". Section 171. It is well settled that the registered holder of fully paid shares is in principle so liable even though he cannot be made to pay anything more. Section 170(1)(d). 12. A petition under section 168A may be presented by a "member". Section 28 defines "member" as a person who has agreed to become a member and whose name is entered in the register of members. 13. It is therefore common ground that Mr Ng was a contributory and a member and that this position was unaffected by his bankruptcy. But Mr Winston Poon SC, for the Company and China Resources, argues that the Official Receiver's disclaimer operated to deprive Mr Ng of his right to petition as a contributory and member. 14. Before I deal with his arguments, I observe it was not challenged that fully paid shares can be the subject matter of a disclaimer. Rightly so in my view. On the plain construction of section 59, the classes of the property enumerated therein should be construed disjunctively. This was the view taken in Re Potters Oils Ltd [1985] BCLR 203 at 206j-207a in relation to section 323 of the Companies Act 1948 in England. 15. Further, it was not argued that the fact that the disclaimer letter was addressed to Choy's solicitors made any difference. Again rightly so. Section 59(1) requires the disclaimer to be in writing but contains no requirement that it be sent to all persons interested in the property, although in the case of leases which could only be disclaimed with the Court's leave, section 59(3) provides that the Court may, before or on granting such leave, require such notices to be given to persons interested as the Court thinks just. The appellants' arguments 16. Mr Poon SC put his arguments in different ways but they came in the end to two arguments. The first was that section 59 said expressly that it operated to determine the rights and interests of the bankrupt. Company law does not recognise trusts of shares or other equitable interests. Section 101 provides that no notice of any trust shall be entered on the register. Article 5 of the Company's articles of association provides, in common form, that the Company is entitled to treat the registered holder of shares as absolute owner and is not bound to recognise any equitable interest in the shares. It followed, so the argument goes, that section 59 determined all Mr Ng's rights and interests in the shares, whether he held them beneficially or on trust for someone else. He was no longer entitled to vote, receive dividends or petition in his capacity as a contributory or member and it did not matter that he was claiming to do so on behalf of Mr Choy. 17. Mr Poon's alternative argument was that even if the bankrupt could still exercise rights in his capacity as trustee of the shares for Mr Choy, there was a distinction between rights attaching to the shares and the statutory rights conferred upon a member of the Company such as the rights to petition for winding up. Membership of the Company is a wider concept than shareholding; one can be a member of a company which has no share capital, e.g. a company limited by guarantee. Mr Poon argued that a trustee of the shares was not trustee of his rights as a member, such as the right to petition for a winding up. It followed that after the disclaimer, such rights as a member were not exercisable at all. The appellant's arguments considered 18. Section 59 is based upon section 54 of the English Bankruptcy Act 1914. Section 59(2) specifically provides that the disclaimer does not affect the rights or liabilities of any other person except so far as is necessary to release the bankrupt and his property and the trustee from liability. Mr Poon's first argument does not give effect to Mr Choy's rights as beneficial owner as protected by this provision. Company law may not recognise equitable interests but bankruptcy law does. It cannot be said that the right to petition or exercise any other shareholder rights on behalf of Mr Choy needed to be determined in order "to release the bankrupt and his property and the trustee from liability", if only for the reason that the shares are fully paid and no liability can arise. 19. So, in Wise v Lansdell [1921] 1 Ch 420 (which unfortunately was not cited in the courts below), a trustee in bankruptcy disclaimed his interest in shares registered in the name of the bankrupt who had mortgaged them by handing over the certificates and a blank transfer. The question was whether the disclaimer put an end to the bankrupt's right to vote. Astbury J held that it did not and that the bankrupt, so long as his name remained on the register, was entitled to vote, though as between himself and the mortgagees, he could only vote as they dictated. He said that the case turns very largely upon the meaning of section 54(2) of the Bankruptcy Act 1914 which is similar to section 59(2):
20. This decision was referred to without adverse comment by Danckwerts J in Morgan v Gray [1953] Ch 83 and does not appear ever to have been questioned. 21. Therefore, the disclaimer could not affect Mr Choy's rights as beneficial owner. It could only affect Mr Ng's beneficial interest (if any) in the shares. In Wise v Lansdell, there was at least a notional equity of redemption to be disclaimed. In this case, as the Court of Appeal rightly said, there was nothing. 22. Mr Poon relied on the decision of Field J in Re Maughan (1885) 14 QBD 956. A debtor held his business premises for a term of years under an agreement for a lease. He had entered into a binding contract for the sale and assignment of his business to a purchaser. As a result, the beneficial interest passed to the purchaser pending completion. The debtor then became bankrupt. It was held that on the proper construction of the Bankruptcy Act, 1883, the right of disclaimer was not limited to property of the bankrupt divisible amongst his creditors but extends to any property from which no benefit can accrue to the bankrupt's estate. The latter included the debtor's interest in the agreement for a lease under which he had liabilities and this was in the nature of land burdened with onerous covenants. His trustee in bankruptcy could in the circumstances disclaim such interest. 23. Mr Poon relied on Re Maughan to show that a trustee in bankruptcy could disclaim the debtor's interest in the agreement for a lease notwithstanding that the beneficial interest therein had passed to the purchaser. 24. But the question in that case was whether the trustee could by disclaimer put an end to the bankrupt's liabilities under the agreement for a lease in which he no longer had any beneficial interest. The lessor, opposing a disclaimer, contended that the power to disclaim under the Act extended only to property to which the bankrupt was beneficially entitled and which therefore vested in his trustee in bankruptcy and would be divisible amongst his creditors. The court held construing the statute that the power was not so limited and extended to contracts or property which imposed personal liability on the bankrupt even if he had no beneficial interest. The question of the effect of the disclaimer upon the purchaser's beneficial interest did not arise and was not dealt with because the purchaser was willing to give up possession and did not oppose a disclaimer. In my view, the decision is of no assistance. 25. Perhaps appreciating the difficulties in the way of his first argument, Mr Poon advanced his second as an attempt to distinguish Wise v Lansdell on the basis that it was concerned with the right to vote and not the right to petition. 26. But the distinction he advances between rights attaching to the shares (such as the right to vote) and the statutory rights conferred upon a member of the company (such as the right to petition for winding up) is quite artificial. Mr Ng's rights as a member (including the right to petition) are for the protection of the shares (which are beneficially owned by Mr Choy) and are therefore held in trust for Mr Choy and exercisable at his direction in the same way as any other rights attached to the shares (such as the right to vote). 27. For these reasons, the appeal must be dismissed. Further observations 28. I should however mention two points which do not strictly arise but they were discussed in the judgment of the Court of Appeal. 29. The first was whether Mr Choy could be said to have acquired "legal title" to the shares. The Court of Appeal referring to the fact that Choy was unsuccessful in having his name put on the register said: "... but registration on the register of members is no more than evidence of ownership. It does not confer legal ownership". This comment did not affect the Court of Appeal's judgment and was unnecessary for its decision. 30. Although a registered holder of shares is commonly said to have legal as opposed to equitable title, I do not think that the expression is particularly helpful. A shareholder must be registered in order to be a member or contributory and to exercise the rights attached to that status under the articles and the Companies Ordinance. It adds little to say that by registration he has acquired legal title to the shares. The Court of Appeal appears to have been influenced by a passage in Ex parte Harrison (1885) 28 Ch.D. 363, 368 in which Lord Selborne L.C. drew an analogy between a shareholder who had delivered the certificates and transfers to a mortgagee and the owner of a legal estate who had done all in his power to convey the property to another. The analogy may have been relevant to the question which arose in that case but does not assist in this one. 31. Secondly, the Court of Appeal said that under section 179 of the Companies Ordinance, a trustee in bankruptcy could petition only if he had been registered as a shareholder. I do not think this is correct. Section 179 contains an express reference to a trustee in bankruptcy as one of the persons entitled to present a petition. It appears to me that under the section, a trustee in bankruptcy can do so, even where he has not been registered. In this connection, the proviso in paragraph (a) of section 179(1) would not be applicable since that only applies to a petition by a contributory. That proviso requires a contributory (other than an original subscriber) to have been on the register for a least 6 months during the 18 months before the commencement of the winding up. If the Court of Appeal's view were correct, the reference to the trustee in bankruptcy would be surplusage since upon registration the trustee would be a contributory. 32. In this respect, our Ordinance is different from section 124 of the Insolvency Act 1986 in the United Kingdom and previously section 224 of the Companies Act 1948 which contain no such reference. In England, it was held in Re H.L. Bolton Engineering Co Ltd [1956] Ch 577 that a trustee in bankruptcy has no such right and that he could petition only when, by registration, he had acquired the status of a contributory. But in Scotland, it has been held that even in the absence of such reference in section 124, section 31 of the Bankruptcy (Scotland) Act 1985 enables the trustee in bankruptcy to petition without being registered. See Cumming's Trustee v Glenrinnes Farms Ltd [1993] BCC 829. The provisions in the Bankruptcy Act analogous to what are now found in section 31 of the Bankruptcy (Scotland) Act 1985 do not appear to have been considered in Re H.L. Bolton Engineering Co Ltd. 33. Under the Hong Kong Ordinance, the trustee in bankruptcy appears to be in the favourable position of not only having a separate right to petition but also not being subject to the requirement in the proviso in paragraph (a) of section 179(1). Order 34. Accordingly, I would dismiss the appeal by the Company and China Resources. 35. We have been addressed on costs. Costs should follow the event and I would order costs of the appeal against them in favour of Mr Ng. Mr Justice Bokhary, PJ : 36. For the reasons given by the Chief Justice, I agree with him that this appeal should be dismissed with an order for costs against the Company and China Resources in favour of Mr Ng. I also agree with what the Chief Justice says in his judgment under the heading of "Further observations". Mr Justice Nazareth NPJ : 37. For the reasons given by my Lord the Chief Justice, I agree that the appeal should be dismissed. I agree also with the further observations made by the Chief Justice and the costs order proposed. Mr Justice Mortimer NPJ : 38. I have had the advantage of reading the judgment of the Chief Justice in draft. For the reasons he gives, I agree that this appeal must be dismissed with the order for costs he proposes. I would add that I also agree with his observations upon the title of a registered holder of shares and the right of a trustee in bankruptcy to petition under section 179 of the Companies Ordinance without being registered. Lord Hoffmann NPJ : 39. I agree with the judgment of the Chief Justice. For the reasons he gives, I too would dismiss the appeal with costs. I also agree with the further observations made by him. Chief Justice Li : 40. The Court being unanimous, this appeal is dismissed with costs of the appeal against the Company and China Resources in favour of Mr Ng. Representation: Mr Winston Poon SC, leading Mr A T Reyes (instructed by M/s Kao, Lee & Yip) for 1st and 2nd appellants/1st and 2nd respondents Respondent/1st petitioner, Mr NG Yat Chi, in person Mr Geoffrey T L Ma SC, leading Miss Yvonne Cheng (instructed by Official Receiver's Office) appearing as Receiver in CWU 321/96 only |