So Kwan Nane and Others v. Kowloon Stock Exchange Ltd and Others
Read the full judgment text of HCA 1018/1975 on BabelCite. This High Court CFI judgment.
1. The plaintiffs in these proceedings are members of the Kowloon Stock Exchange, an incorporated Company Limited by guarantee, and the 1st defendant is that Company (to which I shall hereafter refer as the Exchange) and the 2nd defendants are the Directors of the Company who manage and control its affairs.
|
HCA001018/1975 IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION ACTION NO. 1018 OF 1975 -----------------
----------------- Coram: Trainor, J. (in Chambers) Date of Judgment: 11th November, 1975. ----------------- JUDGMENT ----------------- 1. The plaintiffs in these proceedings are members of the Kowloon Stock Exchange, an incorporated Company Limited by guarantee, and the 1st defendant is that Company (to which I shall hereafter refer as the Exchange) and the 2nd defendants are the Directors of the Company who manage and control its affairs. 2. The plaintiffs allege that the Exchange and or the 2nd defendants lent a sum of $250,000 to one of its members, Lo Yu San, which loan was ultra vires the powers of the Exchange. They further allege that the 2nd defendants purchased certain shares in the Cheong Sun Development Company Ltd., using Exchange funds, on behalf of a person or persons unknown to the plaintiffs, and on being left with those shares treated the shares as an investment of the Exchange thus absorbing the liability of the unknown person or persons. They maintain that it was ultra vires the Exchange to purchase the shares in the first place and further, to absorb the liability and treat the shares as an investment. The plaintiffs allege that they and the Exchange suffered damages to the extent of $1,455,200.00, being the difference between what was paid for the shares and their value at the date of issue of the writ. 3. The plaintiffs sought: a declaration that it was beyond the powers of the Exchange to make the loan of $250,000, and that in making it the 2nd defendants acted ultra vires the memorandum of association of the Exchange and in breach of trust:
4. By their Defence the several defendants admitted that a loan had been made to a member by the Exchange but denied the loan was ultra vires its powers. As to the purchase of the shares they also denied that this was ultra vires as the Exchange is authorised in its memorandum of association to invest in shares, and that was what was done. 5. The defendants, by a summons, issued on the part of the 3rd named 2nd defendant and another on behalf of the remaining defendants, now apply for an order striking out the Statement of Claim on the grounds: that it discloses no cause of action in the plaintiffs as the right of action, if any, lies in the first defendant; further or alternatively on the ground that it is frivolous, vexatious and an abuse of the proceeds of the court as the proper forum for the determination of the plaintiffs' claim is the Exchange in general meeting; the "investment" in Choong Sun Development Co. Ltd., had been ratified in general meeting; with respect to the loan to the member Lo Yu Sang it was open to the plaintiffs to requisition a general meeting but they failed to do so. 6. The first ground of the defendants' application is based on the decision Foss v. Harbottle (1843) 2 Hare 461. The decision in that case is summarised in Palmers Company Law, 23rd edition, 502:
7. Palmers Company Law at 503 quotes Jenkins L.J. in Edwards v. Hallwell (1950) 2 A.E.R. 1064, 1066:
8. Jenkins, L.J. at 1067 enumerated what Palmer calls: "Exceptions to the rule in Foss v. Harbottle." They are those matters which the majority of members of a company cannot confirm. They are summarised at page 503 as follows:
9. Mr. Swaine who appeared for the applicants maintained that the loan made to Lo Yu Sang was intra vires the powers of the Exchange and relied strongly on objects 3(c) and (e) of the objects clause in the memorandum of association. So far as investing the funds of the stock exchange are concerned he relied on the express power to invest conferred in 3(h) of the objects clause. 10. There is no express power to lend in 3(c) and (e) but it was argued that the implication is clearly there. 11. The objects clause so far as it is relevant reads:
12. Mr. Swaine conceded that there is no express power to lend money to a member but, in certain circumstances, the power is implicit. He said it is an object of the stock exchange to protect the interest of its members; and if a member is unable to meet his commitments the interest of all members is injured by the public reaction. He maintained that loss of confidence in the Exchange would be an inevitable consequence of such a default. Therefore, he concluded, a loan to a member who is faced with a position where he must default is within the powers of the Exchange under 3(c) as it is ultimately in the interest of all the members. He argued further that it is an object of the stock exchange to provide safeguards for investors who entrust their savings to stock and share markets, and by making a loan to a member who is in a precarious position to enable him fulfil his obligations to investors is within that object. 13. The reasons for the loan to Mr. Lo were only very scantly outlined to me. There was a report produced by the plaintiffs which was compiled a considerable time after the loan was made. It indicated that although the firm of Mr. Lo was viable, and had a number of offices at the time the loan was made (from which I was asked to conclude that he had many small investors) yet it was heavily in debt as a result of the speculation of its manager, Mr. Lo's son. The report suggested that any money given to the firm would be used by the son in his speculation. The defendants contended that the report indicated that a member was in trouble and small investors would suffer if a loan were not made to enable him re-imburse those small investors. 14. Among the many documents referred to me was a circular from the Chairman of the directors written after the loan was queried pointing out that the loan was unanimously authorised by the Committee of the Exchange on the recommendation of the Finance Committee to help a member evercome his difficulties, and to save the face of the Exchange. 15. It strikes me that the first issue to be resolved in this case is: was it within the powers of the Exchange to lend money to a member in difficulties. It can be argued that 3(c) of the objects clause does authorise such a loan, but there are other possible interpretations. 3(e) might be argued similarly by the defendants, but it might equally be argued to the contrary; particularly in the light of Article 44(g) of the articles of association which provides for the establishment of a fund to compensate investors who have suffered from the default of a member. I understand such a fund has been established but a ceiling of $100,000 has been fixed for such compensation. 16. If it were within the powers of the Exchange to make the loan but it was made irregularly then the irregularity could be remedied by the members; but if it were not within its powers then it could not be ratified by them. To decide whether or not the loan was intra vires I would have to consider all the evidence available on the affirmations and exhibits, and consider the memorandum and articles of association. This is the primary issue between the parties; surely it is the function of a trial judge to decide it. 17. So far as the purchase of the shares in Cheong Sun is concerned it is alleged by the defendants that this was an investment within 3(h) of the objects clause of the memorandum of association and moreover, it was an investment approved of in general meeting. 18. The allegation in the statement of claim is that the shares were not an investment by the stock exchange but were purchased for unknown persons. Here we have one party alleging one thing and another something which is diametrically opposed. It would appear to be clear from 3(h) of the objects clause that the stock exchange may invest its funds; it is far from clear that it may use its funds to buy shares for others, even its members (for whom I understand they were bought). What is the true position is, again, surely, an issue to be tried. It has been alleged by the defendants that the "investment" in the shares was approved in general meeting, but on the documents produced it is not conclusively established that the position was placed unequivocably before the meeting. Even if it were, but the purchase was ultra vires the Exchange then such ratification could not affect that which had been done ultra vires, whatever might be the position of deciding to hold the shares as an investment. But can I decide the reason of the purchase; whether or not it was intra vires; or whether or not the purchase of the shares was an investment? Once again, is not that a matter that should be decided on trial. 19. Mr. Lee for the plaintiffs referred me to the 1973 English Supreme Court Practice - the White Book p.302 (18/19/5) where, after referring to certain authorities it reads:
20. In my opinion the Statement of Claim does disclose a cause of action, and on the general application to strike out I would, subject to what I say in conclusion refuse the application. Mr. Swaine has suggested that even if I were to decide that there are triable issues disclosed, I should strike out certain parts of the Statement of Claim. He contends that paragraph 5 is irrelevant. That paragraph appears after a paragraph which refers to the memorandum and articles of association and alleges that the Exchange has no power to make loans. The paragraph which he finds offensive quotes clause 14 of the articles of association which prohibits a member, other than the right of disposal on resignation, from assigning any rights, benefits or privileges of membership or creating any pledge, hypothecation or lien therein or thereon; and goes on to say that no notice of any assignment pledge hypothecation or lien shall be effective as regards the Exchange nor shall any such interest be recognised as to it. Mr. Swaine says that clause is merely a restriction on a member and, therefore, has no bearing on the rights of the Exchange to make a loan and that paragraph 5 should be struck out. 21. At first sight I considered that paragraph should be struck out but it has since occurred to me that that clause in the article might have a bearing on the circumstances in which the loan was negotiated and be relevant to whether the loan was or was not ultra vires. Were I to strike out the paragraph now evidence that would otherwise be admissible might become inadmissible. In the circumstances I shall not order it to be struck out. Should it transpire at the trial that the paragraph is of no relevance I have no doubt counsel for the defendants will draw the attention of the learned trial judge to it that he may deal with it by way of costs or otherwise as he thinks fit. 22. The other particular paragraph in the Statement of Claim to which Mr. Swaine took exception was paragraph 15. He did so in two contexts. The first was that the paragraph pleaded that the second defendants wrongfully and in breach of duty treated the purchase of the shares as an investment thus absorbing the liability of the persons from whom they were bought. Mr. Swaine contends that if such were the case then the proper plaintiff should be the Exchange unless the plaintiffs pleaded the Exchange was prevented from taking action by the second defendants which they had not done. He cited Birch v. Sullivein (1958) 1 A.E.R.56. 23. If the position rested as put by Mr. Swaine he might well be right, but the paragraph proceeds to allege that what resulted from these actions was ultra vires. It was Mr. Swaine's contention that the plaintiffs' main point in paragraph 15 was that the 2nd defendants had acted wrongfully and in breach of duty as trustees, and that the plea that the defendants acted ultra vires was merely a device to camouflage the main point. All of this I feel, is a matter for the trial judge, and should he decide in favour of Mr. Swaine's contention no doubt the defendants will seek such relief as they feel they are entitled to. 24. I also dismiss the application with regard to those particular elements. 25. I qualify what I have just said by directing certain parts of the prayer to the Statement of Claim to be struck out. From paragraph 1 thereof the words "and in breach of trust" in the last line; 26. From paragraph 2 "or breach of trust" in the last line; 27. From paragraph 3 the semi colon after the word "defendant" in the 2nd last line and substitute a full stop, and strike out all the words thereafter. 28. All of paragraph 4. 29. My reasons for this are that these are claims properly within the competence of the Exchange and there has been no plea that it has been prevented by the 2nd defendants from pursuing them. 30. Accordingly I dismiss the application save as to those parts of the prayer to which I have just referred and order that the defendants pay to the plaintiffs 80% of their costs in opposing their respective summons.
Representation: Mr. Martin Lee (Bernard Wong & Co.) for Plaintiff. Mr. John Swaine (Yu, Tsang & Loong) for 1st & 2nd Defendant excepted the 3rd named 2nd Defendant. Mr. John Swaine (Peter Mo & Co.) for the 3rd named 2nd Defendant. |