Re Commonwealth Printing Press Ltd

Case No.HCCW 15/1974

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCCW000015/1974

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING UP

ACTION NO. 15 OF 1974

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	IN THE MATTER of THE COMPANIES ORDINANCE CHAPTER 32
	and
	IN THE MATTER of COMMONWEALTH PRINTING PRESS LIMITED

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Coram: Li, J.

Date of Judgment: 31st May 1974

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JUDGMENT

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1. This is a petition for the winding up of the Commonwealth Printing Press Limited. It is the result of a power struggle and I shall not bother to ask whether it is, in fact, a cultural revolution or a revolution within a cultural concern. Sufficient it is to say that there are two factions within the company of which five are the opposing members (referred to as "Party A") of this petition and twenty-four (referred to as "Party B") are sympathetic, if they are not the petitioner, to this course. There are only three petitioners in this petition. Of the five opposing members three are qualified to be directors and of the twenty-four, eight are similarly qualified. The qualification, under the Articles of Association, is that a director should hold at least thirty shares of the company's shareholding issued to date. A brief summary of the events may help to understand the situation.

2. As a result of the difference in opinion in the Annual General Meeting which was eventually held on the 12th March of this year, the party, Party A proposed and elected six directors, three qualified party members from Party A and three qualified members from Party B, to take office as from the 1st April 1974. Another situation was that in the shareholding as it stood on the 12th March this year, Party A held the majority of shareholdings by twenty shares. That was why Party A had their way in having no more than six directors elected. Needless to say that Party A did not want the Board of Directors to be swelled with the majority of members belonging to Party B. After that Annual General Meeting no less than two purported directors' meetings were convened without any success because the three other directors belonging to Party B refused to act with Party A. Then, on the 27th April this year, certain members of Party A in their capacity as shareholders gave notice to the directors to convene an Extraordinary General Meeting. On the 31st March, the current eleven directors, consisting of three members in Party A and eight members in Party B held a Directors' Board Meeting in which one person of Party B was elected Managing Director. Pausing at this stage I observe that according to the Articles of Association, the Board of Directors have the right to elect amongst themselves a Managing Director. Further, in that Board Meeting, an additional forty shares were allotted to the Modern Educational Research Society Limited, thereby giving members of Party B a total of 380 shares, in other words, reverting the position of majority in shareholdings to twenty in favour of Party B. Then at the instance of the members of Party A an Extraordinary General Meeting was called and held on the 3rd May this year, in which a member of Party A was elected and appointed Managing Director. The question that is now raised is this, that there is a complete deadlock between the two factions on the following grounds. One is that, according to the Articles of Association, it requires at least two persons of three, to sign cheques for and on behalf of the company, namely, the Managing Director, a director nominated by the Board of Directors and the General Manager. There is no dispute as to the appointment of the General Manager but there is a dispute as to the appointment of the Managing Director. There is also the difficulty of nominating any particular director to sign cheques as a result of the refusal of the six directors to co-operate.

3. Pausing again, at this stage, I have to observe that purported appointment of a Managing Director for the succeeding two years as from the 1st April 1974 in the Board meeting on the 31st March 1974 is not a valid appointment. I say this without prejudice as I understand that this is the subject matter of another O.J. Action pending. I say this only because a Board of Directors has no power to bind its successor in future. Even if they purport to appoint a Managing Director on the 31st March, all the directors have to retire after that day in accordance with the Articles of Association. Therefore the Managing Director's term will lapse by the end of the 31st March. As from the 1st April there was no Managing Director until (if the contention of learned counsel for Party A is right) the 3rd May, when a new Managing Director was appointed at the Extraordinary General Meeting.

4. I shall not make any comment as to the validity of the allotment of the forty shares because it does not affect the issue in this case. Nor should I make any comment, unless it is absolutely necessary, on a subject matter which is the issue of the aforesaid pending action. Sufficient it is to say that, this is a limited company, governed by its Articles of Association. The powers and duties of directors and shareholders are to be considered within the four corners of the Articles of Association and the Companies Ordinance. Mr. Lee, learned counsel for the petitioners very skilfully contends that, inasmuch as there can never be a sufficient quorum of directors to act for the company, the company now faces a deadlock. The company cannot act because there are two factions of directors of three on each side refusing to see one another eye to eye and refused to act for the company.

5. Mr. Gittins, learned counsel for the opposing team of shareholders, argues that there is a residual power on the part of the company in the event that the directors failing or are unwilling to act, hence the Extraordinary General Meeting on the 3rd May and that such action can be resorted to from time to time until the directors see reason again and join forces together. In fact, there is no deadlock and the company can be carried on. I may observe that looking at the balance sheet the company is a profit making concern and will continue to make a good profit. It is also a fact that, in the event of a winding up, it will be to the detriment of all concerned. It will be a very drastic action. A winding up of a company, be it private or public, is a cumbersome, time consuming and money wasting affair. Mr. Harmon on behalf of the Official Receiver, put it very succinctly in a way that if there is any alternative to this deadlock, such alternative should be resorted to even though in the case of a genunine deadlock the court has power to grant a petition to wind up the company.

6. Mr. Gittins cites the authority of a text book written by Professor Gower, as he then was (I believe he is Lord Gower now) containing a rather wide and sweeping statement at p.136 as follows:

"It seems that if for some reason the board cannot or will not exercise the powers vested in them, the general meeting may do so. On this ground, action by the general meeting has been held effective where there was a deadlock on the board, where an effective quorum could not be obtained, where the directors are disqualified from voting, or, more obviously, where the directors have purported to borrow in excess of the amount authorised by the articles."

This is strengthened by another passage in Halsbury's Laws in Volume 7, 4th Edition, paragraph 499:

"Where powers are delegated by the company to the directors, and the directors owing to dissensions and quarrels between them are unwilling or unable to act, the powers may be exercised by the company in general meeting. If, owing to disputes amongst the directors, they are unable to act and the affairs of the company cannot be carried on, the court will interfere by injunction and by the appointment of a receiver and manager of the undertaking and assets of the company until the management of the company is restored to a proper footing."

I have not been asked by either party to take this course except, of course, that Party B petition in a more drastic way that the company be completely wound up.

7. In both of these academic authorities the same cases are cited. One is in the case of Barron v. Potter⁽¹⁾, another is in the case of Foster v. Fostor⁽²⁾. Mr. Lee, for the petitioner, skilfully argues that the general meeting of the company may act only when the directors fail to do what the directors must have power to do and a quorum to do it. He distinguishes the present case in that in this particular instance there is not even a sufficient quorum under the Articles of Association for the company to act and, as such, it is not for the shareholders in a general meeting to assume such power which is non-existent because, in both Barron's case and Foster's case, there had been a sufficient quorum of directors and the directors simply quarrelled amongst themselves and were unwilling or unable to act. It was only in such instances that the Court decided that the shareholders in a general meeting had the right to assume the power that was invested in the directors to act in such matters. In the present case there are only three directors of one part or another who are willing to act. In any event, there will not be a quorum for the directors to act. As such there is no power for the directors to act and therefore the shareholders can not wield such power which is not vested in three directors which do not form the quorum, that is, if I understand him correctly, Mr. Lee's contention.

8. However, in Barren's case the proposition was given by Warrington, J. citing the passages of two judgments, one from Cotton, L.J. and one from Fry, L.J.:

Cotton L.J. says (25 Ch. D. 332): 'Then it is said that there is no power in the meeting of shareholders to elect new directors, for that under the 89th section the power would be in the remaining directors. The remaining directors would no doubt have that power if there was a quorum left. But suppose the meeting were to remove so many directors that a quorum was not left, what then follows? It has been argued that in that case, there being no board which could act, there would be no power of filling up the board so as to enable it to work. In my opinion that is utterly wrong. A power is given by the 89th section to the remaining directors 'if they think proper so to do' to elect persons to fill up the vacancies. I do not see how it is possible for a non-existent body to think proper to fill up vacancies. In such a case a general meeting duly summoned for the purpose must have power to elect a new board so as not to let the business of the company be at a deadlock.' Fry L.J. says this (25 Ch. D. 335): 'Then with regard to the objection that a general meeting cannot elect directors to fill up vacancies, it appears to me that a general meeting would at any rate have that power in the event of all the directors being removed. In my judgment it is quite impossible to read the 89th section as the only section relating to the filling up of vacancies in the office of directors. That applies only where there are remaining directors, and those remaining directors think proper to exercise their power. That does not, in my judgment, deprive the general meeting of the power to elect directors, where there are no directors, or where the directors do not think fit to exercise their powers.' Those observations express a principle which seems to me to be as applicable to the case of a limited company incorporated under the Companies (Consolidation) Act, 1908, as to a case falling under the Companies Clauses Consolidation Act, 1845, and moreover to be a principle founded on plain common sense. If directors having certain powers are unable or unwilling to exercise them - are in fact a non-existent body for the purpose - there must be some power in the company to do itself that which under other circumstances would be otherwise done."

In the case of Foster v. Foster at p.551 it was said that:

"From a business point of view it seems to me that there are only two persons who are possible managing directors, and the board has been reduced to the position that it is unable, owing to internal friction and faction, to appoint anybody as a managing director. In those circumstances I should apply the decision of Warrington, J. in Barron v. Potter [1914] 1 Ch. 895, 903. The learned judge says: 'If directors having certain powers are unwilling or unable to exercise them - are in fact a non-existent body for the purpose - there must be some power in the company to do itself that which under other circumstances would be otherwise done. The directors in the present case being unwilling' - in this case unable - 'to appoint additional directors under the power conferred on them by the articles, in my opinion, the company in general meeting has power to make the appointment'."

9. Reading the facts of these two cases it gives the impression that the proposition that the shareholders' general meeting doing the act the directors are empowered to do would require that the power to be vested in the directors where there is a quorum. However, reading the judgment of Foster's case, the question of directors' quorum is immaterial. Having regard to the facts of this case, the Articles of the Association in the Commonwealth Printing Press Ltd., there is such power on the directors to appoint a managing director to sign cheques, to keep accounts etc. and to manage the company's day-to-day affairs. But the lack of quorum, the lack of power to act is entirely due to friction and faction so that it is not a matter of the directors having no power. The appointment of a managing director is provided in Article 73:

"The Company shall have a Managing Director who shall be elected by the Directors from amongst themselves for a term of two years. The Managing Director shall preside at all meeting of the Company and shall have a second or casting vote thereat."

10. It is quite apparent and quite clear that according to the articles the directors are vested with such a power but they are unable or unwilling to do so simply because two factions of directors fail to see eye to eye and fail to exercise their power. In these circumstances, in my opinion, the passage contained in Lord Gower's book is a statement which is not too wide and is well defined and supported by the various passages cited in the two cases. As I said, I will refrain from deciding on the validity of the issued shares. Having found in law that the company may act and the directors fail to act or refuse to act or refuse to form a quorum to act, the question whether the issue of the forty shares is valid is irrelevant for the purpose of this petition. If the forty shares allotment is invalid then Party A would have a majority holding of twenty shares and they can, in the general meeting, carry forward whatever resolution that the directors are empowered to do and fail to do. If the forty shares were validly allotted then Party B can, in future, do exactly the same thing as Party A purported to do on the 3rd of May. In short, I find that the deadlock, the apparent deadlock is not, in fact, a deadlock. There is an alternative to winding up the company. In fact, it is my earnest hope that seeing that is the position the parties would come to certain arrangements for the profit and the benefit of the company as a going concern rather than throwing away a going concern and a profit making proposition company.

11. In view of the circumstances I find that I am not satisfied that there is such a deadlock and it will not be just to have the company wound up. The petition is dismissed with costs.

Representation:

Mr. M. Lee (Fairbairn & Kwok) for petitioners

Mr. S.V. Gittins, Q.C., and Mr. A. Li for opposing shareholders.

(1) 1914 1 Ch. 895

(2) 1916 1 Ch. 532.