Alexander Chi Shi Shang and Another v. The Hong Kong & Shanghai Bank, Hong Kong (Trustee) Ltd and Another

HCMP000085/1974

IN THE SUPREME COURT OF HONG KONG

(ORIGINAL JURISDICTION)

MISCELLANEOUS PROCEEDINGS NO. 85 OF 1974

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Coram: Leonard J.

Date of Judgment: 26 March 1974

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JUDGMENT

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1. This was an application to strike out the originating summons herein under the Rules of the Supreme Court Order 18 rule 19 and under the inherent jurisdiction of the court on the ground that it is an abuse of the process of the court and discloses no reasonable cause of action and is unreasonable and frivolous and vexatious and that the declarations sought in the summons ought not to be determined on originating summons. I ordered that the originating summons be struck out without prejudice to the initiation by the appellant of proceedings by way of action, if so advised, and that the costs of all proceedings in the matter of the originating summons be taxed and paid by Alexander Chi-shi SHANG (hereinafter called "Alexander") personally to the first defendant the applicants on this summons in chambers and undertook to give my reasons later.

2. The application to strike out was supported by the affidavit of the manager of the first defendant ("the trustee") who was since 1963 the registered holder of 20,534 shares in the second defendant ("the Hongkong Company") under the will of CHOW Chung-liang (deceased) who died on 22nd May 1967. The proceedings sought to be struck out were by way of originating summons for declarations that the purported allotment by the Hongkong Company of 85,525 shares to China Can Company Ltd. ("the China Company") was null and void and a consequential order for rectification of the Hongkong Company's register; further and/or alternatively that each and every allotment of shares made pursuant to the agreements dated 3rd June 1952 and the 23rd July 1952 purportedly made between the Hongkong Company and the China Company was null and void and further and/or alternatively a declaration that the trustee had no valid title to the 20,534 shares purportedly registered in its name and a consequential order for rectification of the Hongkong Company's share register. The originating summons was supported by the affidavit of Alexander dated the 27th February 1974 which did no more than refer to the affidavit of Alexander dated 13th December 1973 in Companies (Winding-Up) No. 24 of 1973 and repeat its contents and pray for the relief claimed in the originating summons by virtue of the matters stated in paragraphs three to eleven inclusive of that earlier affidavit. In Winding-Up No. 24 of 1973 the petitioner sought the winding-up of the Hongkong Company depending for its locus standi on the holding of 20,534 shares. The petition was opposed, inter alios, by Alexander Shang as the holder of 2,000 shares in the Hongkong Company.

3. Paragraphs three to eleven inclusive of Alexander's affidavit read as follows:

The affidavit filed on behalf of the trustee in support of the application to strike out, having referred to the fact that the petition for winding-up came on for hearing on the 21st September 1973 and had been adjourned to enable the parties to seek a solution involving, inter alia, the sale of the trustees' shares which efforts had failed went on to indicate that, as had been the case at the date of presentation of the petition, the Hongkong Company still had no Board of Directors, Alexander continued to conduct its business without authority, without accounting to shareholders and without regard to the requirements of the Companies Ordinance. This affidavit further referred to the dispute between two factions of the family of K.Y. Shang deceased as to the control of Skylly (dealt with by me in my judgment in the winding-up proceedings) the holdings in the Hongkong Company (also so dealt) and the consequent difficulty in holding a general meeting. It stated the grounds for winding-up the Hongkong Company and alleged:

There was a further application before me to add one LIANG Han-yuen (@ LIANG Tse-yuen) the holder of 100 "unimpeachable" shares in the Hongkong Company (and a signatory of the agreements in question) as a plaintiff. This was supported by a further affidavit by Alexander dated 20th March 1974 who stated that the said 100 shares had been allotted to Mr. Liang for cash and that Mr. Liang had granted him a power of attorney (unexhibited) dated 27th February 1974. There was further filed an affidavit sworn on the 20th March 1974 by W.K. Shang co-executer with Alexander of the disputed will of their father K.Y. Shang deceased, who pointed out that the position regarding representation of his father's estate had not been resolved and was the subject matter of P.J.A. 1 of 1969 and produced the pleadings in that action. He went on to point out that the overwhelming majority of shares in Skylly Inc. N.V. formed part of the estate of K.Y. Shang deceased; that Skylly owned 75,804 shares in the Hongkong Company which had been allotted pursuant to the agreements Alexander sought to question and that the proceedings could not therefore be for the benefit of K.Y. Shang's estate; that Alexander's own holding of 2,000 shares (in reliance on which he opposed the winding-up petition) had also been so allotted and pointed out that of the 200,000 shares allotted by the Hongkong Company 500 only had been allotted for cash and the balance (199,500) were issued pursuant to the two agreements.

4. These, then, were the documents before me on the application to strike out. It is clear from them that the status of the petitioner and indeed of all parties (including Alexander) supporting or opposing the winding-up was challenged by O.S. 85/74. That petition had been fixed peremptorily and five days set aside for the hearing of it.

5. Mr. Balcombe advanced four principal arguments to support his contention that the originating summons should be struck out.

6. Firstly that it was an abuse of the process of the court in that it was improperly constituted. It was improperly constituted because:

7. Secondly the point raised depended wholly on Chinese law and no evidence of that law was before the court.

8. Thirdly Alexander was estopped from taking the point by his behaviour in O.J. 188/67 in which action he had obtained a default judgment.

9. Fourthly delay and acquiescence.

10. As to the absence of necessary parties - the China Company was clearly a necessary party for the 1952 agreements could be invalid only if they were ultra vires that company. [They were not ultra vires the Hongkong Company which was enabled by its Memorandum to enter into them (vide Memorandum paragraphs 25 and 29)]. If the agreements were void as ultra vires the China Company that company would be entitled, prima facie, to a return of the assets transferred to the Hongkong Company which might however be able to claim a possessory title. To determine such questions the China Company was a necessary party. Because of its Memorandum of Association the two agreements in question were not ultra vires the Hongkong Company so that if they were held to be void and the China Company got its property back (which might not happen because of the lapse of time) then and the then only could it be said that all the allotments were void as having been made for a consideration which had wholly failed. Therefore all holders deriving their shares through the allotments made in consequence of the two agreements were necessary parties. Because of Section 100 of the Companies Ordinance (which gives power to rectify the register) Alexander's status depended on his being a member. Again Alexander was seeking to maintain the proceedings as one of the executors of an unproved will - he could not maintain the action before probate and the co-executor would even then be a necessary party. In any event the action must if successful invalidate the holding of Skylly Inc. N.V. (not a party) and was therefore not in the interests of the estate.

11. On this ground of absence of necessary parties Mr. Bernacchi contended that the realities were that the China Company could not possibly have been served, that the other executor knew of the proceeding and had been invited to join in them and that the other "small" shareholders could not be damaged (why he made this last suggestion was never clear to me). He sought comfort in Robinson v. Geisel⁽¹⁾ a case in which one of three joint contractors had not been served and a stay was refused when sought on that ground. This case could afford little comfort to him. It lays down no more than that, if, in any case, the court finds that in any cause or matter an order to join other parties will prevent the court dealing with the rights interests of the parties actually before it, it would be in direct contravention of the rule which provides that no cause or matter should be defeated by reason of the misjoinder or non-joinder of parties to make an order to join them. It does not excuse the plaintiff from doing "all he can to bring in all the persons who ought to be joined" (See judgment of Kay L.J. at page 688). Equally little comfort could be gain from New York Life Insurance Co. v. Public Trustee⁽²⁾ on which he also relied for there Warrington L.R. said at page 118:

"The creditors ... are not parties and it seems at first sight wrong to make a declaration affecting their rights in their absence. Of course in ordinary cases it is exceedingly unusual to make any such declaration but one must bear in mind in these cases under the Treaty (of Peace Order of 1919) that they are not ordinary cases of determining rights inter partes"

and Atkin L.J. expressly said that the case ought not to be made a precedent so far as the question of parties was concerned (page 122). While undoubtedly the court has a wide discretion where declarations are sought (Hanson v. Radcliffe Urban Council [1922] 2 Ch. 490 at page 507 and Qureshi v. Qureshi [1971] 1 All E.R. 325) and requires a clear case to be made out before it will strike out an application for discretionary relief and while Order 15 rule 6 prevents the defeat of a cause by reason of the misjoinder or non-joinder of parties no application was made before me to joinder any parties no application was made before me to join any party other than Mr. Liang. I held that Order 15 rule 6 cannot be used to enable a plaintiff to proceed, joining whom he likes, without regard to the question whether the correct parties are before the court. I decided that as far as the question of parties was concerned the proceedings were clearly defective because:

Mr. Bernacchi if I understood him aright did not contend seriously that Alexander could maintain an action on behalf of the estate of K.Y. Shang deceased for he conceded that if an executor was required to prove his title he could not continue unless he produced his Probate. He argued rather that the action was good as it stood in Alexander's own name and that of Mr. Liang, if he was added as a party.

12. As to the appropriateness of proceeding by way of summons rather than, by way of action, Mr. Bernacchi suggested that no question of disputed fact arose for, if Chinese law was not clear the court should seek assistance from English law and what the China Company had done here was clearly to effect a reduction of its capital. This however was to ignore the fact that we did not have before us any accounts from the China Company and if we were to determine whether a reduction of capital had taken place it would be necessary to examine them. The accounts of the China Company might have shown otherwise and the articles of that company might well have permitted distribution in specie. There was not as Mr. Balcombe pointed out any sufficient evidence to show that what was done was ultra vires the power of the China Company in 1952. I had no doubt that if all the necessary parties were before the court complicated questions of Chinese law would arise - these questions being of foreign law would be questions of fact as were questions relating to the constitution of the Chinese company. I consider that procedure by way of summons was inappropriate and never intended for such cases as this.When the application was for declarations and consequent rectifications of the register. the remedy by summons is "a convenient remedy but one on which no order would be made if it appeared that there was some question in dispute to call for investigation" (Mr. Minns' affidavit was in my view sufficient to indicate that there was) "where it is clear that there was something to be answered and something to be investigated the ordinary course ... had been for the judge to dismiss the summons or motion but to leave it open to the party to bring his action" (per Swift J. in Re Greater Britain Products Development Corporation Ltd. 40 T.L.R. at page 489).

13. Although Mr. Bernacchi suggested that in the absence of proof of Chinese law the court should look to the local law, he told me that he relied primarily on the position under Chinese law. Mr. Balcombe argued that there was no evidence of the constitution of the China Company before the court and no evidence of Chinese law. All that was before it was the repetition of Alexander's affidavit relying on the opinions of counsel to say that the agreements in question were invalid. There was no affidavit by a person expressed to be an expert. All the court had was an opinion based on oral instructions of which there was no record and indeed the only exhibit relating to Chinese law was an unsigned typescript. These submissions appear to me to carry great weight. They cannot be dismissed as Mr. Bernacchi sought to dismiss them as "mere techicalities", and as not sufficient to strike out the summons. That papers could be presented to this court in the manner in which these papers were presented indicates great haste. For I regard it as clearly and obviously wrong to seek to prove foreign law by means of an unsworn (indeed, unsigned) opinion given on unknown instructions by a person not proved to be an expert. I mean no disrespect to Mr. Dicks', feeling, as I do, that he would not suggest for a moment that Chinese law could possibly be proved in the manner in which an attempt was to be made to prove it here. The only possible excuse is haste and the only explanation of haste is anxiety to delay or embarrass the trial of the winding-up proceedings which had been fixed peremptorily for further hearing on the very day chosen by the plaintiff as the return date of the summons. Mr. Bernacchi's suggestion that if Chinese law was not proved I could look to English law I regard as beside the point for even under English law I should need to know very much more about the constitution of the Chinese company and the state of its finances before I could hold the agreements invalid.

14. Mr. Balcombe was too temperate an advocate to suggest that the manner in which the papers were presented here would, of itself be suffieient to oblige me to strike out the summons as an affront to the dignity of the court. He contented himself with suggesting that the case was "so obviously bad that one can only infer a delaying tactic". With that I must agree.

15. Mr. Balcombe's third point arose from the default judgment obtained by Alexander in O.J. Action No. 188 of 1967. I have dealt in detail with this in my judgment in the winding-up. Suffice it to say here that the action was between Alexander and the Hongkong Company for declarations as to the invalidity of a general meeting and that in it Alexander obtained a default judgment against the Hongkong Company declaring the meeting invalid on the basis of absence of a quorum. In his statement of claim he stated that "the issued capital of the defendant company was at all material times $2,000,000 divided into 200,000 shares of $10 each", that "at all material times the China Company was the registered holder of 53,200 shares and Skylly Inc. N.V. was the registered holder of 75,804 shares", that the representation of the China Company was void for a number of reasons. He also claimed that Skylly was irregularly represented. By reason of these matters he contended that no quorum was present since the China Company and Skylly between them had more than 50% of the shares. Skylly and the China Company had derived their shares from the allotments he now sought to attack. In other words he could not have succeeded in O.J. 188 unless he satisfied the court in that case that the issued capital was $2,000,000 i.e. that the allotments he now attached were valid. Their validity was a necessary issue of which he had had to satisfy the court before he could get judgment.

16. I should be loathe to hold on this ground alone that these proceedings should be struck out. The somewhat drastic remedy of striking out proceedings is, it has frequently been said, one which is only to be resorted to in plain and obvious cases. I am not prepared on Mr. Balcombe's application (which is made on behalf of the trustee and not on behalf of the Hongkong Company, which ...(illegible), not having a board, has not instructed solicitors) to hold that the Alexander is estopped. It is true that the Hongkong Company is a party to M.P. 85/74 but it is not a party to the application to strike out. As I see it I cannot hold that an estoppel arises between the trustee and Alexander for they have not previously been parties to litigation. I therefore do not decide this application on the ground of estoppel. The previous proceedings do no more than shed light on Alexander's bona fields. Again I should not have acted in limine on the basis of delay and acquiescence alone although the parallels with Ho Tung v. Man On Insurance Co. ⁽³⁾ are temptingly close. It is true that in the present case the members of the Hongkong Company, and Alexander most of all, have put forward the shareholding of the Hongkong Company as valid although derived from the two agreements he now seeks to question and that he owed his status in O.J. 188/66 and in the winding-up No. 24/73 to that very shareholding. In the Ho Tung case⁽³⁾ it was the Company's Articles of Association that were in question. The Company's business had been conducted under them for 19 years and the inference drawn was that all the shareholders had accepted and adopted the Articles as the valid and operative Articles of the company. It was, however, there pointed out that the Articles were in a special position as they were in the power of the shareholders themselves. These two agreements were not "in the power" of Alexander or Mr. Liang who had signed them or the other shareholders to the same extent. Alexander certainly appears to have approbated them and now seeks to reprobate them but I should not have regarded that alone as entitling me to strike out. I therefore do not consider that these two possible defences, estoppel and delay and acquiescence have been so certainly made out as to be "plain and obvious" and I could not have decided to strike out because of them. Accordingly I made my order "without prejudice to the initiation of proceedings by way of action" for all the matters raised by Mr. Balcombe including estoppel and delay and acquiescence are "questions in dispute that call for investigation" in the words of Swift J. They render the procedure by way of summons inappropriate.

17. To sum up, the matters that were so "plain and obvious" as to oblige me to strike out the summons are firstly that the proceedings are improperly constituted because of the absence of necessary parties, because of Alexander's lack of title to sustain them and because of the issues raised by Mr. Minns' affidavit and Alexander's affidavit in the winding-up proceedings but also because of the questions as to estoppel and delay and acquiescence; secondly because the point raised depended on Chinese law and no proper attempt was made to prove that Chinese law. Because of these considerations I could not regard the proceedings as other than an abuse of the process of the court and an attempt to delay and embarrass the hearing of the petition. I did not however wish to prevent the substantial question raised - that is - the validity of the 1952 agreements and the possible consequence (for it is not a certain one) that the allotments made were invalid - from being litigated in the future - hence my order.

Representation:

Bernacchi, Q.C. & Goodbody (T.S. Tong & Co.) for Plaintiff.

Balcombe, Q.C. & Wright (Philip Remedios & Co.) for 1st Defendant.

2nd Defendant unrepresented.

(1) (1894) 2 Q.B. 685.

(2) (1924) 2 Ch. 101.

(3) (1902) A.C. 232.