Lee Wai Tong and Others v. Paui Wong Shek Wah and Others

HCA000274/1970

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO.274 OF 1970

-----------------

Coram: Briggs, J. in Court.

Date of Judgment: 17th July, 1970.

-----------------

JUDGMENT

-----------------

1. The third defendant is the Tsung Tsin or Hakka Association and the seven plaintiffs are members of that Association. At the material time the first, third and seventh plaintiffs were members of the executive committee of that Association and the second plaintiff one of the vice-chairmen of that committee and also a vice-chairman of the Association. The first defendant is likewise a member of the Association and at the material time was the chairman both of its Executive Committee and of the Association itself. He is also a partner in Wah Yan Enterprises, the second defendant.

2. A statement of claim was filed on 24th February, 1970 and the first and second defendants have each filed a defence. No defence has been filed by the third defendant, the Tsung Tsin Association.

3. By a notice of motion dated 6th June, 1970 the third defendant asked the court to strike out the statement of claim on the ground that it discloses no cause of action against the third defendant or any of the defendants and further on the ground that it is vexatious, frivolous and an abuse of the process of the court. This motion was brought under the provisions of Order 18 rule 19 and also under the court's inherent jurisdiction.

4. Though the notice of motion was brought by the third defendant, counsel for the first defendant at the hearing said that he associated himself with the third defendant and asked for a like order. The second defendant was not represented before me and did not file an affidavit although he was served with the notice of motion.

5. In my view the correct method of application in a case of this nature is by summons. With the consent of the parties the hearing was heard in chambers as if the application had been made by summons. However, as I was told that this is a matter of considerable public importance especially to the Hakka people I adjourned the delivery of judgment into open court.

6. In law the Tsung Tsin Association is a company limited by guarantee. Its objects are to promote and to protect "the industrial, commercial and other lawful interests of the Hakka Community" wherever resident.

7. In its articles of Association it is stated that all Hakka people are eligible to become members but for the purposes of registration, the number of members is not to exceed ten thousand.

8. The Tsung Tsin Association is managed by various Committees: namely,

9. It is possible for a member to be an individual person, a firm or a corporation. Reserve members are provided to fill casual vacancies The term of office of members of the executive and supervisory committees is two years but members are eligible for re-appointment.

10. The executive committee controls the business of the Association and is responsible for its general policy. The committee has one chairman and three vice-chairmen, who are ex officio chairman and vice-chairmen of the Executive Standing Committee, the body charged with carrying out the policy decisions of the executive committee. The articles also provide that they are also to be deemed to be the chairman and vice-chairmen of the Association itself. At the material time, as I have said, the first defendant was the chairman.

11. In support of the summons as I shall now call it one Lee Lap Kee, one of the vice-chairmen of the executive committee of the Association made an affirmation with the authority of the executive committee setting out certain facts.

12. In answer to this, the third plaintiff filed an affirmation on behalf of himself only which denies a certain allegation contained in Mr. Lee's affirmation, which denial Mr. Lee contradicts in a second affirmation. No affirmation was filed by any of the other six plaintiffs.

13. Apart from the one allegation referred to above the facts are not in dispute. It is necessary however, to set them out in some detail.

14. The Association owns certain lands at Morrison Hill Road. In 1963 they agreed to demolish the existing buildings on the site and to erect a building thereon of some eighteen storeys. The building, which may be described as a prestige building, was to be known as the Tsung Tsin Building. Construction started, but before even half the building was completed the building contractor ceased work. I was not told when this occurred but the Association could not find the finance to complete the building so it remained half finished and of course it was a deteriorating asset of the Association

15. The first defendant became chairman of the executive committee and hence the Association in 1968 and at the first meeting over which he presided he made suggestions for the completion of the building. The committee passed a resolution that the building should be completed and a building committee for the completion of the Tsung Tsin building was formed of which the first defendant was elected chairman. It so happens that the third plaintiff was a member.

16. This committee agreed that the building should be finished by a firm called Wah Yan Enterprises Company, Hong Kong, which is the second defendant. The first defendant is a partner in this firm and the committee were well aware of this. A subcommittee drafted an agreement between the Association and the second defendant to effect what had been resolved. Mr. Lee stated in his affirmation that the first defendant reported the whole matter to the executive committee on 26th November, 1968. And that he circularized the members with an estimate of what profits his firm expected to make out of the enterprise. In addition the proposed draft contract was discussed at the meeting, its terms were amended and the meeting resolved that it should be referred to a joint meeting of the executive and supervisory committees for approval. The resolution of the building committee was approved and the joint committees agreed that the Association should write to the second defendant to ask if the draft proposals for the contract were agreeable.

17. The third plaintiff in his affirmation denies that the estimate of the first defendant was circulated at this meeting. However, he does not deny that the draft contract was discussed and approved after being amended at the meeting.

18. On 16th January, 1969 in pursuance of the above resolution the matter was put before a general meeting of the two committees. According to Mr. Lee it was made known at this meeting that the Association would grant a twenty years lease of the new building at a rent of $1,000 per month to anyone who would complete the building at his own cost. One Ng Muk Sin, one of the members present, indicated that he was interested. He said he would give the Association $10,000 in addition. The first defendant countered with a like offer. The matter was then put to the vote and the meeting was in favour of awarding the contract to the second defendant by an overwhelming majority.

19. The contract between the Association and the second defendant was signed on 10th March, 1969. The second defendant agreed to complete a building of twelve storeys at their own cost within a specified time. This includes cost of the materials, and the architect's fees etc. The Association agreed that they would lease the whole building with the exception of the third floor to the second defendant at a rent of $1,000 per month for a period of twenty years. It was also a term of the contract that the rent shall not be varied during the period of the lease.

20. I understand that the second defendant has proceeded with the construction of the building in accordance with the contract.

21. Mr. Lee also said that the first defendant had submitted a work report to the Standing Executive Committee on 17th February 1969, i.e. before the contract was signed: that this was approved and that copies were made and circulated to the members of the Association. A copy of this was exhibited and has been translated. It is a long document setting out the whole matter from the point of view of the first and second defendants.

22. There were certain members of the Association, indeed there still are, who were opposed to the award of the contract to the second defendant. In April 1969 fifty four members of the Association requested the chairman to call an extraordinary general meeting to discuss the whole issue. Such a meeting was held on 18th April at which the first defendant did not appear. One hundred and fifty three members attended the meeting which I was told was a very good attendance. The whole matter was put to the meeting and they approved what had previously been resolved by the executive committee and also approved of the work report of the first defendant. The minutes of that meeting have been exhibited and it is quite clear that the whole matter was most fully dealt with. There were only 5 dissentients (presumably this includes some at least of the plaintiffs).

23. In May 1970 the new 1970 executive committee of the Association met for the first time. They passed a resolution approving of the conduct of their predecessors in awarding the contract to the second defendant.

24. The statement of claim prays for various declarations against all the defendants and as against the first defendant only for an account of all the profits that the first defendant has made in or derived from the building contract. I do not think that the building is yet complete so it may well be that what is being sought is an estimate of the profits that the first defendant thinks or hopes he will make. I will say at once that I know of no precedent for such an order. However, this may only be a matter of semantics.

25. The statement of claim does not allege fraud on the part of the first defendant - nor on the facts was that possible - nor does it allege that the first defendant acted ultra vires, the basis of the claim is that at the time when the second defendant entered into the contract with the Association the first defendant did not fully disclose to the third defendant, that is, the Association, nor to the seven plaintiffs, his interest in the second defendant firm. He failed to disclose the extent of his partnership in the second defendant firm and in addition did not disclose the amount of the profits that he hoped or that that firm hoped to make from the contract. The first defendant as the chairman of the executive committee and consequently of the Association itself is in a fiduciary relationship with the Association and this rendered any contract entered into by him voidable. The prayer of the statement of claim asks for declaration that the votes cast by the first defendant in the various meetings in connexion with the building contract are void: that the resolutions so passed by the various meetings in respect of such resolutions are void and of no legal effect: that the first defendant was in breach of his fiduciary duty as chairman in his dealings with the Association and its committees through his being a partner in the second defendant firm. The plaintiffs also ask for an order to set aside the building contract made between the Association and the second defendant.

26. The first point made by counsel for the third defendant is that even if the court were to grant all that is asked for there is nothing to prevent the Association from re-granting a contract to the second defendant in exactly the same terms as they have already done. The second point he made was that the plaintiffs are the wrong persons to complain. If complaint is to be made it is the Association which should be the plaintiff. Thirdly, he says that this matter is one of internal management for the Association. Fourthly that even if the first defendant was in a fiduciary relationship with the third defendant he has made a full and final disclosure of his interests. Finally, that if the court strikes out the statement of claim so far as the third defendant is concerned it would be both competent and just for the court to strike out the claim against the first defendant which cannot stand on its own.

27. The plaintiffs' claim alleges that an actionable wrong has been done to the Association. Generally speaking the only acceptable plaintiff in such a case would be the Association and not a minority of its members. This is known as the rule in Foss v. Harbottle⁽¹⁾.

28. Mellish L.J. said in that case:-

"In my opinion, 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 a majority of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes."

As Lord Davey in giving the Board's judgment in Burland v. Earle⁽²⁾ said:-

"It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal management of companies acting within their powers and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself."

29. In the present case the third defendant is not a joint stock company; it is a company limited by guarantee, but the principle is the same.

30. There are certain exceptions to this rule. I will mention two; if the act complained of constitutes a fraud against the minority and the wrongdoers are themselves in control of the company or as here, of the Association that majority cannot validly confirm such an act because a fraudulent act cannot be validated. This exception need not concern us because there is in this case no allegation of fraud. However, there is a second exception. The majority members of an association cannot validly confirm an act which is ultra vires the association or illegal. Again this is not suggested in the statement of claim. In order to take advantage of this exception to the rule in Foss v. Harbottle⁽¹⁾ the complaining minority must not only prove the essential matters on which they rely at the trial but must also allege them in the pleadings. See Birch v. Sullivan⁽³⁾.

31. Mr. Liu seeks to get round this by alleging two matters (1) he says that the first defendant was in a fiduciary position as chairman of the Association and could not validly make a contract with the Association and (2) that even if he could so contract the contract in question is void because he failed to make a full disclosure of his interest in the second defendant firm when the contract was entered into.

32. This was the argument as addressed to me but the Statement of Claim only alleges that the contract is voidable: not void.

33. It is true that the articles of Association do not contain a proviso allowing the members of the executive committee to make a contract with the Association. Mr. Liu said that the position of the members of the executive committee was equivalent to that of the directors of a joint stock company. There are 85 such members and I do not think it was intended to make such an unwieldy body the equivalent of a board of directors. But even if the position of the chairman of the Association is equated with the position of a director of a joint stock company that does not mean that the contract in this case is void. It may be that it is voidable but it is not void. To this extent I agree with paragraph 11 of the statement of claim. The contract was most positively ratified by the Association in its extraordinary general meeting of 18th April, 1969. If the Association had wanted to take the benefit of the contract being voidable they and not the plaintiffs are the correct party to do so. They did not do so. It is not for the Court to substitute itself for the majority of the members of the Association and to act contrary to the majority's wishes.

34. I do not think that there is any merit in the second point, that the first defendant did not disclose his interest in the second defendant firm. I am satisfied that the Committee and the Association were perfectly aware that the first defendant was a partner in the second defendant firm. This is made plain in the affidavit of Mr. Lee and this satisfies Section 162 of the Companies Ordinance. For the sake of this judgment only I will presume that the estimate of the profit to the second defendant firm was not circulated to the executive committee. However, the actual terms of the contract to be entered into were. They were discussed and according to the uncontradicted affirmation of Mr. Lee were amended and finally agreed to. The committee must have had a clear appreciation of the position of the Association vis a vis the second defendant, and the relative benefits of each of the parties under the contract. A contract cannot be 'discussed' without such matters being considered. I do not think it was incumbent upon the first defendant to give the Association an estimate of what his firm hoped to make: it would at best have been a guess, as we now know, though this is with hindsight. The property market in Hong Kong cannot exactly be described as being stable over any considerable number of years. The first defendant made an offer openly and bona fide. It was discussed publicly and accepted. Mr. Liu said that the rule was that disclosure of interest means the disclosure of the quantum of profit which was expected from the transaction and in support of the proposition he quoted two cases. The first was Briess v. Roshier⁽⁴⁾ which is not relevant as it is a case of a person concealing a fraud. The second case is Dunne v. English⁽⁵⁾. All that case decided is that where an agent contracts in his private capacity with his principal the burden of proving that a full disclosure has been made rests on the agent. In this case this means the first defendant and I think that this has been amply done.

35. Counsel for the plaintiffs also suggested that the extraordinary general meeting of 18th April 1969 was not properly convened, that is not convened in accordance with the articles of Association.

36. The articles provide for the holding of a general meeting of the Association at least once in each year. In addition the executive committee may convene an Extraordinary General Meeting whenever they think fit to do so. Finally such a meeting shall be convened by the chairman on the requisition in writing of ten members of the executive committee or fifty members of the Association.

37. Notice of the holding of any general meeting "specifying the place, the day and the hour of meeting and, in case of special business, the general nature of that business shall be given in like manner hereinafter provided or in such other manner, if any, as may be prescribed by the Association in general meeting". The words in italics are taken from article 16 of the Articles of Association of the Association. 'Special business' is defined so as to include all business transacted at an extraordinary general meeting. "The manner hereinafter provided" refers to chapter XI of the articles which deals among other matters with the way in which notices may be served on members. There was no suggestion at the hearing that a general meeting had laid down anything as to the contents of any notice convening general or extraordinary general meetings. Any resolution put to the vote at a general meeting is decided on a show of hands.

38. On 3rd April fifty three members of the Association requested that an extraordinary general meeting of the Association should be convened to examine the whole matter. And a meeting was held on 18th April. A copy of the requisition and of the notice convening the meeting were exhibited to the affirmation of Mr. Lee. I can find nothing wrong with them. In particular the terms of the notice of the meeting in my view amply satisfy the words of article 16. It refers to the progress made in the completion of the building and to the signing of the contract. This obviously raises the whole issue, including both the propriety of and the terms of the contract itself.

39. Since I take the view that this is a matter of the internal management of the Association and that full disclosure of his interest was made by the first defendant and since I can find nothing wrong with the calling of the extraordinary general meeting, I do not think that it would be right to allow this action to continue. Furthermore, I agree with counsel for the third defendants that even if the plaintiffs were to be completely successful there is nothing to prevent the Association from regranting a contract to the second defendant in exactly similar terms. It would be particularly pointless to invite the Association to hold another extraordinary general meeting for it was admitted in argument that the plaintiffs cannot secure the requisite number of members to secure the convention of such a meeting: and were one to be held the plaintiffs would almost certainly be out voted.

40. Counsel for the plaintiffs asked for an amendment to be made to the statement of claim which would have had the effect of alleging that the contract was ultra vires. I myself have seriously considered whether it would be possible to formulate any amendment so as to save the action. I can think of none. There is no allegation or evidence either of fraud or of a power exercised by the Association or a committee of the Association ultra vires.

41. The court will in certain cases allow a minority of shareholders in a company to bring an action where the majority against whom the relief is claimed are in control of the company and will not allow an action to be brought in the name of the company.

42. Referring to such a case Lord Davey in Burland v. Earle⁽²⁾ says this (at p.93):-

"This, however, is a mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff, and cannot complain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of being confirmed by the majority".

43. There is no evidence of course that the Association was ever asked to lend its name to this action as plaintiff even by the plaintiffs themselves. If this action were to be brought by the Association as plaintiff I do not see how they could succeed. The contract has been made and confirmed by the Association. The present plaintiffs cannot have rights greater than the Association.

44. In view of the above I am confined in my view that the third defendant must succeed in the summons. As to the declaration that the first defendant should account to the plaintiffs, even if it were possible to make such a declaration, this cannot stand on its own. It is dependent upon that part of the statement of claim which alleges that the first defendant was in breach of his fiduciary relationship. The statement of claim must be struck out under Order 18 rule 19 and under the inherent jurisdiction of the Court in that it discloses no reasonable cause of action and is an abuse of the process of the Court.

45. It would have been better if the first defendant had joined with the third defendant in the summons. In view of the request of counsel for the first defendant for an order in similar terms to that asked for by the third defendant and in order to save costs I think the correct direction to make is as follows.

46. I direct that the statement of claim against the first and third defendant be struck out and the action so far as they are concerned be struck out with costs.

47. Certificate for two counsel.

Representation:

B. Liu (Hastings & Co.) for the Plaintiffs

P. Yu (J.S.M.) for the 1st Defendant

B. Bernacchi Q. C. & J. Swaine (Rowdget W. Young & Co.) for the 3rd Defendant

Judgment read in Court.

(1) (1843) 2 Hare 461.

(2) (1902) A.C. 83.

(3) (1958) 1 A.E.R. 56.

(4) (1953) 2 Q.B. 218.

(5) 18 Eq. 524.