Lui Yam Shuen and Others v. The Chinese Chamber of Commerce

HCA000129/1948

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO.129 of 1948

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

Coram: Mr. Justice T.J. Gould.

Date of Judgment: 17 June 1948.

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

JUDGMENT

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

1. The writ in this action which was brought by seven members of the Chinese Chamber of Commerce (hereinafter called "The Chamber") seeks a declaration that the Chamber is not entitled to proceed to the election of the Committee and Supervising Committee during the year 1948, and an injunction to restrain the Chamber from proceeding with such elections. The proceeding actually before the Court was an inter partes summons, the hearing of which was by consent treated as the trial of the action, asking for an interlocutory injunction :-

2. The Chamber is a company limited by guarantee and by virtue of its objects holding the Governor's licence to dispense with the word "Limited" in its name. From affidavits on the file, it appears that certain changes in the Articles of Association had been mooted prior to the outbreak of the Pacific War and in 1947 what are referred to as "new" Articles were considered by a sub-committee and were approved at a general meeting of members on 8th September, 1947. It was proposed to adopt the new Articles at another general meeting on the 16th October, 1947 but that meeting was adjourned until the 17th October when on legal advice it was decided to convene another Extraordinary General Meeting to consider and pass the Articles which were in the meantime to be further considered. In view of the proposal to adopt the new Articles on the 16th October, it was resolved by the Committee that no new applications for membership received after 5 p.m. on 14th October would be considered. This resolution was rescinded at the meeting of the 17th October and a sub-committee was appointed either then or at some subsequent date to consider new applications. By February, 1948, the sub-committee had considered over 3000 applications and 2977 were approved.

3. It is alleged by the plaintiffs that of these applications, some 1500 were lodged by persons solicited by a member named Ko Cheuk Hung and further that a majority of the Committee members of the Chamber were under his influence and were his instruments in directing the policies of the Chamber. This last allegation is hotly denied in an affirmation signed by all members of the Executive Committee (except two absentees and one member who is one of the plaintiffs) and it is to be noted that no committee election has taken place since the admission of the new members. However, for considerations which will appear later in this judgment, I consider these matters to be relevant only as showing the background of the dispute.

4. The new Articles were finally approved and adopted at an Extraordinary General Meeting held on the 5th March, 1948. During that month, according to the affidavits filed on their behalf, the plaintiffs "introduced a large number of their friends and reputable merchants to apply for membership of the Chamber", with the avowed object of checking the growing power of Ko Cheuk Hung. A meeting of the Executive Committee held on the 19th March, 1948 decided that, in view of the approach of the annual meeting, it was impossible to examine the large number of applications in time and referred the matter to the committee for its decision. The Committee decided on the 25th March that the applications should be referred for consideration to the new committee to be elected before the end of April. The proceedings of the Chamber in that month are important. On the 9th, the Executive Committee decided to convene a General Meeting of members for the election of officers on the 22nd April. This was a mistake as under the new Articles 21 days notice was required in place of the 7 days of the old Articles. On legal advice this meeting was cancelled and fresh notices were sent out for a meeting to be held on the 19th May. This was pursuant to a unanimous decision of the Executive Committee including one of the plaintiffs. Finally on the 29th April, the Executive Committee at the request of some 250 members gave further consideration to the matter of new applications for membership but reaffirmed its previous decision to defer them until after the election. The abovementioned affirmation of some thirteen members of the Executive Committee shows that there were about 3000 new applications to be considered, and expresses their opinion that there was no time properly to scrutinize them without holding up the Annual Meeting and that their hurried passing would be detrimental to the real interests of the Chamber.

5. The first and main argument of the plaintiffs is that any election of Committee members which takes place in the year 1948 later than the month of April is a direct contravention of Article 32 of the Articles of Association and should therefore be restrained. The second ground relied upon, for the purposes of which leave was given to make the necessary amendment to the writ, is that the refusal of the Executive Committee and Committee to consider the new applications until after the general meeting and election contravenes Article 6 of the Articles of Association and that as a result the Chamber should be restrained from holding the meeting or election until the applications have been considered. I will deal with these submissions in order.

6. On the first ground counsel for the plaintiffs relied principally on two cases as being illustrative of a line of cases governed by the same principle. The first was Automatic Self-cleansing Filter Syndicate Co. Ltd. v. Cuninghame 1906 2 Ch. D. 34. The facts there were that a company in general meeting passed a resolution by a simple majority requiring the directors to carry into effect a sale of the company's assets. The directors refused, being of opinion that the sale was not for the benefit of the company. By the Articles, the management of the Company's affairs was vested in the directors "subject to such regulations as may from time to time be made by extraordinary resolution." It was held that, the resolution being one of a simple majority, the directors were not bound to comply with it. Cozens - Hardy L.J. said at p.44 of the report "..... it seems to me that the shareholders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the shareholders in the manner described by other Articles, such directors being liable to be removed only by special resolution. If you once get a stipulation of that kind made between the parties, what right is there to interfere with the contract, apart, of course from any misconduct on the part of the directors." The second case Salmon v. Quin & Axtens Ltd., 1909 1 Ch. 311 is one in which the same principle was adhered to; the management of the company was vested in the directors with the proviso that no resolution of the directors on a certain subject should be valid if either of two managing directors dissented from it. A certain resolution of the directors having been so dissented from the Company passed the same resolution by a simple majority in general meeting. It was held that the company should be restrained from acting upon the resolution which was inconsistent with the Articles. In the present case, the relevant paragraphs of the Article governing elections by members of the Chamber are as follows:-

"32. (a) The election of members of the Committee and the Supervising Committee shall be carried out before the end of April in the year in which their election is to take place.

(b) The mode of election is as follows:-

Twenty members shall be elected at a general meeting to supervise the election. These Supervisors shall carry out all that is necessary in connection therewith and fix a date for the same."

Therefore, it is argued that any election taking place after the month of April is a breach of the Articles and should be restrained. As far as the legal principles involved are concerned, I think that the procedure indicated by Article 32 must be taken to be equivalent to an actual election at the general meeting itself.

7. To this argument counsel for the Chamber replies with the rule in the case of Foss v. Harbottle 2 Ha. 461, which laid down the principle that when the acts complained of by the minority as being improperly done were capable of confirmation by the majority of members, the Court would not interfere; the company itself must be the complaining party, it being a matter for the majority to say whether they wished to complain or not. The rule has for its basis the following proposition which is quoted from Bacon, Abridgment, II 269 in Palmer's Company Law, 16th Edition at p.235:

"Where no special provision is made by the constitution of a corporation, the whole are bound by the acts not only of the major part but of the major part of those who are present at a regular corporate meeting, whether the number present be a majority of the whole or not."

This rule is exemplified also in the cases of Mozley v. Alston 1 Fh. 790 and MacDougall v. Gardiner 1 Ch. D. 13. Some extracts from the judgments of the Lords Justices of Appeal in the last mentioned case are worthy of note. James L.J. at page 23 said:

"I cannot conceive that there is any equity on the part of a shareholder, on behalf of himself and the minority, to say, 'True it is that the majority have a right to determine everything in connection with the management of a company, but then we have a right - and every individual has a right - to have a meeting held in strict form in accordance with the Articles'":

and later at the same page:

"The whole question comes back to a question of internal management; that is to say, whether the meeting ought or ought not to be held in a particular way, whether the directors ought or ought not to have sanctioned certain proceedings which they are about to sanction, whether one director ought or ought not to be removed, and whether another director ought or ought not to have been appointed. If there is some one managing the affairs of the company who ought not to manage them, and if they are being managed in a way in which they ought not to be managed, the company are the proper persons to complain of that."

The last sentence is interesting, as the short question in the present action is whether the Committee which will presumably by now have been appointed by the Chamber will be one validly appointed or not; if not, it would appear to be the view of James L.J. that only the company can complain. That the rule in Foss v. Harbottle has this effect is also the opinion expressed in Palmer's Company Law (16th Edition) at page 179.

"But the company may bring an action to restrain a de facto director from acting as director or representing himself as such. This right, however, is confined to the company; an individual member has no right to bring such an action where a director is disqualified or improperly appointed. For the matter is one for the company to determine, that is, for the majority, and if the majority choose not to interfere, the individual member must conform to the will of the majority. See rule in Foss v. Harbottle p.236."

Nevertheless, there are cases, e.g. forfeitures of shares or calls made by directors improperly appointed, where the appointment can undoubtedly be attacked by an individual.

8. To revert to MacDougall v. Gardiner, Mellish L.J. at p.25 of the report says:

"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 the majority of the company are entitled to do legally, there can be no use in having a 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. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed?"

9. In the present case the irregularity complained of is not that the election was effected by a body incompetent to do so but that it was carried out by that body at the wrong time. This being so, it would appear that the irregularity was trivial and did in fact no damage to the plaintiffs, who would have been in no better a position and could not have challenged the election if it had taken place before the end of April. On the face of it, therefore, the election having been authorised by the requisite majority of the proper body without damage to the plaintiffs, it would seem equitable that the Court should refuse to interfere, but it can hardly be denied that if the failure to hold the election at a certain time is an irregularity, there is no time during the two year period following the meeting in May 1948 when a confirming resolution would be any more effective as far as Article 32 is concerned. Therefore the irregularity, if one exists, cannot be cured by a further general meeting of the Chamber without alteration of the Articles for which a simple majority would not suffice. That fact renders it difficult to distinguish this case from those relied upon by the plaintiffs (such as the Automatic Self-cleansing case) which are admittedly exceptions from the rule in Foss v. Harbottle. Counsel for the Chamber sought to do so on the ground that the last mentioned case and those like it were all cases where the plaintiffs had suffered material and personal damage which was not the present case. While that distinction is a good one as far as the present case goes, it is, I think, only incidental and is not the basis of the distinction between the Foss v. Harbottle line of cases and the Automatic Self-cleansing line, which as I have indicated rests upon the fact that the will of the majority could in the former cases, though irregularly expressed, be confirmed if necessary, and in the latter could not, because it had gone beyond the contractual powers of the majority. In Foss v. Harbottle itself, the damage alleged was material. I think that it might be proper to hold in the present case, by way of limitation to the exception exemplified by the Automatic Self-cleansing case, that as the powers given by the Articles were not in fact exceeded, their exercise at the wrong time was a mere irregularity which, even though it could not be cured, did no damage to any person and that therefore the "majority rule" principle should be applied. I think it better, however, to approach the matter from a different angle though the underlying principle involved is the same.

10. The Chamber had by passing the new Articles in March 1948 placed itself in an anomalous position. By Article 11 the annual general meeting is directed to be held at such time as the Chamber may direct in the preceding general meeting and in default during the month of July. Article 11 also contains the following provision:-

"In any year in which the term of office of the committee shall expire, the election of the committee shall take place at the annual meeting in pursuance of this Article."

By Article 16 that election is deemed part of the ordinary business of the meeting. It is agreed that no date for the 1948 annual general meeting was fixed by the preceding general meeting. Therefore the 1948 general meeting must be held in July (or by the application of certain subsidiary provisions, in August) and at it, the committee elections must take place. But according to Article 32 the election must be held before the end of April. That being in the circumstances contrary to the provisions of Article 11 the result is, if both Articles are to be construed as mandatory, that the Chamber is left without any machinery whereby a committee can be elected during 1948, unless the Articles are again altered. If a committee cannot be elected in 1948, it appears that the Chamber will be left without a committee. The general statement, in V Hailsham para. 513 that the acting directors of a company are in like circumstances usually qualified to act, is qualified by the reference at the end thereof to the true construction of the Articles, and the authority for the general statement must have its base in such provisions as Articles 76 of Table A and 38 of Table C of the Companies Ordinance, 1932. Those Articles are not applicable to the Chamber, the Articles of which provide for a definite two year term of office. In such circumstances, where existing appointments have expired and there has been no fresh appointment, the Courts have not hesitated to declare that no directors existed. Thus in Tyne Mutual Steamship Insurance Association v. Brown 74 L.T.R. (N.S.) 283 where the Articles provided that directors held office for one year, it was held that acts after the expiration of that period were invalid in default of re-election, and were not cured by an Article designed to cure defects in appointment and qualification of directors. A similar decision was delivered by the House of Lords in Morris V. Harsser 1946, 1 A.E.R. 586. In the result, the Chamber will have no committee as from some date this year, and if every Article is to be construed strictly, it will not be able to elect one until the Articles are amended - for Article 11 provides for election only in any year in which the term or office of a committee shall expire. In these circumstances, the Articles having resulted in a constitutional deadlock never contemplated by the framers of the amended Articles, the company is entitled to fall back upon the inherent right to elect a committee (which is in law in no way different from the Board of Directors of a trading company). Worcester Corsetry Ltd. v. Witting 1936 Ch. D. 640. was a case in which the power to fill vacancies in the directorate had been vested by the Articles in the directors and no power was reserved to the company to elect in general meeting. It was held that the power of appointing additional directors had not been delegated to the directors so as to exclude the inherent power of the company in general meeting to appoint directors. At the conclusion of his judgment (at page 654) Slesser L.J. used the following very strong words:-

"For these reasons and also because I do not think that the inherent power of the corporators to direct the control of their own company by nominating the directors is excluded by any contract contained in the Articles of Association - I think this appeal must be allowed."

The type of contract referred to, I imagine, is the ordinary procedural agreement embodied in the Articles comparable to that in the Articles of the Chamber and not a contract with a particular person that he shall act. If these words of Slesser L.J. contain a correct statement of the law, there can be no doubt that the Chamber had power to elect a committee at a general meeting properly called. If they go too far, nevertheless I consider that the Chamber would still have inherent power to elect a committee to solve a deadlock produced by the constitution. Somewhat similar deadlocks were referred to in Isle of Wight Railway Co. v. Tahourdin 25 Ch. D. 320 and in Barron v. Potter 1914 1 Ch. D. 895 in which certain passages from the former case are quoted with approval. At page 902 of the judgment in the latter:-

"For practical purposes there is no board of directors at all. The only directors are two persons, one of whom refuses to act with the other, and the question is, What is to be done under these circumstances? On this point I think that I can usefully refer to the judgment of the Court of Appeal in Isle of Wight Ry. Co. v. Tahourdin, not for the sake of the decision, which depended on the fact that it was a case under the Companies Clauses Consolidation Act, 1845, but for the sake of the observations of Cotton and Fry L.JJ. upon the effect of a deadlock such as arose in the present case. Cotton L.J. says: "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."

I should perhaps add, though the point was not taken, that if the meeting of the Chamber in May were to be challenged as the annual general meeting as being held on the wrong date that is a matter which definitely comes within the scope of the rule in Foss v. Harbottle.

11. A result similar to the view I have expressed would be arrived at by holding the Article 32 was directory only and thereby reconciling it with Article 11. I do not think I need go into this aspect of the matter beyond observing that the argument of counsel for the Chamber appears to have considerable weight in the light of the decision quoted by him - R. v. Norwich Corporation 1 B. & A. 310 and in view of the, at least, partial repugaency which would result from a mandatory construction. Looked at from a contractual point of view, which is of course properly urged by counsel on both sides as the correct one, the position is no better so far as the plaintiffs are concerned. The Articles being binding upon the Chamber as a contract under seal, the Chamber is being sued as a covenanting party. Construed as a whole, the effect of the Articles is that there is a positive covenant to take the necessary steps for election before the end of April - not a negative one to do nothing thereafter. If the Chamber commits a breach of that covenant is it to be debarred from remedying that breach as soon as possible? Would an equitable remedy such as injunction be made available to restrain the covenantor from remedying the breach, which has caused no damage, at the suit of a minority of the covenantees? I think not: it would more readily be granted to enforce the election as in the Norwich Corporation case.

12. It remains to consider the second submission on behalf of the plaintiffs - that the Executive Committee and the Committee were not entitled to defer consideration of the new applications of March, 1948 until after the election. On this submission, the Court having indicated that in view of the meagre material on the point contained in the affidavits, and in the absence of any application for cross-examination of deponents, it was not disposed to consider any argument based on mala fides by the two committees concerned, counsel agreed that his argument would rest on the mere fact of the refusal of those committees to consider the new applications before the general meeting - or at least to consider all those that time allowed. His submission was based on Article 6 which reads as follows:-

"6. Any person, firm, 'hong', association or organisation desiring to become a member of the Chamber shall sign a form of Application for Admission provided by the Chamber and shall be proposed by one member of the Chamber. The Standing Committee shall consider the proposal and application and recommend the applicant to the Committee for election."

The second part of that proposition calls for consideration of the applications by the Standing Committee. Apart from the point that no such body at present exists, the Article is obviously directory and indicates the procedure which it is proper to follow. The absurdity of giving too strict a construction to the words used is quickly seen by reference to the last clause - "The Standing Committee .... shall recommend the applicant to the Committee for election." There must obviously be read into those words some such phrase as "if it shall deem fit" and equally there must be a discretion as to when the applications are to be considered, subject only to the necessity of its exercise bona fide and in the interests of the Chamber to the best of the Committee's ability. If, in fact, there has been delay in the present case, it is easy to suggest perfectly good possible reasons and it has been agreed that the argument does not rest upon any allegation of mala fides. That being so, it must fail as the authority relied upon, Cannon v. Trask 20 Eq. Cases 609 was decided upon this very point. In that case, the directors called a meeting at an unusually early date with the admitted object of defeating lawfully acquired increased voting power of certain shareholders. In the words of the Vice Chancellor "They resorted to a contrivance." No such mala fides is conceded or established in the present case. There are other differences between the two cases which I do not deem it necessary to go into.

13. Further matter of defence based upon estoppel was put forward by counsel but as I hold the views indicated above, it is not necessary for me to express any opinion upon it.

14. For the foregoing reasons, I hold that no case has been made out sufficient to constrain or entitle the Court to interfere in the affairs of the Chamber, that the plaintiffs are not entitled to the declaration or injunction asked for and accordingly the action is dismissed with costs to defendant.

Representation: