Paul Murray-jones v. Guardforce Ltd and Others

HCMP001090/1981

M.P. 1090 No. 1981

Company law - minority shareholder's petition under section 168A - application to strike out six out of seven respondents - a bank and its wholly owned subsidiary (which respectively owned and held 51% of the shareholding) were properly joined - four directors who were not shareholders were improperly joined since the reliefs sought could be obtained against the other respondents without the need to make orders against them personally.

M.P. 1981 No. 1090

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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Coram: Fuad, J.

Date: 15 Febraury 1982

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ORDER

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1. This application arises out of a petition under section 168A of the Companies Ordinance (Cap. 32) and prays in aid the inherent jurisdiction of the Court to strike out the 2nd to 7th respondents on the ground that they were improperly joined in the proceedings.

2. For the matter to be understood it is necessary for me to review, as briefly as may be, the contents of the petition and the relief it seeks. The petition states that the 1st respondent, Guardforce Ltd. ("the Company") was incorporated in Hong Kong as a company limited by shares on the 8th March 1977; with a nominal capital of $1m. The nominal capital was increased in November 1977 and August 1979 and now stands at $3,020,000 divided into 302,000 shares of $10 each, of which 291,200 have been issued as fully paid up, and 10,800 as partly paid. The petitioner founded the Company and at the date of incorporation owned 75% of its issued share capital. Between June 1977 and October 1979 ("the initial period") the petitioner exercised the day to day control of the Company's business which was to provide the full range of security services (including the installation and maintenance of alarm systems, the provision of security guards, security advice and consultancy services). During the initial period low profit margins were adopted and no dividends were declared.

3. The petition continues that the Hong Kong and Shanghai Banking Corporation, named as the 2nd respondent ("the Bank"), became a customer of the Company from the earliest days and was, and continues to be, its largest customer; at the same time, the Bank was always the Company's principal bankers. In the Spring of 1979 the Bank approached the petitioner with a view to acquiring an interest in the Company, a suggestion which the petitioner received favourably. As a result of the Bank's approach the Company's nominal and issued capital was increased to its present level; the Company's articles were amended, inter alia, to limit the number of directors to eight; and the Bank acquired 51% of the shareholding in the Company in pursuance of a shareholders' agreement to which the petitioner, the Company and the Bank were three of the parties. Under the agreement the Bank acquired and still holds or controls 153,000 shares registered in the name of Oroton Investments Ltd. (named as the 3rd respondent) constituting 51% of the issued capital. The petitioner was left with and still holds 112,760 shares representing 37% of the issued capital. The remaining shares (12%) were and are held by three named individuals who are not parties to the petition.

4. The petition goes on to say that on the 1st September 1979 the petitioner entered into a service agreement with the Company whereby he was appointed managing director for a fixed term of five years - the appointment would continue thereafter and be terminable on three months' notice.

5. On the 5th October 1979, the petition states, the Bank caused four of its nominees to be appointed directors of the Company's Board, one of whom was the chairman of the Board. Two of these directors are still on the Board but there were changes during 1980 and two new directors were appointed. The four directors presently on the Board on the Bank's nomination all hold senior positions in the Bank, and they are named as the 4th, 5th, 6th and 7th respondents. At all material times the petitioner was the managing director, and the remaining directors were shareholders who hold 12% of the issued share capital. The petition calls them "the executive directors".

6. The petition goes on to say that the Company prospered under the petitioner's lead. The petition then enumerates a number of complaints against the directors who were also employees of the Bank which resulted in personal animosity arising between the chairman of the Board and the petitioner. In March 1981 the chairman of the Bank asked whether the petitioner was willing to sell out to the Bank, an enquiry which was repeated about one month later by another employee of the Bank. Another complaint is that at a Board meeting held in between the dates of the two enquiries the chairman and his three director colleagues pressed the Board to enlarge the Company's overdraft facilities with the Bank from $3.5m. to $5m., although this would be both unnecessary and against the Company's interest for reasons set out.

7. According to the petition, at that Board meeting the same four directors pressed the three executive directors to submit letters of resignation to the Bank which would be effective at the end of the then current financial year if the Company failed to make the profit forecast - this was extraordinary and unjustified. The request for the letters of resignation was repeated at two subsequent Board meetings. Since the executive directors held their shares under the shareholders' agreement the effect of their resignation would be to enable the Bank to acquire their shareholdings and this was behind the demands, and not the reasons advanced by the chairman - to the effect that the Bank needed an assurance in connection with the proposed increased overdraft facility or that the Bank would wish to be free to sell its shareholding if the Company did not achieve the forecast profits, without the encumbrance of service agreements. All this was wrongful and/or fraudulent and done to advance the interests of the Bank at the expense of those of the Company. The petition also asks the Court to infer that these wrongful acts were carried out at the express or implied direction of the Bank.

8. The petition then goes into great detail concerning events which took place between late February 1981 and late May 1981 which led to the "purported dismissal" of the petitioner as a director of the Company. This section starts with an account of an approach made to the petitioner in his capacity as managing director of the Company by a representative of a consortium of "high international repute" as to the possibilities of joint participation, and explains exactly what the petitioner did to follow up the approach, precisely what information he gave to various directors and the Board about developments as they ensued, and the part they played in those developments and the necessary consultative process. The petition then speaks of the draft minutes of a Board meeting of the 2nd May 1981 which were incorrect, in that they wrongly recorded that he was asked to provide the Bank, as majority shareholder, with full details of the approach of the consortium and that "In the meantime no information should be released to the party concerned", and what took place at the Board meeting of the 23rd May where the minutes were up for approval and the petitioner was accused of acting in defiance of a direction of the Board (which he hotly denied). The meeting ended with the petitioner's summary dismissal despite his protests, and this was followed up by a letter dated the 23rd May 1981 from the Company confirming the Board's action is dismissing the petitioner from his position as managing director, under the service agreement. The petition continues by explaining why it is said that the purported dismissal was in breach of the agreement and relies on these matters in support of the allegation that the purported dismissal was improperly motivated on the part of the Bank and/or the four respondent directors and invalid as being in pursuance of a fraudulent scheme to enable the Bank to acquire the petitioner's shares and/or to remove him as managing director, director and shareholder. It is also said that all this points to an unlawful conspiracy between all or some of the respondents numbered 2 to 7, to achieve those results.

9. The prayers for relief are in the following terms -

"AND YOUR PETITIONER prays for the following relief under section 168A of the Companies Ordinance -

10. It will have been seen therefore that -

11. Before I go on to attempt to deal with the merits of the application I should, perhaps, say something about the history of the petition. The petition was filed, with all the present parties named in the title, on the 17th August 1981 and was originally fixed for hearing on the 23rd September. On the 27th August the parties appeared before Mr. Commissioner Barnes (as he then was) and an application for an injunction was disposed of. All the respondents were represented by the same firm of solicitors and were given leave to file affidavits in reply. All the parties were again represented at the hearing of an application, inter alia, for extension of time to file their affidavits before Liu J. on the 23rd September 1981. The parties then appeared before me on the 4th November 1981 when I gave certain directions by consent, mainly regarding discovery. I granted an extension relating to discovery on the 22nd December 1981, and on the 10th February 1982 I was due to hear a summons taken out by the petitioner for a further and better list of documents and for various other orders. On the previous day the respondents took out the summons which I now have to decide, also to be heard on the 10th February. The petition which is expected to take five weeks to hear, is now due to be heard from the 22nd March.

12. I have said all this to indicate that the application for striking out most of the respondents has come rather late in the day. However, applying general principles, I have no doubt that I have jurisdiction (inherent or otherwise) to accede to the application, in the exercise of my discretion, if I am satisfied that any of the respondents were improperly joined despite the delay; an appropriate order for costs could be made.

13. Mr. Charles Ching, for the respondents, founds his application on the contention that a petition under section 168A of the Ordinance is not a lis between parties. A petition is not a pleading within the Rules of the Supreme Court as evidenced by the adaptation of the Companies (Winding-Up) Rules to embrace petitions under section 168A effected by L.N. 178/78. He drew my attention to rules 1, 2, 8, 22 (with Form 3), 35, 173 and Form 4A, as adapted by that Legal Notice. He submitted that the procedure set out in the Rules did not envisage respondents. A petition has to be advertised (rule 24) and served on the company (rule 25). Anyone intending to appear at the hearing has to give notice of his intention (rule 30). Lists of such persons have to be prepared (rule 31). And affidavits in opposition and reply can be filed (rule 32).

14. Mr. Ching, in support of his basic contention, relied on an Australian case, Caratti Holding Co. Pty. Ltd. and Sergio Caratti v. Bernard Zampatti,⁽¹⁾ a decision of the Supreme Court of Western Australia. That was a petition presented by a contributory for the winding up of the company or alternatively for an order under a provision similar, though not identical, to our section 168A. The petitioner held a number of shares which Caratti, the founder of the company was entitled compulsorily to acquire under the articles upon notice and on tendering an amount calculated in accordance with the articles. The petition, inter alia, alleged that Caratti had conducted the affairs of the company for his own benefit. Pending the hearing of the petition the petitioner was granted an injunction against Caratti restraining him from exercising or purporting to exercise his powers under the articles to acquire the petitioner's shares. The court held that there was no basis for the injunction. Jackson C.J., at page 67 said -

"On the other hand, there does not appear to be any jurisdiction for the injunction against Caratti. Althcugh in the petition he is called 'the second respondent', he is not a party to the petition nor is there any method, so far as I am aware, by which he can be made a party. The injunction seeks to restrain the exercise of a contractual right claimed as between himself and Zampatti. In my view if there are grounds for an injunction, Zampatti's remedy is by separate action against Caratti. The injunction against Caratti in the winding up proceedings should be discharged."

15. Mr. Ching pointed out that here, too, contractual rights were involved which should be vindicated, if necessary, by ordinary action. He suggested that the petitioner had so drafted his petition, and selected the respondents, to obtain specific performance of his service agreement which he could not otherwise obtain.

16. Even if he were wrong on his broad ground, Mr. Ching contended, the 4th to 7th respondents were not shareholders and even if it were possible to join them, this was unnecessary. They could not be ordered to buy or sell shares and any relief successfully obtained against the Company would bind them. The matter here was serious because discovery was being sought against each of the respondents.

17. Very few cases under section 168A of the Companies Ordinance have come before the Court, and the Western Australia case apart, no authority seems available on the very question that is before me. I traced the legislative history and scope of section 168A recently in Re Taiwa Land Investment Co. Ltd.⁽²⁾ (an appeal is at present pending) and do not feel it is necessary to do so again. I would note that the amendments made to our Winding-Up Rules necessitated by the provision of the new remedy contained in section 168A were broadly similar to those made to the United Kingdom Rules when section 210 was enacted into the Companies Act 1948. But in the United Kingdom the court had first to decide that it would be just and equitable to wind up the company before it could exercise its discretion to grant relief under the section on the grounds that a winding-up order would unfairly prejudice part of the members. Here there is no winding-up limb (nor is there in the United Kingdom any longer since the coming into force of section 75 of the Companies Act 1980). In this jurisdiction petitions under the section have, in my view, more the characteristics of a suit than those of a winding-up petition.

18. Be that as it may since, subject to rule 1(2) of the Companies (Winding-Up) Rules, those Rules do undoubtedly apply, and since no provision is made for respondents being joined ab initio by the petitioner, Mr. Ching's arguments have great force. But it is clear, by virtue of rule 210, that the Rules are not intended to be a complete code and where no express provision for any matter is made by the Ordinance or the Rules, the practice and procedure is required to be in accordance with the rules and practice of the Supreme Court. In the absence of direct authority I do not feel constrained to hold that there can never be respondents to a section 168A petition. Certainly, I would remark that in several of the cases which I reviewed in the Taiwa Land case, where Commonwealth jurisdictions have interpreted provisions similar to our section 168A, individual respondents do appear to have been parties. I do not consider the Caratti Holding case to be of any great assistance in deciding the issue raised by this application. The learned Chief Justice's remarks I have quoted were obiter.

19. I must, of course, for the present, accept pro veritate all that has been alleged in the petition. Gross misconduct is being alleged against the 2nd respondent, the Bank, whose shares, it is said, are held by the 3rd respondent. Between them they own or control 51% of the shareholding. Among the reliefs sought, in the alternative, are orders to direct the sale of these shares to the petitioner or that the petitioner's shares be bought by those respondents. Applying ordinary principles in my judgment the 2nd and 3rd respondents were indeed properly joined. But it seems to me that the position of the other respondents is rather different. Although serious allegations involving fraud and conspiracy, and oppressive conduct, are laid against the four direcors who are the 4th to 7th respondents (and the Court has very wide, unfettered jurisdiction to make a variety of orders if the petition succeeds) they have no shares to sell and surely could not be ordered to buy any. If the relevant prayers were suitably amended by substituting "the Company" for "the respondents", all the reliefs sought (including the removal of the four respondents as directors) could be obtained without the necessity of making them parties to the petition. Orders would not need to be made against them personally. I have reached the conclusion, therefore that they were improperly joined and that they should be dismissed from the petition now, despite the delay in applying.

(1)    1 A.C.L.R. 63

(2)    [1981] H.K.L.R. 297

Representation:

Winston Poon instructed by Deacons for petitioner

Chanles ching Q.C. and Patrick Fung instructed by J.S.M. for respondents