Hioe Tjien Tjien v. Tjo Ta Co Ltd and Another
Read the full judgment text of HCA 2240/1981 on BabelCite. This High Court CFI judgment.
1. This is an application by the plaintiff for interlocutory injunctions. A dispute has arisen between the plaintiff and the 2nd defendant, who are brother and sister, as to the disposition of family property.
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HCA002240/1981
IN THE SUPREME COURT OF HONG KONG HIGH COURT -----------------
----------------- Coram: Bewley, J. Date of Judgment: 5th May 1981 ----------------- JUDGMENT ----------------- 1. This is an application by the plaintiff for interlocutory injunctions. A dispute has arisen between the plaintiff and the 2nd defendant, who are brother and sister, as to the disposition of family property. 2. The 1st defendant is a property investment co., incorporated in 1961 by their parents with an issued share capital of $2,000,000, divided into 2,000 shares of $1,000 each, which, by 1965, had been fully paid up. The company became the owns of two properties in Ventris Road, Happy Valley, and - the subject of these proceedings - a building in Des Voeux Road, Central. They are valued at cost in the accounts for the year ending 31st December, 1979, and the figure for all 3 buildings is $2,052,905.52. 3. The 1st defendant owned 165 shares of $10,000 each in another company, Tho Tjo Ltd., which went into voluntary liquidation in 1965. By an indenture dated 31st December, 1965, the Des Voeux Road property was assigned to the 1st defendant in part satisfaction of its share in the assets of Tho Tjo Ltd. 4. On 28th September, 1979, the father, Mr. Hioe Tjo Yoeng died intestate. On 23rd October, an Extraordinary General Meeting was held at which all the shareholders of the 1st defendant were present, including the plaintiff, her mother, Tjoeng Lau, her two sisters, Kioen Kioen and Ling Ling, and the 2nd defendant. Tjoeng Lau was not in fact, a shareholder, but she was entitled to a share in her deceased husband's estate. It was unanimously resolved:
5. At a director's meeting, held the same day, the 2nd defendant was appointed managing director with full power and authority to manage and carry on the business of the company. 6. On 25th October, the 3 sisters and the 2nd defendant executed a deed of agreement as beneficial owners of the 1st defendant's shares. It was agreed to regulate their respective interests in the 1st defendant so that, notwithstanding their official shareholding, the 2nd defendant had 2/5 and the 3 sisters 1/5 each. It is not disputed that the 2nd defendant now controls the company. 7. In this deed certain family arrangements involving the company's income and assets are made. The one with which we are most concerned is contained in clause (7). It provides that the Des Voeux Road property shall be retained for the use and benefit of the 2nd defendant absolutely and that the parties shall be obliged to do everything necessary to complete the transfer, or cause the company to complete the transfer, of the property to the 2nd defendant, or his nominee, for the nominal consideration of $100, as and when the 2nd defendant requires. 8. There was another directors' meeting that day, which was attended by the 2nd defendant, Kioen Kioen and Ling Ling, but not by the plaintiff, although she had been notified orally that it would take place. At this meeting it was resolved that the company should execute a power of attorney in the 2nd defendant's favour and that he be authorised to negotiate the sale of the company's properties in such manner and on such terms as he deemed fit. 9. The 2nd defendant subsequently found a purchaser for the Des Voeux Road property and, on 31st December, 1980, it was assigned by the 1st defendant to a company called Lalrobe Trading Ltd., for a consideration of $10,000,000. The assignment was registered on 17th February this year. The terms of payment were $1,300,000 deposit, $3,900,000 cash on completion and 5 personally guaranteed post-dated cheques of $1,000,000 each, payable on or before 1st March, 1st May, 1st July, 1st September and 1st November, 1981. 10. Finally, on 13th March this year, Madam Tjoeng Lau, by deed, formally assigned her interest in her late husband's estate to her 4 children in the same proportions as their respective interests in the 1st defendant, that is to say 2/5 to the 2nd defendant and 1/5 each to the others. She also ratified the deed of agreement dated 25th October, 1979. 11. The 2nd defendant took legal advice as to the manner in which the assignment to Lalrobe should be made. It was in order to avoid double payment of stamp duty that the property was assigned directly to the purchaser by the 1st defendant, rather than to the 2nd defendant himself in the first instance. 12. His solicitor, Miss Mildred Poon, decided that, to regularize the documentation, the resolution of 23rd October, 1979, should be rescinded and she drafted an appropriate resolution to be considered at an Extraordinary General Meeting. This resolution was filed at the companies registry, although, due to a misunderstanding, the meeting never took place. 13. Miss Poon considered that, in view of this mistake, it would be wise, ex abundante cautela, to obtain ratification of the transaction at an Extraordinary General Meeting to be held on 28th March, 1981. This meeting was adjourned to 8th April, but has not yet been held. 14. On that day the plaintiff took out the writ in this action, in which she claims a declaration that such a resolution is ultra vires the 1st defendant and injunctions, the effect of which would be to prevent payment to the 2nd defendant of any part of the purchase price. 15. The previous day, 7th April, the plaintiff had obtained an ex parte order in terms of those injunctions and she now asks that it be continued until the trial of the action, or further order. 16. The plaintiff says that what is proposed amounts to either (1) a reduction of capital that has not been confirmed by the Court and is, therefore, unlawful or (2) an improper distribution of dividends out of capital. 17. The law was stated concisely by Lindley C.J. in Verner v. General and Commercial Investment Trust:(1)
18. Mr. Chang, for both defendants, submits that capital must not be confused with assets and maintains that it is from the latter that the proposed payment will be made. He also points out that the 2nd defendant is entitled in equity to the proceeds of sale: all interested persons having agreed to the transfer, the 1st defendant holds the proceeds in trust for the 2nd defendant in fulfilment of a preexisting obligation. He submits that there is no serious issue to be tried and that the ex parte order should be discharged. 19. The Articles of Association state that the Company may, by special resolution, reduce its share capital in any manner allowed by law. 20. Mr. Fung for the plaintiff, has referred me to three authorities. In Holmes v. Newcastle-upon-Tyne Freehold Abattoir Co.(2) the Court refused to sanction the sale, and apportionment of the proceeds among the shareholders, of a portion of the land that represented the capital of the company. As Mr. Chang rightly points out, however, in that case the shareholders had injected property, not cash, and there was no paid-up capital but the land. The return to shareholders of any part of the land was, therefore, unlawful. 21. The next case was in Re National Funds Assurance Co.(3) The company passed a resolution empowering the directors to issue to members, who had paid up the full amount of their shares, share warrants that carried interest at 5%. The company never having made any profit, the interest on the warrants was paid to the holders out of capital. It was held that the directors had acted ultra vires and were in breach of trust. 22. In Foster v. New Trinidad Lake Asphalt Co. Ltd.,(4) among the assets taken over by a new company in 1897, on the purchase of the undertaking of an old company, were promissory notes for $100,000 given in 1894 to the old company by a third company. These notes, which had never been considered of any value, and had never appeared as assets in the balance sheets of the new company, had recently been paid off with arrears of interest and the directors proposed to treat the whole sum as a windfall in the nature of an unexpected profit and divisible as dividends. Application was made for an interim injunction to restrain the directors from distributing this sum. 23. Byrne J, in granting the injunction, until judgment or further order, said, at p.211: "It appears to me that the amount in question is prima facie capital, and I have no evidence that would justify me in saying that it has changed its character because it has turned out to be of greater value than had been expected." However, he went on to say, at p.212: "It is clear, I think, that an appreciation in total value of capital assets, if duly realized by sale or getting in of some portion of such assets, may in a proper case be treated as available for purposes of dividend ..... the question of what is profit available for dividend depends upon the result of the whole accounts fairly taken for the year, capital, as well as profit and loss, and although dividends may be paid out of earned profits in proper cases, although there has been a depreciation of capital, I do not think that a realized accretion to the estimated value of one item of the capital assets can be deemed to be profit divisible among shareholders without reference to the result of the whole accounts fairly taken." 24. In Lubbock v. The British Bank of South America,(5) which was cited with approval by Byrne J. in Foster, a company with a paid-up capital of £500,000 sold part of its undertaking for a sum, which, after deducting the paid-up capital and incidental expenses, left a net balance of £205,000, which it was proposed to distribute as dividend. The Court held that such payment could not be restrained. Chitty J. said: "I have great difficulty in following the first portion of the argument for the plaintiff, because it was said that what was sold was part of the capital of the company, and that what came in over and above the £500,000 was an accretion to capital, therefore it must be kept intact as part of the capital. That has ..... nothing to do with the matter." And, later, "..... the capital that has to be regarded for the purpose of the Act of Parliament is the capital according to the Act and not the things, whether houses, goods, boots and shoes, or hats, or whatever it may be for the time being representing the capital, in the sense of being things in which the capital has been laid. out." 25. In Dimbula Valley (Ceylon) Tea Co. Ltd., v. Laurie,(6) which was not cited in argument, the Court was asked to consider whether an unrealized surplus resulting from a revaluation of capital assets could be treated as divisible profits. Buckley J. held that, if the valuation was made in good faith by competent valuers and the assets involved were not liable to short-term fluctuations in value, such a distribution was admissible. 26. On these authorities it would seem that realized profits on the sale of fixed assets and other non-trading profits may be treated as profits available for dividend, if there is an overall surplus of assets over liabilities. I see no distinction in principle between a bank (Lubbock's case) and a property investment company. Both seek to make a profit and both run the risk of loss. 27. The plaintiff submits that, in the absence of up-to-date accounts, it is impossible to take a proper view of the 1st defendant's financial position. Those before the Court show only the situation as at 31st December, 1979. They do reveal, however, that the company was then in a very healthy state - pregnant with money, as Mr. Chang picturesquely puts it. It is, to my mind, most unlikely, given its nature and purpose and the buoyant state of the local property market, that there has been any significant change for the worse. 28. There will be no trading losses and there is no circulating capital that might be lost in the current accounting period. The company's income is derived from rentals. In 1978, net profits, after taxation, amounted to $400,421 and in 1979 to $397,748. 29. There is, I understand litigation concerning the Ventris Road properties, but the latter represent fixed assets that are still intact. Their worth must be vastly in excess of the book valuation. 30. The purpose of the rule against the unauthorised return of capital is to protect the creditors of a company. Having regard to the accounts and to the other evidence before the Court, I see no danger on this score. The value of the assets greatly exceeds the sum total of the liabilities and issued capital. 31. It follows that the plaintiff can have little prospect of succeeding in her claim for a permanent injunction. In these circumstances I do not think an interlocutory injunction should be granted. 32. It would be otherwise were there any question of a fraud on the shareholders. See Stringer's Case.(7) But here the proposed sale and transfer were approved by the shareholders in general meeting. 33. For these reasons the application is refused. Costs to be defendant's costs in the cause.
Representation: Mr. Patrick Fung (Woo & Woo) for plaintiffs Mr. Denis Chang, Q.C. and Mr. Sakhrani (J.S.M.) for defendants (1) C.A. 1894 2 Ch. 239. (2) (1875) 1 Ch.D. 682 (3) (1878) 10 Ch.D. 118 (4) (1901) 1 Ch. 208 (5) (1892) 2 Ch. 198 (6) (1961) Ch. 353 (7) (1869) L.R. 4 Ch.App. 475. |