European Asian Bank Aktiengesellschaft v. Reicar Investments Ltd and Others

HCMP001212/1984

1984, No. 1212

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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Coram: Deputy Judge Barnett in Court

Dates of hearing: 23 - 25 June 1986

Date of delivery of judgment: 2 July 1986

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JUDGMENT

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1. In these proceedings, begun by way of originating summons, the Plaintiff seeks payment of all money due tinder a mortgage and four further charges given by the 1st Defendant (Reicar) as mortgagor and under which at the request of Reicar the Plaintiff granted banking facilities to the 2nd Defendant (Tiger) the borrower.

2. An appointment to hear the originating summons was taken before a Master. At that hearing what was not in dispute was that the Plaintiff lent money to Tiger which by then together with interest totalled some $38 million. The lending was at the request of Reicar which put up four properties as security and assumed a primary obligation to repay any money owing to the Plaintiff by Tiger. Under the mortgage and further charges the Plaintiff had made demands for repayment of money due and Reicar and Tiger were in default.

3. The Master gave judgment against Reicar. From that decision Reicar now appeals on the basis that there is a number of issues of fact and law in dispute, some of the points of law necessarily depending upon resolution of the factual disputes. If it can be shown that, there are triable issues, then the judgment should be set aside and Reicar should be allowed to go to trial. Reicar contends that the same principles as arise under Order 14 are applicable here.

4. There was some dispute as to whether those principles are applicable in respect of an originating summons being heard under Order 28. In my view the correct course to adopt is to consider the available evidence or, at least, that evidence which has been canvassed and commented upon. If that evidence is sufficient to show that there are genuine issues of fact, for which the originating summons procedure is generally not suitable, the matter should go to trial. It is not relevant, I think, that the evidence upon which Reicar principally relies has been adduced by the Plaintiff. If Reicar is able to find faults in the Plaintiff's case, I see no reason why it should not be able to take advantage of them. Indeed it would be wrong, if there are such faults to ignore them.

5. For Reicar, Mr. Tang submitted a most helpful written argument. This argument deals with several separate issues but for the purpose of this appeal I think that they can be conveniently divided into two. First, it in argued that there was no due authorisation by Reicar of the mortgage or further charges. Secondly, that the mortgage and further charges were ultra vires i.e. beyond the capacity of Reicar; alternatively, they were beyond the power of the directors as being other than for the purposes of Reicar.

6. Mr. Tang argues thus. According to a minute of a directors' meeting (called the missing minute because it could not be found amongst Reicar's papers but was produced by the Plaintiff upon affidavit) on 15th December 1979 the directors resolved that the company should execute the mortgage. However, the two directors present were also directors of Tiger. They declared their interest as they were required to do by Article 113 of the Memorandum and Articles of Association of Reicar, but voted in favour of the execution of the mortgage which they were not then entitled to do under that Article. consequently, there was no quorum at the meeting and no valid resolution was passed: In re Greymouth (1904) 1 Ch. 32.

7. On the same day there was apparently an Extraordinary General Meeting of Reicar. At that meeting all the shareholders, who were present either in person or by proxy, resolved that the company should execute the mortgage.

8. It is not clear which meeting was held first. The probability is that the directors' meeting came first because it referred to banking facilities of $12 million, which was the sum originally proposed. This sum was reduced to $6 million and is the figure referred to at the E.G.M. However, the chronology is irrelevant because, insofar as the E.G.M. purported to approve the execution of the mortgage, the company at its E.G.M. was usurping the powers of management of the directors: Scott v. Scott (1943) 1 All E. R. 582; and in so far as it purported to ratify the resolution of the directors, no notice of the meeting had apparently been given to Mrs. Carlin, one of the shareholders who was entitled to attend and vote at any General Meeting and, therefore, the E.G.M. itself was invalid. Further, the E.G.M. did not expressly ratify the directors' resolution.

9. For the last proposition, Mr. Tang relied in part on Grant v United Kingdom Switchback Railways Co. (1889) 40 Ch. D. 135. In my view, that case is authority against him because it makes it plain that a company may affirm a contract, which is clearly what took place here, and does not need to know the reason why the sanction of a general meeting is required.

10. It should be noted that Mrs. Carlin had given one of the directors, Mr. B. J. Young, a 12 month proxy to vote for her at all General Meetings of Reicar and "to waive any period of notice required for calling such meetings".

11. Before any of the four further charges were made, there was another E.G.M. of Reicar on 8th February 1980. At that meeting Article 113 was amended by deleting the word "not", thereby enabling directors to vote notwithstanding their disclosed interest in any matter under consideration. The first three further charges were approved at separate E.G.Ms. If the amendment to Article 113 was valid, then plainly the company in General Meeting was again usurping the powers of the directors who by then were entitled to vote notwithstanding their interests. Alternatively, both the E.G.M. at which Article 113 purported to be amended and the subsequent E.G.Ms. were invalid because again no notice had been given to Mrs. Carlin.

12. The fourth further charge was approved at a meeting of directors on 16th May 1981. Assuming that directors could by then vote notwithstanding their interests, because of non-disclosure at that meeting of such interests the resolution to enter the fourth charge was invalid. The knowledge of interests might possibly have been assumed in respect of two directors whose only interest was as directors of Tiger. There was by then, however, a third director (the 3rd defendant) who had given two personal guarantees to the Plaintiff in respect of Tiger's debts, about which there could be no such assumption.

13. There had also been an E.G.M. the day before the Board meeting at which the fourth further charge was approved. This, however, was equally invalid because of usurpation of the director's powers or because of lack of notice to Mrs. Carlin.

14. It is Mr. Tang's contention that the Plaintiff was or should have been on notice of all these matters and therefore cannot rely on the rule in Turquand's case. That rule is:

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Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular. "

15. Following the decision of the Court of Appeal in Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation and Others (1985) 2 W. L. R. 908, a defence based on this rule is a plea of mixed fact and law which must be pleaded. It is therefore incumbent on the Plaintiff to state that it was not aware of any irregularity and to identify what it relics upon.

16. Mr. Ching for the Plaintiff argued that this is a matter of pleading and there are no pleadings in these proceedings. He relies on the fact that no evidence has been adduced by Reicar to support these allegations which would invite a reply by the Plaintiff. It is his argument that there is nothing on the face of the evidence and documents to which I have been referred which could or should have put the Plaintiff on enquiry. Accordingly there are no factual disputes which require to be resolved and, subject to my being with him on various points of law which have arisen, the Master's decision should stand.

17. As I have stated earlier I think it permissible for me to look carefully at the evidence and documents referred to. Having done so, 4 particular matters stand out. They are :

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I hereby certify that the above resolution was duly passed at a meeting of directors of the above company (Reicar) on the above date in which the meeting was duly convened and a quorum was present. "

18. As far as non-disclosure is concerned Mr. Ching points out that the only requirement is of disclosure at the relevant Board meeting. There is no requirement that disclosure should be in writing or that it should be recorded in the minutes of the meeting. Consequently there is no evidence of non-disclosure.

19. There had been disclosure in the minutes of the directors' meeting of 15th December 1979. The Plaintiff was aware of Au-Yeung's personal guarantees. The Plaintiff was also or should have been aware of the close relationship between Reicar and Tiger. In my view, therefore, it is arguable, and that is all that is necessary at this stage, that the Plaintiff should have been alert to this possibility.

20. On the question of notice to Mrs. Carlin, I am satisfied that, unless the Articles of Association of a company expressly excluded it, a shareholder is entitled to attend and vote at any General Meeting notwithstanding any proxy that may have been given, and that for this purpose notice as required by the Articles must be given: Cousins v. International Brake Co. Ltd. (1931) 2 Ch. 90 and Royal Mutual Benefit Building Society v. Sharman and others (1963) 2 All E. R. 242. Mr. Ching sought to distinguish those cases as dealing with the revocation of a proxy or the special provisions of a particular company. I find, however, that they are good for the principle which I have stated.

21. Mr. Ching drew attention to Article 147 which provides for service of notice upon shareholders who have no registered address in Hong Kong, which was the case with Mrs. Carlin. Article 147 reads:

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.... a notice posted up in the office shall be deemed to be duly served on them at the expiration of 24 hours after it is so posted up. "

22. As I understood Mr. Ching, his complaint was that 24 hours was really of very little practical use to Mrs. Carlin. However, Article 147 must be read in conjunction with Article 56 which provides for actual periods of notice, being 21 days notice in respect of special business which by definition includes an E.G.M. That period would, of course, only start to run 24 hours after notice had been posted up in the office. So, at least in theory, Mrs. Carlin had ample time in which to learn of any meetings, to instruct her proxy how to vote, or to revoke the proxy altogether and vote personally.

23. I appreciate that in practice little may have been achieved by giving the necessary notice. However, it remains the law that notice should have been given and the minutes of the various E.G.M. throw doubt on whether this was done.

24. In dealing with the usurpation of the powers of directors Mr. Ching sought to distinguish Scott v. Scott on the basis that that was a case of interference rather than ratification. He contended that when all shareholders are together in a meeting they are entitled to do anything which is within the power of the company: In re Express Engineering Works Ltd. (1920) 1 Ch. 466, In re Oxted Motor Co. Ltd. (1921) 3 K. B. 32, and In re Duomatic Ltd. (1969) 2 Ch. 365.

25. In the present case, as in Scott v. Scott, the matters with which we are concerned are matters clearly arising in the course of management of the company and coming squarely within the duties of the directors. Further, apart from the two directors who were disqualified from voting at the directors' meeting on 15th December 1979 there remained Mrs. Carlin who was capable of both voting and appointing one or more directors to fill the casual vacancies caused by the disqualification of the other two directors. Reicar remained, therefore, capable of management without recourse to the shareholders. The facts in the cases cited by Mr. Ching were rather different. In particular, In re Oxted concerned a matter which was in any event within the power of a General Meeting.

26. Consequently, I am satisfied that notwithstanding a lack of evidence on the part of Reicar there is sufficient material available to have suggested irregularity in the conduct of Reicar and to have put the Plaintiff on enquiry. In my view, this irregularity taints both the mortgage and the four further charges so that they may be void or voidable. There are issues of fact to be resolved which can only be dealt with at trial. Accordingly I allow the appeal and set aside the judgment against Reicar.

27. It is, in the circumstances, not necessary for me to decide upon the ultra vires point. I feel bound to say, however, that I should have resolved this in favour of Reicar. Mr. Ching took me carefully through clause 3 of the Memorandum and drew attention in particular to paragraph (9) which empowers Reicar to carry on business as financiers and capitalists (l), to paragraph (10) which gives power to borrow or raise or secure a payment of money and to secure and guarantee the performance by any company of any obligation; to paragraph (13) to carry on any other business in connection with the business of the company or calculated directly or indirectly to enhance the value of or render profitable any of the company's property or rights, and paragraph (23) which permits lending with or without security. The transaction carried out by Reicar, says Mr. Ching, was no more than a proper lending to Tiger of money legitimately raised for that purpose and falls comfortably within the objects and powers of Reicar. The primary obligation assumed by Reicar is no more than the usual obligation assumed by any mortgagor.

28. Upon a literal interpretation of the Memorandum, as is required on the authority of Cotman v. Brougham (1918) A.C. 514, I would find Mr. Ching's argument hard to resist if his view of the transactions is correct. However, I am inclined to the view that in essence the mortgage and further charges were not lending by Reicar to Tiger but rather, as Mr. Tang contends, the giving of an indemnity should Tiger default on its banking facilities. And nowhere in the objects clause can I discern anything to suggest that the giving of an indemnity is within the objects or powers of Reicar.

29. Even if I am wrong about that and the giving of an indemnity is within the objects and powers of Reicar, or that the proper construction of the transaction is that it was lending within the proper course of business of Reicar, I would take the view that there has been an apparent abuse of power by the directors or the company. The Plaintiff was aware of the interlinking directorships because they were declared at the directors' meeting in December 1979. The Plaintiff could and should have inquired as to the purpose of the transaction which, on the face of it, carried no benefit for Reicar. I am not unmindful of Mr. Ching's argument that there is no evidence of lack of benefit. However, Reicar was undertaking a very substantial burden and the evidence of benefit which there is indicates a commitment fee of 0.1%, a sum which might be described as insignificant.

30. I would hear counsel on costs and directions.

Representation:

Mr. Charles Ching, Q.C. & Mr. Ronny Wong (Fairbairn & Kwok) for the Plaintiff.

Mr. Robert Tang, Q.C. & Miss Maria Yuen (Stephen Harwood & Lo) for 1st Defendant.