Hong Kong Racing Pigeon Association Ltd. and Others v. Lam Koon Nam and Others
Read the full judgment text of on BabelCite. was delivered on 21 June 2002.
1. The 1st Plaintiff is an association incorporated under the Companies Ordinance in 1975 as a company limited by guarantee ("the Association"). At the time, there were 8 subscribers ("the Subscribers"), including the 2nd to 5th Plaintiffs and the 1st and 2nd Defendants. One had since migrated and another one had resigned in 1984 and passed away. It is a non-profit making association, the main object of which is to promote interest in carrier pigeons. There is no dispute that the eight Subscribe
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HCA018376A/1999 HCA NO. 18376/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 18376 OF 1999 ____________
_____________ Coram: Deputy High Court Judge To in Court Dates of Hearing: 14-18, 21 January, 1 March and 29 May 2002 Date of Judgment: 21 June 2002 _______________ J U D G M E N T _______________ Background: 1.The 1st Plaintiff is an association incorporated under the Companies Ordinance in 1975 as a company limited by guarantee ("the Association"). At the time, there were 8 subscribers ("the Subscribers"), including the 2nd to 5th Plaintiffs and the 1st and 2nd Defendants. One had since migrated and another one had resigned in 1984 and passed away. It is a non-profit making association, the main object of which is to promote interest in carrier pigeons. There is no dispute that the eight Subscribers were validly appointed as directors with the 2nd Plaintiff acting as the chairman of the board of directors since 1975. The other Defendants, namely the 3rd to 13th Defendants were appointed and acted as directors at various times between 1984 and 1986 in circumstances which the Plaintiffs now allege were irregular. 2.The Association was not very active until 1984 when the air space of China was open to carrier pigeons. The Association was granted a licence for importing pigeons into China for racing purpose. While the 2nd Plaintiff was the chairman, the day to day affairs were in the hands of the 1st Defendant who received a small salary for his service. The Association was run in a very casual manner almost without regard to its articles of association. In particular, minutes of meetings were improperly kept and members were admitted without following the procedures prescribed in the articles of association (hereinafter called the "Purported Members"). Some Purported Members, namely the 3rd to 13th Defendants, were recruited into the board of directors and participated in the management of the Association. In 1999, the 2nd Plaintiff thought his position in the Association was being jeopardized. He together with the other Plaintiffs queried the regularity of the appointments of the 3rd to 13th Defendants as directors of the Association. In a Subscribers meeting on 29 April 1999 attended by the Plaintiffs and the 1st Defendant, it was decided that these Defendants should not be recognized as directors of the Association. A Notification of Changes of Secretary and Directors to that effect was filed with the Companies Registry on 31 August 1999. 3.On 9 September 1999, pursuant to sections 113(1) and 114A(1)(b) of the Companies Ordinance, the 1st Defendant and 65 Purported Members requisitioned for an extraordinary general meeting to be held for the purpose of passing an ordinary resolution to increase the number of directors from 7 to 18 and to regularise the appointment of the 3rd to 13th Defendants as directors. On the same date, the 1st Defendant wrote to all the other Plaintiffs requesting to convene a board of directors meeting on 16 September 1999 for the purpose of discussing the requisition. However, this meeting was cancelled because of a typhoon. The 1st Defendant then called for another board meeting on 22 September 1999. The 2nd to 5th Plaintiffs replied that they would not attend the meeting as they did not recognise the membership of the requisitionists. That meeting was aborted due to insufficient quorum. On 26 September 1999, the 1st Defendant wrote to the requisitionists on behalf of the board and informed them that the board would not convene the extraordinary general meeting requisitioned. On 20 October 1999, one of the requisitionists issued a notice purportedly under section 113(3) to convene an extraordinary general meeting at 9 p.m. on 13 November 1999 in Luk Yuen Seafoods Restaurant. 4.On 13 November 1999, 65 Purported Members and the 1st Defendant attended the meeting in person and 29 by proxies. The 2nd and 3rd Plaintiffs also went to the meeting with their solicitor, Mr Chong. The 2nd Plaintiff submitted 53 proxy forms. A dispute arose as to the validity of these proxy forms which resulted in the police being called to the scene. Eventually, the 2nd and 3rd Plaintiffs left with their proxy forms. The meeting was held and the two resolutions were passed, increasing the number of directors to 18 and appointing or regularising the appointment of the 3rd to 13th Defendants as directors. 5.The Plaintiffs now seek a declaration that the extraordinary general meeting held on 13 November 1999 was unlawfully convened and that all resolutions purportedly passed were invalid. They also claim damages for the 1st and 2nd Defendants' breach of fiduciary duties as directors. The defence case is that the 4th Defendant was appointed on 16 January 1984 to replace one of the Subscribers, namely Wong Mui, who held the office as representative for and on behalf of the 4th Defendant, that the 3rd, 5th to 13th Defendants were appointed pursuant to resolutions passed on 4 and 17 March 1984 and on 5 December 1986 and that all along they acted as de facto directors. The parties' positions are peculiar. While the Defendants seek to defend the validity of the meeting held on 13 November 1999 and the resolutions passed at the meeting, they are not relying on that meeting as the basis of their appointment as directors and are not seeking any counter declaration that they were otherwise properly appointed independently of that meeting. On the other hand, the Plaintiffs are not seeking to restrain any of the Defendants from acting as directors. Thus, no matter how their present dispute is resolved, there are bound to be loose ends as to the validity of the appointment of the 3rd to 13th Defendants as directors and this litigation is not going to resolve their dispute. 6.The issues raised by this litigation are (1) whether those requisitioning the meeting to be held on 13 November 1999 and attending and voting in it were members of the Association; (2) whether the resolutions should be passed as special or ordinary resolutions and (3) in that connection, whether adequate notice of the intention to pass the resolutions had been given. Membership of the Association 7.It would be convenient to begin with the question as to who are members of the Association. The Plaintiffs rely on Article 3 of the articles of associations and argue that the requisitionists are not members of the Association and have never been admitted as members. The article provides:
8.Under this article, a person could only qualify as a member if (1) his membership was proposed by at least two existing members, (2) the board of directors formed an opinion that his admission is in the interests of the objects of the Association, (3) the board issued a Notice of Acceptance to Membership, (4) he paid the entrance fees within the time stipulated in the Notice of Acceptance, and (5) his name was entered in the Register of Members. 9.The Purported Members were recruited mainly by the 1st Defendant. Some applicants became aware of the Association and applied for membership through shopkeepers selling pigeon feed or carrier pigeons. There is no dispute that none of the 65 requisitionists and none of the 3rd to 13th Defendants had been admitted as members of the Association in accordance with this Article. They did no more than filling in a form and paying the annual subscriptions. Their admission to membership had never been proposed by any existing member, let alone proposal by two were required, and there was never ever any board of directors meeting convened to approve any such membership. No Notice of Acceptance of their membership had been issued. They never paid entrance fees, though they paid annual subscriptions. But no entrance fees have been fixed and passed by the Association either. None of these members had their names entered in the members register, but neither have the Subscribers. 10.Mr Yip for the Defendants submits that the provision regarding membership in Article 3 is not exclusive. He refers to Article 3(b) which provides that the board of directors may admit persons of certain qualification or description to membership and submits that the word "may" suggests that the board has discretion in the admission of members and that Article 3 is not the only way membership may be acquired. 11.With respect, I cannot agree with that interpretation. Article 3(a) provides that no one other than subscribers and others admitted in accordance with the articles shall be members of the Association. The definition of membership in Article 3(a) is clearly an exclusive one. In addition, under Article 1(a), "Member" means "a person admitted to membership of the Association in accordance with these Articles and whose name appears on the Register"; and "Register" means "the Register of Members to be kept pursuant to the Ordinance." Thus, other than subscriber members, one can only become a member by being admitted in accordance with the articles and has his name entered into the Register kept pursuant to the Companies Ordinance. If the word "may" is given the meaning as suggested by Mr Yip, then not only the words "in accordance with these articles and none others" in Article 3(a) would be rendered meaningless, the definition of "Member" in Article 1(a) and the entire Article 3(b) would also be rendered redundant. If that were the intention of the Association, it would simply have adopted the formula in Table C in the First Schedule to the Companies Ordinance, i.e. "such other persons as the directors shall admit to membership." In effect, this is the formula which Mr Yip is seeking to persuade me to accept. The Association was aware of the standard articles in Table C. It expressly excluded Table C except for a number of specified articles which it adopted. It chose the particular formula in Articles 1(a) and 3 defining how a member may be admitted. The Association must have intended the definition in Article 3 to be an exclusive one. In my view, reading Article 3 in its entirety and particularly in the light of Article 3(a), the use of the word "may" in Article 3(b) is to give to the board a power and a discretion to admit or to refuse to admit, as distinct from an obligation to admit, any person who meets the requirements of Article 3(b). 12.The Defendants argue that the Association has been run in an amateurish manner and the collection of membership application forms together form the register of members. While some allowance could be given to an association of this scale, the collection of membership application forms is deficient as a register of members. The Register means, under Article 1(a), "the Register Members to be kept pursuant to the Ordinance." Section 95 of the Companies Ordinance requires particulars as to the names, addresses, occupations or descriptions of the members and the date at which each person was entered in the register and the date at which any person ceased to be a member to be entered in the register. A perusal of the application forms shows that the particulars as to occupation or description of many of the applicants were not filled in. More importantly, apart from a date at the end of the form, which presumably was the date of the application, there is no date showing the date of approval of his membership or date of admission which could reasonably be treated as date of entry in the register. The space reserved for the Chairman's opinion or approval of the application is invariably left empty indicating a total absence of opinion by the board as to whether the admission would be in the interests of the objects of the Association, as required by Article 3(b). Thus, not only that this collection of application forms fails as the Register of Members kept pursuant to section 95 of the Companies Ordinance, it indicates a total non-compliance with the admission procedures. While it may be argued that an applicant should not be penalised by the Association's neglect in compiling the register, the fact remains that the admission was never proposed by at least two existing members, that the board had never formed any opinion as to the applicant's suitability or approved the admission to membership, and no Notice of Acceptance to Membership has been issued by the board. I am unable to hold any of these Purported Members are members of the Association. 13.Next, Mr Yip argues that the Purported Members have acquired their membership by the Association's convention of member- ship admission. No board of directors meeting has ever been held to consider the admission of any applicant to membership. All along, the practice was that an applicant could join the Association by filling in an application form and paying the annual subscriptions. He would be given a registered number to his coop for keeping carrier pigeons. That number would be written on his application form and becomes his membership number. The convention or practice has been adopted by the Association through the Plaintiffs' as well as the 1st and 2nd Defendants' ignorance of Article 3. This practice was known to all the Plaintiffs and no one ever raised any complaint during the 24 years since the Association's inception. The members so admitted were acknowledged as members and participated in the activities of the Association. In his affirmation filed in connection with these proceedings, the 2nd Plaintiff averred that the Association had 388 members. Except for the Subscribers, all of them acquired their membership in this manner. In his evidence in court, the 2nd Plaintiff agreed that he would still recognise some of these 388 as members of the Association. 14.Based on the above evidence, Mr Yip submits that this convention existed since inception and the Association and its members are estopped from denying the membership so acquired. He refers to Paragraphs 3-100 and 3-101 of Chitty on Contract, 28th ed. in support of his proposition:
15.Mr Yip then cited the case of Yuen Ching Yuen v Union Insurance Society of HK Ltd [1998] 1 HKLRD 650 in which Cheung J, as he then was, held:
16.I have no doubt that in the present case the first three of the above conditions are satisfied. The Association or its board of directors, represented by the 1st Defendant at the time, and the Purported Members acted on a common mistaken assumption regarding the admission requirements. This assumption was communicated to the Purported Members in the last sentence of the preamble in the application form which states:
The Purported Members and the board of directors conducted themselves on the basis of the mistaken admission practice. These Purported Members paid annual subscriptions and participated in the activities of the Association. Some of them were given awards in pigeon racing activities. Eleven of them were even invited to act as directors of the Association. 17.As for the fourth condition, Mr Yip submits in the circumstances it would be unjust to allow the Association to go back on the assumption. He argues that it would be unfair to the Purported Members to deprive them of their membership and the Association would have to refund the annual subscriptions paid and the Purported Members would have to return the awards and prizes they won. The question whether it is unfair or unjust turns on whether any detriment has been suffered by the Purported Members as a result of this mistaken assumption. It is true that the parties conducted themselves on the basis of the mistaken assumption, but it is equally true that these Purported Members have not been properly admitted in accordance with Article 3 and have not paid any entrance fees, though of course no entrance fees have yet been determined by the Association. They paid annual subscriptions, participated in the functions of the Association, its races and events as if they were members. They enjoyed all the services and benefits they could have enjoyed for the annual subscriptions they paid, which is not a significant amount. They enjoyed the benefits and privilege of being members of the Association without having their admission approved. They did not have to pay hefty entrance fees as have members of many prestigious clubs in Hong Kong to. They paid annual subscriptions for what they have enjoyed for the year. There is no failure in consideration for the annual subscriptions they paid. I cannot see how they could have suffered any detriment. 18.On the other hand, it is not clear the extent to which each of the Subscribers was responsible for the recruitment of these Purported Members. It appears that the 1st Defendant was principally responsible for their recruitment, while the Subscriber who is not a party to these proceedings was not responsible for any of the recruitment at all. It would then be unfair to the Subscribers, who are the only lawful members of the Association, that their rights in the Association should be diluted by people who have not been properly admitted as members of the Association. On balance, I do not think it is unfair that the Association should be allowed to go back on that assumption and insist on the proper admission procedures as provided by Article 3. 19.On the last condition, Mr Chu submits that by the Plaintiffs' and their solicitors' correspondence prior to the meeting on 13 November 1999, the Plaintiffs have communicated to the Defendants about the mistaken understanding in October 1999 and hence estoppel would cease to apply to the future dealings between the parties. I do not agree with that view. The event relied upon by the Defendants was the admission of these Purported Members many years prior to these correspondence. If membership has been acquired, it has been acquired and there is no question of future dealings between the Association and the Purported Members. But of course, this is of no consolation to the Defendants if the fourth condition for estoppel by convention could not be established. 20.Furthermore, even if these conditions were all satisfied, I do not think estoppel by convention could apply to confer membership on persons who are not eligible for admission to membership in an incorporation. The authorities referred to by Mr Yip in support of estoppel by convention were cases of disputes in contract between two contracting parties and were not cases about membership in a company. This distinction is significant. The fallacy of Mr Yip's argument becomes apparent if one bears in mind three principles. Firstly, that estoppel only applies as between parties to a relation creating the estoppel. Secondly, a company is distinct from its members and thirdly, that the board of directors acts as agent of the company and not as agent of its members. 21.A company upon incorporation acquires a corporate identity distinct from its members, though the collective will of its members is its corporate will and the company acts through natural persons, i.e. its members collectively in general meetings or by its board of directors as its agent. An estoppel operates between parties to a contract or a relation. It does not affect non-parties. While it can be argued that by reason of its conduct in accepting annual subscriptions and permitting the Purported Members to participate in the activities of the Association, the Association is estopped from denying their membership, the estoppel cannot operate as to bind the members of the Association who are distinct from the Association and are not parties to the relationship creating the estoppel. It is trite law that directors are agents of the company but not agents of its members. Hence, it cannot be argued that the acts of the directors creating the estoppel are acts of the members and binding on the members. 22.Mr Yip argues that as the Subscribers are also directors, the estoppel equally applies to them as members. Firstly, there is no evidence as to the extent to which each Subscriber was responsible for the recruitment of these Purported Members. The only evidence is that the 1st Defendant was principally involved, while the other Subscriber who is not a party to these proceedings was not involved at all. Secondly, when acting as directors, the Subscribers were acting as agents of the Association and not in their personal capacity. Thus, nothing of what they did as agents of the Association should affect their personal interest or those of the other Subscribers as members of the Association, in particular the Subscriber who is not a party to these proceedings. This is a necessary consequence of the principle of corporate personality. In the absence of fraud, there is no justification for lifting the corporate veil. In any event, in view of the lack of evidence as to whether all the Subscribers were responsible for the admission of these Purported Members, this is not a case for lifting the corporate veil. 23.Membership in a company is different from contractual relationship between the contracting parties. It creates a relation between members who are otherwise not in a contractual relationship with one another. By operation of law, the memorandum and articles of association become binding on the company and all its members to the same extent as if they respectively had been signed and sealed by each member: section 23 of the Companies Ordinance. They have to conduct their affairs in relation to the company in accordance with the memorandum and articles of association. If the principle of estoppel were to be extended to membership in a company, it would have the effect of affecting non-parties to the relationship creating the estoppel. It would force on the members a relationship with pseudo-members as if they were also members of the Association. It would dilute the members of their membership rights in terms of voting power and control over the Association. It would also diminish their share in the asset of the Association. In none of the authorities referred to by Mr Yip can I find any example where the doctrine of estoppel was extended to non-parties or to membership in a company. Bearing in mind the three principles I referred to above, I hold as a matter of law that the principle of estoppel cannot be extended to membership in a company. To hold otherwise would enable members or directors who are not members of a company, to re-write the articles of association without having to comply with the articles of association or the Companies Ordinance. 24.Accordingly, I dismiss the Defendants' argument that the Purported Members, including the 65 requisitionists, have acquired membership in the Association under Article 3 or by way of estoppel by convention. This finding is equally applicable to the 3rd to 13th Defendants, who claim to be de facto directors but who similarly are not members of the Association. 25.Having come to the conclusion that these 65 requisitionists were not members of the Association, it must necessarily follow that they had no locus standi to requisition and convene the extraordinary general meeting held on 13 November 1999 and to vote at the meeting. That meeting was unlawful, or more precisely was not a meeting of the Association, and the resolutions passed were invalid, not having been passed by persons who were members of the Association. It would be unnecessary for me to consider the Plaintiffs' other arguments that the meeting was irregular. I shall nevertheless, for completeness, deal with the issue of irregularity, assuming that the requisitionists were lawful members of the Association. Irregularity of the meeting on 13 November 1999 26.The requisitionists requisitioned a meeting by their letter dated 9 September 1999. The 1st Defendant convened a board of directors meeting on 16 September 1999 which did not materialise due to a typhoon. He then convened another board meeting to be held on 22 September 1999, but on 17 September 1999 the 2nd to 5th Plaintiffs replied that they did not recognise the membership of the requisitionists and would not attend the meeting. The meeting collapsed for lack of a quorum. On 26 September 1999, the 1st Defendant wrote to the requisitionists to inform them that the Association would not convene the meeting. Mr Chu submits that it was premature for the 1st Defendant to convene the meeting then until 21 days since their request of 9 September 1999 have lapsed and the directors have failed to convene the meeting. I think there is no merit in this argument because the 1st Defendant could not be taken to have convened a meeting by his letter of 26 September 1999. On the facts, it was not until 20 October 1999 that a representative, Mr Tong of the requisitionists, convened the meeting to be held on 13 November 1999. By then, more than 21 days have lapsed and the Plaintiffs have unequivocally indicated that they would not be convening the meeting. 27.Mr Chu argues that the meeting was convened in breach of section 113(1) of the Companies Ordinance which provides that only "directors" in plural could convene a meeting. I dismiss such argument both on the law and on the fact. It is trite law that as a matter of statutory interpretation the plural includes the singular and a single director could convene a meeting. On the facts, it was not the 1st Defendant who convened the meeting but Mr Tong, one of the requisitionists, who was entitled to convene the meeting upon the directors' default. 28.The more substantive attack on the validity of the meeting is that the notice of the meeting inviting the members to attend for the purpose of passing ordinary resolutions was defective. Mr Chu argues that the business to be transacted at the meeting, i.e. increase the number of directors and to appoint the eleven persons named in the notice as directors, are special business which require the approval of a special resolution. He relies on Article 10 of Table C (1975 edition) which was expressly incorporated by Article 5 of the articles of association. Article 10 of Table C provides as follows:
29.Mr Yip, on the other hand, argues that Article 10 is just a deeming provision. He refers to Article 22 which provides:
30.He cites paragraph 7.704 of Palmer's Company Law, 25th edition as authority in support of his proposition that an ordinary resolution is adequate for the purpose of Article 22. Paragraph 7.704 reads:
31.I think that is a statement which is not intended to be taken as widely as Mr Yip would ask me to. There are three kinds of resolutions which may be passed by a company at general meetings. These are special, extraordinary and ordinary resolutions. The kind of resolution required to be passed depends on the business to be transacted. The Companies Ordinance requires certain things to be done by special or extraordinary resolutions. The memorandum or articles of association cannot validly provide that they may be done in any other way: for example alteration of articles by special resolution (section 13). All matters may be resolved upon by ordinary resolution unless the memorandum or articles or the Companies Ordinance require otherwise. The statement in Palmer's Company Law must be read subject to this qualification. 32.The words "shall be deemed" in Article 10 of Table C can be interpreted to mean "shall be conclusively deemed" or "shall be deemed until the contrary is proved". The meaning have to be ascertained from within the article itself. Article 6 of Table C, which was incorporated into the articles of association, provides that all meetings other than the first general meeting and the annual general meeting thereafter shall be called extraordinary general meetings. Article 10 of Table C then deems all business transacted at these extraordinary meetings and all business transacted at ordinary meetings with certain specific exceptions as special business. The article is intended to have wide import. It covers even business which would normally be transacted in ordinary meetings and deems them special business unless they fall within the specified exceptions. Thus the intention must be that other than the specified exceptions, all business shall be conclusively deemed to be special business. Here the meeting called for was an extraordinary general meeting. The business proposed to be transacted was deemed by Article 10 of Table C to be special business. There is no evidence to rebut this presumption. Accordingly, I agree with Mr Chu that the business proposed to be transacted at the extraordinary general meeting to be convened were special business which required the sanction of a special resolution. As the notice failed to specify the intention to propose passing the resolutions as special resolutions, the notice was defective and the resolutions passed were not binding: see MacConnell v E Prill & Co Ltd. In that case the court held that the notice of meeting must not merely indicate but actually specify the intention to pass the resolution as an extraordinary resolution. 33.It is worth noting that a similar result was reached by the court under similar circumstances in Briggs v South Eastern Recovery III plc (1999) G.W.D. 31-1453. In that case, the articles of association similarly defined special business as "all business that is transacted at an extraordinary general meeting, and also all that is transacted at any annual general meeting, with the exception of ... the appointment of ... the directors." The court held, orbiter, that a proposal to remove and elect directors at an extraordinary general meeting was "special business". 34.Mr Yip seeks to save the resolutions by arguing that the resolutions have in fact been passed by more than the required three quarters majority. I do not think that fact could assist the Defendants. The court's duty is not to protect the dissentient shareholder, but the dissentient and absent shareholders, who did not attend the meeting because of the inadequacy of the information in the notice. The notice was inadequate or misleading in its particulars. It invited the members to attend the meeting for the purpose of passing an ordinary resolution, which should be passed as a special resolution. A recipient of the notice might think he would lose out on a simple majority and there was no point to attend the meeting, but rather to leave it to the general meeting to decide whether the resolution should be passed and if indeed it was then afterwards challenge its validity. He was under no obligation to attend and correct those convening the meeting that the resolutions should be passed as special resolutions. He had no idea whether others receiving the notice knew the notice was misleading and defective. He had no idea whether other recipients, and how many of them, would think likewise. He had no idea whether those recipients would believe they could have a good chance to resist the resolutions by just over one quarter minority and would attend the meeting to oppose the resolutions. He was quite entitled as Kekewich J said in Tiessen v Henderson (1899) L.R. 1 Ch 861, "first to throw the notice into the waste paper basket and leave it to the general meeting to decide whether the resolutions should be passed, and afterwards, at a later date, to consider whether it was worth while to oppose their confirmation." 35.In Re: Sze Yap S.S. Co Ltd [1931] HKLR 77 at 83, the Full Court referred to Tiessen v Henderson, supra, and took the view that the Court should protect the dissentient and absent members of the company against a bad and unfair notice. It held:
36.Though in that case, the inadequacy was not whether the resolution should be passed as a special resolution but as to the content of the resolution proposed, the rationale is the same: see MacConnell v E Prill & Co Ltd, supra. The learned authors of Pennington's Company Law, 7th edition, also reached the same conclusion after analysing Kye v Croydon Tramways Co [1898] 1 Ch 358, Tiessen v Henderson, supra, Baillie v Oriental Telephone and Electric Co [1915] 1 Ch 503 and MacConnell v E Prill & Co Ltd [1916] 2 Ch 57. The learned authors wrote at 875:
This analysis shows that what is important is the adequacy of the notice of the meeting and not the nature of the resolution. I agree with that view. It does not matter whether the notice specifies that a special resolution will be passed when all that is required is an ordinary resolution or that it is the other way round. Accordingly, I hold that the notice was defective and could not be cured by the fact that the resolutions were passed by more than three fourths of the persons attending and voting at the meeting. The resolutions were not binding on the Association. The Defendants' secondary case 37.The Defendants' secondary case is that the 3rd to 13th Defendants are de facto directors. But as they are not seeking any counter declaration to that effect, their de facto directorship is no answer to the Plaintiffs' claim for a declaration in respect of the resolutions passed at the meeting on 13 November 1999. Strictly speaking, there is no need for me to consider the Defendants' secondary case. As the parties have incurred much time and expense arguing on this issue, I shall nevertheless deal with it in the hope that this will help to tie up the loose ends left by the parties as a result of their pleadings and to avoid unnecessary future litigation. The 4th Defendant's appointment 38.The 4th Defendant's case is that he was a de facto subscriber of the Association since its inception. He said when the Association was incorporated, he was in the employment of Yue Hwa Chinese Products Emporium Limited which is a Chinese state corporation in Hong Kong. Due to the nature of his work and the political atmosphere at the time, he said, it was inconvenient for him to be registered as a member and director of the Association because of Chinese sensitivity to carrier pigeons as a tool of intelligence. Hence, his uncle who lived with him, Wong Mui, was registered as a subscriber and held the membership and directorship on his behalf. Wong Mui eventually resigned as a director on 16 January 1984 and the 4th Defendant was formally appointed to replace him on the same day. There is no dispute that Wong Mui was introduced to the 2nd Plaintiff by the 4th Defendant for the purpose of incorporating the Association, that he had mentioned to the 2nd Plaintiff about the difficulties created by his employment and that he participated in the activities and management of the Association since its inception. The Particulars of Directors filed on 16 January 1984 showed that the 4th Defendant replaced Wong Mui as director upon Wong's resignation and that the other seven directors were the other seven Subscribers. The 4th Defendant is not seeking any remedy. He admitted in cross examination that he was not claiming to be a subscriber but he insisted that he had been validly appointed as a director of the Association on 16 January 1984 and has since acted as a director until the present dispute arose. 39.The Particulars of Directors is a document filed with the Companies Registry pursuant to the requirements of the Companies Ordinance. It is some evidence of appointment as a director but is not in itself the authority for the appointment, which is vested with the Association in general meeting. I have examined what purports to be the "Full Record of all the meetings of the 1st Plaintiff" in the agreed bundle of documents filed by the parties. While the 4th Defendant's appointment may be justified as an appointment to fill the casual vacancy left by Wong Mui's resignation and there was no need to increase the number of directors to accommodate his appointment, I am unable to find any documentation in the form of board resolutions or minutes of general meeting recording Wong Mui's resignation and the 4th Defendant's appointment as director. I do not think the Particulars of Directors filed with the Companies Registry is sufficient proof of his appointment, though it is some evidence of his de facto directorship. The 3rd, 6th to 8th and 10th to 12th Defendants' appointment 40.These Defendants claim that they were appointed as directors at a meeting held on 4 March 1984. Under Article 13, the number of directors and names of the First Directors shall be determined in writing by a majority of the Subscribers to the memorandum. Alternatively, the Association in general meeting may increase the number of directors under Article 22. There is no dispute that the number of directors determined by the Subscribers in accordance with that article is eight. Hence, the Defendants thought it necessary to pass a resolution on 13 November 1999 to increase the number of directors to 18 to accommodate the appointment of all the Defendants. For reasons as given earlier, an increase in the number of directors has to be sanctioned by a special resolution or in writing by the Subscribers. A perusal of the minutes shows that a meeting was held on 4 March 1984 in the office of the Association. It was attended by 11 persons, namely the 2nd Plaintiff, the 1st, 4th, 6th to 8th, 10th to 12th Defendants and two others. The minutes recorded that the 4th, 6th to 8th, 10 to 12th Defendants were elected as directors. There was no evidence that the number of directors had been increased by a special resolution to accommodate their appointment. The meeting was described as "The 5th Meeting of 1984." It is not apparent from the minutes whether it was a board of directors meeting or a members' general meeting. If it was a board meeting, the board had no power to increase the number of directors and to make the appointment. 41.On the other hand, in view of my finding on the issue of membership, the meeting could not have been a members' general meeting because it was attended by two members and nine non-members. Not only that there was insufficient quorum, it could not have been a meeting of the Association because of the presence of non-members voting at the meeting. The resolution could not have been the will of the Association as it was a decision by a collection of individuals comprising mainly of non-members. The resolution passed or the appointments approved could not have been that of the Association. 42.Mr Yip does not dispute the inadequacies of the minutes but argues that prior to the appointment there had been discussion meetings and nomination and that the appointments were planned, discussed and made in due course. I do not think that is a sufficient answer to the complaint that the appointment or the meetings were irregular. Whatever election or resolution that was passed, it was not that of the Association. The appointment of these Defendants as directors were therefore invalid. The 5th and 9th Defendants' appointment 43.These Defendants claim that they were appointed at the meeting held on 17 March 1984. The minutes recorded that these two Defendants and the seven Defendants appointed on 4 March 1984 were members of the new board of directors. The minutes did not record how these Defendants were appointed as directors. The minutes did not even record who were present and voting at the meeting. It is defective as a minutes. It is not known whether it was a board meeting or a members' general meeting. Whatever it could have been, in view of the deficiency in the minutes and for the same reasons as given above, the meeting was ineffective to bring about the appointment of the 5th and 9th Defendants or any of these nine Defendants, because it was not shown to be a members' general meeting with special resolution having been passed to increase the number of directors to accommodate their appointments. The 13th Defendant's appointment 44.The 13th Defendant claims that he was nominated for appointment as a director at a meeting held on 21 March 1986 and his appointment was approved at a meeting held on 5 December 1986 attended by the 2nd and 3rd Plaintiffs, the 1st and 2nd Defendants and seven other Defendants. The appointment of the 13th Defendant was unanimously approved at the meeting. Again, it is not clear whether the meeting was a board meeting or a members' general meeting. It was described as the "December Routine Meeting", which suggests it was a board meeting. If so, it did not have power to increase the number of directors to accommodate the appointment. 45.The meeting was not a meeting of the Association because of the presence of non-members voting at the meeting. For that reason, any resolutions passed at the meeting could not have been the exercise of the will of the Association. Thus the fact that four Subscribers at the meeting all voted in favour of the appointment could not cure the defect. Furthermore, there is no evidence that a special resolution was passed at the meeting to increase the number of directors so as to accommodate the appointment of the 13th Defendant. The meeting was ineffective to bring about the appointment of the 13th Defendant. De facto directorship 46.Despite that there is no evidence in support of their appointment, there is no dispute that these 11 Defendants have at various stages been invited by some of the Plaintiffs, including the 2nd Plaintiff who is the chairman of the Association, to act as directors. The 2nd Plaintiff signed on the Particulars of Directors filed with the Companies Registry and naming these Defendants as directors of the Association. They contributed their time and effort to the Association. They worked with the other directors of the Association for the purposes and affairs of the Association. No complaint was raised by any of the Plaintiffs until the present dispute arose. Mr Yip submits that the Defendants have been acting as de facto directors for the past 13 or more years and should be allowed to continue as directors. 47.De jure, people cannot be directors unless they have been properly appointed. The principle of de facto directorship is a principle whereby the acts of an ostensible agent of a company, the de facto director, is made binding on the company, because he has openly acted as if he had been validly appointed and his acts were acquiesced by the company or held out by the company as having been duly authorised by the company. A third party acting in good faith is entitled to rely on the fact that the board had unlimited power to authorise another person to exercise the powers of the company and bind the company. The third party is entitled to make that assumption by reliance on the general law of agency and the rule in Turquand's case. As the cases have shown, this assumption could only be made if there is holding out by the company or by reason of the employment of the de facto director in the company. 48.I do not think it necessary to go into a detail analysis of the principle of de facto directorship. Suffice it is to say that this principle applies to protect a third party dealing with a de facto director in good faith so that the company is bound by the acts of the de facto director. In none of the authorities referred to by Mr Yip could it be shown that a person could assert as against the company the lawfulness of his de facto directorship. Such a person could not be described as a third party. By claiming to have lawfully become a director of the company, he must also be taken to have knowledge of the internal management of the company, including his own lack of authority. It would be a startling proposition of the law if an ostensible agent with no express authority to act for a principal may assert as against that principal that he has full power and authority which the principal has never delegated to him. In my view, the principle of de facto directorship only operates to protect a bona fide third party dealing with the de facto director by making the de facto director's act binding on the company. It does not apply as between the de facto director and the company so as to create any right or obligation inter se. 49.Even if the Association or the board of directors have acquiesced in the Defendants acting as its directors, if in fact they have not been properly appointed, the fact that they have acted and remained in purported office for a substantial period would not make them directors de jure. To hold otherwise would be to allow a de facto director to run the company as if it were his own regardless of the company's memorandum and articles of association. This would have the effect of permitting an intruder or a de facto director acting without authority to set up a new regime outside the articles of association of the company, thereby changing the whole structure of the company and rendering its articles of association redundant. The company would become differently constituted at the instance of the de facto directors. This cannot be right. 50.Next, Mr Yip argues that the 3rd to 13th Defendants could only be removed by special resolution in accordance with section 157B of the Companies Ordinance. In fact this is provided for in Article 25. He argues that the Subscribers meeting on 29 April 1999 was irregular because of inadequate notice and service of the notice and that the proposal to remove or to "dis-recognise" the additional directors has not been included in the agenda. I do not think these irregularities could be disputed. However, I think Article 25 and section 157B only apply to directors who have been properly appointed and not to intruders or de facto directors. These Defendants were not properly appointed under the articles of association. They have no protection under the articles of association and there is no question of having to remove them in accordance with the articles. A special resolution for their removal was unnecessary. The case of Re: Hong Kong Korean Church Ltd HCA No.7989 and 8129 of 1993, unreported, 6 October 1992, is precisely on the point. In that case, Rogers J, as he then was, in granting an injunction to stop the defendants from acting as directors of the Korean Church, held at p 11-12:
51.I conclude that as between the 3rd to 13th Defendants and the Association, the Association is not prevented from denying that they were not properly appointed as its directors and that as they were not properly appointed in accordance with the articles of association, it was not necessary to have them removed under the machinery provided in Article 25. The board of directors or the Association is free to put its own house in order and declare that they have never been properly appointed. Breach of fiduciary duties by the 1st and 2nd Defendants 52.I now turn to the Plaintiffs' claim against the 1st and 2nd Defendants for damages for breach of fiduciary duty as directors. The Plaintiffs' pleaded case against the 1st and 2nd Defendants is that without the approval by the board of directors they accepted the membership of the 65 requisitionists; that they convened an extraordinary general meeting on 13 November 1999 in breach of section 113 of the Companies Ordinance; that they called for ordinary resolutions to be passed at that meeting and that they were in breach of Article 13 in attempting to increase the number of directors. It appears that this claim has not been actively pursued at the hearing. 53.In my view, all the complaints against the 1st and 2nd Defendants arose out of a power struggle between the Subscribers, which is now resolved in favour of the Plaintiffs mainly on my finding on the issue of the membership of the 65 requisitionists. Had there been no power struggle, the legality of the membership of these requisitionists as well as the legality of the appointment of the 3rd to 13th Defendants as directors would never have arisen. The Association, as I said, was run in an extremely casual manner, without much regard to its articles of association. For more than twenty years, members have been admitted without complying with the procedures in Article 3. Going through the minutes, it appears to me that the Subscribers who took part in the management of the Association were happy to have more members and never addressed their minds to admission formality and procedures. These Purported Members took part in the activities of the Association with the connivance of the Subscribers, who were the only proper members of the Association. In my view, the Subscribers involved in the management of the Association at the various times when the Purported Members were admitted were equally to blame for their admission. The convention to admit members in this casual manner was allowed to develop. In the circumstances, I do not think it is right to level all the blame on the 1st and 2nd Defendants merely because they took a view different from those Subscribers under the leadership of the 2nd Plaintiff. It is a mistake jointly made by all. Not only that the Plaintiffs are now benefiting from their joint mistake, they seek to put the blame solely on the 1st and 2nd Defendants and seek damages against them. I do not think that could be right. In the circumstances, I think the 1st and 2nd Defendants should fairly be excused for what they did as a result of their common mistake. 54.As for the other complaints, they were premised on the assumption that the 1st and 2nd Defendants convened the meeting held on 13 November 1999. That assumption, as I have said, was wrong. The meeting was convened by one of the requisitionists, Mr Tong. This would be sufficient to absolve the 1st and 2nd Defendants of their liability, even though they might personally be desirous in holding the meeting themselves or might have in the exercise of their misapprehended membership right engineered the requisition and attended and voted at the meeting on 13 November 1999. I am therefore not satisfied that the Plaintiffs have discharged the burden of proving breach of fiduciary duty by the 1st and 2nd Defendants. Conclusion 55.In summary, I grant the Plaintiffs a declaration that the purported extraordinary general meeting held on 13 November 1999 was not a meeting of the Association and all resolutions purportedly passed at the meeting were not binding on the Association. The Plaintiffs' claim for breach of fiduciary duty against the 1st and 2nd Defendants is dismissed. 56.In view of the conduct of the Plaintiffs, it could fairly be said that the Plaintiffs brought litigation upon themselves by the very casual way they conducted the affairs of the Association as regards admission of members or connived at their admission. The Plaintiffs, in particular the 2nd Plaintiff, was instrumental in bringing the 3rd to 13th Defendants into the board, the validity of whose appointments they now seek to challenge. In the circumstances, I do not consider it is appropriate to make any order as to costs against the unsuccessful Defendants, i.e. the 3rd to 13th Defendants. On the other hand, though the 1st and 2nd Defendants successfully resisted the Plaintiffs' claim for breach of fiduciary duty, they were unsuccessful on the issues of membership and the lawfulness of the meeting held on 13 November 1999. They should not be awarded costs against the Plaintiffs. Accordingly, I make a costs order nisi that there be no order as to costs. 57.The parties are now back to where they started in 1975. The Subscribers are the only members and the persons in control of the Association. It is now time that they should, with proper legal advice and good business sense, conduct the affairs of the Association properly and in accordance with its articles of association: for example in appointing its directors and rotating them, and in regularising the membership of the Purported Members or some of them in such a way as is acceptable to the Subscribers and the Purported Members and as is just and equitable in the circumstances. In view of the number of subscribers, they would have to strive hard to resolve their differences rather than to engage themselves in meaningless litigation of this kind. If the minorities are not treated fairly, the likelihood is that Association will face a petition for its winding up on just and equitable ground.
Representation: Mr George Chu, instructed by Messrs Lau, Chan & Ko, for the Plaintiffs Mr Timmy C.H. Yip, instructed by Messrs David Hui & Co, for the Defendants |
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