Cnt Resources Limited and Another v. Lam Bill and Others

CACV000128/1985

BETWEEN

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Coram: Hon. Cons, J.A. & Hon. Jackson-Lipkin, & Mantell JJ.

Date of hearing: 9th August, 1985

Date of delivery of judgment: 9th August, 1985

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JUDGMENT

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Cons, J.A.:

1. This is an appeal from a decision of Deputy Judge Eddis given on the 30th July by which he declined to continue injunctions obtained ex-parte from Mr. Justice Addis on the 23rd July and slightly amended on the following day. The injunctions had restrained the China Paint Manufacturing Co. Ltd, which is the 7th defendant, and six of the seven directors of the company, who are the first six defendants, from using the company's monies to pay out sums to the extent of $11 million by way of bonuses and dividends authorized by a resolution of the board dated the 22nd July.

2. The 1st Plaintiff is a limited company which may be conveniently described as taking over China Paint. By the time that it applied for the ex-parte injunctions it had purchased or agreed to purchase just under 50% of the shares of China Paint. It was also in the course of negotiating for the purchase of approximately a further 21% from some of the directors of China Paint.

3. The 2nd plaintiff is a shareholder in China Paint who has agreed to sell his shares to the plaintiff company. He holds approximately 1%. None of the shares acquired or agreed to be acquired by the 1st plaintiff has yet been entered on the company's register in the 1st plaintiff's name.

4. The inter-partes hearing came on for hearing on the 30th July. During the course of the argument it was agreed between counsel and the judge that the hearing and the subsequent ruling should be confined to whether plaintiff had any locus standi before the court. If I may say so with respect that seems to me a curious course to have taken, and one with very little to commend it, for all that the judge would be concerned to consider would be whether or not there was a triable issue in that respect. If there had been a serious intention to pursue the point I would rather have expected an application to set aside the writ.

5. In the event the judge acceded to the defendants' submission that neither plaintiff had any locus standi. As far as the 1st plaintiff is concerned, he said this:

"To argue that an entity that might some day in some as yet unfulfilled circumstances become a shareholder ought thereby to be entitled to be joined as a party in attempting to put a stop to the internal resolutions of a limited company is, as far as I am concerned, to argue from no starting-point at all."

6. With regard to the phrase "as yet unfulfilled circumstances", the learned judge may have been influenced by his own observation of the fact that some of the sample contract notes exhibited in support of the director's positive affirmation as to his purchase were not fully completed, for he had earlier said that "it was entirely possible that all the notes, were in some way or other 'conditional' or 'in escrow' as it was put in one of the affidavits." He was there referring to an assertion made by the managing director of China Paint. Even if the 1st plaintiff were attempting to enforce its own equitable interests that criticism seems overly strict.

7. Be that as it may, we do not yet have a Statement of Claim. We have seen only the endorsement on the writ. Apart from a reference to negligence which I do not at the moment understand, the endorsement bears all the hallmarks of an action by minority shareholders. The real difficulty in the 1st plaintiff's way is that it has not yet registered its shareholding and that, when seeking a base for a derivative action, seems to me to be fatal. A suggestion that it might be able in some way amend its action or amend the capacity in which it is suing some of the defendants in my view does not help it.^#

8. The 2nd plaintiff is a registered shareholder. As far as he is concerned, the judge said:

"There must be some evidence either in the pleading or in the supporting affirmation that in deed and not just in theory the action instituted is seeking a remedy for the benefit of the company. Here there is none."

9. Whether the resolution in question was for the benefit of the company must to some extent be an issue in the action for it is inextricably tied up with the good faith of the directors. But there was the suggestion in at least one affirmation that to give effect to the resolution would cause irreparable damage to the cash flow of the company, and I would have thought that in itself would have satisfied the test which the learned judge posed for himself. Moreover there is a suggestion that the conduct of the board was ultra vires the company. I express no opinion whatsoever on the merits of that argument; however it does provide a ground not only for a derivative action, but possibly also for a personal action on behalf of the 2nd plaintiff. It is said that even now it is not clear which of the two actions is being brought. As I understand the position he is pursuing both. It is sufficient for today's purposes that he is entitled to bring the first.

10. For these reasons, I would for my part allow the appeal, set aside the order of the 30th July and remit the matter back to the judge to continue the hearing. If for one reason or another he is not available to do so then I presume it will have to start afresh before some other

# On reflection the word 'may' would seem more appropriate. No draft amendment was put forward.

judge. As I read the order of Mr. Justice Addison the injunctions granted by him will continue until the hearing, before whichever judge, is concluded.

Jackson-Lipkin, J.:

11. I agree.

Mantell, J.:

12. I agree that the appeal of the 1st plaintiff should be dismissed and the appeal of the 2nd plaintiff allowed.

13. I have no difficulty at all in affirming the decision of the learned Deputy Judge with regard to the 1st plaintiff which is not and never was a member of the company; and the writ is not in proper form, as I see it, to support a suggestion made extremely late in the day that the 1st plaintiff would have the right to pursue an action as assignee of the shares through its assignor either directly or by making the assignor defendant to the action. And in my view the endorsement to the writ is not sufficient to the purpose.

14. So far as the 2nd plaintiff is concerned, I think it is only necessary to say that he is a member of the company and as such, it is conceded, is entitled to pursue his rights as member. It said that here that is not the case, but to put it no higher than this, if his contention that the Articles of Association require the declaring of an interim dividend or the payment of a bonus to be sanctioned by the members of the company in general meeting be right, then it is at least arguable that in what has been done he has been deprived of the entitlement to vote and to that extent, at least, his rights as a member of the company have been adversely affected. Of course that leaves on one side a much more difficult question of whether or not the Articles of Association are to be construed in that way, but it seems to me that that was not touched upon by the learned Deputy Judge and it is not necessary for us to express a view about it either. For that reason I agree that the appeal of the 2nd plaintiff should be allowed.

Representation:

Charles Ching, Q.C. & Winston Poon (M/s Pang, Kung & Co.) for Plaintiffs/Apellants

Dennis Chang, Q.C. & Benjamin Yu (M/s Philip K.H. Wong & Co.) for 1st, 2nd, 4th 6th & 7th Defendants/Respondents

3rd Defendant in person, not appearing

(M/s Slaughter & May) for the 5th Defendant, not appearing