All Overseas Ltd and Others v. Best Codes Nominees Ltd and Others
Read the full judgment text of CACV 329/2005 on BabelCite. This Court of Appeal judgment was delivered on 22 March 2006.
1. This is an appeal by the plaintiffs against the judgment of Yam J given on 20 September 2005, whereby both the plaintiffs’ applications for summary judgment under Order 14 of the RHC and for issues to be determined by the court under Order 14A were refused. The judge granted the defendants unconditional leave to defend. He ordered that the costs of the applications be costs in the cause save that the costs of the plaintiffs’ summons dated 28 June 2005 and of the hearing on 5 July 2005 be to
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CACV 329/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 329 OF 2005 (ON APPEAL FROM HCA NO. 4515 oF 2002) ____________________________ BETWEEN
____________________________ Before : Hon Woo VP, Hon Cheung JA and Hon Yeung JA in Court Date of Hearing : 15 March 2006 Date of Judgment : 22 March 2006 _______________ J U D G M E N T _______________ Hon Woo VP : Introduction 1.This is an appeal by the plaintiffs against the judgment of Yam J given on 20 September 2005, whereby both the plaintiffs’ applications for summary judgment under Order 14 of the RHC and for issues to be determined by the court under Order 14A were refused. The judge granted the defendants unconditional leave to defend. He ordered that the costs of the applications be costs in the cause save that the costs of the plaintiffs’ summons dated 28 June 2005 and of the hearing on 5 July 2005 be to the defendants in any event. Background 2.At all material times, the 2nd plaintiff (“P2”) and the 3rd plaintiff (“P3”) were the only registered shareholders of Billion Top Garment Limited (“the Company”). In consideration of a loan of $600,000 made by Chelton Finance Limited (“D4”) to them, P2 and P3 pledged their shares in the Company to D4 and executed a Share Mortgage dated 11 January 2002 in favour of D4 (“the Share Mortgage”). As provided for in clause 2 of the Share Mortgage, documents in escrow were deposited with D4. These documents included the share certificates together with related instruments of transfer and contract notes in blank in favour of D4 or its nominees duly signed by P2 and P3, and duly signed (but undated) resignations of one Mr Hau Wing Lam (“Mr Hau”) and Great Wealth Trading Limited (“Great Wealth”), who were the only two directors of the Company. 3.Clause 5(a), (b), (d) and (e) of the Share Mortgage provided as follows:
4.Clause 6 of the Share Mortgage provided as follows:
5.Clause 8 of the Share Mortgage provided as follows:
The parties’ disputes 6.The plaintiffs’ claim is based on the following allegations in the Amended Statement of Claim:
7.The plaintiffs’ prayer for relief seeks the following:
8.By a summons under Order 14 dated 29 October 2004, the plaintiffs sought, inter alia, the orders as stated in sub-paragraphs (1), (2), (4) and (5) of the preceding paragraph. Sub-paragraph (3) was not pursued in the application. 9.By a summons under Order 14A dated 23 June 2005, the plaintiffs applied for the determination by the court the following questions of law and/or construction, and in the event that any of the answers to the questions is in the negative, for final judgment as claimed in the action to be entered against the defendants:
10.By another Order 14A summons dated 28 June 2005, a further question was raised, namely,
11.The defendants’ Defence pleads the Share Mortgage and upon P2 and P3’s default in making repayment of the loan, D4 invoked the powers conferred on it by the Share Mortgage and duly convened the alleged EGM, appointing D2 and D3 as additional directors and D1 as the company secretary and removing P1 as director and Great Wealth as company secretary. It is pleaded that P1 was removed as a director with effect from 31 August 2002 by virtue of the alleged EGM. Thus, it is alleged that neither P1’s consent nor agreement to the appointment of D1 as the company secretary nor P1’s participation in any board meeting was necessary. It is also pleaded that D1, D2 and D3 have been duly appointed under and by virtue of the alleged EGM and are entitled to act as secretary and directors of the Company and to hold themselves out as such. 12.In the 2nd Affirmation of D2, the following allegations are made:
13.In the numerous affidavits/affirmations filed on behalf of the parties, various issues were raised and hotly contested. For instance, there were allegations raised by the plaintiffs whether the loan of $600,000 was made to P2 and P3 or instead to the Company, and whether there were in fact two loans of $600,000 each or there was only one such loan. This hotly contested dispute seemed to have ended (subsided and not resolved, I am afraid) when Mr Chan in his 8th Affirmation stated that he was mistaken because the equitable mortgage (I understand that to mean the 2nd mortgage of the Property) was not in relation to the loan of $600,000 made in 2002 but was in relation to a loan of about $2.6 million made in about 1999/2000. Another important dispute is whether D4 had made demands dated 12 July 2002 on P2 and P3 for repayment of the loan, which demands the plaintiffs allege were fabrications. 14.As Mr Daniel Fung SC, appearing before us on behalf of the plaintiffs with Mr Benjamin Chain and Mr Jenkin Suen, accepted that all the facts which are subject to dispute should be taken in favour of the defendants for the purposes of determining the Order 14A questions and he did not insist on the determination of QUESTION 4, it is unnecessary to deal with these monetary disputes. The judgment 15.In his judgment, the judge identified whether the $600,000 borrowed by P2 and P3 had been repaid as the main dispute between the parties. He stated that the plaintiffs accepted that whether the loan had been repaid is an issue to be tried. He noted the plaintiffs’ contention that even assuming that the loan had not been repaid, the plaintiffs were entitled to judgment under their Order 14 application. Indeed, as noted in paragraph 10 of the judgment, Mr Rimsky Yuen SC for the plaintiffs before the judge, took the stance that the plaintiffs would take all the facts as put forward by the defendants in favour of the defendants. This seemed to be subject to an exception, which is the defendants’ allegation that P1’s appointment as a director of the Company was without knowledge or consent of D4. On this matter, the judge’s observed:
16.The judge ruled that the disputes could not be resolved on affidavits and that whether there was the implied term was an arguable point which should not be decided at this stage. The judge accepted submissions by counsel for the defendants. He said:
17.The judge went on to conclude in the following manner:
Grounds of appeal 18.On behalf of the plaintiffs, a number of grounds of appeal are raised. While one of the grounds alleges that the defendants’ allegations of two loans of $600,000 were incredible and ought to be rejected, as I said before, this matter was not pursued before us. The plaintiffs also filed a supplemental notice of appeal that raises an issue relating to the loan/loans. Since Mr Fung did not press this matter either, I do not need to deal with it. 19.The other grounds challenge the judge’s decision not to determine the questions of law and construction as raised in the Order 14A summonses. 20.The plaintiffs’ stance is that for the purposes of their applications under Orders 14 and 14A, even accepting all of the defendants’ allegations of fact as being true, the plaintiffs are still entitled as a matter of law to judgment. It is contended that the judge erred in failing to determine the questions posed by the plaintiffs under its Order 14A summons of 23 June 2005, and that the questions should be answered in the negative, entitling the plaintiffs to judgment under Order 14. Complaint is also made regarding the judge’s refusal to entertain the laws relating to companies on which the plaintiffs relied because he wrongly treated them as technical objections. 21.Right from the start of his address, Mr Fung stated that the purpose of these proceedings was to seek relief from the court to maintain the status quo ante before the alleged EGM which, on all the available evidence, was invalid. He submitted that even if all the facts as supported by any evidence would be presumed in favour of the defendants, the questions posed in the Order 14A summons should be answered by the court and the answers would be negative, thus entitling the plaintiffs to judgment under Order 14. The available facts from the evidence 22.It is therefore necessary to set out all the available facts from the evidence and also the presumed facts in favour of the defendants first before considering the related law so as to see if Mr Fung’s contention could be maintained. 23.The facts are as follows:
24.It is, however, important to note that in spite of the voluminous affidavits/affirmations filed by the parties, there is no evidence of the following:
25.Mr Fung’s contention is based on the fact that notwithstanding D4’s rights and powers under the Share Mortgage, it had never been registered as a shareholder of the Company. P2 and P3 had remained the registered shareholders. D4 could only seek to be so registered by having the approval of the directors under article 7 of the AA, otherwise it had only an equitable right in the shares of P2 and P3. The Share Mortgage did not help D4 in this regard. These are all correct and are sufficient for the purposes of answering QUESTION 2 in the negative. I shall return to this matter after dealing with QUESTION 1. Question 1 26.The defendants’ case is that D4 had given the notice dated 5 August 2002 to convene the alleged EGM as an authorised proxy of P2 and P3 pursuant to clause 6(b) of the Share Mortgage, and indeed Mr Alexander Wong, for the defendants before us, relied heavily on this notice. It will be remembered that Clause 6(b) of the Share Mortgage provides:
27.The effectiveness of the notice and the validity of the EGM together with the resolutions passed thereat are challenged on the basis that the proper procedure for convening the alleged EGM had not been undertaken. 28.The required procedure for convening a meeting is set out in the AA of the Company. Article (25) of the AA provides:
29.Article 51 of Table A in the First Schedule to the Companies Ordinance (adopted per article (1) of the AA) is also relevant. Article 51 reads:
30.It can be seen therefore, that the procedure for D4 to follow by acting as proxy for P2 and P3 (as shareholders) as set out in clause 6(b) of the Share Mortgage is the same as that stipulated in the aforesaid articles. 31.The notice dated 5 August 2002 was not a notice to the directors of the Company to requisition an EGM: it was expressed to be a notice to members of the Company and not the board. It is therefore clear that the notice cannot be a requisition to the director(s) for a meeting. On the face of the notice, although the written resignation of Great Wealth as director had apparently been dated, a resolution was sought to accept its resignation. This demonstrates that Great Wealth’s resignation as director was still ineffective, and Great Wealth was at the time still a director. Even if the validity of P1’s directorship is challenged, there was Great Wealth as the only remaining director. Accordingly, a requisition for a meeting should have first been made to Great Wealth, and on the condition that Great Wealth was unable or unwilling to act as director having been satisfied, D4 as the proxy of all the shareholders would then be entitled to summon a meeting,. However, the defendants have not alleged that a requisition had been made to Great Wealth or that Great Wealth was unable or unwilling to act, let alone adduced any evidence to that effect. 32.Thus, it is plain that without requisitioning for a general meeting, D4 was not entitled, as proxies for P2 and P3, to convene an EGM. In the circumstances, the alleged EGM cannot be valid, and the resolutions passed thereat cannot be valid either. The powers and rights given to D4 by the Share Mortgage did not and cannot help D4 in this regard. 33.Thus, it is a clear case that QUESTION 1 should be answered in the negative. However, the question seems to be put on the premise that D4 was not registered as shareholders of the shares of P2 and P3. In my view, that is not a necessary premise. The reason for answering QUESTION 1 in the negative is because of the failure on the part of D4, even if properly and legitimately acting as proxy for P2 and P3, to follow the proper procedure for convening the alleged EGM. Question 2 34.Now I shall further deal with QUESTION 2. It is also plain that D4 and its nominees could not possibly have the shares of P2 and P3 transferred to them and registered as shareholders without applying to the existing board of directors. Article (7) of the AA provides:
35.Moreover, section 28(2) of the Companies Ordinance provides:
36.The status of a shareholder is only recognised when he is registered. Before registration, the person who is entitled to a beneficial interest in shares is incomplete and he has no legal title to them. Palmer’s Company Law, Vol 1, para 6.605, summarising the principle as enunciated in Societe Generale de Paris v Walker (1885) 11 App Cas 20 (HL) and Roots v Williamson (1888) 38 Ch D 485 states as follows:
37.The reference to the court’s discretion under s 100 of the Companies Ordinance in rectifying the Company’s register so as to register D4 and its nominees as shareholders is a separate matter altogether. No application has yet been made by the defendants for that relief. In the circumstances of this case, that avenue open to the defendants should not be considered as having any impact on the determination of QUESTION 2. 38.Thus, it is again plain that QUESTION 2 must be answered in the negative. The judge’s refusal to determine the questions 39.Despite the clarity of the situation, both on facts and law, the judge refused to determine these two Questions to which I have responded in the negative. 40.In Shell Hong Kong Ltd v Yeung Wai Man, Kiu Yip Co Ltd & Anor [2003] 3 HKLRD 62, at 69, with the unanimous agreement of the other judges, Chan PJ stated:
41.In their Amended Statement of Claim, the plaintiffs pray for five substantive items of relief, which were reduced into four items in the Order 14 application (see paras 7 and 8 above). The determinations of QUESTION 1 and QUESTION 2 would entitle them to judgment to three of the four items, namely, items (1), (2) and (4) under para 7 above. As I have held, the facts and law are plain in the determination of QUESTION 1 and QUESTION 2, which would have the effect of disposing of the major issues between the parties. The judge’s refusal to determine these Questions was essentially based on the parties factual dispute over whether the loan secured by the Share Mortgage had been repaid, but, in my view, this dispute should not, in the circumstances this case, present any justifiable obstacle for the court in dealing with the Questions. In my judgment, the judge acted against principle in refusing to deal with these two Questions. Order 14 judgment 42.For the reasons given above, and as QUESTION 1 and QUESTION 2 are answered in the negative, I would give the following judgment for the plaintiffs:
Question 3 43.Now I turn to QUESTION 3, which relates to P1’s removal as director of the Company. In my judgment, this is not suitable question for determination under Order 14A in the circumstances of this case. The question only deals with the non-compliance of the notice requirement under s 157B of the Companies Ordinance. But a decision on this question does not help resolve the more fundamental issue whether P1 has since 26 January 2002 been a director of the Company, which is the effect of the declaration sought in the plaintiffs’ prayer for relief. 44.When the Share Mortgage was executed on 11 January 2002 by P2 and P3 as the two only shareholders of the Company in favour of D4, the only two directors of the Company were Mr Hau and Great Wealth. Mr Hau resigned on 26 January 2002 and Great Wealth was the only director left. It is alleged by the plaintiffs that P1 has become a director since 26 January 2002, but the plaintiffs’ evidence is to the effect that P1 was appointed by the new owners of P2 and P3. Yet on the actual identity of the persons who made the appointment, the procedure by which the appointment was made, and how a change of ownership was achieved since the share certificates had been deposited with D4 pursuant to the Share Mortgage, the evidence remains silent. The appointment is challenged by the defendants as having been made without their knowledge or consent. It is alleged in a couple of affidavits filed on behalf of the plaintiffs that the defendants are estopped from denying P1’s appointment by reason of the fact that the alleged EGM of 31 August 2002 purported to remove P1 as a director. But as to how the alleged EGM should operate as an estoppel and whether P1 relied on this alleged EGM to its detriment, there is absolute silence. In the circumstances, I am not inclined to express any view that P1’s appointment or position as director is valid, nor am I prepared to assume that P1’s appointment must be valid for the purpose of answering QUESTION 3. Moreover, it is contended on behalf of the defendants that a term was necessarily implied in the Share Mortgage that P2 and P3 would not appoint P1 or any other person to be a director of the Company without D4’s consent, for otherwise D4 would lose control of the Company which was or was intended to be given to it by the Share Mortgage. Similar to the judge’s decision, I do not need to decide this matter in this appeal. Suffice it to say, the appointment of P1 as director of the Company being invalid is a fact-sensitive matter and the implied term is reasonably arguable. The question whether P1 was a director is interwoven with factual issues. Similarly, whether any notice (having the effect of a s 157B notice or not) had been served on P1 appears also to be in dispute. If the court were to answer these questions, it would in effect give a legal ruling in vacuo or a ruling on the hypothetical basis in a “fact sensitive case”: see Netwell Properties Ltd v JCG Finance Co Ltd [2004] 2 HKLRD 138 at 141E, per Rogers VP. A determination of QUESTION 3 is therefore premature at this stage and would not have the effect any where close to a final resolution of the issues between the parties on this matter. 45.Suffice it for the present purposes, my answer to QUESTION 1 being in the negative will entitle the plaintiffs to the declaration that the alleged EGM is void, and the resolutions purportedly passed in it, including the resolution to remove P1 as director, is also void. However, as explained in the preceding paragraph, I am not persuaded that the court should make a declaration that P1 is a director of the Company. 46.In my judgment, the judge cannot be criticised for refusing to exercise his discretion in determining QUESTION 3. Conclusion 47.For the above reasons, I would allow the appeal and give judgment in favour of the plaintiffs as aforesaid. Appeal on costs 48.There is a ground of appeal that challenges the judge’s order for costs. The judge said:
49.This order for costs under appeal is in respect of QUESTION 4, the question posed by relying on the provisions of ss 18 and 20 of the Money Lenders Ordinance. Mr Fung only briefly addressed us on the appeal against the costs order. His contention is simply that the adjournment of the hearing date for the summons fixed on 5 July 2005 was sought by the defendants, and thus either they should bear the costs of the adjournment or the costs should be in the cause of the action. Moreover, the costs of the Order 14A summons dated 28 June 2005 should in any event be in the cause. As I see it, the adjournment of the hearing on 5 July 2005 was sought because the defendants were confronted with the difficulty created by that summons which raised a matter entirely new and additional to the questions raised in the Order 14A summons of 23 June 2005. Since Mr Fung has not pursued QUESTION 4 before us, which would have involved factual disputes between the parties, I am of the view that for the reasons given by the judge, his order for costs was properly made. I would therefore dismiss this appeal against the costs order. Costs of this appeal and below 50.Since I would allow a substantial part of this appeal and the plaintiffs have quite properly not pursued the monetary disputes and only very briefly addressed us on the appeal against the costs order, I would make an order nisi that the plaintiffs have their costs of this appeal. Regarding the costs below, I would make an order nisi that the plaintiffs have their costs, save that in respect of the Order 14A summons dated 28 June 2005 and the wasted hearing date of 5 July 2005, the costs be to the defendants. Cheung JA : 51.I agree. Yeung JA : 52.I agree with the judgment of Woo VP and the orders, including the costs orders, that he proposes.
Mr Daniel R Fung SC, Mr Benjamin Chain and Mr Jenkin Suen, instructed by Messrs So, Lung & Associates, for the Plaintiffs (Appellants) Mr Alexander Wong, instructed by Messrs Foo & Li, for the Defendants (Respondents) |
Cases cited in this judgment
Further hearings and rulings under CACV 329/2005