Jonathan Lim v. She Wai Hung and Others

HCA 391/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 391 OF 2010

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BETWEEN

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Before: Deputy High Court Judge L. Chan in Chambers

Dates of Hearing: 3 December 2010

Date of Decision: 6 December 2010

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D E C I S I O N

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1.This is an application for summary judgment by the plaintiff. The plaintiff seeks in the statement of claim various declarations and injunctions. He now wants summary judgment for the relief. His case is that the appointments of the 1st and 2nd defendants as directors of the 3rd defendant are irregular. The 1st and 2nd defendants should be enjoined from acting as such and they should terminate the appointment of certain lawyers in the Mainland that they had engaged on behalf of the 3rd defendant.

Background

2.The 1st defendant is the father of the 2nd defendant.  They accept that their appointments are irregular and are willing to undertake not to hold themselves out or act as directors of the 3rd defendant in Hong Kong or the Mainland, but they are not prepared to terminate the appointment of the Chinese lawyers.  They also say that this action is fundamentally flawed as the plaintiff has no locus standi to bring this action and it should therefore be struck out.

3.The cause of this dispute can be traced back to sometime in July 1993, if not earlier.  The 3rd defendant was incorporated on 8 July 1993.  Its two subscriber shares were then acquired by the plaintiff and his father, Juliano Lim (“JL”).  It was then operated as a quasi partnership between JL and the 1st defendant.  The 1st defendant was appointed a director of the 3rd defendant on 31 March 1995.  The plaintiff transferred his subscriber share to the 1st defendant on 4 December 1995 at nil consideration.

4.On 5 December 1995, 5,999 shares were allotted to JL and 3,999 shares to the 1st defendant.  From then on, JL and the 1st defendant were the 3rd defendant’s shareholders holding 6,000 and 4,000 shares respectively.  The 1st defendant resigned as a director on 19 May 1997.  He signed a provisional sale and purchase agreement with JL on 29 May 1997 to sell his 4,000 shares to the 1st defendant at HK$4 million.  They made a formal agreement for the sale on 4 July 1997.  The sale was later aborted because JL did not pay the consideration to the 1st defendant.

5.On 28 July 1997, JL transferred one share to the plaintiff.  The 1st and 2nd defendants say that this share was and is held by the plaintiff as a nominee for JL.  They gave the reason that the Companies Ordinance at that time required at least two shareholders for a private company and JL transferred one share to the plaintiff to hold as JL’s nominee as JL was preparing to take over the 1st defendant’s 4,000 shares as well.

6.The 3rd defendant’s business was in electroplating of spectacle frames.  It had a factory in the Mainland called Kwai Chung Gold Loop Spectacles Processing Factory.  The 3rd defendant’s only substantial business was to operate the factory.  Since May 1997, JL diverted the 3rd defendant’s business in the operation of the factory to one Gold Loop Electroplating and Metal Finishing Company Limited (“Gold Loop”).  Gold Loop was formed by JL and five other Hong Kong residents. JL was the major shareholder of Gold Loop before his bankruptcy.

7.The 3rd defendant used to be a quasi partnership between JL and the 1st defendant.  Despite the abortion of the sale of shares by the 1st defendant to JL, the 1st defendant was still excluded from the management of the 3rd defendant.  The 3rd defendant also formally ceased business in March 1999.  The 1st defendant still holds 4,000 or 40 per cent of the shares of the 3rd defendant.

8.In 2001, the 1st defendant presented a petition under section 168A of the Companies Ordinance against JL and the plaintiff, alleging that they had conducted the affairs of the 3rd defendant in a manner unfairly prejudicial to the 1st defendant’s interest.  The 1st defendant prayed for an order that both JL and the plaintiff should purchase his 4,000 shares.  By a judgment dated 27 February 2004, Kwan J (as she then was) ordered JL alone to purchase the 1st defendant’s 4,000 shares at a price to be fixed and to be valued as at 18 May 1997.  The plaintiff was not required to join in the purchase as Kwan J found that his involvement in the 3rd defendant was minimal and he had made no or no substantial contribution to the capital of the 3rd defendant.  The price was fixed by Kwan J on 26 November 2007 at HK$2,730,453.45.

9.On 11 November 2006, JL and the plaintiff passed a board resolution of the 3rd defendant transferring the 3rd defendant’s entire interest in the factory to Gold Loop at nil consideration.

JL’s bankruptcy

10.JL did not pay any purchase price to the 1st defendant as ordered by Kwan J and the 1st defendant commenced bankruptcy proceedings against him on 26 March 2009.  He was declared bankrupt on 3 June 2009 and thus ceased to be a director of the 3rd defendant.

The EGM called by the 1st defendant

11.On 12 July 2009, the 1st defendant issued a notice to the plaintiff and the Official Receiver notifying them that an EGM of the 3rd defendant would be held on 12 August 2009.

12.The notice stated that JL had, because of his bankruptcy, ceased to be a director of the 3rd defendant.  The 1st defendant therefore proposed to convene an EGM to discuss the election of new members of the board, to constitute a new board, to annul the board’s decision made on 11 November 2006, and to annul the transfer agreement made between the 3rd defendant and Gold Loop of the same day, to authorise the 1st defendant to be the representative of the factory in Shenzhen and to apply to the authorities to restore the name of the factory.

The appointments by the 1st defendant and the legal action in the Mainland

13.On 12 August 2009, the 1st defendant purportedly convened the EGM and purported to annul the board’s decision of 11 November 2006 and the transfer agreement of the same day, to appoint the 1st defendant as the representative of the factory and to authorize the application to restore the name of the factory.  The 1st defendant also signed the minutes in the purported capacity of a director. 

14.On the same day, the 1st defendant, in the purported capacity of a director of the 3rd defendant, signed and filed a notice of change of directors at the Companies Registry, notifying the cessation of JL and the plaintiff as directors and his appointment as a director.

15.On 27 August 2009, the 1st defendant, in the purported capacity of a director of the 3rd defendant, signed another notice and filed it with the Companies Registry, notifying the cessation of appointment of the then Company Secretary and the appointment of his son, the 2nd defendant, as a director from 12 August 2009.

16.On 27 August 2009, the 1st and 2nd defendants in their purported capacities as directors of the 3rd defendant signed the annual return of the 3rd defendant.

17.On 1 September 2009, they signed and filed a notice and changed the registered office of the 3rd defendant to another address.

18.On 14 September 2009, the 1st defendant, in the purported capacity of a director, signed and filed another notice with the Companies Registry, notifying the appointment of the 2nd defendant as the Company Secretary of the 3rd defendant.

19.On 19 November 2009, the 1st defendant, in the purported capacity of the person in charge of the 3rd defendant, signed a statement of claim for the 3rd defendant to commence a legal action against Gold Loop in the People’s Court at Longgan District, Shenzhen of the Mainland, claiming for the restoration of the 3rd defendant’s interest in the factory.

20.On 20 November 2009, the 1st and 2nd defendants held a purported board meeting of the 3rd defendant, whereby the 1st defendant appointed himself the official representative of the 3rd defendant, authorised himself to sign a Power of Attorney on behalf of the 3rd defendant and resolved to commence legal action in the 3rd defendant’s name against Gold Loop.

21.The 1st defendant also signed a Power of Attorney to appoint certain lawyers of the Mainland as the 3rd defendant’s legal representatives in the legal action.  As a result, the 3rd defendant has commenced an action against Gold Loop in the Mainland.

The admission of irregularities by the 1st and 2nd defendants

22.The 1st and 2nd defendants however admitted that the meeting on 12 August 2009 was irregular as there was no requisite quorum required by Article 23 of the 3rd defendant’s Articles of Association.  Article 23 provides:

“For all purposes, the quorum for all general meetings shall be two members personally present and holding either in his own right or by proxy at least fifty-one per cent of the paid-up capital of the Company, and no business shall be transacted at any General Meeting unless the requisite quorum be present at the commencement of the business.”

23.The 1st and 2nd defendants further admitted that the plaintiff had never resigned as a director of the 3rd defendant and he had never appointed the 1st or 2nd defendant as the 3rd defendant’s director or appointed the 2nd defendant as the Company Secretary. 

24.The 1st and 2nd defendants are also not relying on section 157 of the Companies Ordinance to argue for the validity of their acts.

Application for summary judgment

25.The plaintiff then, in his capacity as a shareholder holding one share of the 3rd defendant, commenced this action against the 1st and 2nd defendants.  The 3rd defendant is also sued because the plaintiff intends this action to be a derivative action for the benefit of the 3rd defendant.  Alternatively, he brings this action in his personal capacity to enforce his contract with the 1st defendant by virtue of their being the shareholders of the 3rd defendant.

26.The plaintiff in this application for summary judgment seeks declarations that the 1st and 2nd defendants are not and have not been the directors of the 3rd defendant since their purported appointments, the 1st defendant is and was not the official representative of the 3rd defendant, the plaintiff is and was still a director of the 3rd defendant, and for the invalidity of the board meeting held by the 1st and 2nd defendants and the resolution made thereat and the Power of Attorney.

27.The plaintiff also seeks injunctions to restrain the 1st defendant from holding himself out and acting as a director of the 3rd defendant and as against the 2nd defendant in respect of the offices of director and Company Secretary of the 3rd defendant.

28.In case the court should give the plaintiff leave to defend, the plaintiff would seek alternative remedies under Order 29 rule 1 of the Rules of the High Court for the above-mentioned injunctions and an injunction that the 1st and 2nd defendants and/or the 3rd defendant should within seven days terminate the said Power of Attorney which appointed the Mainland lawyers for the 3rd defendant until the trial of this action or until further order.  It seems that the plaintiff is very keen to stop the 3rd defendant’s legal action in the Mainland against Gold Loop.

The defendants’ challenge of the plaintiff’s locus standi

29.The 1st and 2nd defendants are defending the action and opposing the application for summary judgment or for interim relief under Order 29 rule 1.  They challenge the locus standi of the plaintiff, being the shareholder of one out of 10,000 shares of the 3rd defendant.  They say that JL is still the registered holder of 5,999 shares. It is open to the 3rd defendant to pursue for itself the remedies now sought by the plaintiff purportedly on its behalf.  Hence, the plaintiff cannot institute this action as a derivative action for the 3rd defendant.  They say that the plaintiff should have caused JL’s trustees in bankruptcy, who control the voting right of JL’s 5,999 shares, to agree to the bringing of this action.  Since the 1st defendant only controls 40 per cent of the 3rd defendant’s shares, he is not in control of the 3rd defendant.  JL’s trustees in bankruptcy have enough voting power to decide in a general meeting whether the 3rd defendant should commence this action against the 1st and 2nd defendants.  It is not open to the plaintiff, who owns one share only, to start this action.

30.On the question of control, counsel for the 1st and 2nd defendants referred to Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paras. 12 and 13 citing Barrett v Duckett [1995] 1 BCLC 243 at 249h to 250c, Prudential Assurance v Newman Industries (No. 2) [1982] Ch. 204, Smith v Croft (No. 2) [1988] Ch. 114 at 184-185.  Counsel also raised the pertinent question of whether a claim for the benefit of the 3rd defendant is being improperly stifled by the 1st and/or 2nd defendants (see Shareholders’Rights by Robin Hollington, 5th edn. at paras. 6-12 and 6-25). 

31.The trustees of JL have also made it clear that they do not support this action.

32.Counsel for the plaintiff in reply submitted that JL’s trustees in bankruptcy were appointed by the 1st defendant, being the only creditor of JL who has filed a proof of debt.  Counsel therefore further submitted that the trustees would exercise their powers and privileges for the benefit of the 1st defendant.  It would therefore be highly unlikely that they would vote in favour of commencing proceedings against the 1st and 2nd defendants even if the matter were put to vote in a general meeting.

33.However, counsel for the 1st and 2nd defendants rightly referred to Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670 at p.679, B-D, where Le Pichon J (as she then was) said that:

“Administrators, liquidators, receivers, trustees in bankruptcy or other officers (office holders) are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.”

Decision on the plaintiff’s claim of derivative action

34.The trustees exercise their professional skills and experience in the use of their power for the benefit of the 1st defendant qua creditor of JL only.  They are neither the mouthpieces nor puppets of the 1st defendant.  The trustees’ acts and decisions in administering JL’s estate are also subject to challenge in court by way of appeal under section 83 of the Bankruptcy Ordinance, Cap. 6.  There is no evidence that JL’s trustees in bankruptcy have acted in any biased or improper manner in relation to the affairs of the 3rd defendant.

35.In light of the above, I find that there is a triable dispute over the plaintiff’s entitlement to start this action as a derivative action for the 3rd defendant.

Decision under Order 29 rule 1

36.Furthermore, there is no suggestion that if the plaintiff, being the shareholder of one out of 10,000 shares of the 3rd defendant, should succeed in this action after trial, he would not be adequately compensated by damages for any loss caused to him by the refusal of any injunction now.  I also cannot see how he could not be adequately compensated by damages (see American Cyanamide Co. v Ethicon Ltd [1975] AC 396 and para. 29/1/11 of Hong Kong Civil Procedure 2001).

37.I therefore would not grant any relief summarily on the basis that this is a derivate action.

Analysis and decision of the plaintiff’s personal claim

38.I now consider whether I should grant the plaintiff relief on the basis that this is a personal action by him against the 1st and 2nd defendants.  He relies on section 23(1) and (1A) of the Companies Ordinance, which provide:

“(1) Subject to the provisions of this Ordinance, the memorandum and articles shall, when registered, have effect as a contract under seal-

(a) between the company and each member; and

(b) between a member and each other member,

and shall be deemed to contain covenants on the part of the company and of each member to observe all the provisions of the memorandum and articles.

(1A) Without limiting the generality of subsection (1), the memorandum and articles shall, when registered, be enforceable by the company against each member and by a member against the company and against each other member.”

39.Counsel for the plaintiff submitted that the plaintiff wants the affairs of the 3rd defendant to be conducted in accordance with the Articles of Association.  Counsel further submitted that the plaintiff has been deprived of his right to receive notice of meetings and to attend and vote at meetings.  Counsel said that this is a deprivation of a proprietary right.

40.Kwan J said in paras. 44 and 48 of Re Hong Kong Sailing Federation [2010] 1 HKLRD 801:

“44. However, there exists another line of cases which showed that in certain circumstances, in connection with matters which could be regarded as procedural, an individual shareholder is allowed to bring an action against the company to protect his rights under the constitution, without having to subordinate his rights to the wishes of the majority. Examples of this line of cases to enforce personal rights of shareholders are Pender v Lushington (1877) 6 Ch D 70 (the right to have the votes on the shares counted and recorded at a general meeting despite the distribution of the shares among some nominee shareholders); Wood v Odessa Waterworks (1889) 42 Ch D 636 (the right to have a dividend paid in the manner specified by the articles of association); Kaye v Croydon Tramways [1898] 1 Ch 358 and Baillie v Oriental Telephone & Electric Co. Ltd [1915] 1 Ch 503 (the right to proper notice of meetings to consider a special resolution); Edwards v Halliwell [1950] 2 All ER 1064 (the right to have a decision taken in the way prescribed by the articles, which required a two-thirds majority on a ballot vote).

…

48. The work I find to be of the most assistance is the article of Drury entitled ‘The Relative Nature of a Shareholder’s Right to Enforce the Company Contract’ [1986] CLJ 219, in which the learned author discussed the differentiation between the line of cases which disallowed an individual shareholder to sue in respect of ratifiable internal procedural irregularities applying the rule in Foss v Harbottle, and cases which allowed an individual shareholder to sue to enforce personal rights, usually of a proprietary nature. Merely categorising a right as personal right does not provide a wholly satisfactory solution. The author suggested a possible explanation to chart this borderline between cases where the rule in Foss v Harbottle applies and cases where the rule does not prevent an individual shareholder from suing. The pertinent question he posed is ‘whether a particular dispute is appropriate for determination by an ordinary majority’ (at 240). The exposition at pp. 240-241 reads as follows:

‘If one concentrates on this question, it is possible to view many of the cases where the courts have given a negative answer as ones involving a situation where one group of shareholders has endeavoured to get its way without going through the correct dispute-resolution machinery. There are many instances where this machinery involves obtaining something other than an ordinary resolution. It may be that, in order to produce a settlement of a particular dispute, what is required is a special resolution, or even a special resolution which is held to be for the benefit of the company as a whole. If an attempt is made to impose a solution without going through the correct process, then an individual shareholder is permitted to come to court to seek a remedy. The automatic ordinary majority barrier of Foss v Harbottle is not appropriate in these circumstances to confine the dispute.

There are several other types of situation which can be recognised as inappropriate for reference to an ordinary majority.  Colin Baxter [1983] CLJ 96 has made a very perceptive contribution to analysing the cases from a similar standpoint.  He argues that there is no difficulty in recognising a case for judicial action.  He says that,  ‘[S]uch a case arises if, and only if, (1) a dispute situation has arisen in which it is impossible or impracticable for the members of the body to sort things out for themselves, and (2) there is something that the court can do about it.’  He argues that the law will not bother about irregularities at meetings unless there is a chance that they have influenced the result of a vote, and that in addition intervention must be appropriate.  Baxter suggests that an individual shareholder may seek judicial intervention in three types of situations which, transposed into the terminology of this article, are those where it is inappropriate to refer the matter for adjudication by an ordinary majority.’”

41.Since JL’s trustees in bankruptcy are in control of 5,999 out of 10,000 shares of the 3rd defendant and there is no evidence that they will not act responsibility towards the management of the 3rd defendant’s affairs, I take the view that the matters subject to this action can well be sort out by the determination of an ordinary majority of the 3rd defendant’s members in general meeting.  I therefore would not grant any remedy to the plaintiff on the basis that this action being personal to him as he has not shown his entitlement to bring it in his person right.

Dismissal of summons and costs order nisi

42.Since the 1st and 2nd defendants have raised the issue of the plaintiff’s locus standi right at the start of this application, I think it was wrong for the plaintiff to have maintained the application.  I therefore dismiss it with a costs order nisi that the plaintiff do pay the 1st and 2nd defendant’s costs of this application forthwith. I also certify the matter fit for one counsel.  I now proceed to assess the costs payable by the plaintiff to the 1st and 2nd defendants summarily and on a nisi basis.

Ms Catrina Lam, instructed by Messrs Fairbairn Catley Low & Kong, for the Plaintiff

Mr Kent Yee, instructed by Benson Li & Co., for the 1st, 2nd and 3rd Defendants

Postscript: I invoke the slip rule to formally record my acceptance of the undertakings by the 1st and 2nd defendants referred to in para. 2 of the decision and in terms of paras. 11 (a) and (b) of the plaintiff’s summons filed on 29 June 2010 as follows:

(a) The 1st defendant, whether by himself, his servants or agents or otherwise howsoever and whether directly or indirectly, whether in Hong Kong or in the rest of the PRC, be restrained from holding himself out and acting as the director and official representative of the 3rd defendant until after the trial of this action or until further order of the court; and

(b) The 2nd defendant, whether by himself, his servants or agents or otherwise howsoever and whether directly or indirectly, whether in Hong Kong or in the rest of the PRC, be restrained from holding himself out and acting as the director and the secretary of the 3rd defendant until after the trial of this action or until further order of the court.