Kim Lung Transportation Co (A Firm) and Others v. Ip Man Fai and Another

HCA 271/2012
and HCMP 1002-1003/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 271 OF 2012

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Before: Deputy High Court Judge Pow, SC in Court

Date of Hearing: 24 May 2012

Date of Decision: 6 June 2012

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D E C I S I O N

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Background

1.The 6^th plaintiff (“Tsang”) and the 1^st defendant (“Ip”) set up their local transportation business as early as in 1995.  For carrying on that business, Ip and Tsang established a partnership, viz. the 1^st plaintiff (“P1”).  As the business developed, various limited companies, viz. the 2^nd to 5^th plaintiffs (“P2 to P5”) were incorporated at different times between 2002 and 2010.  These business entities all bear the trade name of “Kim Lung”.  In particular, it is the evidence of Tsang that P4 was incorporated after P1 was formed and traded for a few years.  It was the mutual intention of Ip and him that they should make their business more formal and thus injected the business of P1 into a limited company P4.  It is also the evidence of Ip that P4 was incorporated to take up the business hitherto operated by P1.  It is further not in dispute that in 2010, P2 was formed and was used since then to carry on the business of P4.  Ip and Tsang are and were the only partners of P1, the only 2 shareholders and directors of P2 to P5.

2.Ip is the only shareholder and director of the 2^nd defendant (“D2”).  By a writ issued 21 February 2012, the plaintiffs claimed, inter alia, for injunctive relief against the defendants to enjoin them from (1) soliciting business from existing customers of the plaintiffs; (2) divulging trade secrets and/or confidential information of the plaintiff; and (3) causing any injury to the plaintiffs.  The indorsement on writ also prayed for a declaration that Ip is in breach of fiduciary duties owed to the plaintiffs.  On the same day, the plaintiffs obtained an ex parte Anton Piller Order from Deputy Judge Lok.  The defendants subsequently applied for the discharge of the ex parte order on the ground of material non-disclosure.  The application for discharge was heard by Deputy Judge Lok on 9 March 2012 who found that there was material non‑disclosure, hence discharged the Anton Piller Order.  The Court has been referred to the Reasons for Decision given by Deputy Judge Lok on 2 April 2012.

3.In the meantime, on 24 February 2012, the defendant issued a Summons seeking, inter alia, for:

(i)  the claim by P2 to P5 be dismissed for want of authority;

(ii)  the claim by D1 [erroneously] against both defendants be dismissed for want of authority;

(iii)  further or in the alternative to paragraph (ii), the claim by P1 against the defendants be struck out as it discloses no reasonable cause of action;

(iv)  costs of the action, including costs of and occasioned by this application, between P2 to P5 and the defendants be paid by Messrs Michael Pang & Co. (“MPC”) personally to the defendants; and

(v)  costs of this action, including costs of and occasioned by this application between P1 and the defendants be paid by MPC personally to the defendants.

4.The aforesaid Summons was amended pursuant to an Order of Deputy Judge Lok dated 9 March 2012.  The error in paragraph (ii) above was corrected by substituting the word “D1” by “P1”.  On the same day, Deputy Judge Lok discharged the Anton Pillar Order.  The Amended Summons was returnable to me on 24 May 2012 for arguments.

5.The Statement of Claim was filed on 19 March 2012.  On 17 May 2012, the defendants issued a further Summon seeking an order that the claim by P6 against the defendants be struck out as disclosing no reasonable cause of action.  By a Summons dated 21 May 2012, the defendants sought to Re-Amend the Summons dated 24 February 2012 by widening the grounds for striking out, in relation to P1’s claim against the defendants, to include “scandalous, frivolous or vexation and abuse of court’s process”.  This was the 1^st matter returnable to me on 24 May 2012.  The 2^nd and 3^rd matters were the striking out applications under the Amended Summons originally dated 24 February 2012 and the Summons dated 17 May 2012.

6.On 22 May 2012, Tsang issued an Originating Summon under HCMP 1003/2012 seeking, inter alia:

(i)  leave be granted to Tsang to intervene in HCA 271/2012 for the purpose of continuing such proceedings for and on behalf of P2 to P5 [as in HCA 271/2012] pursuant to section 168BC of the Companies Ordinance and that Tsang be entitled to prosecute HCA 271/2012 in the name of P2 to P5 and do all such things and matters for and on behalf of them in the proceedings; and

(ii)  P2 to P5 [as in HCA 271/2012] do indemnify Tsang out of their assets for the costs incurred by reason of his intervention in HCA 271/2012 pursuant to section 168BI of the Companies Ordinance.

7.Furthermore, by an ex parte Originating Summon also dated 22 May 2012 under HCMP 1002/2012, Tsang applied for leave to dispense with the service of a written notice on P2 to P5 [as in HCA 271/2012] as required by section 168BD.  Hearing for the two Originating Summons was also returnable on 24 May 2012 as the 4^th and 5^th matters to be disposed of by me.

8.First of all, the Summons to Re-amend the striking out Summons was not opposed and I granted the Re-amendment accordingly.  Secondly, Miss Lisa Wong, SC for the defendants fairly accepted that in view of the Court’s approach in Re Myway Ltd. [2008] 3 HKLRD 614, at para. 14, the applications under HCMP 1002 and 1003/2012 should be heard together with the defendants’ striking out application in respect of the claims made by P2 to P5 based on lack of authority.  However, since the defendants would like to file evidence in the HCMP proceedings in opposition, Miss Wong asked that the two matters to be adjourned to be heard together.  Mr Chua Guan-hock, SC for the plaintiffs did not oppose to such course being taken.  Accordingly, I adjourned the hearing of the HCMP proceedings and the defendants’ striking out application in respect of the claims by P2 to P5. I also gave directions for filing of affidavit evidence under the HCMP proceedings.

9.Mr Chua argued that the issue of a costs order in respect of costs thrown away against MPC arising out of instituting proceedings on behalf of P2 to P5 without authority should also be adjourned to be heard with the HCMP proceedings and the striking out application.  Miss Wong disagreed.  She submitted that the issue of cost relates to the existence or absence of authority on the part of the solicitors.  The institution of the HCMP proceedings, which were clearly taken as salvaging operations, tantamount to an admission that the solicitors did not have valid authority in the first place. The Court in the HCMP proceedings will be asked to allow Tsang to intervene in HCA 271/2012 and to carry on the proceedings therein on behalf of P2 to P5.  Even if leave be granted in the HCMP proceedings, the Court could not ratify the original lack of authority on the part of the solicitors.  In other words, the grant of leave in the HCMP proceedings cannot cloak the solicitors with retrospective authority to act for P2 to P5 from the beginning.  Miss Wong thus invited this Court to deal with the application for costs against MPC personally in respect of costs of and occasioned by the claims of P2 to P5 in HCA 271/2012 from its institution up to this hearing.

10.In the end, apart from accepting the submissions of Miss Wong, I rejected the proposal of Mr Chua largely for three reasons:

(i)  no evidence has been filed so far (whether by Tsang, P2 to P5 or by MPC) to demonstrate that there was valid and proper authorization from P2 to P5;

(ii)   the issuance of the HCMP proceedings in these circumstances constituted an acknowledgement that there was prior lack of authority.  This can be seen from the affirmation of Tsang filed in support of the HCMP proceedings.  Tsang said that he requested a board and a general meeting to ratify the authority of MPC to act for P2 to P5.  Ip was absent in the board meeting (which thus failed to have necessary quoram) and voted against the resolution at the general meeting despite conflict of interest.  Tsang thus said that at both the board and shareholder levels, the ratification resolutions were not passed.  Tsang said that as a result, the HCMP proceedings were taken out; and

(iii)   as submitted in Mr Chua’s Skeleton, he argued that the grant of leave under the HCMP proceedings would answer the striking out based on “lack of authority”.  That was an implicit acknowledgment that the HCMP proceedings were instituted to salvage the situation arising out of MPC’s lack of authority.

11.Accordingly, what remain for my immediate determination are:

(i)  defendants’ application to strike out the claims made by P1 and P6; and

(ii)  costs thrown away by reason of lack of authority on the part of MPC to act for P2 to P5 from the date of institution of HCA 271/2012 up to the this hearing to be paid by MPC personally (Miss Wong no longer sought personal costs order against MPC in respect of P1’s claim against the defendants).

Striking out of P1’s claims

12.According to the affirmation filed by Tsang on 21 February 2012, Ip established D2 in March 2010 and perpetrated the alleged solicitation, competition and misappropriation of confidential information/trade secrets through D2.  Miss Wong’s point was simple and straight forward.  She submitted that based on Tsang’s own case, the original business of P1 had already been injected into and taken up by P4 which was incorporated on 15 October 2002.  The business of P4 was further taken up by P2 in 2010 as admitted by Tsang.  The evidence of Tsang spoke of no wrongdoing prior to the incorporation of D2 on 12 March 2010.  None of the alleged wrongs underlying this action could have been committed against P1 or caused any loss or damage to P1.  Mr Chua submitted that it was not plain and obvious that P1 did not continue carrying on business after the incorporation of P4 in 2002.  Mr Chua pointed to the fact that P1 continued to obtain business registration certificate, the latest one expiring on 9 September 2012.  He also pointed to certain invoices issued in 2006 using the letterhead of P1.  He submitted that it was evidence that P1 did not cease doing anything since 2002.

13.Miss Wong was quick to point out that the chop placed on those invoices were that of P4. Miss Wong also pointed out that Tsang only mentioned P2 having an annual trading volume of around HK$36.67 million.  There was no mention at all in his 3 affirmations about P1 carrying on any business since the injection of its business into P4 in 2002.  There was no evidence put forward by P1 in respect of the usual indicia pertaining to someone carrying on active business such as staff records, accounts or profit tax returns etc.  In fact, I note that whenever Tsang mentioned about misappropriation of confidential information, customer base, and solicitation of long time customers by D1/D2, Tsang would refer them as confidential information, customer base and long time customers of P2 (see paras. 11 to 15 of Tsang’s 1^st Affirmation; and para. 7 of Tsang’s 2^nd Affirmation).  Tsang described the wrongful competition as competition with P2 (see para. 11 of Tsang’s 3^rd Affirmation).  In describing the injury caused by defendants’ wrongful act, Tsang invariably referred to “injury to P2’s interest” (see para. 16 of Tsang’s 1^st Affirmation; and para. 3 of Tsang’s 2^nd Affirmation).  Miss Wong lastly referred me to a failed settlement negotiation mentioned by Tsang in his 1^st Affirmation.  The proposed written terms of settlement, which must have been intended to achieve a wholesome separation between Ip and Tsang and their business interests, referred only to P2 to P5.  There was a conspicuous absence of reference to P1. 

14.From the above evidence, I agree with Miss Wong that it is plain and obvious that sometime since 2002, the original business of P1 had already been injected into P4 and thereafter carried on by P4.  As from 2010, such business undertaking was further taken up by P2.  Hence, as at the time of the alleged wrongdoings by the defendants, the alleged “clientele”, “customer base”, “trade secrets” and/or “confidential information” were those of P2 (or at most belonging to P4 or P2 depending on which stage in 2010).  The alleged “solicitation of customers” or “competition in business” could only relate to the business of P4/P2.  I agree with Miss Wong that P1 could not possibly establish loss and damage arising out of the alleged wrongful acts of the defendants.  Since none of the alleged wrongful acts of the defendants could have any effect on P1, the claims for injunctive relief as well as damages plainly cannot be maintained.

15.Mr Chua then argued that apart from the claim for damages, P1 maintains a claim for declaration against D1.  Prayer (iv) of the Statement of Claim prayed for “a declaration that D1 is in breach of fiduciary duties owed to the Plaintiffs”.  Prayer (iv) has to be read in conjunction with paragraph 14 of the Statement of Claim which reads:

“In the premises, D1 is in breach of fiduciary duties owe to P1 to P6. Those duties include, inter alia, not to divulge confidential information or trade secrets of P1 to P5, not to compete against the P group [which was earlier defined as referring to P2 to P5 only], not to engage in any activities which would cause financial injuries against the P group or not to make secret profit from the P group.”

First of all, this is a hopelessly rolled-up plea with no attempt to distinguish the legal relationship between D1 of the one part vis-à-vis each plaintiff individually.  However, it can immediately be seen that out of the 3 identified duties, the duties “not to compete” and “not to engage in any activities which would cause financial injuries” were pleaded as duties owed by D1 to “P2 to P5”, not to P1.  In relation to the duty “not to divulge confidential information or trade secrets”, P1 was included in the formula.  However, as I have earlier mentioned, the evidence shows that whatever confidential information or trade secrets that could be said to have been divulged by D1/D2 happened only after March 2010.  These confidential information or trade secrets would by then be those of P2 (or at most P4/P2).  Accordingly, P1’s claim for the declaration under Prayer (iv) is equally bound to fail.

16.In conclusion, all claims made by P1 in the Statement of Claim are frivolous and vexatious and bound to fail.  I would thus strike out all claims made by P1 against the defendants.

Striking out P6’s (Tsang’s) claims

17.According to paragraph 9 of the Statement of Claim, it was pleaded that Ip and Tsang are long-term partners and owed fiduciary duties to each other as well as to P1 to P5 inter se.  First of all, flowing from my earlier decision of striking out P1’s claims against the defendants, it follows that whether Ip owed fiduciary duties towards Tsang as partners of P1 is irrelevant to this action.  Secondly, paragraph 9 did not spell out the basis on which Ip was said to owe fiduciary duties toward P2 to P5.  One can only guess that such duties could arise from D1’s role as a director of P2 to P5 as pleaded in paragraph 3 of the Statement of Claim.  However, any such of breach of duties toward P2 to P5 could only cause loss and damage to P2 to P5 which are limited companies with separate legal identity.  Paragraph 12 of the Statement of Claim pleaded D2 as being the alter ego of Ip, hence, P6’s claims against D2 stand or fall with his claims against Ip.

18.Miss Wong’s submission is again simple and straight forward.  The alleged wrongdoings, i.e. divulging of confidential information/trade secrets; competition; solicitation of customers; and injury to business could only have been sustained by P2 to P5.  Any loss that falls onto Tsang could only be “reflective loss” which is not recoverable as explained in the seminal judgment of the Court of Final Appeal in Waddington Ltd. v Chan Chun Hoo Thomas [2008] 11 HKCFAR 370.  In other words, Tsang has no locus standi to sue the defendants in respect of any of their alleged wrongdoings towards P2 to P5.  Miss Wong further added that the rationale behind the rule against reflective loss is to prevent double recovery.  She submitted that by instituting the HCMP proceedings, any loss to P2 and P5 would be pursued under the statutory derivative action if leave be granted.

19.Mr Chua did not argue against the principles enunciated in Waddington’s case.  He however argued that Ip (as a director of P2 to P5) owes fiduciary duties towards Tsang (as the other 50% shareholder of P2 to P5).  Mr Chua submitted that such duties could arise in special circumstances as held in Peskin v Anderson [2001] 1 BCLC 372.  Mr Chua then submitted that if his argument were accepted, P6 was at least entitled to a declaration under Prayer (iv).

20.The facts in Perskin were rather complicated.  In short, the case involved a limited company which operated a club and a motor services business.  Members of the club would also be shareholders of the limited company but when they retired from the club membership, their shareholding of the limited company also ceased.  There was however a special summary procedure for reinstatement of one’s club membership (hence shareholding in the limited company) if he applies within 3 years of his retirement.  The plaintiffs were former members of the club (hence former shareholders of the limited company).  Within 3 years of their retirement, they learnt that the limited company sold it motor services business and each club member received over £34,000 each. The plaintiffs issued proceedings alleging that once the directors began to reconsider the proposal to sell the motor services business, it should have informed former members.  They alleged that the directors owed individual fiduciary duty to inform former members of the club of the proposed sale of the motor services business.  The discussions on the legal principles involving possible “fiduciary duty owed by a director to a shareholder” are found in the following paragraphs of the Judgment of Mummery LJ:

“ [27] There was no serious dispute between Mr Vos QC, for the claimants, and Lord Grabiner QC, for the committee and RAC Ltd, about the relevant legal principles governing the fiduciary duties of company directors.

[28] For his part, Mr Vos accepted that the fiduciary duties owed by the directors to RACL do not necessarily extend to the individual members of the club and that, in general, directors do not, solely by virtue of the office of director, owe fiduciary duties to the shareholders, collectively or individually.

[29] According to the headnote in Percival v Wright [1902] 2 Ch 421 that case decided that:

‘The directors of a company are not trustees for individual shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the company’s undertaking.’

[30] The apparently unqualified width of the ruling has, over the course of the last century, been subjected to increasing judicial, academic and professional critical comment; but few would doubt that, as a general rule, it is important for the well-being of a company (and of the wider commercial community) that directors are not overexposed to the risk of multiple legal actions by dissenting minority shareholders. As in the affairs of society, so in the affairs of companies, rule by litigation is not to be equated with the rule of law.

[31] For his part, Lord Grabiner accepted that the fiduciary duties owed by the directors to the company do not necessarily preclude, in special circumstances, the coexistence of additional duties owed by the directors to the shareholders. In such cases individual shareholders may bring a direct action, as distinct from a derivative action, against the directors for breach of fiduciary duty.

[32] A duality of duties may exist. In Stein v Blake and others (No 2) [1998] 1 BCLC 573 at 576, 579, [1998] 1 All ER 724 at 727, 729 Millett LJ recognized that there may be special circumstances in which a fiduciary duty is owed by a director to a shareholder personally and in which breach of such a duty has caused loss to him directly (eg by being induced by a director to part with his shares in the company at an undervalue), as distinct from loss sustained by him by a diminution in the value of his shares (eg by reason of the misappropriation by a director of the company’s assets), for which he (as distinct from the company) would not have a cause of action against the director personally.

[33] The fiduciary duties owed to the company arise from the legal relationship between the directors and the company directed and controlled by them. The fiduciary duties owed to the shareholders do not arise from that legal relationship. They are dependent on establishing a special factual relationship between the directors and the shareholders in the particular case. Events may take place which bring the directors of the company into direct and close contact with the shareholders in a manner capable of generating fiduciary obligations, such as a duty of disclosure of material facts to the shareholders, or an obligation to use confidential information and valuable commercial and financial opportunities, which have been acquired by the directors in that office, for the benefit of the shareholders, and not to prefer and promote their own interests at the expense of the shareholders.

[34] These duties may arise in special circumstances which replicate the salient features of well-established categories of fiduciary relationships.  Fiduciary relationships, such as agency, involve duties of trust, confidence and loyalty.  Those duties are, in general, attracted by and attached to a person who undertakes, or who, depending on all the circumstances, is treated as having assumed, responsibility to act on behalf of, or for the benefit, of, another person.  That other person may have entrusted or, depending on all the circumstances, may be treated as having entrusted, the care of his property, affairs, transactions or interests to him.  There are, for example, instances of the directors of a company making direct approaches to, and dealing with, the shareholders in relation to a specific transaction and holding themselves out as agents for them in connection with the acquisition or disposal of shares; or making material representations to them; or failing to make material disclosure to them of insider  information in the context of negotiations for a take-over of the company’s business; or supplying to them specific information and advice on which they have relied.  These events are capable of constituting special circumstances and of generating fiduciary obligations, especially in those cases in which the directors, for their own benefit, seek to use their position and special inside knowledge acquired by them to take improper or unfair advantage of the shareholders.”

21.The proper question to ask is thus: whether there are special circumstances which could give rise to a fiduciary duty owed by a director to a shareholder personally in which the breach of such a duty has caused loss to the shareholder directly, as distinct from loss sustained by him by a diminution in the value of his shares in the company.  It is only then, the shareholder can have a cause of action against the director personally.  At the hearing, I asked Mr Chua to identify that “direct loss” which was suffered by Tsang “personally”.  Mr Chua was unable to do so and acknowledged that ultimately, it circled back to Ip’s duties towards Tsang as co-partners in P1.  In my judgment, Mr Chua’s reliance on Peskin was completely misplaced given the facts as pleaded in the Statement of Claim and the evidence as disclosed in Tsang’s affirmations.  The declaration sought by Tsang under Prayer (iv) is in my judgment wholly unsustainable. I accept Miss Wong’s submission that Tsang’s claims against the defendants are frivolous, vexatious and bound to fail based on the principles expounded in Waddington’s case.  I accordingly strike out Tsang’s claims against the defendants.

Costs against Messrs Michael Pang & Co. personally

22.Based on the evidence filed, Miss Wong submitted that neither the board of directors nor the members in general meeting of any of P2 to P5 had appointed MPC, or otherwise authorized them to act as its solicitors in instituting HCA 271/2012 and in making the failed applications for Anton Pillar or other interlocutory injunctive relief.  It is not in dispute that there was no prior board or EGM resolution.  I was referred to 2 incidents whereby Tsang attempted to procure P2 to P5 to ratify the actions taken by MPC.  I shall set out Tsang’s evidence as filed in the HCMP proceedings:-

“9. In the circumstances, I requested a board and general meetings to ratify the authority to act for the Companies. Ip was absent from the board meeting held on 29^th February 2012 but attended the general meeting held on 13^th April 2012. Despite his clear conflict of interest, Ip voted against those resolutions in the general meeting. In the circumstances, both at board and shareholder level, the resolutions were not passed. Ip will seek to block any proceedings against him personally, and against Air Global. A copy of the said record of meetings is now shown and produced to me marked ‘TSC-4’. A copy of the Companies’ Memorandum and Articles of Association is now shown and produced to me marked ‘TSC-5’.

10.  As a result, on 8^th May 2012, I arrange to send a letter through my solicitors pursuant to S168BD concerning the present application.  Again, Ip’s response was to delay the Action.  The Action will not progress with Ip’s stalling and delay tactics.  A copy of the inter-partes correspondence is now shown and produced to me marked ‘TSC-6’.”

23.Despite Tsang’s aforesaid evidence, Mr Chua argued that the authority of MPC was ratified at the EGM held on 13 April 2012.  Mr Chua argued that Ip was conflicted out and his vote should not count. He relied on 3 authorities for the proposition that in special circumstances, a shareholder can be prevented from voting in a particular way.  They were: (1) Cook v Deeks [1916] AC 554; (2) Sunlink International Holdings Ltd. v Wong Shu Wing [2010] 5 HKLRD 653; and (3) Fusion Interactive Communication Solutions Ltd. v Venture Investment Placement Ltd. (No. 2) [2005] 2 BCLC 571.

24.Miss Wong was, rightly in my view, astonished by the stance taken by Mr Chua which was clearly contrary to Tsang’s case as affirmed in the HCMP proceedings.  She pointed out that the failure to obtain valid ratification was the very basis on which Tsang sought to intervene pursuant to section 168BD of the Companies Ordinance.  She submitted that P2-P5 and MPC cannot be allowed to blow hot and cold.  She also pointed out that Mr Chua was in a prima facie conflict situation, i.e. representing P2-P5 in pursuing the HCMP proceedings upon Tsang’s evidence and representing MPC in opposing the costs order against them personally.  Although I can see tremendous force in Miss Wong’s submissions, I decided to examine the 3 authorities relied upon by Mr Chua to see if they indeed support his arguments.

25.In my view, the starting point must be the general rule that unlike a director, a shareholder does not owe fiduciary duties to a company and that the right to vote is a proprietary right.  In most circumstances, a shareholder is entitled to vote as he wishes and without regard to the interests of other shareholders [see: Sunlink, paras. 20 to 22].  To this general rule, there are well recognized exceptions such as “fraud or oppression on minority” to which Cook v Deeks belongs.  Cook was a common law derivative action brought by minority shareholders.  Three directors of the company obtained a contract in their own names to the exclusion of the company. The contract was obtained under circumstances which amounted to a breach of trust by the directors which constituted them constructive trustees for the company in respect of the benefits derived under the contract.  These 3 directors however held 75% of the issued shares of the company.  They subsequently passed a resolution at a members’ general meeting declaring that the company had no interest in the contract.  The Privy Council first affirmed the finding that the 3 directors were guilty of a distinct breach of duty in the course they took to secure the contract and that they could not retain the benefit of such contract for themselves but must be regarded as holding it on behalf of the company.  The Privy Council then considered the question whether the directors’ wrongdoing could be made regular by resolutions of the company controlled by the majority votes held by these 3 directors.  Lord Buckmaster LC (giving judgment for the Privy Council) said at page 564:

“ If, as their Lordships find on the facts, the contract in question was entered into under such circumstances that the directors could not retain the benefit of it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. Even supposing it be not ultra vires of a company to make a present to its directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority. To such circumstances the cases of North-West Transportation Co. v Beatty (2) and Burland v Earle (1) have no application. In the same way, if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts, and, indeed, was expressly disapproved in the case of Menier v Hopper’s Telegraph Works. (1)”

26.In Sunlink, the company in question was a listed company that encountered serious financial problems and its shares were suspended from trading and provisional liquidator appointed.  In January 2009, the Exchange decided to put the company in the delisting process.  The provisional liquidator considered that the return to the creditors would be higher if there was a restructuring of the company, then leading to is resumption of trading in its shares, rather than putting it to liquidation.  The provisional liquidator entered into exclusive agreement with a “white-knight” and came up with plans including additional capital injection.  EGM was convened for the passing of resolutions to approve the capital injection.  The meeting was adjourned when it became clear that the defendants (holding very substantial shareholdings in the company) would vote against the resolutions so that they would not be passed.  If the resolutions were not passed, the company’s shares would be delisted and the prospect of any restructuring would be lost.  The company (and its subsidiaries) applied for interlocutory injunction restraining the defendants from voting against the resolutions on, inter alia, the ground that to vote against the resolution was irrational and had the effect of destroying the other shareholders’ investment in the company.  Harris J. went through an extensive survey of the authorities and in particular Hiew Fook Siong v Fung Tak Keung [2006] 3 HKLRD 762 on the subject of whether and if so, how could the voting rights of a shareholder in general meeting could be curtailed by the courts.  In Hiew Fook Siong’s case, Deputy Judge To (as he then was) also reviewed a number of authorities on the subject and concluded that those cases in which the courts interfered with a shareholder’s proprietary right to vote all fell within two recognized exceptions, namely, (i) “alteration of articles” and (ii) “majority practicing a fraud on the minority”.  Deputy Judge To thus concluded that outside these 2 recognized exceptions, a shareholder may exercise his propriety voting rights in his own selfish interests even if they are opposed to those of the company.  In the end, Harris J decline to follow Hiew Fook Siong’s case and said at paragraph 33 of his Judgment:

“The law in this area is imprecise and not easy to apply, but in my view, and in this regard I respectfully disagree with Deputy Judge To, the authorities do demonstrate that the court will intervene to prevent a shareholder voting in a way which will result in the destruction of the economic value of other shareholders’ share for no rational reason.”

Harris J then proceeded to examining the reasons put forward by the defendants for voting against the resolutions. Eventually, based on the evidence put forward by the defendants, Harris J concluded that the defendants had not demonstrated that they were exercising their voting rights rationally in good faith.  Harris J concluded that in the circumstances, voting against the resolutions and the resultant delisting of the company’s shares was not for the benefit of the company, whether considered by reference to the shareholders as a whole, who would lose the economic value represented by their shares, or creditors and would be irrational.  Harris J held that this was sufficient to justify the Court intervening to prevent the defendants from voting against the resolutions.

27.In my judgment, in so far as Sunlink could be seen as an extension or relaxation of the approach taken by Deputy Judge To in Hiew Fook Siong’s case, the decision of Harris J should not be taken out of the factual context of the case.  In my view, the taking of a wholly irrational decision which has the effect of destroying the economic value of the minority shareholders can be grouped under the umbrella of “fraud or oppression on the minorities”.  It is not necessary for my decision in this case to choose between the approaches of Deputy Judge To or Harris J.  Suffice to say that the facts of the present case, as I shall explain hereunder, could not in any way be described as “fraud or oppression on the minorities”.

28.The Fusion case is the last authority relied on by Mr Chua.  This case can easily be distinguished.  It was not a case involving the exercise of shareholder’s rights at a members’ general meeting.  In that case, the plaintiff company applied for an injunction enjoining the defendant from appointing receivers under a debenture.  The injunction proceedings were not authorized by the plaintiff’s board of directors because the board was deadlocked by virtue of the defendant’s appointment of 2 of the 4 directors and there being no provision for a casting vote.  On the issue of authority, Peter Smith J. said (at paragraphs 47 to 49):

“ [47] There has been no board resolution and self-evidently Messrs Bacon and Watts will not agree to commence any action against their company Pertemps.

[48] This is of course bizarre. If Pertemps have behaved wrongly their appointed directors prevent Fusion from rectifying the wrong it will suffer caused by two of its own directors. There are of course ways to circumvent this. First the other shareholders and directors Messrs Seear, Hopkins and Butcher could present a s 459 petition and seek relief to protect Fusion’s position in that petition. It could have been done by counter-application in existing petitions. Second they could have brought a Foss v Harbottle application (see Foss v Harbottle (1843) 2 Hare 461, 67 ER 189) and sought appropriately a Wallersteiner v Moir order to protect the costs (see Wellersteiner v Moir (No 2) [1975] 1 All ER 849, [1975] QB 373). I adverted to this in the two previous hearings and suggested this was a matter of resolving the authority issue. No such applications have been made and Mr Collings boldly in his final submissions before me on 19 April 2005 said ‘Fusion stands on its position on authority’ (albeit reserving the right if the draft judgment was against him to try and cure the position afterwards).

[49] It must be borne in mind, in my view, that blocking of a legitimate cause of action Fusion might bring by Messrs Bacon and Watts given their conflict would in my view be a breach of the fiduciary duty of directors that they owe to Fusion.  It cannot be right that they take advantage of their own breach of duty in blocking a legitimate challenge against a company in which they are also interested.  The courts will not allow such a position to happen.”

The real basis of his Lordship’s decision however was on the facts of that case (as can be seen from paragraphs 50 to 56).  After examining the correspondence exchanged between the parties prior to the imposition of the injunction proceedings, Peter Smith J concluded that the defendant had clearly acknowledged that the plaintiff ought to be represented by its solicitors in the receivership proceedings brought by the defendant against the plaintiff and had accepted in correspondence that the solicitors purporting to represent the plaintiff had authority to do so (including a reference to the possibility of the plaintiff seeking injunctive relief against them).  In the circumstances, the defendant would not be permitted to blow hot and cold on the issue of representation by subsequently questioning the plaintiff’s authority to bring the injunction proceedings. 

29.In my view, the decision in Fusion does not support Mr Chua’s argument in any way.  Mr Chua however argued that whilst Ip was opposing the ratification resolution at a members’ general meeting, he was a person wearing two hats, being both a shareholder and a director.  Hence, he submitted, Ip was under a fiduciary duty not to vote against the ratification resolution which was in the interest of the company.  With respect, this is an argument devoid of merits.  When Ip attended and exercised his voting rights at the EGM, he did so qua his position as a shareholder.  To carry Mr Chua’s argument to a logical conclusion, every time when a shareholder is also made a director, his proprietary right to vote in members’ general meeting would necessarily be shackled and he could no longer vote in accordance with his own personal interest or wishes.  Such a proposition is wrong in principle and is contrary to the well established authorities quoted in paragraphs 20 to 22 of the Judgment of Harris J in Sunlink.

30.In any event, as Miss Wong submitted, one should not lose sight of the events leading to the attempt to pass the ratification resolution at the EGM.  When MPC acted for P2 to P5 in instituting HCA 271/2012, they knew or must have known that they were only acting on the instruction of Tsang who was one of the only two 50/50 shareholders and directors of the companies.  MPC knew that there was no board resolution authorizing their representation.  The action was taken together with an application for Anton Pillar relief against Ip and D2.  There was thus a conscious decision not to alert Ip.  The defendants’ Summons to strike out P2 to P5’s claims on the ground of lack of authority was issued on 24 February 2012.  This prompted Tsang’s first attempt to ratify MPC’s authority by way of the purported board meetings.  The fact of an attempt to ratify was at least prima facie admission of lack of authority in the first place.  It is not in dispute that those board meetings were invalid as there was no quorum in each case.  Then on 9 March 2012, the ex parte Anton Pillar Order was discharged on the ground of deliberate material non-disclosure and Deputy Judge Lok refused a re-grant.  This meant that legal expenses had been wrongly incurred.  Hence, at the time of the EGM on 13 April 2012, there was every reason for Ip not to agree to ratifying the authority of MPC because that would have the effect of rendering P2 to P5 being responsible for the legal expenses wasted upon failed and wrongfully taken legal steps.

31.In my judgment, Ip’s exercise of his proprietary right in his shares can in no way be described as anywhere near “fraud or oppression on minority”.  Ip was entitled to exercise his voting rights in the way he did and his votes against the ratification resolution should not have been discounted.  Accordingly, I find that there was no valid ratification of MPC’s authority at the EGM which is in fact the stance now taken by Tsang himself in his affirmation filed in the HCMP proceedings.  Furthermore, I would not allow Mr Chua to blow hot and cold by ignoring his client’s case in the HCMP proceedings when he sought to exonerate MPC from their personal liability to pay for the wasted costs.

32.Originally, Miss Wong made an additional submission that if Ip was properly excluded from voting at the EGM, the resolution purportedly passed by Tsang alone would still be invalid because there would then be no sufficient quorum for business to be transacted at the meeting.  At the hearing, I had invited counsel to conduct further legal research and make submissions on the vexed question as to whether a member who was present at the meeting but prevented from exercising his voting right could still be counted as part of the quorum.  I am grateful to counsel’s research and submissions.  However, having decided as I had that no valid ratification resolution had been passed at the EGM, it is no longer necessary for me to decide on the point.

33.Miss Wong’s application for costs against MPC personally was based on the authority of Grand Field Group Holdings Ltd. v Tsang Wai Lun Wayland (No. 2) [2012] 4 HKLRD 478 in which Jeremy Poon J said (at paragraphs 11 to 15):

“11. The applicable principles are well settled.

12. When a solicitor purported to act for a client in an action, he impliedly warranted that he had the authority to represent the client. When it later transpired that in fact he did not have such authority, he had acted in breach of the implied warranty. The court would normally order him to personally pay the costs needlessly incurred by the opposing party. It matters not whether the solicitor had acted bona fide and in reasonable reliance of the instructions; or that he had been deceived into believing that he had the authority to act for the client; or that quite innocently he did not know that there was no authority or the authority once existed had ceased to exist. See Yonge v Toynbee [1910] 1 KB 215, per Buckley LJ at pp.224-225, Swinfen Eady J at pp.233-234; Babury Ltd v London Industrial Plc (1989) NLJ 1596.

13. The rationale behind the rule, as explained by Swinfen Eady J is this:

The manner in which business is ordinarily conducted requires that each party should be able to rely upon the solicitor of the other party having obtained a proper authority before assuming to act. It is always open to a solicitor to communicate as best he can with his own client, and obtain from time to time such authority and instructions as may be necessary. But the solicitor on the other side does not communicate with his opponent’s client, and, speaking generally, it is not proper for him to do so … It is in my opinion essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing his client; if it were not so, no one would be safe in assuming that his opponent’s solicitor was duly authorized in what he said or did, and it would be impossible to conduct legal business upon the footing now existing; and, whatever the legal liability may be, the Court, in exercising the authority which it possesses over its own officers, ought to proceed upon the footing that a solicitor assuming to act, in an action, for one of the parties to the action warrants his authority.

14. This is, however, not an inflexible rule. It may sometimes have to yield to special circumstances. For example, in a case where the opposing party’s solicitor is informed that there is a doubt about the solicitor’s authority, there may be no unequivocal representation of authority. Or the facts of the case are such that it may be right to leave the aggrieved party to his remedy in an action in damages for breach of warranty of authority against the solicitor. That said, a solicitor who clearly acted without authority, causing by his representation of authority the opposing party to incur wasted costs, must usually expect to be ordered to pay his costs. See Babury Ltd v London Industrial Plc per Steyn J.

15.  The jurisdiction to order costs against the solicitor acting without authority personally is a summary jurisdiction.  Although the court will give the solicitor a fair opportunity to be heard, it should be remembered that it is not a fully blown action against him.  The court will normally deal with the matters summarily on affidavit evidence. Cross-examination of the deponents of the affidavits will be extremely rare.”

34.Mr Chua did not question the authority or applicability of Grand Field’s case.  He simply argued that it was not an inflexible rule and that in this case, there was no unequivocal representation of authority.  There was no further elaboration on his argument. 

35.It can be seen from Grand Field’s case that the jurisdiction was based on implied warranty of authority.  The learned author of Bowstead and Reynolds on Agency, 19^th ed., explained in paragraph 9-065 that:

“The question that would then arise is as to the test for determining when such a warranty is deemed to be given. It is submitted that this should only be so where, in accordance with normal contractual principles, the warranty of authority can be regarded as inducing an act; and there must then be corresponding reliance on it.”

The learned author then quoted Leggo v Brown & Dureau Ltd. (1923) 32 CLR 96 at 106 in which the court said that “The essentials are (1) assertion of authority; (2) inducement by asserting; (3) transaction which but for that assertion the other party would not have entered into.”

36.At paragraph 9-070, the learned author continued as follows:

“Rebuttal of the warranty

The circumstances in which the warranty is implied create the possibility of considerable flexibility, and the strictness of the liability placed on the agent is in effect tempered by this technique.  Thus where the agent disclaims authority, he avoids such liability, unless the case is one where he contracts to obtain authority.  If the third party does not think that authority can be obtained, this may be a ground for negativing the implication of a warranty… In some cases, the third party may be taken to know of the limitation of authority, so that there are no grounds for implying a warranty by the agent.” [emphasis added]

37.In the present case, Ip and Tsang were the only two shareholders of P2 to P5, each holding 50% shares.  They were the only two directors.  It must have been known to Ip that there was no valid board resolution or members’ resolution authorizing the appointment of MPC.  In fact, 3 days after the institution of HCA 271/2012, the defendants issued the striking out summon challenging the authority of MPC in acting for P2 to P5.  In my view, it cannot be said that the defendants relied in any way upon the implied warranty of authority asserted by MPC.  Having said that, the sauce for the goose must also be sauce for the gander.  MPC must also have appreciated that P2 to P5 did not give and could not have given them valid authority to commence the proceedings against the defendants.  As I had earlier observed, the proceedings were instituted with the specific object of seeking ex parte Anton Pillar relief. There was thus a conscious decision not to alert Ip on the issue of authority. Worst still, when faced with a challenge on their authority, MPC did not withdraw from representation and continued to act for P2 to P5 and persisted up to the hearing before me.  In the HCMP proceedings, MPC assisted Tsang in putting forward his case on the basis that the purported resolution at the EGM was invalid, hence giving rise to the need of seeking relief under section 168BD of the Company’s Ordinance.  On the other hand, in seeking to exonerate themselves from the defendants’ application against them personally for costs, they put forward a contradictory assertion that the said resolution was valid.  This was plainly blowing hot and cold.  I consider their conduct deplorable and wholly inconsistent with their role as an officer of this court.  However, my dim view as to the propriety of MPC’s conduct could not alter the fact that the defendant did not, and could not have, relied on MPC’s implied assertion of authority.  In the circumstances, I cannot exercise the summary jurisdiction expounded in Grand Field’s case to order MPC to pay for costs thrown away. 

38.In the course of the hearing, I enquired from Miss Wong whether she would be invoking the jurisdiction for wasted costs order under Order 62, rules 8 and 8A.  Miss Wong fairly acknowledged that the application had not been made on that basis.  In my view, having regard to the standard expected of solicitors as explained in paragraph 62/8/1 of Hong Kong Civil Procedure 2012, vol. 1, there exists in this case a prima facie of misconduct on the part of MPC for which a wasted costs order could be made against them.  I accordingly invite the defendants to consider whether they would in due course wish to issue a summons pursuant to Order 62, rules 8 and 8A.

39.In the circumstances, with grave reluctance, I am compelled to dismiss the defendants’ application for personal costs order against MPC on the basis of Grand Field’s case.  However, I will make no order of costs against the defendants for this failed application.  I dismiss the application not because I approve of MPC’s conduct.  Neither was it due to Mr Chua’s submissions.  The principal argument of Mr Chua was that the ratification resolution at the EGM was valid.  I had rejected this argument.  Nor did Mr Chua argue the point on “inducement and reliance” which was ultimately the basis on which I find that I could not exercise the summary jurisdiction.

Conclusion

40.I accordingly dismiss the action by P1 and P6 against the defendants.  Subject to paragraph 41 hereunder, I also order that costs of the action by P1 and P6 against the defendants be paid by P6 to the defendants, to be taxed if not agreed, with certificate for 2 counsel.  I make this order against P6 because I accept Miss Wong’s submission that P1 (the firm name of the partnership between Ip and Tsang) was unilaterally used by P6 (Tsang) as one of the plaintiffs in these proceedings, hence P6 should be solely responsible for all costs pertaining to P1’s claim against the defendants.

41.As for costs of the hearing on 24 and 25 May 2012, I note that about one quarter of the total time spent was devoted to the application for personal costs order against MPC to which I will make no order on costs.  Accordingly, I order P6 to pay to the defendants three-quarters of the costs of the hearing on 24 and 25 May 2012.

42.The above orders of costs are orders nisi which shall be made absolute if no application for variation is made within 14 days from the date of this Judgment.

HCA 271/2012

Mr Chua Guan Hock, SC & Mr George Chu, instructed by Michael Pang & Co., for the plaintiffs

Ms Lisa K.Y. Wong, SC & Shu Wun Lee, instructed by Chan & Chan, for the defendants

HCMP 1002/2012 & HCMP 1003/2012

Mr Chua Guan Hock, SC & Mr George Chu, instructed by Michael Pang & Co., for the applicant

1^st to 6^th respondents all in person: (Absent)