Sheng Da Investment Holding (Hong Kong) Ltd v. Wan Qing Hua and Others
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HCMP 838/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 838 OF 2012 ____________
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______________ D E C I S I O N ______________ 1.This is an application by originating summons for a declaration that the shareholders’ resolution passed at the extraordinary general meeting of Sheng Da Investment Holding (Hong Kong) Limited (“the Company”) held on 5 March 2012 is valid and effective. 2.The Company, which is incorporated in Hong Kong, is itself the plaintiff. The defendants are three individuals who are shareholders of the Company, holding in aggregate 44.32% of its issued share capital. There are two other shareholders in the Company, namely, Kippton Limited (“Kippton”) and Styland Infrastructure Limited (“Styland”), holding 51% and 4.68% of the issued share capital respectively. 3.The Company was established in 1995 for the purpose of investing, by way of a sino-foreign cooperative joint venture, in a toll road project near Wuhan in the Mainland. The project was apparently successful, though eventually the Company’s stake was acquired by the Mainland joint venture partner. The compensation payable to the Company for the acquisition was determined by arbitration. An arbitral award was given in favour of the Company on 18 April 2006 for the sum of over RMB 157 million. RMB 75 million had been paid in 2007. A balance of over RMB 82 million remains to be paid. 4.On 9 December 2005, while the arbitration was going on, the shareholders of the Company, ie the three defendants herein and Kippton and Styland, entered into a shareholders agreement written in Chinese. Broadly speaking, that agreement (the precise meaning of which is in dispute) provides:
5.The sum of RMB 75 million paid in partial satisfaction of the award as mentioned above was paid to ICBC in repayment of a bank loan. However, the majority shareholders (Kippton and Styland) have since taken the view that the balance of the arbitral award should not be paid directly by the joint venture partner to the shareholders’ own accounts but should instead be paid into the Company’s account maintained with HSBC in Hong Kong. Mr Che, a director of the Company, explained the plan in this way:
6.The defendants are opposed to that proposal and insist that the amount should be divided and paid into the shareholders’ accounts as envisaged in the shareholders agreement. Underlying their position is the fact there are disputes concerning, among other things, (i) whether the 2nd and 3rd defendants owe certain amounts to the Company as alleged by the majority shareholders, and (ii) whether the Company owes HK$14,885,696 to a company called Lucky Global Investments Limited, which appears to be a parent company of Kippton and Styland. 7.On 5 March 2012, at an extraordinary general meeting of the Company convened for that purpose, the majority shareholders voted in favour of, and the defendants voted against, a resolution in these terms:
8.The resolution was therefore passed for the purpose of procuring payment of the balance of the award into the HSBC account of the Company. If that is implemented it would mean that the money would not be paid directly from the Mainland into the bank accounts designated by the shareholders pursuant to the shareholders agreement. 9.The resolution, however, has not yet been carried into effect. It appears that before the Mainland joint venture partner would recognise and act on that resolution, it had to be attested by a Chinese attesting officer and endorsed by a company called China Legal Service (H.K.) Limited (“CLS”) authorised by the Ministry of Justice of the People’s Republic of China for the purpose of authenticating documents. 10.The Chinese attesting officer engaged by the Company had filed the relevant documents with CLS, but the documents were rejected with a note issued by CLS dated 21 September 2011 which stated as follows:
which can be freely translated as:
11.It was against this background that the Company had begun the proceedings herein by originating summons dated 30 April 2012, seeking a declaration of the validity of the resolution in question. 12.Mr Chang, appearing on behalf of the Company, submits that notwithstanding the possible inconsistency between the course contemplated by the resolution and the shareholders agreement, the court should make the declaration sought because:
13.Ms Eu, who appears on behalf of the defendants, draws my attention to the fact that there are now at least four sets of proceedings that concern the payment of the balance of the award, namely:
14.In particular, it is alleged in the petition in HCCW 175/2013 that Kippton and Styland are acting in anticipatory breach of the shareholders agreement of December 2005 by passing the resolution of March 2012 and seeking payment of the balance of the award into the Company’s account. In other words, the resolution in question and the originating summons here are relied upon as conduct by the majority shareholders of the affairs of the Company in a manner unfairly prejudicial to the interests of the minority, and as conduct warranting the winding up of the Company on the just and equitable ground. 15.The minority shareholders further allege in the petition that when the shareholders agreement was entered into, it was estimated and agreed by all the shareholders that a reserve fund in the amount of RMB 2 million would be sufficient to cover all the liabilities of the Company. 16.They also complain that the majority shareholders have wrongfully (i) caused an accountants firm to be appointed as auditors of the Company without a two-thirds majority approval of the shareholders of the Company, (ii) obtained sole control of the Company’s bank account with HSBC, (iii) refused to provide books and accounts of the Company to the minority for inspection, and (iv) misappropriated monies by causing sums totalling over HK$44 million to be paid to themselves or related parties. 17.Turning to Mr Chang’s arguments, his first point is tantamount to this: although the shareholders agreement is enforceable between the shareholders inter se, and so the minority shareholders could have obtained an injunction to restrain the majority shareholders from passing the resolution on 5 March 2012, they did not obtain any such injunction and it is now too late for them to do so. Since the Company is not a party to that agreement, the resolution passed by the members (with the majority shareholders voting in favour, and even assuming they acted in breach of the shareholders agreement) is, as an act of the Company, valid and effective. 18.I am unable to accept that submission and to take such a blinkered view of the matter. It is not in dispute that declaration is a discretionary remedy. The court’s discretion is a very wide one. It seems to me that in deciding whether to exercise that discretion in this case, the court is entitled to examine whether the resolution was passed in breach of the shareholders agreement which is prima facie binding on the majority shareholders even if it is not binding on the Company as such, and also whether the planned course of action in implementation of the resolution is likewise in breach of the shareholders agreement. If the purpose of obtaining the declaration is to enable something to be done which would constitute a breach of contract, surely that is a matter I ought to take into account in deciding whether to grant the declaration in the first place. 19.Similarly, it seems to me that whether the course of conduct (including proposed future conduct) relating to the award, of which the resolution forms part, is such as to be unfairly prejudicial to the minority shareholders’ interests, is a matter that ought to be taken into account in the exercise of discretion whether or not to grant the declaration sought. It is well established that in the context of section 168A of the Companies Ordinance, a person’s conduct may be unfair if it contravenes some mutual understanding or agreement he has with the petitioner even if it does not amount to an enforceable contract in law. Mr Chang submits that the petition is no more than a tactical move the sole purpose of which is to derail the hearing of the originating summons. On the evidence I am not prepared to draw that inference. 20.As at present advised, I am not overly impressed by Mr Chang’s argument on construction. I have heard no satisfactory explanation why the shareholders would have gone to the trouble of drawing up the shareholders agreement in 2005 (which expressly provides that it can only be varied with unanimous consent) if it did no more than set out an optional, non-exhaustive way of handling the proceeds of the award. However, because of the conclusion I have come to as to how these proceedings should be disposed of, I need not come to a definitive conclusion on this point. 21.The Company’s main argument on illegality is that the shareholders agreement does not deal with or make provision for any of the Company’s liabilities beyond RMB 2 million. However, Ms Eu explains that the RMB 2 million was inserted because that was the sum thought sufficient to cover the maximum aggregate amount of the liabilities of the Company then. It may well be argued, on that footing, that there is an implied term that the amount of the reserve fund should be adjusted if the liabilities were in fact greater. Indeed, Mr Che himself seems to suggest (in paragraph 28 of his second affirmation) that if the Company’s liabilities exceed that figure, the reserve fund should simply be “revised to match the outstanding liability of the Company”. As mentioned above, there is an underlying dispute regarding the liabilities of the Company, and why, the Company having ceased business by 2005, its liabilities had increased substantially thereafter. 22.In all the circumstances, it seems to me that the declaration sought cannot properly be granted without an examination of the issues pertaining to the alleged breach of the shareholders agreement and the allegation that the resolution constitutes unfairly prejudicial conduct. Some of the facts relevant to these matters are in dispute, including the existence of the Company’s liabilities to the ultimate holding company. In my judgment, the originating summons should be adjourned. While there is something to be said for it to be heard either together with or after the petition in HCCW 175/2013, I shall not give any directions that may affect the petition since two of the respondents there, namely, Kippton and Styland, are not represented before me. 23.I make an order nisi that the costs of the hearing before me be in the cause of the originating summons.
Mr Jonathan Chang and Mr Jason Yu, instructed by Andrew Law & Franki Ho, for the plaintiff Ms Audrey Eu SC and Mr Tony Chow, instructed by C.L. Chow & Macksion Chan, for the 1st to 3rd defendants | |||||||||||||||||||||||||||||||||||