Fong Wing Seng v. Shahaan Sakalin and Others

HCA 1390/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1390 OF 2013

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BETWEEN

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J U D G M E N T

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Introduction

1.The plaintiff (“P”) issued a writ against the 5 defendants (respectively “D1”, “D2”, “D3”, and “D4” and “Mega Grade”) on 29 July 2013, and among other things, sought a declaration against D3 and D4 that they had never been validly appointed as directors of Mega Trade, a company incorporated under the laws of Hong Kong,  and an injunction restraining them from acting as directors of Mega Grade.

2.On 26 August 2013, P issued an inter partes summons (“Summons”) for, among other things, an injunction against D3 and D4 to restrain them from acting as directors of Mega Grade until further order. On 30 August 2013, P’s summons was adjourned for substantive argument, upon D3 and D4 jointly and severally undertaking that:

(i)   Not to enter into any lease etc in respect of the property known as 14B, Kingpower Commercial Building in Wanchai (“Property”);

(ii)   Not to draw down any undrawn amount or money from the 2^nd mortgage of the Property dated 26 July 2013 between a finance company and Mega Grade;

(iii)  Not to incur any further liabilities on behalf of Mega Grade.

(“Undertakings”)

Background

3.According to P,on 29 April 1983, a company was established by him and D2, which later changed its name to Sinotronix Investment Limited (“Sinotronix”), and that as at 21 May 1983, P and  D2 were respectively holding 40% and 60% interest in Sinotronix.  The main business of Sinotronix was selling table cloths to Indonesian customers.

4.Sinotronix acquired the Property on 7 June 1993 at the consideration of HK $2,580,000 after selling another property.

5.On 28 July 1997, P and D2 then established another company, Mega Grade, the main business of which included sale of game consoles stock.  For reasons I do not need to go into, the interests of P and D2 in Mega Grade were held by an Indonesian gentleman D1 as to 49,999shares and Universal Plus Corporate Services Limited (“Universal Plus”) as to 1 share, as nominees for P and D2.

6.Thereafter, on 24 January 1998, P and D2 also transferred their shares in Sinotronix to 2 nominees, and with effect from 12 October 1998, after a change of nominees, one Mr Ng then held 99,999 shares and Smart Take Consultancy Limited held 1 share.  According to P, he and D2 continued to be the beneficial owners of Sinotronix in the percentage of 40%: 60%.

7.Then, sometime in 1998, Sinotronix became embroiled in litigation with its PRC supplier.  D2 also took action against Sinotronix for repayment of an outstanding shareholder’s loan and obtained judgment and a charging order for sale.  The Property was then put up for sale in a public auction.

8.Mega Grade acquired  the Property through the auction for a consideration of HK$850,000, which was paid by way of a loan from a BVI company called Princesa Holdings Limited (“Princesa”), which according to P, was also beneficially owned by D2 and P.

9.Sinotronix was then de-registered in the Companies Registry on about 3 May 2002.

10.Further, to cut the long story short, according to P, with effect from 12 December 2002,  the beneficial interests of P and D2 in all the businesses, including Mega Grade, have changed from 40%-60% to P holding 51.61% and D2 holding 48.39%, namely P since then became the majority beneficial owner.

11.Since the incorporation of MegaGrade, there have always been two directors.   P’s case was that these were nominees for P and D2.

12.The Wan family then came into the picture in 2003/2004.  There were 3 siblings:-

Wan Tak Choi (“WTC”)

Wan Wai Choi (“WWC”)

Wan Lai Kuen - D3

13.According to annual returns filed with the Companies Registry, WTC and WWC first became directors of Mega Grade on 28 July 2004, but ceased on 28 July 2006.  D3 then became a director on 28 July 2009, together with WWC who appeared again.  D3 has remained a director since 28 July 2009.  WWC ceased being a director on 28 July 2012, and D4 became a director and has remained a director since.

14.D3’s case is that she was only a nominee for her brother WTC and that she had always taken instructions from him. D4 appears to be also a  nominee for  WTC or the Wan family.

15.Mega Grade now no longer carries on any trade or business, and its only or major asset is the Property.

16.Anyway, according to P, he and his family had been granted a right to continuously occupy the Property since 7 June 1993, when Sinotronix first acquired the Property, so long as they paid for all upkeep and outgoings including the management fees, and that they had remained in exclusive uninterrupted occupation of the Property, where they had been conducting businesses at the Property for the past 20 years until recent events.

17.P said on 21 December 2012, WYC attended the Property and attempted to forcibly and unlawfully evict P and his wife (“Tjio”) therefrom by changing the padlock of the metal gate of the Property.  The incident was reported to the police and P and WTC then agreed to produce the new padlock to the management office of the building pending P seeking legal advice.

18.Thereafter, WTC’s solicitors wrote to the management office of the building stating that WTC was the authorized person of Mega Grade to handle and manage the renovation, tenancy and/or other matter of the Property.  On 28 December 2012, WTC accompanied by police attended the Property and changed unilaterally the lock of the Property.

19.P’s solicitors then sent a complaint letter to the police, WTC and the management office.  As a result of all this, as WTC was unable to produce any authorization from Mega Grade authorizing WTC to take possession of the Property, on 15 January 2013, P and Tjio regained possession and changed the padlock of the Property, and continued to occupy the Property.  There appeared to be a further incident on 20 April 2013when a Mr Wan alleging he was the tenant of the Property and attempted to evict P and to recover the Property, and police was again called to intervene.

20.WTC gave his own version of how the Wan family came into the picture. He said his friend William Fong asked him for a loan in about 2003, and offered by way of security of a charge over the Property which was owned by Mega Grade, and that William Fong told him that the beneficial interest in Mega Grade was held by his family, the head of which was P.  WTC said that he later agreed to lend the money on the basis that he could become a director of Mega Grade until the loan had been repaid.  WTC further claimed that there was a loan agreement executed in around August 2003 by Mega Grade for the sum of HK$500,000 which was to be repaid within 12 months (“Alleged Loan Agreement”).

21.According to WTC, the Alleged Loan Agreement was in the possession of P, but the loan was registered as a charge against the Property.  Indeed, according to the land search record, a “Legal Charge/Mortgage to secure general credit facilities” was registered in favour of WTC on 14 August 2003[1].

22.Then, according to WTC,

(i)   in early 2006, WTC became concerned when the loan had still not been paid off and he said that P then told him that he would try to obtain a loan from an Indonesian bank, but in order to obtain the loan, he needed to replace WTC and WWC as directors and P then appointed 2 other persons who had connections with the bank;

(ii)   WTC had said that by 2009, as he still had not been repaid, he had another discussion with P, as a result of which they agreed that WWC and D3 would become directors of Mega Grade, so that they had control of the company[2].

(iii)  WTC  then also said that in early March 2009,  P’s son William Fong came crying to him and said that P needed further money, and WTC said he agreed to lend another HK$350,000 to P, out of which, HK$50,000 was repaid by P at about end of September 2009.  Later in October 2009, P gave him a cheque to repay the balance but the cheque then bounced[3]. 

(iv)   WTC said that by 2011, when he still had not received repayment, he and P and William Fong had a further discussion, and that they agreed to sell the Property, and that D4, an real estate agent in China was to help to sell the Property, and for this purpose D4 become a director of Mega Grade.  But no buyers could be found, and therefore the Property was leased to a tenant (“Mr Tang”).  When Mr Tang failed to pay the rent, Mega Grade issued  proceedings in the Lands Tribunal, LDPE 426 of 2013[4] (“LT Proceedings”).

23.The LT Proceedings were issued by Mega Grade by its purported authorized person D3 against this Mr Tang on 2 May 2013.  It was not served on P.

24.D3 then purportedly on behalf of Mega Grade obtained default judgment against Mr Tang in the LT Proceedings, and a possession order on 24 May 2013 (“Possession Order”).  Pursuant to the Possession Order, P and Tjio were evicted by the bailiff on10 July 2013 by the bailiff (“Eviction”).

25.The Eviction then sparked off a series of action by P, including applying to join in the LT Proceedings and issuing the present proceedings and the Summons.

26.As mentioned earlier, the Summons was first heard by this court on 30 August 2013, when an interim order was made for directions upon the Undertakings of D3 and D4 pending the substantive hearing or further order.

27.D3 and D4 have agreed to the Undertakings to continue until further order of this court.

LT Proceedings

28.As mentioned earlier, the LT Proceedings were instituted by D3 purportedly on behalf of Mega Grade against a Mr Tang.

29.Mr Tang was alleged to be a tenant at the Property, having said to have entered into a tenancy agreement with Mega Grade for a period of 2 years from 20 October 2012, at a rent of HK$10,000 per month.  It was P’s case that the tenancy was “fabricated” and Mr Tang was a fictitious person.

30.P and his wife Madam Tjio applied to join in the LT Proceedings on 12 July 2013 and, among other things, to set aside the Possession Order, and to restrain any person, except P and Madam Tjio, to enter the Property.  His application was fixed for hearing in the Lands Tribunal on 18 September 2013.  Further, on 2 August 2013, P managed to successfully obtain his assets retained inside the Property.

The Evidence

31.WTC filed an affirmation on behalf of both D3 and D4 in the LT Proceedings (“WTC’s Affirmation”), which was exhibited in an affirmation filed by D3, in opposition to the Summons.  D4 did not file any affirmation in opposition.

32.P had filed two affirmations, one in support of the Summons, and one in reply to D3’s affirmation.  P exhibited in his affirmation Tjio’s affirmation filed in the LT Proceedings (“Tjio’s Affirmation”).

33.P also filed an affirmation from a Mr Fan, a shareholder and director of Universal Plus which held one share in Mega Grade.  According to Mr Fan, Universal Plus was acting as the Secretary of Mega Grade from 13 July 1998 to 8 September 2004.  He further confirmed that Universal Plus had never received any notices of annual general meetings or extraordinary general meetings since about 2003, and no general meetings, whether annual or extraordinary in nature, had been held or written resolutions of all shareholders had been made since then.

34.Further, according to Mr Fan, the directors of Mega Grade for year 2002 and/or 2003 should have retired and no directors had since been appointed by the shareholders.  He said he was not aware of any general meeting or written resolution of shareholders having been passed in relation to the appointment of WTC as director with effect from 7 August 2003.

The Case of D3 and D4

35.Ms Herbert, Counsel for D3 and D4, argued that P must show that there was a serious question to be tried in relation to his assertion that:

(a)  He is the majority beneficial shareholder of Mega Grade;

(b)  That D3 and D4 were not duly appointed as directors.

36.So far as (a) was concerned, in WTC’s Affirmation, he had cast doubts over P’s standing as majority beneficial shareholder, inter alia:

(i)   P never reverted back to him in relation to contacting D1 about the sale of the Property;

(ii)   WTC was never told that D2 had a beneficial interest in Mega Grade and only came to know of this through the LT Proceedings;

(iii)   If P was the beneficial shareholder of Mega Grade and he was unhappy with the directorships of D3 and D4 he could simply remove them from office without the need to come to court for an order.

37.Ms Herbert further pointed out that there was a lack of evidence detailing the exact beneficial ownership of Mega Grade, and further P’s evidence as to the ration of shareholding of Mega Grade as between D2 and P was odd, and that  there was no sufficient evidence to show P was the majority shareholder.

38.She further raised the lack of evidence that Princesa provided the purchase price of the Property.

39.Then on the directorship issue, D3 and D4 said they were duly appointed and that this was supported by the documents registered at the Companies Registry.  A company is required by law to inform the Companies Registrar in relation to any changes of directorships and any resignations of directors[5].  There being no such notification, Mr Herbert then submitted that there was a presumption that the register at the Companies Registry would be correct.  In any event, it was the case of D3 and D4 that P’s case that there were no directors validly appointed after 2003 was contradicted by what was said in Tjio’s Affirmation[6].  Ms Herbert further relied on the equitable doctrine of laches and referred this court to Re Bailey, Hay & Co Ltd [1971] 1 WLR 1357.

Discussion

40.It is trite law that,  following American Cyanmid Co v Ethicon Ltd [1975] AC 396, the court will grant an interlocutory injunction where the applicant can show:

a.    That there is a serious question to be tried;  and

b.    That the balance of convenience lies in favour of granting the injunction.

41.Article 7 of the Articles of Association of Mega Grade (“Art 7”)   provided that

“7. At the Ordinary General Meeting to be held next after the adoption of these Articles and at every succeeding Ordinary General Meeting all Directors, except Permanent Directors if any are appointed, shall retire from office and shall be eligible for re-election.”

42.P confirmed that no Permanent Directors had ever been appointed to the Board of Mega Grade.

43.The last annual return presented by Universal Plus was on 28 July 2003 before they resigned as Corporate Secretary on 8 September 2004.  In the last annual return, a Mr Chong and a Mr Li,were stated to be the two directors. It appears that both of them then resigned on 1 August 2003[7].

44.According to the audited financial statements prepared by accountants appointed by WTC for the year ended 31 March 2004 (“2004 Statements”),a Mr Ong and a Mr Wong were appointed as directors on 1 August 2003, upon the resignation of the above mentioned Mr Chong and Mr Li.  Mr Wong resigned 7 days later and WTC was appointed.  Mr Ong resigned on 20 March 2004, and then WWC was appointed. 

45.Thus, in accordance with Article 7, and according to Mr Fan’s evidence, it appears that after the resignation of Mr Chong and  Mr Li, no directors had thereafter been validly appointed by Mega Grade.  After 28 July 2003, all the annual returns seemed tobe presented by the directors of Mega Grade themselves.

46.The 2004 Statements were the only audited financial statements produced by WTC.  These were signed by WTC and seemed to indicate at least what he reported to the auditors at the time.

47.At that time, Mega Grade appeared to be engaged in trading in electronic games and property investment and there were accumulated losses of almost HK$5.87m[8].  The Property appeared to be changed from the classification of “Leasehold Property” under “Fixed Assets” to be an “Investment Property” then with a carrying value after reclassification of HK$788,901 and was stated to be pledged to secure loans from a director, namely WTC[9].  Further, there was a tenancy agreement stated to expire on 31 August 2008 and the gross rental income during the year was stated to be HK$55,500, whereas for 2003, the gross rental income was stated to be nil[10].

48.P did not deny that he nominated WTC and WWC as his nominee directors to represent his interest in Mega Grade back in 2004[11].  P, however, denied the events as alleged by WTC to have happened in 2006, 2009 and 2011 as outlined in paragraph 22 above, and that those events were fabricated.

49.It appeared to be P’s case as he relied on Tjio’s Affirmation,that the directors were appointed as his nominees until July 2012, and he did not seem to deny D3 was his nominee director.  P’s case, as seen from Tjio’s Affirmation, was D4 was not validly appointed at all as P had never consented to his appointment.

50.So far, as the evidence shows, P should have knowledge of theappointment of theWanfamily members as directors, notwithstanding they were not validly appointed.

51.Having said this, the evidence at this stage showed that D3 and D4 were  clearly only nominee directors.

52.According to WTC, he was told that the shareholding of Mega Grade was beneficially held by P’s family, and that the other majority shareholder of Mega Grade D1 was only a nominee shareholder.   WTC also claimed that in August 2003, P had shown him the shareholder’s resolution confirming his appointment as director.

53.As stated in WTC’s Affirmation, he only started to question P’s claim of beneficial ownership in Mega Grade after reading Tjio’s Affirmation[12].  WTC’s involvement in Mega Grade was clearly through P only, and not through the registered shareholders D1, or Universal Plus, nor D2.  There was no evidence that WTC, or D3, or D4 even knew D1 or D2.    

54.Ms Herbert submitted that according to her calculations, even based on P’s evidence, he was not the majority beneficial shareholder but it was D2.  However, whether P was the majority beneficial shareholder of Mega Grade would not be relevantin relation to the Summons at this stage. P had in his evidence set out the details of how the Property was purchased and he acquired beneficial interest in Mega Grade and why D1 was his nominee shareholder. WTC himself had said he was told P held beneficial interest and the Alleged Loan Agreement was entered on this basis.

55.The issues of beneficial ownership or the percentage thereof are issues between P and D1 and D2 only.  So far as D3 and D4, the issues are whether they were validly appointed as directors of Mega Grade and  even if they were, whether they should have been retired.  I am satisfied that these are serious issues to be tried as between P and D3, D4. Whether D3 and D4 will be able to rely on the equitable doctrine of laches will be a matter for the trial judge. The grant of an interlocutory injunction now sought is a temporary remedy and is in the discretion of this court.

56.This court can only look at the available evidence at this stage.  WTC did not really deal with P’s allegation that Mr Tang was a fictitious person.  It seems that there was little information provided by WTC on Mr Tang, save that on the copy of the tenancy agreement exhibited by WTC, there was a PRC identity card number.  There was no information provided by WTC as to how rent was paid by the alleged Mr Tang, nor were details of any bank account of Mega Grade into which the rent was paid. It was also not clear how Mr Tang could occupy the Property when the evidence showed that it was occupied by P and his family on 20 November 2012, the date of the alleged tenancy agreement and thereafter.

57.It seems that the real disputes between WTC and P are in connection with the Alleged Loan Agreement and any outstanding loans. WTC was of course entitled to take mortgagee action against Mega Grade for repayment and enforcement of his charge against the Property, or on the dishonoured cheque, which he so far had not chosen to do.  Yet, shortly before P’s issue of the writ, D3 caused the Property to be further charged for a 2^nd mortgage for “All Moneys”, presumably on instructions of WTC.

58.Having considered all the circumstances and weighing up the available evidence before this court, I am satisfied that the balance of convenience lies in favour of granting the injunction as sought in paragraph 1 of theSummons, upon P giving the usual undertaking as to damages, save and except that D3 and D4 are authorized to continue to defend P’s application/s in the LT Proceedings.

59.I will also make an order in terms of paragraph 2 of P’s summons.  Costs are to be reserved.

Mr Patrick Chong, instructed by Winnie Leung & Co, for the Plaintiff

Ms Elizabeth Herbert, instructed by Oldham, Li & Nie, for the 3^rd and 4^th Defendants

1^st, 2^nd and 5^th Defendants absent