GUILDFORD INVESTMENT COMPANY LIMITED v.TAK WO FINANCE AND INVESTMENT LIMITED AND OTHERS

1987, No. A1610

IN THE SUPREME COURT OF HUNG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. These are applications to strike out a statement of claim on the grounds that it discloses no cause of action, that is frivolous and/or vexatious and that it is an abuse of the process of the Court.

2. The writ was issued on the 18th March 1987 and contained an endorsement of claim. The Plaintiff company sought declarations that the 2nd, 3rd and 4th defendants, who are directors of the 1st Defendant, may not vote on any resolution of the 1st Defendant in which they have an interest. In particular it sought to set aside resolutions passed at a meeting of the directors of the 1st Defendant held on the 9th of March 1987 on the grounds that the directors each had an interest in these subject matter of those resolutions and secondly that one director, Mr. Cecil Chao, had not been given notice of the meeting.

3. Relief was also sought in respect of an agreement of 23rd December 1971, as amended by a further agreement dated 9th December 1986 between, the 1st Defendant and other companies who are not parties to the action, namely Hsin Chong Properties Ltd. (H.C. P.) and Hsin Chong Land Ltd. (H.C.L.) regarding the terms and conditions under which the 2nd, 3rd and 4th Defendants were appointed as directors of the 1st Defendant. The Plaintiff seeks an injunction restraining the 1st Defendant from implementing the resolutions of 9th March and for orders that the 2nd, 3rd and 4th Defendants resign as directors of the 1st Defendant.

4. A statement of claim was filed on the 16th of April which set out that the Plaintiff and H.C.P. each owned half of the share capital of the 1st Defendant which was a joint venture between them to develop and own a building known as Wah Kwong Building in Hennessy Road. That "pursuant to the terms of a medium term credit facility made available in equal portions to Wah Kwong Properties and H.C.P. by a syndicate of banks led by BNP Finance (Hong Kong) Ltd. and Wardley Ltd. the 5th Defendant became registered as the owner of 799,000 shares (out of a total issued share capital of 800,000 shares) in the 1st Defendant.'' The 5th Defendant "is a necessary and proper party to the proceedings and is joined in that capacity."

5. By the agreement of 9th December 1986 all of H.C.P.s interests were transferred to H.C.L. and the Plaintiff and H.C.L. were to be each entitled to appoint 5 directors to the board of the 1st Defendant. The 2nd, 3rd and 4th Defendants were 3 of the 5 directors so appointed by the Plaintiff. Because of their appointment by the Plaintiff the 2nd, 3rd and 4th Defendants owe a fidiciary duty to the Plaintiff to comply with its instructions and to resign from the 1st Defendant whenever called on to do so.

6. It is alleged that at a meeting held on the 9th March, of which one of the directors of the 1st Defendant Cecil Chao, was not given notice, leases of office premises in the Wah Kwong Building in favour of Wah Kwong Shipping Agency Ltd., Wah Kwong Properties Ltd. and Hsin Chong Holdings Ltd. in which the 2nd, 3rd and 4th Defendants have interests were renewed on terms which did not truly reflect current and likely future rent levels and the manager of the Wah Kwong Building. Diamond Property Management Ltd. ("Diamond") was to be replaced by Hsin Chong Real Estate Management and Agency Ltd. ("HCM"). Consequently the Plaintiff has called on the 2nd, 3rd and 4th Defendants, as its nominees, to resign from the board of the 1st Defendant. They have not done so.

7. The 1st, 2nd, 3rd and 4th Defendants each seek to set aside the statement of claim on 2 broad grounds. The first is that the Plaintiff is not a registered shareholder of the 1st Defendant and therefore has no locus standi to seek the orders it does and secondly the resolutions passed on the 9th March, even if defective, have been entirely replaced and superceded by other resolutions passed at a meeting of the directors of the 1st Defendant held on the 21st March 1987, of which Cecil Chao had notice and at which he was present. At that meeting care was taken to see that individual directors did not vote on resolutions in which they had an interest.

Locus

8. It is the main submission of the 1st, 2nd, 3rd and 4th Defendants that, as the Plaintiff is not a shareholder in the 1st Defendant it has no locus standi to bring this action. It is a personal action and can only be brought by a member of the company. The Plaintiff may well be the beneficial owner of 50% of the shares in the 1st Defendant but only as the holder of an equity of redemption. Section 101 of the Companies Ordinance provides that the Registrar shall not receive notice of any trust, express or implied relating to any shares. Article 12 of the 1st Defendant's articles of association, which forms a contract between shareholders, provided that the company shall be entitled to treat the registered holder of any share as the absolute owner thereof and, except as ordered by a court of competent jurisdiction, shall not be bound to recognise any equitable on other interest in such share.

9. Reliance is also placed on the cases of Re Perkins⁽¹⁾, Musse1white v. Musse1white and Sons Ltd.⁽²⁾, Siemens Bros v. Burns⁽³⁾ and the Hong Kong case of CNT Resources v. Lam⁽⁴⁾.

10. In Re Perkins⁽¹⁾, a debtor of the company had obtained a judgment declaring shares in the company were held by the registered shareholder is his trustee. On that basis it was argued that the company had lien on his stares and was therefore a secured creditor of the detbtor. It was held that that was not so At p. 616 Coleridge C.J. said :-

"it secure to me extremely important not to throw any doubt on the principle that Companies have nothing whatever to do with relations between trustees and their cestuis que trust in respect of the shares of the company."

Esher M.R. agreed. Even though it had been held by a court that one Dickey held shares as bare trustee for Perkins, he was not to be regarded by the company as a shareholder and therefore a person against whom the company had a secured debt.

11. In Musselwhite v. L.H. Musselwhite and Sons Ltd.⁽²⁾, Russell J. refers with approval to dicta of Swinfen Eady M.R. in Siemens Bros and Co. Ltd. v. Burns⁽³⁾

"In the ordinary way where shares are transferred to and registered in the name of a mortgagee it follows, from his positions as owner as law of the shares that the ownership carries with it the voting right: that this is vested in the owner of the shares."

12. In CNT Resources v. Lam⁽⁴⁾, it was held that even though the 1st Plaintiff had purchased or agreed to purchase just under 50% of the shares in the company, as the transfer of the shares had not been registered the 1st Plaintiff had no right to bring either a personal or a derivative action. Cons J.A. said :-

"the real difficulty in the 1st Plaintiff's way is that it has not yet registered its shareholding and that, when seeking a base for a derivative action, seems to me to be fatal."

13. It is argued for the Plaintiff that there is no dispute that the Plaintiff and H.C.L. are in a joint venture using the let Defendant as a vehicle and each side has the right to appoint directors. I am satisfied that is so only so long as the Plaintiff is a registered shareholder of the 1st Defendant and the defect cannot be cured by simply adding the registered shareholder, BNP Finance Ltd. as a defendant against whom no relief is sought.

14. Moreover the Defendants in this action are not parties to the agreement of 9th December 1986 and I agree with Counsel for the 2nd, 3rd and 4th Defendants that they have no obligation under it. The other party to that agreement, Hsin Chong Land Ltd., is not a party to this action.

15. I am satisfied that the Plaintiff has no locus standi to bring this action and the motions to strike out the statement of claim must succeed.

16. The action is dismissed. The Plaintiff must pay the defendants costs, including the costs of this application to be taxed if not agreed.

(1) [1890] 24 QBD 613

(2) [1962] Ch. 964

(3) [1918] 2 Ch. 324

(4) Court of Appeal 128/1985