YUEN KWONG WO LTD v. YUEN YEE LUM AND OTHERS

HCMP 1408/2018

[2020] HKCFI 803

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1408 OF 2018

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D E C I S I O N

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1.  By originating summons filed on 6 September 2018 (“OS”) the plaintiff, Yuen Kwong Wo Limited (源廣和有限公司) (“Company”), applies under section 42 of the Companies Ordinance (Cap 622) (“Ordinance”) for removal of the following documents filed at the Companies Registry:

(1)  the Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed on 1 December 2015 (Document Reference No 2400288428) (“2015 Notice”);

(2)  the Annual Return (Form NAR1) filed on 31 March 2016 (Document Reference No 23101246638) (“2016 AR”); and

(3)  the Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed on 24 January 2017 (Document Reference No 2310376133) (“2017 Notice”).

2.  In §§4 – 9 of the OS, the Company seeks alternative relief for rectification of the information in the Companies Register by removing the 1^st to 5^th defendants as directors of the Company, and an injunction enjoining the 1^st to 5^th defendants from claiming to be directors of the Company.  The latter relief has been abandoned by the Company.

Background

3.  The Company was incorporated on 19 March 2012.  Yuen Kut Lam Company Limited (“YKL Co”) is the registered owner of various trademarks relating to Yuen Kut Lam (源吉林). 

4.  The Company and YKL Co together have been used for the purpose of carrying on the business of selling Chinese herbal tea in the name of Yuen Kut Lam Kam Wo Cha (源吉林甘和茶). 

5.  The shareholders of the Company and YKL Co are members of the Yuen family in that:

(1)  As at 31 March 2016, the Company had 6 shareholders namely, Yuen Lok Ming (源樂明) (“Lok Ming”), Yuen Erjian (源而鑑) (“Erjian”), the 1^st and 5^th defendants, Yuen Yue Dong (源汝當) and Yuen Yee Kwan (源而鈞), and each of them held 16.6% of its issued shares. 

(2)  As at 25 May 2012, YKL Co had 5 shareholders, being Lok Ming, the 1^st defendant, Erjian, Yuen Yue Kwong and Yuen Yu Lau (源而流) each held 20% shareholding and were its directors. 

6.  After the annual general meeting of the Company held on 7 November 2015 (“2015 AGM”), the Company had 7 directors and their dates of appointment and cessation of office are as follows:

Name	Date of Appointment	Date of cessation of office
Lok Ming	19/3/2012	--
1st defendant	21/6/2012	7/11/2015
3rd defendant	23/4/2013	7/11/2015
4th defendant	23/4/2013	7/11/2015
5th defendant	23/4/2013	7/11/2015
Erjian	23/4/2013	--
Yuen Chi Hong (源子康) (“Chi Hong”)	23/4/2013	--
Yuen Chi Man (源子文) (“Chi Man”)	7/11/2015	--
Yuen Errong (源而榮) (“Errong”)	7/11/2015	--

7.  It is the Company’s case that the 1^st, 3^rd to 5^th defendants retired as directors at the 2015 AGM and were not re-elected.  At the meeting, it was noted that the 1^st defendant (who was then 70 years old) had reached the retirement age prescribed by the Company, and should retire from office and hand over all the documents, and he agreed to do so.  However, despite his retirement as director at the 2015 AGM, the 1^st defendant continued to act as director of the Company. 

8.  On 1 December 2015, the 1^st defendant (qua director) filed  the 2015 Notice with the Companies Registry, which stated that the 2^nd defendant had been appointed as a director on 18 November 2015.   

9.  In around March 2016, it was discovered that the 1^st defendant had transferred the trademarks held by YKL Co to the companies controlled by him and the 2^nd defendant.  On 21 March 2016, a resolution was passed to remove the 1^st defendant as director of YKL Co.    

10.  On 31 March 2016, Lok Ming (qua company secretary) filed the 2016 AR at the Companies Registry which stated, incorrectly, that the 1^st, 3^rd to 5^th defendants were directors of the Company.  This is said to have been attributed to the mistake of the accounting clerk who had copied and pasted the information from the previous annual return.

11.  In August 2016, Lok Ming became aware that the 2015 Notice had been filed.  By a letter dated 22 August 2016, Lok Ming informed the Companies Registry that the 1^st defendant had ceased to be a director on 23 November 2015, and that he had no authority to appoint the 2^nd defendant as director of the Company without the requisite resolution passed at a general meeting. 

12.  On 26 September 2016, YKL Co commenced HCA 2478/2016 against, inter alios, the 1^st and 2^nd defendants for alleged breach of fiduciary duties, transferring the trademarks without proper authority, conspiracy to injure YKL Co and passing off.   

13.  After Lok Ming had discovered the mistakes in the 2016 AR, he requested the 1^st to 5^th defendants to rectify the record but to no avail.  His effort in explaining the mistakes to the Companies Registry and filing replacement annual return was not successful.

14.  It is the Company’s case that in reliance on the incorrect information contained in the 2015 Notice and the 2016 AR, the 1^st and 3^rd defendants purported to act as directors of the Company by issuing a notice on 4 January 2017 to convene a board meeting to be held on 20 January 2017 to discuss Company’s affairs (“BOD Meeting”).  In the minutes of the BOD Meeting:

(1)  The 1^st, 3^rd to 5^th defendants, Erjian, Chi Hong and Errong (as representative of Lok Ming) were described as the 7 directors attending (described as attendees (出席者)), while Chi Man and 源而佳were listed as present (列席).

(2)  Various resolutions were passed by a majority of “directors” (being the 1^st, 3^rd to 5^th defendants) against the objection of the 3 de jure directors (being Lok Ming, Erjian and Chi Hong), which were directed at (i) giving the 1^st defendant access to the accounting records, banking records, and custody of the Company’s seals and cheque books; (ii) appointing the 1^st defendant as treasurer of the Company at monthly salary of HK$20,000; (iii) authorising the 1^st defendant to deal with all litigations relating to the Company; (iv) appointing the 2^nd defendant as Chief Executive at monthly salary of HK$28,000; and (v) increasing the number of authorised signatories of the bank accounts from 4 to 7 by appointing all 7 “directors” as such signatories. 

(3)  A resolution was passed by the same 4 “directors”, as majority, to remove Lok Ming as company secretary and to appoint Wong Kwan & Co as his replacement. 

15.  In reliance on the resolutions passed at the BOD Meeting:

(1)  On 24 January 2017, the 2017 Notice (signed by the 5^th defendant as director) was filed by Wong Kwan & Co with the Companies Registry.

(2)  The 1^st to 5^th defendants requested Standard Chartered Bank (“SCB”) to change the bank mandate, which was put to a halt as a result of Lok Ming’s complaint made on 20 February 2017.  This led to SCB freezing the bank account. 

16.  To date, the Company’s bank account at SCB remains frozen.  The Company believes that SCB would only unfreeze the bank accounts until after removal of the incorrect information filed at the Companies Registry. 

Procedural background

17.  The Company filed the OS on 6 September 2018.

18.  By a consent summons dated 3 December 2018, the 2^nd defendant agreed that his appointment as director was “void and null” and that he should be removed as a director of the Company.  By 3 consent summonses dated 10 December 2018, the 3^rd to 5^th defendants agreed that the information in the Companies Register should be rectified by removing them as directors of the Company. 

19.  In her Decision dated 21 March 2019 [2019] HKCFI 759, Au-Yeung J ordered, inter alia, that (1) the appointment of the 2^nd defendant as director of the Company was invalid and that the 2015 Notice be removed from the Companies Register; (2) the Registrar to rectify the information on the Companies Register by removing the appointment of the 3^rd to 5^th defendants as directors of the Company on 7 November 2015; and (3) the Company shall within 28 days file an amended 2016 AR and a replacement Form ND2A to reflect the order under §(2).  

20.  The Order of Au-Yeung J was registered at the Companies Registry on 6 May 2019. 

21.  On 24 May 2019, the Company filed the amended Annual Return (Form NAR1) (Document Reference No 22401773770) (“Amended 2016 AR”) in which the information relating to the appointment of the 3^rd to 5^th defendants as directors of the Company was deleted.  Thenceforth, the 2016 AR was superseded by the Amended 2016 AR. 

22.  On 6 December 2019, a consent summons (signed by the Company and the 1^st defendant) was filed, which recorded the 1^st defendant’s agreement on the Court (1) making “a declaration that the appointment of the [1^st defendant] as director of the [Company] by virtue of the [2015 Notice] be void and null”; (2) the 1^st defendant be removed as a director of the Company with no order as to costs (“1^st consent summons”). 

23.  However, as the Registrar in her 3^rd statement rightly pointed out, the 2015 Notice did not relate to the appointment of the 1^st defendant as director.  Instead, the Company should seek an order to rectify the Amended 2016 AR to reflect the fact that the 1^st defendant was not a director of the Company at the time.

24.  A revised consent summons dated 14 January 2020 was signed by the Company and the 1^st defendant whereby the parties agreed that (1) the 1^st consent summons be withdrawn; (2) the information at the Register be amended by deleting the 1^st defendant as director of the Company from 7 November 2015; (3) the Company shall within 28 days amend the Amended 2016 AR and file a new Form ND2A (“2^nd consent summons”). 

25.  At the hearing before Au-Yeung J on 22 January 2020, leave was granted to allow the Company and the 1^st defendant to withdraw the 1^st consent summons.   

Merit of application

26.  Against the above background, on 17 March 2020, the Company filed a Notice of Appointment to Hear the OS stating that it intends to seek an order for (1) removal of the 2016 AR; (2) removal of the 2017 Notice; and (3) as an alternative to §§(1) and (2), rectification of the information at the Companies Register by removing the 1^st defendant as director of the Company. 

27.  Section 42(1) of the Ordinance provides as follows:

“The Court may, on application by any person, by order direct the Registrar to rectify any information on the Companies Register or to remove any information from it if the Court is satisfied that -

(a) the information derives from anything that -

(i) is invalid or ineffective; or

(ii) has been done without the company’s authority; or

(b) the information -

(i) is factually inaccurate; or

(ii) derives from anything that is factually inaccurate or forged.”

28.  Section 42(4) provides:

“The Court must not order the removal of any information from the Companies Register under subsection (1) unless it is satisfied that -

(a) even if a document showing the rectification in question is registered, the continuing presence of the information on the Companies Register will cause material damage to the company; and

(b) the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the Companies Register.”

29.  The principles governing an application under section 42 have been stated by Godfrey Lam J in Re China Nice Education Research Publishing Investment and Management Co Ltd [2016] 3 HKLRD 525 at §§15 – 20, and may be summarised as follows:

(1)  Section 42(4) prescribes and restricts how the Court’s power to order removal of information may be exercised.  Removal is to be ordered only if (i) the plaintiff has shown that registration of a document showing the rectification is not good enough; the continuing presence of the incorrect information will cause material damage to the company; and (ii) the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the register (§§16 – 17).

(2)  The fact that the information is incorrect, or relates to an invalid or ineffective transaction, or has been filed without proper authority of the company in question or that a document is a nullity or is one that should never have been registered, is not in itself a sufficient reason for removing it as opposed to rectifying it (§18).

(3)  The order made by the court is to be registered, so that the basis of the rectification (or removal) ought to be apparent from an inspection of the record (§20).

30.  The 1^st defendant agreed, under the 2^nd consent summons, that he had not been appointed as a director of the Company at the 2015 AGM.  That being the position, it seems to me that it is appropriate for the Court to make a declaration that the appointment of the 1^st defendant as director of the Company from 7 November 2015 was invalid.  Such declaration is similar to the Order of Au-Yeung J made on 21 March 2019 in respect of the appointment of the 2^nd defendant as director of the Company.

31.  I do not think it is appropriate for the Court to order the removal of the 2016 AR, as sought in §1 of the Notice of Appointment to Hear the OS, given that:

(1)  the 2016 AR has already been superseded by the Amended 2016 AR filed pursuant to the Order of Au-Yeung J on 6 May 2019;

(2)  the Company has agreed under the 2^nd consent summons that the Amended 2016 AR should be further amended by removing the name of 1^st defendant as director of the Company; and

(3)  in any event, I am not satisfied that the Company has shown that the registration of a document (such as a Re-Amended 2016 AR, see §32 below) with the incorrect information rectified is not good enough or that the continuing presence of the 2016 AR will cause material damage to the company.

32.  As the Amended 2016 AR still listed the 1^st defendant as a director of the Company on the date of the return (being 19 March 2016), it is necessary to rectify the Amended 2016 AR by deleting the information in respect of the 1^st defendant as a director of the Company. 

33.  I turn to the 2017 Notice.  The 1^st, 3^rd to 5^th defendants all agreed that they were not directors of the Company at the time the BOD Meeting was held.  As such, they had no power to convene, participate in or vote at the BOD Meeting.  It follows that all resolutions purportedly passed by them qua majority of the directors of the Company at the BOD Meeting were invalid and of no legal effect. This includes the resolution to remove Lok Ming as company secretary and to appoint Wong Kwan & Co as his replacement with effect from 20 January 2017.

34.  As the 2017 Notice contained incorrect information about the removal and appointment of company secretary on 20 January 2017, it should be rectified by deleting all the information set out therein.  As there is no evidence to show that the rectification of the 2017 Notice is not good enough or that if the 2017 Notice is not removed, material damage will be caused to the company, the conditions for the Court to order removal of the 2017 Notice are not satisfied. 

35.  The Registrar submits that the Court should order the Company to file a Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) reporting the cessation of the 1^st defendant as director of the Company.  There is no objection from the Company or the 1^st defendant.  It seems to me that as the 1^st defendant was until the 2015 AGM a director of the Company, a Form ND2A should be filed to reflect the fact that he has ceased to be a director on 7 November 2015.   

Conclusion

36.  For the above reasons, I make the following Order:

(1)  A declaration that the 1^st defendant has ceased to be a director of the Company on 7 November 2015.   

(2)  The Company shall within 7 days hereof file with the Companies Registry a Re-Amended 2016 AR by deleting the information in respect of the 1^st defendant as a director of the Company.

(3)  The Company shall within 7 days hereof file a Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) reporting the cessation of the 1^st defendant as director of the Company on 7 November 2015. 

(4)  The Company shall within 7 days hereof file with the Companies Registry an amended 2017 Notice by deleting all information contained therein.   

(5)  The Company shall within 7 days hereof deliver a sealed copy of the Order made by this Court to the Registrar for registration.

(6)  There be no order as to costs as between the Company and the 1^st defendant.

37.  The parties have not addressed the question of the costs incurred by the Registrar of Companies, who had submitted 4 statements in these proceedings.  I make a costs order nisi that the costs of the Registrar be paid by the Company, to be assessed by way of gross sum assessment, if no agreement is reached between the parties on the amount payable by the Company within 7 days of this Decision.