HOWARD NATHAN SHAPIRO v. GEORGE DEMETRIOUS VARVITSIOTIS AND OTHERS

HCMP 1847/2020

[2021] HKCFI 538

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1847 OF 2020

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J U D G M E N T

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1.  This is the hearing of the plaintiff’s originating summons seeking, amongst other things:

(1)   A declaration that the notice of change of the company secretary and directors filed with the Companies Registry on 5 October 2020 is invalid;

(2)   That the company’s register of members be rectified by removing the names of the 1st, 2nd, 3rd and 4th defendants as members holding shares; and that

(3)   The register of directors be rectified by reinstating the names of James Abraham Shapiro and Alex Nicholas Stamires as directors.

2.  There are two affirmations from the plaintiff in support and three affirmations from the 1st, 2nd and 4th defendants respectively resisting it.

3.  The background arises in relation to a company called Asia Interactive Corporation which was founded by the 1st defendant in Delaware in 2006.  At around the same time, the first defendant established the 5th defendant or “the Company”.  And in 2008, all the shares in the company were transferred to AIC.  Since 2012, the plaintiff has been investing in AIC and as of 2019, he held 10.72 per cent of the share capital of AIC.

4.  Between 2011 and 2018, the company issued various convertible notes as a means of raising capital, and the plaintiff subscribed to various of those notes, as a result of which he has provided loans to the company in the total amount of approximately US$ 1.7 million.

5.  In 2017 or 2018, according to the 1st defendant, the company was advised by financial advisers to reduce its debt, so as to position itself for a public listing on the Canadian stock exchange by way of a reverse takeover.  As a result, various amounts of the convertible notes were converted into equity, and the plaintiff became a shareholder of the Company.

6.  The plaintiff contends that since around April of 2020, it has become clear to him that between 2016 and 2020, there have been various financial irregularities within the Company by which the 1st defendant has misused, or misappropriated company funds.  He also contends that various improper share allotments and board and shareholder resolutions have been made pursuant to what is described as a four-step allotment exercise.  That exercise was implemented on or around 30 August 2019 by, the plaintiff says, the 1st defendant in control of the board of the company. 

7.  Needless to say, the 1st defendant denies these allegations, denies that there have been any irregularities or that the 1st has misused or misappropriated any company funds, and he contends that the allotment of shares was proper and appropriate.

8.  The essence of the complaint of the plaintiff is that the shares allotted to the 1st defendant’s family members within that four-step allotment exercise are improper and should be reversed because, according to him, there is a huge disparity between the shares which have been allotted to the 1st defendant’s family members as against those that have been allotted to the plaintiff and/or his family members.  The most obvious and easily recognisable way in which this proposition can be seen is by reference to a table in the plaintiff’s affirmation, where he looks at the “debt to value of shares” ratios that are inherent within the four-step allotment.  And he says that from those ratios, it is clear that the allotment has favoured the 1st defendant’s family.  In simple terms, he says that the “debt to value of shares” ratio for the 2nd and 3rd defendants is 1:29 and 1:18 respectively, whereas the “debt to value of shares” ratio for himself is 1:0.88.

9.  The 1st defendant argues that there are good and valid reasons why the shares have been allotted in the manner that they have been.  And there is a consequently significant dispute as to those matters.

10.  Mr Brown, on behalf of the plaintiff, suggests that, actually, the disputes are either insignificant or are so obviously to be resolved in favour of the plaintiff that I should proceed in any event.

11.  It is notable from the plaintiff’s application that he does not challenge the shares that were allotted to him or his own family members as part of that four-step allotment exercise.  That in itself gives rise to some potential difficulty for the plaintiff because it makes it impossible for him to suggest that the allotment exercise in itself was an invalid exercise.  What he is simply complaining about is the ratios of the various allotments. The defendants rely upon this to complain that the plaintiff is “cherry picking”, and that that fact alone demonstrates how unsuitable the matter is for resolution on affidavit by way of originating summons.

12.  In addition to challenging the allotment of shares, the plaintiff also challenges various resolutions which were reached at the AGM of the company held in September 2020.  According to the plaintiff, on 20 September 2020, the board, by a simple majority, passed board resolutions requiring that the 1st defendant be directed to take all necessary steps to adjourn all agenda items for the September 2020 AGM on the basis that there was, amongst other things, no directors’ report or independent auditors’ report in breach of the Companies Ordinance.  Notwithstanding this letter, the 1st defendant did not accept the board resolution as valid and, as a result, the September AGM took place.

13.  Mr Yu, on behalf of the 1st defendant says that there was no choice but to hold the AGM because the time required by the Companies Ordinance for this was about to expire, and whilst there was an ability to retrospectively extend the time for lying the financial statements before the members, there was an absolute requirement to hold the AGM.  According to him, once an AGM has been validly called, it is no longer competent for the board to seek to delay the meeting other than as per the prescribed procedures in the articles of association. This AGM was validly called and could not be adjourned.  Therefore, he says that the AGM resolutions cannot be challenged.  And he also raises various factual points such as the proposition that there were in fact audited financial statements available to be laid before the members and also factual positions as to the validity of the various resolutions that were passed.

14.  The essence of the resolution which are challenged by the plaintiff are that various directors were “removed” and others were “re-elected” but the plaintiff says those resolutions are invalid and that the composition of the board ought to return to its position pre the AGM.

15.  In my view, this is not an appropriate matter to proceed for hearing today by way of originating summons.  It is clear that there is a significant level of distrust between the two warring camps.  The affirmation evidence is replete with accusation of misappropriations, breaches of fiduciary duty and rebuttals and counter rebuttals to those various propositions.  There are significant issues of fact as to whether or not there was a breach of fiduciary duty and whether the various acts undertaken by the 1st defendant, either himself or undertaken by the shareholders of the Company, or by AIC at the time when it was the sole shareholder or indeed by others, are appropriate or valid.

16.  I am not satisfied that it is possible to resolve these matters simply on the affidavit evidence.  Therefore, I take the view that this matter should be adjourned and some form of resolution by which all issues can be properly ventilated should be designed.  I understand from Mr Brown that there has been some level of discussion between the parties as to what the various options are in the event that I take the view that this matter should not proceed today.  I therefore do not, at the moment, decide whether or not there should be a conversion to a writ action with full pleadings, and I do not make any decisions as to the way forward.  I will hear counsel in a moment on that point.

17.  However, beyond saying that, it is important to note that my decision to delay the resolution of this dispute from today will inevitably result in a delay probably for some considerable time.  I am conscious that the plaintiff has expressed in his affidavit a concern that the 1st defendant, either is continuing or may continue, to misappropriate further sums from the company and/or continue to act in breach of fiduciary duty.  I am also well aware and have read the affidavit of the 1st defendant explaining the way in which he says he is not misappropriating but simply taking what he is entitled by way of remuneration and other legitimate expenses.

18.  I express no view at all on which party is right, but it does seem to me that if there is any urgency in resolving any particular matters relating to the way in which the company operates until the overall disputes are resolved, it must be and will remain open to the parties to return to court, having regard to individual and specific dispute.

19.  I stress that I would expect all parties involved, both in these disputes and in the operation of the Company, to recognise that there are proper issues and disputes that need to be resolved as between them concerning the running and the governance of the Company.  Whilst those disputes are being resolved, neither party and neither camp should take any  precipitous action which may prejudice the fair resolution of those disputes, or prejudice the other parties, without proper and adequate notice to the other side, so that each party may take whatever steps it considers appropriate to protect itself pending the resolution of this dispute.

20.  The Company is the 5th defendant and it is said, at least by Mr Yu, that there is one independent director sitting on the board of the Company.   I do not descend into the detailed management of the Company and have no desire to do so.  But the independent director, if he is independent, must continue, in my view, to act independently and, to some extent, whilst this dispute is resolved, he will inevitably find himself something of an arbiter between the two warring camps.  That independent director should carefully review all decisions of the board and should be astute to ensure that neither party is being favoured and that all decisions of the Company are made in the best interest of the Company whoever are the members and whoever is ultimately to become the directors.  I cannot put this sentiment into an order of the court because that would be the court descending into the management of the Company. I also recognise that the Company needs to continue to run its business and operations whilst the dispute is resolved, but I hope that by expressing my expectation, any delay involved in the resolution of the dispute may have minimal impact on each of the parties and I hope zero impact upon the business of the Company.

(Discuss re way forward and costs)

21.  The parties will resolve between themselves the way forward.  In terms of costs, in my view, costs in the cause is the appropriate order.  It is not possible for me to say, at this stage, that it was inappropriate to start by way of originating summons.  There is no benefit in reserving the costs in that respect because nothing will emerge later which identifies whether it was appropriate or not.  It is simply one of those things that has happened that is neither necessarily wrong nor necessarily right. 

22.  The fact that it is not appropriate to continue by way of originating summons may have become apparent and indeed probably ought to have become apparent post the filing of the affidavits, but I do not in any sense think that the costs have been wasted in relation to the affidavits.  The only costs that would have been perhaps unnecessarily incurred are costs relating to the preparation for this hearing, but there has clearly been some benefit in having this hearing because it has facilitated both an agreement as to the way forward, but it has also allowed the court to express the views that it did which would not otherwise have been expressed, and the Company would have remained without whatever limited guidance the court has been able to give as to the way it should be managed in the future.  Therefore, in my view, the appropriate order is costs in the cause.