XCHRX TECHPEARL PRINTING LIMITED v. CHOW SHING MING AND OTHERS

1994, No.A1215

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal by the 1st, 2nd and 3rd Dfendants against the Order made by the Master for summary judgment to be entered against the said defendants for the various claims made by the Plaintiff herein.

2. The Plaintiff is a limited company and the 1st and 2nd Defendants were once the directors and shareholders of that company. The 4th Defendant was also a director and shareholder of the company in question and I am given to understand that he is still a director and shareholder of the plaintiff company. Between the three of them, i.e. the 1st, 2nd and 4th Defendants, they owned 100% shareholdings of the plaintiff company at the material time; and they were the only directors of the company at the material time. There has been a change of management, I was told, which probably was the reason why these proceedings were commenced.

3. The point in issue is a very straight and simple one in my view, notwithstanding the complicated nature of the Plaintiff's claim. The Plaintiff's claims against the defendants were based on : firstly, a breach of section 48; secondly, money had and received; thirdly, constructive trust; fourthly, ultra vires; fifthly, breach of section 58 and/or section 79B of the Companies Ordinance; sixthly, breach of directors' duty and lastly, for fraud.

4. All these claims centre around one transaction that occurred back in 1991. Under that transaction, the 1st and 2nd Defendants agreed to sell all their shareholdings in the plaintiff company to the 4th Defendant making him the sole owner of the plaintiff company. In order to pay for the value of such shares it was then agreed between the parties that the company would cause part of its asset to be sold and for the cash to be derived therefrom to be paid over to the 1st and 2nd Defendants for the sale of their shares to the 4th Defendant. It is not disputed that that was quite improper as that would, on the face of it, amounted to a breach of section 48 of the Companies Ordinance that prohibits precisely such an act. However, notwithstanding that a breach of section 48 would attract criminal sanction, it is the plaintiff's case that it would also give rise to civil liabilities.

5. In my view, all the various claims or heads of claims of the Plaintiff would depend upon one single issue; and that is, whether the plaintiff company was solvent at the time when the acts complained of occurred. The reason is simple. Irrespective of whether the transaction that was carried out at that time was proper or not, it would be open to the company through a shareholders' meeting to rectify whatever impropriety that had occurred in the transaction. The company can certainly adopt and approve whatever had occurred subject only to the rider that they cannot do it to the prejudice of a third party, classically a creditor. Therefore if the company was solvent at the material time, it can certainly reduce its capital. And, it can certainly sell its assets to allow the 4th Defendant to buy the shares from the 1st and 2nd Defendants that would involve a reduction of capital. But reduction of capital is not unlawful if it was properly passed by a resolution of the shareholders and the company was at the material time solvent.

6. In the present case, since the 1st, 2nd and 4th Defendants between them at the material time owned 100% of the shareholdings whatever they have done would prima facie be arguable to be deemed to have been done with the blessing and consent of all the shareholders of the company. The only thing lacking would of course be a formal written resolution but that of course would not prevent a proper defence being raised estopping the Plaintiff from complaining subsequently of the acts so blessed by the then shareholders who between them held all the shares in the plaintiff company. The claims of the Plaintiff could be defeated by the Defendants showing that the company was solvent at the material time; and on the face of the document before me, i.e. the audited account, it would appear that the company was solvent in 1991 even after the bad debt of $1.5 million were written off.

7. Mr Lau drew my attention to doubtful debts to the tune of $1.2 million. However, for the purpose of the present proceedings, I do not find that helpful as doubtful debts remains doubtful and not bad at the material time. That of course is not conclusive enough for one to say that the company was insolvent for the purpose of Order 14 proceedings. On the face of it, there certainly is evidence which if belief by the court and accepted by the court would have supported an arguable defence against the Plaintiff's claims.

8. For the reasons given, summary judgment ought not have been entered against the 1st, 2nd and 3rd Defendants. I am satisfied on the materials before me that there is an arguable defence in law and also that there are disputes of facts which cannot be resolved in an Order 14 proceedings.

9. Mr Chain also relies on relief under section 358 of the Companies Ordinance, that of course would require the court to consider all the circumstances to see if the alleged breach of duty or the negligence or misconduct of the directors could be excused. That of course is not a matter which would be appropriate for Order 14 hearings.

10. In the premises, the appeal must be allowed, the summary judgment entered against the 1st, 2nd and 3rd Defendants be set aside.