GAVIN WILLIAM BROWN v. ASTRON CORPORATION LTD

HCMP 1308/2021

[2022] HKCFI 3426

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1308 OF 2021

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BETWEEN

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REASONS FOR DECISION

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1.  Unless otherwise stated, (1) all references herein to numbered divisions, parts, sections and subsections are to those of the Companies Ordinance (Cap 622) (“CO”) and (2) all monetary figures are denominated in Australian dollars.

Introduction

2.  By the originating summons issued herein on 7 September 2021 (“OS”), the plaintiff (“Mr Brown”) sought:

(1) a declaration that the declaration, and proposed distribution in specie, of dividend under “Resolution 1” passed by the shareholders of the defendant (“Company”) at the extraordinary general meeting on 19 July 2021 (“EGM”) is unlawful and ultra vires the Company (paragraph 2); and

(2) a final injunction to restrain the Company from executing such resolution (paragraph 1).

3.  By an inter partes summons taken out on the same day (“Summons”) pursuant to (1) the court’s inherent jurisdiction, (2) s 21L of the High Court Ordinance (Cap 4) and (3) ss 728-730[1], Mr Brown applied for an interim injunction in the same terms as paragraph 1 of the OS until further order.

4.  Mr Brown contends that the intended distribution in specie under Resolution 1 was unlawful and ultra vires the Company because it did not have sufficient distributable profits.

5.  On 10 September 2021, I granted an injunction in terms of paragraph 1 of the draft order attached to the Summons on an interim interim basis pending the substantive determination of the Summons.

6.  I so ordered for the following reasons.

7.  Interim interim relief is meant to be an urgent temporary stop-gap measure where the circumstances were such that the court has to do practical justice on the balance of fairness even though it may not have sufficient time to consider the matter fully: China Shanshui Cement Group Limited v Zhang Caikui [2018] HKCA 409 at [13] per Lam VP.

8.  In light of the evidence placed, and the submissions made, before me, I was satisfied that the balance of fairness favoured the suspension of the implementation of Resolution 1 until the determination of the Summons after a substantive hearing.

Serious issue to be tried

9.  Briefly, the Company is a Hong Kong company listed on the Australian Securities Exchange (“ASX”). It has issued 122,479,784 shares, of which 122,476,778 shares are held by Chess Depositary Nominees Pty Ltd (“CHESS”)[2] as nominee for the beneficial shareholders with CHESS Depository Interests (“CDIs”). Mr Brown held 15,412 CDIs.

10.  The Company and its subsidiaries (collectively “Astron Group”) carried on business in sourcing, extracting, processing and marketing products derived from heavy mineral sands. In particular, the Astron Group carried on a downstream business of processing and selling mineral sands (“Downstream Business”) through a dedicated mineral sands processing facility in Yingkou operated and owned by Astron Titanium (Yingkou) Co Ltd (“Astron China”), a wholly owned subsidiary of the Company in the PRC.

11.  What Resolution 1[3] purported to do was to authorise the Company to:

(1) demerge and dispose of Astron China together with the Downstream Business to a newly incorporated wholly owned Hong Kong company, Astron Titanium (Yingkou) Hong Kong Holdings Limited (“Titanium HK”) (“Demerger”), in return for 122,479,784 shares in Titanium HK (“Consideration Shares”), which were valued between $7 million and $10 million; and

(2) distribute the Consideration Shares as dividend (“Demerger Dividend”) to the Company’s current shareholders in proportion to their shareholding.

12.  Unless restrained by the court, the Company had given notice that it intended to complete the distribution of the Demerger Dividend on 13 September 2021.

13.  Mr Brown raised a serious issue to be tried as to whether the proposed distribution of the Demerger Dividend in the form of the Consideration Shares, if implemented, would contravene s 297, which allows a company to make a distribution of its assets to members[4] only out of distributable profits, which is its accumulated realised profits less its accumulated realised losses.

14.  Whether a company has realised and accumulated profits that can be distributed to its shareholders as dividends on their shares[5] and, if so, the amount that may be so distributed is determined by reference to the “financial items” as stated in the “financial statements” specified in Division 4. See s 302.

15.  The “financial items” are “all of the following - (1) profits, losses, assets and liabilities; (2) provisions; (3) share capital and reserves (including undistributable reserves)” (s 290).

16.  The “financial statements” for the present purpose can be the financial statements prepared by the directors for the previous financial year, which:

(1) must have been laid before the company in general meeting or sent to every member (s 304(1) and (2));

(2) were properly prepared in accordance with Sub-division 3 of Division 4 of Part 9 or so prepared save in relation to matters that are immaterial to whether the distribution would be prohibited under ss 297-300 (s 304(3)); and

(3) included the auditor’s report prepared under s 405 with an unqualified opinion that the financial statements have been properly prepared in compliance with the CO or otherwise with a written statement as to whether the matter in respect of which the report is qualified is material for the purpose of determining whether the distribution would be prohibited by ss 297-300 (s 304(4) and (5)). The written statement by the auditor may be made at the time of the report or subsequently but must have been laid before the company in general meeting or sent to every member to whom the auditor’s report is sent under s 430(3) (s 304(6)).

17.  Where there would have been a contravention if the last annual financial statements are relied upon, the financial statement can be an interim financial statement if it enables a reasonable judgment to be made as to the amounts of the financial items: see s 305(1) and (2).

18.  The requirements of a “financial statement” for the purposes of ss 302, 304 to 306 are not mere formalities: Chan Ka Ching v PAJS Company [2021] HKCFI 1947 at [24] per Deputy High Court Judge Le Pichon. The requisite “financial statement” must be available before a distribution was made. The absence of such a statement when the distribution was made was not a mere procedural irregularity which could be waived or dispensed with by the members entitled to vote. The payment of dividend without an appropriate “financial statement” is ultra vires the company, regardless of whether the company is solvent: Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] Ch 447 at 457A-C per Dillon LJ and Bairstow v Queens Moat Houses plc [2001] BCLC 531 at [44] per Robert Walker LJ. It is trite the accounting sections of the CO protect not just the members of a company but also its creditors: Precision Dippings at 457A.

19.  If the company has no distributable profits at the material time, the purported distribution of a “dividend” is equivalent to an unlawful return of capital which is ultra vires the company and cannot be validated by shareholders’ ratification: Tradepower (Holdings) Ltd v Tradepower (Hong Kong) Ltd (2009) 12 HKCFAR 417 at [123]-[125] per Ribeiro PJ.

20.  Mr Brown questioned the legality of Resolution 1 because:

(1) The Company’s audited financial reports showed that it had consistently been making losses between $1.91 million and $6.29 million for the years ended 30 June 2016 to 30 June 2020.

(2) The Company only turned a profit of $1.86 million and retained earnings of $4.779 million in the 6 months ended 31 December 2020 according to its half yearly reports and accounts for the 6 months ended 31 December 2020, which the Company’s auditor had qualified as (a) having been reviewed substantially less in scope than an audit conducted in accordance with the Hong Kong Standards on Auditing; and (b) not expressing the auditor’s opinion.

21.  The Company had not yet released its annual report for the financial year ended 30 June 2021 at the time of the hearing.

22.  In opposition to the grant of an interim interim injunction, the Company produced a 2-page management accounts as of 30 June 2021 (“Management Accounts”), purportedly showing that it had current year earnings of $9.435 million to justify the Demerger Dividend valued at $8.5 million.

23.  I agree with Mr Jin Pao SC (leading Miss Tinny Chan) that the Management Accounts did not qualify as an “interim financial statement” for the present purpose or one that would enable a reasonable judgment to be made of the “financial items”.

24.  Apart from being unaudited and unsigned by any directors of the Company, the current year earnings of $9.435 million arose almost entirely from “other income” in the amount of $10 million. However, there was no explanation as to the nature of such “other income” in the Management Accounts, without which the accounts did not enable a “reasonable judgment” to be made as to what the Company’s profit was for the year ended 30 June 2021.

25.  The purported explanation as to the source of the $10 million “other income” in paragraph 15 of the affirmation of Joshua Reynold Theunissen dated 9 September 2021 (that it was a dividend distributed to the Company by Astron Pty Limited on 30 June 2021) did not assist the Company. This is so because it is the “financial statement” itself that should enable a reasonable judgment to be made as to the financial items. Where the financial statement is deficient, the company could not reply on other extraneous evidence to fill in the gaps of the financial statement: see BAT Industries plc v Winward Prospects Ltd [2013] EWHC 2612 (Comm) at [32].

26.  That being the case, it is unnecessary for the court to critically scrutinise the alleged $10 million dividend, including whether it could constitute “realised profits” as defined in s 291.

Mr Brown’s locus standi to bring these proceedings

27.  As stated above, Mr Brown was a holder of CDIs, making him a beneficial shareholder who holds his shares in the Company through CHESS. The process to transmute Mr Brown’s CDIs into ordinary shares of the Company had been initiated but not completed at the time of the hearing. There was no suggestion that Mr Brown would not become a registered member of the Company by the time a final injunction was granted under ss 728-730.

28.  The fact that Mr Brown’s name had not yet appeared on the Company’s register of members (due to administrative reasons) did not prevent him from having locus standi to seek an interim interim injunction to halt the distribution of the Demerger Dividend. Although the remedies under ss 728-730 are available only to “members” whose names appear on the register of the company, there is no such statutory restriction in an application made also pursuant to the court’s inherent jurisdiction or its powers under s 21L of the High Court Ordinance, as in the present case.

29.  In support, I was referred to Re Tysan Holdings Ltd [2013] 4 HKC 425 in which Mimmie Chan J refused to strike out the originating summons taken out before the plaintiff became a registered member of the company for what is now a ss 728-730 injunction, partly in view of the plaintiff’s reliance on the inherent jurisdiction of the Court. See [81]-[82].

Damages not an adequate remedy

30.  Damages would not be an adequate remedy if the Consideration Shares were wrongly allowed to be distributed to all the Company’s shareholders as dividend.

31.  Once the Consideration Shares were distributed, the Company would only be able to seek repayment from its members of the value of the shares if they knew or had reasonable grounds for believing that the distribution was made in contravention of ss 297-299: see s 301(1) and (3).

32.  I agree that this would be “a time-consuming and difficult process involving a multitude of parties and fraught with uncertainties” and it would be “practically impossible for the Demerger to be reversed and for the Company to regain full ownership of the Downstream Business”.

33.  In contrast, it was unlikely that the Company or its shareholders would suffer any or any serious or irreparable harm as a result of a delayed distribution of the Consideration Shares. In so concluding, I was not persuaded by any of the 3 matters raised in paragraph 9 of the written submission of Mr Justin Lam, counsel for the Company.

34.  First, it was claimed on behalf of the Company (1) that it had been discussing with financial advisers and brokers in Australia in the preceding 12 months for potential equity capital raising; and (2) that the existing corporate structure of the Astron Group without implementing the Demerger would hinder or even prevent the Company from raising equity capital funding. In support, the Company produced a redacted copy of page 1 and the signing page of what was described as a “close-to-final draft engagement letter with the proposed lead manager”, whose identity was, however, obliterated. It is also worthy of note that the signing page did not in fact bear any signature, suggesting that the Company had not even entered into a binding agreement for the appointment of the unidentified lead manager. More importantly, the pages exhibited made no mention of the said alleged significance of the implementation of the Demerger to the proposed capital raising by a share placement.

35.  Second, given the Company’s notification to the ASX, any person who acquired the Company’s shares on the ASX would have the expectation that all trades from 2 September 2021 were “without entitlement to the interest in the subsidiary being the subject-matter of the in-specie distribution”. It was thus argued that the injunction, if granted, would mean that persons trading on or after 2 September 2021 did not trade on a correctly informed basis. I did not find such argument attractive given that there was just 1 trading day between 2 September 2021 and 7 September 2021 (i.e. the date of the present application) and that trading of the Company’s shares was in any event infrequent.

36.  Third, it was threatened that the non-implementation of Resolution 1 by the completion date of 13 September 2021 would put the Company in breach of the Listing Rules of the ASX, with the potential consequence that its listing may be suspended by the ASX. I agree with Mr Pao that this was a non-point where the Company was merely complying with an order of the court, in respect of which the Company would have to make a public announcement.

Balance of convenience favours the grant of interim interim injunction

37.  The balance of convenience is in favour of preserving the status quo where possible prior to the realisation of the threatened wrongful act.

38.  More particularly, the proper course where an ultra vires act is threatened by a company is to prevent that ultra vires act from being carried out: Parke v Daily News (No. 1) [1961] 1 WLR 493 at 501 per Wilberforce J (as he then was).

No delay in making application

39.  I do not propose to set out the events during the 9 weeks between 2 July 2021 (i.e. the date of the notice of the EGM) and 7 September 2021 (i.e. the date of the OS and the Summons) relied upon by the Company to attribute to Mr Brown unexplained delay and self-induced urgency in the issuance of the OS and the Summons.

40.  The impression that I gained was that Mr Brown was simply making his best endeavours to try to resolve the dispute by open and reasonable out-of-court communications with the Company. I was particularly impressed by the detailed presentation of the reasons why he found the distribution of the Consideration Shares under Resolution 1 objectionable at pages 6-12 of the letter dated 27 July 2021 from his Australian lawyers to the Company.