FONG LAI KUEN v. HOLIDAY RESORTS HOLDING LTD. AND OTHERS

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NOS.1530 AND 5458 OF 1998

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HCMP1530/1998

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(Consolidated)

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J U D G M E N T

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1. These consolidated cases arise out of disputes between two groups of shareholders in the 1st defendant which was at all relevant times the holding company of the development and management companies of Sea Ranch, a housing development at Yi Long Wan, Lantau Island. In HCMP1530/1998, the plaintiff seeks a declaration that the other eight defendants (except for the 2nd and 8th defendants, who have now resigned) are not validly appointed directors of the 1st defendant, and an injunction restraining them from acting as such. In HCMP5458/1998, she seeks declarations that a resolution made at an extraordinary general meeting of the 1st defendant on 21 May 1998, and share allotments made pursuant thereto, are null and void, as well as consequential injunctions relating to the shares and the allotments.

2. The background is as follows. In about 1979, Holiday Resorts (HK) Ltd was incorporated by the developer, John D Hutchison & Co. Ltd, for the purpose of selling the apartments at Sea Ranch. In 1979, Holiday Resorts (Management) Co. Ltd was incorporated for the purpose of providing management services to the apartment owners and the Sea Ranch estate and Holiday Resorts (Transport) Ltd was incorporated to provide a ferry service between Sea Ranch and Hong Kong Island.

3. Sea Ranch was not as successful as its developer had hoped. In about 1983, John D Hutchison & Co. Ltd decided to cut its losses and to sell the three companies mentioned above, together with some unsold units and the clubhouse and facilities to the existing apartment owners for a token sum of $1.00. The 1st defendant was accordingly incorporated to take over control and management of Sea Ranch. It became the holding company of the Holiday Resorts companies. It is a public but unlisted company; I am advised that it is unlisted because membership was intended to be restricted to apartment owners, and public because there are more than 50 apartments, and the limit of membership for a private company is 50.

4. The authorised share capital of the 1st defendant is 250 ordinary shares of which 186 had been issued for $20,000.00 per share in order to pay back the losses already incurred at the time of its formation. Originally, the shares were sold to apartment owners but it appears that some of those owners subsequently sold their apartments but retained ownership of their shares.

5. The plaintiff is a shareholder in the 1st defendant and owns one of the apartments at Sea Ranch. The various defendants are likewise shareholders and some, if not all, are apartment owners either directly or through their own companies.

6. The present series of disputes began in about 1996 and now relate to three meetings of the company and its directors. The first is what began as an annual general meeting, but was declared by the Chairman to be an extraordinary general meeting, on 21 January 1998. For ease of reference, I will call this "the AGM." The second is a meeting of the board of directors on the same date; the "Board Meeting". The third is another extraordinary general meeting on 21 May 1998 ("the EGM"). Originally the validity of appointment of the 2nd, 4th, 6th and 9th defendants as directors at an annual general meeting on 29 November 1996 was also in dispute but the plaintiff now concedes the validity of these appointments.

7. Prior to 21 January 1998, the board of directors of the 1st defendant consisted of :

Ms Yuen Fai Fung (the 2nd defendant)	Mr Chu Siu Wah (the 9th defendant)
Mr Nelson Lam (the 4th defendant)	Madam Lin Shiao Shya
Mr Terence Chu Sai Cheong (the 6th defendant)	Mr Chang Han Ping, Herbert.

The numbers relate to the numbering of these persons as defendants in HCMP1530/1998.

8. The directors gave notice of an annual general meeting to be held on 21 January 1998, but by the Articles of Association that required 21 days' notice and sufficient notice was not given. Mr Chu Siu Wah, who chaired the meeting, purported to declare that it was an extraordinary general meeting, for which only 14 days' notice was required. According to the Minutes of the meeting, which Mr Chu signed, Resolution No.2, which concerns us here, reads :

"All present directors retired at the meeting and the following persons were elected new directors of the company:-

Ms Yuen Fai Fung	Mr. Terence Chu Sai Cheong
Mr. Kam Yee Wai, Andrew	Madam Ip Mo Yin, Mona
Mr. Nelson Lam	Mr. Andrew Wells
Mr. Yip Hin Yan	"

9. The defendants say, and this is disputed, that the Board Meeting was held immediately after the AGM. The object was to make sure of the appointments of the new directors in case the proceedings of the AGM were found to be invalid. There are minutes of this meeting, again signed by Mr Chu Siu Wah. They show that those present were Chu Siu Wah, Yuen Fai Fung, Terence Chu Sai Cheong and Nelson Lam. Chu Siu Wah was the chairman. There was one resolution which is as follows :

"It was resolved that the following persons be appointed as additional directors of the company with immediate effect :

1. Ms. Ip Mo Yin Mona

2. Kam Yee Wai Andrew

3. Andrew Wells

4. Yip Hin Yan."

10. Following on this, the 1st defendant's accountants made a return to the Registrar of Companies on 28 February 1998 of forms which showed the resignation or cessation as directors of Chu Siu Wah, Lin Shiao Shya and Chang Han Ping, Herbert. However, the annual return dated 4 March 1998 showed Chu Siu Wah as still being a director. In correspondence with the Registrar of Companies as to when these directors had resigned, the defendants' solicitors on 12th January 1999 said that they had resigned with effect from 21 January 1998, but curiously enough, although Madam Lin had tendered her written resignation (to take effect from 21 January 1998) on 9 January 1999, Mr Chang did not tender his written resignation, similarly backdated until 21 January 1999.

11. The directors called an extraordinary general meeting to be held on 21 May 1998. There was one resolution and the minutes show that it was passed. The resolution was :

"That the Company do confirm and approve that the Directors of the Company have the authority to allot the unissued shares to the existing shareholders of the Company in accordance with Article 6 of the Articles of Association of the Company"

12. The allotment of shares was carried out and the various other defendants named in HCMP5458/1998 came into the picture as recipients of the allotment.

13. There is some dispute about what happened at the meeting, particularly with regard to the acceptance of proxies. However, it is not in dispute that the chairman, Mr Andrew Kam, closed the meeting after a poll had been taken and written votes collected. He and others went to his office, apparently to count the votes. The result was not announced at the meeting; and there is no evidence of any other meeting at which it might have been announced. Nor is there any evidence that the result was announced by the circulation to the members of the minutes of the meeting, though I think it may be presumed that that is what happened.

14. The plaintiff's case on the AGM is that the directors' retirement in order to stand for re-election vacated their positions. Since the resolutions passed at the AGM are null and void, both by admission of the defendants and following the order of Mr Recorder Edward Chan SC dated 20 January 1999, they have not been validly re-elected or re-appointed. Therefore, they are no longer directors.

15. Originally the defence case was, as appeared from the various statements and affirmations, as well as correspondence between their accountants and the Registrar of Companies, that the directors had been proceeding under the misapprehension that they were required to retire and stand for re-election at every annual general meeting. However, it appears from the oral evidence they had a meeting beforehand with Mr Andrew Kam, the third defendant, himself a solicitor, at which he told them that there was no need for retirement. Mr Chu Siu Wah said that he had known this for a long time. Madam Yuen and Mr Terence Chu said that they agreed with a statement of Mr Kam, who did not give evidence, that it had been decided to follow tradition and include the re-election of directors as part of the business of the AGM as usual. Mr Chu Siu Wah also said that he accepted the tradition but it appears that he did not stand for re-election, though he says that he did intend to continue as a director.

16. Counsel for the plaintiff argues that all this, coupled with the fact that Madam Lin and Mr Chan clearly did intend to cease to be directors with effect from 21 January 1998, means that the Madam Yuen, Mr Nelson Lam and Mr Terence Chu must also have ceased to be directors at the AGM, which was an essential condition precedent for their re-election. The 9th defendant, Mr Chu Siu Wah, must likewise have ceased to be a director by accepting the tradition but not offering himself for re-election. They cannot now approbate and reprobate. They are bound by their decision.

17. There is no provision in the 1st defendant's Articles of Association requiring directors to retire and be re-appointed. The defendants say that the only way in which a director can vacate his office is by resignation under Article 97(d). They never resigned, so they continue in office. Retirement is not equivalent to resignation. The latter requires an act of giving notice of intention to cease to hold office. There is no evidence that the directors gave such notice. Madam Yuen, Mr Chu Siu Wah and Mr Terence Chu all said that they did not give such notice, and neither did any other director, at the AGM. Those who were not re-elected and did not wish to continue would later resign; which is what Madam Lin and Mr Chang did.

18. The defendants say that they would not necessarily have to cease to hold office before re-election could take place. An existing director can simply stand back and continue his office indefinitely or until he resigns. In fact, Madam Yuen's understanding of the tradition was that the directors "would stand for re-election before filling in the form for retirement".

19. In any event, they say, any notice of resignation would have to be given to a recipient who could validly receive it. The AGM was never validly constituted and could not, therefore, accept any notice of resignation.

20. It follows, say the defendants, that the four original directors never ceased to be directors; so irrespective of the invalidity of the resolutions made at the AGM, there was a board, the quorum for which was three, which could and did validly appoint the other four directors at the Board Meeting. There was also a board which could validly call the EGM.

21. The plaintiff's case on the Board Meeting is that it did not happen and they put the defendants to strict proof of it. If it did happen, they say, then it was invalid because the directors who held it, having vacated their office and not having been validly re-elected, could not hold it.

22. The plaintiff's case on the EGM is that the defendants, not being validly re-elected could not call a valid meeting; if it was a valid meeting, that the chairman, Mr Andrew Kam, wrongly excluded proxies; and finally that the meeting was irregular, and the resolution was invalid because, in effect, the meeting never passed it; the meeting was closed before the votes were counted.

Evidence

23. Evidence for the plaintiff came from Mr Chan Yuk Lun. For the defendants, it came from Madam Yuen, the 2nd defendant; Mr Kwan Chi Ho, an accountant who acted as company secretary at the AGM; Mr Chu Siu Wah, the 9th defendant; and Mr Terence Chu Sai Cheong, the 6th defendant. Mr Kam, the 3rd defendant, did not give evidence; an application to call him, though his statement had not been disclosed in accordance with directions, was made; but his statement was shown to other witnesses who adopted it in whole or in part. The statement of Mr Szeto Wai Ming, the 1st defendant's manager, was tendered in evidence but he was not called. His statement simply confirmed what others had said.

24. Evidence for the plaintiffs came from Mr Chan Yuk Lun, the object of his evidence was to cast doubt on the holding of the Board Meeting after the AGM. In brief, he says that he was at the AGM. The Chairman, Mr Chu Siu Wah, announced that there had not been sufficient notice and therefore the meeting was to be an extraordinary general meeting. Some shareholders objected and called for the meeting to be postponed. This was refused and the secretary did not record the objection. Most of the dissenting shareholders then left but Mr Chan stayed. Votes were recorded for the election of the directors, whose names are recorded in the minutes as having been elected. Then Mr Chan asked the Chairman if the meeting was closed and he said that it was.

25. Mr Chan says that he then saw Madam Yuen and her sister leave the meeting room in a hurry, to catch the ferry back to Sea Ranch. He and his wife met them on the way to the ferry pier, and ultimately everyone who had to return to Sea Ranch on the ferry did so.

26. From cross-examination, it appears that Mr Chan's evidence of meeting that Madam Yuen on the way to the ferry is somewhat unlikely, and in any event I cannot see why anyone would have been rushing to catch the ferry as there was only one ferry, a private ferry going only to Sea Ranch. It would have had to take all residents who wanted to go. The most important point is, however, that whenever Mr Chan saw Madam Yuen leave the building his evidence of what happened before that is not particularly clear.

27. Madam Yuen Fai Fung, the 2nd defendant, adopted a statement made by the 7th defendant, Madam Ip confirming that the Minutes of the AGM and the Board Meeting were accurate. With regard to the EGM, she adopted the affirmation of Mr Terence Chu, to the effect that the Chairman, Mr Kam had refused to accept some 26 proxies. The people in the "plaintiff's camp" refused to be registered as attending the meeting, but forced their way into the meeting and caused disturbances. The police were called but went away after making inquiries. Business proceeded and over about half an hour the proxy forms were collected. Mr Kam several times invited shareholders to tender their votes but none of the "plaintiff's camp" did so. Ultimately because the venue was about to close Mr Kam and some of the defendants went to Mr Kam's office where the votes were counted. There were 29 votes in favour of the proposal and one against; and accordingly the motion was regarded as carried. The directors, in reliance thereon, later allotted the unallocated shares to existing shareholders including some of the defendants.

28. Madam Yuen also gave oral evidence about the holding of the Board Meeting and what she did afterwards particularly with reference to how she went from the meeting venue to the ferry. She said she did not meet Mr Chan on the way to the pier.

29. Mr Kwan, the accountant, said that he had been present at the AGM and had prepared the Minutes. It appears that he thought that the directors had to retire and offer themselves for re-election. He was also present at the Board Meeting which he said Mr Kam had proposed because he was not sure of the validity of the AGM. He had also prepared the Minutes of that meeting as well as the returns to the Registrar of Companies in respect of Madam Lin, Mr Chang and Mr Chu. He says that he did this because these directors were not re-elected. He had also later prepared the return showing Mr Chu still to be a director.

30. Cross-examined, he said that although the Minutes said that all directors had retired, that did not happen. To that extent, the Minutes were inaccurate. He said that he and his two colleagues were present at the Board Meeting although curiously enough this fact had been left out of Further and Better Particulars filed by the defendants.

31. Mr Chu Siu Wah, DW3, adopted his witness statement, which merely adopted that of Madam Yip the 7th defendant, and his own affirmation filed earlier in the proceedings. In that he had affirmed that "the defendants accept that the purported general meeting held on 21 January 1998 was null and void and of no effect". In it he also said that none of the existing defendants had resigned and that he had not offered himself for re-election.

32. In oral evidence he spoke to the Board Meeting and its minute. He confirmed that he had not offered himself for re-election at the AGM; he had not told anyone that he wanted to cease to be a director; and he had not intended to resign.

33. From cross-examination, it appears that he and other directors had a meeting, before the AGM with Mr Andrew Kam who told them that it was not necessary for directors to retire and be re-elected. They had done this simply to carry on the tradition of what they did before. In any event he knew this, from his own knowledge.

34. He would not admit or deny that pleaded allegations of mistake of fact about this were true or false. In any event, he had not stood for re-election. In the past directors had stood for re-election and those not re-elected would subsequently resign.

35. Mr Terence Chu Sai Cheong also gave evidence that he had never, at the AGM, signified that he wished to cease to be a director. He confirmed the Minutes of the EGM as having been signed by the Chairman, Andrew Kam.

36. Cross-examined, he said that he had had learnt that there was no need for retirement and re-election at a meeting with Mr Kam before 21 January 1998, and indeed before but he had stood for re-election because he thought it would be more democratic.

37. It is apparent from the above that there are some discrepancies in the evidence, particularly that of the defendants. The most notable point is that while their case originally was that they were mistaken as to the need for retirement and re-election, later it was said that they had known the true position all along but had simply carried on a tradition. I formed the impression that in their company meetings, they made things up as they went along and probably the same goes, at least to some extent, for their evidence. None of them strikes me as particularly reliable though I would prefer the evidence of Madam Yuen to that of Mr Chan where there is a conflict.

The AGM

38. I am satisfied that the Minutes are accurate to the extent that the named directors were elected. Everyone is agreed on that.

39. It is not clear that anyone actually stood up at the meeting and signified that he was retiring. Mr Kwan the accountant, who has the benefit of being independent, says that "that did not happen". It appears that he drafted the Minutes on the basis of the agenda. Madam Lin and Mr Chang were clearly not present, either at the AGM or subsequently, so if they signified retirement they must have done it through someone else.

40. Nevertheless one way or another six directors all indicated to the meeting, by the agenda or by whatever means, that they intended to retire. Three of them and four new directors were elected.

41. The issue turns on the difference between retirement and resignation. The defendants' case is that a director vacates his office only on resignation and not on retirement. Counsel relies on Stephenson v. London Joint Stock Bank Ltd, (1903) 20 TLR 8, which dealt with the difference as it concerned a bank employee. He further argues that a judge appointed for life, as judges used to be appointed in England would not cease to be a judge on his retirement; he would simply cease to sit. The same also would no doubt apply to a military officer who retired, subject to being recalled to service in time of war.

42. No doubt there is a difference between retirement and resignation by an employee though I doubt that, in the normal case, an employee could be regarded as an employee after retirement. His service would have come to an end by agreement and he would have no further right to carry out the work he had done before retirement. As to the position of a judge or a military officer appointed by the Crown, these appointments would be for life. They may have more relevance to the position of a director appointed for an indefinite term. In either case, however, a position would be vacated; someone would be appointed to fill it; and the retiree would not come back to sit in judgment, or command his military unit, unless recalled to service. I do not think these analogies help very much. I think it is necessary to look at the position of a company director in the light of the legislation which defines and regulates that position.

43. The Companies Ordinance, Cap.32, does not provide for the retirement of a director. It provides for resignation, at section 157D and elsewhere refers to vacation of office, e.g., at ss.153 and 155.

44. The Regulations in Table A in the First Schedule may in the computer age be described as the "default" articles of association for a company limited by shares; they apply if no articles are registered or, where articles are registered, insofar as those articles do not exclude or modify them (section 11). At Regulation 90, Table A provides that the office of director be vacated on certain specified events, one of which is resignation by notice in writing given in accordance with section 157D(3)(a).

45. The concept of automatic retirement and re-election comes from Regulations 91-99 of Table A which provide for rotation of directors. By Regulation 91, all directors are required to retire at the first annual general meeting, and one third of them at each subsequent annual general meeting. By Regulation 93, a retiring director is eligible for re-election. By Regulation 94, where a director retires and offers himself for re-election, then if no one is elected to "fill the vacated office", he is deemed to have been re-elected unless at the meeting it is resolved not to fill the office, or unless a resolution for his re-election is put to the meeting and lost.

46. I note particularly the use of the words "fill the vacated office". Mr Lam for the plaintiff argues that there must be a vacation of office on the retirement of a director. In other words, he must cease to be a director. If he did not, there would be no need for the provision deeming him to be re-elected in the absence of the election of another. I think this must be right.

47. I accept that where a director is required to retire under Table A, his office is vacated and he ceases to be a director. He only becomes one again by virtue of the deeming provision. It is only necessary to consider his position if another person is elected to replace him; he could not then claim to act as a director. That would be absurd.

48. Table A is specifically excluded by the Articles of the 1st defendant. However, retirement and re-election is not a concept entirely unknown to the Articles. Article 62 deals with proceedings at general meetings. It provides :

"All business shall be deemed special that is transacted at an extraordinary general meeting and an annual general meeting with the exception of :-

c) the election of Directors in place of those retiring (if any).

This Article envisages the possibility that, at a general meeting, a director may retire. It provides a mechanism for the election of a director in his place, or his re-election there and then. Without it, the re-election would be deemed special business and the appropriate notice of the resolution would be required."

49. It seems to me that there is no difference between the director's position after voluntary retirement under these Articles, and the position of a director after compulsory retirement under Table A. His position is vacated as surely as if he had resigned. Under the 1st defendant's articles resignation in writing is not required and in effect there would be no difference between the announcement of a resignation and the announcement of a retirement. In the first case the director is not willing to be re-elected; in the second case he is. Either way he is no longer a director.

50. Unfortunately for the plaintiff, however, that is not the end of the matter. What the articles envisage is retirement at an annual general meeting and, one way or another, that is what happened. On the evidence, the directors had in previous years had also purported to retire at such meetings.

51. On this occasion, insufficient notice had been given and therefore the AGM was not validly held. The defendants admit that Mr Recorder Edward Chan SC declared that the resolutions passed at the meeting, as well as the purported approval of audited accounts and directors' reports were all null and void and of no legal effect. He did not give reasons for his decision but I assume that it must have been made on the basis that the meeting itself was invalid.

52. I have noted above that Article 62 envisages the possibility that, at a general meeting, a director may retire. There is certainly no provision for retirement outwith a general meeting. Since the meeting itself was invalid, I cannot see how any retirement of a director, communicated at that meeting could be effective to vacate his office. In effect, there was no meeting to which it could be communicated. The whole exercise was a nullity; that applies to the retirements as it does to the resolutions.

53. It follows that I have to find that the retirements communicated at the AGM were ineffective to vacate the office of the directors who communicated them. This would apply even to those who did not stand for re-election irrespective of their intention.

The Board Meeting

54. Here the issue is whether the Board Meeting took place. Having heard the witnesses, and in particular Mr Kwan, who said quite spontaneously that he was there, I accept that it did. It may be that the defendants omitted to show in their Further and Better Particulars that he and others were there but that does not affect his credit; he was an independent person providing a secretarial service. I do not think Mr Chan's evidence of what happened before he saw Madam Yuen leave is sufficiently clear to cast doubt on this and in any event I have preferred Madam Yuen's evidence where there is a conflict.

55. I find that the Board Meeting took place. Because the communicated retirements were ineffective Mr Chu and the others had not vacated their appointments as directors and they could validly appoint other persons to the Board.

The EGM

56. On my findings above, there was no irregularity in the calling of this meeting. As to what actually happened there, there is nothing to contradict what the defendants themselves say.

57. As to the matter of the proxies, while it appears that Mr Kam took a very strict approach to the proof of their identity and appointment, I cannot say that he acted wrongly.

58. The matter which has given me some concern is that of the poll. There seems to be no doubt, on what Madam Yuen and Mr Terence Chu (as adopted by Mr Szeto) say, that Mr Kam and the others closed the meeting without announcing the result of the poll, and took away the ballot papers to count them at his office.

59. To the extent that the Minutes appear to show that the resolution was approved at the meeting, they are inaccurate. However, the ballot papers are before the court, and the result was 29 to 1. I have heard no evidence that anyone filled in a ballot paper which has not been produced. There is nothing to suggest that this is an inaccurate record of how the shareholders actually voted at the meeting.

60. The plaintiff says that the proceedings were irregular. There is no dispute that the meeting continues until the close of the poll, so the Chairman's purported closure of the meeting would be ineffective. Counsel for the plaintiff says that the Chairman must declare the result of the poll and relies on Gore-Browne on Companies, 44th Edn., Vol.2, para.21.19 at 21.037 in support of this. There is no evidence of such declaration and indeed as I noted above it is not clear how the decision was communicated to the members. It is argued that these irregularities render the resolution invalid.

61. Counsel for the defendants relies on Article 68 of the 1st defendant's articles, which provides that :

"...The result of such poll shall be deemed for all purposes to be the result of the meeting at which the poll was so directed or demanded."

Therefore, no declaration of the result is necessary before the meeting is physically closed.

62. In fact this poll was carried out at the meeting itself and it was only the counting of the votes which came later. It seems to me that once the poll was closed, i.e. all votes were in, the meeting could properly be closed. All that was necessary was to count the votes and that could be done later. It is no doubt unfortunate that the meeting was not adjourned to announce the result but in the light of Article 68, I do not see that this would be necessary for the validity of the resolution. The poll was held and finished and the result thereof would be the resolution of the meeting whenever it was announced. There is no evidence to show that the result of the voting was inaccurate.

63. It follows that the EGM and the resolution approved thereat must be held to be valid and I so hold.

Judgment

64. It follows that both the plaintiff's actions must be dismissed with costs to the defendants to be taxed if not agreed.