CHEN PAO TZU v. CHEN SHENG KUEI AND OTHERS

HCMP 2174/2017

[2021] HKCFI 299

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2174 OF 2017

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R E A S O N S  F O R  D E C I S I O N

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1.  By an originating summons dated 9 October 2017 (as amended on 19 October 2017 and re-amended on 2 May 2019), the Plaintiff (“P”) applies under section 42 of the Companies Ordinance (Cap 622) (“Ordinance”)for, inter alia, the following relief:[2]

(1)  A declaration that the member’s general meeting of the 4^th Defendant (“Company”) purportedly held on 14 September 2017 (“Purported EGM”) and the resolutions purportedly passed thereat (“Purported Resolutions”)were void and of no legal effect;

(2)  A declaration that the Form ND2A filed with the Companies Registry on 18 September 2017 in respect of the Company (Document Reference No 22501621358) (“Form”)was void and of no legal effect;

(3)  An order that the Form be expunged or struck out from the Companies Registry; and

(4)  An order restraining each of the 1^st to 4^th Defendants (“D1” to “D4”) from acting on, implementing or carrying into effect any or all of the Purported Resolutions.

2.  After hearing the parties, I made an order in terms of the relief under §1(1) to (3) above. I declined to grant the relief in §1(4). These are the reasons for my decision.

Background

3.  The Company was incorporated on 9 July 1992. It was at all material times (and still is) an investment holding company used by members of the Chen family to hold various wholly owned Mainland subsidiaries that operate chemical and fertilizer business.

4.  The late Mr Chen Yi-Chuan (“Father”)was, until his death on 26 August 2019, the patriarch of the Chen family.

5.  Immediately prior to the Purported EGM, the only directors of the Company recorded in the Companies Register were P and Father.

6.  At the time of the Purported EGM, the only 2 shareholders of the Company were Father, who held 10% of the Company’s issued share capital (500,000 shares), and Full Kang Co Ltd (“Full Kang”), which held the remaining 90% (4,500,000 shares). Full Kang is a company incorporated in Seychelles whose shareholders are members of the Chen family.

7.  The Purported EGM was convened by Full Kang by a notice dated 25 August 2017.

8.  The Purported EGM was held on 14 September 2017. The minutes recorded that it was attended by D1 representing 2,500,000 of Full Kang’s shares in the Company, and a Mr Liu Jingheng (“Liu”) representing the remaining 2,000,000 shares held by Full Kang. At the Purported EGM, the shareholders purportedly resolved to (1) remove P as a director of the Company and (2) appoint D1, D2, and D3 as directors.

9.  On 18 September 2017, D1’s solicitors filed the Form with Companies Registry to register the change in directorship of the Company.

10.  P commenced the present proceedings on 9 October 2017.

11.  The only other events of note are that on 8 March 2018, the Company passed a series of written resolutions by which, inter alia, Father and D1-D3 were removed as directors, and P was appointed as a director (“Purported 2018 Resolutions”). A separate Form ND2A was filed with the Companies Registry in respect of these changes, which forms the subject matter of a separate High Court action (HCA 735/2019)[3] commenced by D1 on 26 April 2019. By order of DHCJ Maurellet SC dated 6 July 2020, that action was stayed on case management grounds as the learned Judge considered that upon determination of the present Originating Summons, the Court will be in a much better position to determine what would be the most cost effective and case management way forward (see [2020] HKCFI 1518 §26).

Discussion

12.  Section 42(1) of the Ordinance provides, inter alia, 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; […]”

13.  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.”

14.  While P initially disputed D1 and Liu’s authority to represent Full Kang at the Purported EGM, P now accepts, for the purpose of these proceedings, that they were duly authorised to do so. P also no longer contends that the requirement of special notice under section 462 of the Ordinance was not met. He only challenges the validity of the Purported EGM on the sole basis that it was inquorate.

15.  Section 585(3) of the Ordinance provides that, in cases of companies with more than 1 member, subject to the provisions of a company’s articles, 2 members present in person or by proxy is a quorum of a general meeting of the company.

16.  Article 6 of the Company’s Articles of Association provides, inter alia, that Company business may only be transacted at a meeting of its members where at least 2 members are present either in person or by proxy:

“(a) 如有兩名成員親身或由代表代為出席成員大會，兩人即構成成員大會的法定人數。如本公司只有一名成員，該名成員之決定可以用書面決議方式作出。

  (b)    如成員大會的出席者人數未達到法定人數，則除委任主席外，不得在該大會上處理任何事務。”

17.  Relying on these provisions, P submits that there is no question that the Purported EGM was inquorate, given that it was only attended by 2 representatives of a single member of the Company, each purportedly holding a portion of that member’s shareholding in the Company.

18.  D1 accepts that the Purported EGM was inquorate, but resists P’s application on the basis of the “irregularity principle” (as explained in Re Dalny Estates Ltd [2018] 1 HKLRD 409 (CA)). Mr Vincent Lung, who appears for D1,[4] submits that, as Full Kang held 90% of the shareholding in the Company and voted in favour of the Purported Resolutions at the Purported EGM, it is plain that those resolutions would have been passed by a majority had there been a quorum. As such, the Court should not intervene in the dispute simply because of the technical irregularity.

19.  In my judgment, the counterfactual posited by D1 is not the correct one. As the authorities explain, the Court does not simply look to ascertain whether the result of the resolution was one which the majority shareholders would approve of. Rather, it considers whether the same result would have obtained had the correct procedure been followed (Re Dalny Estates, §18 per G Lam J). There is thus an implicit requirement that the irregularity was one which could have been cured by the majority. In other words, the principle does not operate to validate a resolution which the majority shareholders could not have lawfully passed.

20.  The existence of this requirement is consistent with the rationale for the rule, which was explained by His Lordship at §§22-24 as follows:

“22. … in exercising its equitable jurisdiction the Court generally follows the maxim that a court of equity does not act in vain. If what has been done irregularly is capable of being and will inevitably be confirmed by the majority, the Court will not interfere. In MacDougall v Gardiner at p. 25, Mellish LJ put it thus:

… if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. …

23. In a similar vein, in Browne v La Trinidad (1887) 37 Ch D 1 at p. 7, Lindley LJ said:

… the most that can be said here is that there is or may be some irregularity, but an irregularity (if such it be) which can be cured at any moment. In such cases the Court never interferes. I think it is most important that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of can be set right at any moment.

Cotton LJ stated at p.10 to like effect that there exists the principle that:

a Court of Equity refuses to interfere where an irregularity has been committed, if it is within the power of the persons who have committed it at once to correct it by calling a fresh meeting and dealing with the matter with all due formalities.

24. Likewise, in Bentley-Stevens v Jones [1974] 1 WLR 638, Plowman J refused to grant an interlocutory injunction to prevent a resolution removing the plaintiff as a director from being acted upon, because ‘the irregularities can all be cured by going through the proper processes and the ultimate result would inevitably be the same.’” (p.641A).

(underline added)

21.  As Mr Lung accepts in his oral submissions, the burden is on the party seeking to rely on the “irregularity principle” to demonstrate that the principle applies, and the threshold is one of inevitability. This was stated in Dalny Estates, §27:

“Furthermore, the passages quoted from the authorities above suggest, arguably, that the application of the principle is dependent upon it being established that the majority would inevitably be in a position to call and hold a meeting properly and regularise the decision if necessary …”

22.  On the facts of this case, D1 has simply not demonstrated that Full Kang could have convened and held a members’ meeting which complied with the quorum requirements in section 585(3) of the Ordinance and Article 6 of the Company’s Articles. Since Full Kang and Father were the only shareholders in the Company, both would have had to attend such a meeting (either in person or by proxy) for it to be quorate. However, there is no evidence before the Court to suggest that D1 could have procured Father’s attendance. In fact, it is D1’s own evidence that Father was then in poor health and that there were serious question about his mental capacity to make decisions at the time. As D1 explains at §§48-50 of his Affirmation:

“48. … my father had been in and out of hospital over the past year and he was simply not in a state to express any authorization at the material time. There is clear evidence that no authorization could have been made by my father at the material time. On 19^th September 2017 … , my Late Father’s doctors medical diagnosis about my Late Father’s health was that he could not speak nor make any expressions. There is now produced and shown to me marked ‘CSK-8’ being a copy of a medical certificate dated 20^th September 2017. This medical certificate was prepared by the Plaintiff’s doctors. In fact, I am in the course of challenging the validity of various medical certificates (including the abovementioned medical certificate) issued by this Plaintiff’s doctor in Taiwan Courts because these medical certificates downplay the mental and physical condition of my Late Father. However, even this medical certificate (CSK-8) which was prepared by the Plaintiff’s doctor shows that the mental condition of my Late Father was bad. I am willing to disclose further medical notes and records of my Late Father during the relevant period, if requested by the Plaintiff.

49. In fact, there was an incident on or about 12^th June 2017 when my Late Father mistakenly claimed that a letter dated 20^th May 2016 was not signed by him, but was forged by myself. However, upon examination by a signature expert, it was shown that the said letter dated 20^th May 2016 was in fact signed by my Late Father.

50. Furthermore, the mental capacity of my father, Mr. Chen Yi-Chuan was litigated in Taiwan. On 10^th April 2019, the Supreme Court (which is the final court of appeal in Taiwan) delivered a written decision questioning the mental capacity of my Late Father. I was proceeding with my application regarding the mental capacity of my Late Father, and my application to be the guardian of my Late Father, but these legal proceedings in Taiwan came to a halt when my Late Father passed away on 26^th August 2019.”

23.  The state of the evidence shows that no valid general meeting of the Company could have been held with Father in attendance. There is thus no basis for D1 to suggest that the Purported Resolutions could lawfully have been passed in accordance with Article 6.

24.  At the hearing, Mr Lung suggests (for the first time) that Full Kang could have regularised the irregularity by applying for an order to call a general meeting of the Company under section 570 of the Ordinance. By virtue of section 570(1), the Court may do so if it is impracticable for any reason to conduct a general meeting of a company in the manner prescribed by its articles or the Ordinance. Section 570(3) gives the Court the power to make any ancillary and consequential directions that it thinks expedient, including (by virtue of section 570(4)) a direction that 1 member of the company present at the meeting is to be regarded as constituting a quorum.

25.  I do not think it is open to Mr Lung to raise the point, which has never been alluded to in the evidence filed by D1 or in his Skeleton. Mr Lung has not been able to articulate any reason as to why the Court should allow D1 to raise the new point in this way.

26.  In any event, the evidence filed by D1 does not lend support to Mr Lung’s contention. It is well-established that the Court has a wide discretion as to whether to call a general meeting under section 570 (Re China Shanshui Investment Co Ltd [2018] HKCFI 1184, §§17-18, per G Lam J). The Court must have regard to all the circumstances at the time of the application and consider whether it is appropriate to displace the requirement of the articles and order that a general meeting be called in other manner. Given the width of the Court’s discretion under this section, it follows that only in cases with particularly compelling facts would it be possible to say that the Court would inevitably have exercised its discretion in favour of the majority shareholders under section 570, thereby enabling them to cure the irregularity.

27.  The threshold is not met in the present case. There is no evidence that Father refused to form a quorum for the meeting (cf. Re Success Plan Ltd [2002] 3 HKLRD 560, 568E per Yuen JA). Insofar as it is said that it is impracticable for a general meeting to be conducted in accordance with the Company’s Articles because of Father’s mental incapacity, it is worth bearing in mind that this issue was fiercely litigated by the parties in Taiwan. There was never any definitive finding either way as to Father’s mental state prior to his death. On the limited state of the evidence before the Court, it is simply not possible to conclude that the Court would necessarily have (1) found that it was impracticable for a general meeting to be conducted and (2) held that it was appropriate to order a general meeting with a quorum. I am thus not satisfied that the Court would inevitably have ordered a meeting to be held for the purpose of ratifying the Purported Resolutions.

28.  More importantly, the fact remains that Full Kang never sought to convene a new meeting to ratify the Purported Resolutions nor made any application under section 570 in the 3 years since the Purported EGM which, according to D1, Full Kang was in a position to do. This reinforces my view that on the facts of the case, D1 fails to demonstrate that the Purported Resolutions would inevitably have been passed by the majority had the correct procedure been followed.

29.  For these reasons, I reject D1’s argument based on the irregularity principle.

30.  The discussion above is sufficient to dispose of the present application. However, Mr Lung raises 2 further new points in his oral submissions, namely that (1) P lacked standing to make the present application, and (2) the Court lacked jurisdiction under section 42 to grant a declaration as to the invalidity of the Purported EGM and Purported Resolutions. Again, I do not think it is proper for counsel to raise new points in this way. That said, I will explain why these 2 points are plainly misconceived.

31.  Mr Lung’s first argument is based on various passages in Re Hong Kong Sailing Federation [2010] 1 HKLRD 801, §§41-43 per Kwan JA; Re Green Valley Investment Ltd [2003] 2 HKLRD 915, §§49, 50, 52 per Yuen J; and Kwok Ping Sheung Walter v Sun Hing Kai Properties Ltd, HCA 857/2008, 23 May 2008, §30, per Kwan J. He submits that section 42 must be read subject to the principle discussed in these cases, such that a minority shareholder, or a fortiori,P, who was never a shareholder of the Company in the first place, has no locus to apply for rectification or removal of documents from the Companies Registry. This is despite the fact that D1 (who is not a shareholder of the Company) commenced HCA 735/2019, in his own name, to impugn the Purported 2018 Resolutions.

32.  In the passages relied upon by Mr Lung, the Court was considering the rule in Foss v Harbottle (1843) 2 Hare 461, namely that an irregularity in the making of decisions of a company is a wrong to the company and that it is the company alone who is the proper plaintiff to bring a suit for redress (MacDougall v Gardiner (1875) 1 Ch D 13, as applied in Re Hong Kong Sailing Federation, §§42-43; Kwok Ping Sheung Walter, §30; and Re Green Valley, §§49-50). These cases all predated the Ordinance[5], which introduced a new section to empower the Court to order removal or rectification of information on the Companies Register.

33.  As lucidly explained by Lord Millett (giving the advice of the Privy Council) in Deloitte & Touche AG v Johnson [1999] 1 WLR 1605 at 1611B-D, the question of locus in truth involves 2 distinct levels of inquiry:

“In their Lordships’ opinion two different kinds of case must be distinguished when considering the question of a party’s standing to make an application to the court. The first occurs when the court is asked to exercise a power conferred on it by statute. In such a case the court must examine the statute to see whether it identifies the category of person who may make the application. This goes to the jurisdiction of the court, for the court has no jurisdiction to exercise a statutory power except on the application of a person qualified by the statute to make it. The second is more general. Where the court is asked to exercise a statutory power or its inherent jurisdiction, it will act only on the application of a party with a sufficient interest to make it. This is not a matter of jurisdiction. It is a matter of judicial restraint. Orders made by the court are coercive. Every order of the court affects the freedom of action of the party against whom it is made and sometimes (as in the present case) of other parties as well. It is, therefore, incumbent on the court to consider not only whether it has jurisdiction to make the order but whether the applicant is a proper person to invoke the jurisdiction.

Where the court is asked to exercise a statutory power, therefore, the applicant must show that he is a person qualified to make the application. But this does not conclude the question. He must also show that he is a proper person to make the application. This does not mean, as the plaintiff submits, that he ‘has an interest in making the application or may be affected by its outcome’. It means that he has a legitimate interest in the relief sought. Thus even though the statute does not limit the category of person who may make the application, the court will not remove a liquidator of an insolvent company on the application of a contributory who is not also a creditor.” (underline added)

34.  In the present case, there is no question that P is a person qualified to make an application under section 42. This follows directly from the wording of section 42(1), which provides that “The Court may, on application by any person, by order direct …” (underline added). Insofar as Mr Lung suggests that the Court has no jurisdiction to deal with P’s application under section 42, such a submission must be rejected as plainly unsustainable.

35.  As far as the “proper person” requirement is concerned, this is, as Lord Millett explained, a question of whether the plaintiff has a legitimate interest in the relief sought. In my judgment, an officer of a company plainly has a legitimate interest in ensuring that the public records accurately reflect the true position with regards to (amongst others) the directorship of the company. Conversely, I might add, a person who is not an officer of a company has a legitimate interest in ensuring that he/she is not named as an officer in the public records concerning the company. This in my view explains why there was no dispute as to the standing of the applicant (who was purportedly appointed a company secretary without her consent) to make an application under section 42 in Yuen Yin Kwan v Sino Insurance Brokers Group Ltd [2020] 1 HKLRD 1117; [2020] HKCFI 284.

36.  For completeness, I note that the English counterpart of section 42 (section 1096 of the Companies Act 2006) has a similarly broad concept of standing. In Re Infund LLP [2019] EWCA Civ 1673, [2020] Bus LR 567, the claimants contended that the subject limited liability partnership (“LLP”)had been restored to the register on the basis of false and dishonest statements and that the LLP was being used to pursue vexatious and abusive proceedings against it in Mexico. They therefore applied under section 1096 of the 2006 Act to reverse the LLP’s restoration to the register. The Court of Appeal upheld the judge’s conclusion that the claimants had sufficient standing to pursue the claim, holding that it was irrelevant that the claimants did not have any direct proprietary or other interest in the LLP or its assets which would be affected by the outcome of the application. Instead, the judge was right to approach the exercise of discretion by looking at the merits of the claim more broadly (§§61-62 per Patten LJ).

37.  Of course, I recognise that the 2 sections are not entirely identical in wording. But I would have thought the position in Hong Kong is a fortiori, given that it expressly provides that applications may be made “by any person” whereas the UK Act does not specifically address the issue of locus.

38.  Returning to Mr Lung’s submissions, insofar as he contends that P is not a proper person to make an application under section 42 by virtue of the rule in Foss v Harbottle, this argument fails to appreciate that the rule is simply the flip side of the irregularity principle. A minority shareholder has no right to complain about a breach of the company’s articles which is remediable by the majority precisely because it is a matter which can readily be ratified by the majority. Where the irregularity is not capable of being regularised, whether because it is outside the powers of the majority, or where it is impossible or impracticable for members to sort things out for themselves, the rule in Foss v Harbottle does not operate as a bar to such a claim (Re Hong Kong Sailing Federation, §49). Mr Lung’s standing argument therefore collapses into his argument on the irregularity principle, which I have rejected on the facts of this case.

39.  I also reject Mr Lung’s second argument that the Court has no power under section 42 to grant declarations as to the validity or invalidity of corporate actions which is the subject of a subsequent filing with the Companies Registry. Section 42(5) provides that the Court may, if it makes an order for the rectification or removal of any information on the Companies Register, make any consequential order that appears to it to be just with respect to the legal effect (if any) to be accorded to the information by virtue of its having appeared on the Companies Register. In my view, the declarations P seeks plainly fall within this section. A declaration as to the invalidity of the Purported EGM and the Purported Resolutions serves to confirm that the information deriving therefrom is of no legal effect notwithstanding that it appeared on the Companies Register. I also consider that such a declaration is just in all the circumstances of the case.

Relief and costs

40.  For these reasons, I find that the Purported EGM and the Purported Resolutions were void and of no effect. Since D1 has failed to show that the same result would have obtained had the correct procedure been followed, there is no proper basis to oppose the declarations sought by P. Given the history of the dispute between the parties, it is also necessary to grant the declarations so as to put the matter beyond doubt.

41.  The principles governing the removal of information from the Companies Registry as opposed to rectification are well-established (see Wang Zhihua v Registrar of Companies, HCMP 2185/2019, unreported, 12 November 2020, §22). P submits that it is appropriate for the Court to order the removal of the Form in the present case given that the Company is an investment holding company holding the interests in various Mainland subsidiaries, and these subsidiaries have ongoing operations and dealings with third parties. I am satisfied that in the circumstances, to allow the Form to remain would cause material damage to the Company. I note that D1 does not seek to argue otherwise. I therefore order that the Form be removed from the Companies Registry.

42.  As I indicated at the hearing, I also make an order to rectify the information contained in any subsequent documents filed with the Companies Registry insofar as they rely on the Purported Resolutions.

43.  I decline to grant an injunction restraining D1-D4 from acting on, implementing or carrying into effect the Purported Resolutions. Given that D1-D4 are bound by the declarations and order I make in these proceedings, I do not think that the injunction sought is necessary or adds anything of substance.

44.  Costs should follow the event. However, in view of the fact that P raised and then abandoned several substantial grounds of challenge over the course of these proceedings, I consider that D1 should not have to bear the entirety of P’s costs. I therefore order that D1 pays 50% of P’s costs of and occasioned by the Re-Amended Originating Summons up to the date of the hearing and 100% of the costs of the hearing, to be taxed if not agreed. I also order that the Companies Registry’s costs, if any, be borne by both P and D1 in equal shares.

45.  Lastly, from the materials before the Court, it appears that the Purported 2018 Resolutions were passed to reverse the changes effected by the Purported Resolutions. In light of my holding that the Purported Resolutions were void and of no legal effect, it would be pointless for D1 to pursue HCA 735/2019 any further. I direct D1 to inform P (and the other defendants named in that action) whether he intends to continue with HCA 735/2019 within 7 days of these Reasons. If and to the extent that D1 decides to continue with HCA 735/2019, the parties do within the next 7 days lodge their proposed directions with this Court with a view to dispose of the action at a 3 hours hearing. It seems to me that there is no reason why the action cannot be disposed of summarily in the same way as these proceedings.