WONG PAK SUM v.HONG KONG FURNITURE & DECORATION TRADE ASSOCIATION LTD

HCMP 2946/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2946 OF 2013

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J U D G M E N T

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1. The defendant is a Hong Kong company limited by guarantee without a share capital. The plaintiff is a member of this company.

2. At the extraordinary general meeting of the company held on 28 October 2013, a number of resolutions were passed.  The second resolution was for the amendment of the articles of association of the company. It was proposed and passed as a special resolution.  The third resolution was a resolution that the company’s property at 10/F, Kwong Ah Building, 114 Thompson Road, Wanchai be let and to give the necessary authorisation to the directors for such purpose.  This resolution was proposed and passed as an ordinary resolution.

3. By the originating summons in these proceedings, the plaintiff seeks the court’s declaration that the second and third resolutions proposed at the extraordinary general meeting of the company are special business and as such could only be passed by special resolution, ie with a three quarters majority.

4. As I have stated, the second resolution was in fact proposed and passed as a special resolution, as it had to be under s 13 of the Companies Ordinance since it was for the amendment of the articles of association.  The only dispute therefore relates to the third resolution.

5. Article 18 of the articles of association of the company is in substance materially the same as regulations 7 and 8 of Table C, in Schedule 1 to the Companies Ordinance.  It is written in Chinese and may be translated as follows:

“18. An annual general meeting and a meeting called for the passing of a special resolution shall be called by 21 days' notice in writing at the least, and a meeting of the company other than an annual general meeting or a meeting for the passing of a special resolution shall be called by 14 days' notice in writing at the least. (The notice shall be exclusive of the day on which it is served or deemed to be served and of the day for which it is given.) The notice shall be sent to members by post, electronic mail or facsimile and shall specify the place, the day and the hour of meeting and, in case of special business, the general nature of that business, …”

6. Article 20 of the articles of association of the company is materially the same as regulation 9 of Table C and provides as follows (in translation):

“20. … All business shall be deemed special that is transacted at an extraordinary general meeting, and also all that is transacted at an annual general meeting, with the exception of the consideration of the accounts, balance sheets, and the reports of the directors and auditors, the election of directors in the place of those retiring and the appointment of, and the fixing of the remuneration of, the auditors.”

7. The defendant does not dispute that the third resolution was special business within the meaning of Articles 18 and 20.  The plaintiff submits that given that the resolution is a special business, it could only passed by a special resolution.  He submits that since it was neither proposed as a special resolution nor passed with a three quarters majority, the resolution was not validly passed.

8. In my view, the plaintiff has confused the concepts of special business and business requiring special resolution.  They are not the same.  He may have been misled by the word “special” in the term “special business” to think that such business is required to be approved by a special resolution.  There is, in my opinion, no such requirement in law or in the articles of the defendant.

9. The general principle is that, subject to any specific requirement in the Companies Ordinance and in the articles of association of a company, all matters are resolved upon by ordinary resolution, ie upon a show of hands, a simple majority of the voters present, and, if a poll is demanded, a simple majority of the votes given whether in person or by proxy: AG v Davy (1741) 2 Atk 212; and see Grant v United Kingdom Switchback Rails Co (1880) 40 Ch D 135.  There are, of course, matters which by statute or by the company’s constitution are required to be decided by special resolution, ie a resolution passed by a three-fourths majority (s 116 of the Ordinance).  Examples include the alteration of the articles of association (s 13), the change of the company’s name (s 22), and the reduction of share capital (s 58).

10. Special business, on the other hand, is not a term defined by reference to the type of resolution required to transact it. It is a term found often in the articles of companies, associations and clubs, such as regulations 58 and 60 of Table A and equivalent regulations in other model articles which take a form similar to the articles of the defendant as set out above.  The significance attached to an item of business being special business is in the contents of the notice that has to be given to members.  Where it is proposed to deal in a meeting with a matter that is special business, the notice of the meeting must specify the general nature of that item of business.  The purpose is to give the member “a fair chance of determining in his own interest whether he ought to attend the meeting, make further inquiries, or leave others to determine the matter for him”: Tiessen v Henderson [1899] 1 Ch 861, 866.  If that is not done, the matter is outside the scope of the meeting and it will not be competent for the meeting to deal with that matter.  In that way absent members – who ex hypothesi have not received sufficient notice – will be protected.  The term “special business” has been in use in company law in this way since at least 1862 (see regulations 35 and 36 of the Table A attached to the Companies Act 1862).

11. The only provision in the Companies Ordinance itself that concerns special business is s 114C. Subsections (6) and (7) provide:

“(6) Notwithstanding anything to the contrary in the articles of a company, any form issued to a member of the company by the directors for use by him for appointing a proxy to attend and vote at a meeting of the company shall be such as to enable the member, according to his intention, to instruct the proxy to vote in favour of or against (or, in default of instructions, to exercise his discretion in respect of) each resolution dealing with any special business to be transacted at the meeting.

(7) In subsection (6) "special business" (特別事務) means-

(a) all business transacted at an extraordinary general meeting; and

(b) all business transacted at an annual general meeting except the declaration of a dividend, the consideration of the accounts and the reports of the directors and auditors, the election of directors in place of those retiring and the appointment of, and the fixing of the remuneration of, the auditors.”

12. These provisions allow a member to give separate direction to his proxy how to vote with respect to each resolution dealing with special business.  S 114C, which was enacted in 1984, is based on s.136 of the (UK) Companies Act 1948.  Subsections (6) and (7) however are not found in s 136 of the 1948 Act.  They appear to have been based on a recommendation of the (UK) Jenkins report: see Report of the Company Law Committee (1962; Cmnd 1749), paragraph 468(h).  It has been said that the purpose of these provisions was to “limit the ability of the directors to manipulate the proxy machinery in such a way that it produces only votes favourable to the board’s views”: see Christopher Bates, Companies (Amendment) Ordinance 1984 (1985) 15 HKLJ 167 at 204.

13. The fact that an item of business is special business therefore has implications on the requirements relating to notice and form of proxy as explained above.  There is no further provision in the Companies Ordinance requiring special business to be transacted by special resolution of the company.  Nor is there any stipulation to that effect in the model articles in Table A or Table C or in the articles of association of the defendant in this case.

14. Mr Lung who appeared for the defendant very properly drew my attention to the decision of Deputy Judge To (as To J then was) in Hong Kong Racing Pigeon Association Ltd v Lam Koon Nam [2002] 3 HKLRD 133.  There, at paragraphs 28 and 32, the learned judge appears to have said that special business required the approval of a special resolution.  When the case is read in its entirety, however, it is clear that first, the passages in question are obiter because the judge had decided that the relevant meeting and resolutions passed thereat were unlawful because the requisitionists of the meeting were not in fact members of the association. Secondly, it does not appear to have been argued by counsel that special business is not, merely by reason of being special business, required to be transacted by special resolution.  Instead, counsel there seems to have argued that an ordinary resolution sufficed in that case because another provision in the articles of the association provided that the number of directors could be increased by the association in general meeting, which was the matter in question (see paragraphs 29 and 30).  Subject to that argument, it seems to have been assumed that special business needed to be approved by special resolution.  With respect to the learned judge, the relevant passages in his judgment should in my view not be taken as authority that special business must as such be approved by special resolution.

15. Where an item of special business is, by reason of its substantive nature, a matter that has to be dealt with by special resolution, such a resolution is of course required.  But the third item of business at the extraordinary general meeting of the defendant held on 28 October 2013 is not such a matter whether under the general law or the articles of the defendant.  It follows that it was not required to be approved by a special resolution.

16. I should record that the defendant takes the position that the matter covered by the third resolution is in any event within the power and authority of the board of directors and that the approval of the company in general meeting was sought only out of an abundance of caution.  As this does not affect the issue in these proceedings, I express no view on it.

17. The originating summons is accordingly dismissed.  I make an order nisi that the plaintiff pay the defendant’s costs to be taxed if not agreed.