RATONAL INDUSTRIAL LTD AND OTHERS v. WAN KIN CHUNG DANIEL AND OTHERS

HCA 3705/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3705 OF 2002

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D E C I S I O N

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Background

1. This is the Plaintiffs' application for an interlocutory injunction restraining the Defendants from acting as directors or interfering with the business of the 1st Plaintiff ("Ratonal"), delivery up of a video tape of a meeting between the Plaintiffs and the Defendants and books of Ratonal. There are major disputes of facts between the parties, but for the purpose of the present application, the Plaintiffs largely accept the case of the Defendants.

2. The dispute involves two camps of shareholders in Ratonal, conveniently identified as the "Tung Camp" including the 2nd and 3rd Plaintiffs and the "Roger Camp" including the three Defendants. The two camps came together and formed a group of companies for the purpose of a public listing in the Stock Exchange of Hong Kong in March 1999. The two camps injected their own companies into the group in exchange for shares in Grand Sky Holdings Ltd ("Grand Sky") based on the value of the companies they injected. The companies contributed by the "Tung Camp" included Ratonal Industrial Limited ("Ratonal") and Bondway Industrial Limited ("Bondway"). Ratonal is a subsidiary of Bondway. As there were other shareholders of Ratonal not willing to join the group, Ratonal and Bondway were not put under Grand Sky but shares in Ratonal and Bondway were issued to the Roger Camp and the 3rd Defendant was appointed as a director of Ratonal. Thus, there are two groups of companies, the Grand Sky group including companies contributed by the Roger Camp and the Bondway group.

3. Following some dispute, the Roger Camp alleged that the Tung Camp had inflated the value of Ratonal and Bondway as a result of which the Tung Camp obtained more shares in exchange from the group. The two camps agreed to a de-merger on 19 October 2001. The business of the group would be separated into two independent lines, the Grand Bond line and the Ratonal line. However, the de-merger did not progress smoothly and the dispute eventually gave rise to a series of company winding up litigations.

4. Apparently to give effect to that de-merger, the 3rd Defendant resigned as director of Ratonal on 15 November 2001. However, the registered office of Ratonal remained in New Trade Plaza, an address under the control of the Roger Camp. No step was taken to change that address until 25 March 2002 when it was changed to New Commerce Centre, an address under the control of the Tung Camp.

5. The shareholding structure of Bondway and Ratonal is complicated. While Ratonal is the subsidiary of Bondway, controlled by directors belonging to the Tung Camp, Ciba International Limited ("Ciba") and Cyberonic International Limited ("Cyberonic") which together hold 57.29% of the shares of Bondway were controlled by directors belonging to the Roger Camp. Thus, despite that the 2nd and 3rd Plaintiffs are directors of Bondway and Ratonal, the Roger Camp are the majority shareholders of Bondway and Ratonal through their control over Ciba nad Cyberonic.

6. On 4 July 2002, Ciba and Cyberonic requisitioned an extraordinary general meeting of Ratonal for the purpose of passing a resolution to remove the 2nd and 3rd Plaintiffs as directors and to appoint new directors. On 1 August 2002, Ciba issued a notice of extraordinary general meeting to be held on 16 August 2002. On 3 August 2002, the 2nd and 3rd Plaintiff held a board of directors meeting and resolved to forfeit the shares of Ciba and issued a notice of forfeiture to Ciba. Regardless of that, the Roger Camp held the extraordinary general meeting on 16 August 2002 and appointed the 2nd and 3rd Defendants and a Mr Ko as directors of Ratonal. On 23 September 2002 the Roger Camp held a board of directors meeting and resolved to move the registered office back to New Trade Plaza address.

7. On 2 October 2002, the Roger Camp filed a petition to wind up Grand Sky. On the same day, the Tung Camp launched a similar offensive by purportedly holding an extraordinary general meeting to increase the number of directors of Grand Sky to eleven and to appoint additional directors to fill up the vacancies. The reconstituted board purported to pass resolutions to remove the Roger Camp directors from the board of Grand Sky. The Roger Camp obtained an ex parte injunction from Deputy High Court Judge Woolley on the same day restraining the Tung Camp from carrying into effect any of the resolutions made at the extraordinary general meeting. On 21 February 2003, Deputy High Court Judge Poon continued the ex parte injunction or re-granted an injunction on similar terms of the ex parte injunction.

Balance of convenience

8. The essential principles concerning the grant of an interlocutory injunction have been set out in the leading English authority of American Cyanamid Co v. Ethicon [1975] AC 396. The requirements are firstly that there is a serious question to be tried and secondly that the balance of convenience lies in favour of granting an injunction. Where everything being equal, the balance lies in favour of preservation of the status quo.

9. There is no dispute that there are serious questions to be tried. The question is on which side the balance lies. On the Plaintiff's case, the Roger Camp obtained an injunction which in effect preserved its control of Grand Sky and hence effectively the companies contributed by the Roger Camp. The Roger Camp are attempting to take control also of Ratonal, a company contributed by the Tung Camp, by out-numbering the Tung Camp in the board of directors and by moving the registered office of Ratonal to an address under the control of the Roger Camp. Mr Lo submitted that leaving the control of Ratonal in the hands of the Roger Camp effectively meant the entire group of companies would be in the control of the Roger Camp.

10. Mr Lo, on behalf of the Plaintiffs, said there were unlawful transfers of funds from Ratonal to Grand Bond. He referred to the cheques issued by the Defendants to the Grand Sky group of companies out of Ratonal's account opened since the de-merger arrangement and the cheques of similar amounts from Grand Sky to Grand Bond. Hence, Mr Lo submitted that unless the Defendants are restrained, irreparable damage could result and the balance lies in favour of the Plaintiffs maintaining control of Ratonal contributed by the Tung Camp in just the same way as the Roger Camp is controlling the group of companies it contributed to the merger.

11. From the undisputed evidence, the Roger Camp took steps to give effect to the de-merger. The 3rd Defendant resigned as director of Ratonal in November 2001 and probably the Roger Camp did not resist the move of Ratonal's registered office in March 2002. The first offensive, if I may called it that way, began on 4 July 2002 by the Roger Camp in requisitioning an extraordinary general meeting for the removal of the 2nd and 3rd Plaintiffs as directors and appointment of new directors, presumably all from the Roger Camp. The Tung Camp did not attend the extraordinary general meeting to contest the resolution, nor did they seek an injunction to prevent that meeting from taking place as did the Roger Camp in defence to the assault on Grand Sky by the Tung Camp in October 2002. What the Tung Camp did was to forfeit the Roger Camp's shares in Ratonal. I can hardly understand the legal and factual basis of the forfeiture. The forfeiture is being contested. In the meantime, the Tung Camp set up Ratonal Electronic Limited to which they diverted the business of Ratonal. Ratonal Electronic Limited has been unknown to the Roger Camp until the present proceedings. The Tung Camp's explanation is that setting up Ratonal Electronic Limited is an interim arrangement to continue the business of Ratonal during the winding up proceedings and undertook to account for the business it obtained to Ratonal. The forfeiture of the shares of the Roger Camp and the setting of Ratonal Electronics Limited give me great cause for concern as to what might happen if Ratonal is managed to the exclusion of the Roger Camp.

12. The 2nd and 3rd Plaintiffs were not removed from their directorship though five additional directors were appointed to outnumber them. Nevertheless they were not denied access to the books of Ratonal. Apart from the appointment of additional directors, the re-removal of the registered office and the alleged unlawful transfer of Ratonal's funds to Grand Bond, there is no evidence of attempts to interfere with the business of Ratonal. The Roger Camp's explanation for the transfer of funds is that they were inter-company transfer. Indeed they were. Suspicious though it may seem, Grand Bond to which the funds were transferred is effectively a wholly owned subsidiary of Grand Sky in which the 2nd and 3rd Plaintiffs hold slightly more than 50% of its shares. So whatever benefit that may have been transferred from Ratonal, it remains within the merger over which the Tung Camp has some degree of control or at least access.

13. As for the appointment of additional Roger Camp directors in Ratonal, Miss Liu submitted that it was just an exercise of their right. With the resignation of the 3rd Defendant from the board of Ratonal, which turned out to have been premature, the Roger Camp was not represented in the board at all. An appointment of one, though not five, was certainly justified. Mr Lo argued that under Article 13 of the Articles of Association of Ratonal, only directors and not the company in general meeting had authority to appoint additional directors and that under Article 14, the company may only appoint directors to substitute another one who has been removed. Hence, he argued that the purported appointment of the Roger Camp directors was unlawful as the company had no power to make the appointments and no directors had been removed. He submitted that this was a triable issue and should not be disposed of at the interlocutory hearing. I think otherwise. The issue raises only a simple question of interpretation of the articles and there is no dispute of facts involved.

14. Article 13 and 14 provide:

"13. Subject to the provisions of Article 6 hereof, the Directors shall have power at any time, and from time to time, to appoint a person as an additional Director who shall retire from office at the next following Ordinary General Meeting, but shall be eligible for election by the Company at that meeting as an additional Director.

14. The Company may by special resolution remove any Director and may by ordinary resolution appoint another person in his stead. The person so appointed shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected as a Director."

15. On the other hand, Article 99 of Table A of Companies Ordinance, Cap. 32 which has not been excluded by the Memorandum and Articles of Association of Ratonal provides:

"The company may by ordinary resolution appoint another person in place of a director removed from office under the immediately preceding regulation, and without prejudice to the powers of the directors under regulation 97 the company in general meeting may appoint any person to be a director either to fill a casual vacancy or as an additional director. A person appointed in place of a director so removed or to fill such a vacancy shall be subject to retirement at the same time as if he had become a director on the day on which the director in whose place he is appointed was last elected a director."

16. Directors are agents of a company. The authority of their appointment comes from the company itself, i.e. the company in general meeting. Unless the company has by its articles of association divested itself of the power to appoint directors in favour of the board of directors, it always has power to make appointments so long as there are vacancies available under the articles. Indeed Article 99 of Table A which is applicable to Ratonal reserves to the company in general meeting the power to fill casual vacancy or appoint additional directors. In my view, the power under Article 13 is a temporary delegated power vested in the board for expediency, to be reviewed or even confirmed at the general meeting. There is nothing from this article or any other articles to displace the very strong presumption or inference that the company in general meeting has not divested itself of the power to make appointments: see Worcester Corsetry Limited v. Witting [1936] Ch 640 at 648. According, I hold that Ratonal in general meeting has power to make additional appointments and the appointment of additional directors by the Roger Camp was just a lawful exercise of their right as shareholders. By itself, without more, this cannot be treated as unlawful interference with the business or management of Ratonal. If the Tung Camp wished to oppose the appointments, it should attend the meeting and state its opinion or if it has grounds to seek an injunction as the Roger Camp did in defence to the offensive by the Tung Camp. By forfeiting the shares of the Tung Camp to evade the general meeting, the Tung Camp is, on the face, seeking to control Ratonal to the exclusion of the Roger Camp.

17. Further, it was not until December 2002, four months after the appointments that the Tung Camp sought to restrain the directors appointed at the meeting. As the appointments were just a lawful exercise of their right as shareholders of Ratonal and in view of the long delay by the Tung Camp in challenging the appointments, the balance must weigh against granting the injunction.

18. As for the removal of the registered office of Ratonal, until 25 March 2002, the registered office of Ratonal was at the New Trade Plaza address under the control of the Roger Camp. For five months after the decision to de-merge and four months after the 3rd Defendant's resignation as a director of Ratonal, the registered office remained in the New Trade Plaza address without apparent problem. The move to the New Commerce Centre was in fact triggered by the Tung Camp.

19. Until the de-merge has been implemented, the group of companies from both camps remained and operated as a group. What the Tung Camp is seeking to do is in effect to force a de-merger without letting it take its normal course. That an injunction has been granted in favour of the Roger Camp in respect of Grand Sky does not automatically mean one should be granted in favour of the Tung Camp in respect of Ratonal. In the case of Grand Sky, the Roger Camp did not seek to exclude the Tung Camp from the management of Grand Sky. In here, the Tung Camp is seeking to exclude the Roger Camp, a benefit which the Grand Sky injunction did not give to the Roger Camp.

Conclusion

20. Thus on the totality, if the injunction is granted, the Roger Camp would be wholly excluded from Ratonal. It is impossible to assess what damages would be suffered by the Roger Camp, in the event that the injunction should not have been granted. On the other hand, there is no evidence of unlawful interference by the Roger Camp of the management and business of Ratonal. The funds transferred from Ratonal remain within Grand Sky to which the Tung Camp has access. They can always check on the activity of the Roger Camp and if necessary apply for injunction again. If the injunction is refused, there is no evidence to suggest that the Tung Camp would suffer irreparable damages or that damages may not be adequate.

21. In view of conduct of the Plaintiffs, the setting up Ratonal Electronics Limited and their delay in challenging the appointments, I agree with Miss Liu, that the balance is strongly against the Plaintiffs. I do not think the Defendants should be restrained from acting as directors of Ratonal, nor should the books of Ratonal be delivered to the Plaintiffs. There is nothing to suggest that the Defendants will destroy the books. It will be inconvenient if the books should be delivered to the Plaintiffs. The Plaintiffs can have access to those books in the registered office of Ratonal as before. As for the video tape, this has been voluntarily produced to the police by the Defendants. There is nothing to suggest that the Defendants will destroy the tape. The tape should be the subject matter of discovery than of injunction. The application for injunction must be dismissed.

22. In view of the outcome and the view that I have formed of the merit of this application, I think it appropriate that I should determine the costs of the application at this stage. I make a costs order nisi that the Plaintiffs shall pay the costs of the Defendants, to be taxed if not agreed.