XU BEI v. THE REGISTRAR OF COMPANIES AND ANOTHER

HCMP 1200/2017

[2018] HKCFI 636

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1200 OF 2017

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DECISION

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INTRODUCTION

1.  This is the call-over hearing of the applicant’s originating summons seeking an order that certain documents filed in the Companies Registry in respect of the 2^nd respondent (the “Company”) be declared null and void and be removed from the Companies Register or, alternatively, that the Registrar of Companies do rectify the information in the Companies Register to reflect the above.

2.  The applicant is the wife of Xu Xue Ping (“Xu”).  In 1998, Xu learned of the Company and its joint venture with Beijingguohui Real Estate Co Ltd, a company incorporated in the People’s Republic of China (“PRC”) in the development of Guohui Building in Beijing Shi, in the PRC (the “JV Company”).  He acquired one share of the Company from Witz Resources Management Limited (“Witz”) which he held on trust for his own company Konbo Investment Ltd (“Konbo”), while Konbo acquired the remaining 99 shares from Witz.  Therefore, Xu beneficially owned all the issued shares of the Company through Konbo.  At the time, Xu and Lau Ching were appointed as directors of the Company (the “Original Directors”).  The above facts are incontrovertible and are supported by written resolution, board minutes, annual return filed on 14 July 1999 and a declaration of trust.

3.  On 22 November 1999, a fraudulent scheme was perpetrated on the Company involving Saul Investments Ltd (“SIL”), Saul Resources Management Ltd (“SRML”), and Clausewitz Resources Management Ltd (“Clausewitz”).  The scheme involved filing of the following documents with the Companies Registry:

(1) a special resolution for the removal of Xu and Lau Ching as directors;

(2) a notification for removal of Lau Ching as the Company’s secretary, and replacing her with Hanmark Enterprises Ltd;

(3) a notification of appointment of SIL and SRML as directors (the “Unauthorized Directors”);

(4) SIL’s and SRML’s consents to act as directors;

(5) an ordinary resolution to increase the issued shares of the Company from 100 to 10,000 and a copy of return of allotments allotting 9,900 new shares in the Company to SIL; and

(6) a notice of change of the Company’s registered address to another address.

4.  The scheme did not end there.  The Unauthorized Directors filed an annual return on 28 July 2000 which essentially recorded the above scheme.  Pursuant to the scheme, 9,900 new shares were allotted to SIL. Noteworthy is that the annual return represented that the transfer of one share from Clausewitz Resources Management Limited (“Clausewitz”) to Xu 99 shares from SIL to Konbo were cancelled.  These statements are factually incorrect as those 100 shares were transferred by Witz to Xu and Konbo and not by Clausewitz and SIL.  By that the date, the Company was effectively stolen from Xu and Konbo by SIL and Clausewitz. 

5.  Just a month prior to that, on 18 June 2000 the Original Directors had filed an annual return showing there have been no change in the members since the annual return for 1999.  As result of the annual return filed by the Unauthorized Directors, on the record of the Companies Register the information in this return was superseded.  However, no further filing or act has since been done to further the scheme and/or to assert interest or control over the Company.

6.  In June 2001 through to May 2003, the Original Directors filed annual returns showing there have no change in the members since the last return they filed. 

7.  In 2004, the scheme came to the knowledge of the Original Directors.  To their knowledge, no steps had been taken by SIL or anyone to assert ownership or control of the Company.  They held board meeting and resolved to engage Messrs Henry Fok & Co to deal with the related matters.

8.  At an extraordinary general meeting held on 30 September 2004, Xu’s directorship was confirmed and Konbo was elected as the other director of the Company.  A resolution was passed giving Xu and Konbo authority to cancel the shares previously issued to SIL without authority.  The directorships of SIL and SRML and the shares purportedly issued to SIL were formally cancelled with immediate effect.

9.  On 14 January 2005, Messrs Henry Fok & Co filed notice of change of secretary and director recording the confirmed directorships of Xu and Konbo and their consents to act as directors.  Pursuant to that, Lau Ching filed another annual return dated 18 June 2005 confirming no change in directorship and members of the Company.

10.  However, the Company Registry informed Messrs Henry Fok & Co that they had not filed the requisite forms recording the removal of SIL and SRML as directors and Hanmark Enterprises Limited as secretary of the Company.  Hence, Lau Ching filed a notice of change of secretary and director and an annual return on 7 March 2006 showing her appointment as secretary and the resignation of SIL and SRML.  Since then, the Company believed that all the record has been set straight and were rectified.  The Company did not file any further annual returns.

11.  On 8 October 2014, Xu transferred his 100 shares in the Company to the applicant and to appoint her as director of the Company.  When the Company proceeded to file the annual return dated 18 June 2015, the Companies Registry took issue with the share transfer.  Hence, the Company took out the present originating summons applying for the order. 

12.  The situation at present is as follows.  Clausewitz was wound-up through a creditor’s petition pursuant to the order of Master Lok (as he then was) dated 19 May 1999.  Notice had been given pursuant to section 291(5) of the former Companies Ordinance (Cap 32) for striking SIL and SRML off the Companies Register as defunct companies.  The striking off took effect three months from the date of the gazette, ie on 25 February 2006 for SIL and 20 April 2006 for SRML.  Obviously this fraudulent syndicate of SIL collapsed and that explained why the fraudulent scheme did not progress further.  On the other hand, this asset rich Company holds a considerable share in the JV Company which in turn holds a very valuable building in Beijing.

DISCUSSION

13.  Section 42 of the current Companies Ordinance (Cap 622) gives the court jurisdiction, upon application by any person, to direct the Registrar to rectify any information on the Companies Register or to remove any information from it if the court is satisfied that the information derives from anything that is invalid or ineffective; or has been done without the company’s authority or the information is factually inaccurate or derives from anything that is factually inaccurate or forged.

14.  The filing of a single return by the Unauthorized Directors followed not only by their silence but by a number of consecutive returns filed by the Original Directors consistent with the position of the Company prior to the return filed by the Unauthorized Directors is remarkable.  The returns filed by the Original Directors after 2000 are contemporaneous documents.  By a broad brush approach, the fact that SIL which purportedly held substantially all the interest in the Company which holds substantial interest in the JV Company which in turn holds a valuable property in Beijing was struck off from the register speaks volumes of its fictitious nature and the fraudulent scheme it was participating. 

15.  On the evidence of the applicant, it is clear that the documents filed by the Unauthorized Directors were filed without the Company’s authority.  The statutory book of the Company is still in the applicant’s possession.  It does not record the scheme, the membership of SIL or Clausewitz and the appointment of SIL and SRML as its directors.

16.  These aside, the falsity of the scheme is apparent from the annualreturn filed by them stating that the share transfer of one share from Clausewitzto Xu and 99 shares from SIL to Konbo were cancelled on 19 November 1999.  Clausewitz and SIL were never shareholders of the Company and had no shareto transfer to Xu or Konbo.  On this ground alone, both the written resolution to issue and allot new shares to SIL and to remove the Original Directors must be invalid.  This had a practical and knock-on effect on all the forms and documents filed by the Unauthorized Directors.  Those documents must be factually inaccurate or forged.

17.  This is a blatant case of fraud practiced on the Company to deceive its shareholders and possibly third parties intending to dealwith the Company.  I am satisfied that the annual returns and other documents filed by SIL and SRML on 22 November 1999 and the information contained therein relating to the Company, ie its shareholding and directorship under SIL and SRML entered in the Companies Register is unauthorized by the Company, invalid, factually inaccurate or forged.

18.  Under such circumstances, there could be no question about rectification of the Companies Register in relation to these matters.  The only question is about removal of the documents filed by SIL and SRML.  Section 42(4) provides that the court must not order the removal of any information 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.

The court has to consider, first, whether the continuing presence of the information will cause material damage to the company; and second, to balance the interest of the company in having the information removed against the interest of other persons in having the information to continue to appear on the Companies Register.

19.  If a document showing the rectification is filed in the Companies Register, the continuing presence of the documents filed by the Unauthorized Directors as such would not cause material damage to the Company.  However, I accept the applicant’s argument that these documents should be viewed against the scheme as a whole.  They were filed pursuant to an elaborate scheme to extinguish the shares of the lawful owners and to exclude the Original Directors from management of the Company.  The continuing presence of these documents might cause intangible damage to the Company.  Investors, lenders and people dealing with the Company might view the propriety of the conduct of the Company and its directors with suspect and might be weary of their authority as its directors and officers representing the Company.  People intending to deal with the Company might be deterred bythe sight of these documents and might speculate if there is anything untowardgoing on in the Company or within its management.  There is a real risk that material damage to the Company might result by keeping these documents in the Companies Register.  The documents are fraudulent and created with intent to deceive.  They should never have been registered and kept in the Companies Register and should cease to continue to be kept there.  On the other hand, I cannot see how SIL, SRML or any other person could arguably have any interest in the continuing appearance of these inaccurate or forged documents and the inaccurate information contained therein in the Companies Register.  The balance is in favour of their removal than rectification of the information in the Register.

CONCLUSION

20.  Accordingly, I make an order that the Registrar of Companies do remove the nine documents stated in paragraph 1 of the originating summons.  I make no order as to costs.