XCHRX MANFIELD COATINGS COMPANY LIMITED v. SPRINGFIELD COATINGS COMPANY LIMITED AND ANOTHER

1994, No. MP2532

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HEADNOTE

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COMPANY LAW - COMPANY UNABLE TO CONVENE GENERAL MEETING DUE TO LACK OF QUORUM - APPLICATION UNDER S.114B OF THE COMPANIES ORDINANCE TO CONVENE A MEETING FOR THE PURPOSE OF APPOINTING AN ADDITIONAL DIRECTOR.

HELD :

(1) IT WAS IMPRACTICAL TO HOLD A MEETING.

(2) HOWEVER, THE APPLICATION WAS REFUSED BECAUSE THE APPOINTMENT OF AN ADDITIONAL DIRECTOR WILL OVERRIDE THE AGREEMENT OF THE SHAREHOLDERS ON THE MANAGEMENT AND CONTROL OF THE COMPANY.

 

1994, No. MP2532

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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Background

1. This is an application by the Plaintiff pursuant to s.114B of the Companies Ordinance (the "Ordinance") for the convening of an extraordinary general meeting of the 1st Defendant. The meeting is to be held for the purpose of appointing Mr Ko Jack Lum, a representative of the Plaintiff as an additional director of the 1st Defendant.

2. The Plaintiff is a shareholder of the 1st Defendant holding 75% of its shares. The 2nd Defendant is the other shareholder holding 25% of its shares.

3. The 1st Defendant was incorporated on 26th March 1991. The 2nd Defendant together with one Mr Yuen Shu Wah ("Mr Yuen") were the subscribers of the 1st Defendant each holding one share. On 15th October 1992, the authorised capital of the 1st Defendant was increased from $10,000 to $2,100,000 by the creation of 2,090,000 shares of $1 each. Mr Yuen was allotted 1,259,999 shares making his total shareholding to 1,260,000 shares. The 2nd Defendant was allotted 524,999 shares making his total shareholding 525,000 shares and one Mr Charles Yeung ("Mr Yeung") was allotted 315,000 shares.

4. On 23rd January 1993 Mr Yuen transferred his 1,260,000 shares to the Plaintiff. Mr Yeung also transferred his 315,000 shares to the Plaintiff.

5. The current directors of the 1st Defendant are Mr Yuen and the 2nd Defendant. Mr Yeung by letter dated 27th July 1993 resigned as a director of the 1st Defendant with effect on 23rd July 1994. The notice of resignation was filed with the Companies Registry on 2nd September 1993.

6. On 30th June 1994, the Plaintiff wrote to the 1st Defendant requesting the appointment of Mr Ko as an additional director.

7. By notice dated 9th July 1994, Mr Yuen served on the other directors notice of a director's meeting for the purpose of discussing the appointment of Mr Ko as an additional director.

8. On 25th July 1994 a director's meeting was held. Mr Yuen was present, the 2nd Defendant was represented by his alternate director, Mr Chu. There was a disagreement as to who should be the chairman of the meeting . According to the minutes of the meeting, the meeting was adjourned.

9. On the same day, the Plaintiff made a requisition under s.113 of the Ordinance to convene of an extraordinary general meeting to appoint Mr Ko as an additional director.

10. Mr Yuen by notice dated 30th July 1994 gave notice of another director's meeting to be held on 4th August 1994.

11. On 4th August 1994, the director's meeting was held. Again there was a dispute between Mr Yuen and Mr Chu as to who should be the chairman of the meeting. The meeting was again adjourned.

12. On the same day, Mr Yuen served notice that an extraordinary general meeting of the 1st Defendant was to be held on 20th August 1994.

13. On 20th August 1994, the 2nd Defendant was absent. The extraordinary general meeting was aborted due to the absence of a quorum. Article ?(a) of the Articles of Association of the 1st Defendant provided that the quorum shall be two members present in person or by proxy.

14. On 13th September 1994 the present application was issued by the Plaintiff. On 6th December 1994 the 2nd Defendant presented a petition for the winding up of the 1st Defendant on just and equitable grounds, alternatively he asked for relief pursuant to s.168A of the Ordinance.

15. Although the 2nd Defendant has issued a summons to stay the present application, Mr Fisher, Counsel for the 2nd Defendant, informed the Court that he was opposing the present application and would not be relying on the summons to stay the proceedings.

Impractical to hold a meeting

16. The first issue I have to decide is whether it was impractical to hold a meeting of the 1st Defendant. In In re El Sombrero Ltd. [1958]1 Ch.900,Wynn Parry J. held that the question raised by the word "impracticable' was merely whether in the particular circumstances of the case the destined meeting of the company could as a practical matter be conducted.

17. Mr Chan, Counsel for the Plaintiff, submitted that the facts of the case clearly showed that it was impractical to hold a meeting. Two director's meetings were aborted because of a disagreement as who should be the chairman, while the extraordinary general meeting was aborted due to the absence of a quorum.

18. Mr Fisher argued that it was not impractical to hold a meeting. The two director's meetings were merely adjourned and not aborted. He submitted that any impracticability was self-generated. Mr Yeung was a director of the 1st Defendant, he could attend the director's meetings and vote in favour of the proposal. No reasons was given by the Plaintiff as to why Mr Yeung did not attend the meetings.

19. I am of the view that it was impractical to hold the meeting. The problem was not self-generated. The absence of Mr Yeung was due to the objection by the 2nd Defendant to him continuing as a director after he had transferred his shares to the Plaintiff. By a letter dated 6th July 1994 (page 62 of the bundle) the 2nd Defendant's solicitors demanded Mr Yeung to resign immediately. Mr Yeung by letter of 9th July 1994 (page 64) stated that he was willing to resign and he did not propose to participate in any of the director's meetings. The absence of Mr Yeung from the director's meetings could not be held against the Plaintiff.

20. Mr Fisher argued that the application was made precipitously. The 2nd Defendant in his petition claimed that he was in Shanghai and Mr Yuen knew that he could not attend the meeting on 20th August 1994. There was, however, no indication prior to the petition that the 2nd Defendant was willing to attend the meeting but was unable to do so by reason of his engagement. Certainly he could appoint a proxy to attend if he wished his views to be heard.

21. In respect of the two director's meetings, there was no suggestion as to how the impasse regarding who should be the chairman could be resolved.

Should the meeting be called?

22. I now turn to the issue whether my discretion should be exercised in favour of ordering a meeting.

23. In In re El Sombrero Ltd., Wynn Parry J. held that the general right to have a quorum of two members, whoever they might happen to be, could not be regarded as a class right attached to any particular shares and so could be overridden by the court directing a meeting to be held at which one shareholder would be a quorum.

24. In In re Opera Photographic Ltd. [1989]1 W.L.R.634, Morritt J. approved a passage in Brightman J.'s judgement in In re H.R. Paul & Sons Ltd. [1973]118 S.J.166 where he held that,

"The jurisdiction conferred by the section was discretionary and his Lordship was therefore not bound to make an order. But to refuse B. Ltd.'s application would deprive a majority shareholder of the right to alter the articles of association, and confer on a minority a right of veto not commensurate with their shareholding. His Lordship did not accept that the quorum provisions should be regarded as a right vested in the minority to frustrate the wishes of the majority, and he would therefore grant the relief sought."

25. Mr Chan, relying on these cases, submitted that the court is always ready to exercise its discretion where the majority shareholders are being kept out of their rights by the minority's use of the quorum provision to prevent a meeting. Further the quorum provision cannot be regarded as conferring on the minority shareholder an effective veto on the exercise of the majority's rights. He further rely on the judgment of Harman J. in Re Whitchurch Insurance Consultants Ltd. [1993]BCLC1359 where he held that,

"I cannot think that the mere existence of a s.459 petition at the date of hearing of the s.371 application is inevitably a bar. It may be a bar. It is obviously a matter which bears upon the discretion of the court, but it is not something which prevents the court exercising its powers."

26. I accept that the general right to have a quorum could not be regarded as a class right attached to the shares of the minority shareholders.

However, in the present case, the 2nd Defendant is saying that he and Mr Yuen, when they formed the 1st Defendant, agreed to do so on the basis of a partnership and they had the joint control and management of the company and they agreed that, without the prior consent of the other party, there would not be any change in the directorship and the ownership of the shares of the company. This was also the agreement between them when Mr Yeung joined the company in 1992 and remained to be so when the 2nd Defendant signed the resolution consenting to Mr Yuen and Mr Yeung transferring their shares to the Plaintiff.

27. While the partnership factor was disputed by Mr Yuen and Mr Yeung in the correspondence, this is one of the issues that the Court has to adjudicate in the winding up petition. To install an additional director at this stage would override the agreement reached between 2nd Defendant and Mr Yuen regarding the control and management of the company.

28. Furthermore, there is nothing to prevent the 2nd Defendant being removed as a director by the other directors. Mr Chan stated that if the additional director was appointed, there was no plan to remove the 2nd Defendant as a director although he could not give any undertaking on behalf of his client in that regard. Although in Re Sticky Fingers Restaurant Ltd. [1992] B.C.L.C.84, the court was only prepared to order a meeting for the purpose of appointing an additional director upon the applicant's undertaking not to remove the other director, Dillion L.J. in Harman v. BML Ltd. [1994]1 W.L.R.893 was of the view that it was not the function for the court to make a new shareholders' agreement between the parties and impose it on them by extracting various undertakings from the parties. I will respectfully follow this approach. In that case, the Court of Appeal reversed the judge's decision to call for a meeting because to do so would override class rights deliberately entrenched for the protection of a minority shareholder and recorded in a shareholder's agreement.

29. In the present case, there is of course no written shareholders' agreement. However the contented agreement regarding the management and control of the 1st Defendant is a matter I should take into account in the exercise of my discretion. I consider that my discretion should not be exercised in favour of the Plaintiff. To do otherwise would override the agreement reached between the 2nd Defendant and Mr Yuen on the management and control of the company. In this connection it is observed that apart from the issue of appointing an additional director, there is no allegation that the 1st Defendant could not otherwise function properly.

30. The 2nd Defendant referred to the unauthorised withdrawal of money by Mr Yuen from the 1st Defendant's account. The 1st Defendant's assets had deteriorated from a healthy state to a negative value. The 2nd Defendant expressed his doubt about the probity of Mr Yuen's conduct of the company's affairs. These allegations had not been denied by Mr Yuen. If the 2nd Defendant was ousted as a director, the management would be in the hands of someone who is accused of such misconduct. Dillion L.J. in Harman v. BML Ltd. held that he attached great importance to the fact that there were allegations of unauthorised payments from the company. He said that "You do not want in charge of the company's business people who are strongly suspected of having stolen the company's moneys."

31. Mr Chan submitted that the 2nd Defendant was using the quorum requirement for an ulterior motive, namely, to force the majority shareholders to buy his shares. The purchase of the 2nd Defendant's shares was certainly discussed in the correspondence but I could not at this stage draw a conclusion that was the motive of 2nd Defendant.

32. In the premises the Plaintiff's application is refused with costs to the 2nd Defendant.

33. I will make no order on the 2nd Defendant's summons.