NGAN KWING SUN v. TOP WELL INDUSTRIAL LTD

HCMP 420/2019

[2019] HKCFI 3096

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 420 OF 2019

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HCMP 421/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 421 OF 2019

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(Heard Together)

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J U D G M E N T

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1.  By two Originating Summonses the Plaintiff applies for relief pursuant to s.152 of the Companies Ordinance, Cap 622 (“Ordinance”) that Top Well Industrial Ltd (“Top Well”) and Hope Yet Textile Co Ltd (“Hope Yet”) do register the transfer of shares, namely, 500,000 shares of Top Well and 25,000 shares of Hope Yet, acquired by the Plaintiff from the Administratrix (“Mrs Lee”) of the Estate of the late Mr Lee Yiu (“Mr Lee”).

2.  These Originating Summonses were heard together pursuant to an Order dated 27 May 2019.

3.  The evidence before the court is extensive but the issues taken by the Companies are confined. 

Law

4.  There is no dispute over the applicable principles of law.

5.  Generally speaking, ownership of a share confers membership to the company and it is only transferrable in accordance with the company’s articles of association: s.134 of the Ordinance.

6.  S.151 of the Ordinance provides as follows :

“(1) The transferee or transferor of shares in a company may lodge the transfer with the company.

    (2) Within 2 months after the transfer is lodged, the company must either—

(a) register the transfer; or

(b) send the transferee and the transferor notice of refusal to register the transfer.

(3) If a company refuses registration, the transferee or transferor may request a statement of the reasons for the refusal.

(4) If a request is made under subsection (3), the company must, within 28 days after receiving the request—

(a) send the person who made the request a statement of the reasons; or

(b) register the transfer.

… ”

7.  S.152 of the Ordinance may be invoked in the event of refusal by a company to register a transfer of shares :

“(1)  If a company refuses to register a transfer, the transferee or the transferor may apply to the Court for an order under this section.

(2)  On an application under subsection (1), the Court may order the company to register the transfer, if the Court is satisfied that the application is well-founded.”

8.  As to the court’s approach regarding a company’s decision to refuse to register a transfer of shares, it is trite that the court will not interfere with the exercise by directors of a discretion not to register a transfer unless it can be shown that their decision is not one which a reasonable board of directors can bona fide believe to be in the interests of the company, or that such power was exercised for collateral purposes: see Cheng Chien Kuo v New Resources Holdings Ltd HCMP 2985/2014, unrep, 20 June 2017, §19 per G Lam J.

9.  If the directors’ decision is one which a reasonable board can consider to be in the interests of the company, then the court presumes that they acted bona fide and had good grounds for their decision: see Tett v Phoenix Property Co Ltd [1984] BCLC 599, at 621c.

10.  Where the articles of the company provide that the directors are not required to provide reason for their refusal to register transfer of shares, they must now be read subject to s.151(3) of the Ordinance: see Cheng Chien Kuo, §17. 

11.  The court may consider whether the reason(s) provided by the directors can justify their decision: see Tett, supra, at 621c-d, applied in Re Yuen Kiu Kwan [2009] 3 HKLRD 371.

Top Well

12.  Top Well was incorporated in Hong Kong in 1999 as a private company limited by shares with paid up capital of HK$2,000,000 (2,000,000 ordinary shares).  Prior to September 2008, it carried on the business of, inter alia, leasing of looms to Hope Yet Weaving Factory situated in Dongguan, China.  It holds 35,417 shares in Hope Yet.

13.  Presently, the registered shareholders are:

(1)  Chan Yik Ping (“Chan”), 500,000 shares;

(2)  Leung Kai Cham (“Mr Leung”) (passed away in 2012), 500,000 shares;

(3)  The Plaintiff, 500,000 shares; and

(4)  Mr Lee (passed away in May 2009), 500,000 shares.

14.  With the death of Mr Lee and Mr Leung, who were directors of Top Well, Chan is the only director of Top Well.

15.  Article 11 of the Articles of Association (“A/A”) of Top Well provided that: “Unless and until otherwise determined by an ordinary resolution of the Company, the Directors shall be not fewer than two in number, and there shall be no maximum number of Directors”.

16.  It is not in dispute that no ordinary resolution has been passed for reducing the number of directors to 1 under Article 11.

17.  Under Article 22 of the A/A of Top Well: “The Company may, from time to time, by ordinary resolution appoint new Directors”. No replacement director has been appointed after the death of Mr Lee and Mr Leung.

18.  Chan, as a director of Top Well, filed a Special Resolution dated 9 October 2009 with the Companies Registry on 12 October 2009 stating, inter alia, that Top Well would become dormant from the date of delivery of the Special Resolution to the Registrar.

19.  The Plaintiff does not agree that Top Well is dormant.  It holds shares in Hope Yet, which has a rental income, and is a director of that company.  Further, the Plaintiff was not aware of any Special Resolution passed on 9 October 2009 until late 2018.

Hope Yet

20.  Hope Yet was incorporated in Hong Kong in 1995 as a private company limited by shares with paid up capital of HK100,000 (100,000 ordinary shares).  It was in the textile business and had a weaving factory in the Mainland at Dongguan.  Currently, Hope Yet has leased out its land in Dongguan and is receiving a rental income from it.

21.  The registered shareholders of Hope Yet are:

(1)  Chan, 16,666 shares;

(2)  Mr Leung, 16,667 shares;

(3)  The Plaintiff, 6,250 shares;

(4)  Mr Lee, 25,000 shares;

(5)  Top Well, 35,417 shares.

22.  After the death of Mr Lee and Mr Leung, there remain only two directors of Hope Yet, Chan and Top Well.  As Chan is the only director of Top Well, he is in sole control of Hope Yet.

23.  Chan, as a director of Hope Yet, filed a Special Resolution dated 15 January 2018 with the Companies Registry on 19 January 2018 stating, inter alia, that Hope Yet would become dormant from the date of delivery of the Special Resolution to the Registrar.

24.  The Plaintiff disagrees that Hope Yet is dormant by reason of its receipt of rental income.  The receipt of such income was admitted by Chan.  The Plaintiff also says that he was not aware of any Special Resolution passed on 9 October 2009 until late 2018.

Purchase of Mr Lee’s shares

Top Well

25.  Pursuant to an Agreement dated 16 January 2009, the Plaintiff agreed to purchase 25% shares of Top Well (500,000 shares) from Mr Lee at the consideration of HK$700,000.

26.  On or around 23 April 2009, the Plaintiff paid HK$500,000 as part of the consideration to Mr Yiu Wing Kwong, who was nominated by Mr Lee for that purpose.   

27.  Mr Lee passed away on 23 May 2009.  Mrs Lee was appointed as Adminstratrix of the Estate of her husband pursuant to Letters of Administration dated 15 July 2009.

28.  On 8 October 2018, Mrs Lee and the Plaintiff entered into a Supplemental Agreement.  Pursuant to that Agreement, the Plaintiff paid HK$200,000 to Mrs Lee as the outstanding balance of the consideration for the share purchase on the same day.

29.  On 15 October 2018, the Instrument of Transfer and Bought and Sold Note were executed by Mrs Lee and the Plaintiff.  Those documents were duly stamped on 23 October 2018. 

30.  By way of a letter of 1 November 2018 from his solicitors, the Plaintiff requested Top Well to register the transfer of shares. 

Hope Yet

31.  By another Agreement dated 16 January 2009, the Plaintiff agreed to purchase Mr Lee’s 25% shares of Hope Yet (25,000 shares) at the consideration of HK$800,000.

32.  By a Statutory Declaration dated 15 July 2009, Mrs Lee acknowledged the payments of HK$511,362 and RMB50,000 by the Plaintiff to her husband on or around 28 June 2008 for her husband’s shares in Hope Yet.

33.  On 7 February 2012, the Plaintiff paid a further sum of HK$200,000 to Mrs Lee as the consideration for the shares.

34.  On 8 October 2018, Mrs Lee and the Plaintiff entered into a Supplemental Agreement.  Pursuant to that Agreement, the Plaintiff paid HK$28,636 to Mrs Lee as the outstanding balance of the consideration for the purchase of the shares on the same day.

35.  The Instrument of Transfer and Bought and Sold Note for the shares were executed by Mrs Lee and the Plaintiff on 28 October 2016.  The documents were stamped on 10 November 2016. 

36.  By another letter dated 1 November 2018 from his solicitors, the Plaintiff requested Hope Yet to register the transfer of share. 

Refusal of registration

37.  By 2 letters dated 24 December 2018 from Messrs Ford, Kwan & Co the Plaintiff’s registration requests were refused.  The stated reason for refusal was essential the same:

“We are instructed that, among the 25,000 ordinary shares of the late Mr Li Yiu (“the Deceased”), 4,166 ordinary shares are beneficially owned by [Top Well]. Hence, the administratrix of the Deceased does not have beneficial ownership of the said 25,000 ordinary shares. In the circumstances, our client considers that it is not proper to register the transfer of the said 25,000 ordinary shares.”

[quoted from Hope Yet’s refusal letter]

The Boards’ power to refuse registration

38.  Article 7 of Top Well’s A/A provided as follows:

“The Directors may in their absolute direction and without assigning any reason therefor, refuse to register a transfer of any share. If the Directors refuse to register a transfer they shall within two months after the date on which the transfer was lodged with the Company, send to the transferee notice of the refusal as required by Section 69 of the Ordinance [the old Companies Ordinance, Cap. 32].”

39.  Article 3 of Hope Yet’s A/A provided as follows:

“The Directors may decline to register any transfer of shares to any person without giving any reason therefor. The Directors may suspend the registration of transfers during the twenty-one days immediately preceding the Ordinary General Meeting in each year. The Directors may decline to register any Instrument of transfer, unless (a) a fee not exceeding two dollars is paid to the Company in respect thereof, and (b) the instrument of transfer is accompanied by the Certificate of the shares to which it relates, and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer.”

The position of the Companies

40.  Appeared on behalf of the Companies, Mr Pang maintained the stated reason for refusal and had made a number of points to suggest that the purchase by the Plaintiff of the shares belonging to Mr Lee was suspicious. 

41.  It was also submitted that the directors were entitled to take a holistic view of the available information and come to the view that the registrations would not be in the interests of the Companies. The reason was that the Companies would come under the control of the Plaintiff as the majority owner, and he is someone not to be trusted. 

Analysis

Top Well

42.  In the case of Top Well, the evidence is that there was no properly constituted Board, due to the lack of sufficient number of directors, to properly exercise the power under Article 7.  It should be noted that at the material times Messrs Ford, Kwan & Co was acting for Chan[1] but not Top Well.  I am unable to see how Chan could have exercised the power of the Board by himself alone.  This, I believe, is a fatal flaw in Top Well’s case.

43.  Secondly, I agree with Mr Chan, who appeared for the Plaintiff, that the suggestion that there was question over the beneficial ownership in respect of 4,166 shares of Hope Yet in the name of Mr Lee cannot be a valid ground for refusing to register the transfer of shares in Top Well. Notwithstanding that the two companies are related, they are separate entities. 

44.  Thirdly, it is trite that a company is not concerned with the beneficial ownership of shares.  Article 5 of Top Well’s A/A stated as follows:

“Save as herein otherwise provided, the Company shall be entitled to treat the registered holder of any shares as the absolute owner thereof, and accordingly shall not, except as ordered by a Court of competent jurisdiction or as by Ordinance required, be bound to recognise any equitable or other claim to, or interest in, such shares on the part of any other person.”

45.  For completeness, I should mention that, on his own evidence, Chan did not become involved in the business of the Companies until after the death of Mr Lee and Mr Leung.  The matter concerning the 4,166 shares of Hope Yet was not something within his personal knowledge.  The details of what Chan was allegedly told, on which he relied, are not at all easy to understand.  In particular, the suggestion that Mr Lee’s 25,000 shares in Hope Yet came from Chan Chi Ming[2] when there was no record of Chan Chi Ming as a shareholder of that company. 

46.  As regards the various points made in respect of the purchase of Mr Lee’s shares, I am unable to see any substance in them. They did not form part of the reason for refusal set out in the letter of 24 December 2018.  The purchase was supported by 2 Agreements, the payments were evidenced by the documents produced by the Plaintiff and there were 2 Statutory Declarations from respectively Mrs Lee and her son wherein the purchase was acknowledged. 

47.  Finally, the attack on the character of the Plaintiff should be viewed with healthy scepticism by the court.  It was not part of the stated reason of refusal.  This submission was not deployed in the Companies’ Skeleton Arguments and, with respect, was not made with conviction.

48.  There was no love lost between Chan and the Plaintiff.  In 2010, the Plaintiff took out a derivative action against, inter alia, Chan alleging a number of misconduct on his part as a director of Top Well.  This action remains on foot.

49.  As pointed out above, Chan did not become involved in the Companies’ business until May 2009 at the earliest, and much of the alleged misconduct of the Plaintiff took place before his involvement. 

50.  Further, the allegations against him were answered by the Plaintiff in his evidence with documentary support.  For instance, in contradiction of the allegations that he was dismissed as director of the Companies for misconduct, the company records showed that the Plaintiff had resigned from such directorship prior to the Board meetings in which he was allegedly dismissed. 

51.  It is not possible to resolve these allegations on affirmations.  If the Companies wish to rely on these matters, the burden of proof must be on them.  There was no application by the Companies to cross-examine the Plaintiff (see the dicta of G Lam J in Cheng Chien Kuo, §38, made in the context of allegation of mala fide against directors). 

52.  In the premises, I am unable to accept the allegation of bad character as a valid ground for refusal to register the transfer of shares. 

Hope Yet

53.  The above analysis (with the exception of paras 42 and 43) applies equally to Hope Yet.  There was, technically, a properly constituted Board to exercise the power to refuse the registration of share transfer.  However, in substance, Chan was the only member of the Board. 

54.  At the material times, Messrs Ford, Kwan & Co was acting for Chan (“one of the directors of [Hope Yet]”) instead of Hope Yet (see their letter to the Plaintiff’s solicitors dated 14 November 2018). It is therefore not clear whether the refusal to register the shares was a decision of the Board. 

55.  The equivalent of Article 5 of Top Well’s A/A was to be found in Regulation 7 of Table A, First Schedule of the old Companies Ordinance, Cap 32, which was incorporated in the Hope Yet’s A/A by virtue of Article 1.  Regulation 7 provided as follows:

“Except as required by law, no person shall be recognized by the company as holding any share upon any trust, and the company shall not be bound by or be compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except only as by these regulations or by law otherwise provided) any other rights in respect of any share except in absolute right to the entirety thereof in the registered holder.”

Conclusions

56.  For these reasons, I am satisfied that the applications for registration of the transfers in question are well-founded. Accordingly, I make the order in terms of paras 2 of the Originating Summonses. 

57.  As for the costs of and occasioned by these Summonses, in light of the somewhat unusual circumstances of these cases, I invite the parties to endeavour to agree on the appropriate costs order within 7 days from the handing down of this Judgment, failing which the Plaintiff is at liberty to fix a hearing to resolve the issue without delay.

58.  I am grateful to counsel for their assistance.