TSE WING YIN, IRENE v. CHAN WAI KEUNG AND ANOTHER

CACV 139/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 139 OF 2001

(ON APPEAL FROM HCMP 5085 OF 2000)

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J U D G M E N T

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Hon. Rogers, VP:

1. This is an appeal from a judgment of Yam J given on 16 January this year. The matter before the Judge was an application under section 114B of the Companies Ordinance. What was sought was an order to call a meeting of the company with a view to appointing two new directors.

2. The matter arises in this way. The company was a recently formed company. It was formed in the summer of last year. There is a shareholders' agreement. That was dated 27 July but it was in fact signed on 31 August. The parties to that shareholders' agreement were the plaintiff on the one side and the two defendants on the other. The company was to run a restaurant. Originally, the idea had apparently been to run a coffee bar in Wanchai but the rent was too high and it was decided to run a Japanese restaurant in the New Territories. The parties under the shareholders' agreement were to put in a total of $750,000 in loans. The plaintiff was to put in $450,000 and the two defendants were to put in $150,000 each. The final payment as regards the two defendants was to be 30 August of last year.

3. The shareholders' agreement envisaged an arrangement between the parties whereby the plaintiff would be the "executive" director. Under clause 3 of the shareholders' agreement, she would be responsible for the daily business operations and the recruitment of employees and their supervision. On the other hand, the two defendants would also be directors. The board of directors together would discuss and formulate the company's general and specific policies. The views of the directors were to be exchanged between them at regular weekly board meetings and if there was any dispute, it had to be resolved by vote.

4. It seems that the parties fell out almost immediately. Indeed, Mr Chan, in his submissions today, emphasised a point made in the papers. He said that the defendants had signed the shareholders' agreement under pressure from the plaintiff because, otherwise, the plaintiff would not have let the defendants have sight of the various vouchers and documents relating to expenditure. The defendants themselves were not satisfied that the plaintiff herself had put her share of the money into the company and they refused to sign cheques without vouchers. They regarded some of the vouchers that were produced as highly suspicious.

5. It was against that background that, on 9 September, solicitors on behalf of the plaintiff wrote to the defendants saying that their client wanted to call an EGM so that additional directors could be appointed. That suggestion fell on stony ground.

6. The originating summons for this application was issued on 3 October. It seems that it was not served for some time because the returnable date was 31 October. In the meantime, however, before the summons came to be heard, the defendants themselves had issued an application under section 168A of the Companies Ordinance. That has now been transferred to the Companies List because it is also a petition for winding-up.

7. The hearing of this application took place in January of this year. It is clear that the parties have fallen out. From what can be determined, that falling out is, in all likelihood, irrevocable. There is inherent distrust between the parties, largely, it would seem, arising out of the accounts. The rights and wrongs between the parties certainly cannot be decided today.

8. It is important to notice as regards this application, however, the effect of the shareholders' agreement. It is quite clear that, under the shareholders' agreement, there is a balance held in respect of the directors' powers. If new directors are appointed, that would disturb the balance of the powers. There are other effects in relation to appointment of new directors. In the first place, they are not bound by the shareholders' agreement - neither, incidentally, is the company - and secondly, the new directors have not put money into the company. There were side issues which were raised in this case. In particular, the 1st defendant was the licence holder of the restaurant. He was concerned initially that alcohol was being served although a licence to serve that had not been obtained. That has been resolved, apparently, because the plaintiff is now the licence holder, we are told, and there is also a liquor licence has been obtained. Mr Kwong, on behalf of the plaintiff, has undertaken to file an affirmation exhibiting copies of the licences.

9. In my view, this impasse should be resolved by the winding-up petition and the application under section 168A being pursued as quickly as possible. It is, as I have already indicated, inherently wrong, it seems to me, that new directors should be appointed at this juncture. The appointment of new directors has, in effect, allowed the plaintiff to take over the company. The defendants can clearly be out-voted at any stage.

10. The correct course in this situation seems to me to be that new directors should not have been appointed. The plaintiff's complaint, upon which this application was founded, was that cheques were not being signed and other bank documents could not be signed. That could have been resolved at the hearing by requiring undertakings to be given to allow others to sign the bank documents. The danger as regards the two defendants, if that were to happen, seems to me to be less in this case than it would be in others. The reason for that is quite simple. The whole of the time that this restaurant has been in operation since last September, the defendants have not been signing cheques but the restaurant is apparently still in business, although of course we have no idea of what the state of the accounts is.

11. For my part, therefore, I consider that the Court should make the following orders: that the appeal should be allowed; that the order ordering the holding of an extraordinary general meeting should be set aside; that the plaintiff should be ordered to take all reasonable steps to secure the resignation of the two directors who have been appointed as a result of the order below, and this would be upon the defendants' undertaking which they have given this Court that they will leave in place the bank signing arrangements which are currently in place; and finally, that the winding-up petition should be restored for hearing for directions at 9.30 next Tuesday before Kwan J, with a view to directions being given for the hearing of that petition as quickly as possible.

Hon. Le Pichon, JA:

12. I agree with the judgment of the Vice-President. I would only add this: the defendants have expressed some concern that the continuation of the cheque-signing arrangements might affect them adversely. Any misconduct in that respect as regards the assets of the company is a matter about which they could complain in the petition that they have already presented. This would entail making appropriate amendments should future developments warrant them.

Hon. Hartmann, J:

13. I agree with the judgments given and have nothing further to add.