WU CHI MAN v. MOE FANG

HCA 607/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 607 OF 2010

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BETWEEN

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REASONS FOR DECISION

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1.  This is an appeal by the Plaintiff against the decision of Master de Souza dated 1 December 2011, allowing the Plaintiff’s application to re-amend the Statement of Claim but refusing his application to join one BBQ BY THE BEACH LIMITED (“the Company”) as the 2^nd Defendant in this action. The issue in this appeal is a narrow one: whether the learned Master was right in refusing the joinder application.

The dispute between the parties

2.  The Plaintiff and the Defendant were formerly good friends and they had known each other since their days in the secondary school.  Since 1996, they entered into a business venture of operating barbecue leisure yards in the New Territories.

3.  In about July 2004, the Plaintiff and the Defendant agreed to set up a company to operate a barbecue leisure yard on a piece of land in Tuen Mun.  For such purpose, the Company was incorporated on 9 August 2004.  The Plaintiff and the Defendant were each allotted 495 shares and were both appointed as the directors of the Company.  The other 10 shares were held by another person.

4.  It is common ground that in October 2008, the Plaintiff transferred his shares to the Defendant and resigned as a director of the Company.  However, the parties dispute the circumstances behind such transfer.

5.  According to the Plaintiff’s case, he was involved in a debt dispute in October 2008 and was harassed by debt collectors.  In order to avoid the Company from being dragged into the Plaintiff’s dispute and to create an impression that the Plaintiff was not related to the Company, the Plaintiff agreed, as an interim measure, to resign as a director of the Company and transfer his shares to the Defendant.  The Plaintiff therefore claims that the Defendant has been holding the 495 shares in the Company on trust for him.  Further, the Defendant agreed, in the meantime, to distribute 30% of the profit generated by the Company’s business operation to the Plaintiff.

6.  Despite the Plaintiff’s repeated requests, the Defendant did not return the 495 shares in the Company or distribute the 30% profit to the Plaintiff, and this resulted in the commencement of the present proceedings.

7.  On the other hand, the Defendant’s case is that the shares were transferred because the Company was a facing a tax investigation in 2008 and was ordered by the Inland Revenue Department to pay additional tax in the sum of about $1.69 million plus a penalty.  As the Plaintiff did not want to contribute fund to contest the tax assessment or to pay for such additional tax, he decided to relinquish his 495 shares and transferred them to the Defendant.

8.  According to the Defendant, the transfer of shares was at nominal value because the Company essentially had no asset left after taking into account the additional tax liability it was facing.  The parties therefore agreed that the Defendant would sort out the problem regarding the additional tax liability and the Plaintiff would not be responsible after he relinquished his shares.  Subsequently, the Defendant raised a loan and paid off the demand note by herself.  In such circumstances, the Plaintiff is not entitled to ask for the return of the shares.

The joinder application

9.  Obviously, the present action is only concerned with a personal dispute between the Plaintiff and the Defendant regarding whether the Defendant has been holding the shares of the Company on trust for the Plaintiff.  Whilst it is accepted that the Company is only a nominal party, the Plaintiff, nevertheless, wants the Company to be joined as a party to the proceedings so that whatever decision made by the court will be binding on the Company as well.

10.  The Plaintiff seeks to rely on O 15 r 6(2)(b)(i) of the RHC to support the application.  Under the said rule, the court will allow the joinder of a party if the same is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon.

11.  In my judgment, it is quite unnecessary for the Company to be joined as a party to the proceedings.  Assuming that the court finds in favour of the Plaintiff, the court can simply make an order directing the Defendant to transfer the shares back to the Plaintiff.  In such case, the Company has no option but to register the Plaintiff as a shareholder of the Company.

12.  In his submission, Mr Kwong, counsel for the Plaintiff, submits that the Plaintiff simply does not trust the Defendant.  In the light of the Defendant’s uncooperative attitude in opposing the joinder application, the Plaintiff is concerned that the Defendant may play gamesmanship or take steps to cause the Company to obstruct the Plaintiff from becoming a registered member even if he succeeds in this action.  Further, the Plaintiff has the following concerns:

(i)   the Defendant may transfer all the shares of the Company to a nominee who may not accept that the Company is bound by the judgment in this action;

(ii)   the Defendant may conduct the affairs of the Company in a manner which would prejudice the interest of the Plaintiff; and

(iii)   in the event that the Company falls into liquidation or receivership, the Company will be taken over by a liquidator or receiver who may refuse to accept that the Company is bound by the judgment in this action.

13.  As I see it, these considerations do not justify the joinder application.   The Defendant is now the sole shareholder and director of the Company.  In the event that the court finds in favour of the Plaintiff on his claim, the Defendant would be able to and would have to comply with any order made by the court.  As submitted by Mr Leung, counsel for the Defendant, the Defendant possesses both the capacity to execute and register the transfer of shares given her dual capacity.  As the sole director of the Company, any action by the Company to register the Plaintiff must go through the Defendant. If the court orders the Defendant to do so, it is quite impossible for the Defendant to cause the Company to refuse to register the Plaintiff as a shareholder.

14.  The Plaintiff is afraid that the Defendant may arrange for a nominee to replace her to act as a director and such nominee may refuse to register the Plaintiff as a shareholder in case that he succeeds in this action.  However, it is unlikely that the Defendant would do so given that she is involved in the daily operation of the Company.  Furthermore, even if the Defendant executes such nominee arrangement, the Defendant would still retain de facto control over the registration of shareholders through the nominee director.  In such case, the court can still order the Defendant to cause the Company to register the Plaintiff as a shareholder if he succeeds in his claim.

15.  In the second scenario where the Defendant may conduct the affairs of the Company in a manner which would prejudice the interest of the Plaintiff, the Plaintiff can simply take out an application for injunction to restrain the Defendant from performing any of such acts.  If the Plaintiff successfully obtains an injunction from the court, the Plaintiff can then serve the order on the Company.  Further, I cannot see how the joinder of the Company can help the Plaintiff in the sense that it would deter the Defendant from performing any of these acts.  In other words, even if the Company is made a party to the proceedings, the Defendant can still proceed to do such acts and the only effective way to stop the same is to obtain an injunction against the Defendant and not joining the Company as a party.

16.  In the third scenario where the Company falls into liquidation or receivership, I myself cannot foresee any possibility that the liquidator or receiver would refuse to accept the judgment of the court.  The present action is only about a personal dispute between two former shareholders, and the dispute does not affect the daily operation of the business of the Company.  In such circumstances, the liquidator or receiver would just comply with any decision of the court relating to the ownership of the 495 shares of the Company.

17.  With a view to justify the joinder application, the Plaintiff is also seeking for relief against the Company under s 100 of the Companies Ordinance, Cap. 32, which entitles the court to rectify the register of members of a company.  However, such claim is simply pre-mature.  According to s 101 of the same Ordinance, no notice of any trust, expressed, implied, or constructive, shall be entered on the register of members of a company.  Putting the Plaintiff’s case at the highest, the Defendant is now only holding the shares on trust for the Plaintiff.  In such circumstances, the Company should not register the Plaintiff as a member unless and until the court finds the case in favour of the Plaintiff and makes an order directing the Defendant to transfer the 495 shares back to the Plaintiff.  As there is yet a valid claim for relief under s 100, there is no legal basis to join the Company as a party at this stage.

18.  The Plaintiff also argues that, as there is no prejudice to the Defendant or the Company caused by the joinder application, there is no good reason for the Defendant to oppose the application.  Further, as it happened in the case of Wong Kam San v Zhao Kai Investment Ltd & Ors, unreported, HCA No 1653 of 2004 (decision of L Chan DHCJ on 11 April 2006), it is not unusual to join a company as a nominal party in such kind of action.

19.  Again, these are not proper reasons to justify the joinder application.  There may be a lot of legitimate reasons as to why the Defendant wants to protect the Company from getting involved in the litigation, for example, the litigation may hurt the credit position of the Company, and it is still the burden on the part of the Plaintiff to establish that the joinder of the Company is necessary for the adjudication of all the relevant issues of the case.  As mentioned above, the Plaintiff has simply failed to discharge such burden.

20.  Further, Wong Kam San is not a proper authority to support that the Company should be joined as a party in the present case.  Firstly, the issue of the joinder of the company had not been properly argued in Wong Kam San.  Secondly, the dispute of the shareholders in Wong Kam San did affect the daily operation of the company, as the plaintiffs were also seeking an injunction against, inter alia, the directors of the company from interfering with the business of the company and a related Sino-foreign joint venture.  The facts here are quite different, as the personal dispute between the Plaintiff and the Defendant does not affect the daily operation of the Company.

21.  By reason of the aforesaid, the learned Master was right in refusing the joinder application and the appeal was therefore dismissed with costs.