HIEW FOOK SIONG AND OTHERS v. FUNG TAK KEUNG AND OTHERS

HCA 231/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 231 OF 2006

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D E C I S I O N

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Introduction

1.  This is an application by the Plaintiffs for an interim injunction restraining the Defendants from proceeding with an extraordinary general meeting of a company known as Sai Kung P L B (Maxicab) (No. 1 & 2) Company Limited (the “Company”) scheduled to be held on 15 February 2006 or procuring the passing of certain proposed resolutions at that extraordinary general meeting. 

2.  The Plaintiffs and the Defendants are 22 of the 43 shareholders of the Company.  There are altogether eight directors in the Company.  One is a permanent director appointed under its articles of association (the “Articles”).  The 1^st to 5^th Plaintiffs and the 7^th and 10^th Defendants are the other seven directors.  The Plaintiffs altogether held 6.5 shares in the Company while the Defendants held 20.5 shares.  Neither the Plaintiffs nor the Defendants had a clear majority.  The Plaintiffs have control of the board of directors (the “Board”) and have held directorship for fifteen to twenty-five years while the 7^th and 10^th Defendants have only been appointed as directors for seven years.  Previously, the Plaintiffs with their supporters (the “Plaintiffs' Camp”) were in majority, but it appears that the majority has been swaying towards the Defendants and their supporters (the “Defendants' Camp”).

3.  The Defendants' Camp began to struggle for power since 25 April 2005 when the 1^st to 5^th Defendants and two others filed a petition under section 168A of the Companies Ordinance in High Court Miscellaneous Proceedings No 852 of 2005 (the “Section 168A Petition”) seeking, inter alia, discovery and appointment of a manager to manage the affairs of the Company.  On 12 October 2005, the petitioners, whom I conveniently treat as the Defendants' Camp, took out a summons for appointment of an interim manager (the “Manager's Summons”).  The Manager's Summons was heard before Barma J on 13 October 2005.  Usual directions were given and the summons was subsequently set down for hearing on 26 April 2006 before Barma J.

4.  On 25 October 2005, two of the petitioners of the Section 168A Petition and another shareholder (collectively, the “1^st Requisitionists”) issued a notice to convene an extraordinary general meeting to discuss and pass resolutions to (a) remove all the directors of the Company including the 7^th and 10^th Defendants, (b) amend the Articles so as to remove the permanent director of the Company and (c) appoint the 1^st, 2^nd, 4^th, 5^th, 7^th 10^th and 16^th Defendants as new directors of the Company.  The extraordinary general meeting was scheduled to be held on 8 December 2005.  None of the 1^st Requisitionists are among the Defendants in the present action.  But it is apparent that they share a common interest with the petitioners in the Section 168A Petition and with the Defendants in the present action. 

5.  On 29 November 2005, the Plaintiffs responded by issuing a writ in High Court Action No 2410 of 2005 (“HCA 2410/2005”) and a summons (the “1^st Interim Injunction Summons”) seeking, inter alia, an interim injunction to restrain the 1^st Requisitionists from proceeding with the requisition for an extraordinary general meeting and passing of the proposed resolution.  At the hearing before Deputy High Court Judge Poon, counsel for the 1^st Requisitionists gave an undertaking to Court in terms of the relief sought by the Plaintiffs' 1^st Interim Injunction Summons.  The hearing of the 1^st Interim Injunction Summons was set down to be heard before Barma J on 24 February 2006.

6.  On 15 December 2005, the 1^st Requisitionists issued a summons to strike out the Plaintiffs' writ in HCA 2410/2005 on the basis of no reasonable cause of action.  That summons was also set down to be heard with the 1^st Interim Injunction Summons before Barma J on 24 February 2006.

7.  While the Section 168A Petition was still on foot and the Manager's Summons and the 1^st Interim Injunction Summons are still pending, the Defendants including five petitioners in the Section 168A Petition issued another requisition to the Company to convene an extraordinary general meeting to discuss and pass resolutions to remove the 1^st to 5^th Plaintiffs and the 7^th and 10^th Defendants as directors of the Company and to appoint eight existing shareholders as new directors (the “Proposed Resolutions”).  As the Company failed to convene the meeting within twenty-one days of the deposition of the requisition, the Defendants issued a notice on 13 January 2006 pursuant to section 113 of the Companies Ordinance to convene an extraordinary general meeting on 15 February 2006 to discuss and pass the Proposed Resolutions.   Presumably, at this stage, the Defendants' Camp believed they had command of the majority of the shareholders of the Company.

8.  On 3 February 2006, the Plaintiffs issued a writ and the present summons in High Court Action No 231 of 2006 seeking an interim injunction to restrain the Defendants.  This action and the present summons are replicas of those in HCA 2410/2005.

The law

9.  The principles concerning the grant of an interlocutory injunction have been set out in the leading authority of the House of Lords in American Cyanamid Co Ltd v Ethicon Ltd [1975] AC 396.  The party seeking the injunction has to satisfy the court, firstly, that there is a serious question to be tried and, secondly, that the balance of convenience lies in favour of granting an injunction than refusing it.  I now turn to examine these issues.

Serious question to be tried

10.  Whether there is a serious question to be tried has to be examined in the proper perspective of the case.  The Plaintiffs have not filed a statement of claim.  They have filed a General Indorsement of Claim in which they seek to restrain the Defendants from (a) proceeding in any way with their requisitions and notice to convene an extraordinary general meeting of the Company; (b) proposing, discussing and voting on resolutions to remove the Plaintiffs as directors of the Company and to appoint new directors in their place; and (c) taking any or any other steps to procure the passing of the above resolutions or any part thereof in any of the Company's extraordinary general meeting to be held or otherwise.  The effect of the interim injunction is to entrench the Plaintiffs' position as directors until the next Annual General Meeting in April 2006.

11.  Mr Peter Ng SC, counsel for the Plaintiffs, did not seek to dispute the Defendants' right to requisition and convene an extraordinary general meeting.  Counsel's argument was focused on whether the majority shareholders, or I should say any shareholder, may exercise his voting right at the meeting in any manner he wishes.  On the other hand, Mr Anthony Chan SC, counsel for the Defendants, argued that an interim injunction is not in itself a cause of action and will not normally be granted unless to protect temporarily a right the infringement of which would give rise to a cause of action or to prevent a breach of the law.  He quoted the following passage of Lord Diplock in The Siskina [1979] AC 210 at 256:

“A right to obtain an interlocutory injunction is not a cause of action.  It cannot stand on its own.  It is dependent upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the court.  The right to obtain an interlocutory injunction is merely ancillary and incident to the pre-existing cause of action…”

The existence in the plaintiff of a legal right which is being infringed or threatened to be infringed has long been recognised by Lord Diplock as a basic requirement for the grant of an interlocutory injunction in the landmark case of American Cyanamid Co Ltd v Ethicon Ltd in which Lord Diplock said at 406C:

“… an application for an interlocutory injunction [is] to restrain the defendant from doing acts alleged to be in violation of the plaintiff's legal rights.”

I think it must be right that the right to an interlocutory injunction cannot exist in isolation, but is always incidental to and dependent on the enforcement of a substantive right, which usually although not invariably takes the shape of a cause of action.  A plaintiff cannot seek an interlocutory injunction by arguing in vacuo that there is a serious question to be tried without showing that he has a cause of action or at least a substantive right which is being infringed or threatened to be infringed.

12.  Mr Peter Ng SC argued that the Plaintiffs have a cause of action based on the principle in Clemens v Clemens Bros Ltd and another [1976] 2 All ER 268 which alone is sufficient to satisfy the threshold of a good arguable case.  Secondly, he argued that the Defendants' attempt to convene the meeting amounted to an abuse of legal process.

13.  In Clemens v Clemens Bros Ltd and another, the plaintiff and her aunt held respectively 45% and 55% of the issued share capital of a family company.  The company had carried on a highly successful business in building trade.  The aunt and four other non-shareholders were directors of the company but the plaintiff was not.  The total directors' emoluments exceeded the company's net profits before taxation.  The directors proposed to increase the company's share capital by issuing shares to the four directors and to a trust for long service employees of the company.  The effect of the issue of new shares would reduce the plaintiff's shareholding to under 25%.  The plaintiff opposed but the resolution was passed.  The plaintiff then sought a declaration that the resolutions were oppressive of the plaintiff and that they be set aside.  Foster J set aside the resolutions.  He held that a majority shareholder was not entitled as of right to exercise her majority votes in any way she pleased but her voting right was subject to equitable considerations which might make it unjust to exercise it in a particular way.   He said at 282c:

“I think that one thing which emerges from the cases to which I have referred is that in such a case as the present Miss Clemens is not entitled to exercise her majority vote in whatever way she pleases.  The difficulty is in finding a principle, and obviously expressions such as ‘bona fide for the benefit of the company as a whole', ‘fraud on a minority' and ‘oppressive' do not assist in formulating a principle.

I have come to the conclusion that it would be unwise to try to produce a principle, since the circumstances of each case are infinitely varied.  It would not, I think, assist to say more than that in my judgment Miss Clemens is not entitled as of right to exercise her votes as an ordinary shareholder in any way she pleases.  To use the phrase of Lord Wilberforce, that right is ‘subject … to equitable considerations … which may make it unjust … to exercise [it] in a particular way.”

14.  The next authority relied on by Mr Peter Ng SC is Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 All ER 437.  In that case, the council owned sixty flats which it decided to sell on long leases.  It formed a company with an issued capital divided into 60 shares for the management of the flats.  One share would be transferred to each purchaser of the flat.  Until all the flats had been sold, the transferees of the shares had no voting right in the company.  Thus the council as owner of the unsold flats had 100% of the voting right in the company.  After twelve flats had been sold, the council decided to let the flats instead of selling them.  Then the company brought an action against the council.  The council as majority shareholder holding 100% of the voting right sought to force the company to discontinue the action against the council.  Sir David Megarry V-C held although a majority shareholder, unlike a director, owed no fiduciary duty to the company and was entitled to vote in his own interest, that did not give him an unrestricted right to pass a resolution depriving a minority shareholder of his rights or property.

15.  With respect, I do not think these cases establish any general principle that the majority shareholder may not exercise his voting right in any way he pleases.  Instead, these cases fall within one of the two recognised exceptions to the general rule that unlike directors, shareholders do not owe each other fiduciary duties to exercise their voting right in any particular way other than according to their own will and even in their self interest.  These exceptions are alteration of articles and majority practising a  fraud on the minority.  Voting rights are proprietary rights, to the same extent as any other incidents of the shares, which the holder may exercise in his own selfish interests even if these are opposed to those of the company.  The learned authors of Gower and Davies' Principles of Modern Company Law, 7^th edition, have stated the law correctly when they wrote at 486 as follows:

“Scattered throughout the reports are statements that members must exercise their votes ‘bona fide for the benefit of the company as a whole', a statement which suggests that they are subject to precisely the same basic principle as directors.  But, it seems, this is highly misleading, and the decisions do not support any such rule as a universal principle.  On the contrary, it has been repeatedly laid down that votes are proprietary rights, to the same extent as any other incidents of the shares, which the holder may exercise in his own selfish interests even if these are opposed to those of the company.”

After examining a host of authorities, the learned authors concluded at 494 as follows:

“What conclusions (if any) can be drawn from the foregoing discussion of the case law?  Only, it is submitted, that the twin concepts of “fraud on the minority” and “bona fide in the interests of the company” are obsolete and meaningless in relation to activities by members.  They were invented by the judges to curb the worst excesses of majority rule and at the time of their invention they were needed in the light of the then statute law.  Now, however, because of recent statutory reforms they are needed no longer.  In most cases anything that they achieve can be achieved better by a petition under s.459 (the equivalent of section 168A of the Companies Ordinance in Hong Kong).”  (note added)

16.  Mr Peter Ng SC submitted that the views of the learned authors were merely academic and unsupported by any authorities.  I respectly disagree.  The above general principle is so well established that it can be found quoted in many cases.  Even in Clemens v Clemens Bros Ltd and another, referred to by Mr Peter Ng SC, Foster J quoted the following dictum of Sir Richard Baggallay in North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 at 593:

“The general principles applicable to cases of this kind are well established.  Unless some provision to the contrary is to be found in the charter or other instrument by which the company is incorporated, the resolution of a majority of the shareholders, duly convened, upon any question with which the company is legally competent to deal, is binding upon the minority, and consequently upon the company, and every shareholder has a perfect right to vote upon any such question, although he may have a personal interest, in the subject-matter opposed to, or different from, the general or particular interests of the company.  On the other hand, a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect; and this rule is as applicable to the case of one of several directors as to a managing or sole director.  Any such dealing or engagement may, however, be affirmed or adopted by the company, provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it.”

17.  In my view, the above dicta is a clear statement of the general principle that a shareholder, unlike a director, is free to exercise his voting right in any manner he pleases.  Unlike a director who owes a fiduciary duty to the company, a shareholder does not and he may vote even according to his own selfish interest and to the dis-interest of the company.  There is no general requirement that a shareholder may only exercise his voting right bona fide in the interest of the company.  The learned authors were right when they said that the statements in the reports that members must exercise their votes “bona fide for the benefit of the company as a whole” is misleading.  That statement has been taken out of context.  The context in which that statement was made was usually in connection with two the well recognised exceptions to the general rule, i.e. alteration of articles of the company and the majority practising a fraud on the minority.  In Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 which was quoted by Foster J in Clemens v Clemens Bros Ltd and another, the phrase “bona fide for the benefit of the company as a whole” was used in the context of alteration of articles.  Lindley MR said at 671:

“The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company's memorandum of association.  Wide, however, as the language of s.50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities.  It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.”

18.  Instead of supporting his proposition, Estmanco (Kilner House) Ltd v Greater London Council, is only an example of the second exception to the general rule.  Sir Robert Megarry V-C said at 447:

“All that I need say is that in my judgment the exception usually known as ‘fraud on a minority' is wide enough to cover the present case, and that if it is not, it should now be made wide enough.  There can be no doubt about the 12 voteless purchasers being a minority; there can be no doubt about the advantage to the council of having the action discontinued; there can be no doubt about the injury to the applicant and the rest of the minority, both as shareholders and as purchasers, of that discontinuance; and I feel little doubt that the council has used its voting power not in order to promote the best interests of the company but in order to bring advantage to itself and disadvantage to the minority.  Furthermore, that disadvantage is no trivial matter, but represents a radical alteration in the basis on which the council sold the flats to the minority.  It seems to me that sum total represents a fraud on the minority in the sense in which ‘fraud' is used in that phrase, or alternatively represents such an abuse of power as to have the same effect.”

19.  Clemens v Clemens Bros Ltd and another is neither an example of alteration of articles nor strictly an example of fraud on the minority.  It is, I should say, a hybrid of both.  Foster J was at difficulties in laying down a general principle as to the circumstances under which a shareholder may not exercise his voting right in any way he pleases.  He was content to use the vague expression that a shareholder's right to vote is subject to equitable considerations which may make it unjust to exercise it in a particular way.  The equitable considerations relied on by Foster J in that case was the injustice intentionally created by the aunt to deprive the plaintiff of her negative control of the company.  He said at 282f:

“But I cannot escape the conclusion that the resolutions have been framed so as to put into the hands of Miss Clemens and her fellow directors complete control of the company and to deprive the plaintiff of her existing rights as a shareholder with more than 25 per cent of the votes and greatly reduce her rights under art 6.  They are specifically and carefully designed to ensure not only that the plaintiff can never get control of the company but to deprive her of what has been called her negative control.”

Mr Anthony Chan SC submitted that Clemens v Clemens Bros Ltd and another has been seriously criticised.  Be that as it may, I concur with the result of that case.  If I had to place it within one of the exceptions, I would consider it as a case of the majority practising a fraud on the minority to deprive her of the negative control in the company.  May be, as the learned authors of Gower and Davies' Principles of Modern Company Law said, the categorisation is now obsolete because of the statutory remedy available under the UK equivalent of our section 168A of the Companies Ordinance.  I think Foster J's dictum points to a new perspective in which the exceptions may now be looked at in the light of the existing statutory protection on the minority.

20.  But even considering the Plaintiffs' claim under the new perspective in Clemens v Clemens Bros Ltd and another, the Plaintiffs' case is far from near to Clemens v Clemens Bros Ltd and another.  That case is about depriving the minority shareholder of her existing right as a shareholder, i.e. her negative control of the company.  What the Plaintiffs are seeking is to protect themselves from being removed as directors of the Company in the extraordinary general meeting to be convened.  Their directorships in the Company is not a right protected by the Articles, as in the case of the permanent director.  Their removal does not involve alteration of the Articles.  Our company law is founded on the principle of majority rule.  No director is entitled to be in office unless he has the mandate of the majority shareholders.  They have no right to remain as directors against the wishes of the majority.  If any of the Plaintiffs should be removed in accordance with the Articles as a result of any resolution properly passed at an extraordinary general meeting properly convened, they do not have any cause of action against those shareholders whose exercise of their undoubted right to vote brought about their removal from office. 

21.  Mr Peter Ng SC argued that what the Defendants did in convening the extraordinary general meeting is an abuse of legal process.  He prepared a table, which show that two of the three 1^st Requisitionists and five of the seventeen Defendants in this Summons are petitioners in the Section 168A Petition and are represented by the same firm of solicitors.  He submitted that the inference could be drawn that they acted in concert or with a united front.  He said that the 1^st Requisitionists have undertaken not to proceed with procuring a similar resolution to be passed at an extraordinary general meeting which they convened until determination of the 1^st Interim Injunction Summons.  Hence, he argued strongly that from these circumstances the inference could be drawn that when the Defendants issued a notice on 20 December 2005, eighteen days after the 1^st Requisitionists had given their undertaking, it was done with the ulterior motive of by-passing the undertaking and is an abuse of process. 

22.  The Defendants are not parties to the 1^st Interim Injunction Summons.  They are not bound by the undertaking of the 1^st Requisitionists.  Even if it could be inferred that they acted with the 1^st Requisitionists in a united front against the Plaintiffs, they are exercising their legitimate right to convene a meeting and to vote at the meeting.  They should not be bound by the undertaking of any third parties especially as they were not parties to the 1^st Interim Injunction Summons.  I do not see any reason why any shareholder other than the 1^st Requisitionists should be restrained from exercising their legitimate right to convene and vote at the meeting so convened.  I think it is a startling proposition that if one member of a company has giving an undertaking not to convene a meeting and to vote in the meeting, other members who were not parties to that earlier proceedings or undertaking should be likewise restrained from doing the same.  Mr Peter Ng SC could quote no authority in support of his proposition.  I do not think his argument at all valid.

23.  For the above reasons, I come to the conclusion that the Plaintiffs do not have a cause of action or any legal right to protect by way of an interim injunction.  In view of this conclusion, there is no need to consider the question of balance of convenience.  However, I shall, for completeness deal with that question.

Balance of convenience

24.  Counsel are in disagreement as to who bears the burden of proving that damages is inadequate.  The governing principle as to whether the court should grant an interlocutory injunction is as stated by Lord Diplock in American Cyanamid at 408 as follows:

“As to that, the governing principle is that the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant's continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff's undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.”

Thus, in this part of my deliberation, I shall direct my mind to the possible result of a postulated trial, first one way and then the other.  In the event that the plaintiff is successful, if the plaintiff would be adequately compensated by damages and the defendant is good for the damages, no interlocutory injunction should be given.  The burden to show that damages is inadequate is on the plaintiff.  If the plaintiff is able to show that damages are inadequate, then I shall consider the second scenario, i.e. in the event that the defendant is successful whether damages to the defendant is adequate and whether the plaintiff is good for the damages.  In this part of the exercise, the burden is on the defendant to show that damages is inadequate.  If the defendant is unable to discharge the burden, the interlocutory injunction should be granted.  The burden is firstly on the plaintiff.  If he is able to discharge the burden, it is shifted to the defendant.

25.  If the Plaintiffs are successful and if the Defendants are allowed to procure the passing of the resolutions, the Plaintiffs would be removed from their office as directors.  What loss would they suffer?  The 2^nd Plaintiff's affirmation filed on behalf of the Plaintiffs have not offered any clue as to what damages the Plaintiffs would suffer.  He only responded to the Defendants' evidence that the operation of the Company's fleet of mini-buses would be affected.  I suppose the Plaintiffs would suffer loss of remuneration, which is not substantial and there is nothing to suggest the seventeen Defendants who are shareholders and owners of mini-buses are not good for the damages.

26.  Mr Peter Ng SC submitted that the Defendants, some of whom were the petitioners in the Section 168A Petition, have made allegations in the petition which have the effect of tarnishing the Plaintiffs' names and if the Plaintiffs were removed as directors, the petition would not be proceeded further and they would have no opportunity to vindicate themselves in the petition.  He argued that this damage is unquantifiable.  This was not deposed to in the affirmation.  Nevertheless, the removal of the Plaintiffs as directors of the Company and the Section 168A Petition are separate matters.  Even if an inference could be drawn from their removal that the allegations in the petition are justified, the Plaintiffs will have a fair opportunity to resist the resolutions to remove them at the extraordinary general meeting, have their case put to vote and have their names cleared.  The Company in general meeting shall be the judge of their cause.  I am not satisfied that the Plaintiffs have discharged the burden of proving that damages were inadequate.  For this reason, there is nothing in the way of refusing the interlocutory injunction.

27.  It is only if the Plaintiffs were able to discharge their burden of proving inadequacy of damages that the Defendants are required to assume the burden of proof should the result of the trial goes the other way.  For argument sake, assuming the injunction was granted but the Defendants were successful in the main action, what loss would they suffer?  In the 1^st Defendant's affirmation filed on behalf of the Defendants, he alleged that documents and records belonging to the Company may be destroyed or rendered untraceable and suggested risk of dissipation of the Company's asset.  Mr Peter Ng SC submitted that this is mere speculation and not substantiated by evidence.  I agree.  The 1^st Defendant also alleged that the Company would suffer loss in goodwill and loss of business which would eventually result in loss to the Defendants as shareholders.  Such loss could be assessed based on past and present profits.  I do not think this loss is unquantifiable and the Plaintiffs not good for the damages.  It would then become necessary to find out where the balance of convenience lies.   It is only in that eventuality that I would agree that the status quo would be in favour of allowing the Plaintiffs to remain in office until the next Annual General Meeting in April 2006.  But the Plaintiffs were unable to bring their case to this eventually.

Conclusion

28.  The Plaintiffs have utterly failed to show a serious question to be tried and that they would suffer irreparable damages if the interlocutory injunction is not granted such that any award of damages is inadequate.  Accordingly, the Plaintiffs' application for interlocutory injunction must be dismissed with costs with certificate for two counsel.