SIMON FIREMAN v. GOLDEN RICE BOWL LTD

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HEADNOTE

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Application to register shares in a private company refused by the Directors under the Articles of Association - Fresh application made under Section 69(1B) of the Companies Ordinance also refused - Summons issued for an order to disallow the refusal under Section 69(1B) dismissed as the application was not well founded - Principles for exercising discretion enunciated in In re Smith and Fawcett Ltd. (1942) 1 Ch. 304 followed.

1987, No. MP 716

IN THE SUPREME COURT OF HONG KONG

MISCELLANEOUS PROCEEDINGS

H1GH COURT

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BETWEEN

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JUDGMENT

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1. This is an application by the plaintiff, Simon Fireman for an order to disallow the refusal to register a transfer of shares by the defendant company, Golden Rice Bowl Limited (the company) and to order forthwith the registration of Instruments of Share Transfer dated the 16th April 1984 from Lee Hoi Ming to the plaintiff of 455,250 shares which represents about 30% of the issued share capital of the company.

2. The company which is a private company was incorporated on the 25th November 1980 under its former name Nomilla Limited. By a special resolution passed on the 15th February 1981, the name was changed to the present name Golden Rice Bowl Limited. Of the shares issued, Dominic Chan is the registered holder of 506,750 shares and Lee Hoi Ming is the registered holder of 455,250 shares.

3. On the 16th April 1984, Instruments of Transfer of the Shares of Lee Hoi Ming were executed in favour of the plaintiff. The Instruments of Transfer are endorsed with the words,

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We hereby certify that this transfer is by way of legal charge for security purposes only and that no beneficial interest in the shares passes."

and are signed and dated by Johnson, Stoke and Master the solicitors for the transferee , i.e. the plaintiff. On the 18th April 1984, an application was made to the company on behalf of he plaintiff for the transfer of the shares to be registered. The application was considered at a meeting of the Board of Directors of the company on the 28th May 1984 attended by two directors, Mr Dominic Chan and Mrs Shui Wai-see. At that meeting, a resolution was passed refusing the application pursuant to article 6 of the articles of association. Article 6 provides:-

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The Directors may in their discretion 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."

Notification of the resolution was given to the plaintiff's solicitors by a letter dated the 29th May 1984.

4. The Companies (Amendment) Ordinance 1984 came into operation on the 31st August 1984 and included a new section, S.69 (1B) which provides:-

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Where a company refuses to register a transfer of any shares, the transferee may apply to the court to have the transfer registered by the company; and the court may, if it is satisfied that the application is well founded, disallow the refusal and order that the transfer be registered forthwith by the company."

As a result of the introduction of this section, the plaintiff made a second application to the company on the 18th October 1986 for the Instruments of Transfer to be registered, but this application was also refused on the 11th December 1986.

5. I accept the submission of Mr. Chan who appeared for the company that as the application for registration was refused before Section 69(1B) came into force, the plaintiff was debarred from making a fresh application for the legislation does not have retrospective effect. However, if I am wrong, I shall now proceed to consider the issue on its merits.

6. The section is couched in terms which confer a discretion upon the court whilst the material words for consideration are "well founded". I have been informed that the section is peculiar to Hong Kong and the genesis of the section is unknown. So far as I am aware, this is the first case where the section has been invoked. However, Mr. Collins who appeared for the plaintiff drew my attention to an article by Christopher Bates, in the Hong Kong Law Journal (1985) Vol. 15 No. 2 at page 190 where on page 191, he makes the following reference to the section:-

"A transferee who has been refused registration may apply to the court which, if it is satisfied that the application is well founded, may order that the transfer be registered forthwith.

 

It is not clear why this procedure has been treated as a remedy separate from any claim that may exist for rectification of the register. It might have been preferable to have extended that remedy expressly to cover this sort of case. In an application for rectification, the court has useful ancillary powers to award damages and to decide questions of disputed or doubtful title."

7. No authorities were cited to me, but it is of assistance to consider the principles to be adopted by the court where the articles of association of a private company have given a discretion to directors to refuse to register a transfer of shares. They were explained by Lord Greene M.R. in In re Smith and Fawcett Ltd.⁽¹⁾ where he had this to say at 306:-

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The principles to be applied in cases where the articles of a company confer a discretion on directors with regard to the acceptance of transfers of shares are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purpose. They must have regard to those considerations, and those considerations only, which the articles on their true construction permit them to take into consideration, and in construing the relevant provisions in the articles it is to be borne in mind that one of the normal rights of a shareholder is the right to deal freely with his property and to transfer it to whomsoever he pleases. When it is said, as it has been said more than once, that regard must be had to this last consideration, it means, I apprehend, nothing more than that the shareholder has such a prima facie right, and that right is not to be cut down by uncertain language or doubtful implications. The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately framed, cannot be allowed to cut down the right of transfer to any extent which the articles on their true construction permit. Another consideration which must be borne in mind is that this type of article is one which is for the most part confined to private companies. Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the directors powers of the widest description."

8. Where the articles provide a discretion, the court must be satisfied that the discretion is exercised bona fide and honestly, but the court is not entitled to interfere with a decision with which it merely disagrees.

9. If the directors had accepted the transfer of the shares in this case the plaintiff might acquire too much influence over the company and there would obviously be cause for concern if the plaintiff's objective was to try and obtain control of the company. By the acquisition of the shares of Lee Hoi Ming, he was in fact acquiring about a 30% interest in the company. They are perfectly valid objections to the plaintiff's application.

10. In my judgment where persons agree to form a private company for a particular purpose, the directors cannot be expected to approve a transfer of shares which a member has charged as security for a loan to a complete stranger who has no interest in the business. The act of charging the shares was a private matter between Lee Hoi Ming and the plaintiff and was not the concern of the other memberes of the company. The plaintiff was obviously aware of the restriction contained in article 6 on the transfer of shares and unless a promise had been made to him or some inducement had been held out that he would be registered as the transferee, he could have no legitimate expectation that his application would be approved. By article 6 the directors have a discretion to refuse an application to register a transfer without giving any reason. That ride power, provided that it is exercised bona fide in the interests of the company cannot be interfered with by the Court. The Court will not exercise its discretion under the section where the application would defeat the objects for which the company was formed or where its original character is likely to be changed. Such an application would not be in the best interests of the company.

11. When the shares were charged to the plaintiff no promise or inducement was made made to him that he would be accepted as a member of the company. Further it is clear that the plaintiff has no interest in or connection with the company. In all the circumstances, I am quite satisfied that the plaintiff's application is not well founded with the result that it will be dismissed with costs.

(1)    [1942] 1 Ch. 304