CHAN CHOI WAH v. RING SOUND CO LTD AND ANOTHER

1992 No, MP 1085

Headnote

Company Law - application under S.114B of the Companies ordinance, Cap. 32, for a direction that a general meeting of the company be called - dispute as to title of the applicant shareholder to the shareholding and strong opposition to the application - use of quorum provisions to block efforts to call meeting - cross-examination on interconnected disputes between the parties disallowed and application granted.

1992, No. MP 1085

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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J U D G M E N T

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1. The applicant seeks an order under S. 114B of the Companies Ordinance, Cap. 32 for the calling of a general meeting of the first respondent company with consequential directions as to the meeting itself. In her affirmation the applicant deposes that she is both a member and director of the first respondent (the company), whilst the only other member or director is the second respondent. She states that the company has an authorised capital of $500,000 divided into shares of $1.00 each, of which 450,000 shares have been issued. Of these shares, the applicant claims she holds 350,000 and the respondent 100,000. The company's latest annual return, filed on 4th January 1992 and exhibited as CCW1 to the applicant's supporting affirmation, confirms these figures.

2. The origin of the dispute lies in the 2nd respondent's refusal to allow the applicant to see the company's books of account. The reason for the applicant's request to do so was a qualification in the auditor's report of 23rd November 1991 concerning a director's loan without a definite repayment term. The applicant apparently did not herself have any managerial involvement in the company.

3. After this refusal, the applicant requisitioned the directors to convene a general meeting of the company to consider a resolution for the appointment of an additional director. She says she gave notice to the 2nd respondent of a directors meeting for this purpose.

4. The 2nd respondent, through her solicitors, then declined to attend the board meeting, which was duly dissolved for failure of the required quorum of two directors. As the general meeting had not therefore been called, the applicant as the requisitionist convened an extraordinary general meeting of the company under S.113 of the Ordinance. Again, through her solicitors the 2nd respondent declined to attend, and the general meeting could not take place for lack of a quorum. It was this impasse which caused the applicant to resort to S.114B in asking the Court to order that a meeting of the company be called.

5. The 2nd respondent, who is also a lady, filed an affirmation in reply denying the applicant's title to the shares founding the application. She claimed that the initial shareholdings were originally intended to be equally divided amongst herself, the applicant and one LAM Tin-sang. However, due to a mistake of the company's accountant the initial allotment of shares was in the respective quantities of 50,000, 300,000, and 100,000 to Lam, the applicant and herself. The 2nd respondent further claimed that when Lam subsequently retired from the business he was supposed to transfer his shares to her. Again, according to her, Lam's shares were mistakenly recorded as being transferred to the applicant.

6. Dealing with this second mistake of the accountant, the 2nd respondent said she did nothing about  it as she and the applicant were then good friends. She also said that the accountant told her the mistake would not matter -

"because if the applicant wanted to sell the shares, she had to sell the shares to me first, and the price would at most be $1.50 for each share."

7. The 2nd respondent went on to say that she and the applicant had discussions in mid-1988 about the applicant's intention to emigrate to the United States. She claimed that this resulted in an agreement for sale of all the applicant's shares to the 2nd respondent for $400,000. Again there was no formal transfer of the shares because the 2nd respondent said she and the applicant were still good friends and she trusted the applicant. It was nonetheless understood between them that the applicant -

"should have no further interest or capacity whatsoever in the 1st respondent."

8. According to the 2nd respondent, the relationship deteriorated soon after the applicant's return from the United States in February 1991. Thereafter she received notice of the applicant's intention to requisition a general meeting but did not attend because of what she claimed to be the applicant's lack of capacity to do so. The 2nd respondent contends that the company is now in a state of deadlock and proposes to wind it up.

9. The applicant filed a further affirmation vigorously denying the 2nd respondent's version of events. Further affirmations were then filed by other witnesses on behalf of the 2nd respondent, who herself filed an affirmation annexing proceedings between the parties in another High Court action, A1621 of 1992. The 2nd respondent is claiming in that action the return^-of various loans to the applicant between 1988 and 1990 totalling $630,000. The applicant in turn has counterclaimed for an account in respect of various transactions concerning premises in the joint names of herself, the 2nd respondent, and a third lady, one SIK Wei-sing.

10. The parties appeared before Jones J. on 8th June 1992 when the hearing of the originating summons was adjourned on directions for cross-examination on the affidavits, with leave to file further evidence. This hearing was shortly after the applicant's second affirmation was filed and the same day as the filing of the 2nd respondent's second affirmation with two further affirmations from supporting witnesses. In the circumstances the learned judge had no choice but to adjourn the hearing, and his directions for cross-examination are, if I may say so, sensible on the evidence as he then knew it.

11. Thereafter, the issue became increasingly complex. The 2nd respondent filed her third affirmation on 29th June annexing the pleadings in the High Court action and discussing property disputes arising out of the collapse of an apparently close relationship between the parties. This was followed by a further affirmation from the applicant arguing her case on the property disputes and expanding her earlier allegations.

12. At the start of this hearing I doubted the suitability of S. 114B as a vehicle for resolving these various interconnected disputes. In deference however to the earlier directions the hearing proceeded and the applicant briefly confirmed her affirmations and was tendered for cross-examination.

13. Initial cross-examination concerned the origins of the shareholdings of the applicant, the 2nd respondent and Mr. Lam. The situation remained unclear, save that the applicant denied the 2nd respondent's case as put to her and as set out in the 2nd respondent's own affirmations. Cross-examination then turned to the issue of the property dispute in its wider context. This covered such divers matters as life assurance premiums said to be paid for the applicant by the 2nd respondent and various items of jewellery said to have been given to the applicant. At this point the cross-examination was disallowed for irrelevance and the court ruled that there should be no further cross-examination as to the applicant's title to the shares.

14. In so ruling, I have no reason to doubt in principle that a respondent to a S. 114B application may dispute an applicant's title to the shareholding founding the application itself. Such a contested issue should however be confined to matters readily susceptible to resolution on the affidavits. When there are several affidavits on each side and either party's version is totally denied by the other, and when the issue of the shareholding is but one factor in an acrimonious property dispute between former friends, the unsuitability of this procedure is readily perceived. The 2nd respondent's proper remedy on the case she presents in her affirmations is by way of specific performance of the alleged agreement for purchasing the applicant's shares. This would be coupled with an application under S.100 of the Companies Ordinance for rectification of the register of shareholders.

15. On the cross-examination as to title being disallowed, and as there was no other basis for the 2nd respondent's opposition, the hearing concluded. Mr. Chua for the applicant submitted that his application was properly brought and was supported by the requisite evidence. Mr. Wong for the 2nd respondent submitted that the issue of the entitlement to the shares should be resolved first and urged the court to adjourn the present application pending that decision. He said he had argued for a full trial at the hearing on 8th June and that his client should not therefore be penalized in costs.

16. I turn to the circumstances in which S.1148 may be used and note that the initial words of the section afford it a wide range of availability. The immediately following words assume a situation where it is "impracticable" to call a meeting of the company, and this wording was considered by Wynn-Parry J. in El Sombrero Ltd. [1958] 1 Ch. at p.904. The learned judge concluded that the situation envisaged was simply one where, in practical terms, a meeting duly convened and held could not be conducted, a conclusion supported by Morritt J. in Opera Photographic Co. Ltd. [1989] 1 WLR 34. It is also relevant that Wynn-Parry J. decided that even strong opposition to the application should not in a proper case prevent the court's intervention to direct a meeting. I have no difficulty in finding the present situation one in which it is impracticable to call an effective meeting of the company and hence within the terms of S. 114B.

17. It is clear that the section gives the court a discretion to make the order and the court is not bound to do so even if the criteria of the section are fulfilled. The applicant is however ostensibly a majority shareholder who is kept out of her apparent rights by the 2nd ' respondent's use of the quorum provisions to prevent a meeting. As Morritt J. observed in Opera Photographic Ltd., the quorum provisions cannot be regarded as conferring on the 2nd respondent an effective veto on the exercise of another shareholder's rights.

18. The further issue is the dispute as to the applicant's title to the shares, which leads to Mr. Wong's argument for an adjournment of this application pending its decision. However this will inevitably take many months, during which the applicant will continue to be denied her apparent rights as a majority shareholder. The company running a restaurant which I understand to be a going concern, and there is a perceptible injustice in excluding her from the company's affairs whilst the issue is resolved. The 2nd respondent has moreover contributed to the delay by failing, both initially and after the dispute arose, to pursue her remedies of either rectification or specific performance. To grant a further adjournment pending an action by the 2nd respondent, as yet uncommenced, would leave the applicant vulnerable to the further delay of a lawsuit in which she was not the dominant litigant.

19. Finally, whilst adjournment of this application would certainly continue the exclusion of the applicant from control of the company, the granting of relief under S. 114B would not necessarily exclude the 2nd respondent. Without prejudice to her claim, and even on the order I propose to make, she has the opportunity of cooperating with the applicant in the interests of the company and pending the decision on the ownership of the shares. In all the circumstances I find that the balance of justice is against granting an adjournment of this application on the terms urged by the 2nd respondent.

20. The order sought by the applicant is for a general meeting of the company at which a resolution be considered that Mr. CHAN Yuk-tin be appointed as additional director. Further directions are sought, in particular that one member of the company present in person or by proxy should be deemed to constitute a quorum. I understand that CHAN Yuk-tin is employed in the restaurant operated by the company and that he is also the brother of the applicant. Whilst cooperation between the applicant and the 2nd respondent presently seems a distant objective, it is nonetheless one towards which the court should strive. With that in view, the appointment of the applicant's brother as a director should only be considered in the event that the parties cannot agree an impartial candidate.

21. I therefore exercise the court's discretion in favour of the applicant and direct that a meeting of the company be called and held. I also direct that one member of the company present in person or by proxy shall be deemed to constitute a quorum for such meeting and I direct that the meeting should be held at the office of the applicant's solicitors. Should the parties consider it necessary, I will hear them as to further directions.

22. In all the circumstances I find no reason to deprive the applicant of her costs of this application and these are duly awarded.