MIGHTY CHINA INTERNATIONAL LTD v. CHINA RESOURCES AND TRANSPORTATION GROUP LTD AND OTHERS

HCA 1960/2021

[2023] HKCFI 652

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1960 OF 2021

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BETWEEN

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D E C I S I O N

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1.  This is the Plaintiff’s application by a summons dated 19 August 2022 (“the cross-examination summons”) for cross-examination of 5 deponents of affirmations at the substantive hearing of the “Authority Issue” (namely as to whether those currently suing on behalf of the Plaintiff have authority to sue), directed to be heard as a preliminary issue in these proceedings. The Plaintiff also applies to amend the cross-examination summons to include 2 further deponents. At the conclusion hearing, the decision was reserved which I now give.

Procedural history

2.  The writ in these proceedings was issued on 31 December 2021 by the Plaintiff, a Hong Kong incorporated private limited company, against the Defendants.

3.  On 7 January 2022, an issue arose in an interlocutory injunction hearing as to whether the 2 directors of the Plaintiff Chiu Ling Yan (“CLY”) and Cheung Siu Yu (“CSY”) had authority to act for the Plaintiff. Mr Recorder Jin Pao SC ordered the Authority Issue to be tried as a preliminary issue.

4.  Further directions were given by DHCJ Bernard Man SC on 4 March 2022 for the filing of evidence by the Plaintiff, D3 (“LYX”) and D4 (“ZH”) in relation to the preliminary issue with liberty to the parties to apply for cross-examination on the affidavit evidence filed.

5.  The Authority Issue was scheduled to be determined on 2 November 2022 with 2 days reserved. Meanwhile, on 19 August 2022, the Plaintiff took out the cross-examination summon that is now before this court.

6.  It is relevant to mention that LYX commenced proceedings in HCA 133 of 2022 against CSY, CLY and the Plaintiff on 28 January 2022 for, inter alia, a declaration that CSY and CLY have been removed as directors of the Plaintiff on 7 October 2021 (“HCA 133”).

Legal principles

7.  The applicable principles are not controversial.

8.  For cross-examination pursuant to O. 38 rule 2(3), the approach to be adopted is referred to in the judgment of Kwan J (as she then was) in Andrew Wyles Waters v Malahon Credit Co Ltd, CACV 44/2003, 14 October 2003 at §10. The Court of Appeal applied the approach in Wendy Wenta Seng Yuen v Philip Pak Yiu Yuen [1984] HKLR 431 which it stated as follows:

“(1) the court has an unfettered discretion to permit cross-examination but an applicant is not entitled to this right as of course;

(2) the applicant has to establish that in all the circumstances there is “good and sufficient” reason for the application;

(3) where the evidence on the affidavits will result in a “final order”, it may not be difficult to establish “good and sufficient” reason for the application; where the evidence is for use in an interlocutory matter, it may be more difficult, in view of the expense and delay involved, for the court to be satisfied that the discretion should be exercised in favour of permitting cross-examination;

(4) what is essential is for the applicant to establish that the proposed cross-examination might be productive of a “useful result” at the stage that the application is made.”

9.  The burden of proof lies with those suing name of the plaintiff to prove authorisation and, at the substantive hearing, the court has to see whether the objections raised by the defendant can be summarily disposed of on the affidavit evidence that has been placed before the court for the purpose, and if not, how the objection can be determined accordingly: see Kammy Town Ltd v Super Glory Corp Ltd, HCA 3524/2003, 14 January 2005 at §§13-14.

The matters for determination

10.  The Authority Issue requires determination of the identity of the directors and shareholders at the time these proceedings were brought, i.e. 31 December 2021 (“the relevant date”).

11.  It is common ground that (i) D3 became the sole director of the Plaintiff on 25 March 2019; and (ii) on 15 May 2020 Wu Senhong (“WSH”) was allotted 1 share in the Plaintiff and appointed as its 2^nd director.

12.  In determining the identity of the directors of the Plaintiff as at 16 February 2020 when CLY was recorded as appointed, it is necessary to determine when WSH resigned from his directorship. The relevant evidence is set out below.

WSH’s resignation

13.  This question arises in that Form ND2A filed in the Companies Registry on 8 December 2020 states that WSH’s resignation occurred on 7 December 2020. It is the evidence of LYX in his 2^nd affirmation dated 1 April 2022 (“LYX 2^nd”)[1] that as a result of WSH’s resignation, LYX became the Plaintiff’s sole director and as such, as well as being the sole beneficial shareholder, procured the Plaintiff to appoint CLY as a director.

14.  LYX changed solicitors in late June 2022 and came to realize that part of the contents of LYX 2^nd may not accurately reflect his knowledge of the relevant facts due to language difficulties.

15.  In LYX’s 3^rd affirmation dated 13 February 2023 (“LYX 3^rd”), LYX states that induced by the representations pleaded in §§15, 25 and 27 of his Amended Statement of Claim in HCA 133, LYX appointed CLY as director.

16.  The affirmations of ZH and Lee Kai Ling[2] (“LKL”) (both dated 3 October 2022[3]) as well as WSH’s affirmation dated 10 February 2023 concern WSH’s resignation.

17.  In ZH 2^nd, ZH deposes to her having had a discussion with LYX in early December 2020 about the Plaintiff’s administrative matters and how she came to cause Solomon, the Plaintiff’s company secretary, to prepare relevant documentation relating to WSH’s resignation and to lodge the relevant form on 8 December 2020.

18.  LKL’s affirmation explains how she came to prepare the relevant documentation for WSH’s resignation and the filing of Form ND2A and recently, upon the request of Solomon’s solicitors in relation to a claim against CLY and CSY in HCA 133, she made further enquiries and realised that WSH did not sign the draft letter of resignation prepared at the time Form ND2A was prepared.

19.  In his affirmation, WSH states that in early December 2020, he mentioned to LYX that he would like to resign as a director but did not take any action at the time nor provide any letter of resignation. WSH states that he resigned on 24 February 2021 and, at the same time, he transferred the one share he held in the Plaintiff to LYX.

20.  Mr Tony Ko, counsel for the Plaintiff, submitted that if WSH’s resignation were effective on 7 December 2020, applying the Duomatic principle (as explained in WHC Limited trading as Wine High Club Perfecta Enterprises Ltd and Ors v Hong Kong Wine Chamber of Commerce Ltd, HCMP 758/2019, 24 October 2019, [2019] HKCFI 2548 at §§47-48), CLY’s appointment as director would be valid.

21.  On that basis, it was submitted that it is necessary not only to cross-examine WSH but also LYX, ZH and LKL.

22.  Ms Queenie Lau, counsel for the 3^rd and 4^th Defendants (collectively “the Defendants”) submitted that cross-examination serves no purpose as the validity of the appointments of CLY is a legal question and can be determined on the evidence before the court.

23.  On the question of WSH’s resignation, the Articles in Part 2 of Schedule 2 to the Companies (Model Articles) Notice Cap 622H (save for immaterial exceptions) apply to the Plaintiff. The applicable articles include Article 25 which provides, inter alia, that “a person ceases to be a director if … (e) the person resigns the office of director by notice in writing of the resignation in accordance with section 464 (5) of the [CO][4]” or (f) is removed from the office of director by an ordinary resolution of the company.

24.  Section 464 (5) of the CO sets out the statutory requirements for an effective resignation. In my view, whether or not those requirements were satisfied does not depend on cross-examination.

25.  In so far as Article 25 (f) is concerned, there is no evidence of any resolution passed by the Plaintiff for WSH’s removal from the office of director.

26.  The existence or otherwise of a notice in writing of WSH’s resignation on 7 November 2020 as required by section 464 (5) is critical.

27.  According to LKL, a draft letter of resignation was prepared at the same time as Form ND2A. Only recently, LKL came to realise that the draft letter had not been signed.

28.  There is no evidence regarding the handling of the draft letter after it had been prepared nor of the documentation required for the filing of Form ND2A at the Companies Registry nor is it clear what documents WSH signed on 24 February 2021.

(1) Validity of CLY’s and CSY’s appointment as director

29.  In ZH 2^nd, ZH also deposes to the fact that she had mistakenly thought from a discussion she had with LYX in about February 2021 that the latter had already decided to appoint CLY as a director of the Plaintiff and so had given instructions to Solomon to prepare the relevant documentation (including a draft resolution) for execution and the necessary form for filing at the Companies Registry.

30.  On 9 July 2021, LYX transferred 50% of his shareholding in the Plaintiff to CSY. There is a Form ND2A recording CSY’s appointment as a director of the Plaintiff on the same day.

31.  Then in about 9 July 2021, in another discussion with LYX, ZH mistook that the latter had decided to appoint CSY as a director of the Plaintiff and so instructed Solomon to prepare the relevant documentation similar to that for CLY.

32.  In a later affirmation (LYX 3^rd at §10), LYX states that induced by the representations set out in HCA 133 at §§15, 25 and 27, on 16 February 2021 and 9 July 2021 respectively, he had intended to make arrangements to procure the appointment of CLY and CSY as directors of the Plaintiff and informed ZH of his intended arrangements so that the relevant documentation could be prepared.

33.  However, LYX also states that he had been hesitant in appointing CLY and CSY as directors and had not signed any document or made the final decision for their appointment as directors of the Plaintiff.

34.  There are no shareholders’ and/or Board resolution, meeting minutes or decision in respect of the appointment of CLY and CSY as directors in the Plaintiff’s corporate records. It is LYX’s understanding that “due to the miscommunication between [LYX] and [ZH], [ZH] mistakenly thought that [the Plaintiff] had appointed CLY and CSY as directors[5].”

35.  Following enquiries requested by the Defendants’ new lawyers appointed in June 2022, ZH came to realise that LYX did not sign any of the requisite forms for the appointment of CLY or CSY as a director of the Plaintiff.

36.  The Plaintiff submitted that cross-examination of LYX, ZH and LKL is necessary as there is a factual dispute as to whether the appointments of CSY as well as CLY as directors resulted from LYX’s decision to appoint or whether there was a miscommunication.

(c) Resignation of CSY and CLY

37.  CSY and CLY are recorded in Form ND2A (filed at the Companies Registry on 5 November 2021) as having resigned as directors on 7 November 2021.

38.  CSY and CLY maintain that they have been removed as directors without their knowledge or consent and that there is no written document to show that they had resigned.

39.  The Defendants’ case is that CSY and CLY were not validly appointed as directors as no valid resolution at the board or shareholder level was passed to appoint them.

40.  If (contrary to the Defendants’ view) they had been validly appointed, it is the Defendant’s case that CSY and CLY have already validly resigned.

Whether cross-examination is necessary

(a) Validity of CLY’s appointment on 16 February 2021

41.  For CLY to have been validly appointed on 16 February 2021, it has to be shown that there was an ordinary resolution passed by the Plaintiff or an appointment by the directors.

42.  There is no question but that WSH did not transfer his share (held as nominee) back to D3 until 24 February 2021.

43.  A party invoking the Duomatic principle (to cure an irregularity) bears the burden of demonstrating that it applies. The Defendants submitted that an irregularity must be one which could have been cured by the majority. The principle does not operate to validate a resolution which the majority shareholders could not have lawfully passed[6].

44.  But as the only 2 shareholders were D3 and WSH, the Duomatic principle could not have assisted the Plaintiff as unanimous consent has to be shown. Nor could the quorum requirement of at least 2 members have been fulfilled for convening a shareholders meeting.

45.  As regards an appointment by the directors, that will be determined by the date of WSH’s resignation which, in turn depends on the credibility of the evidence of LKL and WSH in relation to the letter of resignation.

(b) Validity of CSY’s appointment

46.  The Defendants further submit that directors can only make appointments that are consistent with their powers. As stated in Mortimore’s COMPANY DIRECTORS: Duties, Liabilities, and Remedies (3^rd edition) at §6.44, “they must, therefore, respect any procedural requirements set out in the articles”.

47.  In short, the Defendants submit that in order for the appointment of CSY (or CLY to be valid, it must be shown that both substantive and procedural requirements have been respected. As they do not seem to be fulfilled, it cannot be shown that CSY or CLY were properly appointed directors.

48.  If LYX were a sole director at the time of CLY and/or CSY’s appointment, Article 20 of the Model Articles requires there to be a written resolution or written record for such appointment. The absence of a written resolution or written record would be an irregularity and thus a relevant factor to be taken into consideration by the trial judge.

49.  Absent authority (and none has been cited), I do not consider that this irregularity would, ipso facto, invalidate the appointment of the relevant director in the circumstances described.

(c) Validity of the resignation of CLY and CSY

50.  CSY and CLY maintain that they never resigned. There is a Form ND2A recording the resignation of CSY and CLY as directors on 7 November 2021.

51.  As I understand it, if CSY and CLY were validly appointed as directors, the Defendants rely on CLY’s oral communication (on behalf of himself and CSY) and ZH (as LYX’s agent) of CSY and CLY’s intention to resign evidenced in WhatApp exchanges between CSY and ZH on 6 October 2021 on that subject.

52.  The Defendants submit that whether CSY and CLY’s resignations are valid “is a matter of objective construction”.

(d) Filings in the Companies Registry

53.  The Defendants submit (and I respectfully agree) that filings in respect of changes in directorship do not of themselves alter the substantive rights within a company. They do not have the effect of validating or otherwise authenticating a person’s directorship in the company.

Conclusion

54.  Looking at the totality of the evidence filed, determination of the date of WSH’s resignation depends entirely on the credibility of LKL and WSH relating to the letter of resignation. Further, I consider that the issue whether the appointment of CSY as director resulted from LYX’s decision to appoint or whether there was a miscommunication relating to the appointment of CSY as a director requires the cross-examination.

55.  Accordingly, LYX, ZH, LKL and WSH are directed to attend for cross examination at the hearing of the Authority Issue. At the hearing, Plaintiff was content that the Defendants be at liberty to cross-examine CSY and CLY.

56.  That direction should not be taken by the Plaintiff as liberty to cross-examine the witnesses on other issues and, effectively, engage in a trial run of the action. Having said that, the scope and extent of the cross-examination allowed at the trial is a matter that is best left to the trial judge.

57.  In that regard, I would add that, generally speaking, whether or not cross-examination should take place is a matter for the trial judge and listing such an interlocutory application for hearing by different judge is unsatisfactory and contrary to the objectives of the CJR.

58.  I reiterate that the views I have expressed should not in any way constrain the discretion of the trial judge hearing the Authority Issue.

59.  There is to be an order nisi that the costs of this application be in the cause of the Authority Issue.