KWOK KWAI KONG v. LO KWING CHIU AND OTHERS

HCMP 592/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 592 OF 2008

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D E C I S I O N

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1.  This is an application by Kwok Kwai Kong  (“Kwok”) made under section 114B of the Companies Ordinance, Cap. 32, seeking an order to convene an extraordinary general meeting for Jetco Co Limited (“the Company”).  This is his second application to the court. 

2.  I will first relate the relevant background matters.  Kwok, the 1^st defendant Lo Kwing Chiu (“Lo”) and the 3^rd defendant Shum Shue Chup (“Shum”) are the three shareholders and directors of the Company, with Kwok holding 50% of the issued shares and Lo and Shum holding 25% each.

3.  Under article 8 of the articles of association of the Company, it is provided that the quorum of a directors’ meeting shall be three directors personally present or represented by their substitutes.  Under article 22, it is provided that for all purposes, the quorum for all general meetings shall be three members of the Company personally present or by proxy.

4.  In October 2006, Lo sued the Company in DCCJ No. 5151 of 2006 (“the District Court Action”) for arrears of director’s remuneration at the rate of $60,000 a month from May to October 2006.

5.  On 25 November 2006, Kwok and Shum issued an originating summons in HCMP No. 2480 of 2006 (“the 1^st Proceedings), seeking an order under section 114B to convene an extraordinary general meeting of the Company with the intention of appointing solicitors for the Company to defend the District Court Action, as Lo had refused to attend a board meeting on 21 November 2006 for that purpose and the board meeting was inquorate.  In the originating summons, Kwok and Shum sought to serve a notice for the extraordinary general meeting in the form as exhibited to Kwok’s supporting affirmation, that the quorum of the proposed meeting or any adjournment thereof shall be two members, and that the quorum of any further extraordinary general meeting of the Company or any adjournment thereof, the agenda of which is exclusively related to the District Court Action, shall be two members.

6.  Shum filed an affirmation in the present proceedings claiming that he was unaware he was a co-plaintiff in the 1^st Proceedings, and alleging that he did not authorise Kwok to make the supporting affirmation on his behalf in the 1^st Proceedings.  It is not necessary to deal with this for present purpose.

7.  On 15 December 2006, I gave a decision in the 1^st Proceedings and made an order in favour of Kwok and Shum in terms of paragraphs 1 and 2 of the originating summons.  I held it was not practicable to convene a general meeting and it would be appropriate to exercise my discretion to order a meeting be convened under section 114B with a quorum of two members, for the purpose of enabling the Company to appoint solicitors to defend the District Court Action.  I ordered that for any further extraordinary general meeting with an agenda exclusively related to the District Court Action, the quorum shall be two members.  I also gave directions for the extraordinary general meeting to be convened by serving notice in the form as exhibited to Kwok’s supporting affirmation.  The notice contained an agenda of the proposed meeting with three proposed resolutions, one of them provided that all instructions to be given to the Company’s solicitors in the District Court Action must be given by Kwok and Shum jointly.

8.  The decision in the 1^st Proceedings was made to break a numerical deadlock of the shareholders, as a quorum required of three members should not confer a veto power on Lo as a minority shareholder to prevent a general meeting to be held.

9.  I have not decided in the 1^st Proceedings that Lo is not eligible to attend and vote at any general meeting the agenda of which is exclusively related to the District Court Action, as Mr Herman Tang, who appeared for Kwok in the present proceedings, would appear to suggest.

10.  The extraordinary general meeting was convened on 5 January 2007 under the order in the 1^st Proceedings.  However, Shum did not attend in person or by proxy, for reasons not necessary to go into.  Kwok purported to pass all the resolutions on the agenda in the notice on his own.  He claimed that he gave the minutes of the meeting to Shum afterwards and Shum indicated his approval and ratification.  Shum has denied this in the affirmation he filed in the present proceedings.  For present purpose, it is not necessary to resolve this dispute.

11.  What happened afterwards was that Kwok sent the minutes of the extraordinary general meeting to solicitors and gave instructions to solicitors to defend the District Court Action on behalf of the Company.  He approved a draft defence in February 2007 but the defence was not filed by the solicitors.  In March 2007, the relationship between Kwok and Shum deteriorated and they were not on speaking terms, so it would appear impossible for them to give and confirm instructions to solicitors jointly pursuant to the resolution purportedly passed in January 2007.  In May 2007 or thereabouts, the solicitors ceased to act for the Company and in August 2007, Lo entered a default judgment against the Company in the District Court Action.

12.  In January and February 2008, Kwok attempted to convene various board meetings to appoint solicitors for the Company with the view of instructing solicitors to apply to set aside the default judgment.  The board meetings were inquorate, as Lo and Shum did not attend.

13.  Kwok then issued a notice to convene an extraordinary general meeting on 18 February 2008 for the above purpose but the meeting was inquorate too.

14.  Hence, the originating summons in the present proceedings was issued.  The application is opposed by Lo and Shum, who have joined forces.

15.  In this originating summons, Kwok seeks an order that an extraordinary general meeting be convened, for the purpose as indicated above, with a direction that one member shall form a quorum, and that would also apply to any further extraordinary general meeting the agenda of which is exclusively related to the District Court Action.  He seeks a direction that the notice for the extraordinary general meeting be served in the form as per a draft notice and agenda exhibited to his supporting affirmation.  The agenda contained various resolutions to be considered, one of them being that all future appointment of and instructions to solicitors to represent the Company on matters relating to the District Court Action shall be made by Kwok alone.

16.  There is a material difference between the present proceedings and the 1^st Proceedings.  Here, Kwok is not asking the court to break a numerical deadlock but a shareholding deadlock.  This is not something that the court is inclined to do in an application of this kind, as it is well established that section 114B is not an appropriate vehicle for resolving deadlock between shareholders with equal shareholdings (Re Ma On Shan Whitehead Golf Centre Limited [2001] 4 HKC 582; Re Success Plan Limited [2002] 3 HKLRD 560 at 568E to G).  Section 114B is a procedural section and is not designed to alter substantive voting rights or shift the balance of power between shareholders by permitting a shareholder with equal shareholding to overrule the wishes of shareholder or shareholders with equal shareholding (Ross v Telford [1998] 1 BCLC 82; Gore-Browne on Companies, 45^th ed, para 12[15]).

17.  In his oral submission, Mr Tang submitted that he is not asking the court to resolve a shareholding deadlock as the deadlock in the shareholders’ votes could be broken by the court appointing Kwok the chairman of the meeting.  Under article 62 of the articles of association, the chairman of a meeting is entitled to a second or casting vote.  This just seems to be a way of resolving shareholding deadlock, which is not what section 114B is designed to do.  Mr Tang reminded me that I had also appointed Kwok chairman of the meeting when I ordered an extraordinary general meeting to be held in the 1^st Proceedings.  That order was made in very different circumstances.

18.  Mr Tang contended that the court should interfere with the rights of Lo and Shum to vote at the extraordinary general meeting on the basis that the rights of shareholders must not be exercised fraudulently in the wider equitable sense or for the purpose of oppressing a minority.  I express no views on this except to say that if that is his contention, he has used the wrong procedure by invoking section 114B.  As Mr Stephen Lau for the defendants pointed out, he should consider a derivative action.  Another alternative is the procedure in section 168BC.

19.  I have stood down the hearing for Mr Tang to consider the alternatives.  Mr Tang later informed the court that Kwok does not propose to resort to alternative procedures.

20.  For the above reasons, I dismiss this application with costs to the 1^st and 3^rd defendants.