ALL OVERSEAS LTD AND OTHERS v. BEST CODES NOMINEES LTD AND OTHERS

CACV 329/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 329 OF 2005

(ON APPEAL FROM HCA NO. 4515 oF 2002)

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J U D G M E N T

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Hon Woo VP :

Introduction

1. This is an appeal by the plaintiffs against the judgment of Yam J given on 20 September 2005, whereby both the plaintiffs’ applications for summary judgment under Order 14 of the RHC and for issues to be determined by the court under Order 14A were refused.  The judge granted the defendants unconditional leave to defend.  He ordered that the costs of the applications be costs in the cause save that the costs of the plaintiffs’ summons dated 28 June 2005 and of the hearing on 5 July 2005 be to the defendants in any event.

Background

2. At all material times, the 2^nd plaintiff (“P2”) and the 3^rd plaintiff (“P3”) were the only registered shareholders of Billion Top Garment Limited (“the Company”).  In consideration of a loan of $600,000 made by Chelton Finance Limited (“D4”) to them, P2 and P3 pledged their shares in the Company to D4 and executed a Share Mortgage dated 11 January 2002 in favour of D4 (“the Share Mortgage”).  As provided for in clause 2 of the Share Mortgage, documents in escrow were deposited with D4.  These documents included the share certificates together with related instruments of transfer and contract notes in blank in favour of D4 or its nominees duly signed by P2 and P3, and duly signed (but undated) resignations of one Mr Hau Wing Lam (“Mr Hau”) and Great Wealth Trading Limited (“Great Wealth”), who were the only two directors of the Company.

3.  Clause 5(a), (b), (d) and (e) of the Share Mortgage provided as follows:

“(a)  The Shareholders [ie, P2 and P3] undertakes with the Lender [ie, D4] that they will at any time thereafter (whether before or after the security hereby constituted shall have become enforceable), on the request by the Lender, execute and sign all transfers, powers of attorney or other documents and give or procure the giving by the directors of the Company all consents, approvals and directions which the Lender may require for perfecting the Lender’s title to the Shares or vesting the same, or any of them, in a purchaser or in any trustee for or nominee of the Lender.

(b)    In respect of any transfers of the Shares the Shareholders hereby irrevocably and by way of security authorize the Lender at any time thereafter (whether before or after the security hereby constituted has become enforceable) to date any such transfers if the same be undated, and if the same shall have been theretofore in blank to fill in any blanks in favour of the Lender or any trustee for or nominee of the Lender, or any purchaser and to submit the same for registration with the Company.

(d)     The Shareholders hereby ratify and confirm and agree to ratify and confirm any instrument, act or thing which the Lender may execute or do pursuant to Clauses 5(b) or 5(c) hereof.

(e)    The Shareholders hereby further undertake with the Lender that they will forthwith upon request by the Lender procure the Company’s Articles of Association to be altered to incorporate an Article acceptable to the Lender which will ensure that all transfers of the Shares pursuant to this Share Mortgage will be approved by the Directors of the Company and that it will not cause or allow the Company’s Articles of Association to be further altered without the prior written consent of the Lender.”

4.  Clause 6 of the Share Mortgage provided as follows:

“(a)  The Lender [ie, D4] may at any time after the security hereby constituted has become enforceable exercise at its discretion (in the name of Shareholder [ie, P2 and P3] or otherwise and without any further consent or authority on the part of the Shareholder) any voting rights attaching to the Shares or any of them as if the Lender were the sole beneficial owner thereof.

(b)     The Shareholders by way of security hereby irrevocably authorize the Lender at any time (whether before or after the security hereby constituted has become enforceable) as and when the Lender thinks fit to act as their proxy in all general meetings of the Company and to raise requisitions in its name addressed to the directors of the Company for the purpose of convening general meetings pursuant to the Companies Ordinance, Cap.32 of the laws of Hong Kong, or upon the failure on the part of the directors of the Company to convene such general meetings, to convene the same pursuant to the said Ordinance in its name and to exercise all voting rights attached to the Shares or any of them.”

5.  Clause 8 of the Share Mortgage provided as follows:

“The security hereby constituted shall forthwith become enforceable if the Loan (or any part thereof) has not been paid within 7 days upon demand of the Lender and the Lender may at any time thereafter, upon giving not less than three (3) days’ prior notice to the Shareholders, appoint or procure the appointment of a new Director or new Directors of the Company, and/or sell the Shares, or any of them, at any time and in any way which the lender may deem expedient.”

The parties’ disputes

6. The plaintiffs’ claim is based on the following allegations in the Amended Statement of Claim:

(a)   All Overseas Limited, the 1^st plaintiff (“P1”) has become a director of the Company since 26 January 2002. 

(b)   P1 and Great Wealth Trading Ltd (“Great Wealth”) were the only directors of the Company.

(c)   The Company is the registered owner of a property known as Workshop B9, 2^nd Floor, Block B, Hong Kong Industrial Centre, 489-491 Castle Peak Road, Kowloon (“the Property”) which has been leased to tenants, and P1 has been collecting all rentals from the tenants.

(d)   By a Notification of change of secretary and directors dated 31 August 2002, Best Codes Nominees Limited, the 1^st defendant (“D1”) purported to act as company secretary of the Company and gave notice to the Companies Registry that (i) Great Wealth resigned as secretary and director of the Company, (ii) D1 was appointed the secretary of the Company, and (iii) P1 resigned as a director of the Company.

(e)   P1 has never resigned as director of the Company.  Until reading the Notification of 31 August 2002, P1 had no notice, had not participated in any board meeting when D1 was appointed company secretary, and had not agreed to the appointment of D1 as company secretary.

(f)   By another Notification dated 25 September 2002 to the Companies Registry, Lau King Fai, the 2^nd defendant (“D2”) purported to act a director of the Company and gave notice that (i) D2 and Li Hui Zhang, the 3^rd defendant (“D3”) were appointed directors of the Company on 25 September 2002.

(g)   By two consents to act as director both dated 25 September 2002 to the Companies Registry, D2 and D3 gave notice that they consented to act as directors of the Company.

(h)   By an undated fax received by the plaintiffs’ solicitors on 26 November 2002, Best Codes Management Limited on behalf of D1 alleged that P1 was removed as director by a special resolution passed at an Extraordinary General Meeting of the Company dated 31 August 2002 (“the alleged EGM”).  P1 had no notice of the alleged or any EGM held on or around 31 August 2002.

(i)   P2 and P3, the 2 registered shareholders of the Company, have no notice of and have not participated in or agreed to the holding of the alleged EGM or any EGM.

(j)   D3 had also purportedly acted as director of the Company to give notice to the Companies Registry of the change of the Company’s registered office.

(k)   The defendants had also purportedly acted for the Company to (i) enter into an agreement for selling the Property on 19 November 2002 to one Wylie Industrial Ltd for $2,700,000; (ii) enter into a settlement with D4 over a dispute on the repayment of an outstanding loan owed by the Company and secured by a 2^nd mortgage of the Property, which formed the basis of a Petition by D4 to wind up the Company under High Court Companies Winding Up No. 1034/2002, and (iii) cause the mandate of the Company’s account No 33-335-02404 with Overseas Trust Bank Limited be altered so that the previous signatory was no longer authorised to operate the said account.

7. The plaintiffs’ prayer for relief seeks the following:

(1)   A declaration that D1 is not and never was the company secretary, and that D2 and D3 are not, and never were the directors of the Company.

(2)   An injunction to restrain D1, D2 and D3 and each of them whether by themselves, their servants or agents or otherwise howsoever from holding themselves out and acting as, in the case of D1, company secretary, and in the case of D2 and D3, directors of the Company.

(3)   An injunction to restrain D4 whether by itself, its directors, servants or agents or otherwise howsoever from purporting to act as proxy or otherwise howsoever for or in the name of P2 and P3.

(4)   A declaration that the alleged EGM is void.

(5)   A declaration that P1 is the director of the Company.

8. By a summons under Order 14 dated 29 October 2004, the plaintiffs sought, inter alia, the orders as stated in sub-paragraphs (1), (2), (4) and (5) of the preceding paragraph.  Sub-paragraph (3) was not pursued in the application.

9. By a summons under Order 14A dated 23 June 2005, the plaintiffs applied for the determination by the court the following questions of law and/or construction, and in the event that any of the answers to the questions is in the negative, for final judgment as claimed in the action to be entered against the defendants:

QUESTION 1: Whether on the true and proper construction of clauses 5 and 6 of the Share Mortgage, D4 was entitled to convene an extraordinary general meeting of the Company without first having the shares of P2 and P3 transferred to and registered in the name of D4 and its nominees.

QUESTION 2: Whether D4 can have the shares of P2 and P3 transferred to and registered without applying to the old/existing board of directors (as at 30or 31 August 2002) consisting of P1.

QUESTION 3: Whether the new shareholders (even if which is denied they were) can remove P1 as a director without complying with s 157B of the Companies Ordinance.

10. By another Order 14A summons dated 28 June 2005, a further question was raised, namely,

QUESTION 4: Whether the giving of the Share Mortgage by P2 and P3 to D4 amounts to an agreement for the repayment of the money within s. 18 of the Money Lenders Ordinance, Cap 163 and if so, whether D4 was entitled to enforce the Share Mortgage without complying with s 18(1) and/or s 20(1) of the Money Lenders Ordinance.

11. The defendants’ Defence pleads the Share Mortgage and upon P2 and P3’s default in making repayment of the loan, D4 invoked the powers conferred on it by the Share Mortgage and duly convened the alleged EGM, appointing D2 and D3 as additional directors and D1 as the company secretary and removing P1 as director and Great Wealth as company secretary.  It is pleaded that P1 was removed as a director with effect from 31 August 2002 by virtue of the alleged EGM.  Thus, it is alleged that neither P1’s consent nor agreement to the appointment of D1 as the company secretary nor P1’s participation in any board meeting was necessary.  It is also pleaded that D1, D2 and D3 have been duly appointed under and by virtue of the alleged EGM and are entitled to act as secretary and directors of the Company and to hold themselves out as such. 

12. In the 2^nd Affirmation of D2, the following allegations are made:

(a)   As part of the security, on or about 11 January 2002, the following documents were delivered to D4, namely, instruments of transfer and contract notes executed in blank by P2 and P3 to transfer their shares in the Company to D4 or its nominees, resignation letters executed in blank by Mr Hau and Great Wealth who were the only two directors of the Company at the time, the common seal of the Company, and all the bank statements and cheques except bank statements and cheques of account No. 004-007-252465-001 of the Company with the HSBC.

(b)   On or about 11 January 2002, it was also agreed between P2 and P3 and D4 that (i) Mr Hau and Great Wealth would resign as directors of the Company and Great Wealth would resign as company secretary when so decided by D4 or its nominees; (ii) additional or new directors and new company secretary of the Company nominated by D4 be appointed when so decided by D4 or its nominees; and (iii) no new or additional director be nominated and appointed by P2 and P3 without consent of D4 or its nominees.

(c)   On 26 January 2002, Mr Hau resigned as director of the Company at the direction of D4 as it was unlawful for Mr Hau, having been adjudicated bankrupt, to hold the directorship.

(d)   Without knowledge or consent of D4, the name of P1 wrongfully and unlawfully appeared as a director of the Company in the Notification of Change of Secretary and Directors dated 26 January 2002 and signed by Mr Chan Man Kong Gilman (“Mr Chan”) on behalf of Great Wealth and filed with the Companies Registry.

(e)   In or around July 2002, P2 and P3 defaulted in repayment of the loan.  D4 exercised its rights under the Share Mortgage by, inter alia, dating the documents in (a) above (save Mr Hau’s resignation letter).  The effects of these documents, as intended, were that D3 and a company called Allbo Investment Limited (nominees of D4) became the shareholders of the Company and at the same time Great Wealth resigned as director of the Company.

(f)   By the alleged EGM of 31 August 2002 attended by D4 as proxy of P2 and P3, D1 was appointed company secretary, D2 and D3 were appointed as directors, and P1 was removed as director.

13. In the numerous affidavits/affirmations filed on behalf of the parties, various issues were raised and hotly contested.  For instance, there were allegations raised by the plaintiffs whether the loan of $600,000 was made to P2 and P3 or instead to the Company, and whether there were in fact two loans of $600,000 each or there was only one such loan.  This hotly contested dispute seemed to have ended (subsided and not resolved, I am afraid) when Mr Chan in his 8^th Affirmation stated that he was mistaken because the equitable mortgage (I understand that to mean the 2^nd mortgage of the Property) was not in relation to the loan of $600,000 made in 2002 but was in relation to a loan of about $2.6 million made in about 1999/2000.  Another important dispute is whether D4 had made demands dated 12 July 2002 on P2 and P3 for repayment of the loan, which demands the plaintiffs allege were fabrications.

14. As Mr Daniel Fung SC, appearing before us on behalf of the plaintiffs with Mr Benjamin Chain and Mr Jenkin Suen, accepted that all the facts which are subject to dispute should be taken in favour of the defendants for the purposes of determining the Order 14A questions and he did not insist on the determination of QUESTION 4, it is unnecessary to deal with these monetary disputes.

The judgment

15. In his judgment, the judge identified whether the $600,000 borrowed by P2 and P3 had been repaid as the main dispute between the parties.  He stated that the plaintiffs accepted that whether the loan had been repaid is an issue to be tried.  He noted the plaintiffs’ contention that even assuming that the loan had not been repaid, the plaintiffs were entitled to judgment under their Order 14 application.  Indeed, as noted in paragraph 10 of the judgment, Mr Rimsky Yuen SC for the plaintiffs before the judge, took the stance that the plaintiffs would take all the facts as put forward by the defendants in favour of the defendants.  This seemed to be subject to an exception, which is the defendants’ allegation that P1’s appointment as a director of the Company was without knowledge or consent of D4.  On this matter, the judge’s observed:

“12.   It should be remembered that the defendants have all along been saying that the 1^st plaintiff should not be appointed as a director.  That is in breach of an implied term of the share mortgage since it is quite clear that the whole objective of the share mortgage is to give the 4^th defendant the liberty to become shareholders and directors of Bullion [sic] Top if the loan is not repaid.  And by appointing the 1^st plaintiff as the director, they would have no control over the company.  Of course, Mr Yuen said that is quite inconceivable because when Hau was removed, it should be known to the defendants that the 1^st plaintiff was appointed as a director in his place. …” (Emphasis added.)

16. The judge ruled that the disputes could not be resolved on affidavits and that whether there was the implied term was an arguable point which should not be decided at this stage.  The judge accepted submissions by counsel for the defendants.  He said:

“15.   …  I would not go into the detail but suffice it for me to say that I accept Ms Lam’s submission that under section 100, the court has jurisdiction to rectify the Companies Register.  Section 100 could be pursued by originating summons under Order 102 or through Order 33, rule 3 within an action.  Miss Lam said there will be a counter-claim to that effect in the action here.”  (Emphasis added.)

17. The judge went on to conclude in the following manner:

“The decision

16.   All this boils down to one thing and I think it is this: was the $600,000 a loan repaid or not?  If it is not repaid, the 4^th defendant has every right to enforce the share mortgage, albeit certain rules or regulations or procedure was not properly followed.  For example, there is no proper requisition of an EGM from the director first when Great Wealth Trading Limited was still a director.  On 5 August 2002, the 4^th defendant could have done something better than what they have done.  But then, should the court rectify the position under section 100?  It all boils down to the original question whether the loan has been repaid.  If the loan has not been repaid, to my mind, that the plaintiffs should not gain their ground on a technical point only and the defendants should be given unconditional leave to defend.  If the loan has been repaid, there is no reason why the defendants should be allowed to remove the directors of the company even if they have followed the proper procedure.

17.   Therefore, the order is unconditional leave granted to the defendants to defend the action.” (Emphasis added.)

Grounds of appeal

18. On behalf of the plaintiffs, a number of grounds of appeal are raised.  While one of the grounds alleges that the defendants’ allegations of two loans of $600,000 were incredible and ought to be rejected, as I said before, this matter was not pursued before us.  The plaintiffs also filed a supplemental notice of appeal that raises an issue relating to the loan/loans.  Since Mr Fung did not press this matter either, I do not need to deal with it.

19. The other grounds challenge the judge’s decision not to determine the questions of law and construction as raised in the Order 14A summonses. 

20. The plaintiffs’ stance is that for the purposes of their applications under Orders 14 and 14A, even accepting all of the defendants’ allegations of fact as being true, the plaintiffs are still entitled as a matter of law to judgment.  It is contended that the judge erred in failing to determine the questions posed by the plaintiffs under its Order 14A summons of 23 June 2005, and that the questions should be answered in the negative, entitling the plaintiffs to judgment under Order 14.  Complaint is also made regarding the judge’s refusal to entertain the laws relating to companies on which the plaintiffs relied because he wrongly treated them as technical objections.

21. Right from the start of his address, Mr Fung stated that the purpose of these proceedings was to seek relief from the court to maintain the status quo ante before the alleged EGM which, on all the available evidence, was invalid.  He submitted that even if all the facts as supported by any evidence would be presumed in favour of the defendants, the questions posed in the Order 14A summons should be answered by the court and the answers would be negative, thus entitling the plaintiffs to judgment under Order 14.

The available facts from the evidence

22. It is therefore necessary to set out all the available facts from the evidence and also the presumed facts in favour of the defendants first before considering the related law so as to see if Mr Fung’s contention could be maintained.

23. The facts are as follows:

(1)   On 11 January 2002, P2 and P3, the only shareholders of the Company, mortgaged all their shares to D4 under the Share Mortgage.  At the time, Mr Hau and Great Wealth were the only two directors of the Company.

(2)   Great Wealth was still a director at the time of the resignation of Mr Hau on 26 January 2002.  Thereafter it remained a director although D4 dated its resignation as a director on 5 August 2002.

(3)   P1 was appointed as director of the Company on 26 January 2002 upon the resignation of Mr Hau.  It is alleged by the plaintiffs that P1’s appointment was valid because either it was appointed by the new owners of P2 and P3 or by Great Wealth as the only remaining director of the Company (pursuant to article (25) of the Company’s Articles of Association (“AA”).  On the other hand, the defendants alleged that P1’s appointment as director was without their knowledge and consent.

(4)   By virtue of the Share Mortgage, D4 was given all necessary blank transfer instruments for registering itself and its nominees as the shareholders of P2 and P3 and the blank resignation of Great Wealth, and D4 was at liberty to complete these documents to give effect to them as intended. 

(5)   By Clause 6(b) of the Share Mortgage, D4 was irrevocably authorised by P2 and P3 to act as their proxy.

(6)   It is presumed that sometime in July 2002, P2 and P3 had defaulted in repayment of the loan secured by the Share Mortgage.

(7)   By a notice dated 5 August 2002 for an EGM of the Company to be held on 31 August 2002 addressed to all members of the Company, given by D4 as proxy of P2 and P3, D4 proposed the following resolutions to be passed at the meeting, namely,

(i)   D2 and D3 be appointed directors with effect of the date of passing the resolution;

(ii)  The resignation of Great Wealth be accepted with effect from 1 August 2002;

(iii)  P1 be removed as director and Great Wealth be removed as secretary with effect of the date of passing the resolution; and

(iv)  Best Codes Management Consultants Limited be appointed secretary with effect from the date of passing the resolution.

(8)   The resolutions referred to above were passed at the EGM, which is the alleged EGM.

(9)   D4 or its nominees had not at any time been registered as shareholders of the Company.

24. It is, however, important to note that in spite of the voluminous affidavits/affirmations filed by the parties, there is no evidence of the following:

(1)   A resolution or instrument appointing P1 as director of the Company allegedly on 26 January 2002.

(2)   Any requisition by D4 or its nominees to the board of the Company for a meeting.

25. Mr Fung’s contention is based on the fact that notwithstanding D4’s rights and powers under the Share Mortgage, it had never been registered as a shareholder of the Company.  P2 and P3 had remained the registered shareholders.  D4 could only seek to be so registered by having the approval of the directors under article 7 of the AA, otherwise it had only an equitable right in the shares of P2 and P3.  The Share Mortgage did not help D4 in this regard.  These are all correct and are sufficient for the purposes of answering QUESTION 2 in the negative.  I shall return to this matter after dealing with QUESTION 1.

Question 1

26. The defendants’ case is that D4 had given the notice dated 5 August 2002 to convene the alleged EGM as an authorised proxy of P2 and P3 pursuant to clause 6(b) of the Share Mortgage, and indeed Mr Alexander Wong, for the defendants before us, relied heavily on this notice.  It will be remembered that Clause 6(b) of the Share Mortgage provides:

“The Shareholders by way of security hereby irrevocably authorize the Lender at any time (whether before or after the security hereby constituted has become enforceable) as and when the Lender thinks fit to act as their proxy in all general meetings of the Company and to raise requisitions in its name addressed to the directors of the Company for the purpose of convening general meetings pursuant to the Companies Ordinance, Cap.32 of the Laws of Hong Kong, or upon the failure on the part of the directors of the Company to convene such general meetings, to convene the same pursuant to the said Ordinance in its name and to exercise all voting rights attached to the Shares or any of them.”

27. The effectiveness of the notice and the validity of the EGM together with the resolutions passed thereat are challenged on the basis that the proper procedure for convening the alleged EGM had not been undertaken. 

28. The required procedure for convening a meeting is set out in the AA of the Company.  Article (25) of the AA provides:

“(25)     The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as the number of Directors is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose.  If there shall be no Directors able or willing to act, then any two members may summon a general meeting for the purpose of appointing Directors.”

29. Article 51 of Table A in the First Schedule to the Companies Ordinance (adopted per article (1) of the AA) is also relevant.  Article 51 reads:

“51.  The directors may, whenever they think fit, convene an extraordinary general meeting, and extraordinary general meetings shall also be convened on such requisition, or in default, may be convened by such requisitionists, as provided by section 113 of the Ordinance.  If at any time there are not within Hong Kong sufficient directors capable of acting to form a quorum, any director or any 2 members of the company may convene an extraordinary general meeting in the same manner as nearly as possible as that in which meetings may be convened by the directors.”

30. It can be seen therefore, that the procedure for D4 to follow by acting as proxy for P2 and P3 (as shareholders) as set out in clause 6(b) of the Share Mortgage is the same as that stipulated in the aforesaid articles. 

31. The notice dated 5 August 2002 was not a notice to the directors of the Company to requisition an EGM: it was expressed to be a notice to members of the Company and not the board.  It is therefore clear that the notice cannot be a requisition to the director(s) for a meeting.  On the face of the notice, although the written resignation of Great Wealth as director had apparently been dated, a resolution was sought to accept its resignation.  This demonstrates that Great Wealth’s resignation as director was still ineffective, and Great Wealth was at the time still a director.  Even if the validity of P1’s directorship is challenged, there was Great Wealth as the only remaining director.  Accordingly, a requisition for a meeting should have first been made to Great Wealth, and on the condition that Great Wealth was unable or unwilling to act as director having been satisfied, D4 as the proxy of all the shareholders would then be entitled to summon a meeting,.  However, the defendants have not alleged that a requisition had been made to Great Wealth or that Great Wealth was unable or unwilling to act, let alone adduced any evidence to that effect.

32. Thus, it is plain that without requisitioning for a general meeting, D4 was not entitled, as proxies for P2 and P3, to convene an EGM.  In the circumstances, the alleged EGM cannot be valid, and the resolutions passed thereat cannot be valid either.  The powers and rights given to D4 by the Share Mortgage did not and cannot help D4 in this regard.

33. Thus, it is a clear case that QUESTION 1 should be answered in the negative.  However, the question seems to be put on the premise that D4 was not registered as shareholders of the shares of P2 and P3.  In my view, that is not a necessary premise.  The reason for answering QUESTION 1 in the negative is because of the failure on the part of D4, even if properly and legitimately acting as proxy for P2 and P3, to follow the proper procedure for convening the alleged EGM.

Question 2

34. Now I shall further deal with QUESTION 2.  It is also plain that D4 and its nominees could not possibly have the shares of P2 and P3 transferred to them and registered as shareholders without applying to the existing board of directors.  Article (7) of the AA provides:

“(7)   The Directors may in their absolute discretion and without assigning any reason therefore, refuse to register the transfer of any shares.  If the Directors refuse to register a transfer they shall within two months after the date of which the transfer was lodge with the Company, send to the transferee notice of the refusal as required by Section 69 of the Ordinance.”

35. Moreover, section 28(2) of the Companies Ordinance provides:

“(2)   Every other person who agrees to become a member of a company, and whose name is entered in its register of members, shall be a member of the company.”

36. The status of a shareholder is only recognised when he is registered.  Before registration, the person who is entitled to a beneficial interest in shares is incomplete and he has no legal title to them.  Palmer’s Company Law, Vol 1, para 6.605, summarising the principle as enunciated in Societe Generale de Paris v Walker (1885) 11 App Cas 20 (HL) and Roots v Williamson (1888) 38 Ch D 485 states as follows:

“A transfer of the legal title is therefore incomplete until registered.  Pending registration, the transferee has only an equitable right to the shares transferred to him.  He does not become the legal owner until his name is entered on the register in respect of these shares.”

37. The reference to the court’s discretion under s 100 of the Companies Ordinance in rectifying the Company’s register so as to register D4 and its nominees as shareholders is a separate matter altogether.  No application has yet been made by the defendants for that relief.  In the circumstances of this case, that avenue open to the defendants should not be considered as having any impact on the determination of QUESTION 2.

38. Thus, it is again plain that QUESTION 2 must be answered in the negative.

The judge’s refusal to determine the questions

39. Despite the clarity of the situation, both on facts and law, the judge refused to determine these two Questions to which I have responded in the negative. 

40. In Shell Hong Kong Ltd v Yeung Wai Man, Kiu Yip Co Ltd & Anor [2003] 3 HKLRD 62, at 69, with the unanimous agreement of the other judges, Chan PJ stated:

“23.   In cases which involved the determination only of a question of law or the construction of a document or where the whole case largely depends on the solution of a question of law or the construction of a document, the O. 14A procedure is often adopted to put an early end to the entire case.  However, it can be seen that under the condition in (b), this procedure can be invoked for the purpose of finally determining not only the entire cause or matter but also ‘any claim or issue’ in the cause or matter.  It is not necessary for the making of an application under O. 14A that the determination of a question of law or construction of any document would finally determine the whole action.  Such a requirement would be wrong as a matter of ‘interpretation of the order and as an exercise of discretion’.  See Leggatt LJ in Korso Finance Establishment Anstalt v Wedge & Others (unrep., 15 February 1994, CA Transcript, at p. 7 (in which it was held that an issue of construction was still suitable for determination under O. 14A even though a determination of this issue would not finally determine the entire action between the parties).  If is sufficient if an issue in the case can be disposed of using such procedure.  However, it is not contemplated that the parties would submit a trivial matter for determination under O. 14A.  This would not only be contrary to the spirit and purpose of this procedure, but may also lead to possible abuse, resulting in unnecessary expense and delay and wastage of judicial time.  No judge would accede to that sort of request or application in the proper exercise of his discretion.” (Emphasis added)

41. In their Amended Statement of Claim, the plaintiffs pray for five substantive items of relief, which were reduced into four items in the Order 14 application (see paras 7 and 8 above).  The determinations of QUESTION 1 and QUESTION 2 would entitle them to judgment to three of the four items, namely, items (1), (2) and (4) under para 7 above.  As I have held, the facts and law are plain in the determination of QUESTION 1 and QUESTION 2, which would have the effect of disposing of the major issues between the parties.  The judge’s refusal to determine these Questions was essentially based on the parties factual dispute over whether the loan secured by the Share Mortgage had been repaid, but, in my view, this dispute should not, in the circumstances this case, present any justifiable obstacle for the court in dealing with the Questions.  In my judgment, the judge acted against principle in refusing to deal with these two Questions.

Order 14 judgment

42. For the reasons given above, and as QUESTION 1 and QUESTION 2 are answered in the negative, I would give the following judgment for the plaintiffs:

(1)   A declaration that D1 is not and never was the company secretary, and that D2 and D3 are not, and never were the directors of the Company.

(2)   An injunction to restrain D1, D2 and D3 and each of them whether by themselves, their servants or agents or otherwise howsoever from holding themselves out and acting as, in the case of D1, company secretary, and in the case of D2 and D3, directors of the Company.

(3)   A declaration that the EGM of 31 August 2002 is void.

Question 3

43. Now I turn to QUESTION 3, which relates to P1’s removal as director of the Company.  In my judgment, this is not suitable question for determination under Order 14A in the circumstances of this case.  The question only deals with the non-compliance of the notice requirement under s 157B of the Companies Ordinance.  But a decision on this question does not help resolve the more fundamental issue whether P1 has since 26 January 2002 been a director of the Company, which is the effect of the declaration sought in the plaintiffs’ prayer for relief.

44. When the Share Mortgage was executed on 11 January 2002 by P2 and P3 as the two only shareholders of the Company in favour of D4, the only two directors of the Company were Mr Hau and Great Wealth.  Mr Hau resigned on 26 January 2002 and Great Wealth was the only director left.  It is alleged by the plaintiffs that P1 has become a director since 26 January 2002, but the plaintiffs’ evidence is to the effect that P1 was appointed by the new owners of P2 and P3.  Yet on the actual identity of the persons who made the appointment, the procedure by which the appointment was made, and how a change of ownership was achieved since the share certificates had been deposited with D4 pursuant to the Share Mortgage, the evidence remains silent.  The appointment is challenged by the defendants as having been made without their knowledge or consent.  It is alleged in a couple of affidavits filed on behalf of the plaintiffs that the defendants are estopped from denying P1’s appointment by reason of the fact that the alleged EGM of 31 August 2002 purported to remove P1 as a director.  But as to how the alleged EGM should operate as an estoppel and whether P1 relied on this alleged EGM to its detriment, there is absolute silence.  In the circumstances, I am not inclined to express any view that P1’s appointment or position as director is valid, nor am I prepared to assume that P1’s appointment must be valid for the purpose of answering QUESTION 3.  Moreover, it is contended on behalf of the defendants that a term was necessarily implied in the Share Mortgage that P2 and P3 would not appoint P1 or any other person to be a director of the Company without D4’s consent, for otherwise D4 would lose control of the Company which was or was intended to be given to it by the Share Mortgage.  Similar to the judge’s decision, I do not need to decide this matter in this appeal.  Suffice it to say, the appointment of P1 as director of the Company being invalid is a fact-sensitive matter and the implied term is reasonably arguable.  The question whether P1 was a director is interwoven with factual issues.  Similarly, whether any notice (having the effect of a s 157B notice or not) had been served on P1 appears also to be in dispute.  If the court were to answer these questions, it would in effect give a legal ruling in vacuo or a ruling on the hypothetical basis in a “fact sensitive case”: see Netwell Properties Ltd v JCG Finance Co Ltd [2004] 2 HKLRD 138 at 141E, per Rogers VP.  A determination of QUESTION 3 is therefore premature at this stage and would not have the effect any where close to a final resolution of the issues between the parties on this matter. 

45. Suffice it for the present purposes, my answer to QUESTION 1 being in the negative will entitle the plaintiffs to the declaration that the alleged EGM is void, and the resolutions purportedly passed in it, including the resolution to remove P1 as director, is also void.  However, as explained in the preceding paragraph, I am not persuaded that the court should make a declaration that P1 is a director of the Company.

46. In my judgment, the judge cannot be criticised for refusing to exercise his discretion in determining QUESTION 3.

Conclusion

47. For the above reasons, I would allow the appeal and give judgment in favour of the plaintiffs as aforesaid.

Appeal on costs

48. There is a ground of appeal that challenges the judge’s order for costs.  The judge said:

“20.   Costs in the cause except the costs of the plaintiff’s summons dated 28 June 2005 and the hearing on 5 July 2005 be to the defendants in any event.  … I consider that the defendants are entitled to have costs in respect of the hearing on that day occasioned by the adjournment which was, in turn, occasioned by the new Order 14A amendment sought from me and that is in respect of adding question No. 4.” 

49. This order for costs under appeal is in respect of QUESTION 4, the question posed by relying on the provisions of ss 18 and 20 of the Money Lenders Ordinance.  Mr Fung only briefly addressed us on the appeal against the costs order.  His contention is simply that the adjournment of the hearing date for the summons fixed on 5 July 2005 was sought by the defendants, and thus either they should bear the costs of the adjournment or the costs should be in the cause of the action.  Moreover, the costs of the Order 14A summons dated 28 June 2005 should in any event be in the cause.  As I see it, the adjournment of the hearing on 5 July 2005 was sought because the defendants were confronted with the difficulty created by that summons which raised a matter entirely new and additional to the questions raised in the Order 14A summons of 23 June 2005.  Since Mr Fung has not pursued QUESTION 4 before us, which would have involved factual disputes between the parties, I am of the view that for the reasons given by the judge, his order for costs was properly made.  I would therefore dismiss this appeal against the costs order.

Costs of this appeal and below

50. Since I would allow a substantial part of this appeal and the plaintiffs have quite properly not pursued the monetary disputes and only very briefly addressed us on the appeal against the costs order, I would make an order nisi that the plaintiffs have their costs of this appeal.  Regarding the costs below, I would make an order nisi that the plaintiffs have their costs, save that in respect of the Order 14A summons dated 28 June 2005 and the wasted hearing date of 5 July 2005, the costs be to the defendants.

Cheung JA :

51. I agree.

Yeung JA :

52. I agree with the judgment of Woo VP and the orders, including the costs orders, that he proposes.