CHAN NGAI SING v. RUBBER TECH INDUSTRIAL LTD

HCA 625/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 625 OF 2007

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J U D G M E N T

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1.    The plaintiff is appealing against the decision of the master on 29 October 2007 in striking out the action for being an abuse of process of the court and/or frivolous and vexatious.

Background

2.    The present case is concerned with the declaration and payment of dividends of the defendant between 1996 and 2006. 

3.    The defendant was formed in 1993 to take over the Rubber Tech Factory, the partnership business of Mr. K.K. Chan.  The plaintiff is the eldest son of Mr. K.K. Chan.

4.    Initially, the shareholding of the defendant was as follows:

The plaintiff	1,900,000 shares	(95%)
Mrs. K.K. Chan (nee KY Tang)	100,000 shares	(5%)

The plaintiff did not provide any consideration for the 95% shares.

5.    The defendant’s financial year ends on 31 March.  In the year 2003/04, the plaintiff transferred 75% of his shares to Mr. K.K. Chan, Mrs. Chan and his younger brother Mr. C.O. Chan, retaining the remaining 20% of the shares.

6.    The plaintiff was a director of the defendant until 25 October 2006.  The plaintiff did not maintain any current account with the defendant, but Mr. K.K. Chan did.

7.    The Articles of the defendant adopted Table A of the Companies Ordinance (Cap. 32) with variations.  The relevant articles are:

(1)	Art. 5: the defendant shall be entitled to treat the registered holder of any shares as the absolute owner thereof, and shall not be bound to recognize any equitable interest in the shares by any other person;
(2)	Art. 15(8): the directors shall have the power to declare and pay dividends to the shareholders;
(3)	Art. 116: the directors may from time to time pay to the members such interim dividends as appear to be justified by the profits of the company.

8.    There is a related action HCA 600/2007 commenced by the defendant against the plaintiff on 23 March 2007, 4 days before the present action, seeking to recover the alleged unauthorized drawings of about $4 million by the plaintiff.

The claim

9.    The plaintiff is claiming the balance of interim dividends declared but unpaid to him between 1999 and 2006 in the sum of $12,136,538 with interest:

Year	Interim dividend Declared	Plaintiff’s shareholding	Plaintiff’s “dividend entitlement”
1999/2000	$6,000,000	95%	$5,700,000
2000/2001	$7,000,000	95%	$6,650,000
2001/2002	Nil	95%	Nil
2002/2003	$5,800,000	95%	$5,510,000
2003/2004	$6,000,000	20%	$1,200,000
2004/2005	Nil	20%	Nil
2005/2006	$3,932,690	20%	$786,538
2006/2007	Nil	20%	Nil
Total			$19,846,538

10.    The plaintiff gives credit of $7,710,000 for payments of dividends received during the following years:

And the balance due is $12,136,538.

11.    Except for 2002/2003, the plaintiff relied on the declaration of interim dividends as recorded in the Directors’ Reports in the audited accounts for the relevant years.  The relevant Directors’ Reports stated that “The directors have declared an interim dividend of [$X] per share totalling [$Y] which was paid to the shareholders during the year.”

12.    As to 2002/2003, the Directors’ Report stated that the directors did not recommend to pay any dividend.  The plaintiff relied on the minutes of a board meeting dated 31 October 2002 signed by Mr. K.K. Chan resolving that an interim dividend of $2.90 per share amounting to $5.8 million be paid to the shareholders of the company registered at the close of business on 31 October 2002, with the plaintiff share being $5,510,000, and Mrs. Chan’s share being $290,000.

13.    The plaintiff has signed as a director on the 2001/2002 and 2002/2003 audited accounts of the defendant.

The defence

14.    In support of the defendant, Mr. K.K. Chan deposed that the plaintiff is a nominee shareholder holding the shares on trust for him, and he had received all the interim dividends declared through his current account with the defendant. 

15.    The defendant produced a letter dated 28 February 2002 addressed to Mr. K.K. Chan, signed by the plaintiff and Mr. K.K. Chan stating that the 1.9 million shares in the defendant belonged to Mr. K.K. Chan, and the interim dividend of $6,650,000 paid on 28 February 2002 belonged to Mr. K.K. Chan (“Declaration of Trust”).  The plaintiff alleged that the Declaration of Trust was a forgery.

16.    The defendant averred that the $7.71 million received by the plaintiff were not dividends, but unauthorized drawings from the defendant.

Grounds for striking out

17.    Mr. Barlow SC, for the defendant, submitted the following grounds for striking out the action:

(1)	A company is not legally liable to pay dividend twice over where it has already been paid to a 3rd party, albeit wrongly;
(2)	The plaintiff’s claim is bogus as he well knew that he had no beneficial entitlement to the shares and/or the dividends;
(3)	The claim for the balance of the dividends due for 1999/2000 and 2000/2001 was statute barred;
(4)	The 2002/2003 interim dividend was not due and payable as it was only proposed (as per the minutes) but not declared (as per the Director’s Report);
(5)	The plaintiff’s signature on the audited accounts of 2001/2002 and 2002/2003 was confirmation that all dividends declared by the defendant from 1999/2000 to 2002/2003 were already paid by the defendant to the shareholders;
(6)	The non-statute barred dividends, if any, were satisfied by payments admittedly received by the plaintiff exceeding the sum.

Legal principles on striking out

18.    It is for the defendant seeking to strike out the plaintiff’s claim to show that it is clear and obvious that the claim was abusive, vexatious or frivolous.

19.    It is an abuse of process to bring an action for claims known to be statute barred (see Ronex Properties Ltd v. Laing [1983] 1 QB 398 (CA); Akai Holdings Ltd (In Liquidation) v. Domine Ko Cheong Wing and others (HCCL 20/25 per Stone J dated 9 June 2006).

20.    It is also an abuse of process to plead a case known to be a sham (see Overseas Trust Bank Ltd v. Coopers & Lybrand & ors [1990] 1 HKLR 568 (CA)).

21.    In deciding on whether a point is plain and obvious, the Court will not resolve any question of facts in favour of the applicant save it is uncontrovertible, nor to resolve complex question of law requiring further argument.

Payment of the interim dividend to non-shareholder

22.    Mr. Barlow submitted that Mr. K.K. Chan admitted receiving all the dividends throughout the years, and the defendant is not liable to pay the same dividends twice over.  The plaintiff may only sue the directors for wrongful payment and/or Mr. K.K. Chan for restitution.

23.    Mr. Barlow relied on the principle that a dividend is a share of profits allocated to the shareholders of the company, and it can only be paid out of the profits and not out of capital (see Gore-Brown on Companies (45^th ed.) Vol. 1, para. 25[2]). 

24.    Mr. Barlow pointed out that under the Articles of the defendant, it is for the directors to declare a dividend, interim or final, if there are moneys available for distribution.  Once the dividend is declared and paid, there is no profits to support the declaration of the dividend twice over.  Hence, if the dividend is paid to the wrong recipient, the company is not liable to pay the dividend twice over.  The directors are liable to claims for recovery of dividend improperly paid (see Halsbury’s Laws of Hong Kong (2005 Reissue) Vol. 6(1) para. [95.0753]).  The recipient may also be sued for money had and received, if he is not entitled to the dividend.  Indeed, Mr. K.K. Chan averred that he should be the right defendant.

25.    Mr. Kat SC, for the plaintiff, queried Mr. Barlow’s proposition as not supported by authorities, as indeed there is no such authority. 

26.    Mr. Kat submitted that once a dividend has been declared and becomes payable, it constitute a debt immediately payable to the shareholders.  The position is the same for an interim dividend declared and paid (see Gore-Brown Vol. 2, para. 47[27]).  Hence, it was submitted that a shareholder is entitled to sue the company upon the dividends being due and payable, and the debt to the shareholder is not extinguished by the company paying away the dividends to a third party.

27.    Mr. Kat relied on the principle that unless the articles otherwise provide, dividends are payable to those who are registered shareholders at the time of the declaration (see Gore-Brown para. 25[17]), and s. 101 of the Companies Ordinance (Cap.  32) provides that “No notice of any trust, expressed, implied, or constructive, shall be entered on the register, or be receivable by the Registrar.” 

28.    In the present case, Art. 5 makes similar provision as s. 101 of the Companies Ordinance, and Art. 15(8) provides that the directors shall have power to declare and pay dividends to the shareholders.

29.    As this stage, I do not consider that it is plain and obvious and beyond argument that a company is, as a matter of principle, not liable to a shareholder in debt for dividends wrongly paid to a third party. 

30.    It remains whether the plaintiff is precluded from claiming against the defendant in the circumstances of this case.

Bogus claim

31.    Mr. Barlow did not argue the bogus claim point in any detail but without abandoning it.  

32.    An allegation of fraud cannot be dealt with on paper.  The plaintiff has produced open correspondence between himself and the other shareholders during 2006 stating that they were pleased that the plaintiff remained as a shareholder and were not interested in buying the plaintiff’s shares.  Hence, I am not satisfied that it is plain and obvious that the plaintiff was abusing the process by bringing a bogus claim knowing that he had no beneficial entitlement.

2002/2003 interim dividend declared but not paid

33.    It is common ground that an interim dividend is only due when actually paid by the company (see Gore-Brown Vol. 2, para. 27[27]; Company Law in Hong Kong: Practice and Procedure, para. 11.097).

34.    Further, no interest is payable on company dividends prior to judgment  (see Gore-Brown, Vol. 1, para. 25[17]).

35.    Mr. Kat submitted that the board resolution dated 31 October 2002 amounted to a declaration of interim dividend of $5.8 million for 2002/2003, and the Directors’ Report in recommending that no declaration of dividend for that year did not override the earlier declaration.

36.    Mr. Barlow submitted that Mr. Kat’s proposition is wrong in law.  He submitted that an interim dividend is paid on account of the final dividend.  An interim dividend is due only when actually paid by the company.  The declaration of any interim dividend does not create a debt immediately payable.  It is open to the board at any time before payment to review its decision and resolve not to pay.  Therefore, shareholders have no right to enforce payment of an interim dividend when declared (see Company Law in Hong Kong: Practice and Procedure para. 11.097). 

37.    The Directors Report for 2002/2003 stated that the directors did not recommend to pay any dividend for that year.  The audited accounts for 2002/2003 showed nil payment of dividends.  The plaintiff has signed on 2002/2003 audited accounts of the defendant.  Mr. K.K. Chan also deposed that no interim dividend was paid for 2002/2003.

38.    The plaintiff alleged that Mr. K.K. Chan was responsible for the preparation of the accounts and he signed the audited accounts without reading.   However, the plaintiff was a director of the company, and he had confirmed by signing that no dividend was paid for 2002/2003.  I do not consider that there was compelling reasons to go behind the audited accounts.

39.    Hence, I find it is plain and obvious that no interim dividend was declared and paid for 2002/2003.

Statute of limitation

40.    The relevant limitation period to recover dividends declared but not paid is 6 years, being an action founded on a simple contract (see Company Law in Hong Kong: Practice and Procedure para. 11.100, citing In Re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] AC 146).

41.    The present action was commenced on 27 March 2007.  Hence, the relevant period of limitation ends on 28 March 2001.

42.    Mr. Kat submitted that the Directors’ Reports for 1999/2000 and 2000/2001 were only signed on 28 January 2002 and 28 February 2002, hence, the dividends for those years were only declared and paid on those dates, making them within the limitation period.  

43.    With respect, I do not agree.  The respective Directors’ Report clearly stated that the interim dividend was declared and paid “during the year”, which must mean the relevant financial years.  It cannot mean the year when the Directors Report was signed.

44.    Alternatively, Mr. Kat submitted that apart from the evidence of Mr. C.O. Chan that $800,000 out of the 2000/2001 interim dividends were paid to Mr. K.K. Chan on 15 June 2000, there was no documentary evidence disclosed as to when the interim dividends for the respective years were paid.   Mr. C.O. Chan only became a director of the defendant on 30 November 2000, 5 months after the alleged payment, and the payment of $800,000 was only supported by a non-descriptive bank entry.  Mr. C.O. Chan’s evidence should be tested against the accounting documents.  Hence, the defendant cannot plainly and obviously establish the payment dates of the interim dividends as fixing the liability, and payment date could be taken to be the respective year end dates.

45.    And applying the First-in First-out principle of accounting, the receipts of $7.71 million will first go towards the satisfaction of the plaintiff’s share dividends of $5.7 million for 1999/2000, making it unnecessary to claim for that year.  Then the balance of the receipts will go partly towards the satisfaction of the plaintiff’s share of $6.65 million for 2000/2001.  Since it is arguable that the payment of the 2000/2001 interim dividend was on 31 March 2001, the claim of the balance of the 2000/2001 interim dividend was within the limitation period by 4 days.

46.    Mr. Barlow submitted that the FIFO principle is not applicable as the plaintiff has by the pleadings appropriated the dividends received to the respective years of payment.

47.    Mr. Kat pointed out that there was no such appropriation as the Defence pleaded that the $7.71 million was payments of dividends on account in accordance with the FIFO principle.

48.    I noted that Mr. Barlow was himself applying the FIFO principle in appropriating the $1.5 million received in 2002/2003 (where there was no declaration of interim dividend as per the Directors’ Report) towards the balance of 2000/2001 dividend, leaving the payments of $4.41million received by the plaintiff in 2005/2006 and 2006/2007 in excess of the plaintiff’s claim for balance of unpaid dividend for 2003/2004 and 2005/2006 by $2,423,462, hence, extinguishing the non-statute barred claim.

49.    In the premises, I am not satisfied that it is plain and obvious that the plaintiff’s claim for 2000/2001 was statute barred. 

Audited accounts of the defendant

50.    Mr. Barlow relied on the audited accounts of the defendant as conclusive evidence that all the dividends had been paid to the shareholders.

51.     Further, the plaintiff has signed as a director the 2001/2002 and 2002/2003 audited accounts of the defendant, covering the accounts for the years 2000/2001, 2001/2002 and 2002/2003 by reason of the inclusion of the comparative past year’s figures in any current year’s accounts.  Hence, the effect of the plaintiff’s signature in the 2001/2002 audited accounts was also to confirm the 2000/2001 audited accounts.  The 2000/2001 profits and loss accounts stated the dividend payment of $6 million, which tallied with the Director’s Report that dividends of $6 million were paid to the shareholders of the company during the year. 

52.    And the plaintiff’s signature on the 2002/2003 audited accounts confirmed the payment of all dividends to the shareholders up to that year by reason of the nature of accrual accounting.

53.    Mr. Barlow submitted that removing the claims up to 2002/2003, the net effect was an overpayment to the plaintiff:

Year	Plaintiff’s “dividend entitlement”	“Dividends received by Plaintiff	Balance b/d
2003/2004	$1,200,000		$1,200,000
2004/2005	Nil		$1,200,000
2005/2006	$786,538	$780,000	$1,206,538
2006/2007	Nil	$3,630,000	($2,423,462)

The defendant was suing to recover, inter alia, this $2,423,462 in HCA 600/2007.

54.    Mr. Kat submitted that the audited accounts were inconclusive:

(1)	The statement in the relevant Directors’ Reports that the dividends were paid to the shareholders during the current year was contradicted by Mr. K.K. Chan’s admission that all the dividends were paid to him;
(2)	The Directors’ Report for 2001/2002 stating that no dividend was declared and paid during that year was inconsistent with the Declaration of Trust which stated that the interim dividend of $6.65 million paid on 28 February 2002 belonged to Mr. K.K. Chan.

55.    Mr. Barlow submitted that the reference to the $6.65 million dividend must clearly have been to the 2000/2001 interim dividends by reason of the identity of the figure, and the discrepancy was more apparent than real.

56.    The statement that the dividends were paid to the shareholders was not inconsistent with receipt by Mr. K.K. Chan if that was done with consent of the plaintiff.  And the plaintiff has signed to confirm the accounts as at and up to 2002/2003.

57.    As I have observed above, the plaintiff was a director of the defendant, and he had signed off the audited accounts of the defendant for 2001/2002 and 2002/2003.  That dealt with the claim before 2002/2003.  For the rest of the years the plaintiff had received payment in excess of the claim.

58.    The present claim (except for 2002/2003 which has been dealt with above) was based on the declaration and payment of the interim dividends as stated in the Director’s Reports and audited accounts.  Hence, it was not up to the plaintiff to approbate on the declaration of the interim dividend and to reprobate on the payment to the shareholders.

Conclusion

59.    In the premises, the appeal is dismissed.

Costs

60.    I make an order nisi that the plaintiff do pay the costs of and occasioned by the appeal to the defendant, to be taxed if not agreed.