MA CHING YUK v. MA CHING NAM AND OTHERS

HCMP 3478/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3478 OF 2013

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HCMP 3479/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3479 OF 2013

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D E C I S I O N

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1.  I have two originating summonses before me issued by Ma Ching Yuk, who is a director and shareholder of the two companies which are the subject of the applications.  The first concerns Heptacontinental Continuation Limited (“HCL”).  The second concerns one of its shareholders, Heptacontinental Investment Company Limited (“HICL”).

2.  The companies were part of a group originally established by Ma King Ming.  He had seven children, including three sons, the plaintiff and the 1st and 2nd respondent.

3.  Mr Ma, his wife and children held shares in various companies with an interest in HCL and HICL.  Appended to this judgment is a chart showing those companies, their shareholders and directors.  This has been prepared by the plaintiff. 

4.  In 2003, Ma King Ming died, his wife died three years later in 2006. 

5.  In September 2007, the Tai Sang Commercial Building was sold.  HCL owned 19 per cent of the building which was its only asset, and since that time it has held the proceeds of sale which exceed quarter of a billion Hong Kong dollars.

6.  In the audited financial statement for the year ending 31 December 2010, it states that as at the end of the year HCL had accumulated profits of HK$253,928,512. The auditor’s report contained qualifications. 

“(1) As stated in Note (3c) to the financial statements, interest income are accounted for on cash basis. This is not in accordance with the accrual concept stated in Hong Kong Accounting Standard 1 (Revised).

(2) We have not been provided with the Company’s statutory records and board and shareholders’ meeting minutes. Accordingly, we are unable to ascertain whether there exist any matters that can affect the amounts and disclosure in the financial statements.

(3) We are aware that several litigations has been ongoing against the Company during the year. We have not been provided with documentation on these litigations. There were no practical alternative audit procedures that we could adopt to assess the financial impact of these litigations on the Company. Accordingly, we are unable to ascertain whether there exist any contingent liabilities or matters that can affect the accounts and disclosures in the financial statements.

(4) No audited financial statement for the year ended 31 December 2005 is available for our examination. In consequence, we are unable to satisfy ourselves as to the correctness of the opening accumulated profits appearing in the balance sheet at HK$255,119,860.

(5) Included in other payables was amount due to director of HK$1,002,250 in respect of which direct confirmation has not been returned and we have not been provided with sufficient documentary evidence as to the directors’ remuneration of HK$274,300. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves as to the truth and correctness of such amounts.”

7.  On 6 September 2011, a Board meeting took place approving a recommendation that there be a declaration of an interim dividend and convening an extraordinary general meeting at which shareholders would have the opportunity to consider and approve the Board’s recommendation.

8.  The Board meeting was attended by Ma Ching Nam and Ma Ching Shun.  No objection is taken to the means by which either meeting was convened. 

9.  On 6 October 2011, the extraordinary general meeting was adjourned at the request of the plaintiff in order to give HICL the opportunity to participate at the extraordinary general meeting.  On 19 October 2011, the Board of HICL convened a meeting for 26 October 2011 to consider the proposed resolution approving a declaration of dividend by HCL.  HICL holds seven Class A shares in HCL but has minimal economic interest in it. 

10.  On 22 October 2011, the 1st and 3rd respondents, who are directors of both companies and own 11.764 per cent of HCL, respectively declared their interest.  The Board appointed the 1st respondent to represent it at HCL’s extraordinary general meeting which was held on 3 November 2011 approving the interim dividend which is now being distributed.  HICL received $18,200.

11.  The plaintiff objects to what took place for the following reasons:

(1) He points out that because the accounts were qualified section 79G(4) of the Companies Ordinance, Cap 32 was engaged.  That subsection provides:

“The auditors shall in that case also have stated in writing (either at the time of their report or subsequently) whether, in their opinion, the matter in respect of which their report is qualified is material for determining, by reference to items mentioned in section 79F(2), whether the distribution would contravene the relevant section; and a copy of the statement shall have been laid before the company in general meeting.”

This has not occurred.  This was not a procedural irregularity that could be waived by members.  Section 79G had been contravened and the payment was ultra vires HCL.

(2) It followed that the directors who had approved the Board resolution on 6 September 2011 were in breach of their fiduciary duties. 

(3) Although the plaintiff did not have, as a member, a cause of action which he could pursue against the company for recovery of the dividend, and is not planning to try and recover them, he had locus to apply to the court for relief in respect of an ultra vires act.

(4) There was no reason in principle why that relief should not take the form of a declaration that section 79G had been breached and that the 1st and 3rd respondents had breached their fiduciary duties. 

12.  I accept that section 79G had been contravened.  I also accept that if the plaintiff had been aware that a declaration of dividend would contravene section 79G, which he was not at the time, he had locus to apply to enjoin the company from putting the offending resolution before the members at the extraordinary general meeting.

13.  It is not suggested that in resolving to recommend an interim dividend, the directors were acting mala fides. 

14.  The plaintiff has not stated precisely how the 1st and 3rd respondents had breached their fiduciary duties.  I understand it to be, in broad terms, that they did not take steps to ensure that the requirements of the Companies Ordinance had been complied with.  I note that the plaintiff himself does not appear to have ever suggested that the Board should take professional advice prior to the declaration of a dividend.

15.  A director is under a fiduciary duty not to exceed his powers, and if he causes a company to dispose of its assets in a manner which is prohibited by the Companies Ordinance he will be in breach of his fiduciary duties: see “Directors Personal Liability” Pennington, 1st edition, paragraph 3.04.

16.  It seems to me that the 1st and 3rd respondents did breach their fiduciary duties. 

17.  Rule of the High Court, Order 15 rule 16 states:

“No action or other proceeding shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby, and the Court may make binding declarations of right whether or not any consequential relief is or could be claimed.”

18.  As Litton VP, as he then was, observed in Lee Miu Ling v The Attorney General [1996] 1 HKC 124 at 136:

“The court’s jurisdiction to give such relief is governed by Order 15 rule 16 which, in effect, limits the court’s powers to make ‘binding declarations of right’.”

19.  This is explained in Gouriet v Union of Post Office Workers in the judgment of Lord Diplock.

“(2) Gouriet v. Union of Post Office Workers [1978] AC 435 per Lord Diplock at 501:

‘...Nothing that I have to say is intended to discourage the exercise of judicial discretion in favour of making declarations of right in cases where the jurisdiction to do so exists. But that there are limits to the jurisdiction is inherent in the nature of the relief: a declaration of rights.

The only kinds of rights with which courts of justice are concerned are legal rights; and a court of civil jurisdiction is concerned with legal rights only when the aid of the court is invoked by one party claiming a right against another party, to protect or enforce the right or to provide a remedy against that other party for infringement of it, or is invoked by either party to settle a dispute between them as to the existence or nature of the right claimed. So for the court to have jurisdiction to declare any legal right it must be one which is claimed by one of the parties as enforceable against an adverse party to the litigation, either as a subsisting right or as one which may come into existence in the future conditionally on the happening of an event.

The early controversies as to whether a party applying for declaratory relief must have a subsisting cause of action or a right to some other relief as well can now be forgotten. It is clearly established that he need not. Relief in the form of a declaration of right is generally superfluous for a plaintiff who has a subsisting cause of action. It is when an infringement of the plaintiff's rights in the future is threatened or when, unaccompanied by threats, there is a dispute between parties as to what their respective rights will be if something happens in the future, that the jurisdiction to make declarations of right can be most usefully invoked. But the jurisdiction of the court is not to declare the law generally or to give advisory opinions; it is confined to declaring contested legal rights, subsisting or future of the parties represented in the litigation before it and not those of anyone else’.”

20.  As the Court of Appeal explains in Terrian Limited v. Oriental Peer Company Limited [1987] 2 HKC 61, the granting of relief under Order 15 rule 16 is not limited to circumstances in which the applicant has a cause of action.  It is not in dispute that because of the Prudential principle the plaintiff does not have a personal right to recover the dividends that had been wrongly declared and paid.  The question is whether he has a right that has been affected in such a way as to justify the court granting the discretionary remedy of a declaration. 

21.  The precise ambit of a member qua member’s personal right, as opposed to his right by derivative action, to seek relief in respect of an ultra vires act has not been fully explored before me.  But it seems to me on balance that if, as is not disputed, a member could take action qua member to enjoin the declaration of a dividend that would be ultra vires, he has locus to seek a declaration after the event in order to establish that a wrong has taken place which needs to be cured.  He does not necessarily have to take the more substantial step of commencing a derivative action. 

22.  However, the remedy is discretionary, and even if a breach of section 79G has taken place, it does not follow that a declaration should be granted. 

23.  On balance, I do not think it should be in the present case.  It is not suggested by the plaintiff that the dividend should be paid, and it seems clear from the 2011 accounts that the company would have no difficulty in lawfully declaring a dividend should what has been distributed be refunded.

24.  It also seems more likely than not, given the shareholding and what I have to say in respect of the next action, that the shareholders would approve any new resolution to approve dividends.

25.  I also accept Mr Stock’s submission, that as the plaintiff himself did not raise any technical objections to the declaration of dividend at the time, and as illustrated by qualification (4) referred to above in the audited accounts for 2011, a matter which occurred at a time when he had a more pivotal role in respect the management of HCL, that it is rather lame for him now to express concern about corporate governance and anxiety to establish a mistake has been made to ensure that similar mistakes are not made by other associated companies in the future. 

26.  I therefore dismiss the originating summons in respect of HCL.

27.  The complaint in regard to HICL is different. 

28.  The plaintiff complains that it was not in HICL’s interest to vote in favour of the resolution, and that the Board only resolved to do so to advance their own interests.  He says that they should have convened an extraordinary general meeting and asked the members of the company to vote on the matter.

29.  As the estates of neither parent are in administration, it seems unlikely that if this had taken place it would have produced a different result.  Be that as it may it does not seem to me that the plaintiff has established a breach of fiduciary duty. 

30.  The 1st respondent explains his, and the 2nd and 4th respondents’, approach to the matter, in paragraphs 5 to 8 of his affirmation in opposition to the application. 

“5. The corporate structure is clear as to its intent and effect. HICL was the legal and beneficial owner of seven class A shares in HCL. I fully accept that, in terms of voting rights, the situation is different in that it holds and can vote 70,000 votes in HCL which comprises a 41.18% voting right. I would also accept this constitutes a weighted voting in favour of HICL in comparison to its ownership interest in HCL. This, however, as I said at the outset of my Affirmation in HCMP No. 3478 of 2013, recognises the corporate structure that my father put in place through Ma Kam Ming Company Limited ("MKMCL") so that my mother and the three brothers could, effectively, operate and control the structure after he passed away. Since my father and mother have both passed away, the operation and control of the structure has vested in the three brothers, myself, the 2nd Respondent and the Applicant. It follows that where there is a unity of interest and agreement between myself and the 2nd Respondent, given the structure, this means that we hold the majority of votes through the corporate structure. This said, we have always sought to resolve matters by way of discussion of all issues. This, however, has not been possible due to the reluctance of the Applicant to communicate with his siblings. The other siblings from time to time have differing views, but we manage to resolve our differences of opinion through sensible discussions.

6. I do not accept that there were no commercial rationale behind the 26 October 2011 board resolution to appoint myself as the authorised representative of HICL to attend HCL's EGM and to vote in favour of an interim dividend distribution to and amongst the shareholders of HCL.

7. In my view, as I have explained in my Affirmation in HCMP No. 3478 of 2013, it was in the interests of all the shareholders of HCL for the interim dividend distribution to be made – because of the effect of quantitative easing and inflation the value of the proceeds of sale of the building, which were then held in Tai Sang Bank Limited by HCL, were in real terms diminishing rapidly and substantially. Therefore a distribution was in the best interests of all shareholders.

8. In paragraph 9 of his Affirmation, the Applicant suggests that the 1st to 4th Respondents failed to take into account the views of HICL's shareholders. This is incorrect: (a) because the shareholders are common to each of HICL and HCL (with the exception of Heptacontinental Development Company Limited) and, (b) as I have now repeated on multiple occasions, ultimately voting control rests in and between myself, the 2nd Respondent and the Applicant. It is therefore entirely inconceivable that if the shareholders had been consulted higher up the corporate structure, ultimately in and amongst the shareholders of MKMCL, that the resolution would not have been passed - both I and the 2nd Respondent were and are of a like mind in this respect.  It is therefore also inaccurate that in passing the 26th October 2011 board resolution the Respondents, including myself, bypassed and ignored the views of HICL's shareholders.”

31.  This is developed further in paragraphs 11 to 13 of the 1st respondent’s affirmation in the HCL action. 

“11. The building was sold in September 2007 and HCL’s proceeds of sale were held at an account of HCL in Tai Sang Bank Limited from that point until the distribution of the Interim Dividend. The effect of quantitative easing and inflation meant that holding the proceeds of sale in an account earning little or no interest meant that the value of the moneys so held was diminishing rapidly and substantially. Prior to the distribution of the Interim Dividend, there was never any discussion or agreement as to the utilisation of the money.

12. All the siblings will say they were and remain unable to communicate with the Applicant which meant that their relationship with the Applicant was unworkable. As I mention above, the concept of HCL was a continuation, but on a harmonious basis. Our inability to communicate with the Applicant meant that we were unable to harmoniously continue with HCL.

13. In consequence and because of the effect of quantitative easing and inflation, we siblings agreed and remain agreed that it would be in the best interests for all the shareholders if the proceeds of sale of the building were distributed pro rata in accordance with their shareholdings in HCL by way of interim dividend. The rationale for this was that, as we were unable to agree with the Applicant how to move forward with the proceeds of sale, and because they were diminishing in real value, it would be better that they were distributed to each of us so that we could each do what we considered correct or appropriate with them.”

32.  This seems to me to be a reasonable view for the directors of HICL to have taken.  The plaintiff has taken a different view, but I have difficulty seeing how, given HICL’s minimal economic interest in HCL, it could be said on the basis of the affirmation evidence, there having been no cross-examination, that the 1st to 4th respondents have breached their fiduciary duties to HICL. 

33.  Section 115 of the Companies Ordinance provides that a company may by special resolution appoint a person to be its corporate representative for the purposes of voting shares held in another company.  I do not think in the circumstances the Board exercising this right and not referring the matter to shareholders can be said to be wrong, although the question may be capable of debate. 

34.  I will therefore dismiss the originating summons in respect of HICL.

(Submissions on costs)

35.  I am just going to make orders that the costs follow the event. 

Appendix