GAB GESELLSCHAFT FUR AUSLANDBETEILIGUNGEN A.G. v. ITALORIENT ENTERPRISE LIMITED AND OTHERS

M.P. 2752 of 1987

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. This is an application by the 2nd defendant to set aside an order that I made in favour of the plaintiff on the 31st December 1987 against the six defendants on an ex parte hearing upon notice given to the 1st defendant. However, no steps have been taken by the other five defendants to discharge the order.

2. The 1st defendant was incorporated on the 3rd August 1977 with a nominal capital of HK$1,000,000 divided into 1,000,000 shares of HK$1 each of which 312,503 shares have been issued and are credited as fully paid up. The plaintiff is the holder of 218,753 shares and the 2nd defendant holds 93,750 shares. Although it was contended that the shares of the 2nd defendant are held on trust for the plaintiff, for the purposes of the present application and at the ex parte hearing the 2nd defendant has been treated as the beneficial owner.

3. The 4th and the 5th defendants were former directors of the 1st defendant but resigned at a meeting held on the 30th December 1987. Nevertheless, the plaintiff disputes the validity of their appointments.

4. The present directors of the 1st defendant are the 2nd defendant who is the managing director, the 3rd defendant and Ms Martelli. Ms Martelli is the only representative of the plaintiff on the board while Mr A. Zancanaro is her alternate director.

5. The 2nd and 3rd defendants have been concerned in the day to day management of the company in Hong Kong while the plaintiff which is a company incorporated in Switzerland, has, in effect, been a sleeping partner. The nub of the issue is a complaint by the plaintiff that it has been prevented from participating in the management of the 1st defendant by the conduct of the 2nd and 3rd defendants.

6. When the ex parte application was heard, I had before me an affidavit sworn by Mr Zancanaro on the 2nd December 1987 in another action, M.P. 2532 of 1987 between the plaintiff and the 1st defendant which was filed in support of an originating, summons for an order to convene a meeting of the 1st defendant under section 114B of the Companies Ordinance together with an affidavit of the plaintiff's solicitor Mr P.A. Turner.

7. Apart from being an alternate director for Ms Martelli, Mr Zancanaro had been appointed by the plaintiff to make an investigation into the affairs of the 1st defendant and to convene an ordinary or extraordinary general meeting for, inter alia, approving the 1986 balance and the appointment of the hoard.

8. During the course of his investigations, Mr Zancanaro ascertained that since its incorporation, there had been many anomalies in the running of the 1st defendant including the failure to pass any special resolution and the failure to give notice of board meetings to the other directors.

9. It is provided by Article 8(a) of the Articles of Association of the 1st defendant that a quorum for the transaction of business at any general meeting shall be two members present in person or by proxy. The plaintiff made an attempt to participate in the management of the 1st defendant when a resolution was proposed by Mr Zancanaro whereby one share of the plaintiff would be transferred to Ms Martelli. However, at the meeting of the company held on the 8th August 1987 the proposal was rejected by two votes to one when the 2nd and 3rd defendants voted against the proposal. Subsequently, the plaintiff submitted a requisition for the holding of an extraordinary general meeting on the 2nd November 1987 but this proved abortive as neither the 2nd defendant nor the 3rd defendant attendedinded with the result that the meeting was dissolved as it was inquorate.

10. Accordingly, an originating summons was filed on the 26th November 1987 by the plaintiff against the 1st defendant, for an order that an extraordinary general meeting be convened under section 114B for the purposes of passing an ordinary resolution that there be no maximum number of directors and that nine named persons he appointed to the board. The hearing for the originating summons was fixed for the 12th January 1988 when I made an order for a meeting to be convened on the 3rd February 1988 with a quorum of one. However, that meeting has since been adjourned to a date to be fixed pending the delivery of my judgment on the present application.

11. On the 8th December 1987, a letter was written on behalf of the 2nd defendant to the 1st defendant claiming sums by way of unpaid salary which amounts have been disputed by the plaintiff. The plaintiff also raised queries with regard to the draft accounts of the 1st defendant for the year ended the 31st December 1986. It is also anticipated that queries will be raised with regard to the accounts for the year ended the 31st December 1987 which have not so far been produced.

12. The 2nd defendant gave notice on the 15th December 1987 that a meeting of the board of the 1st defendant would be held on the 17th December 1987. Mr Zancanaro attended the meeting when the 2nd defendant stated that the company was technically insolvent and that unless fresh funds were injected, it might be necessary to commence a voluntary winding-up. On the 23rd December 1987, Mr Zancanaro received notice that a board meeting would be held on the 30th December 1987 for the purpose of considering the critical financial situation of the company and whether it should continue in business. Mr Zancanaro said that he would be unable to attend due to a previous engagement and requested that the meeting be postponed to the 31st December 1987, but this request was refused. The meeting was duly held on the 30th December 1987 when a resolution was passed to wind up the company voluntarily and Mr D. Joradn, the 6th defendant, of Kwan Wong Tan & Fong, a firm of accountants, was appointed as provisional liquidator. The passing of the resolution to wind up the company led to the ex paste application on the 31st December 1987.

13. Essentially, the plaintiff's argument is that the 2nd defendant's action by putting the 1st defendant into voluntary liquidation amounted to a deliberate attempt to thwart the hearing on the 12th January 1988 for an order to convene the extraordinary general meeting thereby failing to act in the best interests of the majority shareholder. The plaintiff also objected to the passing of the resolution on the grounds that it has not been possible to ascertain the true financial position of the company to determine whether it is in fact insolvent.

14. On the evidence placed before me, I acceded to the application and upon the plaintiff's undertaking as to damages and to serve a summons for the same relief upon the 1st defendant, I made an order declaring that the resolution to wind up the company was null and void together with consequential orders including taking any step to present a petition to wind up the company under the Companies Ordinance.

15. Upon the present application in addition to the evidence presented at the ex parte hearing, I had before me two affidavits sworn by the 2nd defendant and two further affidavits from Mr Zancanaro.

16. In his first affidavit sworn on the 11th January 1988, the 2nd defendant states that he is a ceramics engineer and is the managing director of the 1st defendant. In 1970, he was employed by the world's largest ceramics company, Sacmi SpA of Milan of which Mr Cicorella was the managing director. Mr Cicorella resigned as managing director of this company in February 1977 when he was given a controlling, interest in another Italian ceramics company, Welko Industriale SpA (Welko), a company in which he already held a minority interest. The 2nd defendant accepted an invitation by Mr Cicorella to join Welko and became one of the directors.  He worked for Welko from February 1977 until the middle of 1979 in Italy and Yugoslavia. Having completed his work upon a joint venture with Welko, he eventually accepted, from Mr Cicorella, a Post in Hong Kong during the summer of 1979 with the 1st defendant. He said that the purpose of coming to Hong Kong was to close down the company although this is disputed by Mr Zancanaro. However, as the business of the 1st defendant proved to be more successful than anticipated it was decided to continue the business and it eventually became the representative company of Welko and the 2nd defendant eventually became the managing director. The 2nd defendant said that the plaintiff was set up as Mr Cicorella's nominee company as it would have been illegal for him to own his own shares in the 1st defendant direct having regard to Italy's Exchange Control Laws. This allegation was also denied by Mr Zancanaro who said that the plaintiff was formed in 1971. The plaintiff, therefore, represents the shareholding of Mr Cicorella in the 1st defendant.

17. During the middle of 1984, the 2nd defendant decided to resign from the 1st defendant and notified Mr Cicorella to this effect. However, after some discussion, Mr Cicorella offered to give the 2nd defendant a 30% interest in the 1st defendant if he would remain as managing, director. This offer was accepted and 30% of the shares of the company were transferred by the plaintiff to him. After the shares had been transferred, anew agency agreement was entered into on the 2nd January 1985 between Welko and the 1st defendant under which the company's commission was increased. The 2nd defendant denied that he holds the shares on behalf of the plaintiff but as I have said, this does not arise upon the present application for he has been treated as the beneficial owner.

18. The 1st defendant is ostensibly a subsidiary of the plaintiff but there was almost no communication between the company and the plaintiff during the 2nd defendant's eight years' service with the company. The 2nd defendant states that he received all his instructions with regard to the running of the 1st defendant direct from Mr Cicorella. Welko has provided numerous guarantees for the company's performance relating to various large sums including a sum of US$600,000 from Hong Kong Electric Holdings. There is clearly a close connection between the plaintiff, the 1st defendant and Welko.

19. The 2nd defendant claims that the origin of the dispute arose in the middle of 1985 when Mr Cicorella said that he wished to retire from the active management of the group and asked him to accept the position in his place. The 2nd defendant at first accepted, but later declined with the result that since that time, there has been considerable bitterness between them.

20. By November 1986, the 2nd defendant said that the dispute had become so serious that he was induced to resign from the board of Welko. He claims that he was entitled to a pension worth about US$22,000 under Italian law, but that Welko had refused to pay this sum so that he was compelled to issue proceedings in Italy. As Welko had no defence to the claim judgment was entered in his favour.

21. As a result of the agency and commission arrangements between Welko and the 1st defendant, Welko has, according to the 2nd defendant, become heavily indebted to the company but has refused since the 1st March 1987 to pay the amounts that are due. The 2nd defendant went on to say that in March 1987, Welko, with the assistance of the company and himself engaged in negotiations for a very large contract worth about US$19,000,000 with a company in the People's Republic of China which would have resulted in a commission to the company of nearly US$2,000,000. However, he states that in an attempt to avoid payment of commission, Welko purported to cancel the agency agreements in June 1987.  Following Welko's default, the company's financial position deteriorated rapidly with the result that the 1st defendant commenced proceedings against Welko in Italy in July 1987 to enforce the terms of the agency agreement and to recover commission due totalling about US$3,200,000.

22. The 2nd defendant states that the only current asset of the 1st defendant of any substantial value is the claim against Welko. He referred to other assets of the 1st defendant, but they are long term investments. However, he admitted that a sum of HK$925,543 is owed to the 1st defendant by Ceramics Minerals Engineering Limited of which company he is the sole beneficial owner.

23. The largest creditor of the company is Hong Kong Electric Holdings which is owed US$240,000, being the balance due for amounts advanced. to the company for the purpose of a joint venture in the People's Republic of China. Repayment of the loan which is guaranteed by Welko is by three instalments of US$80,000 in November, 1987, 1988 and 1989, but following its financial difficulties, the 1st defendant has been unable to pay the first instalment due in 1987.

24. The 2nd defendant also claims to be a major creditor of the 1st defendant for monies advanced to the company for outgoings and staff salary which should have been paid by Welko.

25. Despite his contention that the 1st defendant is insolvent, the 2nd defendant says that if the company were to recover from Welko the sums due, it should have a very large surplus. As a major creditor and a 30% shareholder of the company he would he a substantial beneficiary of any surplus whereas  Mr Cicorella would not benefit. He believes that Mr Cicorella owns about 90% of Welko and that any payment by Welko to the company of which he only owns 70% would effectively be paying a 30% share of the money to himself. However, according to Mr Zancanaro, Mr Cicorella's interest is 68.3%. Accordingly, he believes that it is Mr Cicorella's intention to obtain control of the board of the company through his nominee, the plaintiff, and then to discontinue the company's litigation against Welko in Italy. To this extent, he contends the interests. of the company are in direct opposition to those of its 70% shareholder, the plaintiff, the nominee of Mr Cicorella. The 2nd defendant is therefore of the opinion that Mr Cicorella is attempting to take control of the company in order to frustrate the proceedings in Italy against Welko so that the application under section 114E is not for the benefit of the 1st defendant but for the benefit of Mr Cicorella.

26. As to the events of the 2nd November 1987, the 2nd defendant says that he was in Italy at the time holding meetings with his lawyer with regard to the company's action against welko and that Mr Cicorella knew that he would he unable to attend the meeting on that day. He also says that he wrote two weeks before to the effect that he would be unable to attend and had also mentioned this fact to Mr Zancanaro at the company's meeting on the 21st October 1987 when he had suggested that the general meeting be postponed until early December after he returned from Italy.

27. The 2nd defendant states that he and the 3rd defendant decided to pass the resolution to wind up the company as they had in good faith formed the opinion that the company could not pay its debts as they fell due and in particular the first instalment of US$80,000 due to Hong Kong Electric Holdings on the 30th November 1987. They concluded that the appointment of a liquidator would result in an investigation of the affairs of the company which would safeguard the interests not just of the majority, but also of its creditors and minority shareholders. The plaintiff contends that the 2nd and 3rd defendants acted unreasonably in passing the resolution.

28. It is significant that by section 228A(2) of the Companies Ordinance any director who makes a declaration under sub-section (1) with regard to passing a resolution to wind up the company voluntarily without having reasonable grounds for his opinion that the company, by reason of its liabilities, cannot carry on business shall be liable to a fine of $10,000 and to imprisonment for six months.

29. A petition was presented on the 11th January 1988 on behalf of the plaintiff against the 1st defendant claiming relief under section 168A of the Companies Ordinance on the grounds that the affairs of the company are being conducted in a manner unfairly prejudicial to the plaintiff. Similar relief to that claimed in the originating summons under section 114B is sought together with an order for the appointment of an accountant to ascertain the financial position of the company and to make a written report to the Court and for a declaration that the 2nd defendant holds his shares on behalf of the plaintiff or in the alternative, that he be ordered to sell them to the plaintiff. The 2nd defendant is agreeable to a sale of his shares provided that the price is calculated on the basis that Welko has repaid its debt to the 1st defendant in full and that the company discharges its indebtedness to him.

30. Mr Zancanaro made a second affidavit on the 27th January 1988 in support of the present summons. He says that he is also an employee of Welko which position he has held since the 1st June 1987. He disputes the validity of the 2nd defendant's appointment as managing director of the company, because Ms Martelli did not receive notice of the meeting that was held on the 12th January, 1985 when his appointment was made.

31. Mr Zancanaro refers to the plaintiff and Welko having common interests in the ceramics industry, but that the Corporate structures of the companies are separate. He denied the 2nd defendant's assertion that Welko and the plaintiff are involved with each other to the extent that Mr Cicorella was aware of the full details of the present dispute whilst Ms Martelli had no idea of the feud or grievances that the 2nd defendant appears to have against Mr Cicorella. He also disputed that the 2nd defendant had ever been a director of Welko. Other allegations made by the 2nd defendant were disputed by Mr Zancanaro but it is unnecessary for me to summarise them all for the purposes of this application.

32. With regard to the litigation in Italy, Mr Zancanaro says that Welko has a counter claim amounting, to US$643,851.48 but admitted that a sum of US$22,000 is owed to the 2nd defendant although he denied that judgment for this sum had been obtained in Italy. He also confirmed that Welko had guaranteed the payments to Hong Kong, Electric Holdings and was making arrangements to pay the first instalment shortly.

33. The plaintiff contends that the present financial position of the company As not so serious as to justify the resolution to wind up the company. It is the intention of the plaintiff that once proper accounts of the company have been prepared by independent accountants appropriate steps will be taken to resolve the present financial difficulties of the company, including, if necessary, the continuation or discontinuation of the litigation in Italy. Further it has been. argued that if the financial position of the company was so serious, the 2nd defendant should have sought the assistance of the majority shareholder, the plaintiff, at an earlier time and not for the 2nd and 3rd defendants to oppose the participation of the plaintiff in the management of the company. The plaintiff, therefore, contends that the dispute between the company and Welko appears to stem from a personal grievance on the part of the 2nd defendant rather than from his role as a director of the company.

34. Mr Smith who appeared for the 2nd defendant submitted four grounds on which the order should be discharged :-

35. In respect of the first ground, Mr Smith cited in support of his argument International General Electric Company of New York Ltd., & Another v. Commissioners of Customs and Excise⁽¹⁾ where it was held that an order declaring the rights of parties must in its nature be a final order and (subject to appeal) be res judicata between the parties. In his judgment at page 789 and 780 Upjohn, L.J. had this to say:-

36. I arm quite satisfied that this submission is correct and indeed Mr Allman-Brown for the plaintiff conceded that the order in these terms was a mistake although he did not concede that it amounted to a declaration. In my judgment, however, I am of the opinion that it does amount to a declaration and that the order as drawn should not have been made. The intention of the order was to preserve the status quo not to determine finally the rights of the parties. In fact the second part of the order adequately protects the rights of the plaintiff and reflects the true intention of the order. The first part was drawn in error and I overlooked the mistake when I approved the order.

37. The second ground that the summons had not been served was misconceived for the order related to the service of the originating summons to be issued, for at the time of the ex parte application, no documents had been filed. If I understood him correctly Mr Smith effectively abandoned this ground because the originating summons was duly filed and served pursuant to the undertaking.

38. In respect of the undertaking for damages given by the plaintiff, the 2nd and 3rd defendants have issued a summons for security for costs in the present proceedings and also in the proceedings issued under section 168A. However, Mr Allman-Brown has informed me that his instructing solicitors have received $160,000 which they have undertaken to retain until the application for security for costs has been considered. This proposal was accepted by Mr Smith so this issue no longer arises.

39. The principal argument put forward for the discharge of the order is based upon an allegation that there was material non-disclosure of facts by the plaintiff upon the ex parte application. The law as to material non-disclosure is clear and my attention was drawn by Pig Smith to the well known authority The King v. The General Commissioners for the Purposes of the Income Tax Acts for the District of Kensington⁽²⁾ which deals with the duty of making a full and fair disclosure of all material facts upon an application made ex parte. In his judgment at p.509 Warrington, L.J. had this to say:-

40. Mr Smith also referred me to another case on the issue of non-disclosure, Siporex Trade S.A. v. Comdel Commodities Ltd.⁽³⁾ where Bingham, J. at p.437 said:-

41. Mr Smith relies upon four instances of material non-disclosure which he submitted should have been disclosed to the Court at the ex parte hearing which are as follows:-

42. He emphasised that Mr Zancanaro's affidavit that was before me at the ex parte hearing had been sworn on the 2nd December 1987, four weeks before the resolution to place the company into voluntary liquidation on the 30th December 1987, and that it was made in support of the section 114B application. None of the matters upon which complaint was made was set out in the affidavit but could only be found in the exhibits. The only references to Mr Cicorella were in paragraph 3 of exhibit AZ9, but there was no indication of his connection with the plaintiff or Welko.

43. Mr Smith argued that in effect the relationship between the 1st defendant and Mr Cicorella's nominee, the plaintiff amounted to a quasi-partnership which had broken down so that it was just and equitable for the company to be wound up because the company is insolvent.

44. Despite requests made by the plaintiff for a meeting to be convened, the 2nd defendant. showed a lack of co-operation and was dilatory in replying to correspondence. There was no evidence to support the 2nd defendant's contention that the object of obtaining control by the plaintiff was to enable the company to stopthe Italian litigation which is the crux of the issue relating to material non-disclosure. The plaintiff has in fact given an undertaking to take no action to withdraw or compromise the Italian proceedings subject to the Court's supervision with liberty to apply. Further, there is no intention by the plaintiff to oust the 2nd defendant from the board.

45. It is particularly significant that the resolution to wind up was not passed until after the originating summons to convene the meeting had been issued. There was plainly a connection between the plaintiff's application and the passing of the resolution to wind up. Further evidence to substantiate this fact was the refusal by the 2nd defendant to hold the meeting on another date so as to accommodate Mr Zancanaro.  No reason was given as to why an alternative date could not have been arranged.

46. The resolution to wind up the company voluntaeily was on the ground that the 1st defendant is insolvent. However, the evidence in no way shows conclusively at this stage, as to whether the 1st defendant is insolvent. Whilst Mr Smith raised the issue of a quasi-partnership, and that it is just and equitable that the company should be wound up, this issue can only be decided after evidence has been heard.

47. The application for the injunction arose following the passing of the resolution which was clearly intended to frustrate the plaintiff's attempts to convene a meeting under section 114B which has therefore deprived the plaintiff from becoming involved in the management of the company. No reason was given for the refusal of the plaintiff's request, which was perfectly reasonable. There is also evidence to show that the 2nd and 3rd defendants did not have reasonable ;rounds to pass the resolution. Accordingly the existence of monies outstanding to Hong Kong Electric Holdings and the litigation in Italy. were not material facts that had any effect on my decision. Further, the interests of Mr Cicorella in the plaintiff, the 1st defendant and Welko did not constitute material facts which had any bearing on my determination while the 2nd defendant's shareholding was not relevant. As a result, none of the matters referred to by Mr Smith related to facts that were material to the hearing of the application upon which there was non-disclosure by the plaintiff. The argument in respect of material non disclosure therefore fails.

48. In the result, the first part of the order will be discharged, but the other terms will remain in force until further order.

(1)    [1962] 1 Ch. 784

(2)    [1917] 1 K.B. 486

(3)    [1986] Vol.2 L1.L.R. 428