XCHRX DAVID YUK WAH HO v. GAO JIA REN AND ANOTHER

HCCW399/99 and HCA7720/99

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H E A D N O T E

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Company - exclusion of statutory right to present a winding-up petition - effect

Controlling stake of joint venture partners in the main holding company (G Ltd) of the joint venture vested in M - provision in joint venture agreement abrogating M's right as contributory to petition for winding-up of G Ltd - whether provision valid

In re Peveril Gold Mines Ltd and Russell v. Northern Bank Development Corporation Ltd considered

HCCW399/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP

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AND HCA7720/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7720 OF 1999

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D E C I S I O N

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1. A petition to wind-up Greater Beijing Region Expressways Limited ("GBRE") on the just and equitable ground was presented by Miracle Chance Limited ("Miracle") on 5 May 1999. The present application is to decide a preliminary issue namely, whether the following resolution dated 5 May 1999 ("the Resolution") is valid and effective :

" I, the undersigned, Gao Kun, being the registered holder of 65 percent of the issued shares of and in the Company contained in share certificate number 1, at this date, do, pursuant to Article 82 of the Company's Articles of Association, resolve :-

1. Petition

THAT a petition for the winding-up of Greater Beijing Region Expressways Limited on the just and equitable ground be presented to the High Court of The Hong Kong Special Administrative Region.

..."

2. The shareholders of Miracle are Gao Kun also known as Gao Jia Ren and also known as Karl Golden ("Mr Gao") and David Yuk Wah Ho ("Mr Ho") in the proportions 65% to 35%. They are also the sole directors of Miracle.

3. Article 1 of the Articles of Association of Miracle defined "resolution of members" as meaning and including, inter alia, a resolution consented to in writing by an absolute majority of the votes shares entitled to vote thereon. Article 82 provided that :

"82. An action that may be taken by the members at a meeting may also be taken by a resolution of members consented to in writing or by telex, telegram, cable, facsimile or other written electronic communication, without the need for any notice, but if any resolution of members is adopted otherwise than by the unanimous written consent of all members, a copy of such resolution shall forthwith be sent to all members not consenting to such resolution. The consent may be in the form of counterparts, each counterpart being signed by one or more members."

The articles thus contain a mechanism for a paper resolutions to be passed by a majority shareholder as an alternative to action being taken by members at a general meeting.

4. It is relevant to note at this point that the Court of Appeal (in CACV298/1998) in allowing Miracle's appeal against the dismissal of its action in HCA5544/1998 against Mr Ho as having been commenced in Miracle's name without authority held (at pp.5-6) that where the board of directors is ineffective and not acting, the power to commence and pursue proceedings which had been delegated by the Articles to the directors reverts to the person or persons who delegated, namely, the company in general meeting. It further held that a general meeting was unnecessary in view of the definition of 'resolution of members' in Article 1 considered above.

5. Accordingly, the only question which arises for determination by this court is whether the Resolution is in breach of the Joint Venture Agreement and, if so, whether that has the effect of rendering the Resolution invalid and ineffective.

The Joint Venture Agreement

6. On 16 August 1996, Mr Gao, Carnation Developments Limited ("Carnation"), the alter ego of Mr Ho and Miracle entered into an agreement to govern the joint venture which Mr Gao and Carnation had agreed to establish for the purpose of setting up a group of companies to develop, construct, operate and manage a portfolio of strategic expressway and bridge projects around Beijing with a view to enjoying the good returns from such infrastructure projects. Carnation transferred all its shares in Miracle to Mr Ho on 6 March 1997.

7. The expressed intention of the parties as stated in Article 2 is that Miracle should hold a controlling stake in GBRE, the proposed main holding company of the joint venture. Further, Mr Gao and Mr Ho's respective interests in the issued share capital of Miracle would be in the proportions 65 to 35. Chapter 5 of the Joint Venture Agreement dealt with the management of Miracle and the GBRE group, each of which was referred to as the "Relevant Company". Article 17 vested all decisions in the board of directors of Miracle or, in the case of a member of the GBRE group, GBRE save for those governed by Article 18. Article 18, inter alia, provided as follows :

"18 For each Relevant Company the following shall be matters which require the approval of both Shareholders:

.......

(d) The winding-up of the Relevant Company (except upon expiration of the relative concession rights) or its merger or amalgamation with another company or the disposal of substantially all its assets;

..."

Article 19 went on to provide :

"19. In the event that unanimity is not achieved in respect of a matter proposed under Articles 17 and 18, whether at a formal meeting or other forum, a Shareholder who put forward the proposal may serve a written notice of a meeting at seven (7) days space to consider afresh the proposal, and if at such further meeting the Directors of Miracle or GBRE, or the Shareholders, are still unable to come to a unanimous decision whether because the relevant persons cannot come to an agreement or the relevant persons do not attend, then the said Shareholder may serve a further notice on the other Shareholder and Miracle (a) that a deadlock has occurred and (b) (at the option of such Shareholder) either that the Directors of Miracle shall act immediately to wind up Miracle (the other Shareholder to take all steps to cooperate in such winding up) or that the other Shareholder shall sell all its Miracle Shares (as defined in Article 23) or purchase all the said Shareholder's Miracle Shares (such sale or purchase to be dealt with under Chapter 8 as if a breach had occurred under Article 28(e) and the other Shareholder were a Defaulter thereunder)."

Breach of the Joint Venture Agreement

8. Leading counsel for the Applicants submitted that in view of Article 18(d) of the Joint Venture Agreement, in procuring or being responsible for the Resolution Mr Gao was plainly in breach of Article 18(d) and that the court should restrain such a breach by Mr Gao. Further, if the allegations in the petition were true, far from not having any redress, such redress is to be found in the Joint Venture Agreement itself : it is open to Mr Gao to terminate the Joint Venture Agreement, to wind-up Miracle or opt for a buyout or purchase under Article 19, and/or sue Mr Ho. In any event, the real question was Miracle's authority to present the petition. A breach of Article 18(d) necessarily meant that Miracle did not have the requisite authority. For that reason, the Resolution must be invalid and ineffective.

9. In response to those submissions, Miracle attacked the validity of Article 18(d) itself which became the main issue in the case and to which I now turn.

Exclusion of statutory right to present a winding-up petition

10. At the heart of the submissions of leading counsel for Miracle is the proposition that any provision in the articles of a company limiting or excluding the right of a contributory to present a winding-up petition is void and ineffective, as being in conflict with the provisions of section 177 of Cap.172 and as being against the public policy. See In re Peveril Gold Mines Ltd. [1898] 1 Ch 122. Miracle is a contributory of GBRE. If the articles of association of GBRE had contained a provision fettering Miracle's right to present a winding-up petition, it would be struck down as being contrary to the statutory rights conferred on Miracle by Cap.32. It was submitted that it matters not whether the fetter is contained in the articles of association of GBRE or in some private agreement. So long as such an agreement has the effect of abrogating the statutory right of a contributory to present a winding-up petition, on the reasoning in In re Peveril Gold Mines Ltd., it must be struck down.

11. Although the judgment of the Court of Appeal in In re Peveril Gold Mines Ltd. left open the question whether a valid contract may or may not be made between the company and an individual shareholder that he shall not petition for the winding-up of the company, it is stated in McPherson on the Law of Company Liquidation, 3rd Edn. (1987) at 112 that :

"Such an agreement would directly offend against the policy of the Act and, for this reason, would, it is submitted, not be given effect."

12. For the Applicants, it was submitted that the Joint Venture Agreement was nothing more than a contract between shareholders inter se as to how they would exercise their rights and, as such, is valid.

13. Both the Applicants and Miracle seek support for their respective positions from Lord Jauncey's speech in Russell v. Northern Bank Development Corporation Limited [1992] 1 WLR 588. It is therefore necessary to consider that decision in some detail. It concerned the validity of an agreement between shareholders and the company TBL which contained a provision in the following terms :

"3. No further share capital shall be created or issued in the company or the rights attaching to the shares already in issue in any way altered (save as is herein set out) or any share transfer of the existing shares permitted, save in the following manner, without the written consent of each of the parties hereto."

The relevant statutory provision is Article 131 of the Companies (Northern Ireland) Order 1986 :

"(1) A company limited by shares or a company limited by guarantee and having a share capital, if so authorised by its articles, may alter the conditions of its memorandum in any of the following ways. (2) The company may - (a) increase its share capital by new shares of such amount as it thinks expedient;..."

After noting that the agreement was executed not only by the shareholders but also by TBL, Lord Jauncey referred to the decision of the Court of Appeal in Bushell v. Faith [1969] 2 Ch 438 which concerned the validity of one of the articles of association of a private company which provided that in the event of a resolution being proposed at a general meeting for the removal of a director, any share held by him should carry three votes per share. It was held in that case that the article was not invalidated by section 184 of the Companies Act 1948 which empowered a company by ordinary resolution to remove a director. Lord Jauncey cited the dicta of Russell LJ at 447-448 :

"Mr Dillon argued by reference to section 10, and the well known proposition that a company cannot by its articles or otherwise deprive itself of the power by special resolution to alter its articles or any of them. But the point is the same one. An article purporting to do this is ineffective. But a provision as to voting rights which has the effect of making a special resolution incapable of being passed, if a particular shareholder or group of shareholders exercises his or their voting rights against a proposed alteration, is not such a provision. An article in terms providing that no alteration shall be made without the consent of X is contrary to section 10 and ineffective. But the provision as to voting rights that I have mentioned is wholly different, and it does not serve to say that it can have the same result." (emphasis added)

He then observed at 594E-595A :

" I do not doubt that if clause 3 had been embodied in the articles of association so as to be binding on all persons who were or might become shareholders in T.B.L. it would have been invalid but it was, of course, not so embodied. To my mind the significant part of this dictum for the purposes of this appeal is the words 'articles or otherwise' occurring in the first sentence thereof. These words appear to recognise that it is not only fetters on the power to alter articles of association imposed by the statutory framework of a company which are obnoxious.

Turning back to clause 3 of the agreement it appears to me that its purpose was twofold. The shareholders agreed only to exercise their voting powers in relation to the creation or issue of shares in T.B.L. if they and T.B.L. agreed in writing. This agreement is purely personal to the shareholders who executed it and as I have already remarked does not purport to bind future shareholders. It is, in my view, just such a private agreement as was envisaged by Lord Davey in Welton v. Saffery [1897] A.C.299, 331. T.B.L. on the other hand agreed that its capital would not be increased without the consent of each of the shareholders. This was a clear undertaking by T.B.L. in a formal agreement not to exercise its statutory powers for a period which could, certainly on one view of construction, last for as long as any one of the parties to the agreement remained a shareholder and long after the control of T.B.L. had passed to shareholders who were not party to the agreement. As such an undertaking it is, in my view, as obnoxious as if it had been contained in the articles of association and therefore is unenforceable as being contrary to the provisions of article 131 of the Companies (Northern Ireland) Order 1986. T.B.L.'s undertaking is, however, independent of and severable from that of the shareholders and there is no reason why the latter should not be enforceable by the shareholders inter se as a personal agreement which in no way fetters T.B.L. in the exercise of its statutory powers."

14. The fact that the relevant agreement is dehors the articles is not determinative of its validity. Whilst various passages in Lord Jauncey's speech might appear to provide comfort to both parties it is essential, first, to focus on the statutory right in question. More particularly, it is important to bear in mind in whom the right is vested. In the present case the relevant statutory right is Miracle's right as a contributory of GBRE to petition for the latter's winding-up. It is in that context that the effect of the provision in question (i.e. Article 18(d)) has to be assessed. What is in issue is not Mr Gao and Mr Ho's respective rights as contributories of Miracle but Miracle's rights as a contributory of GBRE.

15. The Applicants' submission is premised on the Joint Venture Agreement being nothing more than a shareholders agreement and personal to them. But is that the case? First, there is a notable difference between the facts in Russell v Northern Bank Development Corporation Ltd. and Bushell v. Faith on the one hand and the present case on the other. The agreements in those cases so far as it concerned the shareholders who were parties to it were purely personal to the shareholders and did not purport to bind future shareholders. In the present case, the Joint Venture Agreement is binding on the "assignees" of the original shareholders Mr Gao and Carnation. Under Article 26, it is a condition precedent to any transfer of shares that the transferee agrees to be bound by the Joint Venture Agreement. Second, whilst the agreement as between the shareholders in Russell v. Northern Bank Development Corporation Ltd. as to how each of them would exercise his voting rights was upheld, TBL's agreement that its capital would not be increased without the consent of each of the shareholders was held to amount to an undertaking not to exercise its statutory powers. This was held to be "as obnoxious as if it had been contained in the articles of association" and was struck down. The submission that the agreement in Russell was a shareholders agreement which was upheld elides the fact that it was struck down in so far as it sought to bind the company which was party to it.

16. Leading counsel for Miracle raised two additional points. He submitted that Article 18(d) cannot, in any event, contemplate misfeasance situations because when Article 19 of the Joint Venture Agreement is considered, it offers no effective remedy, assuming, for present purposes, that the allegations contained in the petition are true. All that Article 19 provides is that where the shareholders cannot agree, the aggrieved shareholder has only the following options : to wind-up Miracle, to require the other shareholder to sell all its Miracle shares to the aggrieved shareholder or to purchase the aggrieved shareholder's Miracle shares. In the event of such a sale or purchase, it has to be dealt with under Chapter 8 of the Joint Venture Agreement. Under those provisions, the sale or purchase is to be at the fair value as at the date of the transfer notice certified by the auditors of Miracle. It is to be noted that the cost of such a valuation is to be at the expense of the aggrieved shareholder. The remedy available under Article 19 thus provides no redress for misconduct at the GBRE level about which Miracle is entitled to complain.

17. The other point that was prayed in aid is that in construing private contracts, the court must strive to avoid a construction that flouts business commonsense. In Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] AC 191, Lord Diplock stated at 201 :

"...if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

This was cited with approval by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich B.S. (HL(E)) [1998] 1 WLR 896 at 913E-F, noting that :

"...the law does not require judges to attribute to the parties an intention which they plainly could not have had".

It was submitted that if the Applicants' construction of Article 18(d) is correct, it would mean that one party would be barred from seeking redress from the court without the consent of the other party when the very complaint is that that other party has misappropriated the assets of the joint venture for his own benefit.

18. I mention these additional points because they formed part of Miracle's submission but my decision does not turn on them. Rather, it is the invalidity of Article 18(d), being a fetter upon Miracle's statutory right as a contributory that is dispositive.

Conclusion

19. When one considers the effect of Article 18(d), it comes to this : Miracle may not petition to wind up GBRE without the consent of Mr Gao and Mr Ho. The purport and effect of the Joint Venture Agreement is the surrender, by Miracle, of its statutory right as a contributory of GBRE to petition for its winding-up to Mr Gao and Mr Ho. In my judgment, Article 18(d) amounts to a fetter on the statutory right conferred on Miracle by Cap.32. I agree with the view expressed in McPherson (supra) that such a fetter "offends against the policy of the Act and ... should not be given effect".

20. Accordingly, the preliminary issue is to be resolved in favour of Miracle : the Resolution is valid and effective.

21. Costs should follow the event and I make an order nisi to that effect.