XCHRX ONG KIM YIM, MARY v. SHEECON TRADING COMPANY LIMITED AND OTHERS

1995, No.MP780

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(MISCELLANEOUS PROCEEDINGS)

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J U D G M E N T

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1. The Plaintiff is one of the shareholders of the 1st Defendant company. She was also one of the directors. In this application, she complained that the purported directors meeting held on 18 October 1988 purportedly allotted 1,322,786 shares of the 1st Defendant to the 4th Defendant was null and void and of no effect. She further complained that the purported AGM of the 1st Defendant held immediately after the aforesaid directors meeting whereby only the 3rd, 4th and 5th Defendants were re-appointed as directors but not the Plaintiff, was also null and void and of no effect.

2. The 1st Defendant was incorporated on 20 December 1983. Article 7 of the Article of Association of the 1st Defendant provided that all directors should hold office for one year and at the AGM to be held in the next year after incorporation and in each succeeding year retire from office. Under the then S.111 of the Companies Ordinance, Cap.33, the first AGM had to be held within 15 months after incorporation. By Ordinance No.6 of 1994, which came into effect on 31 August 1994, this 15 months period was changed to 18 months. Hence under the old S.111, the 1st Defendant should have held its first AGM within 15 months from 20 December 1983 i.e. not later than 20 March 1985, or under the new provision, not later than 20 June 1985. It is irrelevant for either of these dates as no AGM was held in 1985. It was decided in two cases, namely Re Consolidated Nickel Mines Limited [1914]1 Ch.8843 and Re Zinotty Properties Limited [1984]1 WLR 1249 that all directors of the 1st Defendant should have retired either on 20 March 1985 or 20 June 1985.

3. Further the notice of the purported AGM was dated 27 December 1988 and issued by one Channing Shui, the 2nd Defendant herein purportedly in the capacity of the company secretary of the 1st Defendant. The Plaintiff submitted that since there was no director after the retirement of all directors, the 2nd Defendant had not been properly appointed as the company secretary on 5 September 1988 and he had no power to issue the notice. Furthermore, although the notice was dated 27 December 1988, it was, as admitted by the 2nd Defendant, not sent out until 30 September 1988. Thus, even if the notice could have reached the Plaintiff and the 5th Defendant on the date of the despatch, there was only 17 clear days' notice instead of 21 clear days. It has been decided in the case of Securities and Futures Exchange Commission v. The Stock Exchange of Hong Kong Limited [1992]1 HKLR 135 that if a notice of the AGM given was less than what was required by the Companies Ordinance S.116(1) of at least 21 clear days, any resolution purportedly passed at the AGM would be ineffective.

4. The defence pointed out that the Plaintiff had signed minutes of AGM for the years 1984 to 1986 and that there were notices calling for AGM and minutes of directors' meeting up to 1986. It was therefore contended that the Plaintiff should be estopped from denying that there was no AGM. The Plaintiff admitted signing those documents in January 1987 at the request of the Auditors. However, it was submitted for the Plaintiff that there was no AGM in 1987 and 15 months since the last purported AGM on 29 September 1986 i.e. 30 December 1987, there was no more directors of the 1st Defendant. Thus the Plaintiff did not have any directors either since 21 March 1987 or 21 June 1985, or 30 December 1987 by the latest. Thus, all the purported resolution of the members of the 1st Defendants, or the directors of the 1st Defendant, are void and of no effect. These resolutions included the appointment of the 3rd, 4th and 5th Defendant as the directors of the 1st Defendant and the allotment of 1,322,786 shares of the 1st Defendant to the 4th Defendant. Such an allotment would reduce the shareholding of the Plaintiff from 1 out of 102 to 1 out of 1,322,786 shares.

5. The Defendants relied on Article 88 which is the 1975 Edition of Table A. It provides as follows :

"88. All acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director."

6. The effect of such an article has been considered by a number of cases. In Dawson v. American Consolidated Land and Trading Company [1908]1 Ch.6, one of the three directors, unknown to the other two, had parted with his qualification shares for 6 days. Thereafter, there was no formal re-appointment made by the other two directors. It was held by the Court of Appeal in England that Article 114 (which is equivalent to Article 88 above) did not operate only as between the company and outsider but also as between the company and its members and was sufficient to cover such irregularities.

7. However, Chitty, LJ, observed at p.14 that such an article was "not framed so as to render valid a resolution passed by any persons who without a shadow of title assumed to act as directors of a company". In that case, there were at least two directors who had the power to appoint the third one to fill a vacancy. The Court ruled that there was no formal re-appointment but that the two directors treated the third one as of duly appointed director. In our present case, all directors retired in 1985. If the paper AGMs in 1985 and 1986 should be treated as valid (which I consider they are not as the Plaintiff's contention that they were signed afterwards in 1987 is not disputed), then all directors should have retired at the end of 1987 as there was not even a paper AGM in that year. There was no attempt even to appoint any director in that year, hence there was just no director whose act could have been saved by the old Article 88. It was not a case of directors whose appointments were defective.

8. In British Asbestos Company Limited v. Boyd [1903]2 Ch.438, it was held that there was a defecto Board of Directors when one of the two directors present had, unknown to them, been vacated from office early on as he had accepted the office of secretary of the company. At the time of the board meeting, he had already resigned from the office of secretary and was capable of resuming his office as a director. Again he was treated as a director by the other validly appointed director. The validly appointed director had power to fill vacancy of the board. The fact that he took the other director as a validly appointed director is similar to the facts in the case of Dawson above. This again is different from the present case when there was not a single director and there was no meeting of any kind, at least since 1987 or any attempt to appoint any director at the end of that year. Further, the invalid notice issued by the 2nd Defendant could not be saved by Article 88 as there was no director in the board at all.

9. The Defendants further relied on the case of Browne v. La Trinidad (1887)36 Ch.D.1. Lindley LJ stressed the rule that the court never interfered in cases where there were some irregularities which can be set right at any moment. The complaint that the AGM was held without sufficient notice and or that the directors had ceased to hold office were all matters which can be set right in a general meeting called to rectify the irregularities. However, in that case, the notice of AGM was issued at the direction of a board meeting held by two validly appointed directors. Notice was given to all directors (with one director given verbal notice only). The board used to hold meetings at short notice. There was no formal mode or length of notice prescribed for board meetings of the company. However, in the present case, the notice complained of is notice prescribed by the Companies Ordinance for an AGM.

10. Lastly, the Defendants relied on S.4 of the Limitation Ordinance and submitted that this action is an action founded on simple contract and should be barred after the expiration of 6 years. I, however, accept the Plaintiff's submission that this is not an action on contract and therefore is not covered by S.4 of the Limitation Ordinance.

11. I accept the submission of the Plaintiff and therefore make the declaration as sought, i.e. that the appointment of the 2nd Defendant as its company secretary on the purported resolution of the 1st Defendant on 5 September 1988 was void or invalid and of no effect. The AGM and the directors meeting of the 1st Defendant purportedly held on 18 October 1988 was void or invalid and has no effect. There was no director in the Board of Directors since 21 March 1985 and the 1st Defendant had, since its incorporation on 20 December 1983, failed to hold any AGM in accordance with the requirements of the Companies Ordinance.