CHEER HOLDINGS LTD AND ANOTHER v. CHEUNG KIN WAH

HCMP 2524/2017

[2018] HKCFI 404

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2524 OF 2017

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J U D G M E N T

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BACKGROUND

1.  The 1^st applicant (“A1”) and 2^nd applicant (“A2”) (collectively “the Applicants”) apply for an order that statutory forms filed by the respondent (“Mr Cheung”) showing that he was appointed as sole director of each of the Applicants (“the Impugned Forms”) be removed from the Companies Register.  The ground is that the appointment was being made as a result of a meeting invalidly convened.

2.  By way of background, A1 was incorporated on 15 July 2011.  Its shareholders stated in the last annual return made up to 15 July 2016, before the Impugned Form of A1 was filed, were as follows:

Name	Shareholding
Lee Wang Hin (“Lee Senior”)	50%
Du Chuanqing (“Mr Du”)	20%
Du Huaqin	14%
Mr Cheung	7%
Cheung Kin Man Wilson (Mr Cheung’s brother)	5%
Kwan Chi Wai	2%
Luo Fu Yun	2%

As of the date of this annual return, the directors were Chow Ho Yan and Chow Siu Chi (collectively “the Chows”).

3.  Mr Li Wing Yiu (“Mr Li”), the son of Lee Senior, has been acting as the CEO of the Applicants since 2011 and is personally involved in its management.

4.  Lee Senior passed away on 2 February 2016.  According to Mr Li, Lee Senior and Mr Du had transferred their shares in A1 to the Chows at the end of 2015.  The IRD “approved” the transfer in October 2016 and so the bought and sold notes and instruments of transfer were executed on 7 October 2016.

5.  A1 has been operating 4 care homes (including what was known as the Main Home and the Bridge of Rehab Home).

6.  A2 is a property holding company that owns 3 flats on the 4^th floor of Mai Kwai Mansion, No. 87 Wo Tong Tsui Street, Kwai Chung (“the Mai Kwai Flats”).  The Mai Kwai Flats have been partitioned into cubicles and, amongst others, let out to tenants. 

7.  A2’s sole shareholder is A1 and the directors were the Chows, according to the annual return made up to 30 June 2016.

8.  Mr Cheung had been the warden of the Bridge of Rehab Home.  He was arrested on 10 August 2014 for sexual offences committed on female inmates who had mental disabilities. 

9.  On 2 September 2014, A1 resolved to suspend Mr Cheung from all of his duties and directorship and prohibited him from entering the care homes.  Mr Li was appointed by A1 to take over the management and operation of the care homes and A2.

10.  Mr Cheung was later charged with the offence of having unlawful sexual intercourse with a female with mental disability.  The charges were eventually dropped on 17 May 2016, as the victim was unable to testify due to post trauma depression.

11.  The charges against Mr Cheung provoked public outcry. There was public demonstration outside the Bridge of Rehab Home.  According to Mr Li (who held a different view from SWD, the Social Welfare Department), the charges brought against Mr Cheung had caused the certificate in relation to the Bridge of Rehab Home to be revoked.  Its 92 inmates had to be relocated. A1 closed one out of 4 homes and suffered serious damage to its reputation as provider of residential care.

12.  After the charges were dropped, Mr Cheung did a series of acts culminating in the removal of the Chows as directors and his appointment as sole director of the Applicants at a meeting of A1 purportedly held on 8 July 2017 (“the July Meeting”). 

13.  On 11 July 2017, Mr Cheung filed the Impugned Forms with the Companies Registry in respect of each of the Applicants, purporting to reflect the change in directorship.

14.  The Applicants claim that no valid notice had been issued to convene the July Meeting and disputed the appointment.  They thus ask for:

(1)   An order for the Impugned Forms to be removed from the Companies Register;

(2)   An order that the court do give leave for a general meeting of A1 and A2 to be held to elect directors; and

(3)   An injunction restraining Mr Cheung from representing himself to be a director of A1 and A2.

15.  Mr Cheung disputes the capacity of the Applicants to issue the present originating summons.  He also claims that the July Meeting was validly convened by the minority shareholders as the directors of A1 refused to convene a meeting. 

16.  The Registrar maintains a neutral stance but has filed a helpful report setting out the position as in paragraphs 2 and 7 above.  The Registrar confirmed that the only change upon filing of the Impugned Forms was that the Chows were removed as directors of A1/A2 and that Mr Cheung was appointed the sole director instead.

17.  The issues are therefore:

(1)   Whether the Applicants have the capacity to sue Mr Cheung in these proceedings;

(2)   Whether the July Meeting was validly convened;

(3)   Whether the Impugned Forms should be removed;

(4)   Whether the court should direct a meeting to be held by A1 and A2 respectively;

(5)   Whether an injunction should be issued to restrain Mr Cheung from claiming himself to be a director of the Applicants.

ISSUE 1 – WHETHER THE APPLICANTS HAVE THE CAPACITY TO SUE MR CHEUNG IN THESE PROCEEDINGS

18.  Under section 42 of the Companies Ordinance, Cap 622:

“Registrar must rectify information on Companies Register on order of Court

(1) The Court may, on application by any person, by order direct the Registrar to rectify any information on the Companies Register or to remove any information from it if the Court is satisfied that—

(a) the information derives from anything that—

(i) is invalid or ineffective; or

(ii) has been done without the company’s authority; or

(b) the information—

(i) is factually inaccurate; or

(ii) derives from anything that is factually inaccurate or forged.

…

(4) The Court must not order the removal of any information from the Companies Register under subsection (1) unless it is satisfied that—

(a) even if a document showing the rectification in question is registered, the continuing presence of the information on the Companies Register will cause material damage to the company; and

(b) the company’s interest in removing the information outweighs the interest of other persons in the information continuing to appear on the Companies Register.”

19.  In Re China Nice Education Research Publishing Investment and Management Co Ltd [2016] 3 HKLRD 525, §2 and Lam Hon Keung Keith v Dalny Estates Limited, HCMP 182 & 183/2016, 6 April 2017, §2, it was the shareholder/beneficial owner of the respective company that applied for relief under section 42 of Cap 622.  However, those 2 cases did not limit the category of applicants.

20.  The Applicants plainly have an interest in seeing that they are run by the properly authorized persons.  They have a right to make an application under section 42 of Cap 622.

21.  Mr Cheung challenges the status of Mr Li as the deponent for the Applicants as Mr Li is a CEO but not a shareholder or director of the Applicants.

22.  In response, Mr Li has produced:

(a) A board resolution of A1 dated 28 January 2014 which authorized him to represent A1 to institute legal proceedings and instruct solicitors and to recover all benefits belonging to A1 from relevant persons, including Mr and Mrs Cheung. 

(b) The minutes of a general meeting of A1 dated 2 September 2014 which authorized him to represent A1 in handling legal proceedings. Mr Cheung had voted against the resolution but it was passed by 70% vote. 

Such authority given to Mr Li has never been revoked. 

23.  I find that the Applicants do have capacity to issue the present originating summons and Mr Li does have authority to represent them.

ISSUE 2: WHETHER THE JULY MEETING WAS VALIDLY CONVENED

Relevant provisions

24.  Mr Cheung relies on sections 565, 566, 568, 571 and 836(2)(b) of Cap 622. I view this with some caution because it was really the Articles of Association of A1 incorporating Table A in the First Schedule to the Companies Ordinance, Cap 32 (subject to some exclusions not relevant to the present proceedings) that applied.

25.  Under Article 14 of A1’s Articles of Association, removal or appointment of directors is by ordinary resolution.

26.  Under Article 51 of Table A:

“The directors may, whenever they think fit, convene an extraordinary general meeting, and extraordinary general meetings shall also be convened on such requisition, or in default, may be convened by such requisitionists, as provided by section 113 of the Ordinance (ie Cap 32). …”

27.  Section 113 of Cap 32 (2011 version)[1] provides that:

“Convening of extraordinary general meeting on requisition

(1) The directors of a company, notwithstanding anything in its articles shall, on the requisition of members of the company holding at the date of the deposit of the requisition not less than one-twentieth of such of the paid-up capital of the company as at the date of the deposit carries the right of voting at general meetings of the company, … forthwith proceed duly to convene an extraordinary general meeting of the company.

(2) The requisition must state the objects of the meeting, and must be signed by the requisitionists and deposited at the registered office of the company, and may consist of several documents in like form, each signed by one or more requisitionists.

(3) If the directors do not within 21 days from the date of the deposit of the requisition proceed duly to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a meeting, but any meeting so convened shall not be held after the expiration of 3 months from the said date. (underline added)

(4) A meeting convened under this section by the requisitionists shall be convened in the same manner, as nearly as possible, as that in which meetings are to be convened by directors.

...”

28.  Under Article 52 of Table A, 14 days’ notice is required of a general meeting.  The notice shall specify the place, the day and the hour of meeting.  Despite being called by shorter notice, the general meeting will still be regarded as having been duly called if it is so agreed by a majority in number of members holding not less than 95% of the value of shares.[2]

29.  Under section 134 of Cap 32:

“A notice may be given by the company to the persons entitled to a share in consequence of the death … of a member by sending it through the post in a prepaid letter addressed to them by name, or by the title of representatives of the deceased, … , at the address, if any, within Hong Kong supplied for the purpose by the persons claiming to be so entitled, or (until such an address has been so supplied) by giving the notice in any manner in which the same might have been given if the death … had not occurred.” (underline added)

30.  Under section 135 of Cap 32:

“(1) Notice of every general meeting shall be given in any manner hereinbefore authorized to—

(a) every member … ;

(b) every person entitled to a share in consequence of the death … of a member who, but for his death …, would be entitled to receive notice of the meeting[3];

…

No other person shall be entitled to receive notices of general meetings.”

31.  In his oral submission, Mr Cheung relies on the following purported notices leading to the July Meeting:

(a)   Two letters dated 2 June 2017;

(b)   “Minutes of Urgent Shareholders Meeting” of A1 purportedly held on 10 June 2017 (“10 June Minutes”) and a letter dated 28 June 2017; and

(c)   A letter dated 24 June 2017.

Letters dated 2 June 2017

32.  None of these 2 letters referred to the July Meeting.  Both of them were issued in the personal name of Mr Cheung.  Although Mr Cheung had 7% shareholding as of 2 June 2017, these letters could not be a valid notice of a general meeting or a member’s request to directors to hold a general meeting because:

(a)   The letters were not addressed to A1 or any of the directors but to individual shareholders, ie “the descendants of Mr Lee Wang Hin” and Mr Du respectively; 

(b)   The letter to the descendants of Mr Lee Wang Hin referred to a meeting date that was 4 months before the date of the letter, which Mr Cheung admitted to be wrong;

(c)   The descendants of Lee Senior may not be the same as the persons entitled to a share in consequence of the death of Lee Senior or the personal representatives within the meaning of section 134 of Cap 32;

(d)   No place and hour of the meeting was specified; Mr Cheung merely gave his telephone number for the addressees to call him.

(e)   If this letter had intended to refer to a meeting to be held on 10 June 2017 (as did the letter addressed to Mr Du), the notice period was less than 14 days.

33.  Mr Cheung submitted that it was because the minority shareholders did not expect the directors to call a meeting, so he issued the 2 letters of 2 June 2017.  However, as Mr Cheung admits, there was no evidence to show that the directors were requested to but were not willing to call a meeting. 

The 10 June Minutes and a letter dated 28 June 2017

34.  It appeared that the meeting on 10 June 2017 was attended only by shareholders holding 30% voting rights.  If it was held as a result of the directors’ failure to call a meeting pursuant to section 113(3) of Cap 32, it was invalid because less than 21 days had elapsed between the request to the directors and the requisitionist’s meeting.

35.  This meeting on 10 June did not appoint Mr Cheung as director.  The purported “resolutions” appeared to be, amongst others, to hold the July Meeting and to set out the agenda, ie to terminate the Chows as directors and to appoint Mr Cheung as CEO to replace Mr Li.

36.  The 10 June Minutes were sent to Lee Senior, Mr Du and the Chows on the same day.  However, the 10 June Minutes could not constitute notice of the July Meeting as there was no mention of the hour and place of that meeting.

37.  Mr Cheung claims that the letter dated 28 June 2017 was to “revise” the notice given on 10 June by giving the time and place of the July Meeting.  This letter was sent to Lee Senior, Mr Du and the Chows.

38.  Again, the notice was invalid because it was not issued by the board of directors; and the notice period was less than 14 days.  There was no evidence that the directors had declined to hold a meeting. 

Letter dated 24 June 2017

39.  This letter was sent on 23 June 2017 although it was dated the 24^th. It was addressed to the Chows (then the only directors) as “the Management” of A1.  There was no mention of the July Meeting.  It was a request signed by Mr Cheung as a shareholder for accounts only.

The July Meeting

40.  There is dispute as to who the majority shareholders were as of 8 July 2017 – Lee Senior and Mr Du (according to Mr Cheung) or the Chows (according to Mr Li).  I accept that Mr Cheung was not aware of the transfer of the shares of Lee Senior and Mr Du to the Chows as it was not reflected in the annual return of A1 made up to 15 July 2016.  But a check on the statutory book of members would have seen the Chows’ names as shareholders since 7 October 2016. It was just that the annual return for 2016/2017 was not yet due for filing.

41.  However, it is not necessary to resolve the difference here as the alleged notice of meeting was invalid as the above analyses show.  Apparently the Chows had received notice of this purported meeting but did not attend as they did not want to be seen as accepting the irregularity. 

42.  It is well established that the majority shareholders are the only persons who can complain about a technical miscarriage of a meeting: Lam Hon Keung Keith, §§13-14.

43.  This is precisely what the majority and hence A1 are complaining of.  The July Meeting of A1 and resolution appointing Mr Cheung as sole director were thus not valid.

44.  Regardless of the position with A1, there was simply no meeting held as regards A2 to appoint Mr Cheung as a director.

ISSUE 3: WHETHER THE IMPUGNED FORMS SHOULD BE REMOVED

45.  G Lam J explains the effect of section 42(4) of Cap 622 as follows in China Nice, §§17-18:

“17. The effect of the language of sub-s.(4), it seems to me, is to restrict the power to order removal and to make rectification the ordinary remedy where the situation referred to in sub-s.(1) arises. Removal is to be ordered only if the two additional conditions as set out in sub-s.(4) are satisfied:

(1) First, the applicant has to show that registration of a document showing the rectification is not good enough; the continuing presence of the incorrect information will cause material damage to the company. Note that it is damage to the company, not to any other person such as the applicant, that needs to be shown.

(2) Secondly, the applicant has to show that the company’s interest (note, again: not any other person’s interest) in removing the information outweighs the interest of other persons in the information continuing to appear on the register.

18. On the terms of s.42(4), the fact that the information is incorrect, or relates to an invalid or ineffective transaction, or has been filed without proper authority of the company in question, is not in itself a sufficient reason for removing it as opposed to rectifying it; nor in my view is the fact that a document is a nullity or is one that should never have been registered had the true facts been known.  The structure of s.42 suggests that even forged documents are not necessarily to be removed unless the conditions in sub-s.(4) are satisfied.  By statute, removal cannot be ordered unless, inter alia, it is shown that material damage to the company will be caused by the continuing presence of the incorrect information despite any rectification.”

46.  The information in the Companies Register as to Mr Cheung’s directorship was derived from an invalid July Meeting and the filing of the Impugned Forms was done without the Applicants’ authority. 

47.  Mr Cheung had acted upon his invalid directorship.  He took possession of the Main Home and the Mai Kwai Flats in July and October 2017, denying access by anyone from A1 or A2.  On 29 July 2017, he gave notice to the tenants of the Mai Kwai Flats to stop paying rent or utility charges to the previous management.  On 4 October 2017, as director of A2, he asked the tenants of the Mai Kwai Flats to pay one On Happiness Limited.

48.  Mr Cheung even showed a copy of one of the Impugned Forms to a tenant, apparently to show the change in management.  Two tenants could not stand the pestering and moved out.  The acts in paragraph 47 created financial harm on the Applicants.

49.  Mr Li deposed, which I accept, that none of those notices were issued with authority of A1 or A2.

50.  Further, according to Mr Li, SWD was aware of the Impugned Forms filed by Mr Cheung; SWD indicted that the certificate of the Main Home would unlikely be renewed if the Main Home had anything to do with Mr Cheung. 

51.  On 27 October 2017, Mr Li received a call from SWD informing him that Mr Cheung was making public announcements through the internet media that he has been appointed director of A1 and was ready to resume control of A1. According to Mr Li, he was told that A1 must take steps to correct the situation if Mr Cheung was not validly appointed as a director, otherwise SWD would unlikely consider A1’s application sympathetically.

52.  It is not necessary to resolve if SWD did make the representations to Mr Li.  I do not need to base my decision on them.  The public reading this judgment today can still remember how its confidence in the responsible running of a care home for the mentally disabled was shattered upon the arrest of Mr Cheung.  The risk of damage to the reputation of A1 was and is real.  If the certificate for a care home is not renewed, the prejudice to its inmates in having to be relocated is also real.

53.  In my view, the continuing presence of information as to Mr Cheung’s directorship on the Companies Register will cause material damage to the Applicants financially and irreparable damage in terms of reputation.

54.  The Applicants’ interest in removing the information outweighs the interest of Mr Cheung (who was suspended from office and not validly re-appointed at all) in the information continuing to appear in the Companies Register.  Removal of the Impugned Forms is plainly more appropriate than just rectification and I so order.

ISSUE 4: WHETHER THE COURT SHOULD DIRECT A MEETING TO BE HELD BY A1 AND A2 RESPECTIVELY

55.  Section 570 of Cap 622 provides that:

“570. Power of Court to order meeting

(1) This section applies if for any reason it is impracticable—

(a) to call a general meeting of a company in any manner in which general meetings of that company may be called; or

(b) to conduct the meeting in the manner prescribed by the company’s articles or this Ordinance.

(2) The Court may, either of its own motion or on application—

(a) by a director of the company; or

(b) by a member of the company who would be entitled to vote at the meeting,

order a general meeting of the company to be called, held and conducted in any manner the Court thinks fit.

(3) If the order is made, the Court may give any ancillary or consequential directions that it thinks expedient.

(4) Directions given under subsection (3) may include a direction that one member of the company present at the meeting in person or by proxy is to be regarded as constituting a quorum.

(5) A general meeting called, held and conducted in accordance with an order under subsection (2) is to be regarded for all purposes as a general meeting of the company duly called, held and conducted.

(6) The legal personal representative of a deceased member of a company is to be regarded in all respects, for the purposes of this section, as a member of the company having the same rights with respect to attending and voting at a meeting of the company as the deceased member would, if living, have had.”

56.  The present application is not made by a shareholder or director.  Once the Impugned Forms are removed, the Applicants’ directorship would revert to the position before filing of the Impugned Forms.  It would not be impracticable for the Applicants to convene an EGM or board meetings.  I fail to see why the court needs to give leave to hold a meeting and I decline to do so.

ISSUE 5: WHETHER AN INJUNCTION SHOULD BE ISSUED TO RESTRAIN MR CHEUNG FROM CLAIMING HIMSELF TO BE A DIRECTOR OF THE APPLICANTS

57.  Mr BK Ho relies on the principles in American Cyanamid in support of his claim for an injunction.  With respect, those principles are only applicable to interlocutory injunctions. 

58.  The proper legal principle to apply is that the injury to be inflicted by the wrongdoer would be of such a character that the claimant could not practically be compensated in damages: Clerk & Lindsell on Torts, 22^nd ed, §29-01.

59.  I repeat the paragraphs 47-53 above.  Given the Applicants’ evidence that Mr Cheung has been evading service of statutory demand and other court documents, which has not been refuted by Mr Cheung, it is possible that Mr Cheung may also evade his liability to pay back financial gains unlawfully diverted from the Applicants.

60.  Unless restrained, it is likely that Mr Cheung would continue to claim to be a director of the Applicants and cause irreparable damage to the Applicants.

61.  If Mr Cheung never had valid directorship (since its termination in 2014), he has no loss to speak of.  In any case, any loss that Mr Cheung may suffer as a result of the injunction (eg loss of directors’ remuneration) may be compensated for by damages. 

62.  On balance, it is just and convenient to grant the injunction sought until he is properly appointed as director by any of the Applicants.

63.  There are other factual disputes eg whether Lee Senior and Mr Du had understated the sale price of the shares to evade tax/stamp duty.  That matter is for the IRD or Stamp Office to pursue against the wrongdoer and is not relevant to the issues before me.

64.  Mr Cheung has also purportedly filed a “counterclaim” on 30 January 2018, after the time for filing of evidence has closed. There was no opportunity for the Applicants to consider his counterclaim.  I therefore disregard that counterclaim.

CONCLUSION

65.  I order as follows:

(1)   That the Impugned Forms be removed from the Companies Register;

(2)   That there be an injunction restraining Mr Cheung from claiming himself to be directors of the Applicants;

(3)   That no order be made as regards the application for an order that the Applicants do hold a meeting to appoint directors and secretaries.

(4)   A copy of this order shall be served on the Registrar of Companies.

66.  Costs should follow the event and be paid by the Respondent to the Applicants and the Registrar and I make an order nisi accordingly.

67.  The Applicants shall file and serve a costs statement by 5 March 2018.  Mr Cheung shall file and send his grounds of objection by 12 March 2018.  Parties shall attend a hearing for summary assessment of costs on 14 March 2018 at 9:30 am with 15 minutes reserved.