TANG YI, AS THE ADMINISTRATRIX OF THE ESTATE OF THE ESTATE OF BONG WON LING, DECEASED v. CALIGER ENTERPRISES LTD AND OTHERS

HCMP 206/2023

[2024] HKCFI 1485

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 206 OF 2023

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D E C I S I O N

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Introduction

1.  Tang Yi, the Administratrix of the Estate of Bong Won Ling (“Plaintiff”), has applied by originating summons issued on 9 February 2023, for an order pursuant to section 570 of the Companies Ordinance, Cap 622 (“Ordinance”) that each of the four defendants companies (“Companies”) convene extraordinary general meetings to consider and resolve reconstituting the board of each company by the appointment of three additional directors, namely, Tiffany Wong, Edward Middleton and Gilbert Ho, who are insolvency practitioners at Alvarez & Marsal.

2.  The Plaintiff married the Deceased in San Francisco in September 2014. They had one child, Betty Bong. The Deceased died intestate five years later on 3 June 2019. The Deceased had three daughters by his previous marriage to Ha Toi Chun (Bong Mer Lee (“Mary”), Bong Pik Li (“Teresa”) and Bong Yee Li (“Mishel”)) and a son, Jackson Bong, who is also deceased, by Yung Chun Nei. Sanna Wong is Jackson’s Wife. They had a son and daughter, Bon and Jade. The Deceased owned flats in Hong Kong in his own name of which the Plaintiff became the registered owner in November 2019.

3.  On 27 November 2019 the Plaintiff was appointed the Adminstratrix of the Deceased estate[1].

4.  The Plaintiff has issued the application because the Boards of the Companies I describe in the next paragraph have refused to register the Deceased’s share in the Companies in her name qua Administratrix, and failed to provide corporate information that she says she requires to administer the Estate. In addition, the Plaintiff has concerns about the propriety of the way the Boards have dealt with the affairs of the Companies, in particular, by purporting to declare a dividend by Caliger and loans by it to Mishel, Teresa and Sanna. In the circumstances, the Plaintiff takes the view that to ensure that the Companies respond properly to her requests, including registering her as a member, and to ensure that the Companies affairs are properly conducted, independent professionals should be appointed to the Boards.

5.  The Companies are as follows:

(1)  The 1^st Defendant (“Caliger”) had two shareholders, the Deceased (80%) and Sanna (19%) and Bon and Jade (1%), and two directors, Mishel and Sanna. It is a property-leasing company and owns no property.

(2)  The 2^nd Defendant (“Kingsway”) also had two shareholders, the Deceased (90%) and Mishel (10%), and currently two directors, Teresa and Mishel. It owns a flat and a carpark in the Wings, Tseung Kwan O.

(3)  The 3^rd Defendant (“Trading”) had four shareholders, the Deceased (67%), Sanna (15%), Teresa (9%) and Mishel (9%), and two directors, Mishel and Teresa. It owns a polyster texture and filament yarn selling and property-leasing company. It owns Units nos. 2 & 3 on the ground floor of Po Lung Centre in Kowloon Bay.

(4)  The 4^th Defendant (“Taipei”) also had the same four shareholders as Trading in the same proportions and the same two directors, namely, Mishel and Teresa. It is a property owning and leasing company owning the whole of the 1^st, 2^nd and 3^rd floors of Tung Yuen Factory, Cheung Sha Wan.

6.  Mishel, Sanna and Teresa are the beneficiaries of the Estate. They are unwilling to relinquish control of the Companies, as they see it, to the Plaintiff, although what she seeks is the appointment of independent professionals to administer their affairs and facilitate the Administration of her late Husband’s Estate. If the Plaintiff qua Adminstratrix, were to be registered as a member and able to exercise the rights attaching to the shareholdings referred to above, she would be able to pass ordinary resolutions, and reconstitute the Board. However, despite her requests the directors of the Companies have refused to register her as a member. Once the Estate is distributed the Plaintiff’s shareholding would be less than 50% and Mishel, Sanna and Teresa (assuming that they agreed) would be able to control the constitution of the Boards and manage the Companies. The refusal to register the Plaintiff as a member has what has led to the present application.

7.  There is also a dispute as to whether or not the Letters of Administration were properly granted, which will be resolved in HCAP 42/2023, which was issued on 10 October 2023. The Letters of Administration were granted on the basis that the Deceased was domiciled in Hong Kong at the time of his death. However, in proceedings in Taiwan commenced by Teresa concerning the distribution of the Deceased’s assets in Taiwan, the court found that the Deceased had been domiciled in Shanghai at the time of his death. It is on this basis that in the Probate proceedings Teresa, Mishel, Bon and Jade seek the removal of the Plaintiff as Adminstratrix and the appointment of an independent professional. There is thus a dispute over who is entitled to control and vote the Deceased’s shares in the Companies.

8.  On 10 November 2023 the 1^st, 3^rd and 4^th Defendants issued a summons seeking leave to rely on additional evidence out of time, which I grant with costs to the Plaintiff.

9.  On 22 November 2023 the Plaintiff issued an application to amend the originating summons (“Inter Partes Summons”) to add orders that she be registered as a member of the Defendants and for the shares registers to reflect this. At the hearing before me the Plaintiff only sought the order included in the original originating summons, not the amended relief. The Defendants made the preliminary point that in the circumstances the relief sought in the original originating summons had become moot, because if the additional relief is granted there would be no need for the court to order a meeting and if it were not, it would mean that the Plaintiff would not have locus to make the application for a convening order. Before considering the competing arguments in detail I will start with the principles, which provide the legal framework in which an application of this sort falls to be considered.

Legal Principles

10.  There is no dispute that on the death of a member the shares in a company devolve by operation of law (referred to as transmission) to the deceased’s personal representative. This process is different from a transfer of shares. This is illustrated by sections 158 to 160 of the Companies Ordinance, Cap 622, which deals expressly with transmission of the interest in shares and the right of the recipient of the shares to be registered as a member[2]. The Defendants take the point that prior to the issue of the summons to amend the Originating Summons the Plaintiff had not sought to be registered in reliance on section 158. This is said to be relevant to the question of the impracticability of convening and conducting a meeting under section 570, which I explain later, because the Plaintiff has not tried to use the procedure available to her to insist on registration. Although, it is correct that the Plaintiff’s solicitors couched the request for registration in terms of recognising a transfer of shares rather than referring to section 158, it is ultimately an arid point, because there is nothing to suggest that if the solicitors had formulated the request properly it would have affected the outcome. What is more relevant is whether the fact that the Plaintiff is not registered, and thus not a member of any of the Companies, means she does not have locus to make an application under section 570. A shareholder must be registered to become member of a company incorporated with share capital[3]. Although there is a note in [570.02] of Companies Ordinance, Commentary and Annotations 2021 Vol. 2 Sweet & Maxwell, that a legal representative of a deceased member will be treated as a member for the purposes of section 570 no authority is cited in support. It is also not clear from the language whether the editors are suggesting that the fact that a member is a personal representative makes no difference to the exercise of voting rights, rather than suggesting that a personal representative does not have to be registered to rely on section 570. In my view only a member has locus to make an application under section 570(2)(b). A personal representative does not become a member by transmission, only the legal and beneficial owner of the shares.

11.  The Ordinance provides a mechanism for a personal representative to become a member if registration is refused. An application under section 159 should be straightforward unless there is an underlying dispute as to the status of the personal representative. Once an order has been made and registration taken place (if necessary by a third party empowered by the court to do so) an application under section 570 can be made.

12.  Section 570 provides that if it is impracticable to convene or conduct a general meeting in any manner in which one may be convened or conducted, the court may (its thus discretionary) order that an order be convened and conducted as the court considers fit.

13.  Section 570 is available to a member, which can demonstrate that it is entitled to convene a meeting, at which business can be conducted, but for some reason it is impracticable to do so[4]. If there is an alternative procedure available to a member to convene and conduct a meeting, it is not impracticable. A majority member will generally be able to convene a meeting if the directors fail to do so on a requisition by the member using the procedure in section 568. The problem which may arise is not in convening a meeting but conducting it because of the quorum provisions in the articles, which will commonly require two members to be present. If the minority shareholders oppose the resolution a majority shareholder wishes considered and resolved, they can stymy the attempts by not attending the meeting. Some articles provide that if a quorum is not present within a specified time the meeting be adjourned for a period and when recommenced a single member will constitute a quorum[5]. However, it is common for such articles to be qualified and provide, as in the case of the Articles of the Companies, that if the meeting was convened upon the requisition of members, it be dissolved.

14.  What is clear is that if an applicant can demonstrate on the balance of probabilities that it is not possible to conduct a meeting because other shareholders will not attend thus preventing a meeting being quorate the impracticability requirement is satisfied. I would emphasise that this has to be proved by evidence. In many cases this is readily established, because the other shareholders have refused to attend previous meetings. In other cases it may be less clear because the process has not progressed beyond a refusal to cooperate in the convening of a meeting. In such case in order to establish facts on which an inference can properly be drawn that it is probable that a quorum cannot be achieved the applicant might write asking for confirmation that other shareholders will attend in person or in proxy and an unhelpful reply may, read in the context of a pattern of uncooperative behaviour and obfuscation, be sufficient for the court to infer that it is likely a quorum cannot be achieved and this will be sufficient for the purposes of proving impracticability.

15.  A common ground of opposition to an application under section 570 is that there is an underlying dispute about ownership of the relevant shares and the right to exercise the voting rights that attach to them. This is a factor that the court will consider in the exercise of its discretion[6].

16.  The majority shareholder of a company has a right to determine who sits on the company’s board. This is a consequence of section 462 of the Ordinance, which provides that a company has an unqualifiable right to remove a director by ordinary resolution. As I explain in Re Mandarin Capital Advisory Ltd[7], in order for a minority shareholder to contest successfully an application to convene a meeting to remove him as a director (or by parity of reasoning, to reconstitute the board) it will be necessary for the minority shareholder to demonstrate that, assuming that the meeting could be convened and conducted without the intervention of the court, he would be entitled to an injunction to prevent the applicant tabling a resolution to remove him. Strong evidence would be required of an unqualified right on the part of a respondent to participate in the management of a company all the time he remained a shareholder. What would normally be required is a written agreement between shareholders to which a company is not a party, which contains an express prohibition against removal of a director all the time he remains a shareholder, which can be enforced by injunction.

17.  As I have already explained a minority shareholder cannot legitimately curtail the exercise of this right by declining to attend a general meeting to prevent a quorum. This would prevent a meeting being conducted and constitute impracticability for the purposes of section 570(1)(b).

18.  Although some authorities talk in terms of the power under section 570 being discretionary and multi-factorial, that does not mean that the determination of an application involves a general assessment of competing factual considerations. It is more disciplined than that. The starting point is the principle that a majority shareholder is entitled to exercise their voting rights. Suggestions of unfairness are only likely to be relevant if they arise from a dispute over ownership of the relevant shares or the alleged collateral infringement of a legal right of the sort discussed in Mandarin Capital.

The Issues

19.  The focus before me was on whether the Plaintiff had locus to make the application at all on the grounds that she has not been registered as a member of any of the Companies. The Defendants also advanced the following additional grounds of opposition:

(1)  The Plaintiff has not demonstrated impracticability.

(2)  The court should not exercise its discretion under section 570 because it is an unjustified attempt by the Plaintiff to take control of the Companies.

(3)  The Defendants intend to challenge the Letters of Administration on the grounds that they contain a material error, namely, that the Deceased was domiciled in Shanghai and not Hong Kong at the date of his death. The consequence of the challenge succeeding would be, assert the Defendants, that Mainland intestacy laws apply and the Plaintiff would not be the Administratrix.

(4)  Mishel alleges that the properties held by Kingsway were held on trust for her by the Deceased.

Locus

20.  It follows from what I have said in [10]–[11] that the Plaintiff has made the application under section 570 prematurely. That is sufficient to dispose of the application brought under section 570. I will deal briefly with the other objections.

Impracticability

21.  In their skeleton argument the 1^st, 2^nd and 3^rd Defendants state that if the Plaintiff is successful in her application to be registered as a member “she will be able to obtain control over the companies in due course”, which suggests that they would accept the consequence of the Plaintiff becoming a member and the majority shareholder, namely, reconstitution of the Board.

22.  They make a further point that there is no difficulty in obtaining a quorum in the case of Caliger and Taipei. Each of those companies have two or three other shareholders. As I have explained earlier commonly the principal problem an applicant under section 570 is seeking to resolve is the conduct of a meeting rather than its convening. This occurs when, for example, one of the two shareholders dies and an administrator is not promptly appointed over the deceased’s estate, thus making it difficult for the remaining shareholder to convene a meeting and impossible to satisfy the quorum requirement. On occasions the quorum requirement cannot be satisfied because the other shareholder or shareholders refuse to attend a meeting preventing a resolution being passed not by their ability to vote their shares against it, but by taking advantage of the quorum requirement[8]. In such circumstances the impracticability criteria is satisfied. As I have already noted in [14] this requires evidence that the other shareholders would not attend. There is none. I cannot infer from the evidence that I have that they would not. If the Plaintiff is correct that she is entitled to be treated as a member for the purposes of convening a meeting, it follows that she could call a meeting herself pursuant to section 568. In the circumstances it follows that the Plaintiff has not demonstrated that it is impracticable to call and/or conduct a meeting in the manner prescribed in the 1^st and 4^th Defendants articles or the Ordinance.

Discretion

23.  In short, the 1^st, 3^rd and 4^th Defendants say that the Court’s discretion should only be exercised in the circumstances of this case by allowing the appointment of only one director to each of Caliger, Trading and Taipei. The 2^nd Defendant, Kingsway (which is concerned about disposal of the properties owned by it that Mishel contends the Deceased agreed were held on trust for her) argues that an order should require the Plaintiff to undertake that the properties owned by it would not be disposed of without the consent of all directors.

24.  If I have taken the view that the Plaintiff was entitled to an order that would have permitted her to cause independent professionals to be appointed to the Boards of the Companies I would in the circumstances of the case have required the Plaintiff to agree that she would not cause the existing directors to be removed without their agreement or order of the court.

Conclusion

25.  I dismiss paragraphs 1 and 2 of the Originating Summons. I will not dismiss the Originating Summons itself as their remains the application to amend it. The Originating Summons and the Inter Partes Summons should be listed for directions before a Judge with 30 minutes reserved. I make a costs order nisi that the costs of the Originating Summons up to and including the date of the hearing be paid forthwith by the Plaintiff to the Defendants with a certificate for two counsel. Costs of the Inter Partes Summons be reserved.