NG TAI JOO v. THE REGISTRAR OF COMPANIES AND OTHERS

HCMP 356/2021
HCMP 357/2021

[2021] HKCFI 1510

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 356 OF 2021

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  IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 357 OF 2021

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D E C I S I O N

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1.  There are two originating summonses before me: one in HCMP 356/2021, the plaintiff being one Ms Ng Tai-joo (the “Plaintiff”), and the corporate defendants in those proceedings being Paul & Shark Asia Pacific Limited (the “Company”); and in HCMP 357/2021 Paul & Shark Retail Hong Kong Limited (“the Subsidiary”).

2.  According to the annual returns for the year 2020, insofar as the Company is concerned, the shareholders of the company are as follows:  Dama S.P.A. (“Dama”) held 70 of the shares whereas the Plaintiff held 15 shares and her sister, Ms Ng Tai-lei (“Lily”) held 15 shares in total.  On the face of the register, these were the directors of the company as at the relevant date:  Andrea Dini (“Dini”), 1 April 2016 to present; Lily, 28 June 2017 to present; the Plaintiff, 28 June 2017 to 23 February 2021.

Brief factual background according to the Plaintiff

3.  I will set out below in brief what the Plaintiff says is the relevant factual background for the purpose of these proceedings. I of course bear in mind that I am not trying the matter and I am not required and cannot find facts in these proceedings.  I only set them out to explain the background which led to the present proceedings having been taken out.

4.  The Plaintiff explains that she is an experienced businesswoman operating in high-end fashion brands in Mainland China as well as the Greater China region, having previously worked in the industry for around 20 years. She had previously been in charge of another high-end Italian brand for a long period of time, namely Salvatore Ferragamo. In or around 1999/2000, she says that she played an indispensable and pivotal role to the initial entry of the Paul & Shark brand in Mainland China and that she prepared a business plan and persuaded her then-employer, which was a leading fashion brand distributor in the region, to take on the brand’s distributorship in Mainland China. 

5.  Dini, the sole shareholder of Dama, and owner of the Paul & Shark’s brand, showed appreciation of her talents and had done so for a long time.  He invited her on a number of occasions to join his brand. 

6.  She also explains that her sister, Lily, was of significant importance to the Paul & Shark brand’s previous successes in Mainland China, having worked with the brand. 

7.  Due to some dissatisfaction with the original distributor’s performance, Dini had intended to buy back the Paul & Shark brand’s businesses from its distributors and, while at first, he had asked for advice, which was provided by the Plaintiff on a friendly and a gratuitous basis, they subsequently met and after some discussions decided to take the matter further. 

8.  She says that Dini also invited her to join the new company but that she had rejected his original approach.  She only wanted to join if she could have a stake “as a partner” and participate in the management and have what she says is an equal right in management.  She says that Dini eventually accepted those requests and agreed that, while Dama would hold 70 per cent of the equity, she, together with her sister, would hold 30 per cent of the company’s shares. 

9.  There were then some ongoing negotiations in the first and second quarter of 2016, where the parties eventually agreed on some bases for their co-operation.  This also led to a shareholders’ agreement in writing, which I will refer to below.

10.  The Plaintiff in her original affirmation and her affirmation in reply referred to a significant number of matters which she says proves a longstanding personal relationship with trust and confidence between herself and Dini and in particular highlights the fact that on some occasions, as is recorded in some messages between them, they are referred to as “partners”.

11.  It is now perhaps convenient to highlight some of the terms of the shareholders’ agreement dated 1 July 2016 and whose parties are Dama, the Plaintiff and her sister.  The recital of the shareholder agreement under (B) provides as follows: 

“The parties are desirous to enter into this agreement to regulate their relationship and conduct, as shareholders of the company, inter se.”

12.  Under article 2, heading “Agreement”, 2.1, it is stated that:

“In consideration of the premises and for the purposes of this agreement, the parties hereby agree as follows:

2.1.1. to capitalise the company with an investment USD1 million;

2.1.2. to apportion the legal ownership and beneficial interest in the company amongst party A, party B and party C according to the ratio of 70 per cent, 15 per cent and 15 per cent, whereby party A, party B and party C shall contribute US700,000, US150,000 and US150,000 respectively.”

Party A is Dama whereas party B is the Plaintiff and party C is her sister, Lily.

13.  Clause 2.5 provides as follows: 

“Unanimous approval

No actions or resolution in respect of the following matters shall be taken by the company except with the unanimous approval of the parties, namely:  the issuance of any securities, shares (ordinary or preference shares) in the company; the alteration of the memorandum and/or articles of association of the company; the alteration of the rights of any class of shareholders; the provision of loans and guarantees; the sale, disposal or transfer of any interest in any share(s) in the company by any party thereto; the material change to the business of the company and that of the Shanghai WOFE; any action likely to cause the company’s dissolution, liquidation, amalgamation or reconstruction or the merger of the company with any other corporation, firm or spin-off or consolidation of the company with any other entity or the incurrence of expenses in excess of US$100,000.”

14.  Matters concerning the management are largely set out under clause 3.  A significant part of the arguments before me was devoted to the proper construction of clause 3.1 which I set in full here. Clause 3.1 provides that:

“Directors. The number of directors shall be at least two, with one representative from party A and one representative from party B and party C. The parties may increase (or decrease, as the case may be) the number of directors of the company at any time provided that the unanimous agreement of the parties must be first had and obtained.”

15.  Clause 3.2 provides that:

“Meetings

The articles of association of the company shall govern the conduct of the shareholders and directors of the company.  In the event of a conflict between the terms of this agreement and the articles of association of the company, the terms of this agreement shall prevail between the parties.”

16.  Clause 7 is an entire agreement and variation clause.  It provides as follows: 

“This agreement constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written or oral, relating to its subject matter. No variation of this agreement shall be effective unless it is in writing and signed by the parties.”

17.  The final clause which may be of some relevance here is at 10.3:

“The parties further undertake they will not transfer any of its interests in the company to any person who is not party to this agreement unless such person obtains the written consent of the company and executes a deed of adherence in a form satisfactory to the parties, agreeing to be bound by all the terms and restrictions of this agreement, as if it were an original party to the agreement.”

Summary of the arguments

18.  In summary, the battle lines in the present hearing were along these lines:

(1)  was the Company meeting convened and held pursuant to the articles of association?

(2)  if not, could Dama rely on the ‘irregularity principle’ since it held 70 per cent of the shares of the Company and could therefore have availed itself of section 570 of the Companies Ordinance (ie the old section 114B of the former Companies Ordinance).  This in turn depends on whether the Plaintiff’s construction of the shareholders’ agreement is correct and/or whether other considerations which relate to it being a quasi partnership and there being other equitable consideration make it such that the irregularity principle would not or should not apply in the present instance.

19.  A subsidiary issue concerns whether or not clause 3.1, if it indeed has the meaning as contended for by the Plaintiff, should be held to be unenforceable as being a fetter on the statutory right of a majority shareholder to remove directors.  This is a matter which has been considered in quite a number of authorities, including Muir v Lampl [2005] 1 HKLRD 338, per Johnson Lam J (as Lam VP then was).

20.  As is obvious from the fact there are two proceedings, there is also a dispute relating to the Subsidiary.  However, as I pointed out to the parties during the hearing, if the defendants were successful in dismissing the originating summons at the Company level, it would follow that the Subsidiary would be able to rely on the irregularity principle as the Company can control the board of the Subsidiary.

The construction argument

21.  The Plaintiff’s case in this regard, as explained by Mr Dicky Cheung who made skilful submissions on her behalf, was essentially that the purported resolutions and purported meetings were null and void and of no legal effect because they were inquorate and therefore invalidly adopted. 

22.  He pointed out that on 28 December 2020, Dama had sent an email which enclosed certain written requests expressly invoking the members’ power to “request the directors to call an extraordinary general meeting” under section 566 of the Companies Ordinance.  Insofar as the Company is concerned, the members of which were Dama, the Plaintiff and Lily, this power was purportedly invoked in Dama’s capacity. 

23.  He also highlighted that on 4 January 2021, Dama had made clear the requests were made under section 566 of the Companies Ordinance and stated “the directors are required to call the EGMs accordingly”. 

24.  On 13 January 2021, the Plaintiff and Lily agreed to the calling of the extraordinary general meetings of the two companies (the “EGMs”) whilst making clear that the instructions were limited to the issuance of a notice of EGMs only.

25.  On 16 February 2021, neither the Plaintiff nor Lily attended the EGMs and, as a result, it is contended that the EGMs were inquorate insofar as the holding Company is concerned, since it had three members only and, as only one attended the EGM on 16 February 2021, the quorum required under article 33(1) of the company’s articles, ie. two members, was not constituted.

26.  He further submitted that, pursuant to article 36(1) of the holding Company’s articles, if a general meeting was inquorate, it should be dissolved “if called on the request of members” or “in any other case could be adjourned to the next week with a lower quorum according to article 36(2)”. 

27.  It was further submitted that whilst it was clear that the EGMs were both called on the members’ requests, and in particular by Dama in the holding Company’s case, Dini, as Dama’s representative, had wrongly adjourned the EGM to the following week.

28.  The defendants’ position essentially relies on construction of Article 36(1)(a).  The Plaintiff points out that the articles of association of both companies contain references to the word “call’ and “request” and that Article 36(1)(a) provided that the meeting must, “if called on the request of members, be dissolved if the quorum was not present”.  In the present case, it was submitted that, although the EGMs were called by the directors, this did not mean that the EGMs were not so called on the request of the member, in this case Dama.

29.  I tend to think there is force in the Plaintiff’s submission in this regard and I note that Mr Byron Chiu for the 2^nd and 4^th defendants, to his credit, did not deal with this point orally and dealt with it briefly in writing.  It seems to me that, but for the application of the irregularity principle, the originating summonses would succeed.

Irregularity principle

30.  This legal concept was explained concisely and pithily by Le Pichon J (as her Ladyship then was) in Peter Yip v Asian Electronics Limited [1998] 2 HKC 96 at 102I to 103B:

“The irregularity principle really comes to this: the lawfulness of a decision taken by a meeting of members or board cannot be questioned if the only facts alleged to make it unlawful is a mere informality and irregularity and the intention of the meeting is clear. This is particularly so if there is no evidence that the decision of the meeting would have been different if the correct procedure had been observed. In this connection, it is appropriate to refer to what Cotton LJ observed in Browne v Le Trinidad (1888) 37 Ch D 1 10: ‘A court of equity refuses to interfere where an irregularity has been permitted if it is within the power of the persons who have permitted it at once to correct it by calling a fresh meeting and dealing with the matter with all the due formalities.’”

31.  The irregularity principle is now well established and has also been explained at length by the Court of Appeal fairly recently in Re Dalny Estates Limited [2018] 1 HKLRD 409. 

32.  This was also explained by Linda Chan J in her recent decision in Chen Pao Tzu v Chen Sheng Kuei & Ors, unreported decision dated 3 February 2021, where she held as follows - paragraphs 19 to 20: 

“In my judgment, the counterfactual posited by D1 is not the correct one. As the authorities explain, the court does not simply look to ascertain whether the result of the resolution was one which the majority shareholders would approve of. Rather, it considers whether the same result would have been obtained had the correct procedures been followed (Re Dalney Estates, paragraph 18 per Godfrey Lam J). There is thus an implicit requirement that the irregularity was one which would have been cured by the majority. In other words, the principle does not operate to invalidate the resolution which the majority shareholders could not have lawfully passed.”

33.  I will then set out paragraph 20 of her judgment, and at paragraph 21 her Ladyship notes counsel’s concession during oral submission that:

“...the burden is on the party seeking to rely on the ‘irregularity principle’ to demonstrate that the principle applies, and the threshold is one of inevitability. This was stated at paragraph 27 of Dalney Estates: ‘Furthermore, the passages quoted from the authorities above suggest, arguably, that the application of the principle is dependent upon it being established that the majority would inevitably be in a position to call and hold a meeting properly and regularise the decision if necessary’”.

34.  The question then is: would an application, if it had been made under section 570 inevitably have been successful? 

35.  As a matter of general principles applying to such an application, I found the principles as summarised by Richard Seldon QC sitting as a deputy judge of the English High Court in Vectone Entertainment Holding Limited v South Entertainment Limited & Ors [2005] 123 BCC to be helpful.  At paragraph 32, his Lordship held: 

“[32] Against this background, I turn to the relevant principles to be applied, which were not in dispute. They are to be derived from two recent cases: Union Music Ltd v Watson [2003] EWCA Civ 180, [2003] 1 BCLC [2004] 2 BCLC 224 at 231, 453 and Re Woven Rugs Ltd [2002] 1 BCLC 324. I derive the following principles from the Union Music case.

(a) Section 371 of the Companies Act 1985 is a procedural section intended to enable company business which needs to be conducted at a general meeting to be so conducted. A company should be allowed to get on with managing its affairs without being frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act.

(b) Where there is a majority shareholder and no class rights attaching to particular classes of shares which the convening of a general meeting is designed to override, the court in exercising its discretion under s 371 will consider whether the company is in a position to manage its affairs properly and will also take into account the ordinary right of the majority shareholder to remove or appoint a director in exercise of his majority voting power.

(c) The fact that quorum provisions in the articles require two members' attendance is not in itself sufficient to prevent the court making an order under s 371 to break a deadlock in favour of a majority shareholder who is seeking a proper order, such as the appointment of a director, which he has the right to procure in ordinary circumstances.

(d) Section 371 is a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder. However, a quorum provision is not of itself sufficient to constitute such an agreement.”

36.  More recently, in Hong Kong, Harris J had in Re Mandarin Capital Advisory [2011] 2 HKLRD 1003 considered the proper approach the court would take in an application such as the present.

“19. A majority shareholder, such as the plaintiff, has by virtue of section 157B of the Companies Ordinance a statutory right to remove the 1^st Defendant. Section 114B is the procedure provided by statute for addressing problems, inter alia, in realising the right given by section 157B caused by the impracticality of conducting a general meeting of a company. Section 157B expressly states that the right that it confers cannot be excluded by anything in the memorandum or articles of agreement or any agreement between the company and a shareholder.

20.  It seems to me that in order for a minority shareholder to contest successfully an application for an order under section 114B, which will enable the applicant to convene a general meeting to remove him as a director, on the grounds that a company is in the nature of a quasi partnership, it would be necessary for the respondent to demonstrate that, assuming that the meeting called 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 as a director.  In considering whether or not such an injunction should be granted regard would need to be had to the clear implication of section 157B, namely, that a majority shareholder has a right to remove directors, which is not easily restricted.  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 that he remained a shareholder.  In my view this requires something more than allegations that, if made out at trial, might establish that it is unfairly prejudicial for the respondent to be excluded from management of a company.  What I anticipate will 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.”

37.  His Lordship then observed that, as a matter of general procedure, at paragraph 22:

“In my view this does not demonstrate any more than an initial understanding about how the business was to be managed.  It does not demonstrate an agreement that if the Parties fell out the Plaintiff could not exercise his statutory right to remove the 1^st Defendant as a director, which is not the same as saying that the 1^st Defendant’s removal might not be capable, either independently or in conjunction with other relevant factors, of constituting unfair prejudice for the purposes of section 168A of the Companies Ordinance.  I do not think this conclusion is affected by the point emphasised by Mr Maurellet, namely, that all the Plaintiff says in response to the 1^st Defendant’s evidence is this, which is contained in paragraph 7 of his 2^nd affirmation: “However, I cannot currently recall whether there was any discussion or an agreement of a partnership.  It is unhelpful that the 1^st Defendant makes assertion of partnership without giving any particulars.”

38.  Paragraph 26:

“26.  I would in closing repeat that in my view applications under section 114B should be determined by reference only to those considerations that are relevant to the exercise of the right of an applicant to convene a meeting and put the particular resolution in question before a company in general meeting for consideration and voting.  In my view it is undesirable that applications of this sort should be allowed to develop into an assessment of the conduct of a company’s affairs by its directors with delay to the determination of the application, increase in costs and probably no resolution to the real issues between the parties.  If as a result of an order under section 114B action is taken by an applicant which a respondent believes is unfairly prejudicial to him he may seek the appropriate relief in a procedure designed for the determination of such complaints.”

39.  I note that a similar approach had been subsequently taken by Peter Ng J in Re E-Harbour Services Limited [2004] 5 HKLRD 180.  In particular, his Lordship concluded as follows, at paragraph 44:

“In closing, I would respectfully adopt the sentiment expressed by Harris J in Re Mandarin Capital Advisory that it is undesirable for section 114B applications to be allowed to develop into an investigation into the conduct of a company’s shareholders/directors in managing its affairs. For reasons already explained in the passage in Re Woven Rugs Limited” [2002] 1 BCLC 324 at paragraph 32 “and quoted above, the proper forum in carrying out that sort of investigation should be in a section 168A petition, if a respondent is so advised to take that course...”

40.  These are, in my view, salutary observations. There is before the court, in applications such as the present, no proper pleadings nor a petition for unfair prejudice so the court is to some extent considering these matters in a vacuum.  The other difficulty of course, is that it is harder to gauge the impact of the result of the application on the overall proceedings since, in the absence of a petition or pleading, it is not clear what the ultimate relief an applicant would be seeking, eg a buy-out or seeking the other party to buy out.  This would obviously have a result on the justice of the case.

41.  I finally mention the decision of Yuen JA in Re Success Plan Limited [2002] 3 HKLRD 560.  Both counsel appearing before me sought to draw reliance from different paragraphs. 

42.  Mr Chiu highlighted paragraph 43 where her Ladyship held:

“It is well-established law that the refusal of another shareholder to form a quorum for a meeting is an example of a situation where it would be impracticable to call a meeting of the company. A quorum requirement does not confer a veto power on a minority shareholder by his ability to prevent a shareholders’ meeting from being held, unless the minority shareholder has a special right”.

43.  Whereas Mr Cheung highlighted paragraph 47:

“The possibility that unfair prejudice might result from a court-ordered meeting is a matter that the court would take into account, because the court would not lend its aid to the commission of acts which would be unfairly prejudicial to any shareholders. That is not to say, however, that the fact that a petition has been presented would in all circumstances defeat an application for a court-ordered meeting”.

44.  It seems to me that this last paragraph highlights the importance of considering the matters in the round and, in the absence of an unfair prejudice petition, it would be harder for the court to in practice assess the degree of unfair prejudicial conduct on any given shareholder.

Construction of clause 3.1

45.  It is undisputed that the principles of construction, whether it is for a contract or articles or shareholders’ agreement, are governed by the same principles.  Notwithstanding the skilful and attractive submissions of Mr Dicky Cheung on behalf of the Plaintiff, I do not consider that clause 3.1, properly construed, confers on the plaintiff a “right to participate in the management of the company”. 

46.  I first note that this is not one of those matters explicitly covered by clause 2.5 of the shareholders’ agreement which refers to unanimous approval. 

47.  I consider that there is force in the defendants’ submission that, on a plain construction of clause 3.1, that entitles both sisters to at least one representative and it is therefore in substance a representation clause. 

48.  To borrow the words of Johnson Lam J (as Lam V.P then was) in Muir v Lampl, the clause is simply silent as to whether the other shareholders could exercise their statutory right under section 157B to remove a director.  The whole scheme is to ensure the plaintiff could have her representative on the board.

49.  Clause 3 does not provide that each of the parties A, B or C shall be entitled to have one representative, nor does it provide fixed percentage of representation on the board by one or each of the parties to the agreement.  It seems to me therefore that there is no contractual basis to contend that there was a “pre-existing balance on the board which could be and should be preserved by reason of clause 3.1”.

50.  If that had been the parties’ agreement, the clause would have easily provided for equal representation on the board as between party A and parties B and C.  Given that the shareholding was split 70 per cent / 30 per cent, if that had been the intention, it would be surprising that it would not have been formulated in a much clearer way. 

51.  It seems to me that the last sentence of clause 3.1, “The parties may increase (or decrease, as the case may be) the number of directors of the company at any time provided the unanimous agreement of the parties must be first had and obtained”, simply deals with the situation where the total number of directors of the company is to be increased or decreased from what it previously was.  In the present case, where the number of directors was three and remained three but what had happened was that the balance shifted from one-two in favour of the sisters to two-one in favour of Dama, this would not apply.

52.  As I pointed out during the course of the hearing, if the Plaintiff’s contention to the effect of the second part of the clause were correct, it would have the odd feature that if one party were to allow the other one to have a majority on the board, then from that moment onwards it would be unable to reverse that effect, notwithstanding that, in the case such as the case before me, it had 70 per cent majority.  In other words, once it allowed the other party to have majority on the board, this could never be undone.

53.  In addition to clause 3.1 of the shareholders’ agreement, the Plaintiff has also sought to rely on other equitable considerations, which are germane in quasi partnership cases, pointing to the expression “partner” which was used in some of the messages as well as the overall context.

54.  Having regard to the requisite threshold in applications under section 570 and to the evidence before me, I do not consider that this by itself would have prevented the court granting relief under section 570. 

55.  I should note that Mr Chiu very fairly accepted in the course of the hearing that the Plaintiff could, if she were able to demonstrate to the requisite threshold, apply for such interlocutory relief as would be appropriate in the context of unfair prejudice proceedings rather than in originating summonses such as the ones before me today.  This seems to me to be consistent with what Harris J opined in Mandarin Capital Resources.

56.  In the light of my conclusion, it is unnecessary to consider the interesting argument before me as to the applicability of Muir v Lampl and whether or not it was correctly decided or in line with other first instance authorities.

Subsidiary

57.  For reasons explained above, I have held that if I considered that the application with respect to the holding Company should be dismissed, it would follow that the application should also be dismissed insofar as the Subsidiary company is concerned, since the holding Company would obviously be in a position to control the Subsidiary and who sat on its board and therefore the irregularity principle would also apply.

Disposal

58.  Although the Plaintiff has failed in obtaining the relief that she sought, I consider this situation was partly the result of what I have considered to be the incorrect procedures adopted for the EGM. 

59.  The outcome of these proceedings also reflects the nature of these applications, that these are discrete applications and, applying the authorities above, not the forum to resolve the unfair prejudice allegations which will no doubt be brought and considered in appropriate proceedings.  The fact that the Plaintiff feels she was effectively “ousted from the board” is therefore a matter which she can take up, if so advised, in unfair prejudice proceedings, either by way of interlocutory relief or using that as the basis for seeking a buy-out if she can meet the relevant legal threshold.

60.  As an aside, and as I pointed out during the course of argument, if ultimately the Plaintiff and her sister are seeking a buy-out remedy, there may be something to be said about her not being involved in the management of the company as this would simplify the question of valuation of the shares and of the business, assuming that she is able to demonstrate that such relief ought to be granted.  A fight at board level would simply complicate that exercise and also make it possibly more expensive. 

61.  I shall now hear the parties on costs.

(Submissions re costs)

62.  Having considered the background leading to the dispute as well as the fact that not all the arguments advanced ultimately led to the defendants being successful and also that some of the matters may (I put it no higher than that) be reused or re-argued in other contexts, in the overall exercise of my discretion, I will order 50 per cent of the costs of these proceedings be to the 2^nd and 4^th defendants, to be taxed if not agreed.

63.  It remains for me to thank both parties counsel for their able assistance.