TONG HOK TAK DAFFY AND OTHERS v. BEVERLY CONSULTANTS LTD AND OTHERS

HCA2617/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2617 OF 2003

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D E C I S I O N

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1. There are three applications before the court. The first is the plaintiffs' summons filed on 15 July 2003 seeking interlocutory injunctions and disclosure ("the injunction summons"). The second and third applications are respectively the plaintiffs', and the 1st and the 2nd defendants' summonses seeking inspection of documents under Order 24, rule 10, Rules of the High Court ("the plaintiffs' O.24 summons" and "the defendants' O.24 summons" respectively). At the conclusion of the hearing, I granted the injunction summons in favour of the 3rd plaintiff, and also the plaintiffs' O.24 summons, and dismissed the defendants' O.24 summons. My reasons appear below.

BACKGROUND

2. Star World International Limited, the 3rd defendant ("the Company") is a company incorporated in Hong Kong. Golden Valley Agents Limited, the 2nd defendant ("GVAL") and Beverly Consultants Ltd, the 1st defendant ("Beverly") are the only two shareholders and directors of the Company. GVAL holds 5100 shares and Beverly holds 4900 shares.

3. Both GVAL and Beverly are BVI companies. In the case of GVAL, it is registered under Part XI of the Companies Ordinance. Rhodes Investments Limited ("Rhodes"), another BVI company, is the sole shareholder of GVAL. Mr Leslie Cheung was the sole shareholder and director of Rhodes. Mr Cheung was a well-known pop singer and actor. He died on 1 April 2003.

4. As for Beverly, it is the defendants' case that it is also registered under Part XI of the Companies Ordinance. The Company Name Index Search produced by the plaintiff however does not reveal any registration of Beverly under Part XI of the Companies Ordinance. Mr Alvin Leong, the 2nd defendant, is the sole beneficiary of Beverly.

5. The 1st and 2nd plaintiffs are the executors named in the will of Mr Cheung. They are in the process of applying for grant of probate to the estate.

6. On 22 May 2003, the 1st and 2nd plaintiffs were registered in the Register of Members of Rhodes as the joint shareholders of Rhodes in replacement of Mr Cheung. On the same day, the 1st plaintiff was appointed as the sole director of Rhodes.

7. Also on 22 May 2003, the 1st plaintiff was appointed the sole director of GVAL. The Registered Agent of GVAL in BVI effected the Certificate of Incumbrancy relating to this appointment on 6 June 2003. On 26 May 2003, notice of the 1st plaintiff's appointment as sole director of GVAL was filed with the Hong Kong Company Registry. The Notification appointing the 1st plaintiff as the authorized representative of GVAL was also filed with the Hong Kong Company Registry.

8. Further, on 22 May 2003, the 1st plaintiff as the sole director of GVAL resolved to appoint himself as the authorized representative of GVAL to deal with all matters relating to the Company.

9. By a letter dated 26 May 2003, GVAL acting by the 1st plaintiff requested to inspect "the books of accounts and corporate materials and records" of the Company. The letter was addressed to the Company for the attention of Beverly and the 2nd defendant. GVAL made the request in its capacity as a shareholder and a director of the Company.

10. By another letter of the same date, GVAL acting by the 1st plaintiff gave notice to Beverly and the 2nd defendant that GVAL would not ratify any resolution or action taken on behalf of the Company that did not have its prior written approval.

11. This led off a series of correspondence between the solicitors for Beverly and the 2nd defendant ("PWC") and the plaintiffs' solicitors ("FCLK"). Principally, PWC requested for particulars of and documents supporting the appointment of the 1st plaintiff as the director of GVAL. In response, FCLK did supply such documents as copies of Notifications of Changes of Directors and of Changes of Authorized Representative, Consent of the 1st plaintiff to act as director, the Certificate of Incumbrancy and the director's resolution of GVAL appointing the 1st plaintiff as its authorized representative to deal with matters relating to the Company.

12. In the meantime, in one of its letters dated 12 June 2003 to FCLK, PWC made an offer to buy out GVAL's interest in the Company. In another letter of the same date, PWC enquired with FCLK whether their instructions "include and/or extend to acts for and on behalf of the executor/administration" of Mr Cheung's estate.

13. Notwithstanding that, PWC continued to question the appointment of the 1st plaintiff as the sole director of GVAL, and his authority to act. In a letter dated 13 June 2003, PWC pointed out that even if the 1st plaintiff were nominated as the sole director and/or the authorized representative of GVAL, the 2nd defendant and Beverly were not obliged nor bound to accept the nomination. Similarly, PWC also did not accept the appointment of the 1st and 2nd plaintiffs as executors under Mr Cheung's will, and asked for documents verifying the capacity or authority in which the executors hold them out to be.

14. The correspondence between PWC and FCLK also dealt with payments and funds received by the Company since the death of Mr Cheung and also the royalties and income on a new album of Mr Cheung to be published by a Universal Music Limited ("Universal"). Specifically, FCLK took the view that the refusal of Beverly and the 2nd defendant to recognize the 1st plaintiff as the duly appointed representative of GVAL had "frustrated the proper functioning of the management of the Company", and that there was an imminent need to preserve the royalties and financial benefits to which the Company would be entitled on the release of the new album. FCLK also take the position that Beverly alone did not have authority to represent the Company to deal with its assets, and demanded the 2nd defendant and Beverly to give a number of undertakings, including depositing money received by the Company into an escrow account, refraining from withdrawing money from the Company's bank account without the written consent of either of the executors and producing the books and accounts of the Company for inspection.

15. On 15 July 2003, the plaintiffs commenced these proceedings and issued the injunctions summons, which was returnable on 18 July 2003. On 17 July 2003, the 2nd defendant's affirmation was filed, in which he requested the plaintiff to produce at the hearing a full copy of Mr Cheung's original will and to provide the same to him pursuant to Order 24, rule 10. At the hearing on 18 July 2003 before Suffiad J, the plaintiffs' counsel produced to the Court and allow the defendants' legal representatives to inspect the original will of Mr Cheung with certain parts of it (primarily the terms of distribution) covered up.

16. On 18 July 2003, the plaintiffs served notice under Order 24, rule 10 requesting the 2nd defendant to produce for inspection the shareholders agreement made between GVAL and Beverly and also the supplementary agreement entered into between the Company, Mr Cheung and Universal. By letter dated 21 July 2003, PWC declined the plaintiffs' request for inspection, and persisted in the request to inspect and take photocopies of the original will of Mr Cheung, including the covered parts.

17. On 30 July 2003, Beverly petitioned for the winding-up of the Company in HCCW 824 of 2003 on the basis that the substratum of the Company had gone with the death of Mr Cheung. GVAL was named as the respondent to the petition. The petition and the verifying affidavit were served on FCLK as the solicitors for GVAL, and also on the 1st plaintiff as the duly authorized representative of GVAL.

18. On 31 July 2003, the plaintiffs and the 1st and 2nd defendants took out their respective Order 24, rule 10 summonses.

INTERLOCUTORY INJUNCTIONS

(1) Serious issues to be tried

19. Central to the 1st and 2nd defendants' challenge to these plaintiffs' claim and the injunction summons is the authority of the 1st and 2nd plaintiffs to act. Specifically, the 1st and 2nd defendants dispute the 1st plaintiff's authority to act as the sole director and/or the authorized representative of GVAL. It is said that the plaintiffs has not been candid, in that they have not disclosed documents showing how the interests of Mr Cheung in Rhodes and in turn GVAL was passed to the 1st plaintiff.

20. The plaintiffs' case is that the interests of Mr Cheung devolved upon the executors, namely, the 1st and 2nd plaintiffs, upon his death. It is by operation of law and not by transfer, as the defendants believed. No document is therefore required to effect the transmission and to bring about the entry in Rhodes' members register to the effect that the share formerly held by Mr Cheung is now held in the joint names of the 1st and 2nd plaintiffs. On that basis, the 1st plaintiff was appointed to be the sole director and the authorized representative of GVAL.

21. In my view, there must be a serious question to be tried with regard to whether the 1st plaintiff is validly appointed to act for GVAL in its affairs and in relation to the Company. It is undisputable that Rhodes owns GVAL. The members' register of Rhodes shows clearly that the 1st and 2nd plaintiffs jointly hold the one share in Rhodes. The documents also show that the 1st plaintiff had been appointed to be the sole director of Rhodes. On that basis, the 1st plaintiff appointed himself as the sole director of GVAL and also as its authorized representative. The public records at the Company Registry also show the 1st plaintiff to be the authorized representative of GVAL. That being the case, prima facie, the 1st plaintiff is authorized to act for GVAL in relation to its affairs and in relation to the Company. The 1st and 2nd defendants being third parties dealing with GVAL, should in the normal course of events, go by the public records. Why should they, or on what basis can they, attempt to go behind the public records to challenge the 1st plaintiff's authority to represent GVAL?

22. The 1st and 2nd defendants refer to the shareholders agreement dated 1 May 1999 made between Beverly and GVAL, and contend that the Company has always been run as a quasi-partnership between the 2nd defendant and Mr Cheung and the management has always been entrusted to Beverly. It is therefore said that the plaintiffs, in particular, the 2nd plaintiff has no right to be involved in the management and operation of the Company. There is thus no sound basis for the claim herein.

23. Although under clause 5.2 of the shareholders agreement, Beverly was appointed the managing director of the Company, clause 8.2 stipulates that Beverly shall manage and develop the business of the Company and execute the policy of the board of directors. It clearly recognizes that Beverly is subject to the policy and decisions of the board. And notwithstanding that clause 5.1 provides for the appointment of Mr Cheung to the board of the Company, Mr Cheung had never been so appointed. The only two directors on the board of the Company have always been Beverly and GVAL. There is clearly a serious issue to be tried with regard to whether Beverly is entitled to act unilaterally with regard to the affairs and management of the Company.

24. The 1st and 2nd defendants also take issue with the plaintiffs' entitlements to bring these proceedings. It is pointed out that, by the terms of the Indorsement of Claim, this is intended to be a derivative action, brought on behalf of all shareholders of the Company except Beverly. The derivative action is, however, not maintainable because there is no fraud alleged, that GVAL is the majority shareholder, that the plaintiffs have other remedies available, and that a winding-up petition has been presented against the Company.

25. For the plaintiffs, it is argued that the 1st and 2nd plaintiffs are joined in this action as interested and necessary parties, they being the executors of Mr Cheung's estate, who is beneficially interested in the Company through GVAL. In the case of GVAL, it has a right to be represented to the board and to participate in the Company, which has been denied by Beverly acting by the 2nd defendant. The 1st plaintiff also has a personal right to act as the authorized representative of GVAL, which has been denied. It is therefore said that the claim is both a personal claim and also a derivative claim. Reference is made to the terms of the Indorsement of Claim, which states that the plaintiffs claim on their own behalf and also on behalf of all the shareholders of the Company except Beverly : Prudential Assurance Co. Ltd v. Newman Industries Ltd (No.2) [1982] 1 Ch 204, 210C.

26. As a matter of law, it is permissible to maintain a personal claim and a derivative claim in the same action. But for my part, I have some reservations whether the 1st and 2nd plaintiffs have any personal right or interests that would entitle them to the relief sought in the injunction summons. The 1st and 2nd plaintiffs do not appear to have any claim against the 1st and 2nd defendants in their own right. In the case of GVAL, however, it must be at least arguable that it has a separate and personal cause of action against the 1st and 2nd defendants by reason of its being a director and shareholder of the Company, and also as a party to the shareholders agreement.

27. This would have been sufficient to dispose of the defendants' objection that there are no serious issues to be tried by reason that the derivative action is demurrable. Suffice to say that insofar as it is a derivative action brought by GVAL, the fact that it holds 51% of the shares is not necessarily a bar. What is required is to establish that the alleged wrongdoer, in this case Beverly, is in control of the company. As a result of the refusal by Beverly and the 2nd defendant to accept the authority of the 1st plaintiff to act in relation to the Company, GVAL has not been able to participate in the Company. The Company is therefore effectively under the sole control of Beverly, notwithstanding that it holds only 49% of the shares. Also because of the refusal to recognize the 1st plaintiff as the authorized representative of GVAL, the submission that GVAL can outvote Beverly at the general meeting to change the management of the Company, and therefore has other remedies available, is untenable. Additionally on the argument that the present action is not in respect of a fraud on the Company, but is primarily a shareholders dispute, the term fraud is not confined to deceit but embraces a wider equitable meaning. The presentation of a winding-up petition does not ipso facto make the derivative claim bad. After all, the petition was presented after these proceedings were commenced.

28. In short, I do not accept the 1st and 2nd defendants' submissions that there are no serious issues to be tried on the plaintiffs' claim.

(2) Damages an adequate remedy

29. For the 1st and 2nd defendants, it is submitted that the plaintiffs' main concern is the royalties from the new album or arising in future. Thus damages is an adequate remedy and there is no suggestion that the 1st and 2nd defendants will not be in a position to meet an award of damages. But the crux of the plaintiffs' claim here is wider than that. There is the concern that the Company has no functioning board, and the Company is managed to the exclusion of GVAL. In the absence of supervision and scrutiny from a board, there are risks of loss to the assets, including the master tapes of Mr Cheung, and the funds, including the royalties received, such that damages will not be an adequate remedy.

(3) Balance of convenience

30. An important concern in the period leading up to the determination of the plaintiffs' rights and entitlements in the Company and the adjudication of the winding-up petition, must be to preserve the value and assets of the Company for the benefit of GVAL and Beverly. Beverly and the 2nd defendant have taken the stance that the affairs of the Company can be operated by Beverly alone, and that GVAL has no right to be involved. This coupled with their refusal to accept the 1st plaintiff as the authorized representative of GVAL effectively means that the Company has no functioning board and it is being operated to the exclusion of GVAL. At the same time, Beverly and the 2nd defendant had refused to adopt the proposal for the preservation of the royalties generated from the new album. Additionally, Beverly has petitioned for the winding-up of the Company. Bearing all these in mind, the balance of convenience will come down in favour of granting the relief sought in the injunction summons.

(4) Cross undertaking as to damages

31. Mr Mok indicates in his submissions that the plaintiffs have no objection to offering a cross undertaking. But in my view, the 1st and 2nd defendants have not shown any loss or damages that necessitate a cross undertaking.

32. For the reasons above, I am of the view that the injunction summons should be granted but only in favour of the 3rd plaintiff, GVAL. The 3rd plaintiff's costs of the application be in the cause.

THE PLAINTIFFS' O.24 SUMMONS

33. By the plaintiffs' O.24 summons, the plaintiffs seek the production and inspection of the shareholders agreement made between Beverly and GVAL, and also the supplemental agreement dated 25 July 2000 made between the Company, Mr Cheung and Universal. Both of these documents were specifically referred to and relied on in the 2nd defendant's affirmation filed on 17 July 2003. There is no reason why the plaintiffs are not entitled to inspect them. There is also nothing in the materials before the court or in counsel's submission to indicate why the plaintiffs should be refused inspection of them. Accordingly, I make an order in terms of the paragraph 1 of the plaintiffs' O.24 summons save that the time place and manner of inspection are to be agreed between the plaintiffs' solicitors and the 1st and 2nd defendants' solicitors. There is no reason why costs should not follow event. Accordingly, the costs of the application are to be paid by the 1st and 2nd defendants to the plaintiffs in any event.

THE DEFENDANTS' O.24 SUMMONS

34. By the defendants' O.24 summons, the 1st and 2nd defendants seek the production and inspection of the entire origina1 will of Mr Cheung. Mr Barlow indicates at the outset that the summons is to be stood over if the injunction summons is not granted, otherwise the 1st and 2nd defendants will seek an order in term of their summons.

35. The plaintiffs are prepared to allow inspection of all parts of the will related to the appointment of the 1st and 2nd plaintiffs as executors and their power, which they accept to be relevant to the issues in these proceedings. The plaintiffs, however, object the inspection of the parts of the will dealing with distribution. Both in correspondence and in submissions, FCLK and counsel confirm that the covered parts in no way restrict the powers of the executors. The plaintiffs take the view that the beneficial interests under the will is irrelevant to the issues in these proceedings. The plaintiffs contend that those parts on distribution are private and sensitive information, by reason of the size of the estate and the interest the public and the media have in Mr Cheung, and the 1st and 2nd defendants should not be given access to them.

36. Both at the hearing before Suffiad J and the hearing on 1 August 2003, the plaintiffs had produced for inspection the original will, but with the parts dealing with distribution being covered up. The uncovered parts of the will recite the appointment of the 1st and 2nd plaintiffs as the executors of the estate of Mr Cheung. The 1st and 2nd defendants, nevertheless, insist on seeing the entire will. To the extent that the 1st and 2nd defendants contend that they are entitled to inspect the entire will, it is for them to make out a case of the relevance of the whole will and their entitlement to the order sought.

37. It is, however, not altogether clear from the affirmation of the 2nd defendant or the correspondence exchanged between solicitors what the relevance of the entire original will of Mr Cheung is and the basis of the 1st and 2nd defendants' application for its production and inspection.

38. In PWC's letter dated 22 July 2003 in reply to FCLK's enquiry on the relevance of the covered part of the will, it was stated that "the reasons advanced by your counsel as to the basis for covering up the will only confirms that the contents of the parts covered up are very relevant to the present proceedings", and that the 1st and 2nd defendants maintained that contents of the covered parts "must be relevant in the present proceedings".

39. Mr Barlow's submissions at this hearing do not advance the position any further. It is said that the 2nd defendant wishes to ascertain who are the beneficiaries under the will. It is also said that the 2nd defendant may be one of the named beneficiaries. It is not known on what basis the 2nd defendant holds this belief. But more importantly, it would be a mis-use of these proceedings and the occasion to seek discovery for the collateral purpose of verifying the 2nd defendant's belief, when the issue of beneficial interest or the identity of the beneficiaries under the will is not relevant to the issues herein.

40. The 1st and 2nd defendants having failed to make out a case of relevance and the ground for the application, the defendants' O.24 summons is dismissed with costs to the plaintiffs in any event, to be taxed if not agreed.