SILVER CITY INTERNATIONAL (HOLDINGS) LTD v. SINO LUCK INVESTMENT LTD AND ANOTHER

HCMP5412/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.5412 OF 2003

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J U D G M E N T

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Application

1. This is an application by Silver City International (Holdings) Limited ("Silver City"), a 51% shareholder of Silver Dynasty Investment Company Limited ("the Company") for an order to convene an annual general meeting of the Company pursuant to sections 111(2) and 114B of the Companies Ordinance, Cap.32 ("the Ordinance") for the consideration and passing of certain proposed resolutions to change the composition of the board of directors and to remove Mr Chan Wai Sun ("Mr Chan") from its current position as the president (general manager and managing director) of the Company.

2. The background leading to this application may be summarized as follows.

The Company

3. The Company was incorporated on 22 April 1986. Initially, Silver City held only 49% of the shares. The balance of 51% was held by the other shareholder, Sino Luck Investment Limited ("Sino Luck"). In 1991, the ratio of shareholding was reversed and has since remained the case up to now.

4. Currently, the Company's board of directors consists of four directors appointed by each of Silver City and Sino Luck. Two of the directors coming from Sino Luck's camp, namely, Ms Amelia Chan Chi Wun and Ms Chang Yin Ling were appointed in February 2003. Their appointment is disputed by Silver City.

The JV Agreement

5. The Company was set up by the parties as a joint venture vehicle for investing in the hotel business in the Mainland.

6. In June 1986, Silver City and Sino Luck first entered into a Chinese joint venture agreement for that purpose ("the JV Agreement"). Pursuant to the JV Agreement, the minimum and maximum number of directors are 2 and 12 respectively (Clause 7); Silver City would nominate nominees for the office of chairman and deputy general manager and Sino Luck, vice chairman and general manager (Clause 8). The board would meet at least once every year and all important matters require unanimity among all directors (Clause 9).

The Shareholders Agreement

7. On 5 May 1988, Silver City and Sino Luck entered into a shareholders' agreement ("the Shareholders Agreement") to establish provisions for operation of the Company. The following clauses of the Shareholders Agreement are pertinent :

"1. In spite of the provisions as contained in the Memorandum & Articles of Association of the Company, the Company shall not do, approve, undertake, carry on, take part or otherwise deal with the increase of capital, allotment of shares, transfer of shares, creation of charges over the assets of the Company, acting as guarantor for another person or corporation, issue of debentures and the merger, amalgamation or reconstruction of the Company unless and until unanimously resolved by such members as, being entitled so to do, vote in person or, where proxies are allowed, by proxy in the General Meeting of the Company.

2. The parties hereto shall procure the amendment of the Memorandum & Articles of Association of the Company in accordance with Clause 1 herein and in the event that such amendment be not approved by the Registrar of Companies for whatever reason, Clause 1 herein shall remain binding and enforceable as against the parties hereto.

3. Each term of service of the Chairman and Vice Chairman of the Board of Directors and the President (General Manager or Managing Director) of the Company shall be for a fixed term of five years as from the date of the execution of this Deed hereof PROVIDED THAT the first Chairman of the Board of Directors shall be nominated by Silver City International Development Limited and the first President (General Manager or Managing Director) and first Vice Chairman of the Company shall be nominated by Sino Luck Investment Limited for the first two consecutive terms. Silver City International Development Limited and Sino Luck Investment Limited shall be entitled to nominate such a person or corporation to fill either one of these 3 offices for the subsequent terms thereof.

4. The ordinary course of business of the Company shall be administered by the President (General Manager or Managing Director) of the Company. ..."

8. It is common ground that the Shareholders Agreement is not inconsistent with the JV Agreement.

Representation on the board

9. At the time when the Shareholders Agreement was executed, three out of the four extant directors came from Silver City's camp. Sino Luck was represented on the board by Mr Chan only. Indeed, over a substantial period of time, until the disputed appointment of the two directors referred to in paragraph 4 above, the parties did not have equal representation on the board. Silver City had four directors from its camp while Sino Luck had three.

Mr Chan

10. Mr Chan was appointed the first president (general manager or managing director) in 1988 and served the two consecutive terms of five years each. Despite the expiry of the second term in 1998, Mr Chan has since remained in this position up to now. He is responsible for and in control of the daily operation of the Company.

Silver City's complaints

11. Silver City's complains may be summarized thus.

12. First, Silver City is the majority shareholder of the Company and has invested heavily into the joint venture. It has advanced a total sum of more than US$18 million by way of loans to finance the Company's three hotel projects. Since 1998, there has been a complete breakdown of communication between the parties. Mr Chan has since then unjustifiably excluded Silver City and all the directors of the Company representing Silver City from the management and control of the Company. Because of the mis-management of the Company by Mr Chan, one of the hotel projects is exposed to the real risk of being taken over by creditors. Silver City needs to gain control of the Company as soon as possible.

13. Second, the purported appointment of two additional directors in February 2003 was made without their prior knowledge or consent. The relevant board meeting was convened without Silver City's knowledge or any of the directors representing Silver City present. Silver City intends to remove one of them from the board at the proposed general meeting.

14. Third, the Company has not held any general meeting since 1996 or 1997. All efforts made by Silver City to call meetings of directors and hold general meetings have been ignored and not acceded to by Sino Luck and Mr Chan. By letter dated 19 September 2003, Silver City's solicitors wrote to one of the directors of the Company requesting to convene an annual general meeting. On 12 November 2003, the solicitors gave notice to the Company of an intention to convene an annual general meeting on 8 December 2003. The request was refused by Sino Luck whose solicitors stated in letter dated 4 December 2003 that in the absence of Sino Luck, no general meeting of the Company, be it annual general meeting or extraordinary general meeting, shall be a legally valid and binding meeting. On 8 December 2003, Mr Huang Zhou Zhang, a director of the Company representing Silver City attended the registered office of the Company with the view to attending the general meeting requested. A director representing Sino Luck told him that no one from Sino Luck would attend.

15. Relying on these complaints, Silver City makes the present application.

Section 114B

16. Silver City prays in aid sections 111(2) and 114B of the Ordinance. As counsel's submissions were focused principally on section 114B, I will deal with this limb first.

17. Section 114B of the Ordinance stipulates :

" (1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting of the company in manner prescribed by the articles or this Ordinance, the court may, either of its own motion or on the application of any director of the company or of any member of the company who would be entitled to vote at the meeting, order a meeting of the company to be called, held and conducted in such manner as the court thinks fit, and where any such order is made may give such ancillary or consequential directions as it thinks expedient, including a direction that 1 member of the company present in person or by proxy shall be deemed to constitute a meeting.

(2) Any meeting called, held and conducted in accordance with an order under subsection (1) shall for all purposes be deemed to be a meeting of the company duly called, held and conducted.

..."

18. The general approach to be adopted in a section 114B application is this. An applicant must first show that it is impracticable to call a meeting. Once it is established, the court has a discretion, after taking into all circumstances, whether to order a meeting : see Re Success Plan Ltd [2002] 3 HKLRD 560, para.42 at p.568C-D. Circumstances inevitably vary from case to case. Some relevant factors that the courts may take into account are discussed below. They are not meant to be exhaustive.

19. The state of the company is a relevant factor when the company is in a "log jam". If it is frozen and does not have annual general meetings to produce annual statements, virtually nothing about the company is made known to the shareholders. In those circumstances, a meeting should be ordered: see Re Universal Horizon Investment Ltd [2000] 3 HKC 627. Rogers JA (as he then was) explained at pp.630E-631D :

"It seems to me that one matter which is of particular importance in this case is the state of the company. Section 114B is designed to prevent what might be a 'log jam' in the operation of the company. If, for one reason or another, a company cannot operate properly by reason of there being a failure to hold a meeting or a failure of directors either to be able or willing to call a meeting, section 114B can be used to prevent the 'log jam' continuing.

The judge approached this application on the basis that this was a well run company. It seems to me that at least since May of last year, this has not been a well run company at all. It has been a frozen company and it is most undesirable that a company is frozen in this way. It is most undesirable that companies do not have annual general meetings. It is particularly undesirable that private companies do not produce their annual accounts. These are particularly important in private companies because they are about the only thing that shareholders can have in order to know what the assets of the company are, and what has happened inside the company, and what has been done inside the company. Without the annual accounts, virtually nothing is known by the shareholders. It is that factor which again seems to have been overlooked by the judge in refusing this application. Moreover, in view of Article 7 whether and for how long the appointment of the three directors can be regarded as subsisting must be a matter of some doubt.

In the course of submissions, Mr Chain, on behalf of the plaintiff, indicated that the plaintiff might be willing to permit Mr Shi to remain as a director. Given the state of affairs, that might be a sensible course.

For my part, I am satisfied that the judge erred in the manner which I have indicated in approaching this case and it falls to this court to exercise its own discretion. I have no doubt, in my mind, that that discretion should be exercised by ordering the holding of a meeting. In many ways, the sooner a meeting is held, the better : the affairs of the company can be properly sorted out for the benefit of the shareholders. If the shareholders cannot get on amongst themselves, there are other ways of resolving that matter, but preventing the company from holding meetings is not a way of sorting out shareholders' disputes. "

20. The court will also have regard to the possibility of any unfair prejudice resulting from a court-ordered meeting : Re Success Plan Ltd, para.47 at p.569A-B.

21. The court may also take into account the existence of a shareholders' agreement, even disputed, although the court does not need to make a definitive finding. In Manfield Coatings Co. Ltd v. Springfield Coatings Co. Ltd & Another [1995] 1 HKC 74, Cheung J (as he then was) refused to order a meeting as it would have the effect of overriding a disputed agreement between members on the control and management of the company pending the winding up petition of the company in which the alleged agreement was one of the issues to be resolved.

22. It seems that Cheung J was exercising his discretion to preserve the status quo pending the resolution of the parties' disputes in the winding up petition. His approach must be correct because in an application as limited as section 114B, it is not right for the court to decide on the parties' substantive rights : see Re Success Plan Ltd, para.50 at p.569F-G, per Yuen JA. She went on to say :

"51. In my view, that is for the parties to resolve, whether by way of directors resolutions under article 13 or by way of an EGM. It is not for the Court to say how business should be conducted in advance. Should any directors not be acting in the best interests of the Company, they would be personally liable for breach of fiduciary duties. Should any shareholders take any actions that would be oppressive to other shareholders, the prejudiced shareholders would be entitled to present petitions for unfair prejudice or for a just and equitable winding-up of the Company.

52. Since the only issue now before the Court is whether it should order a meeting of the Company to be held to get it out of a 'frozen' state, it should confine itself to that consideration. It is neither necessary nor desirable for the Court at this stage to go any further to examine, in advance, the fairness of individual resolutions, as that would in effect pre-empt future considerations of the matters in the preceding paragraph."

23. With the above principles in mind, I now turn to consider the present application.

Impracticable to call a meeting

24. It is common ground that given the deadlock between the parties, it is impracticable to call an annual general meeting. The debate is purely on whether I should exercise my discretion to order the meeting.

Counsel's debate

25. Sino Luck does not object to the calling of an annual general meeting per se. What it finds objectionable is the resolutions contained in the Schedule attached to the Originating Summons herein, proposed by Silver City to be considered and if seen fit to be passed at the meeting which have the effect of :

(1) reducing the number of directors representing Sino Luck to 3 and increasing those representing Silver City to 5 (Resolution 2 to 3);

(2) appointing three individuals to be chairman, vice-chairman and the president (general manager and managing director) respectively, effectively removing Mr Chan from the last mentioned office (Resolution 4).

26. The basis of Sino Luck's objection can be found in paragraphs 12 and 18 of Mr Chan's first affirmation filed on 27 January 2004 where he said :

"12. The original spirit, intention and understanding in forming [the Company], as mutually agreed by both shareholders and reflected in the [JV Agreement], were that both shareholders do have an equal number of directors nominated by either one irrespective of its shareholding ratio, and that (a) an even number provided for in both the minimum and the maximum number of directors and (b) no provision for the 51% shareholder (at the material time it was [Sino Luck]) to have a larger number of directors over the 49% shareholder and (c) the post of President (General Manager or Managing Director) of [the Company] ... were to be taken up by D1's nominee and by me respectively or simultaneously.

...

18. [The Shareholders Agreement] was a supplement to [the JV Agreement], it did not supersede [the JV Agreement], hence the original spirit, intention, understand and agreement in forming [the Company], remained intact; and they are that despite the shareholding ratio of each JV partner (shareholder in [the Company]) each has the equal right in nominating the same number of directors in [the Company] ..."

27. Mr Chan went on to depose that the above Resolutions are oppressive to Sino Luck as a minority shareholder.

28. Mr Wong, counsel for Sino Luck, in his oral submissions pitched his clients' case at a higher level. While Mr Wong accepted that Mr Chan did not expressly say so in his two affirmations, he submitted that there existed an agreement between the parties that there should be joint management and control of the Company irrespective of the difference in shareholding. Equal representation on the board was a reflection of the alleged joint management agreement. Resolutions 2 and 3, if passed, would constitute a breach of this joint management agreement by changing the equal representation on the board. Relying on Manfield Coatings Co. Ltd, Mr Wong argued that the annual general meeting should not be ordered.

29. In his written submissions, Mr Wong submitted that under Clause 9 of the JV Agreement, any major decisions would require unanimity of all directors nominated by the parties. In his oral submissions, he went even further and contended that under Clause 9, unanimity on important decisions is required between the parties qua shareholders. He accepted that Silver City is entitled under Clause 3 of the Shareholders Agreement to nominate candidates to fill up the offices of chairman, vice chairman and president. But he argued that such a change in the Company's management is an important matter that requires unanimity of the parties qua shareholders under Clause 9. He therefore submitted that the Resolution 4 would have the effect of rewriting the parties' joint management agreement, which is not permissible.

30. It appears from his submissions that for present purposes, Mr Wong only cited the breach of the alleged joint management agreement as contended above as the oppressive conduct on Silver City's part against Sino Luck as minority shareholder.

31. Ms Wee, counsel for Silver City, submitted in essence that the alleged joint management agreement does not stand up to close scrutiny. It is inconsistent with the relevant articles of the Company on appointment and removal of directors, the Shareholders Agreement and the undisputed fact that until February 2003, the parties did not have equal representation on the board for a substantial period of time. Ms Wee said Silver City has every intention to gain control of the Company, which is currently under the mismanagement of Mr Chan. That is what a majority shareholder is perfectly entitled to do.

Whether to order a meeting

32. In my view, an annual general meeting must be called and indeed, the sooner the better. I will explain why below.

33. First, it is common ground that the Company has not called an annual general meeting since about 1997. There is hardly any justification for such default. I can see none in Mr Chan's affirmations. He referred to the breakdown in communication between the parties since about 1999. He also relied on the "customary PRC-style of conducting business through mutual consultation and reconciliation in place of annually held general meeting". In my view, these matters, even taken at their highest, are simply not an excuse for not calling an annual general meeting. Further, such default exposes both the Company, which was at all material times under Mr Chan's management, and the directors (including those representing Silver City) to possible personal liability under sections 111(5) and 122(3) of the Ordinance. This continuous default must be stopped immediately.

34. Secondly, it is apparently not in dispute that the Company has not produced any annual statement since it had failed to call any annual general meeting for the past seven years. Though a majority shareholder, Silver City has been consistently deprived of such important information on the whereabouts of the Company's assets, how the affairs of the Company were conducted throughout the years and its current financial status. Silver City is entitled to have the annual statements forthwith. This is particularly so when it has raised serious allegations against Mr Chan that through his mismanagement, the Company in now put jeopardy.

35. Thirdly, I take note of the disputed agreement on joint management and equal representation on the board and counsel's submissions. Subject to paragraph 36 below, I do not consider it right to make any finding on these matters on the materials before me. If need be, they should be determined in another proceedings after all the factual issues are fully ventilated. That said, it does not prevent the annual general meeting from going ahead with a condition that no resolution should be placed or passed at the meeting which will have the effect of disturbing the equal representation on the board.

36. Fourthly, the objection to Resolution 4 cannot stand. In his affirmations, Mr Chan asserted that it would be oppressive to pass a resolution to remove him as the president. But he has failed to explain with credible reasons why that is the case. He seemed to have suggest in paragraph 12 of his first affirmation that the parties had agreed that his appointment as president is not subject to any time limit. But Sino Luck now accepts that there is no inconsistency between the JV Agreement and the Shareholders Agreement. When read with Clause 3 of the Shareholders Agreement, his appointment under the JV Agreement does have a time limit, that is, two consecutive terms of five years each. Any suggestion that Mr Chan could stay in the office without any time limit by virtue of the JV Agreement must fail. In his submission, Mr Wong took a separate point. As noted above, he contended that removing Mr Chan would require unanimity among the shareholders under Clause 9 of the JV Agreement because it is an important matter. With respect, his submission is simply not supported by evidence at all. It flies in the face of Clause 9. Even Mr Chan has not made such a bold assertion in his affirmations. Indeed, what is the purpose of giving each party the right to make nominations under Clause 3 of the Shareholders Agreement when the incumbents, despite the expiry of their terms of office, cannot be removed without unanimity? As noted above, Mr Wong's original submission on the effect of Clause 9 is that important matters require unanimity among the directors. He transformed it to one among shareholders in the course of oral submissions when confronted by Clause 3 of the Shareholders Agreement. This shifting of stance is a desperate but futile attempt on his part to construct an argument without a proper basis.

Section 111(2)

37. I now turn to the second limb on section 111(2) of the Ordinance which provides :

" (2) If default is made in holding a meeting of the company in accordance with subsection (1), the court may, on the application of any member of the company, call, or direct the calling of, a general meeting of the company and give such ancillary or consequential directions as the court thinks expedient, including directions modifying or supplementing, in relation to the calling, holding and conducting of the meeting, the operation of the company's articles, and including a direction that 1 member of the company present in person or by proxy shall be deemed to constitute a meeting."

38. For the same reasons above, I hold that a meeting should be convened under section 111(2) of the Ordinance as well.

Conclusion

39. I will made the following order :

(1) That an annual general meeting of the Company be convened 28 days after the handing down of this judgment at 10 a.m. at the offices of the Company on 2305 Convention Plaza Office Tower, 1 Harbour Road, Hong Kong, for the purposes of considering and if thought fit passing Resolutions 1 and 4 as set forth in the Schedule attached to the Originating Summons herein.

(2) That Silver City and Sino Luck are at liberty to propose resolutions to be placed at the aforesaid meeting on the removal and appointment of directors pursuant to Article 29 of the Company's Articles of Association, subject to the condition that the number of directors representing each of them should be equal after the passing of such resolutions.

(3) In the event that Sino Luck shall be absent from the aforesaid meeting, one member, being Silver City by its authorized representative, do constitute a meeting.

(4) There be an order nisi to be made absolute 14 days after the handing down of this judgment that Silver City shall have the costs against Sino Luck, to be taxed if not agreed.