KARUPAYEE AMMAL (as the administratrix of the estate of KARUPAYA SELVARAJ, Deceased) v. GMT INDUSTRIAL LTD

HCMP 522/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 522 OF 2017

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J U D G M E N T

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Background

1.  The background to the application before me is a family dispute following the death intestate of Karupaya Selvaraj, the father of the family and the founder of GMT Industrial Limited, the defendant company (“the Company”) and the holder of 65% of its shares until his death on 22 February 2003.

2.  Upon his death Letters of Administration of his estate was granted to Selvam, the other founding member.  He subsequently also died intestate on 19 May 2008 and Letters of Administration was granted to his surviving widow, Fan Rong Li and to a Yau Paul.  Subsequently on 12 October 2009 the plaintiff was granted Letters of Administration de bonis non of the estate.

3.  Since 2008 the affairs of the Company, it is submitted, have been largely in the hands of Moorthy and Mohan Salvaraj, the two surviving sons who hold 10% and 12% of the shares respectively.  That relationship has been far from trouble free, and Mohan has commenced winding up proceedings against the Company twice — first in 2010 and then again in 2013, although both proceedings were subsequently disposed of by consent.  The plaintiff, as their mother, has kept a neutral stance throughout in the hope that matters could be resolved between them.

4.  The application before me was precipitated by the plaintiff’s discovery in or around May 2016 that resolutions had purportedly been passed by the Board of Directors of the Company declaring an interim dividend of HK$15,600 per share, amounting to a total of HK$234,000,000 for the year ended 31 December 2014 and for the advancement of interest free loans to Mohan and Moorthy respectively of HK$3,985,000 and HK$19,585,800.  Pursuant to the said resolutions allegedly passed in December 2014 Mohan and Moorthy received the sum of HK$28,080,000 and HK$23,400,000 respectively as interim dividends as well as the aforesaid sums of unsecured interest‑free loans in June and February 2015.

5.  The plaintiff instructed her solicitors to seek an explanation from the Company and at the same time to seek registration of herself as a member in place of the deceased in respect of his shareholding.  The Company refused to so register her; hence this application.

6.  I should say at the outset that although the summons was issued on 7 March 2017 and was accompanied by a detailed affidavit of the plaintiff explaining the basis of the application, the Company has not sought to file evidence, notwithstanding being represented before DHCJ Douglas Lam SC in chambers on 31 March 2017 when it was given leave to serve affidavit evidence in opposition within 42 days. 

7.  Indeed it was not until the eleventh hour that the Company’s solicitors by letter dated 14 November 2017, received at the court office the following morning, made clear by implication at least that the application would be unopposed since they requested that if any order was made on the plaintiff’s summons relating to any transfer this should be done in the context of the extant winding up proceedings.  If it is tautologous to suggest an hour beyond the eleventh hour it is at least appropriate to say that at the very last minute — indeed just before the hearing was to commence —Mr Brian Lo, Counsel for the Company appeared and sought an adjournment which I declined and I gave reasons for my decision ex tempore.  Mr Lo said that he had no instructions to do anything other than to make the application for adjournment and no instructions to appear on the substantive application.  The proceedings therefore continuedunopposed and, conscious of this, Ms Joyce Leung, Counsel for the plaintiff made her case to the court and properly referred the court to the evidence filed by the plaintiffs which contained correspondence setting out the Company’s prior positions.

8.  The plaintiff’s application is made under sections 159 and 633 of the Companies Ordinance (Cap 622) ("the Ordinance") for an order that the Company register the plaintiff as member as the successor in title to 9,750 shares held in the name of the father, and for rectification of the Company’s share register to the said effect.  The plaintiff as I have said is the administratrixof the father’s estate pursuant to the Letters of Administration de bonis non dated 12 October 2009.

9.  I should add at this point by way of parenthesis that after the commencement of this application a winding up petition was presented by Mohan on 7 April 2017, on the ground that it is just and equitable to wind up the company by reason of “deadlock and financial paralysis” of the Company caused by the breakdown of trust and confidence between two minority shareholders namely Mohan and his brother Moorthy and breaches of fiduciary duties by Moorthy.

10.  Subsequently Mohan withdrew all allegations of breaches of fiduciary duties against Moorthy and removed him as 2^nd Respondent in the winding up petition.

11.  The winding up petition is now opposed by the plaintiff, interalios, and the parties are currently in the process of exchanging pleadings.  The plaintiff resists the winding up petition on the basis that the Company is solvent and the remaining majority shareholders accounting for more than 50% of the shares of the Company are, she says, in a position to properly manage the Company and continue its business.  It is this winding up petition to which the Company’s solicitors refer in their letter of 14 November to which I have referred.

Legal principles

12.  If the right to shares in a company is transferred to a person by operation of law and the person notifies the company in writing that the person wishes to be registered as a member of the company in respect of the shares, section 158 of the Ordinance provides:

“ (2) Within 2 months after receiving the notification the company must either—

(a) register the person as a member of the company in respect of the shares; or

(b) send the person notice of refusal of registration.

(3) If a company refuses registration, the person may request a statement of the reasons for the refusal.

(4) If a person makes a request under subsection (3), the company must, within 28 days after receiving the request—

(a) send the person a statement of the reasons; or

(b) register the person as a member of the company in respect of the shares.”

13.  If a company refuses registration under section 158 the person to whom the right to the shares is transmitted may apply to the court for an order under section 159 of the Ordinance and the court may order such registration if it is satisfied that the application is well founded.

14.  By section 633 of the Ordinance, if the name of any person is, without sufficient cause, omitted from the registrar of members, the person aggrieved may apply to the court for rectification of the register.

15.  It is well established that transmission of shares occurs on the death of a shareholder to his personal representative.  This position is spelt out in clause 29 of Table A in Schedule 1 of the former Companies Ordinance (Cap 32):

“ In case of the death of a member the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognized by the company as having any title to his interest in the shares; but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by him with other persons.”

16.  Thus as the only person recognized by the Company as having title to the deceased’s interest in the shares, the deceased’s personalrepresentative is entitled to request the Company to have his/her name registered as a member in respect of the shares.

17.  It is perhaps pertinent also to emphasize the distinction well recognized in company law between the transfer of shares and their transmission on death.  A provision in the articles of association providing that the directors may, in their absolute discretion, decline to register any “transfer of shares” without assigning any reason is of no relevance to the case of transmission of shares on death.  The rationale behind this proposition was set out by the House of Lords in Moodie v W&J Shepherd (Bookbinders) 1950 SC (HL) 60 at 65 – 66 per Lord Porter:

“ Powers of restriction upon the right of the transfer or transmission of shares from one person to another are a serious restriction upon the rights of holders of shares in the company, even though that company be a private one. No doubt in such a case it may well be desirable for the directors to have control over the transfer of shares to outside persons, but that construction does not necessarily apply to the transmission of shares from a holder to his personal representatives, and, if it is desired to control such a transmission, it should be done in plain terms.”

18.  If the directors wish to exercise an absolute discretion to refuse to register any transfer of shares, such refusal has to be exercised collectively as a whole by the board of directors of a company.  The mere failure to pass a resolution is not a formal act or exercise of the right to decline/refuse to register: ibid at 66 per Lord Porter.

19.  Alternatively if there is no board at all and therefore no valid resolution can be passed to refuse registration, the company is obliged to register the transmission of shares to the personal representative pursuant to section 158 of the Ordinance.  See Re Yuen Kiu Kwan [2009] 3 HKLRD 371 at 378, per Kwan J (as she then was).

Factual background

20.  The plaintiff by their solicitors, Messers Haldanes, on 17 May2016 raised the questions I have alluded to in relation to the payment of thedividend purportedly declared and the loans purportedly approved to Mohanand Moorthy and in addition sought a transfer to the plaintiff of the shares held by the deceased.  Whilst the letter used the word “transfer” it was clear from its context that the request was made in the plaintiff’s capacity as administratrix of the deceased’s estate.  The plaintiff’s solicitors chased a response on 6 June 2016 and the Company’s solicitors, Oldham Li & Nie responded on 10 June 2016 and in relation to the request to transfer shares said this at paragraph 6 of their letter:

“ We would also ask you to note that pursuant to the provisions of our client’s Articles of Association, directors of our client have a discretion to decline to register the transfer of any shares to the person to whom they do not approve and they also decline to register any transfer of shares on which the company has a lien.”

21.  They went on then to claim a lien in respect of various claims it was maintained the Company had against the deceased and said that the directors having considered the plaintiff’s request declined to make the registration requested and would only give further consideration to the matter after the alleged indebtedness had been settled.

22.  The plaintiff’s solicitors responded on 17 June denying the allegations and pointing out that no such claim had been intimated in the nearly 7 years since the Letters of Administration de bonis non had been granted to their client.  They then restated the plaintiff’s entitlement to exercise the rights conferred by the deceased’s shares.

23.  The Company’s solicitors responded by letter dated 6 September 2016 exhibiting numerous receipts and a schedule showing an alleged indebtedness by the deceased to the Company of HK$71,415,027.92 and saying that until such time as the outstanding sum due is paid, their client was not agreeable to any transfer of the shares from the name of the deceased.

24.  It was following this correspondence that the plaintiff commenced these proceedings.

Is the Company entitled to require the transfer of the shares?

25.  According to clauses 1 and 2 of the Articles of Association of the Company, the regulations contained in Table A shall apply to the Company except for regulation clauses 19, 30 – 33 inclusive, 45, 48, 50, 54, 64, 66, 69, 71 – 74 inclusive, 82 and 84.  Clauses 30 – 33 of Table A are provisions setting out the rights of any person becoming entitled to a share in consequence of the death of bankruptcy of a member and the director’s right to decline or suspend registration in those circumstances.

26.  Although expressly excluding the application of clauses 30 – 33 of Table A, the Articles of Association of the Company do not contain alternative provisions governing the rights and procedures applicable on transmission of shares upon death or bankruptcy of members.  The only provision giving the directors powers to decline to register is in respect of a “transfer” of shares but not a “transmission” of shares.

27.  It is the plaintiff’s submission therefore that the directors of the Company have no power to decline the registration request by the plaintiff when the deceased’s shares were transmitted by law to her as his estate’s administrator.  Ms Leung for the plaintiff goes further however and says that even if, which is strenuously denied, the directors do have the power to decline registration, there could have been no valid refusal in this case because there is no evidence of a resolution by the Company to refuse the plaintiff’s request and beyond that no annual general meeting could have been held (and in fact has not been held) by the Company since the father’s death because of the quorum requirement being 2 members being present in person or by proxy holding together more than 50% of the shares in the Company.  In addition the plaintiff submits both Mohan and Moorthy would have retired by December 2009 at the latest, in accordance with Article 8.  Thus, with no directors in office, the Company could not have given any valid refusal to register the shares in the plaintiff’s name.

28.  If belt and braces were to be needed, Ms Leung then looked tothe reasons for refusal given by the Company and submits that in any eventthe alleged debt was incurred over 6 years ago and is therefore statute barred and is, in any event, given the interim dividend purportedly approved, and which resulted in substantial payments to Mohan and Moorthy, less than half of the sum that would be due to the deceased in respect of the interim dividend for his shareholding which amounts to HK$152,100,000.

Court’s decision

29.  It seems to me on these facts that there were no valid grounds for refusal of the plaintiff’s request for registration and the Company has not sought to advance any evidence in opposition to this application.

30.  I find the application is therefore well founded and in accordance with the provisions and principles governing sections 158 and 159 of the Ordinance.

31.  There only remains therefore for me to be satisfied that an order in those terms would not fall foul of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), which provides:

“ In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

32.  Since I have said a winding up petition was presented against the Company on 7 April 2017, should I accede to the plaintiff’s applicationto register, this would amount to an “alteration in the status of the members of the company” under section 182.

33.  In making such an order therefore I need to be satisfied as to the purposes of this section and the evil it seeks to prevent.  The authorities are clear that its purpose is to preserve the status quo and to support the principle of pari passu distribution of assets in the event of the winding up of the company.  In Re Belgravia Properties Ltd [2015] 1 HKLRD 509 the court had to consider the validation of a share transfer after a winding up petition had been presented against the company.  It was held there by Harris J:

“ In my view, the correct approach to determining whether or not to grant an application for validation of a share transfer, is to ask whether or not the creditors might be better or worse off in the event of a winding‑up order being made, and the transfer not having been sanctioned.”

34.  Harris J further endorsed the observations made by Blackburn J in Rudge v Bowman (1867–68) LR 3 QB 689 at 696:

“ The object of this section is obvious, inasmuch as when a petition has been filed any shareholder might transfer his shares to an insolvent person, and get him registered, so as to get rid of his own liability, and the register might thus be made to consist of persons who had nothing to lose, the legislature intervenes, and says, that between the petition and the order no transfer of sharesshall take place, unless the court otherwise orders. The clause as to the alteration of the status of members I do not quite understand; for instance, death or marriage is rather beyond the power of the legislature. But whatever this may mean, a transfer may be made even in the interval if the court chooses to sanction it; and I have no doubt the court would allow a transfer from a pauper to a rich man to be registered, although not the converse.”

35.  In this case I am satisfied that if the Company registers the plaintiff’s name in respect of the deceased’s shares and rectifies the share register that there will be no prejudice to creditors of the company.  The plaintiff, as administratrix of the deceased’s estate will become personallyliable should any call be made on the shares.  This position is confirmed by clause 29 in Table A which provides that the passing of title of the deceased’s shares to his personal representatives would not release any liability due from the deceased’s estate.

36.  Accordingly I grant the application in terms of the plaintiff’s originating summons and order that the Company pay the plaintiff’s costs.