UNIVERSAL HORIZON HOLDINGS LTD. v. SHI HAN WEN

CACV 99/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 99 OF 2000

(ON APPEAL FROM HCMP 3887/1999)

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J U D G M E N T

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Hon Rogers JA :

1. This is an appeal from a decision of Deputy Judge Woolley given on 24 February of this year. The matter before him was an application under 114B of the Companies Ordinance, Cap. 32, for the calling of a meeting of the company, Universal Horizon Investment Limited ("UHIL").

2. The application had been taken out by a company by the name of Universal Horizon Holdings Limited ("UHHL"). UHHL is a BVI company. The respondent to the application is Mr Shi Han Wen, who is one of the three directors of UHIL. The other two directors are Mr Yip Fai, sometimes referred to as Mr Ye Hui, and Mr Mao Shu Zhong. There are two shareholders of UHIL. In the first place, Mr Shi has 1,000 shares and there are 9,000 shares which are registered in the name of UHHL, the plaintiff.

3. The history behind the company is that it was set up by Mr Tong. Mr Tong died on 6 February 1999. The plaintiff company, UHHL, is in a curious state. There was a dispute between the parties in the court below as to who were the directors. That was resolved by the judge, at least for the purposes of this application, on the basis that Madam You, who was the late Mr Tong's wife, was the only director of the plaintiff. Although that is not accepted for all purposes, at least for the purposes of today, that is the basis upon which, in my view, this court has to proceed.

4. UHIL is a company which holds property, it also used to trade by buying what might be referred to as capital goods overseas for resale in the Mainland.

5. After Mr Tong's death, difficulties arose. The remaining directors of the company clearly were at loggerheads with Madam You. Madam You based her application for the holding of this meeting on the footing that there should be a special resolution to remove Mr Shi, Mr Yip and Mr Mao as directors and an ordinary resolution to appoint herself and her brother, Mr You Bin, as directors of the company. Her reason for wanting to do so is because she has had no information as to the running of the company.

6. As transpired in this court, it would seem clear that at any rate since February 1999, there has been no annual general meeting of UHIL. As a result, the company is clearly in default in that respect. At the request of the court, the articles of UHIL were produced to us. Article 7 clearly provides that all the directors of the company have to retire but are eligible for re-election at each ordinary general meeting.

7. The position of the company is somewhat curious. Because of the disputes between Madam You and the current directors, an injunction was obtained on 31 May of last year which was continued in June of last year which restrained the three directors from exercising their powers as directors, amongst other things, of UHIL and two other companies which are indirectly wholly owned by UHIL. In that condition, the company has remained ever since.

8. The judge below held that the plaintiff UHHL was entitled to be instructed by Madam You and that it had given proper instructions to its solicitors. The application was refused on the basis of the exercise of the court's discretion. Amongst other things, the judge held that the company was being properly run by the existing directors; that Madam You's motives were improper: she was seeking to replace the three directors who had previously run the company with herself and her brother, who had no experience of running Hong Kong companies, particularly in the situation where there was a dispute as to the beneficial ownership of the 9,000 shares.

9. I would, however, mention that the beneficial ownership of the 9,000 shares is not a matter which seemingly, on the face of it, concerns Mr Shi, Mr Mao or Mr Yip. If there were other parties who had any beneficial interest in those shares or any interest, direct or indirect, through a family trust, it would seem that they were the members of the late Mr Tong's family and not the directors. In any event, it seems to me that as far as company law is concerned, the company and therefore the courts do not look behind the shareholding of a company to see who are beneficially interested in the shares. Under section 102 of the Companies Ordinance, Cap. 32, the register of members is prima facie evidence of any matters which are inserted therein. Since, as had been shown in the exhibit, UHHL is registered as the shareholder of the 9,000 shares in UHIL, this court should proceed upon the basis that UHHL is the shareholder and, on the basis that Madam You is entitled to give instructions on behalf of holdings, the matter should proceed accordingly.

10. 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.

11. 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.

12. 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.

13. 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.

14. In indicating that I consider that this court should allow this appeal and order the holding of a meeting as prayed, I consider that it may be sensible that the order should lie in chambers for a period of say, 14 or 21 days, to enable the parties, perhaps, to come to some agreement as to who may be elected as directors at the meeting which should be held.

Hon Hartmann J :

15. I agree.

Hon Godfrey VP :

16. I also agree; but as we are differing from the judge below, I will add a few words of my own.

17. The gravamen of the charge against Madam You is that she is acting in bad faith, or for a collateral purpose, in seeking to persuade the court to order this meeting of the company. I am not satisfied that that charge has been made out. The plaintiff has satisfied all the formal requirements for an order of the court directing such a meeting, and, in the absence of any good reasons to the contrary, the proper course, for the reasons given by Rogers JA, is to order that the meeting be held.

18. If the parties can come to some sensible agreement as to the future conduct of the company's affairs and the constitution of its board of directors, so much the better. The best we can do to assist them to do so is to direct that the order we make today lie in chambers for, say, 14 or 21 days, as Rogers JA has suggested. That will give the parties an opportunity to take further instructions, and to resolve the present issue, without further intervention by the court.

19. The costs must follow the event. We will order that the appellant have its costs here and below.