GOLDEN TIMES ASIA LTD v. MAK YIU CHEUNG

HCA3523/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3523 OF 2003

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J U D G M E N T

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1. This is the plaintiff's application by inter partes summons for interlocutory injunctions to :

(1)	compel the defendant to re-activate or cause to re-activate three bank accounts ("the Accounts") maintained by the plaintiff with the Bank of China (Hong Kong) Limited ("BOC"); and
(2)	restrain the defendant from deactivating or causing to be deactivated the Accounts.

Background

2. The plaintiff was incorporated on 7 December 2001 and engages in the business of optical disks. Mr Tseng Wei Lin ("Tseng") and the defendant each held one share in the plaintiff and are the directors of the plaintiff. Madam Yu Chien Huei ("Yu"), Tseng's wife, was the Company Secretary. Both Mr and Mrs Tseng are Taiwanese nationals and resident in Taiwan.

3. On 23 September 2003, the plaintiff commenced these proceedings claiming damages and injunctive relief against the defendant for breach of director's duties. On the same day, the plaintiff issued the present summons seeking the interlocutory injunctions mentioned above.

4. The plaintiff's case as appeared from the two affirmations made by Tseng in support of the application is that the defendant had unlawfully written to BOC causing the Accounts to be "frozen", which according to Mr Chung's submission, is that the Accounts have become inoperative in that no deposit nor withdrawal can be effected.

5. From the affirmations filed by the defendant in opposition to this application, the defendant accepts that he had on 13 September 2003 informed BOC that disputes had arisen between the directors of the plaintiff and requested BOC to freeze the accounts. The defendant explains that this was done as a result of discoveries of certain conduct on the Tsengs' part. Specifically the defendant says Tseng and Yu had been using funds of the plaintiff for their personal use, had set up and are operating two companies that engage in activities and business similar to and in competition with those of the plaintiff. Further, the defendant says that he discovered on 18 August 2003 that Tseng had, without his agreement, caused the plaintiff to allot two shares to Yu and himself thereby diluting the defendant's shareholding in the plaintiff, and had further appointed Yu to be the 3rd director of the company, a matter to which I shall return later.

Strong or good prima facie case

6. As in other interlocutory injunction applications, the plaintiff has to make out a case on the merits of the claim as well as to show that the balance of convenience comes down in favour of granting the injunctions. It is not in dispute that the first of the injunctions sought by the plaintiff involves a mandatory injunction. Mr Chung accepts that in a mandatory injunction application, the plaintiff's case has to be made out to a higher standard of proof than is required for a prohibitory injunction, namely, it has to be a very strong probability upon the facts or a strong prima facie case : TKI Limited & Anor v. New Happy Limited & Anor [1995] 1 HKC 551.

7. The defendant's first challenge to the plaintiff's claim relates to its authority to commence these proceedings. The plaintiff's case is that by a board resolution passed on 15 September 2003 at a meeting presided over by Tseng and Yu, Tseng was duly authorized to deal with the matter of the Accounts being inoperative, including to commence proceedings against the defendant. The issue therefore turns on whether Yu was properly appointed as a director of the plaintiff. If she was, then this board resolution authorizing Tseng to deal with the dispute and to bring claims against the defendant would be valid. Conversely, if Yu was not properly constituted a director, then this board resolution of 15 September 2003 would be of no consequence, and these proceedings would be invalidly constituted, not being properly authorised by the plaintiff's board of directors.

8. As to the appointment of Yu to the board of directors, the plaintiff's case is that on or about 5 January 2003, Tseng, Yu and the defendant orally agreed on three things, namely :

(1)	Yu would be appointed as an additional director;
(2)	the signatories of the Accounts would be changed so that any two persons of Tseng, Yu and the defendant would be authorised to operate them; and
(3)	two new shares of the plaintiff would be allotted, one to Tseng and one to Yu.

According to Tseng's affirmation, the accountant of the plaintiff was instructed to deal with the formalities. Eventually, the accountant prepared a board minute dated 8 January 2003 containing resolutions to appoint Yu as director and to allot new shares to Tseng and Yu. Tseng had signed on this minute in the capacity as chairman of the board. The defendant, however, did not sign. The defendant denies the existence of the oral agreement and the meeting.

9. In my view, insofar as the plaintiff is relying on this board minute dated 8 January 2003 as the basis for contending that Yu was validly appointed, there must be grave doubts about the merits. On the plaintiff's case, at the most, there was an oral agreement between Tseng and the defendant on about 5 January 2003, but there was no valid board meeting or resolution on 8 January 2003 authorising the appointment of Yu as an additional director.

10. Mr Chung submits that it is open to the plaintiff to rely on the meeting on 5 January 2003 as a valid directors' meeting. But not only does the defendant deny the occurrence of this meeting and the existence of the oral agreement, the defendant also takes the point that there was no validly convened board meeting because no notice of it had been given. There is simply no answer from the plaintiff on this challenge. Notwithstanding that Tseng had filed a second affirmation, the plaintiff has not put in any evidence to show that due notice of this meeting had been given or that it was otherwise duly convened in accordance with the articles in association of the plaintiff.

11. Mr Chung also points out that on 15 April 2003, Yu, Tseng and the defendant had gone to BOC to cause the mandate of the Accounts to be changed to enable any two of them to operate it. It is submitted that this is indicative of the existence of the oral agreement. Firstly, even if this does show an oral agreement, it is not the same as supporting a validly convened board meeting authorising the appointment of Yu as a director. Secondly, it is to be noted that the board minute dated 8 January 2003 did not record a resolution to effect the change to the mandate of the Accounts. As to why this is so, there was no explanation coming from the plaintiff. In my view, this is a factor that would operate against the suggestion that the act of changing the mandate supports an oral agreement in the terms as deposed to by Tseng. I note, too, that this change of mandate only happened on 15 April 2003, some three months after the purported oral agreement or meeting on 5 January 2003. Again, there is no explanation for the lapse of time in between.

12. I take the view that not only is there not a strong prima facie case, there is simply no good prima facie case as to the authority to bring these proceedings in the name of the plaintiff. That would be sufficient to dispose of this interlocutory injunction application, but given that extensive submissions on the balance of convenience had been advanced, I shall briefly deal with that as well.

Balance of convenience

13. Primarily, the plaintiff says that the company's operation is being stifled as a result of the Accounts being inoperative. It is also said that without activating the Accounts, the plaintiff cannot pay its suppliers and creditors. The result is that the company would be driven to a standstill and would eventually become insolvent. On that basis it is submitted that there would be irreparable damage to the company if the injunctions were not granted.

14. This submission overlooks a number of factors relating to the existing operation of the plaintiff. Firstly, it would appear from the accounts exhibited that for the two years since its incorporation, the plaintiff has not been operating on a profitable basis. The audited and unaudited accounts show the company to be running at a deficit. The invoices exhibited to Tseng's affirmation suggest that notwithstanding payment on behalf of them were due as early as in July, August, they have remained unpaid. This has nothing to do with the fact that the Accounts are inoperative. Further, from the summaries given in Tseng's affirmation, it would appear that the plaintiff, in terms of its assets and liabilities, is not in a solvent position. This submission that, without the injunctions, the plaintiff would be driven on the path to insolvency, does not sit comfortably with the finance position as shown in the accounts.

15. Additionally, Miss Lau has referred to a number of unusual features in the accounts. It is not necessary for the court to make findings on these in this application. It is sufficient to acknowledge that there are apparently these unusual features as outlined in her submissions. I am of the view that the evidence does not show that the company would suffer irreparable damages if the injunctions were not granted. Also on the scale of balance of convenience is the fact that Tseng and Yu are resident outside the jurisdiction and have made no offer of cross-undertaking. There is force in Miss Lau's submission that if the Accounts were re-activated, the present mandate would enable Tseng and Yu to utilize the funds in the Accounts without resorting to the defendant. Given the hostility between Tseng, Yu and the defendant, there is a real likelihood that the defendant would be excluded from the operation of the Accounts. This together with the fact that some of the invoices are to pay companies in which the Tsengs appear to be interested in, are relevant to how the court should exercise its discretion, bearing in mind, too, that Tseng and Yu, who no doubt are the prime mover behind the present proceedings, are resident outside jurisdiction and have made no offer of cross-undertaking.

Conclusion

16. For the reasons that I have indicated, the plaintiff's application fails. The summons is dismissed. Having regard to the fact that the plaintiff has not made out a good prima facie case on merits, in exercising my discretion on costs, I order that the plaintiff should pay the defendant the costs of this application, to be taxed if not agreed.