KWOK CHI WING v. REALDER MARINE SUPPLY CO. LTD. AND ANOTHER

HCMP 56 & 57/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 56 OF 2002

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REASONS FOR DECISION

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1. I have before me two applications by way of originating summons under section 114B of the Companies Ordinance, Cap. 32. In HCMP No. 56 of 2002, the plaintiff Kwok Chi Wing ("Kwok") seeks an order against Realder Marine Supply Company Limited ("Marine Supply") and Leung Tat Cheung ("Leung") that an extraordinary general meeting of Marine Supply may be convened for the purpose of considering and if though fit passing these resolutions: (1) that the financial and taxation affairs of Marine Supply have attracted unfavourable attention of the Inland Revenue Department and immediate actions must be taken by Marine Supply to deal with the complaints; and (2) that anyone of the following persons be appointed as a director of Marine Supply until the conclusion of the next general meeting of the company, namely, Sz-To Fook Cheung, Ling Chun Kee and Tang Kin Man. In HCMP No. 57 of 2002, Kwok as plaintiff seeks an order, mutatis mutandis, against Realder Trading Company Limited ("Trading"). At the conclusion of the hearing, I granted the relief sought in each of the proceedings and these are the reasons for my decision.

The background

2. The matters not in dispute may be stated as follows. Kwok and Leung had been in the business of marine supply as partners for a number of years, trading in the name of a firm known as Realder & Company. Later they established various limited companies to carry on the business as the operations expanded and diversified. Among the companies are Marine Supply, incorporated on 1 November 1994, and Trading, incorporated on 3 February 1994.

3. The capital of Marine Supply is HK$10,000.00 divided into 10,000 shares of HK$1.00 each. The amount of paid up capital is HK$100.00. Of the issued shares, 61 shares are registered in the name of Kwok and 39 shares are registered in the name of Leung. Kwok and Leung were the only directors until Leung resigned on 31 October 1998. Article 5 of the articles of association provided that unless and until the company in general meeting shall otherwise determine, the quorum for a meeting of the directors shall not be less than two. Article 23 provided that the quorum for all general meetings shall be two members personally present or by proxy.

4. As for Trading, the capital is also HK$10,000.00 divided into 10,000 shares of HK$1.00 each. The paid up capital is HK$2.00. One share is issued to Kwok and the other is issued to Leung. They were the only directors of the company until Leung tendered his resignation on 31 October 1998. Article 10 of the articles of association provided that the quorum for the transaction of business at any general meeting shall be two members present in person or by proxy and article 31(b) provided that unless otherwise determined by the company by ordinary resolution, the quorum for meeting of the directors shall be two.

5. After Leung had resigned as a director of both companies, Kwok appointed Ling Chun Kee, an employee of Marine Supply, as a director of that company to fill the vacancy, and Sz-To Fook Cheung, an employee of Trading, as a director of Trading. In the case of Trading, the appointment was made under article 25 which provided, inter alia, that the continuing directors may act for the purpose of increasing the number of directors to the number fixed by the articles as the necessary quorum. Leung has challenged the validity of the appointment of directors to fill his vacancy. I understand this is one of the reasons for calling a general meeting of shareholders so that a resolution for the appointment of a director may be passed and thereafter the resolutions of a properly constituted board of directors would not be open to any challenge.

6. The other reason for calling the general meeting, as I was given to understand, is to discuss and resolve on measures that should be taken as regards the demands for tax by the Inland Revenue Department. Judgment had been obtained against Trading in July 2001 for profits tax due and the Inland Revenue Department had written to Marine Supply in March 2002 threatening recovery proceedings for unpaid tax. It is proposed that the companies should make a decision whether to challenge the assessment for tax in each instance and that a properly constituted board of directors should resolve whether to appoint auditors to deal with any challenge to the tax demands.

7. I have no information on the latest financial position of these companies. On the evidence filed by Kwok, he alleged that when Leung left the companies in October 1998, the companies were in debt or heavily in debt. In December 1999, the mortgagee bank exercised its power of sale in respect of two properties mortgaged by Kwok and Leung in its favour as security for facilities granted to, inter alia, Marine Supply and Trading. In October 2000, Kwok presented a petition to wind up Trading on the ground that the company was unable to pay its debt to him for HK$43,425.60. It would appear from a letter of Kwok's solicitors to Leung's solicitors in January 2001 that the petition was subsequently withdrawn. In reply to a question from the court, Mr. Bernard Man, who appeared for Kwok at the hearing, informed me that the two companies are not actively trading and it is envisaged that steps would be taken to wind up the companies, once resolutions are passed in the general meetings so that there would be a properly constituted board of directors to attend to such matters.

Whether it is impracticable for a general meeting to be conducted

8. Prior to the issue of the originating summons, Kwok's solicitors had written to Leung's solicitors on 9 and 10 October 2001 enclosing various documents received from the Inland Revenue Department and requesting Leung to come forward with the view to finalising all matters relating to these companies as the affairs of the companies were in disarray since he resigned in 1998 and he had not resolved the problems despite Kwok's repeated requests. If he should fail to co-operate, Kwok would have no alternative but to commence proceedings against him. By their letters dated 23 October 2001, Leung's solicitors responded that they had instructions to accept service of process on his behalf.

9. On 5 November 2001, Kwok's solicitors served on Leung's solicitors two notices in respect of each company for an extraordinary general meeting to be held on 29 November 2001, for discussing and considering the resolutions that I have set out earlier. In the covering letters, it was stated that if Leung should fail or refuse to attend the meetings, Kwok would apply to court for an order that a meeting be held. Leung's solicitors responded by letters dated 5 and 22 November 2001. They referred to the mortgage action brought by the mortgagee bank against Kwok, Leung, the two companies and others and demanded that Kwok should give a full account for all money and assets taken from the companies no later than 21 days, failing which Leung would seek relief against him. They further alleged that the directors appointed to fill Leung's vacancy were intermeddling with the bank accounts and assets of the companies and legal action would be brought against them. It was also alleged that Kwok had failed or refused to submit all relevant accounts and documents to the accountants for an accountant's report to be prepared and this had led to the tax problems. As for the notice of an extraordinary general meeting, as Leung would object to the proposed resolutions, "there is no need to proceed with the alleged meeting".

10. The originating summonses in these two actions were issued on 7 January 2002.

11. I should mention that the above attempt was not the first attempt of Kwok to hold a general meeting of shareholders. On 23 December 2000, his solicitors had served similar notices in respect of the companies on Leung's solicitors for an extraordinary general meeting to be held on 8 January 2001 to consider a resolution for the appointment of auditors. On 4 January 2001, another set of notices were served by Kwok's solicitors on Leung's solicitors for an extraordinary general meeting to be held on 29 January 2001 to consider a resolution for the appointment of a director. Leung's solicitors responded on 27 January 2001 stating that he was opposed to the proposed resolution to appoint a director in view of the insolvency of the companies and that he proposed to re-appoint himself as a director solely for the purpose of maintaining the minimum number of directors to deal with any winding up matters. It was stated in the letter that his proposal was to be treated as his vote to the proposed resolution of Kwok in lieu of holding a meeting.

12. After the present proceedings have been commenced, and somewhat belatedly, Leung's solicitors wrote an open letter to Kwok's solicitors dated 13 March 2002 stating that Leung "is prepared to be re-appointed as director of [the companies] for the purpose of disposing of any outstanding matters in respect of [the companies]" and proposing that Kwok should withdraw the proceedings with no order as to costs. Kwok replied by the letter of his solicitors dated 19 April 2002, stating that it was necessary to convene a general meeting to effectively deal with the financial and taxation matters of the companies.

13. I am satisfied from the above events that it is not practicable for a general meeting to be conducted for these companies. I do not accept the submission made by Miss Jacky Yeung on behalf of Leung that one could pray in aid section 116B of Cap. 32, as well as article 24 in the case of Marine Supply, and article 10(c) in respect of Trading. The effect of these articles is that a resolution in writing signed by all the shareholders shall be valid and effectual as a resolution passed at a general meeting duly convened. These provisions are of no assistance where there is no agreement between the shareholders as to the resolution to be passed, as in the present situation.

Whether section 114B should be invoked to resolve a deadlock

14. In the case of Marine Supply, if a general meeting is to be held, the resolution will be voted upon by Kwok and Leung and as Kwok is the majority shareholder, there will not be any deadlock in the voting.

15. In the case of Trading, Kwok and Leung are equal shareholders, each holding one share. It was submitted by Miss Yeung that a deadlock in voting is foreseeable here and she cited Ross v. Telford [1998] 1 BCLC 82 at 87 to 88 in support of the proposition that section 114B should not be used by the court to break a deadlock between two equal shareholders as this is "a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders where they have agreed that power shall be shared equally and where the potential deadlock is something which must be taken to have been agreed on with the consent and for the protection of each of them."

16. Mr Man accepted the proposition in Ross v Telford. He submitted however that the proposition would not apply in the case of Trading, as there would not be any deadlock in voting, a mechanism to resolve a potential deadlock having been provided for in the articles of association. There are two directors currently appointed for Trading, Kwok and Sz-To Fook Cheung. The latter's appointment was made pursuant to article 25, as I have mentioned earlier, although Leung has disputed the validity of his appointment. Under regulation 62 in Table A, which applies to Trading, in the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall be entitled to a second or casting vote. The election of a chairman at a general meeting is governed by regulation 57 in Table A, which also applies to the company, and under this provision, the directors present shall elect one of their number to be chairman of the meeting. As there are two directors of Trading, they would constitute a quorum for a chairman of the meeting to be elected and the chairman would have a casting vote. I agree with this submission. I do not think any meeting ordered under section 114B would have resulted in any change to the substantive voting rights of Leung in Trading.

The possibility of a section 168A petition

17. Miss Yeung next submitted that where there is the possibility of a proposed action for unfairly prejudicial conduct under section 168A, Cap. 32, this is a matter which should bear upon the discretion of the court in ordering a meeting under section 114B even though this might not be an absolute bar to the exercise of that power (see Re Whitchurch Insurance Consultants Ltd [1993] BCLC 1359).

18. I do not propose to set out in detail the allegations of Leung against Kwok that may form the basis of a petition under section 168A. In summary, it is alleged that there were improper taking of the assets of the companies, that the branch businesses allegedly established in China did not exist, that the auditors were unable to carry out their work because of Kwok's refusal or failure to account for the assets taken, that Kwok had arranged for a mortgage of the shops owned by him and Leung to obtain banking facilities and had not accounted for the facilities which were used up by him, that Kwok had committed forgery of Leung's signature on various instructions to the bank, and that the directors appointed to fill his vacancy had unlawfully and fraudulently withdrawn money from the companies.

19. It is pertinent to note that Leung had resigned in 1998 because, according to him, Kwok's conduct and his intermeddling in the affairs of the companies had become worse by then and he had completely ignored Leung's requests for proper accounts. Notwithstanding that Leung had consulted solicitors since 2000 to protect his interests, and that letters had been written in November 2001 threatening proceedings, no action has been taken to bring proceedings under section 168A and no explanation has been furnished for the failure or delay in bringing proceedings.

20. Apart from the lack of action on the part of Leung over a long period, I have serious doubts about the merits of any action he might bring under section 168A. Many of the grave allegations he made are lacking in particulars and he has not adduced any document or evidence from an independent source to substantiate what he alleged. Some of his allegations are contradicted by the documents produced in Kwok's affirmation in reply, being the alleged non-existent branch businesses in China and the arrangement of the mortgage of the shops.

21. In view of the above considerations, it does not seem to me appropriate to give any weight to the possibility of a petition under section 168A in the exercise of my discretion whether to order a general meeting.

Other considerations

22. It was suggested by Miss Yeung that in the case of Marine Supply, there is a preliminary issue regarding the shareholding of Kwok and the court should not exercise its discretion to call a meeting where the preliminary issue should be decided first. What Leung has asserted in his affirmation is that Kwok had made himself a majority shareholder without making any capital payment. I fail to see how any or any serious issue has been raised regarding the shares registered in Kwok's name. Kwok, Leung, and three others had all signed their names as subscribers in the memorandum of association and Kwok had agreed to take 43 shares as subscriber. The other three subscribers had subsequently transferred their shares to Kwok in 1997, as borne out by a contemporaneous letter of these persons.

23. As for the winding up petition brought by Kwok against Trading in October 2000, that is of no relevance as it would appear from the correspondence that the petition had been withdrawn by January 2001.

24. In my judgment, it would be appropriate in the present circumstances to exercise my discretion under section 114B to order that a general meeting be held to discuss and consider the proposed resolutions. The quorum provisions in the articles should not be used by Leung to frustrate measures that should be taken by the companies to deal with their financial and taxation matters and to wind up their affairs.

Orders

25. In each of the actions, I made an order as sought in the originating summons that an extraordinary general meeting be convened for the purpose of considering, and if thought fit, passing the proposed resolutions. I further directed that one member of the company present in person or by proxy should be deemed to constitute a quorum.

26. I see no reason why costs should not follow the event. I have ordered that the plaintiff's costs of the application in each of the proceedings are to be borne by the 2nd defendant, to be taxed if not agreed.