LEE CHAI CHEONG AND ANOTHER v. THE PRUDENTIAL ENTERPRISE LIMITED

Judgment handed down: 21st January 1992

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J U D G R E N T

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Fuad, V.-P.:

1. This is an appeal from the decision of Hooper, J. dated 23rd July 1991 whereby he dismissed a claim by the executors of a deceased woman for the dividends declared on shares in a private company held by her at the time of her death.

2. When Madam Lee Chai Cheong died on 29th April 1980 she was the holder of 108 shares in The Prudential Enterprise Limited, a private company (''the company''). Probate was granted on 26th January 1989 to the two sons she named in her will (''the executors"). They were the unsuccessful plaintiffs in this action and they now appeal. The dividends claimed, which were declared between 16th December 1981 and 2nd April 1990, total $281,016.

3. On 10th February 1989 the solicitors acting for the executors (''the solicitors'') sent the grant of probate of the deceased's will to the company "for the purpose of registration in your records'' and asking for its return "after its purpose has been served''. The company returned the grant on 20th February asserting that no action was called for on their part because ''it is not clear what specific registration you are referring to (whether to register the Executors as members or to register our acceptance of the Grant or any other registration)."

4. On 21st February the solicitors responded as follows:

"....

The action required of your Company is to register in your Register of Members the names and addresses of the executors of the deceased shareholder of your Company. We therefore enclose herewith the original Grant for the said purpose and shall be grateful if you would note down on your records the names and addresses of our clients as being the executors of Lee Hui Leun Tai, deceased, a shareholder in your Company.

...."

5. The company's reply dated 25th February was in the following terms:

"(1) We understand, from the first sentence of your second paragraph, that your clients. Mr. Lee Cha Cheong and Mr. Lee Chai Kwong are making application to our Company to enter their two respective names and addressed into our Register as two individual members of our Company replacing the one of the deceased.

(2) Is (1) correct?

(3) Regarding the second sentence in your second paragraph, it appears to us that your clients proceeded further, in addition to (1) above, and requested that their status as executors of the deceased be recorded after their registration as members (if successful).

(4) is (3) correct?

(5) We will be grateful for your reply to clarify your clients' positions. Meanwhile, our Company has not taken any action as requested in your third paragraph.''

6. The company sent a reminder to the solicitors on 21st March asking for a reply to this letter, adding ''For the avoidance of doubt, we repeat our confirmation that your client's names have not been entered into our Register.'' On the following day the solicitors replied:

" We refer to your letter of the 21st instant and wish to say that the purpose of registering the Grant of Probate in your record is to enable you to mark the names and addressed of the executors as being the executors of your deceased member.

We therefore fail to understand why you should refuse to enter in your record and names and addresses of our clients.''

7. By the 2nd paragraph of their letter of 28th March the solicitors applied to the company ''for all the dividends and bonus payable by your Company to the estate of the above named deceased since 29th April 1980.'' On 11th April the company informed the solicitors that they were seeking legal advice ''in the light of sec. [sic] 135 of our Article'' and pointed out that they had had no reply to the questions they had raised by their letter of 25th February.

8. On 13th April the solicitors asked for a copy of the company's Articles and went on to say:

"As regards the reply to items (1), (2), (3) and (4) in your letter of the 25th February 1989, a reply has been made to you on 22nd March 1989 in which we stated that you are required to note the names and addresses of the executors as being the executors of the Will of your deceased member.''

The company made the following response on 13th May:

"(1) We refer to your letter of 13th April 1989. It is now abundantly clear to our Company that your clients Mr. Lee Chai Cheong and Mr. Lee Cha Kwong are not making application to our Company to enter their respective names and addresses into our Register as two individual members replacing the one of the captioned deceased.

(2) Your clients no doubt are in possession of copies of our Memorandum and Articles of Association. Alternatively, such document is public knowledge at the Company Registry.

(3) Regarding the request of your clients in the 2nd paragraph of your 28th March 1989 letter, our Directors decided, upon advice, not to take any action pursuant to Section 135 of our Article.''

9. This exchange of letters ceased fat just over 12 months until the solicitors despatched their letter before action on 22nd May 1990. They threatened proceedings unless the dividends ''payable to the estate'' were paid over within 14 days ..., reiterating that "The Grant of Probate of the will ... has been sent to you for record purpose.'' On 7th June 1990 the company replied:

''With reference to your 22nd May 1990 letter, we write to re-emphasize our understanding that, your clients, the Executors, are not seeking the registration of transfer or transmission of shares and accordingly our Company's correspondence do not address such matters as we understand from your somewhat confused earlier correspondence that your

clients are simply wishing the deceased to remain registered shareholder in our register.

We do not understand your threat of legal proceedings as we have already pointed out to you the impact of Article 135 of the Company (copy enclosed) on your requests yet we have had no response from you to such matters. We would ask that you reconsider your position and we are sure that you will understand the situation more fully once you have considered Article 135.

We also enclose the account of dividends as requested.

We invite you to contact us for further information if necessary.''

10. After reviewing this exchange of correspondence, I permit myself to comment that it may be that the parties were simply at cross purposes and that they were not sparring with each other as might first appear. Certainly it seems that the company appreciated that they could not register the executors as members without their consent. It is not clear whether the executors really understood what the company's letters were getting at.

11. The executors instituted their action on 12th June 1990. It was heard on 8th July 1991 and Hooper, J. delivered his reserved judgment, as we have seen dismissing the executors' claim, on 23rd July.

12. I now refer to some of the provisions of the company's Articles of Association. Articles 34-41 deal with the transfer of shares. As is common in private companies, there are severely limited rights of transfer (in article 36) with special provisions applicable to persons who have became entitled to shares by reason of the death or bankruptcy of a member (article 36(f)). There are exceptions to those restrictions (article 36(g)) where a member has transferred, or by will bequeathed, shares to a member of his family, as defined. By the next article:

''37. The Directors may decline to register any transfer of shares without assigning any reason and in the case of shares hot fully paid up, may refuse to register a transfer to a transferee of whom they do not approve."

13. The Articles follow common precedents which deal with ''transmission'' (by operation of law, including devolution by death) in contradistinction to ''transfer'' (by the act of a member). Articles 42-44, which are concerned with the transmission of shares, are in the following terms:

''42. The executors or administrators of a deceased member not being one of several joint holders shall be the only persons recognised by the Company as having any title to the shares, registered in the name of such member, and in the case of the death of any one or more of the joint registered holders of any registered shares, the survivors shall be the only persons recognised by the Company as having any title to or interest in such shares.

43. Any person becoming entitled to shares in consequence of the death or bankruptcy of any member, upon producing proper evidence of the grant of probate or letters of administration or such other evidence that he sustains the character in respect of which he proposes to act under this Article, or of his title, as the Directors think sufficient, may, with the consent of the Directors which they shall not be under any obligation to give be registered as a member in respect of such shares, or may, subject to the regulations as to transfer hereinbefore contained, transfer such shares. This Article is hereinafter referred to as 'the Transmission Clause.'

44. The Directors shall have the same right to refuse to register a person entitled by transmission to any shares or his nominee, as if he were the transferee named in an ordinary transfer presented for registration.''

14. In the section which makes provision in respect of dividends (articles 122-139) we find:

''134. A transfer of shares shall not pass the right to any dividend declared thereon before the registration of the transfer.

135. The Directors may retain the dividends payable upon shares in respect of which any person is under the Transmission Clause (Article 43) entitled to become a member, or which any person under that Article is entitled to transfer, until such person shall become a member in respect thereof, or shall duly transfer the same.''

15. The ordinary law had the effect of vesting Madam Lee's shares in her executors on her death. In relation to article 43, since satisfactory evidence of probate of the deceased's Will was produced to the company (in terms of s.72 of the Companies Ordinance, Cap. 32) the executors became entitled (a) to be registered as the holders of the shares subject to the directors' consent and thus to become members of the company or (b) to transfer the shares without themselves being registered. Apart from this article, s.67 of the Companies Ordinance provides that the transfer of a deceased's shares by his personal representative is as valid as if the latter were a member at the time of the transfer.

16. It is also well settled that since registration as members would have rendered them personally liable for calls, the executors could not be registered without their consent - there must be a ''distinct and intelligent request on the part of the executors'' (per Lord Cairns, L.C. in Buchan's case (1879) 4 App.Cas. 583, at p.589). It is common ground, as the correspondence clearly shows, that the executors never sought to be have their names registered as members of the company.

17. The company declined to pay over to the executors the dividends due to Madam Lee's estate relying squarely upon article 135. Unless that article, on its true construction, permits the directors to retain the dividends, the executors would have had the right to enforce a claim for them on behalf of the estate of the deceased, without themselves being registered as members (James v. Buena Ventura Nitrate Grounds Syndicate Ltd. [1896] 1 Ch 456).

18. It was part of the executors' case at the trial of the action that on a proper construction of paragraph (3) of the company's letter of 13th May 1989 (I quote from the Amended Reply) ''the Defendant had ... informed the Plaintiffs that the ... Directors would not exercise any power under article 135 ... to retain the dividends ..." and ''that in any event the Defendant had by its letter ... waived its right and/or power conferred and/or arising out of the said article to retain the dividends ...".

19. The judge rejected this contention. It was still maintained in the Notice of Appeal but, if I may say so with respect, this stand was rightly abandoned by Mr. Edward Chan when opening the executors' appeal.

20. The executors contended that article 135, on its true construction, could not be relied upon by the company to resist their claim to the dividends due on the deceased's shares, because a condition precedent to the application of that article had not been fulfilled. They say that since the directors of the company had not given their consent to the registration of the executors as members, neither of them was "a person ... entitled to become a member ..." within the meaning of that expression in article 135.

21. Mr. Chan drew attention to the difference in wording employed in the beginning of article 43 with its reference to any person "becoming entitled to shares'', and submitted that while the executors could rightly be said to be entitled to the shares of the deceased, by the ordinary use of language, a person could not be said to be ''entitled to become a member'' if the directors were lawfully able to decline registration. He contended that there was no warrant for simply reading the word ''entitled'' as if the word were "eligible''. The former word, he pointed out was widely used in the Articles (e.g. in articles 10, 12, 36, 43, 65, 70, 73, 74, 75 and 81), whereas the word ''eligible" was used in articles 95 and 100. This demonstrated that the draftsman knew the difference in meaning; when one word was used in such circumstances, it should not be taken that another word was meant.

22. Mr. Chan presented an elaborate submission designed to show that the judge had impliedly accepted an argument put forward on behalf of the company by Mr. Robert Tang about the purpose for which article 135 was designed which was not supported when the relevant precedents and commentaries in the 16th and 17th Editions of Palmer's Company Precedents are compared and properly understood. I mean no disrespect to Mr. Chan when I state my conclusion, without rehearsing his helpful submissions, that to the extent that it is relevant for the court to consider the purpose of a particular provision in the task of interpretation, article 135 in the form adopted by the company is, indeed, designed to "exert pressure'' on the personal representatives of a deceased member to elect to become members themselves or to transfer the shares in accordance with the articles. It seems to me that the practical effect of article 135 is little different from the precedent which appears (on p.461 of the 17th Edition of Palmer) in these terms:

''[Provided always that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share, and if the notice is not complied with within ninety days the Directors may thereafter withhold payment of all dividends or other moneys payable in respect of the share until the requirements of the notice have been complied with,]."

About this form the editors say, on the same page:

"The proviso, which is designed to enable the company to exert pressure on the personal representatives to become members or transfer the shares may be and often is excluded."

23. Having said this, I respectfully agree with Mr. Chan's proposition which is put in this way in his skeleton arguments:

''It is quite wrong to define the purpose of the clause, and then seek to put an artificial meaning to the plain words of the clause. If the wording in a clause is clear, effect must be given to it, and it is wrong for the Court to refuse to give the plain words their meaning under the pre-conceived pretext that such would be against the main purpose the clause.''

24. For convenience, I here sat out article 135 again:

''135. The Directors may retain the dividends payable upon shares in respect of which any person is under the Transmission Clause (Article 43) entitled to become a member, or which any person under that Article is entitled to transfer, until such person shall become a member in respect thereof, or shall duly transfer the same."

25. In my opinion it is clear, when the relevant articles are read together, that the words ''entitled to become a member'', coming as they do, immediately after the express reference to article 43, embrace a person who is entitled to become a member in conformity with the terns of article 43, which requires the consent of the directors. I am fortified in my view of what the words mean by being impressed, as was the judge, by the fact that article 135 would have little practical value if it could only operate after the provisions of article 43 had been satisfied, i.e. after the directors had already consented to the executors themselves being registered as members, or in the case of a transfer, they had duly complied with the regulations as to transfer. I entertain no doubt that the court was not compelled, by the words used, to ascribe what would, to my mind, be such an absurdly improbable intention to those who subscribed to the articles. Subject to the other ground raised in this appeal, in my judgment the company was entitled to retain the dividends due to Madam Lee's estate, relying on article 135.

26. On behalf of the executors, it was also contended that the judge was wrong in concluding that the company had, on the evidence led at the trial, established that valid resolutions had been passed to justify the retention of the dividends under article 135. The only direct evidence on the question was contained in hearsay statements.

27. Before dealing with the issues which relate to the hearsay evidence, I think that it is necessary to say something about the pleadings. The defence (filed on 14th September 1990) to the statement of claim pleaded a reliance on article 135 for the retention of the dividends due to the estate of the deceased. The reply filed on 19th October pleaded that the company had waived any right to retain the dividends under article 135 in the course of correspondence between the parties. Paragraph 6 of the defence had pleaded that the directors of the company had passed resolutions to retain the dividends under article 135 and had thus retained the dividends. The same paragraph also stated that the company had forwarded a statement of dividends to the solicitors under cover of their letter of 7th June 1990. To this paragraph on behalf of the executors, in the reply it was pleaded as follows:

''6. As to paragraph 6 of the defence, it is admitted that a statement of dividends was forwarded to the plaintiff's solicitors undercover of the defendant's letter dated 7th June 1990.''

It will have been noticed that nothing was said there about the averments in paragraph 6 of the defence regarding the resolutions passed by the directors.

28. The next thing that happened was that on 3rd July 1991, five days before the hearing, the executors took out a summons for leave to amend their reply. Since the hearing date was so close, the matter was left to be dealt with on the first day of the hearing and the judge granted leave for the reply to be amended on that occasion. It was amended in two respects. By a new paragraph 8 it was pleaded that the plaintiffs did not admit that the directors had passed any valid resolutions to allow them to retain any dividends payable on the deceased's shares and, further, that if (which was not admitted) the directors had passed any resolutions in respect of the retention of the dividends, such resolutions only empowered the company to retain the interim dividends authorised to be retained by resolutions evidenced by minutes which had been produced - dated 28th July 1986 (on discovery) and 3rd July 1987 (at the trial).

29. There was also a new paragraph 9 in the amended reply by which, also for the first time, it was averred that on the true construction of article 135 the company was not entitled to retain any dividends payable on the deceased's shares.

30. The solicitors acting for the company gave two, notices under s. 47 of the Evidence Ordinance, Cap. 8, and RSC O.38 that at the trial of the action the company desired to give in evidence, under those provisions, statements made by Mr. Samuel Tak Lee and Madam Irene Yu, both dated 5th July 1991. Each notice (which was dated 6th July. 1991) stated that the maker of the statement could not be called as a witness at the trial because he or she was beyond the seas, namely in the USA. Although the notices were not served within the time required by O.38, r. 21(1), they were admitted in evidence on the day of the trial. The executors did not object to their admission and therefore the judge was not called upon to exercise a discretion under 0.38, r. 29 (1) (a).

31. In his statement Mr. Samuel Tak Lee says that he is a director of the company and has been one during most of the period since 16th November 1965. He is now the Managing Director. He said that he would be unable to attend the trial because he had left Hong Kong on a business trip to the USA on 28th June accompanied by Madam Irene Yu, who is also employed by the group of companies to which the company belongs, and would not be returning to Hong Kong until 10th or 11th July 1991. He explained that he had scheduled the business trip at this time because he was under the impression that the trial of this action would proceed on the documents in the agreed bundle, and be confined primarily to arguments on the law and the proper construction of the articles. He said that the last minute application of the executors to amend their reply had come as a complete surprise to the company.

32. I will mention here that Mr. Chan submitted that it was clear from paragraph 6 of the original reply that issue was being joined on the matters not specifically pleaded to in paragraph 6 of the defence. I will only say that I am not at all surprised that the company took the view expressed by Mr. Lee because when I first read the pleadings, before I came to the amendment, I did not realise that there was any issue on the question whether or not proper resolutions had authorised the retention of the dividends.

33. Mr. Lee's statement then continues as follows:

"6. I am advised that the plaintiffs may be suggesting that minutes recording meetings of the Board of Directors of Prudential may be minutes of mere 'paper meetings'. I can confirm that the BOD of Prudential does have the power to conduct paper meetings under its Articles but that where these are conducted, the proposed resolutions and the minutes are circulated to all Directors and all Directors duly sign the minutes. In all other cases the minutes represent resolutions made at actual meetings at which the Directors are present or, in the case of a corporate director, represented. With particular reference to the minute at page 32 of the Agreed Bundle, this meeting did indeed take place. I was present as was N&L Investment Limited represented by Irene Yu. The sane applies in relation to the BOD meeting which took place on 3rd July 1987 at which time a resolution was also made in relation to withholding of Madam Lee Tai Kuen's dividend.

7. I am advised that the Plaintiffs may be seeking to suggest that the retention of dividend by the Board of Directors since 1981 has not come about by a decision or exercise of discretion by the Board. This is quite incorrect.

8. I can confirm in relation to the first declaration of dividend on 16th December 1981 that the BOD of Prudential had met a few days prior to that day (I cannot recall the exact date) and resolved unanimously to withhold the dividend of Madam Lee Tai Kuen pursuant to the power under Article 135.

9. Thereafter on each occasion that a dividend was to be declared (both before and after probate of the will was obtained) a meeting of the BOD of Prudential took place (generally a day or two prior to the minuted meeting declaring the dividend) and it was unanimously resolved to continue to withhold the dividend payable to the estate of Madam Lee Tai Kuen. I was present at each of these BOD meetings.

10. Although on the majority of occasions the actual decision to withhold dividend has not been minuted, this is a by-product of the fact that Prudential is a family company. All decisions of the BOD were arrived at unanimously and in a relaxed and informal manner.

11. Generally meetings and resolutions of the BOD were only minuted when external requirements required it eg. the accountants or auditors of Prudential or the Bank which had placed restrictions on declaration of dividend as a condition of financing projects.

12. The fact that minutes of the BOD meetings of 28th July 1986 (p.32 of the Agreed Bundle) and of 3rd July 1987 do record resolutions to withhold dividend of Madam Lee Tai Kuen does not mean that such resolutions were not made in previous years. This is simply an indication of the informality with which matters were approached in this family company.''

34. In her statement, Madam Irene Yu confirmed that she would be unable to attend the trial due to the business trip to the USA. She said that she is an authorised signatory of N&L Investment Limited. In that capacity she was called upon to attend Board meetings of the Prudential Enterprise Limited of which N&L Investment Limited had been a director since 26th February 1965. She said that on 28th July 1986 and 3rd July 1987 she had attended Board meetings of the company on behalf of N&L. She confirmed the authenticity of the minutes recording the resolutions made during those meeting and that she had signed the minutes on behalf of N&L.

35. After setting our the contents of the hearsay statements, the Judge said this on the subject:

" If those statements are accepted at their face value, clearly this issue must be decided in favour of the defendant company. But Mr Edward Chan for the plaintiffs, despite the fact that no counter-notice has been served, urges me to place no weight on those statements. He has sought to argue that they are inconsistent with the facts as revealed in the agreed bundle of documents. Having considered his submissions and having considered the bundle of agreed documents, I am unable to say that they are inconsistent with those documents. That being the case, no counter-notice having been served, I am entitled to place weight upon them. In my judgment, this question must be answered in the affirmative.''

36. In inviting us to come to a contrary conclusion, Mr. Chan pointed out that in the circumstances, under the relevant rules, and according to the authorities, no counter-notice could have been served under O.38, r.26 requiring either of the makers of the statements to be called as a witness. Mr. Tang accepted that once one the reasons set out in O.38, r.25 for not calling a person as a witness has been relied upon, a counter-notice is ineffectual unless it raises an issue regarding that reason which is ultimately determined in favour of the person giving the counter-notice (Cluett H.K. Ltd. v. Hercules Knitters Ltd. [1986] HKLR 112, C.A.).

37. Mr. Chan submitted that the judge's erroneous view of the procedural law had affected his assessment of the evidence. Moreover, he said, the judge was wrong in not appreciating that the statements were indeed inconsistent with at least some of the agreed documents. Mr. Chan emphasised that the present was a case where an appellate court was in as good a position to reach conclusions on the facts, as was the judge, since no oral evidence was led.

38. Mr. Chan pointed to the following matters which should have influenced the court not to place any reliance upon Mr. Samuel Tak Lee's hearsay statement:

(i) the account he gave in paragraphs 8 and 9 was inconsistent with the company's letter of 11th September 1985 - why, he asked, was the probate asked for "[to] process the distribution of dividend to the ... estate'' if a resolution to retain the dividends had already been passed? Mr. Chan acknowledged that the request ended with the words ''subject to legal advice" but argued that no explanation had been given as to what the legal advice had been;

(ii) the explanation given by Mr. Lee for the selective recording of resolutions of the Board (referred to in paragraphs 10 and 11 of the statement) was implausible. When the resolutions recorded in the minutes which were produced (dated 28th July 1986 and 3rd July 1987) were examined, there was nothing to indicate what ''external requirements" necessitated the minuting of those particular resolutions;

(iii) Prudential Enterprise was a substantial company and all the documents before the court suggested that it was managed in a thoroughly professional and business-like manner, the directors frequently referring to, and acting upon, legal advice. The directors showed themselves keen to comply meticulously with legal requirements and acted cautiously. All this, it was contended, was inconsistent with the passing, (but not recording by minutes) of resolutions, in breach of article 113.

39. The hearsay statements were admissible under s. 47 of the Evidence Ordinance and therefore s. 51 (3) is relevant:

''(3) In estimating the weight, if any, to be attached to a statement admissible in evidence by virtue of section 47, 48, 49 or 50 regard shall be had to all the circumstances from which any inference reasonably be drawn as to the accuracy or otherwise of the statement and, in particular -

(a)    in the case of a statement falling within section 47(1) or 48(1) or (2), to the question whether or not the statement was made contemporaneously with the occurrence or existence of the facts stated, and to the question whether or not the maker of the statement had any incentive to conceal or misrepresent the facts;"

40. Approaching the matter afresh since the judge mistakenly placed in the scales the absence of a counter-notice, I think I am entitled to take into account the fact Mr. Lee was away from Hong Kong on the date of the trial in understandable circumstances. I have already indicated my view that until the 3rd July 1991 when notice of the proposed amendment to the reply was given (by which time he was already in the USA) he could not reasonably have expected that he would be required as a witness on the point raised by the amended reply. It is, of course, always the case that an outsider will find it difficult to produce evidence about what goes on in a company, but the fact is that the statement of Mr. Lee has remained uncontroverted. Had Mr. Lee been in court he may have been able to give satisfactory answers to the points now raised on behalf of the executors.

41. Taking all the circumstances into account, I have not been persuaded that the matters pointed to by Mr. Chan are sufficient to preclude due weight being given to Mr. Lee's statement.

42. I would dismiss this appeal.

Macdougall, J.A.:

43. I agree that the appeal should be dismissed.

Nazareth, J.A.:

44. I also agree.

Fuad, V.-P.:

45. In handing down these judgments dismissing this appeal we make an order nisi that the appellants pay the costs of the appeal.

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