SHE TSU YI v. TSUI KI TING AND OTHERS

HCMP3290/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3290 OF 2004

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J U D G M E N T

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Application

1. This is an application for (a) rectification of the register of shareholders of Po Tek Holdings Limited (“the Company”) pursuant to section 100 of the Companies Ordinance; (b) rectification of the Company’s register of directors; and (c) consequential relief.

The parties

2. The Company was initially a shelf company incorporated on 7 November 2001 by two subscribers (“the Subscribers”).  In 2003, it was acquired as a corporate vehicle for the purposes of an investment in a residential development project in Nanjing (“the Project”) held by Wu Ning Property Development Limited (“Wu Ning”).

3. The applicant is Mr She Tsu Yi (“Mr She”), who claims to be a 30% shareholder and a director of the Company.  The two individual defendants are Mr Tsui Ki Ting (“Mr Tsui”) and Mr Ser Kee Lee (“Mr Ser”), who are brothers (“the Tusi Brothers” collectively).  They deny Mr She’s claim and asserts that they are the only two shareholders, respectively holding 2/3 and 1/3 of the shares, and directors of the Company.

A spin-off

4. This application is in fact a spin-off from HCA1684/2004 (“the Action”), a derivative action purportedly started by Mr She.  One of the issues arising from the Action is whether Mr She is a shareholder of the Company entitling him to bring the derivate proceedings.  By taking out the present proceedings, Mr She picks out this contested issue about his status and attempts to have it resolved summarily.

5. Such litigation tactics, at a first glance, seems to be objectionable but Mr Jat, SC, appearing for Mr She, submits that the present proceedings are necessary because no remedy for rectification can be obtained in the Action.  A section 100 application has to be brought by originating summons under Order 102 rule 3, Rules of the High Court.

6. This may well explain why the present application has to be taken out.  But Mr She obviously craves for more.  He wants to have the issue determined in his favour summarily on affidavit.

Mr She’s case

7. Mr She’s case is premised on a purported first meeting of the Company’s directors held on or about 7 May 2002 (“the 2^nd Set of Minutes”).  The 2^nd Set of Minutes was undated but signed by the Tsui Brothers and Mr She.  It stated, inter alia, that :

(1)	There was a form signed by the Subscribers appointing the Tsui Brothers and Mr She to be the first directors of the Company.
(2)	There was produced to the meeting instruments of transfer of transferring each of the share held by the Subscribers to Mr Tsui and Mr She respectively.
(3)	Allotment of shares were made to Mr Tsui (3,999 shares), Mr She (2,999 shares) and Mr Ser (3,000 shares).

8. Mr She contends that he was thus duly appointed as one of the three first directors of the Company; and that through the allotment of the shares by the directors, he became a 30% shareholder of the Company.

9. Mr She next alleges that at the first shareholders’ meeting of the Company held on or about 7 May 2002, it was resolved that :

(1)	The shareholdings of the Company would be the same as described above.
(2)	The Company would participate in the Project by taking 15% of the shares/equity interest in Wu Ning then held by Great Margin Development Limited.  The Company would enter into a trust agreement with Great Margin in this regard.
(3)	The initial capital contribution by the Company would be US$300,000 and the shareholders would contribute to that sum in accordance with their respective shareholding in the Company.

10. On or about 24 May 2002, Mr She received a notice from Mr Tsui requesting him to pay a sum of US$90,000 to Mr Tsui’s designated bank account before 31 May 2002, such sum being his proportionate share of the capital contribution to the Project.  That Mr She did on 29 May 2002 by way of a cheque in the sum of HK$702,000 (equivalent to US$90,000).

11. By two receipts dated 6 April 2002 and 27 May 2002 issued to the Company, Great Margin acknowledged receipt of US$300,000, the capital contribution by the Company in respect of the Project.  Mr She had not received any further notice for capital contribution since then.

12. By letter dated 10 October 2003, Mr Tsui advised Mr She, among other things, that other than the US$300,000, the Company had not paid any further capital contribution to the Project.  By letter dated 27 October 2003, Mr She replied to Mr Tsui’s letter, stating that he as a 30% shareholder of the Company, he was still very much interested in the Project.  He would definitely not sell or transfer his shares.

The Tsui Brothers’ case

13. The Tsui Brothers have raised a number of matters in opposition.  For present purposes, it is sufficient to just look at those set out below.

14. They first allege that there was no directors meeting held on or about 7 May 2002 as alleged.  What happened was this.

15. Initially, four parties were interested in participating in the Project through the Company.  They were the Tsui Brothers, Mr She and one Mr Tam Tai Wai (represented by one Ms Chan Lai Ping).  The four engaged in a series of meetings before 7 May 2002.

16. On or about 7 May 2002, Mr Tsui prepared a minutes of the first meeting of the directors (undated) for each of the four parties to sign, which they did (“the 1^st Set of Minutes”).  According to the 1^st Set of Minutes, a form signed by the Subscribers was produced to the meeting appointing the four parties as the Company’s first directors.  Allotment of shares was also made to each of them.  Minutes of a shareholders meeting held on 7 May 2002 with the four of them as shareholders were also prepared.

17. A demand note requesting Mr Ser, Mr She and Ms Chan to pay their respective capital contributions was sent to them.  But later on or about 22 May 2002, Mr Tam decided to withdraw.  On or about 24 May 2002, Mr Tsui prepared the 2^nd Set of Minutes to reflect Mr Tam’s withdrawal.

18. The Tsui Brothers contend that although the parties did engage in discussion, no conclusion or decision had been reached.  They however accept that Mr Tsui did issue the demand note to Mr She and had received US$90,000 from him.

19. Mr She maintains that the first directors’ meeting that he relies on did take place.  But it would appear that he does not seriously dispute that there were in fact two sets of minutes and the circumstances they came into existence.

The Company’s register

20. According to the register kept by the Company and returns filed with the Company Registry, there are only two shareholders, namely the Tsui Brothers.  On 18 May 2002, the Subscribers had each transferred its share to them respectively.  Then an allotment of one share was made in favour of Mr Tsui.  Thus Mr Tsui now holds two shares and Mr Ser, one.  Both of them were also appointed as directors of the Company on the same date.

How to make good Mr She’s case

21. Mr Jat accepts that Mr She has to make good his application.

22. According to the 2^nd Set of Minutes, which Mr She relies on, his shareholding consists of :

(1) One share transferred by one of the Subscribers pursuant to an Instrument of Transfer produced at the meeting.

(2) 2,999 shares allotted by the directors appointed by the Subscribers pursuant to a form produced at the meeting.

23. In my view, in order to make good his case on affidavit, Mr She has to satisfy me that the transfer did take place and the allotment was effective.

No instrument of transfer produced

24. On the Subscribers’ shares, the instrument which purported to effect the transfer has not been produced as evidence.  In the absence of such documentary proof, I am unable to accept on affidavit evidence alone that the transfer did take place as alleged.

Any effective allotment?

25. It is common ground that directors of the Company are empowered by its articles of association to allot shares.  Mr She’s case is that it was the first director appointed at the meeting on 7 May 2002 who made the allotment in his favour.  For first directors, only the Subscribers could make the appointment.  Thus, the question is whether the Subscribers had duly appointed the first directors as recorded in the 2^nd Set of Minutes so that the purported allotment made by them would become effective.

26. Taking the documentary evidence at their face value, it would appear that the Subscribers had signed three forms for appointment of the first directors :

(1) The one referred to in the 1^st Set of Minutes, appointing the Tsui Brother, Mr She and Mr Tam.

(2) The one referred to in the 2^nd Set of Minutes, appointing the Tsui Brothers and Mr She.

(3) The one which appointed the Tsui Brothers on or about 18 May 2002, their appointment being recorded in the Company’s register.

27. None of the forms has been produced as evidence.  The reasons why there were apparently three sets of forms and the circumstances giving rise to each of them are not clear on the evidence before me.  In light of the evidential lacuna, I am not in a position to determine what effective appointment the Subscribers had in fact made.

28. Mr Jat submits that the Company was a shelf company.  When the parties acquired it, the Subscribers must have signed the forms in blank, leaving them to be filled in later by the parties according to their desire.  The Subscribers must have by conduct authorised the appointment made when the forms are filled in.  I am unable to accept this submission for two reasons.  First, there is no evidence before me to this effect.  It is sheer speculation.  Second, Mr Jat seems to have invited me to take judicial notice of such conduct.  If that is his invitation, I will not accept it because there is simply no basis to do so.  Even if I were to accept Mr Jat’s submissions, it does not necessarily assist Mr She’s case.  As I have already observed in paragraph 26 above, there were apparently three sets of forms signed by the Subscribers for the appointment of first directors.  Which set of the forms produced the effective appointment cannot be resolved on affidavit alone.

29. In my view, the gap in the evidence is so large that the question as to who had been effectively appointed as the first directors by the Subscribers cannot be determined at this stage.  It follows that whether there was an effective allotment of shares as recorded in the 2^nd Set of Minutes cannot be determined here either.  A trial is necessary. 

Other observations

30. My conclusion above is sufficient to dispose of this application.  I only wish to make two more observations.

31. First, when I come to my conclusion above, I have not lost sight of the conduct of the Tsui Brothers, including issuing the demand note to Mr She for capital contributions, receiving and acknowledging the payment by Mr She and sending him the letter dated 10 October 2002.  Such conduct may well be consistent with the contention that the parties had reached an agreement on their participation in the Company and the Project through the Company.  But such an agreement, even if it did exist, is not sufficient to make good Mr She’s application in the absence of the requisite evidence on transfer and allotment.

32. Second, Mr She asks for a rectification of the register of directors without a declaration.  I would have thought that a declaration is the primary and necessary relief.  Rectification is consequential.

Conclusion

33. For the above reasons, Mr She is not entitled to summary judgment.  The matter has to proceed to trial, preferably to be heard together with the Action.  I will ask the parties to submit within 14 days after the handing down of this judgment an agreed list of proposed directions for the future conduct of these proceedings or, if failing agreement, their respective proposals.  I will deal with the directions on paper.

Costs

34. I accept that it is necessary to commence the present proceedings in order to obtain the relief of rectification under section 100 of the Companies Ordinance.  But Mr She should not have pressed for summary judgment.  I will therefore make an order nisi that costs of the proceedings to date be in the cause, save and except that Mr She do pay the costs of and occasioned by the contested hearing before me (including the direction hearing on 1 March 2005), to be taxed if not agreed.