LIU QIUHUA v. XIANG XIN AND OTHERS

HCMP 29/2025

[2025] HKCFI 1048

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 29 OF 2025

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R E A S O N S  F O R  J U D G M E N T

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1.  This is a case where the directors of a listed company tried to stall or obstruct a shareholder’s right to requisition the company to convene an extraordinary general meeting (“EGM”) to be held for the purpose of considering and passing resolutions to reconstitute the board.

2.  After hearing the parties’ arguments, this Court granted the declarations and permanent injunctions sought by the plaintiff (“Plaintiff”) against the 15^th defendant (“Company”) and the 1^st to 14 defendants, who are directors of the Company (collectively “Directors”), with costs to be paid by the 1^st to 5^th, 7^th to 14 defendants (collectively “Ds”) personally.  These are the reasons for my judgment.

Background

3.  The following facts are not in dispute or are indisputable.

4.  The Company was incorporated in the Cayman Islands and its shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”) (stock code 223). 

5.  Amongst the Directors:

(1)  the 1^st to 9^th defendants (“D1-D9”) have been directors of the Company prior to the lodgement of the “1^st Requisition” (as defined in §9 below); and

(2)  the 10^th to 14^th defendants (“D10-D14”) were appointed by the board as additional directors of the Company on 23 December 2024. 

6.  The Plaintiff has since November 2016 owned 717,634,000 shares in the Company (“Shares”):

(1)  The Shares were acquired by the Plaintiff pursuant to (a) a subscription agreement dated 18 October 2016 made with the Company and (b) 2 placing letters dated 19 October 2016 made with the placing agents of the Company. 

(2)  The subscription and placements of the Shares to the Plaintiff were announced by the Company on 20 October 2016 which stated, inter alia, that (a) the Plaintiff[1] was “a PRC resident and an Independent Third Party” and “a private investor focussed on investment in the services of listed companies in the PRC and Hong Kong”; and (b) upon completion of the subscription and placements, the Plaintiff would become a substantial shareholder holding 14.85% shareholding in the Company.  

(3)  The subscription and placements of the Shares were completed on 18 November 2016.  The Plaintiff paid a total amount of HK$160,774,810 as consideration for the Shares. 

7.  Since then and for a period of 8 years, the Plaintiff’s status and rights as shareholder have never been questioned by the Company or its directors. 

(1)  In the annual reports of the Company for the years from 2017 to 2024, the Plaintiff was described as a substantial shareholder and the holder of the Shares. 

(2)  The Plaintiff exercised her voting right in respect of the Shares at the general meetings held in August 2023, April, September and December 2024[2].

8.  During the period from February to June 2024, two shareholders (Zeng Xu and Han Wenli, who later became 2 of requisitionists under the 1^st Requisition) began to express dissatisfaction over the management and corporate governance of the Company and urged the management to improve and strengthen the internal control, reduce operational risk and enhance transparency of the Company[3]. 

9.  The 2 shareholders were not satisfied with the lack of improvement on the part of the management, and together with the Plaintiff and 3 other shareholders, lodged a requisition with the Company on 20 August 2024, requiring it to convene an EGM for the purposes of considering resolutions to remove all the executive directors and replacing them with the directors proposed in the requisition (“1^st Requisition”). The 1^st Requisition was announced by the Company on 21 August 2024[4].

10.  On 30 August 2024, the Company announced that no EGM would be convened pursuant to the 1^st Requisition as the requisitionists were not registered holders on the Company’s register of members.[5]

11.  Meanwhile, on 15 September 2024, the Company entered into a subscription agreement to issue new shares representing 16.66% of its enlarged issued shares for HK$27,798,000 to China Innovation Investment Limited (stock code 1217) (“China Innovation”), of which D1 is a director, at a discount[6]. The subscription was completed on 25 September 2024 and the shareholdings of the existing shareholders was diluted as a result.[7]

12.  On 25 October 2024, 6 shareholders including the Plaintiff, who together held 145,912,400 shares representing 10.76% of the issued shares of the Company (collectively “Requisitionists”), lodged another requisition (“2^nd Requisition”) pursuant to article 58 of the Amended and Restated Articles of Association of the Company (“AA”) requiring the Company to convene an EGM for the purpose of considering resolutions to remove all the directors and to appoint 5 new directors to the board (“Proposed Resolutions”).[8] 

13.  On 14 November 2024, the Company issued a notice to convene an EGM to be held on 24 December 2024.[9]  Thereafter, 5 out of the Requisitionists deposited their shares with HKSCC Nominees Ltd (“HKSCC”) and gave a proxy to HKSCC to vote on their behalf at the EGM.  Only the Plaintiff continues to hold 66,663,400 shares in her name[10]. 

14.  However, instead of proceeding to hold the EGM, D1-D9  took a series of steps to defer holding an EGM:

(1)  On 21 November 2024, the Company announced a proposed rights issue, which was not available to overseas shareholders including those located in the Mainland or Macau (“Rights Issue”). As the Requisitionists are either residents of the Mainland or Macau[11], if the Rights Issue were proceed to completion, their combined shareholding would be diluted to less than 10%, being the threshold for requisitioning an EGM.[12]

(2)  On 5 December 2024, D1-D9 caused the Company’s solicitors to issue notices under s.329 of the Securities and Futures Ordinance (Cap. 571) requiring the Requisitionists to provide information about the shares held by them.[13]

(3)  On 12 December 2024, the Company announced that it had received a requisition from China Innovation to investigate the legality of the purchase of shares by the Requisitionists on the ground that the Requisitionists had allegedly purchased their shares with funds transferred through illegal channels, in violation of the foreign exchange control regulations in the Mainland (“Regulations”), such that the purchases of their shares are void.[14]

(4)  On 20 December 2024, D1-D9 resolved to postpone the EGM to 6 January 2025 allegedly to “protect the interests of the Company” in light of the need to review the information in relation to the allegations (“1^st Decision”).[15]

(5)  On 23 December 2024, D10-D14 were appointed as new directors, with D10 as executive director and D11-D14 as independent non-executive directors.  In addition, one non-executive director (D3) was re-designated as executive director.[16]

(6)  At the board meeting held on 27 December 2024, it was resolved that the EGM be postponed sine die as the Directors considered that it was “of paramount importance to have a thorough and conclusive investigation of the validity and legality of the Requisitionists’ shareholding before the EGM is held” (“2^nd Decision”).[17]

(7)  On 27 December 2024, the Company announced that the Company had launched formal complaints against the Requisitionists with the relevant authorities in the Mainland and had submitted legal claims against them in the Mainland courts.[18]

(8)  On 5 January 2025, the Company announced that except the Plaintiff, the Requisitionists had transferred their shares to HKSCC and, therefore, were no longer “members” of the Company.[19]

15.  On 7 January 2025, the Plaintiff filed an originating summons (“OS”) to seek the following relief:

(1)  A declaration that each of the 1^st Decision and the 2^nd Decision was made for improper purposes and/or in breach of their fiduciary duties;

(2)  A declaration that the Requisitionists have the right to hold the EGM themselves pursuant to article 58 of the AA;  

(3)  A mandatory injunction requiring the Directors and the Company to give notice to resume the EGM to be held within 14 days for the purpose of considering the Proposed Resolutions; and

(4)  A prohibitory injunction to restrain the Directors and the Company from (a) delaying, adjourning or otherwise interfering with the convening, holding or the conduct of the EGM, (b) the consideration of the Proposed Resolutions, and (c) interfering with, not admitting or disallowing any votes cast at the EGM by the Plaintiff or her proxy.   

16.  Also on 7 January 2025, the Plaintiff filed a summons to seek a permanent injunction in the same terms as the OS (“Summons”).

17.  At the hearing of the Summons before this Court on 10 January 2025, Mr Patrick Chong[20], counsel for the Plaintiff, submitted that the court should grant an “interim interim” injunction in the same terms as the Summons for the following reasons:

(1)  the alleged illegality regarding the Requsitionists’ usage of funds in acquiring their shares, even if established, would not affect the Requisitionists’ title to their shares;

(2)  the only inference one could draw was that the 1^st and 2^nd Decisions were made by the Directors for the improper purpose of entrenching their control over the Company and, therefore, were voidable; and

(3)  the 1^st and 2^nd Decisions were made in breach of article 58, and the Plaintiff’s interests as member were affected as she was entitled to require the Company to hold the EGM by 25 December 2024 for the purposing of considering and voting on the Proposed Resolutions.

18.  On the other hand, Mr Charles Sussex SC[21], counsel for the Directors[22], submitted that the court should not grant any injunction against the Company or the Directors, and should give directions on filing of evidence because:

(1)  it was inappropriate for the court to determine the issue of the bona fides of the Directors in making the 1^st and 2^nd Decisions summarily;

(2)  the court should not interfere with the internal management of the Company provided that the Directors genuinely believed that what they were doing was in the best interests of the Company;

(3)  the Directors were willing to give an undertaking to the court not to proceed with the Rights Issue pending determination of the OS and the Summons[23]; and

(4)  Ds confirmed that they would bear their own costs and the costs of the Plaintiff should they fail in their opposition to the OS and the Summons. 

19.  Although this Court took a dim view as to whether the Directors had any valid ground to oppose the injunctions sought by the Plaintiff, to ensure that all the issues raised by the parties would be determined once and for all, directions were given on filing of evidence in respect of the OS and the Summons, both of which would be heard before this Court on 21 February 2025.

20.  By letter dated 20 January 2025, D4-D5 and D7-D9 through their solicitors informed the Plaintiff’s solicitors that they would not be opposing the OS and the Summons and agree to be bound by any order to be made by the court.

21.  By another letter dated 1 February 2025, D11, D13 and D14 through their solicitors likewise confirmed that they would not be opposing the OS and the Summons and agree to be bound by any order to be made by the court.

22.  The only directors opposing the OS and the Summons are D1-D3, D10 and D12 (“Remaining Directors”).  They contend that the EGM should be resumed subject to the condition that the Requisitionists have to change their proposed candidates for executive directors, who are residents in the Mainland, to persons who are residents in Hong Kong (“Condition”). 

23.  I do not see any proper basis for the Remaining Directors to impose the Condition.  As submitted by Mr Victor Dawes SC[24], there is no such requirement under the Listing Rules, the Companies Ordinance (Cap. 622) (“CO”) or the AA.  Nor is there any proper basis to suggest that executive directors must be residents in Hong Kong in order to properly discharge their duties, given that the Company’s principal operations are conducted through its subsidiaries in the Mainland.  Indeed, at least 2 incumbent executive directors are Mainland residents.

24.  More importantly, it is a matter for the shareholders, rather than the Remaining Directors or the court, to decide who should be appointed as directors of the Company.   

Discussion

25.  Under ss.728 to 730 of the CO, a “member”[25] of a company (including a non-Hong Kong company)[26] may apply for an injunction to restrain or require a person to do any act or thing if that person is engaging in conduct that constitutes a breach of fiduciary or other duties as a director owed to the company or a breach of the company’s articles. 

26.  Where, as here, the interlocutory injunction sought by the plaintiff is one which, if granted, would have the effect of finally disposing of the matter, the court would examine the merits more closely and take account of the parties’ respective prospects of success in establishing or defeating the claim.  The court would take whichever course which appears to carry the lower risk of injustice if it should turn out that the injunction was wrongly granted (Able Success Asia Ltd v China Packaging Group Company Ltd, HCMP 1091/2014, 15 May 2014, §§34-35, per G Lam J (as he then was)).

27.  As regards the directors’ duties, the principles are well established:

(1)  The powers conferred by the articles of association on the directors are fiduciary powers and must be exercised for the purpose for which they are granted.  Where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company.  But the absence of any element of self-interest does not make the exercise of fiduciary power a valid one as self-interest is only one instance of improper motive (Howard Smith Ltd v Ampol Petroleum Ltd, [1974] AC 821, at 834B-H, per Lord Wilberforce).   

(2)  A director owes fiduciary duties of utmost good faith and cannot exercise their power for dominantly improper purposes or otherwise than for the benefit and in the best interests of the company (Sanju Environmental Protection (Hong Kong) Ltd v Wang Lishan [2021] HKCFI 1503, §27; Poon Ka Man Jason v Cheng Wai Tao [2023] HKCA 676, §56, per G Lam JA).

(3)  Where the exercise of a power by the directors is being challenged, the approach of the court is to consider the nature of the power whose exercise is in question, then to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not.  In doing so, the court will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management.  Having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls (Howard Smith, 835F-H).

(4)  The mere fact that the directors have directly deposed to the absence of any improper purpose does not make it incontrovertible (Able Success at §35).

28.  In my judgment, the 1^st and 2^nd Decisions were made by the Directors in breach of their fiduciary duties for the following reasons. 

29.  First, the alleged illegality regarding the Requsitionists’ usage of funds in acquiring their shares, which was the only reason given by the Directors for making the 1^st and 2^nd Decisions, was wholly irrelevant.  As submitted by Mr Dawes:

(1)  As a matter of PRC law, the proper governing law on the legal effect of acquisition of shares and ownership of shares is the governing law of the contract, which is Hong Kong law.[27]

(2)  As a matter of applicable Cayman and Hong Kong law,[28] even if the goods were delivered to the transferee pursuant to an illegal contract of sale, the property in the goods passes to the transferee, and the transferee has all the remedies available to him as a valid holder of that property interest (Chitty on Contracts, 35^th ed., §19-178; Singh v Ali [1960] AC 167, pp.176-177, as applied in Kwok Chung To v Wong Chuen Sang,CACV 15/1968, 20 November 1968, §19 and Chung Tin Pui v Li Pak Sau,HCA 568/2007, 29 September 2017, §52). 

(3)  Cayman law also adopts the same position as English law.[29]

(4)  Thus, any violation of the Regulations would not affect the status of the Requisitionists as shareholders and their right to vote at the EGM.

(5)  In any event, the available penalties for breach of the Regulations in the Mainland are limited to a fine and/or criminal liability.[30] This is a matter for the Requisitionists.  It has nothing to do with the Company. 

30.  Second, taking into account the following facts and matters, it is clear that the 1^st and 2^nd Decisions were made by D1-D9 and the Directors respectively for the purposes of entrenching their position in the Company and preventing the shareholders from having the opportunity to consider and pass the Proposed Resolutions to remove the Directors and appoint new directors in their place:  

(1)  The Plaintiff had been a substantial shareholder of the Company, having subscribed for the Shares back in 2016.  The Company (rightly) has not questioned her status and rights as shareholder for over 8 years and has repeatedly acknowledged and allowed her to exercise her rights qua shareholder.    

(2)  After the 1^st Requisition had been lodged with the Company, within a period of 10 days, D1-D9 caused the Company to issue substantial number of new shares to China Innovation at a discount and turned it into a substantial shareholder. 

(3)  On 5 December 2024, D1-D9 suddenly decided to investigate the Shares subscribed by the Plaintiff 8 years ago. 

(4)  This was immediately followed by China Innovation raising the alleged illegality on 12 December 2024.  The alleged illegality was then seized upon by D1-D9 as a reason for adjourning the EGM as resolved at the board meeting on 20 December 2024 (i.e. the 1^st Decision).

(5)  The objective and contemporaneous evidence shows that in deciding to adjourn the EGM so as to investigate the alleged illegality, D1-D9 did not obtain any legal advice from the Company’s Cayman lawyers.  This was despite the fact that the alleged illegality was (a) something new to D1-D9; (b) important to the Requisitionists as it would affect their status and rights qua shareholders; (c) important to D1-D9 as it concerned whether or not they had a proper basis to adjourn the EGM; and (d) important to the Company given that if the alleged illegality would have the effect of rendering the subscription of shares by the Requsitionists void (as D1-D9 suggest), the Company would have to repay the consideration received for the shares issued to the Requisitionists.

(6)  In this regard, I do not accept the bare assertion of the Directors that D1-D9 obtained “oral” advice from the Company’s Cayman lawyers.  Had such advice been obtained, it would have been mentioned in Conyers’ opinion dated 8 January 2025 as well as the announcements made by the Company regarding the adjournments of the EGM.  Neither the opinion nor the announcements referred to the alleged “oral” advice, and no explanation whatsoever has been provided by D1-D9 for its absence. 

(7)  In the meantime, D1-D9 tried to implement the Rights Issue designed to exclude the overseas shareholders including the Requisitionists in circumstances where there was no proper basis, legal or factual, to justify the exclusion.   

(8)  This was followed by the appointment of D10-D14 as new directors on 24 December 2024, and the 2^nd Decision made by the Directors on 27 December 2024 to further adjourn the EGM sine die. 

31.  For all the above reasons, I hold that the 1^st and 2^nd Decisions were made by the Directors for improper purposes and, therefore, are voidable. 

32.  Further, the 1^st and 2^nd Decisions were made by the Directors in breach of article 58, and the Plaintiff’s interests as member were affected as she was entitled to require the Company to hold the EGM by 25 December 2024. 

(1)  Article 58 of the AA provides that:

“Any one or more Member(s) holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company, on a one vote per share basis, shall at all times have the right, by written requisition to the Board or the Secretary of the Company, to require an extraordinary general meeting to be called by the Board for the transaction of any business or resolution specified in such requisition; and such meeting shall be held within two (2) months after the deposit of such requisition”.

(2)  As a matter of Cayman law:

(a)  The proposed EGM should have been held by 25 December 2024.  The failure to convene the proposed EGM by 25 December 2024 constitutes a breach of article 58.[31]

(b)  While the directors have a general power under article 64 to adjourn a general meeting, the power to adjourn must be exercised for a proper purpose and consistent with their duties to hold the meeting within 2 months.[32]

(c)  Although Conyers opines that under article 64, the board has the power to postpone the EGM “from time to time and indefinitely prior to the holding of the EGM”, and the board may exercise its power under article 64 “if they consider the postponement is proper and in the interest of the Company and/or its shareholders”, such statement must be read subject to the principles expounded in Howard Smith, as summarised in §27(1) and (3) above. If, as I so find, the 1^st and 2^nd Decisions were made by the Directors for improper purposes, the exercise of the power under article 64 is also voidable.   

(d)  The only relevant date is the date of the deposition of the 2^nd Requisition.  The fact that some of the Requisitionists have since transferred their shares to HKSCC would not render the 2^nd Requisition to become invalid.[33]

33.  It is appropriate for the court to grant the declarations and the injunctions in the following terms:

(1)  A declaration that the decision to postpone the EGM of the Company scheduled to be held on 24 December 2024 to 6 January 2025 by D1-D9 on the basis of the standing of the Requisitionists was irrelevant and was made for improper purposes in breach of their fiduciary duties, that such decision is voidable.

(2)  A declaration that the decision to postpone sine die the EGM of the Company scheduled to be held on 6 January 2025 by the Directors on the basis of the standing of the Requisitionists was irrelevant and was made for improper purposes in breach of their fiduciary duties, that such decision is voidable.

(3)  The Directors and the Company do by 25 February 2025 give notice to members for the resumption of the EGM (including but not limited to issuing a notice of meeting) and hold the said EGM within 14 days from the date of such notice to consider and to approve the Proposed Resolutions set out in the 2^nd Requisition issued pursuant to Article 58 of the AA (“2^nd Requisition Notice”).

(4)  The Directors and the Company be restrained from:

(a)  Delaying, adjourning, blocking, preventing or otherwise interfering with the convening, holding or the conduct of the EGM;

(b)  Delaying, adjourning, blocking, preventing or otherwise interfering with the consideration and/or resolution of any of the agenda set out in the 2^nd Requisition Notice; and

(c)  Blocking, preventing, interfering with and/or rejecting, not admitting and/or disallowing any vote(s) cast at the EGM by the Plaintiff and/or any authorised representative(s) of the Plaintiff and/or any proxy appointed by the Plaintiff and/or by nominee shareholder who holds shares for the Plaintiff.

(5)  The Directors shall be jointly and severally liable to pay the costs of and occasioned by these proceedings, including the Summons, with certificate for 2 counsel, to be taxed if not agreed save that:

(a)  D4-D5 and D7-D9 shall only be liable for the Plaintiff’s costs up to 20 January 2025;

(b)  D11, D13 and D14 shall only be liable for the Plaintiff’s costs up to 1 February 2025;

(c)  There be no order as to costs between the Plaintiff and D6; and

(d)  The Directors shall not be entitled to seek indemnity for their costs liabilities from the Company.

34.  It is only fair that the Directors should be ordered to pay the costs of and occasioned by the OS and of the Summons personally, and they are not entitled to recover any costs incurred or to be paid by them from the Company for the following reasons:

(1)  There is no reason why costs should not follow the event. 

(2)  The court finds that the 1^st and 2^nd Decisions were made by the Directors in breach of their fiduciary duties and are voidable. 

(3)  The Directors were told in clear terms that at the first hearing of the Summons that if the court finds against them, they would be ordered to pay costs personally, and cannot seek to recover any costs incurred or any adverse costs order which may be made against them from the Company.

(4)  The Remaining Directors continued to oppose the OS and the Summons.

(5)  As regards the other Directors, although they no longer oppose the Plaintiff’s applications, they do not agree to pay the costs incurred by the Plaintiff.  As a result, the same submissions have been made by Mr Ernst Ng for the Directors.  No time and costs have been saved by the Plaintiff or the court.