BILLION EXPRESS INDUSTRIAL LTD v. TSANG HUNG KONG

HCA 2740/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2740 OF 2008

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D E C I S I O N

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1.  There are 3 summonses before me:

(1)   The Defendant’s summons dated 19 January 2009 to strike out the action on the ground of lack of authority to sue;

(2)   The Plaintiff’s summons dated 16 February 2009 for summary judgment against the Defendant;

(3)   The Defendant’s summons dated 6 March 2009 to adjourn the striking out summons for directions that the issues raised by the parties be tried.

2.  The O. 14 summons is for directions only.  Parties agreed that authority to sue should be dealt with first, and in the event that I order the trial on authority to sue, the O. 14 summons shall be stayed until after the issue is resolved.

Background

3.  The Plaintiff is a limited company and the Defendant is a shareholder and director of the Plaintiff. 

4.  The Plaintiff’s shares are held by two rival camps each holding 50%: Mrs Ming (3,600 shares) and Mr Lai (600 shares) on one side, and the Defendant (3,600 shares) and Mr Yan (600 shares).

5.  The Plaintiff’s sole business is in holding a joint venture company in the Mainland called Yue Kong.  The Plaintiff has the right to appoint a director and legal representative of Yue Kong.

6.  The Defendant has been all along been appointed a director and legal representative of Yue Kong, and is holding the relevant corporate documents and articles.

7.  Table A of the Companies Ordinance (Cap. 32) is adopted save as expressly excluded or modified in the Articles of Association (“AA”) of the Plaintiff. 

8.  Art. 4 of AA provides that the directors may elect a chairman of their meetings, and determine the period for which he is to hold office, and unless otherwise determined the chairman shall be elected annually. 

9.  Although there was no formal election as such, the Defendant has been acting as the Chairman (until his purported removal at a meeting in his absence which gives rise to the present dispute).

10.  Art. 11 of AA and Art. 100 of Table A (as adopted) provide that the directors may meet together for the despatch of business, adjourn, and otherwise regulate their meetings as they think fit. 

11.  Art. 11 of AA provides that the requisite quorum for a meeting of the directors is 2. 

12.  Art. 100 of Table A further provides that questions arising at any meeting shall be decided by a majority of votes.  In case of an equality of votes, the chairman shall have a second or casting vote.  A director may, and the secretary on the requisition of a director shall, at any time summon a meeting for the directors.

13.  On 28 July 2008, Mrs Ming gave notice for a directors’ meeting to be held on 4 August 2008 to discuss the following matters:

(1)   removal of the Defendant as Chairman of the directors;

(2)   election of the Chairman of the directors;

(3)   appointment of the Plaintiff’s representative in Yue Kong.

14.  On 3 August 2008, a meeting took place between Yan, Lai and the Defendant.  No notice of this meeting was given to Mrs Ming.  That those three persons met up is not disputed, but the nature of the meeting and whether any agreement was reached are in dispute.

15.  The Defendant alleged that Yan, Lai and himself agreed to adjourn the meeting on 4 August, and Lai agreed to so inform Mrs Ming.  This is denied by Mrs Ming on behalf the Plaintiff. 

16.  On 4 August 2008, the meeting as notified was held.  Only Mrs Ming and Lai were present.  Resolutions were passed to:

(1)   remove the Defendant as Chairman of the directors;

(2)   elect Mrs Ming as Chairman of the directors;

(3)   appoint Mrs Ming to act on behalf of the Plaintiff in respect of all matters relating to Yue Kong.

17.  On 5 December 2008, Mrs Ming gave notice for a directors’ meeting to be held on 10 December 2008. 

18.  On 10 December, all four directors attended the meeting.  Resolutions were passed by the casting vote of Mrs Ming as Chairman in:

(1)   confirming the removal of the Defendant as the director and legal representative of Yue Kong;

(2)   appointing Mrs Ming as the director and legal representative of Yue Kong;

(3)   directing the Defendant to deliver up the documents and articles of Yue Kong within 7 days.

19.  On 17 December 2008, Mrs Ming gave notice for a directors’ meeting to be held at 4 pm on 22 December 2008.  The notice stated, inter alia, the motion to authorize Mrs Ming to instruct lawyer to sue the Defendant to enforce the resolutions passed on 10 December 2008.

20.  On 19 December 2008, the Defendant gave notice for another  directors’ meeting to be held at 10 am on 22 December 2008 with agenda similar to the 17 December notice.  The defendant also gave notice of an Extraordinary General Meeting to be held on 8 January 2009.

21.  The meeting at 10 am on 22 December 2008 were attended by the Defendant and Yan only.  Resolutions were passed, inter alia, to:

(1)   authorize the Defendant to instruct lawyer to sue Mrs Ming in falsely claiming and acting as the Chairman of the directors;

(2)   invalidate the notice for the meeting at 4 pm on 22 December 2008;

(3)   dismiss the motion to authorize Mrs Ming to instruct lawyer to sue the Defendant.

22.  The meeting at 4 pm on 22 December 2008 were attended by Mrs Ming and Lai only.  Resolutions were passed, inter alia, to:

(1)   authorize Mrs Ming to instruct lawyer to sue the defendant for performance of the resolution passed on 10 December 2008;

(2)   revoke all resolutions passed at the earlier meeting at 10 am on 22 December 2008.

23.  On 8 January 2009, Mrs Ming and Lai attend the EGM, the Defendant and Yan were absent.  Resolutions were passed to:

(1)  remove the Defendant as the director and legal representative of Yue Kong;

(2)  appoint Mrs Ming as the director and legal representative of Yue Kong;

(2)   dismiss the motion to elect a new chairman of the board within 7 days of the EGM.

24.  In the Statement of Claim, the Plaintiff prayed for the following relief:

(1)   an injunction restraining the Defendant from acting as a director of Yue Kong;

(2)   an injunction directing the Defendant to deliver up the documents and articles of Yue Kong to Mrs Ming;

(3)   an injunction directing the Defendant to perform all necessary procedure to:

(i)    remove the himself as director and legal representative of Yue Kong;

(ii)        appoint Mrs Ming as director and legal representative of Yue Kong.

Defendant’s case

25.  Defence affidavit evidence stated that the Plaintiff had always had informal meetings, written notices of meetings were only issued once or twice in the past, and minutes were only drawn up some of the times.

26.  Mr Chiu, for the Defendant, submitted that the meeting on 3 August 2008 was an informal meeting of the directors.  Unless the Court is to order a trial on oral evidence, the agreement to adjourn the 4 August meeting must be presumed in favour of the Defendant.  Notwithstanding that no notice was given to Mrs Ming, the resolution passed on 3 August 2008 was valid under the “irregularity” principle in MacDougall v Gardiner [1875] 1 Ch D 13 in that the majority shareholders are the only persons who can complain about that the thing which they are entitled to has not been done, and the principle is applicable to directors’ meeting (see Yip Peter v Asian Electronics Ltd [1998] 2 HKC 96 per Le Pichon J (as she then was)).  As the Defendant, Yan and Lai, or alternatively, the Defendant exercising the casting vote and Yan constituted the majority of the board, the decision to adjourn the 4 August meeting would have been passed whether or not Mrs Ming was present at the meeting on 3 August.

27.  As the 4 August meeting had been adjourned, Mrs Ming could not be duly elected Chairman on 4 August.  Hence, the resolutions passed by the casting vote of Mrs Ming on 10 December were invalid, so was the resolution on 22 December for authority to sue to enforce those resolutions.

28.  Further, as the meeting at 10 am of 22 December 2008 revoked the notice of the meeting at 4 pm, any resolution passed in the afternoon (including the authority to sue the Defendant) was also invalid.

Plaintiff’s case

29.  Mr Lee, for the Plaintiff, submitted that the “irregularity” principle will only apply where the mechanism for calling a meeting was engaged but in an improper or irregular manner.  It does not apply where there has been no shareholders’ or directors’ meeting as such. 

30.  Mr Lee submitted that there was no evidence from the Defendant that any written or even oral notice of a directors’ meeting on 3 August was given to Lai or indeed anyone, nor that the meeting on 3 August was intended to be a board meeting as opposed to a meet up of three persons who happened to be directors of the Plaintiff.  It is to be contrasted with the meetings on 4 August and subsequently where proper notices and minutes were drawn up.  Hence, there was no meeting of the directors, and no application of the “irregularity” principle.

31.  Further, even assuming the meeting on 3 August 2008 was a directors meeting, the so called decision to adjourn the 4 August meeting is invalid, since under the law, the power to adjourn a meeting is only vested in the meeting itself, and the meeting on 4 August can only be adjourned on 4 August but not earlier.

32.  In any case, the meeting at 10 am on 22 December could not invalidate the notice of the afternoon meeting, as the board cannot prospectively bind itself in the future.  No issue of any casting vote is involved in the afternoon meeting.

Discussion

33.  It is helpful to remember that what is in issue is the authority to sue resolution passed at the 4 pm meeting on 22 December 2002.  However, in considering the issue, it is relevant to consider whether the Defendant was replaced as the Chairman of the directors by Mrs Ming, as the authority to sue was to enforce the resolution passed by the casting vote of Mrs Ming on 10 August.  In any case, the casting vote of the Chairman is the only measure to save the Plaintiff from otherwise being a deadlock company.  In reality, if the Defendant has remained the Chairman, any authority to sue can be revoked at any time.

34.  On the “irregularity” principle, in Yip Peter v Asian Electronics Ltd, Le Pichon J said at p. 102I to 103A:

“The irregularity principle really comes to this: the lawfulness of a decision taken by a meeting of members or board cannot be questioned if the only facts alleged to make it unlawful is a mere informality and irregularity and the intention of the meeting is clear.  This is particularly so if there is no evidence that the decision of the meeting would have been different if the correct procedure had been observed…”

35.  And in Re Green Valley Investment Ltd [2003] HKLRD 915 (CA), Yuen J (as she then was) said at p. 924J to 925A:

“49.   It has been well-established since MacDougall v Gardiner [1875] 1 Ch D 13 that the majority shareholders are the only persons who can complain about a technical miscarriage of a meeting.

50.    James LJ expressly rejected the suggestion (put forward in the present case by Counsel for the plaintiffs) that minority shareholders are entitled to have a meeting held in strict form so that they could try to persuade the majority shareholders their way…”

36.  Mr Lee submitted that notwithstanding the “irregularity” principle, there was no evidence that the meeting on 3 August 2008 was intended as a directors’ meeting. 

37.  On the other hand, the Defendant adduced background evidence that the Plaintiff’s directors used to meet informally in the past, and at any rate he is only asking for a trial on whether there was valid resolution passed on 3 August to adjourn the meeting on 4 August 2008. 

38.  I do not see that doing things informally is a feature peculiar to the Plaintiff.   In Bramford v Bramford [1970] 1 CH 212, 237, Harman LJ said:

“It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been done all right from the beginning. I cannot believe that that is not a commonplace of company law. It is done every day. Of course, if the majority of the general meeting will not forgive and approve, the directors must pay for it.”

39.  That said, what the intention of Yan, Lai and the Defendant was on 3 August 2008 could not be ascertained on affidavit, and subject to the validity of the adjournment point, what happened on 3 August should be resolved on oral evidence. 

40.  Mr Chiu pointed out that Lai had not filed any affidavit, and the denial of the adjournment was only in the hearsay of Mrs Ming. 

41.  Be that as it may, the dispute involves intention and oral agreement, and it cannot be resolved without oral testimony.

42.  At the hearing of this application, Mr Lee referred to Shackleton on the Law and Practice of Meetings (9^th ed.), para. 7-01, footnoting Kerr v Wilkie (1860) 1 LT 501 (HL) for the proposition that at common law the right to adjourn a meeting is vested in the meeting itself.

43.  Mr Lee and Mr Chiu were asked to research on the point, and they come back saying there does not appear to be any case specifically on the adjournment of a directors’ meeting before it is held.

44.  Mr Lee submitted that under Art. 100 of Table A (as adopted), “a director may … summon a meeting of the directors”.  As such, the summoning director is entitled to have the meeting held as summoned.

45.  Mr Lee referred to several authorities on the adjournment of meetings generally to support his proposition that the power to adjourn a directors’ meeting is vested at the meeting itself but not aliunde.

46.  In Kerr v Wilkie, it was held that the meeting of trustees entrusted by an Act of Parliament had the general power to adjourn the meeting although it was not given by the Act (per Lord Wensleydale and Lord Chelmsford both at p. 503 (right column)).

47.  In National Dwellings Society v Sykes [1894] 3 Ch 149, the chairman purported to exercise the power to adjourn an annual meeting of the shareholders.  Chitty J said at p. 162:

“The meeting is called for the particular purposes of the company. According to the constitution of the company, a certain officer has to preside. He presides with reference to the business which is there to be transacted. In my opinion, he cannot say, after that business has been opened, ‘I will have no more to do with it; I will not let this meeting proceed; I will stop it; I declare the meeting dissolved, and I leave the chair.’ In my opinion, that is not within his power. The meeting by itself (and these articles certainly apply to apply to what I have said) can resolve to go on with the business for which it has been convened, and appoint a chairman to conduct the business which the other chairman, forgetful of his duty or violating his duty, has tried to stop because the proceedings have taken a turn which he himself does not like.”

48.  In Carruth v ICI Ltd [1937] AC 707, an extraordinary general meeting was held to consider the rearrangement of capital by conversion of deferred shares into ordinary shares.  At the class meeting of the deferred shareholders, the resolution was declared negatived on a show of hands.  The chairman demanded a poll to be taken forthwith, and adjourned the meeting to a later hour when the result of the poll would be announced, and he announced that the resolutions had been duly carried.  An objection was raised that neither the notice convening the meeting nor the resolution set out therein referred to or covered a reduction of capital affecting the class of shares in a manner not otherwise authorized by the articles.  On this point, Lord Russell of Killowen said at p. 761:

“The meeting having been properly convened, can it be said that the circumstances attending its holding were such as to invalidate its acts, or in other words, such as to justify us in holding that there was no resolution of the deferred shareholders?  I have come to the conclusion that the answer should be in the negative.  There are may matters relating to the conduct of a meeting which lie entirely in the hands of those who are present and constitute the meeting.  Thus it rests with the meeting to decide whether notices, resolutions, minutes, accounts and such like shall be read to the meeting or be taken as read; whether representatives of the Press, or any other persons not qualified to be summoned to the meeting, shall be permitted to be present, or if present shall be permitted to remain; whether and when discussion shall be terminated and a vote taken; whether the meeting shall be adjourned.  In all these matters, and they are only instances, the meeting decides, and if necessary a vote must be taken to ascertain the wishes of the majority.”

49.  In Mulholland v St Peter, Roydon, Parochial Church Council & Anor [1969] 1 WLR 1842, the Representation of the Laity Measure Act, 1956 provided for an annual parochial meeting in every parish to be convened by notice of the vicar.  At the meeting, a motion for adjournment was proposed but the vicar presiding at the meeting refused to put the motion to a vote, and went to transact certain business.  The proceedings at the meeting were set aside by the court, and Pennycuick J referred to Rule 8(8) on the adjournment of the meeting and said at p. 1848D-E:

 “On the other hand, I am unable to see any ground upon which the vicar was justified in refusing to put to the meeting Mr Mulholland’s motion for an adjournment. Rule 8(8) provides that ‘The annual meeting shall have power to adjourn, and to determine its own rules of procedure.’ So under that sub-rule the power to adjourn is expressly conferred upon the annual meeting itself in contradistinction to the vicar. It seems to me that the vicar was bound to put the motion for adjournment to the vote and that until that resolution had been put, and defeated, the meeting was not entitled to proceed with any business, including that of the election of members of the council.”

50.  The English Court of Appeal in Byng v London Life Association Ltd [1990] 1 Ch 170 cited National Dwellings Society v Sykes and held that only in limited circumstances would the chairman of a shareholders’ meeting have power to adjourn the meeting.

51.  Mr  Chiu submitted that the cases cited are all distinguishable: they are concerned either with shareholder’s meetings or the Chairman’s power to adjourn meetings over the majority of the shareholders, or meetings where special procedure has been paid down for its adjournment.  The cases held that the meeting itself (by a majority) may decide on an adjournment, but they in no way exclude the majority of the directors to adjourn or postpone a meeting before the date of the meeting.

52.  I do not see that any of the cases cited specifically dealt with the adjournment of a directors’ meeting before it was held.  I shall approach the matter on principle.

53.  Both Art. 11 of AA and Art. 100 of Table A (as adopted) provide that the directors may meet for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit.

54.  The directors are given wide discretion to dispatch business, adjourn and regulate their meetings as they think fit, and there is no good reason why their meetings should be so regulated that any adjournment could only be exercised at the meeting itself.  It does not make sense to require a meeting summoned by a director to take place where the majority of the directors are unable to attend.  On the other hand, the date of the meeting should be what the majority of the directors may lawfully decide.

55.  It is noted that under the AA of the Plaintiff, while the shareholders may appoint proxies to vote at their meetings (see Table A), substitute for a director who is or about to be absent from Hong Kong may only be appointed by a majority of other directors (see Art. 6 of AA). 

Conclusion

56.  In the event, I hold that under Art. 11 of AA (and Art. 100 of Table A), the directors may adjourn a board meeting summoned by a director before it is held.

57.  Notwithstanding the saga on 22 December 2002, any decision on the authority to sue should lie with the de facto majority of the board.  The EGM on 8 January 2009 dismissed the motion to elect a new Chairman, but did not deal with the validity of the election of the Chairman at the directors’ meeting on 4 August 2009, which prima facie is a matter of the board.  Hence, the trial on what happened on 3 August 2008 is relevant.

58.  Mr Chiu submitted that the authority to sue point should be resolved first before the case be allowed to proceed further and not be left for determination at the trial of the action (see Kammy Town Ltd v Super Glory Corporation Ltd HCA 3524/2003 (14 January 2005); [2005] HKCU 93 per A Cheung J). 

59.  I agree it should be so in this case, especially where Mr Lee is confident that once that issue is resolved in his favour, the rest may be dealt by way of summary judgment.

60.  Hence, I direct that there be a separate trial on the issue of authority to sue. 

61.  The parties should agree on the directions for trial on the authority to sue.

Costs

62.  I make the order nisi that costs of summons (3) and the hearing on 8 May 2008 be to the Defendant. 

63.  Costs on summons (1) and (2) are reserved.

64.  I invite written submissions on summary assessment.

Postscript

65.  Looking at the shareholding structure of the Plaintiff, it is not unreasonable to think that Mrs Ming and the Defendant were once in good partnership.  For such kind of venture, united it stands and divided it falls.  It will be lamentable to see what may be beginning of the end regardless of the outcome of litigation, not to mention the uncertainties and substantial costs of litigation. 

66.  From worldwide experience, the trend is voluntary mediation.  Successful mediation invariably costs less than full blown litigation.  It is all the more relevant where the parties’ interest lies in future cooperation.   A skilful mediator brings home the benefit of reconciliation and settlement, so that the parties may look forward to cooperation and prosperity.  

67.  The Judiciary’s pamphlet “What is Mediation” gives a general introduction[1].  The Masters conduct information sessions for litigants who are interested.  I hope the parties do seriously consider mediation, and their legal advisors give them the necessary advice. 

68.  Lastly, I thank Mr. Lee and Mr. Chiu for their research and submissions.