ALBERTO FORCHIELLI v. FRANCESCO DELLA VALENTINA AND ANOTHER

HCMP 183/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 183 OF 2011

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D E C I S I O N

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Introduction

1.  I have before me an Originating Summons for an order convening an extraordinary general meeting of the Company for the purpose of removing the 1^st Defendant from the Board of the Company and replacing him with Ms. Gao Zhen, Jenny and also instructing solicitors to represent the Company in High Court proceedings.  The Originating Summons also seeks an order that one member of the Company present personally or by proxy do constitute a quorum at the extraordinary general meeting.

2.  As the nature of the relief sought suggests the application is necessary because the Company has 2 shareholders, the Plaintiff and the 1^st Defendant, who have fallen out.  They hold 56% and 44% respectively of the issued share capital. The articles of association provide that the quorum for a general meeting is two members.  The Plaintiff anticipates, not unreasonably, that 1^st Defendant will not attend an extraordinary general meeting at which the inevitable result is something he objects to, namely, his removal as a director.

3.  The Plaintiff says that the necessity for the 1^st Defendant’s removal has come about as follows.  The Company’s exclusive business is providing advisory services on investment opportunities in the Mainland to Mandarin Capital Management S.A. (“MCM SA”), which is an Italian investment company in which the Plaintiff and the 1^st Defendant have indirect minority interests.  MCM SA has lost confidence in the 1^st Defendant.  MCM SA has indicated that it might terminate the investment advisory agreement with the Company if the 1^st Defendant remains a director.  It is entitled to terminate the investment advisory agreement on 120 days written notice.  The 1^st Defendant has been offered the opportunity to resign, but has declined to do so.  In these circumstances the Plaintiff has concluded he must cause the removal of the 1^st Defendant from the Board of the Company.

4.  This application is not the first attempt to remove the 1^st Defendant.  The Plaintiff attempted to do so by an irregularly convened extraordinary general meeting, in respect of which I granted an injunction on the application of the 1^st Defendant on 27 January 2011.  The Plaintiff then took steps to convene a 2^nd extraordinary general meeting to remove the 1^st Defendant.  The 1^st Defendant issued proceedings to prevent this new extraordinary general meeting.  In these circumstances the Plaintiff makes the present application.

The Plaintiff’s Case

5.  Mr. Anson Wong, who appeared for the Plaintiff, accepts that in order for his client to obtain the order he seeks, he must satisfy the two fold test identified by Yuen J.A. in Success Plan Ltd. [2002] 3 HKLRD 560 at 568C:

(1) The applicant must satisfy the court that it is impracticable to call a meeting.

(2) If it is impracticable, the court must be satisfied that it should exercise its discretion to convene a meeting.

6.  I accept, for reasons I address later, that it is impracticable to call an extraordinary general meeting to consider the reconstitution of the board given the 1^st Defendant’s refusal to cooperate.  The more contentious question is whether or not I should exercise my discretion to order a meeting, which can be conducted if only one member is present.  Mr. Wong submits that I should.  First, he argues the relief is essential to protect the statutory right of a majority shareholder to remove a director and a quorum requirement does not confer a veto power on a minority shareholder by giving him the ability to prevent the holding of a general meeting: Re Opera Photographic Ltd. [1989] BCLC 763 per Morritt J at 765F-H and Re Success Plan Ltd supra at 568E.

7.  Secondly, he argues that the existing deadlock at Board level, which prevents the convening of a meeting has to be removed in order to prevent a log-jam in the Company’s operations: Re Universal Horizon Investment Ltd [2000] 3 HKC 627 per Rogers JA at 630F.  I am not persuaded that this is the relevant way of approaching this matter as it is possible for the Plaintiff as a member to cause an extraordinary general meeting of the Company to be convened pursuant to section 113 of the Companies Ordinance.  I explained this during the injunction proceedings, but the Plaintiff has not chosen to use that mechanism because he says, and this brings us to the material point, it would be useless if having convened an extraordinary general meeting no business could be conducted because the 1^st Defendant absented himself to avoid there being a quorum.

8.  Thirdly, Mr. Wong argued that commercial reality requires the 1^st Defendant’s removal.  If as a result the 1^st Defendant thinks that he has a basis for seeking relief from the court in the form, for example, of proceedings under section 168A, so be it, but the immediate problem of MCM SA terminating the investment advisory agreement has to be addressed now.  The possibility of the consequence of an order constituting unfair prejudice should not of itself deter the court from granting an order under section 114B: Re Whitchurch Insurance Consultants Ltd. [1994] BCC 51; Re Success Plan Ltd. supra at page 569A-B.

The 1^st Defendant’s Case

9.  Mr. Maurellet, who appeared for the 1^st Defendant, argued that it was not impracticable to convene a meeting, because the Plaintiff could always avail himself of the section 113 procedure.  This seems to me to miss the point.  The issue is not whether a notice convening a meeting can be validly circulated, it is whether or not it is practicable to “conduct the meeting of the company in the manner prescribed by the articles ….”.  In practice this means convene a meeting that could consider and pass resolutions, which necessarily means a meeting at which a quorum is present.  In the present case the 1^st Defendant has made it clear that he does not intend to attend any meeting at which his removal as a director can be determined and in these circumstances it is not practicable to conduct a meeting to address the business that the Plaintiff wishes to have addressed by the Company in general meeting.

10.  Mr. Maurellet argued that even if the impracticability test is satisfied the court should not exercise its discretion to order a meeting.  He advanced 4 reasons.

11.  First, he submits that the order would override the 1^st Defendant’s rights as agreed when the Company was established, namely, that it would be run as a partnership, and which are reflected in the articles, which effectively prevent his removal.  The 1^st Defendant says that the Company was established as a quasi-partnership.  He points to the Plaintiff’s evidence that he cannot currently recall whether there was any discussion about a partnership as indicating that, at the very least, there is an arguable case that the order sought is inconsistent with the basis upon which the parties have agreed to manage the Company.  It is correct that the Plaintiff has chosen not to file detailed evidence contesting the 1^st Defendant’s case in this regard and that it is plausible that at the time the Company was established the Plaintiff and the 1^st Defendant proceeded on the basis that the Company would be jointly managed.  Mr Maurellet argued that it is not the function of section 114B to alter the balance of power within a company.

12.  Mr. Maurellet cited various authorities that demonstrate that the court will not allow section 114B to be used in a manner which is inconsistent with an agreement between shareholders concerning control of a company: Manfield Coatings Co. Ltd. v Springfield Coatings Co. Ltd [1995] 1 HKC 74 at 78-79; Harman v BML Ltd. [1994] 2 BCLC 674 at 679-680; Re Rich Treasure Enterprise Ltd. [2001] 3 HKLRD 769 at 771-772; Alvona Developments Ltd. v The Manhattan Loft Corporation (AC) Ltd. [2006] BCC 119.

13.  I accept that these authorities appear to support a general proposition that where it is demonstrated to the court that the shareholders have agreed how control of a company is to be allocated between them that section 114B should not be used to alter that control: see also my decision in He-He International Holdings Development Limited HCMP 2313/2009 unrep. 15 April 2010, §11.  However, for reasons that I address later in this decision what this means in practical terms for the way in which an application of the present sought needs to be argued and determined has to be considered with some care.

14.  The problematic situation is of the type that appears to have arisen in Manfield Coatings v Springfield Coatings Co. Ltd., supra, namely, one in which the respondent argues, as in the present case, that it was agreed orally at the time a company was established that it would be operated on the basis of joint control and management, but the agreement was not reduced into writing and the applicant disputes its existence.   Cheung J took the view at page 79A-B that “the contended agreement regarding the management and control of the first defendant is a matter I should take into account in the exercise of my discretion.  I consider that my discretion should not be exercised in favour of the plaintiff.  To do otherwise would override the agreement reached between the second defendant and Mr Yuen on the management and control of the company.”

15.  Peter Smith J reached a similar conclusion in Alvona Developments Ltd. v The Manhattan Loft Corporation (AC) Ltd. supra, namely, that the court should have regard to an alleged, but by virtue of the summary nature of the procedure in the case before him, unproved agreement concerning control of a company.  This case concerned an application under section 371 of the Companies Act 1985, which is in similar terms to section 114B.  After a comprehensive view of the authorities he said this in paragraphs 55 to 59.

“55. It is not appropriate for me to decide beyond the facts of this case whether or not the agreement contended for is or is not a substantive right for the purposes of s.371. That must be decided on a case by case basis.

56. I am nevertheless firmly of the view that it is impossible to distinguish the agreement contended for by Powis from the one contended for and upheld to create deadlock in the Ross case. The purpose of the agreement was to ensure that there would be one joint director. I do not see that is any different from the result of the Ross case. As regards that right it was plainly intended that the right could not be taken away except by agreement i.e. a deadlock would arise if a dispute arose over the appointment or removal of that joint director.

57. I therefore conclude that it would not be right at the Pt 24 stage on the assumption that the agreement is as contended by Powis to make an order under s.371.

58. I take on board Mr Thompson’s submission that this kind of case has an impact on applications under s.371. The section was plainly intended to be a procedure to be invoked summarily (and thus speedily). Nevertheless that apparently simplified procedure has been overturned by the application of class rights and other matters in my view by the courts. Whilst this might involve arguments that were capable of being ventilated under a s.459 petition it is clear that the courts have allowed arguments that could be used under s.459 petition to be deployed on a s.371 application. One can see that clearly for example from Opera and Harman most clearly.

59. Equally in refusing to make an order under s.371 it seems to me that it is still open to either party if it believes that the other party is behaving in a way which unfairly prejudices its interests to present a petition under s.459. Mr Thompson submitted that as a majority shareholder Alvona would not be in a position to do that. However the authorities Re Legal Costs Negotiated Ltd [1999] B.C.C.547 and Re Baltic Real Estate Ltd [1992] B.C.C. 629 show that whilst that is usually the case it is not an absolute principle. If Powis is acting in a way which unfairly prejudices Alvona as regard its majority shareholder, i.e. by asserting an agreement which does not exist or otherwise blocking Alvona in its perceived legitimate rights as the majority shareholder, I do not see why a s.459 petition should not lie. Even if I am not right in that it would be able to issue a petition for just and winding up. This is a classic quasi partnership I would have thought for the purpose of a venture namely the development and sale of the property. That is reinforced in my view by the fact that Mr Thompson accepted that it would be envisaged that the company would be liquidated when the development was completed.”

16.  Mr. Maurellet argues that these 2 cases demonstrate that the court should have regard to evidence that an order would be inconsistent with an existing agreement concerning control of the company. It does not seem to me, however, that the authorities on which Peter Smith J relied in Alvona Developments Ltd. v The Manhattan Loft Corporation (AC) Ltd. supra, do necessarily lead to the conclusion that he and Cheung J reached.  In Re Opera Photographic Ltd. [1989] BCLC 763 Morritt J. (as he then was) considered an application under section 371 in which the defendant argued that the company was a quasi-partnership in which each shareholder had an equity of equal management participation and in those circumstances the court should not make an order that resulted in one shareholder being able to oust the other.  I think it useful to quote the entirety of the judge’s reasoning which is not too lengthy and is to be found at page 764b to 765h of the judgment.

“The provisions of s 371 are as follows:

‘(1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called or to conduct the meeting in a manner prescribed by the article or this Act, the court may, either of its own motion or on the application – (a) of any director of the company or (b) any member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit.

(2) Where such an order is made the court may give such ancillary or consequential directions as it thinks expedient; and these may include a direction that one member of the company present in person or by proxy be deemed to constitute a meeting.’

The provisions of the statutory predecessor of s 371(1) (s 135(1) of the Companies Act 1948) have been considered twice in reported cases. The first is Re El Sombrero [1958] 3 All ER 1, [1958] Ch 900, a decision of Wynn Parry J in which, as summarised by the headnote, he concluded that the question raised by the word ‘impracticable’ was merely whether in the particular circumstances of the case the desired meeting of the company could, as a practical matter, be conducted. Second, that that case was eminently one in which the court ought to exercise its discretion because otherwise it would be depriving the applicant of his statutory right under s 184(1) to remove the respondents as directors. The facts in that case were, for present purposes, merely that the applicant held 90% of the issued shares; the two respondents held the remaining 10% and were the only directors, and by seeking to absent themselves from any meetings that were convened effectively prevented the majority shareholder from exercising the rights attached to his 90% holding.

The section also came before the court in the subsequent case of Re H & R Paul & Son Ltd (1974) 118 Sol Jo 166. In that case there had been provisions for some form of takeover and the consequence had been that directors ceased to be qualified and amendments were proposed to the articles of association so that directors could be properly appointed. There had been a dissentient minority who did not like the takeover or the merger and who by absenting themselves from the meetings convened for the purpose of amending the articles and other purposes effectively frustrated anything being done. In his judgment Brightman J is reported as saying:

‘The jurisdiction conferred by the section was discretionary and his Lordship was therefore not bound to make an order but to refuse B. Ltd’s application would deprive the majority shareholder of the right to alter the articles of association and confer on the minority a right of veto not commensurate with their shareholding. His Lordship did not accept that the quorum provisions should be regarded as a right vested in the minority to frustrate the wishes of the majority and he would therefore grant the relief sought.’

In this case counsel for the second respondent (Mr Instone), submits that there is no allegation of breach of duty against the second respondent; that the second respondent was acting within his rights; and that the company is what is conventionally described as a quasi partnership case in which each of the individuals had an equity of equal management participation. He submits that Re El Sombrero is of no assistance because in 1958 it was considered that 51% gave an absolute right to remove a director and, as he submits, that has been overtaken by events in the form of a decision of the House of Lords in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 to the effect that the legal rights of the parties may be overlaid by equitable consideration arising out of the constitution and their agreement.

The plain fact of this matter is that deadlock exists between the two individuals which has to be resolved one way or another. It is either capable of being resolved by ordering a meeting, at which no doubt Mr Martin will be removed, and which will then no doubt result either in him exercising the preemption rights under the articles of selling his shares, or presenting a petition for the winding up of the company, or presenting a petition under s 459 based on unfair prejudice to him. If no order is made the deadlock will continue because no meetings can be conducted which are going effectively to manage or procure the management of this company, and if that persists for any length of time then no doubt one or other of the individuals will again be presenting a petition based on that deadlock in order to provide some form of resolution.

In the circumstances I do not think that the distinction which counsel for the second respondents seeks to draw is a valid one. The point still remains that the applicant, as the 51% shareholder, has the statutory right under the Companies Act 1985 to remove Mr Martin as a director. As Brightman J’s decision in Re H & R Paul shows, the quorum provisions cannot be regarded as conferring on the second respondent some form of veto as being his entitlement. If he is, as no doubt he will be, removed if I make the order sought it may then well be that further proceedings will have to be undertaken by one side or another to procure the purchase of the other shares, but that seems to me to be inevitable in any event. It would be in those proceedings that the wrongfulness or otherwise of the conduct of either of the individuals would have to be determined in order to decide what order to make and what form the relief should be.”

17.  As is apparent from the passages I have quoted, Morritt J concluded that the allegation of an agreement or understanding between the shareholders inconsistent with the order sought was not a ground for refusing to make an order that allowed a majority shareholder to exercise his statutory right to remove a director.  The reason for taking this approach was expressed as follows by Anthony Mann QC in paragraph 32 of Re Woven Rugs Ltd. [2002] 1 BCLC 324:

“[32] That evil day is the day of the commencement of proceedings under s 459. I can see that, if the parties do not resolve their disagreements shortly, such an application is more or less inevitable. That does not deter me from exercising the discretion in favour of Miss Roberts’ client any more than it deterred Morritt J in the Opera Photographic case ([1989] BCLC 763 at 765, [1989] 1 WLR 634 at 637). It may well be that the removal of Mr Sharafi from the board will be the trigger for those proceedings; but while no one would want to encourage the start of such notoriously expensive and difficult proceedings as those, such proceedings do seem to me to be the proper forum for adjudicating on a question of whether, in the circumstances, and in the absence of a shareholders agreement as to directorships, it is unfair to remove the Sharafi representative from the board and/or appoint additional directors, and if so what the appropriate relief is. If there has to be a forum for resolving the corporate dispute between the parties, then that seems to me to be it. Much of what Mr Chivers submitted to me in this hearing amounted to an invitation to embark on that sort of inquiry on the basis of something less than the full picture that will doubtless be presented to the court hearing a s 459 petition, and without the flexibility of the sort of remedies available in such proceedings. While determining s 459 petitions on full evidence and with a full range of remedies is bad enough, determining them on insufficient evidence (which is what the evidence in the present hearing amounted to) and with only a blunt instrument at the court’s disposal is even worse.”

18.  I find the analysis in Re Opera Photographic Ltd .and Re Woven Rugs Ltd. more persuasive than that in Manfield Coatings v Springfield Coatings Co. Ltd., supra, and Alvona Developments Ltd. v The Manhattan Loft Corporation (AC) Ltd. supra.

19.  A majority shareholder, such as the plaintiff, has by virtue of section 157B of the Companies Ordinance a statutory right to remove the 1^st Defendant.  Section 114B is the procedure provided by statute for addressing problems, inter alia, in realising the right given by section 157B caused by the impracticality of conducting a general meeting of a company.  Section 157B expressly states that the right that it confers cannot be excluded by anything in the memorandum or articles of agreement or any agreement between the company and a shareholder.

20.  It seems to me that in order for a minority shareholder to contest successfully an application for an order under section 114B, which will enable the applicant to convene a general meeting to remove him as a director, on the grounds that a company is in the nature of a quasi partnership, it would be necessary for the respondent to demonstrate that, assuming that the meeting called could be convened and conducted without the intervention of the court, he would be entitled to an injunction to prevent the applicant tabling a resolution to remove him as a director.  In considering whether or not such an injunction should be granted regard would need to be had to the clear implication of section 157B, namely, that a majority shareholder has a right to remove directors, which is not easily restricted.  Strong evidence would be required of an unqualified right on the part of a respondent to participate in the management of a company all the time that he remained a shareholder.  In my view this requires something more than allegations that, if made out at trial, might establish that it is unfairly prejudicial for the respondent to be excluded from management of a company.  What I anticipate will normally be required is a written agreement between shareholders, to which a company is not a party, which contains an express prohibition against removal of a director all the time he remains a shareholder, which can be enforced by injunction.

21.  In the present case the 1^st Defendant’s evidence is limited to paragraph 6 of his 1^st affirmation in which he says this:

“The Plaintiff and I have equal status in the Company, both of us were directors and from the beginning it was agreed we would run the business together as partners. This structure was envisaged so that there would be a balance of power and checks and balance between the Plaintiff and I. This would safeguard my investment (as a 44% shareholder of the Company) as well as reassure third parties the Company was dealing with that there would be checks and balance at the Company.”

22.  In my view this does not demonstrate anymore than an initial understanding about how the business was to be managed.  It does not demonstrate an agreement that if the Parties fell out the Plaintiff could not exercise his statutory right to remove the 1^st Defendant as a director, which is not the same as saying that the 1^st Defendant’s removal might not be capable, either independently or in conjunction with other relevant factors, of constituting unfair prejudice for the purposes of section 168A of the Companies Ordinance.  I do not think this conclusion is affected by the point emphasised by Mr. Maurellet, namely, that all the Plaintiff says in response to the 1^st Defendant’s evidence is this, which is contained in paragraph 7 of his 2^nd affirmation: “However, I cannot currently recall whether there was any discussion or an agreement of a partnership.  It is unhelpful that the 1^st Defendant makes assertion of partnership without giving any particulars.”

23.  In conclusion, I find that the allegation of a quasi-partnership is not a ground for refusing the Plaintiff’s application.

24.  Secondly, Mr. Maurellet argues that an inadequate answer has been provided to the 1^st Defendant’s complaints about the Plaintiff’s mismanagement including accounting irregularities.  Mr Maurellet submits that the matters of which the 1^st Defendant complains should be taken into account by the court in the exercise of its discretion and weigh against granting the order.  Section 114B gives the court a discretion whether or not to grant an order, but the factors to which the court should have regard when it comes to exercise that discretion must be of the sort that are relevant to the exercise of the right, in the present case, expressly conferred by section 157B.  It seems to me that the kinds of complaints made by the 1^st Defendant are not a reason to prevent a majority shareholder exercising his statutory rights to remove a director.  It is also undesirable that what should be a simple application is turned into something more complex by allowing it to be contested on the basis that the applicant is unfit to run the company in question.

25.  Thirdly, Mr. Maurellet argues that the real purpose of the application is to allow the Plaintiff to instruct solicitors to represent the Company in proceedings brought against it by the 1^st Defendant.  It seems to me that this is also an irrelevant consideration as is Mr. Maurellet’s fourth reason, namely, what he suggests is the uncertainty about the likelihood of MCM SA terminating the investment advisory agreement.  The precise reason why the Plaintiff wishes to remove the 1^st Defendant as a director will generally be irrelevant.

26.  I would in closing repeat that in my view applications under section 114B should be determined by reference only to those considerations that are relevant to the exercise of the right of an applicant to convene a meeting and put the particular resolution in question before a company in general meeting for consideration and voting.  In my view it is undesirable that applications of this sort should be allowed to develop into an assessment of the conduct of a company’s affairs by its directors with delay to the determination of the application, increase in costs and probably no resolution to the real issues between the parties.  If as a result of an order under section 114B action is taken by an applicant which a respondent believes is unfairly prejudicial to him he may seek the appropriate relief in a procedure designed for the determination of such complaints.

27.  For the above reasons I make an order that:

(1) that an extraordinary general meeting of the 2^nd Defendant be convened on 3 May 2011 for the purpose of considering and, if thought fit passing, the resolutions in the schedule hereto;

(2) that the attendance by one member either personally or by proxy shall constitute a quorum at the said extraordinary general meeting;

(3) notice of an extraordinary general meeting signed by the Plaintiff given 14 days before 3 May 2011 shall be sufficient and lawful notice for the convening of the said extraordinary general meeting;

(4) liberty to apply;

(5) costs of the application to be paid by the 1^st Defendant to the Plaintiff.