MKGWH v. RKSH

CACV 229/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 229 OF 2010

(ON APPEAL FROM HCMC NO.9 OF 2010)

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BETWEEN

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J U D G M E N T

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Hon Yuen JA (giving the judgment of the Court):

1.  This is an appeal from an order of Deputy Judge Carlson given on 7 October 2010 in interlocutory proceedings pending the determination of ancillary relief.  The learned judge granted an interlocutory mandatory injunction against the Husband ordering him to vote a block of shares at an AGM to be held this Friday 14 January 2011 “to restore the [Wife] to an executive directorship” of a company.  It is notable that the company is a public company and all the other members of the board (including all the independent non-executive directors) have already stated in effect that bringing marital disputes into the board is not in the best interests of the company.  The issue on appeal is whether the court should exercise its discretion to make an order effectively imposing a director on a company (particularly a public company), which the Husband says, on the authority of a number of cases, is contrary to principle.

Background

The Marriage

2.  The Husband and the Wife were married in 1973.  They have three children who are now all adults.  The Wife petitioned for divorce in 1999.  A decree nisi was granted in June 1999 but the decree absolute was not granted until March 2010 on the Husband’s application.         

The Company

3.  In 1975, the Husband and Wife founded a company (“the Company”) which since 1986 has been listed on the Hong Kong Stock Exchange (“HKSE”).  The Company was originally involved in electronics but its business now includes investing in properties and antiques (the Wife being active in antiques circles). 

4.  It is common ground that the family controls (in one form or another) slightly more than 50% of the shares in the Company with the rest being held by the public.  We will refer later to the way in which the family shares have been held. 

Wife’s positions in the Company pre-June 2010

5.  Before June 2010, the Wife was the Chairman and an Executive Director of the Company.  These positions are of significance because:

-   under the Company’s bye-laws, the Chairman is not required to retire from the board of directors; and

-   as part of her remuneration package as an Executive Director, she has resided at her present address for the past 6-7 years. 

The Wife is residing in 2 apartments in a building on the Peak, of which the Company owns 4 out of 6 apartments. However, as will be seen later, her continued residence there has been put in jeopardy.

Family’s control of shares in the Company

6.  Coming back to the family’s shares in the Company, they are held in various forms:

-    in relatively small numbers, in the personal names of the Husband and the Wife; but

-    mainly, in the names of companies (3 offshore companies and a company called JOL) which are owned by a discretionary trust called the M Foundation (these have been referred to in the order of the learned judge as “the Family Shares”).  

The M Foundation

7.  The M Foundation was set up shortly after the Company’s listing in 1986.  Public documents show that it holds a sizeable proportion of the Company’s shares mainly through 3 offshore companies, viz. 2 Liberian companies CCI and PCI, and a Panamanian company MTI.  (Although the M Foundation’s regulations referred only to the 2 Liberian companies, it is presumed that the M Foundation’s regulations apply to all 3 offshore companies). 

8.  Under the regulations of the M Foundation, the Husband and Wife were the “Prime Beneficiaries”.  It was agreed between them that all assets held in their separate or joint names were owned as to 80% by the Husband and 20% by the Wife and that “this split-up shall remain so in the future”.

9.  More importantly for present purposes, under the M Foundation’s regulations, the Husband held the share certificates of CCI and PCI (and presumably also MTI) and was their Managing Director.  It was provided that during the Husband’s lifetime, he would manage the assets of CCI and PCI (and presumably also MTI) .  In effect, the Husband can decide how to vote the M Foundation’s shares in the Company.

The Deed of Divorce

10.  It may be convenient at this stage to mention that the M Foundation’s regulations for the proportionate holding of shares may have been affected by a Deed of Divorce dated 20 November 2001 which superceded an earlier deed.  In this Deed the parties agreed that certain shares in the Company listed in Part D would be transferred to a trust to be set up under which the Husband would hold 51%, the Wife 31% and the children, the balance, with the Wife having the voting rights for the children’s shares until they are vested.  However from those papers before this court to which we have been referred, it is not apparent that the trust has been set up or the shares transferred to it. 

11.  Also of interest is the agreement that the apartments in the Peak will be registered in the name of the Company but would be “for the Wife to reside in for her lifetime”.

Sale of vase and consequent events

12.  So much for the relevant background.  The proceedings that came before the learned judge arose out of events that occurred after the sale of an antique vase in April 2010. However it is relevant to note two matters which occurred before the sale. 

2008 Messages from the Husband

13.  First, an email from the Husband in 2008.  At that time the Company needed to improve its financial position and on 25 September 2008 the Husband sent an email to the Wife (and others).  The email said:

“Please discuss & prepare when to control the followings:

1. Source of funds

- ...

- [Wife] sells antiques

...

Stage 3, hold [Husband]/[Wife]/[others] salary (Company to pay back each + 10% interest rate when above 1 funds arrive”.

14.  A few days later on 29 September 2008 the Husband sent a fax to the Wife (and others) discussing the need not to use overdraft facilities any further.  He wrote:

“Please try on other sources of funds only ...

- Sell Antiques < [Company Secretary] please give me antiques lists owned by Co, can sell ours and loan to Co> [Wife] check paintings, others etc”.

15.  The Wife’s case is that she took those 2008 messages as a request to her to sell such antiques of the Company as she considered appropriate at her discretion.  She also says that it was within her usual authority as Chairman and Executive Director to do so.  However the Wife has not asserted on affirmation that the Husband was actually aware of the proposed sale of the antique vase before the event.

2009 Internal Control Manual

16.  The second relevant matter is that the following year (2009) the Company produced a manual which provided certain procedures to be followed before its assets can be dealt with.  The Wife did not follow these procedures when she effected the sale of the antique vase through an auction house.

Sale

17.  The sale took place on 8 April 2010.  The net proceeds were $2,496,000.

18.  On 14 April 2010, according to the Company’s documents (an internal Report of Misappropriation), a member of staff discovered the sale via the auctioneer’s website.

The Husband’s handwritten note

19.  On 15 April 2010, the Husband sent a handwritten note by email to the Wife, copied to their son and the Company Secretary, saying that the Company still lacked cash, and saying

“ please arrange followings to auction:

(a) fine blue-glazed vase. Hammer price $2,600,000. Net Amount: HK$2,496,000 Done by Sotheby, [Company Secretary] please follow up payments; also b, c, d, e, f. [These listed some paintings and another vase]

...

Thanks again”.

20.  On 16 April 2010 the Wife gave instructions to the auctioneer for the proceeds to be paid into the Company’s bank account.  On the same day (according to the internal Report of Misappropriation), she said she did not know about the procedures set out in the Internal Control Manual. 

Payment of proceeds to the Company put “on hold”

21.  Despite her earlier instructions for payment however, the Wife then apparently instructed the auctioneer to keep payment of the proceeds “on hold”.

22.  Consequently on 26 May 2010 the Husband’s solicitors wrote to the Wife’s solicitors claiming that the Wife had arranged for the sale of the vase “without the Company’s consent or prior knowledge” and demanding that the Wife authorize payment by the auctioneer of the net proceeds to the Company.

23.  On 2 June 2010 (according to the internal Report of Misappropriation), the auctioneer informed the Company that the proceeds had been put into the Wife’s personal account.

Wife’s position regarding proceeds

24.  On 4 June 2010 the Wife’s solicitors replied denying that the vase was sold without consent, referring to the Husband’s handwritten note of 15 April 2010.  She denied having appropriated the proceeds but acknowledged that she had not instructed the auctioneer to release the proceeds to the Company as the Company owed her $2.65m being her salary from October 2008 to May 2010 and other amounts, in the total sum of about $3.1m.  She wanted “confirmation” that she could obtain payment for herself from the auction proceeds.

25.  In the same letter she also claimed that funds of the Company were not being properly accounted for (according to a later letter from the Wife’s solicitors to the HKSE, this was in respect of certain PRC rentals and the payment of bonuses).  She said that accountants would be instructed to launch an investigation.

Removal of Wife as Chairman and Executive Director

26.  On 8 June 2010 the Company circulated a board resolution (attaching the internal Report of Misappropriation) for removing the Wife as Chairman and director.  (It is now accepted by the Company that this was invalid and it is now said that this was merely “intended to be an expression of the board’s dissatisfaction with her performance as Chairman and Executive Director”).

27.  On 10 June 2010 a board meeting was arranged.  The Wife attended with her solicitors and as chairman, declared the meeting “cancelled” when it was initially inquorate. Apparently the meeting took place later by telephone conference after their departure.  According to the minutes of meeting, the board considered the internal Report of Misappropriation and then resolved to remove the Wife as Chairman and to “re-designate” her as non-executive director. 

Wife’s complaint to the HKSE

28.  The next day 11 June 2010 the Wife sent a formal complaint to the HKSE challenging the power of the board to remove her and listing her allegations against the Husband regarding the PRC rentals and bonuses.

Investigation Committee

29.  On 15 June 2010 a physical board meeting was held attended by the Husband, the Wife, their son who is also a director, as well as the Company’s three independent non-executive directors (“INEDs”).  It was resolved that an Investigation Committee (“IC”) be set up comprising all the INEDs to investigate, with the assistance of forensic accountants, (1) the allegation of the Wife’s unauthorized sale of the vase and (2) the Wife’s complaint to the HKSE about the PRC rentals.  (The issue of bonuses raised by the Wife was apparently not included as it was explained by the Company’s solicitors to the HKSE in a letter dated 24 June 2010 that it was a discretionary bonus which was paid to all staff members including the Wife herself). 

IC findings

30.  The IC found that (1) the sale of the vase was not in compliance with the Company’s Internal Control procedures and was unauthorized, and (2) there was no misappropriation of the PRC rentals.    

INEDS’ views at board meeting 9 July 2010

31.  On 9 July 2010 there was a board meeting of all directors (including the Wife as non-executive director) in which the IC report was considered.  This was an acrimonious meeting.  The views of the INEDs were that:

-   “bringing personal divorce and family matters into the Company was a big mistake and caused very serious damage to the Company’s business and operations”;

-   in the unauthorized sale of the vase, the Wife “did not act in accordance with her fiduciary duty as a director”; and

-   the $1.4m legal costs incurred by the Company in dealing with the Wife’s allegations was a “waste” and “not in the interests of the Company”.

Consequence of removal as Chairman

32.  Eventually on 28 July 2010 the Wife instructed the auctioneer to pay the proceeds of the sale into the Company’s account.  However as a result of that episode, the Wife has been removed as Chairman, she has been “re-designated” a non-executive director and her relationship with the rest of the board is clearly strained.

33.  As we understand it, the Wife is not in the present proceedings challenging the board’s power to remove her as Chairman, but the consequence of that removal is that she will have to stand for re-election as director at the Company’s AGM, which was originally scheduled for 22 October 2010 and which is now scheduled to take place on 14 January 2011.

Family Shares - application for 1^st injunction

34.  In August 2010, the Wife applied to the court for an injunction.  She sought two orders:

-   first, that pending the determination of ancillary relief, the Husband should not deal with the Family Shares (“the 1^st Order”); and

-   secondly, that at the AGM “the [Husband] must take and cause to be taken all necessary steps including exercising the voting rights attached to the Family Shares to restore the [Wife] to an executive directorship of [the Company] and thereafter continuing as an executive director” (“the 2^nd Order”).   

Orders made by Deputy Judge Carlson

35.  The hearing of the injunction application took place before Deputy Judge Carlson in mid-September 2010, and in a judgment given on 7 October 2010, the learned judge made the two orders. 

Termination of licence at Peak property - application for 2^nd injunction

36.  It is convenient at this stage to set out some subsequent events which led to the Wife’s application to the judge for the grant of a 2^nd injunction in December 2010.

37.  This concerns the Wife’s complaint that the Company has taken steps to evict her from her residence.

38.  Prior to June 2010, the Wife resided at the Company’s Peak property as part of her remuneration package as an executive director.  She continued to reside there after the Company “re-designated” her as a non-executive director.

39.  In December 2010 the Company wished to dispose of certain PRC properties through the sale of shares in a subsidiary.  This constituted a Very Substantial Disposal (“VSD”) under the Listing Rules and trading in its shares was suspended.  In the course of communications with the HKSE on the effect of the disposal, reference was made to the Company’s investment property on the Peak.  The HKSE took the view that since the Wife was no longer an executive director and thus accommodation was not provided under her remuneration package, the licence for her occupation after June 2010 constituted a continuing connected transaction (“CCT”).

40.  The Company says that in order to secure the VSD and resumption of trading in its shares which had been suspended for the sale, it decided to terminate the licence to the Wife and to rent out the property to third parties.  This again led to disagreements between the Wife and other members of the board at a meeting on 17 December 2010.  The following day the Company gave one month’s notice to the Wife to vacate the property.

41.  On 21 December 2010 the Husband wrote to the Company with a request that the Company “consider all possible options for [the Wife] to continue living at [the Peak property]”, referring to an undertaking he had given to the court on 17 December 2010 to take steps to procure that the Wife could remain at the property including persuading the board to grant a licence and his payment of the licence fee.

42.  On 24 December 2010 the INEDS of the Company wrote to the Husband setting out their reconsideration of his request.  They indicated that after the Wife’s re-designation as non-executive director in June 2010, she was a bare licensee, that she had not been participating in the Company’s operations since 2000, had made no contribution and had jeopardized the Company’s interests.  They also said that the licence fee being paid for the property was below market and that the Company was considering a sale of the property as offers were being received which were “very close to the market value”.

43.  On the same day the Company received an advice from its solicitors Baker & McKenzie setting out the non-compliance with the Listing Rules regarding the licence, and advising rectification actions.  These included seeking independent shareholders approval which the Company considered to be too costly and less preferable to a termination of the licence. 

44.  The termination of the licence led to the Wife’s application for a 2^nd injunction. Deputy Judge Carlson adjourned the summons pending this court’s decision on the appeal from his earlier decision.

Husband’s undertaking regarding payment for the Wife’s occupation

45.  Regarding the issue whether the Wife can continue to occupy the Peak property, this is not a matter which this court can deal with now for two reasons. 

46.  First, there has been no determination by the learned judge regarding the 2^nd injunction application and there is therefore no extant appeal.  We should however record the fact that the Husband has through leading counsel given an undertaking in this court that he will pay the “market rent” for the 2 apartments occupied by the Wife for the grant of a licence, subject to the Company complying with the Listing Rules for the effecting of such a transaction, and on the basis that such payments made by the Husband would be taken into account in the ancillary relief proceedings.  He has also given an undertaking to pay any difference between the market rent and the amount of licence fees paid for the Wife’s occupation of the property since her “re-designation” as non-executive director in June 2010.

47.  Secondly, the Company is not before the court.  It is for the board of directors, perhaps after taking legal advice, to consider how to deal with the Wife’s occupation of the property.  The board must act in the best interests of the Company and its deliberations will no doubt include considerations as to whose responsibility it was to comply with the Listing Rules when the Wife was permitted to continue to reside there after her “re-designation” as non-executive director, the Husband’s offer to pay market rent for her occupation and the possibility of litigation with the Wife if she challenges her eviction.

This appeal

48.  Coming back to this appeal, we should first set out the parties’ positions now.  In the Notice of Appeal the Husband has proffered undertakings not to dispose of his shareholding in the Company and to ensure proper and adequate housing for the Wife.  During the hearing of the appeal, he has proffered an additional undertaking not to vote the Family Shares at all at the forthcoming AGM.

49.  As for the Wife, leading counsel accepts that the choice of executive directors was entirely a matter for the board, and therefore to that extent the appeal would have to be allowed.

Arguments for the Husband

50.  Leading counsel for the Husband submits that although the 2^nd Order was made in the exercise of the judge’s discretion, there was an error in principle, in that in making the 2^nd Order, the learned judge has imposed a director on a company by way of an interim remedy, and this was contrary to principle as recognized by the English Court of Appeal in Pringle v Callard [2008] 2 BCLC 505, and demonstrated by the decisions of this court (Rogers VP and Le Pichon JA) in In re Chime Corp[2003] 2 HKLRD 905 and of Lam J in Muir v Lampl [2005] 1 HKLRD 338.  

51.  It is not clear whether these authorities were cited to the learned judge by counsel representing the Husband (not those appearing in this court).  In Pringle, there was a shareholders’ dispute between C in one camp and the P brothers in the other camp. C was not a director but his wife was.  The P brothers claimed that C was guilty of improper conduct and removed Mrs C from the board.  C issued proceedings under s.459 Companies Act (the equivalent of s.168A Companies Ordinance) to buy out the P brothers, or alternatively to be bought out.  He also sought an injunction preventing the P brothers from attempting to remove Mrs C from the board.  The judge granted the injunction.

52.  On appeal the Court of Appeal held that on the basis that there was a serious question to be tried, the court should then go on to consider whether there was an adequate remedy for C at the end of the day.  Since the P brothers had given undertakings to give Mrs C and her solicitors at least 2 clear business days notice of any transactions over £10,000, C’s interests were adequately protected.  Any sums outstanding to him as a result of those transactions could be taken into account when the court decided in the s.459 proceedings which camp was to buy out which camp.  The injunction was therefore unnecessary. 

53.  The Court held per curiam that “in essence it was contrary to principle to impose a director on a company.  It was highly impractical so to do in any event where there were disputes between the directors or indeed allegations of improper conduct. Accordingly the court would be extraordinarily cautious before imposing a director on a company by way of an interim remedy” (paras. 32 and 33).

54.  In Re Chime Corp, TW was before his disappearance the majority shareholder of C Co. After his disappearance, his shares were expropriated and diluted by the issue of new shares, with the result that by the time the administrators of his estate issued proceedings under s.168A, the estate had no shares at all.  In the course of interlocutory proceedings, the administrators sought an order that they be appointed to C Co’s board.

55.  The judge held that the appointment of the administrators to the board would be intrusive and was inappropriate for interlocutory relief.  Rogers VP agreed and added that although the administrators had shown a need for information they had not shown a need to interfere.  He said (para.26): “Although it is possible that the court could make an order which would have the effect of determining the composition of a board of directors as a matter of final relief on a s.168A petition, we consider that it probably would only do so in very special circumstances.  A company is a trading entity and those appointed to the board are there to supervise the company.  The court would be in a difficult position to select those who were appropriate to conduct the commercial affairs of a company.  A court should only interfere in the current management of a company if it is absolutely essential to do so”.                               

56.  In Muir v Lampl there was a shareholders agreement the effect of which (according to the Plaintiff) he was given immunity from being removed as a director of the company.  Lam J held that such an agreement would not be enforceable as being a fetter on the statutory power of the company to remove a director under s.157B Companies Ordinance.  As part of his considerations the judge took into account the fact that since the running of a company affects not only its shareholders but also creditors, the management of a company cannot be regarded as a purely private matter between its shareholders (para. 25(c)).

Arguments for the Wife

57.  Leading counsel for the Wife argued that these were “pure” company law cases between shareholders, or between a shareholder and the company, whilst the issue before us is a case between a couple in matrimonial proceedings, where the Husband was ordered to vote the Family Shares in such a way that the Wife could keep a directorship in the Company (even if not an executive directorship), so as to maintain the status quo. 

58.  He relied on the case of Poon v Poon [1994] 2 FLR 857, where a husband and wife were directors and shareholders of a family company, the other shareholders being the wife’s siblings.  After obtaining a transfer of shares from the husband making her the majority shareholder in place of him, the wife called an EGM to remove him as director.  The husband sought an order restraining the wife from putting the resolution before the general meeting of the company.

59.  Thorpe J (as he then was) held that although the company was a separate legal entity, it was not an entity in which any other individual or non-family member had any interest.  The judge rejected the argument that the matter should go before the Companies Court, holding that the company was a family business which the family chose to incorporate, and that all current disputes “within the family” should be litigated in the Family Court (p859F-G).  In the Family Division, pending a final hearing, every effort was made to preserve the status quo and to discourage or prevent either spouse from pre-emptive strike.  The husband was seeking the return of his shares and there had been a previous attempt by the wife to strip out the assets of the company.  Accordingly he granted the injunction, but on the basis that there would be appointed in addition an independent director and a professional secretary to take over the husband’s functions (together with other undertakings from the husband).              

Discussion

60.  In our view, it would be artificial to say that this interlocutory mandatory injunction only affects the two parties in the marriage and how they are to vote their shares. Of course a shareholder is free to vote for the purpose of his own interests without regard to the company’s interests (Pender v Lushington (1887) 6 Ch D 70) but where the court is asked in the exercise of its equitable jurisdiction to grant an interlocutory mandatory injunction, the court cannot shut its eyes to the effect of its order.  Given the size of the Family Shares, the effect of the order is to make the Wife a director of the Company, and indeed that is explicitly recognized in the order.

61.  Nor can it be said that it is simply maintaining the status quo.  It was not the act of the Husband but the articles of the Company that require the Wife to retire at the AGM.  She would only have been exempt from retirement if she were Chairman, but as has been noted earlier, that appointment is a matter for the board, and in any event no order regarding her position as Chairman is sought from the court.  Since retirement is a matter of course under the articles of the Company, the crux of the matter is whether the court should exercise its discretion to order the Husband to vote the Shares in such a way that would lead to disruption on the board of a public company.

62.  The strain between the Wife and the other members of the board as a result of events following the sale of the vase is plain to see.  It is not the function of this court to decide disputes of fact but even if the Wife were to be able to point to the Husband’s handwritten note as authorizing the sale (whether before or after it took place), it would appear that her attempt afterwards to withhold the proceeds from the Company in order to pay her own salary was perhaps misguided.  Having said that, the board also appears to have reacted to her actions somewhat precipitously by treating the sale of the vase as a misappropriation (rather than as a withholding of proceeds) and passing the “paper” resolution of 8 June 2010.  At the end of the day, the guiding principle must be that all shareholders, including outside shareholders, as well as the creditors of the Company, are entitled to the proper and efficient management of the Company’s affairs by the board, without the infiltration of mistrust and bitterness which unfortunately often accompany matrimonial proceedings, and which have already intruded into this company’s operations. 

63.  As we have seen in the authorities discussed earlier (Pringle v Callard, Chime Corp, Muir v Lampl), the court will not lightly impose a director on a company in controversial circumstances in interlocutory proceedings.  Unlike Poon v Poon, this is not a private family company.  That factor was clearly material to Thorpe J’s judgment as he repeatedly emphasized it.  In contrast, the Company here is a public company, with a substantial number of outside shareholders whose interests should also be taken into consideration.  With respect, it is not an answer to say that outside investors would know that this was a family company and that the family would ultimately have the final say: we are not here dealing with a dispute between an outside shareholder on one side and the family shareholders on the other side.  Indeed the benefit of investing in a company where a family holds the majority of shares is that it is perceived that there would be no hostility among board members and thus more efficient management.

64.  Further, unlike the Husband’s position in Poon v Poon, the Wife’s interests, like the interests of outside shareholders, would be protected by the INEDS and any attempts by the Husband or other directors to “run down” the Company would be closely scrutinized by the regulatory authorities.  There is far greater transparency with a public company than would be available with a private company, and so the argument by the Wife that she needed to be on the board to obtain access to information is far less strong than with a private company. In any event she would be able to obtain discovery in the ancillary relief proceedings.

Order

65.  For these reasons, on the basis of the undertakings proffered by the Husband and set out in this judgment (including the undertaking that he would not vote the Family Shares at the AGM), we order that the appeal be allowed and the 2^nd Order of 7 October 2010 be set aside.  The parties having agreed that costs should follow the event, there will be an order that the Wife shall have to pay the Husband’s costs of the appeal.  As for the costs before the learned judge, this has not been the subject of agreement, and so we will make a costs order nisi that the Wife should be entitled to half the costs of the application for her success in obtaining the 1^st Order.

66.  Finally it remains for this court to express the hope that the parties will see their way to achieving a less stressful and less costly conclusion to the matrimonial proceedings by taking advantage of mediation as a means of dispute resolution.