SHENZHEN CAU TECHNOLOGY CO LTD v. CHINA MERCHANTS KIN SWISS TRANSPORTATION CO LTD AND ANOTHER

HCMP 333/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO333 OF 2014

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D E C I S I O N

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1.  I have an interlocutory application before me taken out in these proceedings. These proceedings are begun by originating summons dated 13 February 2014 by Shenzhen CAU Technology Company Limited (“CAU”) as a member of a company, namely China Merchants Kin Swiss Transportation Company Limited (“the company”), whereby CAU seeks an order:

(1) for an EGM of the company to be called pursuant to section 114B of the Companies Ordinance, Cap 32, now repealed and replaced by section 570 of the Companies Ordinance, Cap 622, for the purpose of removing and appointing directors and for ancillary directions dispensing with notice and reducing the requisite quorum to CAU’s attendance alone; and

(2) allowing CAU to inspect or to obtain copies of the audited accounts of the company from 2006 to 2013.

2.  An interlocutory application was taken out by summons dated 11 March 2014 by a company called China Merchants Logistics Group Limited (“CML”), first of all for leave to join in the proceedings as the 2^nd respondent, which was granted, by consent, by Madam Justice Mimmie Chan on 1 April 2014, and, secondly, for an order that the hearing of the originating summons be adjourned pending the resolution of the dispute over the ownership of 52,000 shares of and in the company registered in the name of CAU, which is the application before me this morning.

3.  The company is a company incorporated in Hong Kong with a total of 80,000 issued shares of which 52,000 are registered in the name of CAU and the remaining 28,000 in the name of China Merchants Shipping and Enterprises Company Limited, a related company of CML.

4.  CAU is a listed company in Mainland China.  According to the affirmation of its vice-general manager, Mr Yang Bin, the directors and controlling shareholders of CAU have changed many times before.  The current directors and controlling shareholders took control of CAU only in May 2013.  At that point, the new management was not even aware that CAU held shares in a company.  The 52,000 shares have never been reported as CAU’s assets in its audited accounts.  It was only when CAU was contacted by CML with a request that it endorse on certain documents for audit purposes that the new management of CAU learnt of its status as a registered shareholder in the company.  CAU thereupon requisitioned a general meeting of the company. 

5.  No meeting was held. Instead, CAU received a letter from CML’s solicitors in November 2013, stating that CAU held the 52,000 shares in the company on trust for CML.  The trust is said to have arisen out of a share transfer agreement dated 18 November 2000.  In brief, CML says that CAU was a vendor who had been fully paid and that CML is the absolute beneficial owner of the shares in question.  CML further demanded that CAU execute an instrument of transfer to return the shares to CML. 

6.  Mr Yang of CAU, however, says that some other arrangement must have been made in relation to the company’s shares between 2000 and 2004, rather than that they should be transferred to CML as it claims.  Moreover, Mr Yang says that under Mainland laws, the limitation period for enforcing the share transfer agreement is two years and the chance of CML being able to enforce that agreement after the lapse of 14 years is slim.

7.  Accordingly, CAU decided to proceed with convening a meeting under section 113 of Cap 32.  A meeting was scheduled to be held on 29 January 2014.  It failed because the requisite quorum prescribed by the articles was not present, hence the originating summons in these proceedings.

8.  As CAU has refused to transfer the shares to CML, on 19 February 2014, CML issued proceedings against CAU (joining the company) for a declaration that CAU held the 52,000 shares in question as a nominee for CML and for an order that the register of members of the company be rectified by striking out the name of CAU and entering the name of CML instead.  CAU contests those proceedings.

9.  Mr Frederick Chan, who appears on behalf of CML this morning, submits that CAU’s application turns upon issues which depend on the resolution of the dispute over the ownership of the shares.  First, under section 114B of Cap 32, now section 570 of Cap 622, the court may order a general meeting to be called upon application by a “member of the company who would be entitled to vote at the meeting”.  Mr Chan argues, based on the decision of Lewison J in Re Kilnoore Limited (in liquidation) [2006] Ch 489, that CAU is not entitled within the meaning of section 570 of Cap 622 to vote at the meeting because it holds the shares on a bare trust and is required to vote in accordance with the directions of the beneficial owner.

10.  I have some doubt whether In re Kilnoore is applicable to the facts here.  That was a case relating to the different context of sections 245, 249 and 435 of the (UK) Insolvency Act 1986, which are provisions relating to the validity of a floating charge in the event of insolvency.  The issue was whether the applicant there was connected with the company in question, which turned on whether it was “entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it” within the meaning of section 435(10) of the Insolvency Act.  Lewison J drew a distinction between rights and power and took the view that the use of the word “power” enabled the court to look to the economic reality of the case. 

11.  I am not sure that the reasoning and policy considerations in that context apply in this case.  In fact, Re Fernlake Pty Ltd (1994) 13 ACSR 600, also cited by Mr Chan, would suggest that as between the vendor, who remains registered as a member of the company, and the company and other shareholders, it is the vendor who is solely entitled to vote in respect of those shares.  The court there, however, went on to refuse to exercise its discretion to give effect to a resolution passed by the vote of the vendor because, in the view of W C Lee J, it would be inequitable for the court to give effect to a resolution passed wholly in breach of the trusts by which the shareholders were bound in circumstances where the shareholders were fully aware of the relevant circumstances of those breaches (see also Sung Li Holdings Limited v Medicom Finance Pty Limited (1995) 13 ACLC 955 at 963). 

12.  These cases suggest that even though as between the company and a member, the member may have a legal entitlement, a beneficial owner may be able to restrain the nominee holding shares from exercising the rights of a shareholder which is, in substance, what CML is seeking to do.  Furthermore, section 570 of the Companies Ordinance, Cap 622, confers a discretion on the court to order a meeting and give ancillary directions relating to notice and quorum.  In circumstances such as the present, the court can, in my view, take into account the beneficial ownership of the shares in deciding whether to order a meeting summarily or await the outcome of an application for rectification.

13.  Secondly, insofar as CAU’s application for inspection is concerned, it is well-established that under section 152FA of Cap 32, now section 740 of Cap 622, it is necessary to ask whether the inspection is sought in good faith and would be for a proper purpose and, in particular, whether the purpose is germane to the applicant’s status as a shareholder (see Re LehmanBrown Ltd [2011] 5 HKLRD 668 at paragraph 33).  If CAU is in fact a mere nominee holding the shares and the application for inspection is not brought for the benefit of the person beneficially entitled to the shares but is, in fact, opposed by him, there may be questions raised — and I need not put it any higher than that — as to whether inspection is being sought in good faith and for a proper purpose.

14.  In my view, CML’s claim over the shares does materially affect the questions that arise upon CAU’s application by the originating summons.  There is therefore something to be said for adjourning the hearing of the originating summons herein until after the determination of the dispute over the beneficial ownership of the shares.

15.  A similar question has from time to time arisen in shareholders’ petitions for winding-up or for relief from unfairly prejudicial conduct.  In Donald Quintin Cheung v Fester Corporation Limited [1993] 1 HKLR 49 at 54, Nazareth J quoted and adopted the following passage from an earlier judgment of Pennington J in a related case:

“… the general rule of practice is that if there is a genuine dispute as to the ownership of shares that dispute should be settled before a petition for winding up is considered unless it can be shown that harm will be done to a minority shareholder because in the interim period the majority shareholders are able to take steps which will reduce the value of his shareholding.”

16.  In Re Kenley (HK) Limited [2003] 4 HKC 61, Kwan J said: 

“… this is but a rule of practice not a rule of law. In exercising its discretion, the court would consider all circumstances in determining whether to require the petitioner to establish his locus first and have the dispute regarding his locus determined outside the petition.”

17.  In this case, CAU has no locus to inspect any corporate documents or vote at any meeting but for the holding of the disputed shares.  CML has put forward a substantial amount of documentary evidence in support of its entitlement to the shares, including a certificate issued by CAU dated 30 April 2001 confirming that all the shares it held in the company belonged to CML, and the share transfer agreement I have already mentioned.  These are exhibited to a detailed affirmation of Mr Liu Yan, a vice-general manager of CML filed on 19 February 2014 in HCMP 393/2014, which has been placed before me in these proceedings.

18.  There is also evidence that CAU transferred 24,000 shares to a related company of CML on its instructions in August 2004 for the nominal consideration of HK$1.  Moreover, it is common ground that the shares in question have never been reported in CAU’s own accounts as its assets during the material years and that the audited accounts of the company have never been provided to CAU.  For over 10 years, the status quo has been that CAU is not treated, in any meaningful sense, as a shareholder.  Since 2001, the directors of the company have been nominated and decided by CML.  All the corporate documents, including the registers of members and directors, have been kept at the direction of CML.  To my mind, these are matters consistent with CAU being content hitherto to be treated as a mere nominee. 

19.  The current management of CAU has no personal knowledge of any matter contrary to CML’s case that there is a trust.  All that CAU has said so far is:

(1)   paragraph 21 of Mr Yang’s affirmation:

“Given the time lapse and the change of directorships, it is not possible for the Applicant (Cau) to find out what happened after the alleged agreement was struck between the Applicant and Top Chief Company Limited and/or China Merchants Logistics. However, the Applicant verily believed that the assertion China Merchants Logistics was not forthcoming with the whole truth and some other arrangement must have been made in relation to the Respondent’s shares between 2000 to 2004 rather than to be transferred to China Merchants Logistics as it now claimed.” (sic)

(2)   paragraph 40 of Mr Yang’s affirmation: 

“Moreover, China Merchants Logistics was well aware of the Applicant holding the 65% (sic 52,000 shares) share of the Respondent immediately after the Applicant transferred 30% of the Respondent’s share to China Merchants Shipping. China Merchants Logistics did not assert any beneficial ownership then. The Applicant verily believes that this supports the fact that some other arrangement must have been agreed between the Applicant and the China Merchants Group in relation to the Respondent’s share owned by the Applicant after the share transfer agreement dated 18 November 2000 was not performed.”; and

(3)   paragraph 11 of Mr Yang’s second affirmation: 

“As I mentioned previously, as the current management of Cau only took over Cau recently, we did not find any record showing why the ownership of the Company’s shares was not reported in Cau’s annual reports previously.”

20.  In HCMP 393/2014, CAU filed an acknowledgment of service in May 2014 contesting CML’s claim, but has thus far not filed any affirmation in opposition.  In these circumstances, it is fair to say that CML has raised at least a reasonably arguable case that the shares do belong to it.

21.  Miss Tang, who appears for CAU, has, in her submissions, raised the possibility of the share transfer agreement being tainted by illegality under Mainland laws.  In my view, this does not assist CAU. First, there is no evidence of Mainland law in support of this new argument. Secondly, all that Miss Tang is able to say by way of conclusion is that CML’s case is “not as cast-iron as [CML] has asserted”.  In my view, this does not detract from CML’s argument that CAU’s originating summons should be deferred until after the determination of the ownership over the shares. 

22.  Miss Tang refers to section 435 of the Companies Ordinance, Cap 622, and submits that there is an automatic entitlement for every member, upon demand, to receive a copy of the latest audited accounts. That may be so but section 435 does not provide for any power on the part of the court to order inspection.  Inspection is governed by section 740 which is discretionary and which is the provision prayed in aid by CAU.  Further, it appears that all documents, including audited accounts, have hitherto been provided to CML with the acquiescence, if not consent, of CAU.  The arrangement may have been that provision of documents to CML was treated as sufficient discharge of the obligation of the company to supply documents to the registered shareholder.  Furthermore, the position is that if CML is right, CAU has remained a registered shareholder against the wishes of the beneficiary and in breach of its duties to hand over the legal title upon demand.  On that basis, CML would, in my view, be entitled in equity to an order preventing CAU from having access to information relating to trust property and requiring CAU to hand over any documents it has obtained qua trustee, ie, qua member of the company.  So the reliance placed on section 435 which concerns the obligation of the company and its officers vis-à-vis a member does not take the matter further.

23.  Relying on Re Brockbank [1948] Ch 206, Miss Tang further argues that even if CML is the beneficial owner, as a beneficiary it cannot direct the trustee in the performance of his functions.  But Re Brocdbank concerned a will trust with detailed provisions regarding the trustee’s functions.  Here, there is no dispute that if there is a trust, it is a bare trust.  At the very least, CML would be entitled to call for the shares to be transferred to itself, a demand which it has in fact already made. 

24.  CAU has, in addition, referred to certain provisions of Mainland law on the basis of which it contends that any action on the share transfer agreement, which was dated 2000, would be time-barred now under Mainland law.  However, there are conflicting opinions on Mainland law filed as exhibits to the affirmations and I am by no means satisfied, (1) that Mainland law is the applicable law regarding the beneficial ownership of the shares which are shares in a Hong Kong company; or (2) that under Mainland law, the question of ownership is necessarily determined by reference to the enforcement of the share transfer agreement.  It seems to me these are matters that remain to be resolved in the proceedings brought by CML for declaration of ownership and rectification of the register of members.

25.  CAU says CML has not identified how inspection of the audited accounts of the company would in any way affect CML’s interests or how any real prejudice would be caused by its proposed change of directors of the company, or the appointment of an additional director in the meantime, pending resolution of the dispute over ownership of the shares.  CAU has also referred to certain regulatory provisions applicable in the Mainland in respect of disclosure to be made by a listed company.  CAU contends that it would face dire and perhaps even penal consequences if it fails to obtain the audited accounts of the company so as to include relevant information in CAU’s own accounts and public disclosures. 

26.  With respect, the issue for me at this juncture is not primarily a question of balancing hardship and inconvenience.  Moreover, on a fair reading of the Mainland provisions, it is difficult to see why CAU would be penalised if it made a full and frank disclosure of the present position, including, for example, that it is a registered shareholder in the company, that it does not have the audited accounts of the company or other information about its assets, that CML contends it is the beneficial owner and CAU a mere nominee of the shares, that CML has brought proceedings for recovery of the shares and that CAU’s inspection application and CML’s claim for ownership are both proceedings pending before the Hong Kong courts.

27.  I have to be satisfied that the jurisdiction under sections 570 and 740 of Cap 622 are, first of all, engaged and, secondly, ought to be exercised in favour of CAU before I can make any of the orders sought by CAU.  In all the circumstances, it seems to me that these are questions that should be resolved in light of the court’s findings on the ownership of the shares.  I therefore make an order that the hearing of the originating summons herein be adjourned sine die pending the determination and resolution of the issues of the ownership of 52,000 shares in the company now registered in the name of CAU and the rectification of the company’s register of members in respect of those shares in HCMP 393/2014.

(Submissions on costs)

28.  In the summons itself, CML seeks an order for costs to be in the cause of HCMP 393/2014.  The summons would, in any event, have to come before the court for directions to deal with the originating summons by way of an application for adjournment.  Today’s hearing, however, was necessitated by CAU’s opposition to the application and the same applies to the reply affirmation of Mr Liu Yan, dated 20 May.

29.  I think, in these circumstances, the fair order on costs would be that CAU is to pay CML the costs of the second affirmation of Liu Yan dated 20 May 2014 and the costs of today’s hearing.  The rest of the costs on the summons taken out by CML dated 11 March 2014 will be in the cause of HCMP 393/2014.  The costs to be paid have to be paid forthwith.