ZHAO CHAO v. MINGYUAN MEDICARE DEVELOPMENT CO LTD AND OTHERS

HCMP 1412/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1412 OF 2015

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J U D G M E N T
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Introduction

1.  By an Originating Summons dated 9 June 2015 (“Originating Summons”), the Applicant (“Zhao”) seeks “declaratory relief”:

a. that the purported removal of him from his office as executive director of the 1^st Respondent (“Company”) pursuant to Article 107(A)(vi) of the Company’s Bye‑laws (“Art 107”) on 5 June 2015 be set aside; and

b. re‑instating Zhao to his office as executive director of the Company.

2.  By a Summons dated 4 September 2015 (“Summons”), Zhao seeks leave to file and serve the 3^rd Affirmation of Lam Yan Fong Flora dated 2 September 2015 (“Lam 3”). Lam is the solicitor of Zhao who has the conduct of these proceedings.  At the beginning of the hearing, this court indicated to the parties that it would read Lam 3 de bene esse.

Background

3.  The Company was incorporated under the laws of Bermuda in 1989 and was later registered in Hong Kong under Part XI of the then Companies Ordinance, Cap 32.  Its shares are listed on the Hong Kong Stock Exchange although trading has been suspended since 1 April 2015 and still is.  At the material time, its Board of Directors (“Board”) consisted of the 2^nd Respondent as Chairman and executive director, the 3^rd Respondent as non‑executive director, the 4^th and 5^th Respondents as independent non‑executive directors, and Zhao who was appointed as executive director of the Company in April 2013.

4.  According to the minutes of the Company’s Board meeting dated 5 June 2015 (“Minutes”), signed by the 2^nd to 5^th Respondents as directors, the Board unanimously resolved to remove Zhao pursuant to Art 107.  The reason stated in the Minutes was that Zhao had failed to report to the Company on his detention and arrest by the People’s Procuratorate of Binhai New Area, Tianjin (“PPT”) in March 2015 on bribery and corruption related charges. The Board thus questioned Zhao’s integrity and suitability to continue to act as a director of the Company.

5.  In his affirmation in support dated 9 June 2015 (“Zhao 1”), Zhao frankly admitted his detention and arrest by the PPT in March 2015, but said he was subsequently released on bail on 14 April 2015.  He claimed his arrest was due to his role as president and vice general manager of a company by the name Shanghai Mingyuan Enterprises Group Limited (“Shanghai Mingyuan”) and the PPT told him their main target was in fact the 2^nd Respondent and his younger brother Iu Chung, also known as Yao Yong (“Iu”). However, since the two refused to attend an interview in the PRC, the PPT had to arrest Zhao instead.

6.  Zhao’s removal pursuant to Art 107 was publicised by the Company in an announcement dated 5 June 2015.  The Minutes themselves were sent to Zhao’s solicitors, Messrs Lam & Co, by letter dated 13 July 2015.

7.  In Zhao 1, Zhao said he suspected that the 2^nd Respondent, Iu and Poon Kwong Wai (“Poon”), CFO and Company Secretary of the Company, were complicit in a fraudulent transaction relating to the Company’s 51% indirect equity interest in a hospital in Shanghai viz “上海衡山虹口妇幼医院” (Shanghai Hengshan Hong Kou Women and Children Hospital) (“Hospital”) through a company called “上海唯依医院投资管理有限公司” (Shanghai Wei Yi Hospital Investment and Management Limited) (“Wei Yi”) which owned 100% interest in the Hospital.  Details of the so‑called fraudulent transaction are set out in Zhao 1 and shall not be repeated here.

8.  In Zhao 1, Zhao also said his abrupt removal as a director was prompted by the concern of the 2^nd Respondent and Poon about his probing into the reason for the delay in publication of the Company’s audited financial statements for the year ended 31 December 2014.

9.  The Respondents deny Zhao’s accusation.

Deliberation

10.  Zhao’s case, as summarised in para 5 of Mr Kim’s skeleton submissions, is that:

a. The alleged reason for the removal stated in the Company’s announcement dated 5 June 2015 is fundamentally wrong and without proper basis (“Point 1”).

b. Zhao was given no opportunity to be heard by the Board prior to his removal in breach of natural justice – it can only be “surmised” that his removal was mala fide, prompted by his probing into the financial affairs of the Company (“Point 2”).

c. There was non‑compliance with Art 107 (“Point 3”).

d. It is implied that Art 107 does not permit the other directors to remove Zhao simply because he refused to be complicit in the prima facie wrongful acts committed by some of the other directors of the Company (“Point 4”).

e. In all the circumstances, it would be in the interest of the Company and its shareholders that Zhao be re‑instated (“Point 5”).

11.  The legal basis of Mr Kim’s submissions is unclear to this court as no authorities have been cited in support of any of the points made.

12.  Mr Chen, for the Respondents, cited a number of grounds in his two written submissions as to why the application should be dismissed.  This court need only refer to three of them which are sufficient to dispose of the present application.

13.  First, Art 107 of the Bye-laws provides:

“(A) A Director shall vacate his office:-

…

(vi) if he shall be removed from office by notice in writing served upon him signed by all his fellow-Directors”.

14.  By virtue of Art 107, a director can legitimately be removed from and he shall vacate his office if a notice in writing signed by all other directors is served upon him.  The mode of service is not circumscribed in any way by Art 107 – there is no requirement that service must be effected personally on the director in question or at a particular address provided by him to the Company.  In these circumstances, it seems to this court that as long as the notice comes into the hand of the director in question, there is sufficient service of the notice for the purpose of Art 107.  Further, Art 107 does not specify the “form” of the notice.  Again, there is no reason why a notice in the “form” of Board minutes should not suffice.

15.  As this court indicated earlier, the Minutes were sent to Zhao’s solicitors on 13 July 2015.  In Zhao 1, which was dated 9 June 2015, Zhao said at para 30 that he had not received the notice. This may be true as at 9 June 2015 but by the time of his second affirmation dated 28 August 2015 (“Zhao 2”), it became impossible for Zhao to deny receipt of it.  Hence, at para 18 of Zhao 2, he said:

“Not until on 13 July 2015 had I received through my solicitors the alleged notice signed by all directors of the 1^st Respondent.”

16.  That is a clear admission that Zhao has received the requisite notice. If so, in this court’s view, there is sufficient compliance with Art 107 and the office of Zhao as director should be treated as vacated.

17.  That answers Point 3.

18.  Second, there is no requirement in Art 107 that Zhao’s fellow directors must give reasons for the removal in the notice or that they must substantiate their reasons for the removal before it becomes effective.  Nor is Art 107 expressly qualified by, for instance, a proviso that the director in question must be given an opportunity to be heard by the Board prior to his removal.  Nor has Mr Kim been able to explain, by reference to the criteria set out in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381, 391J‑392B, why such a proviso should be implied into the Bye‑laws.

19.  The legal position under general company law is set out in Samuel Tak Lee v Chou Wen Hsien & Ors [1984] 1 WLR 1202.

20.  In that case, the plaintiff in his personal capacity claimed for a declaration that a notice in writing by his co-directors requesting him to resign was invalid and of no effect and that he remained a director of the company in question. The writ was struck out and the action dismissed by Fuad J. The plaintiff's appeal was dismissed by the Court of Appeal. The plaintiff’s further appeal to the Judicial Committee of the Privy Council was also dismissed on the grounds that:

a. Although directors exercising their power under article 73(d)[1] had to act in the best interests of the company and not for ulterior reasons, the provisions of article 73(d) required the office of director to be vacated immediately when the holder received a notice in writing signed by all the other directors; and that, even if one or more directors had acted for ulterior reasons, the plaintiff's expulsion from the board was still effective.

b. The ordinary principles of Foss v. Harbottle (1843) 2 Hare 461 would preclude an action by a wrongly expelled director in his own name to restore himself to office.

21.  At 1026-1027, Lord Brightman, delivering the judgment of the Privy Council, said:

“Their Lordships are in agreement with the majority of the Court of Appeal that the power given by article 73 to directors to expel one of their number from the board is fiduciary, in the sense that each director concurring in the expulsion must act in accordance with what he believes to be the best interests of the company, and that he cannot properly concur for ulterior reasons of his own. It does not, however, follow that a notice will be void and of no effect, and that the director sought to be expelled will remain a director of the board, because one or more of the requesting directors acted from an ulterior motive…

To hold that bad faith on the part of any one director vitiates the notice to resign and leaves in office the director whose resignation is sought, would introduce into the management of the company a source of uncertainty which their Lordships consider is unlikely to have been intended by the signatories to the articles and by others becoming shareholders in the company. In order to give business sense to article 73(d), it is necessary to construe the article strictly in accordance with its terms without any qualification, and to treat the office of director as vacated if the specified event occurs. If this were not the case, and the expelled director challenged the bona fides of all or any of his co-directors, the management of the company's business might be at a standstill pending the resolution of the dispute by one means or another, in consequence of the doubt whether the expelled director ought or ought not properly to be treated as a member of the board.” (emphasis added)

22.  That answers Points 1, 2 and 4.

23.  Third, in Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd [2009] 2 HKLRD 11, the Court of Appeal held that the termination of Mr Kwok’s appointment as chairman of the company’s board and his re‑designation as a non‑executive director was a matter of the internal management of the board itself.  In dismissing Mr Kwok’s application for an injunction against his fellow directors, Rogers VP said at [19] – [20]:

“19. … I consider that the relief sought here is simply something which this Court cannot give. The reason for that is that this whole matter is a matter of internal management by the Board. What the Board apparently is considering is who should be their chairman, and who should be their chairman is, first and foremost, a matter for the Board itself. This Court cannot dictate to a board who should be its chairman. This Court cannot dictate to a company who should be its executive directors. Two hundred years ago, Lord Eldon said in the case of Carlen v Drury (1812) 1 Ves & B 154 :

… the court could not undertake the management of every brewhouse and playhouse in the kingdom.

20. That is a fundamental principle of company law. Lord Davey, 100 years ago, referred in the case of Burland v Earle [1902] AC 83 at p.93, a case referred to by the Judge below:

It is an elementary principle of law relating joint stock companies that the court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so.” (emphasis added)

24.  The same can be said in the present case.

25.  Under Art 107, who should and who should not sit on the Board of directors of the Company is a matter of its internal management.  The court should be very slow to interfere with the Board’s decisions since in doing so it will be usurping the function of the Board and replacing the directors’ commercial judgment with its own.  Whether or not the Board was right to conclude that the reputation of the Company would be adversely affected by Zhao’s detention and arrest and whether it is in the Company’s best interest to distance itself from Zhao is not for this court to decide.  Rather, it is a matter of the Board’s internal management and this court should not second guess the wisdom of the Board’s decision.  

26.  That answers Point 5.

27.  To conclude, this court is of the view that Zhao’s application is misconceived and should be dismissed.

28.  For completeness, after perusing Lam 3, this court is of the view that its contents have minimal relevance to Zhao’s substantive application.  Given its lack of probative value and its lateness, the application to adduce it in evidence should also be dismissed.

Disposition

29.  The Originating Summons and the Summons are hereby dismissed.  There shall be an order nisi that costs be to the Respondents, to be taxed if not agreed, with certificate for counsel.

[1]  Which stipulated that the office of a director “shall be vacated” if he was “requested in writing by all his co-directors to resign”.