SO KAM YIN AND ANOTHER v. HANSBY CO LTD

HCMP 4610/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4610 OF 2003

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J U D G M E N T

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1. In these proceedings, So Kam Yin and So Kwong Man ("the Applicants"), the executors of the will of the late Lau Ting Man ("the deceased"), seek orders against Hansby Company Limited ("the Company") pursuant to section 69(1B) of the Companies Ordinance disallowing the Company's refusal to register the transfer to them of shares that are presently registered in the name of the deceased, and requiring such transfer to be registered forthwith.

2. The background to these proceedings is as follows. The Company was incorporated in Hong Kong on 29 September 1987. Its capital consists of 400,000 shares of HK$1 each, all of which have been issued and are fully paid up. Its registered shareholders are the deceased, who is the registered owner of 220,000 shares, and his wife, Madam Suen Tai Yuen, who is the registered owner of the remaining 180,000 shares. Until the death of the deceased, he and Madam Suen were also the only two directors of the Company. At present, the directors consist of Madam Suen and Miss Lau Po Yee ("Miss Lau"), who is the daughter of Madam Suen and the deceased. The Company is the registered owner of two properties:-

(1) Shop K, Ground Floor, Lee Kee Building, No. 55 Ngau Tau Kok Road, Kowloon ("Shop K"); and

(2) Unit B8, 8th floor, Merit Industrial Centre, No. 94 To Kwa Wan Road, Kowloon ("Unit B8").

According to Madam Suen, both of these properties are presently unencumbered. The Company does not appear to have any other assets.

3. The deceased and Madam Suen were married in 1977. Their daughter, Miss Lau, was born in 1979. The deceased died on 2 September 1997. By his will dated 30 September 1994, he appointed the Applicants to be his executors, and in effect left the whole of his estate to them on trust for his illegitimate minor son, Lau Ching Yip, leaving nothing for Madam Suen or Miss Lau. It appears that Madam Suen was unaware of the fact that the deceased had an illegitimate son until after the terms of the will became known.

4. There are at present two other sets of proceedings involving Madam Suen and the Applicants. The first is HCA 1822 of 2002, in which Madam Suen seeks declarations as against the deceased's estate that the deceased held a property known as Flat 1612, 16th floor, Joyful Villas, No. 11 Hong Lee Road, Kowloon and a 50% shareholding in a company called Kokil Limited on trust for himself and Madam Suen. The second is HCMP 1627 of 2003 (originally DCMP 1752 of 2002), in which Madam Suen and Miss Lau make an application for various forms of relief under the Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481).

5. One of the assets of the deceased's estate was his shareholding in the Company. Towards the end of 2002, the Applicants took steps to have this shareholding transferred to them, in their capacity as executors of the estate of the deceased. An instrument of transfer was executed on 21 November 2002, and the Applicants' solicitors wrote to the Company on 26 November 2002 seeking to have the transfer of the shares into the names of the Applicants registered in the Company's share register. The Company failed to do so. Following a request (pursuant to section 69(1A) of the Companies Ordinance) for a statement of reasons for the refusal to register the transfer, which appears also to have gone unanswered, the Applicants issued an Originating Summons on 9 July 2003 seeking an order that such reasons be provided. In the event, the Company consented to an order that such reasons be provided, and reasons were given on 29 September 2003. These reasons, which were addressed to the Applicants, were as follows:-

" 1.	On or about 5th March 1986, [the deceased] and [Madam Suen] purchased [Unit B8] as joint tenants.
2.	The Company was incorporated on 29 September 1987 for the purposes of holding real properties on trust for [the deceased] and Madam Suen. On or about 19 May 1989, [Unit B8] was transferred to the Company for a price of HK$800,000 but Madam Suen did not receive any part of the consideration. The Company therefore held the said property on trust for [the deceased] and Madam Suen. By reason of the doctrine of survivorship, upon [the deceased]'s death, Madam Suen became the sole beneficial owner of the said property.
3.	On or about 26 February 1988, [the deceased] and Madam Suen purchased [Shop K] in the name of the Company. The Company therefore held the said property on trust for both [the deceased] and Madam Suen. By reason of the doctrine of survivorship, upon [the deceased]'s death, Madam Suen became the sole beneficial owner of the said property.
4.	In mid-May 2002, Madam Suen commenced proceedings entitled HCA No. 1822 of 2002 in the High Court against you in your capacity as the Executor of the Will of [the deceased] for relief prayed for in the Statement of Claim dated 14 May 2002. By Defence and Counterclaim dated 2 October 2002, you defended the claims and counterclaim against Madam Suen.
5.	In or about late June 2002, Madam Suen and [Ms Lau] commenced an action entitled DCMP 1752 of 2002 in the District Court under the Inheritance (Provision for Family and Dependants) Ordinance, Cap. 481 against you in your capacity as the Executor of the Will of [the deceased] for relief prayed for in the Originating Summons dated 22 June 2002. You contested the claims of Madam Suen and Miss Lau.
6.	As your stance in the two actions shows, you deny that the Company holds the properties particularised in paragraphs 1 and 3 on trust for Madam Suen. If you are registered as the shareholders of the Company, you may dispute and destroy the very raison d'etre of the Company. There is likelihood that the Company may be embroiled in lengthy litigation and has to be wound up as a result.
7.	By reason of the foregoing, it is not in the best interest of the Company to register you as the members of the Company."

6. The Applicants did not consider that these reasons justified the Company's refusal to register them as shareholders, as they were acting as executors of the deceased's estate, and as trustees of Lau Ching Yip by operation of law. Accordingly, they brought these proceedings to have such refusal disallowed, and to obtain an order for their registration as shareholders of the Company.

7. In support of their application, the Applicants filed an affirmation of So Kam Yin, which set out the fact that they were executors of the deceased's will, and described their efforts to have the shares registered in their names, which had culminated in the bringing of these proceedings. In response, Madam Suen filed an affirmation in her capacity as a director of the Company, in which she referred to the other proceedings to which she and the Applicants were parties, exhibiting the pleadings in HCA 1822 of 2002 and the principal affirmations in HCMP 1627 of 2003, and essentially repeated the reasons which had been given by the Company for refusing to register the transfer of shares to the Applicants. She also stated that Company had been incorporated "for the purpose of holding real properties upon the advice as to tax benefits by accountant" and that "apart from holding properties, [the Company] has never engaged [in] other business", referred to the fact that she and the deceased had, during his lifetime been the only directors of the Company, mentioned that she had always managed Unit B8 and retained the rental derived from it for household expenses, and stated that it was the common intention of the deceased and herself that the Company was "incorporated for use of the deceased and me holding properties on trust for both of [us]".

8. She also exhibited land searches in respect of each of the two properties. These showed that Unit B had been acquired by the deceased and herself as joint tenants for HK$649,000.00 on 5 March 1986, and was transferred by them to the Company for a consideration of HK$800,000.00 on 19 May 1989. On the same date, it was mortgaged to the China State Bank Limited to secure HK$800,000.00 by way of general banking facilities. So far as Shop K was concerned, it was acquired by the Company for HK$490,000.00 on 26 February 1988, on which date it was also mortgaged to the same bank to secure $450,000.00 by way of general banking facilities.

9. Although the Applicants had been given leave to file evidence in response, they did not do so. Mr Chum, who appeared for the Applicants, explained that this was because they had no positive evidence to put forward in contradiction of the matters deposed to by Madam Shum.

10. I was also referred to the Company's Articles of Association. These were modelled on Table "A" in the First Schedule to the Companies Ordinance, with some modifications. The only material modification for present purposes is that by clause 4 of the Company's Articles of Association, it is provided that:-

"The directors may, in their absolute discretion and without assigning any reason therefor, decline to register any transfer [of] any share, whether or not it is a fully paid share."

11. Section 69(1B) of the Companies Ordinance is in the following terms:-

" (1B)

Where a company refuses to register a transfer of any shares, the transferee may apply to the court to have the transfer registered by the company; and the court may, if it is satisfied that the application is well founded, disallow the refusal and order that the transfer be registered forthwith by the Company."

12. This provision is one which is unique to Hong Kong. In Simon Fireman v Golden Rice Bowl Ltd [1987] HKLR 981, Jones J considered that it was of assistance to have regard to the principles adopted by the court where a company's articles of association give the directors an apparently unfettered discretion to refuse to register a transfer of shares. In such a case, where the exercise by the directors of such a discretion is challenged, the question for the court to consider is whether or not it could be shown that the discretion had not in fact been exercised by the directors bona fide in what they considered to be the best interests of the company - see Re Smith and Fawcett Ltd [1942] 1 Ch 304, where Lord Greene M.R. said (at p. 306):-

"... Another consideration which must be borne in mind is that this type of article is one which is for the most part confined to private companies. Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the directors powers of the widest description."

and went on to say (at p. 308):-

"... The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company. In the present case the article is drafted in the widest possible terms, and I decline to write into that clear language any limitation other than a limitation, which is implicit by law, that a fiduciary power of this kind must be exercised bona fide in the interests of the company. Subject to that qualification, an article in this form appears to me to give the directors what it says, namely, an absolute and uncontrolled discretion."

13. In the Fireman case, Jones J said that:-

"Where the articles provide a discretion, the court must be satisfied that the discretion is exercised bona fide and honestly, but the court is not entitled to interfere with a decision with which it merely disagrees."

14. He went on to hold that the effect of registering the transfer would be to give the plaintiff, who had no previous connection with the company, a substantial shareholding in it, and that this might have the effect of changing the nature of the company, which was a small private company. In these circumstances, where the plaintiff was aware of the power of the directors to refuse to register a transfer, and no promise or representation had been made to him that a transfer to him would be registered, Jones J declined to interfere with the exercise of the directors discretion in the matter.

15. In Lee Chee Ngor Moreta v Prudential Enterprise Ltd [1991] 2 HKC 499, the administratrix of the estate of a deceased shareholder, who had died intestate, sought to transfer shares in the company to herself. The company refused to register the transfer. An application to disallow the refusal to register the transfer failed, since the company's articles conferred a right of pre-emption on the other members of the company, subject only to the ability of a member to transfer or bequeath by will any shares held by him to a member of his family, and the plaintiff was a family member of the deceased, a transfer to her by herself in the capacity of a personal representative was held not to fall within the exception to the rights of pre-emption, so that it could not be said that the directors had acted improperly in refusing to register the transfer when it had been effected without first offering the shares to other members of the company, particularly when it was not suggested that the directors had acted on the basis of some improper motive.

16. It is not clear from the reports of those cases whether the companies concerned gave any reasons or explanation for their refusal to register the Plaintiffs as shareholders. In this case, however, the Company has explained its reasons for refusing to register the transfer of the deceased's shares to his executors. The reason is clearly based on the premise that the two properties held by the Company are not owned by it beneficially, but were always held by it on trust for the deceased and Madam Suen jointly, with a right of survivorship as between them. Madam Suen has put forward the factual basis on which she says that this is the position. It seems to me that in these circumstances, where reasons have been put forward, it is necessary to assess the validity of those reasons and to consider whether or not they are such as could found a bona fide and honest belief that a refusal to register is in the interests of the Company. To do so, it is in my view also necessary to consider whether or not the evidence which is available can be said to establish the existence of the trust alleged by Madam Suen. If it does, I would agree that there would be no purpose to be served in ordering that the Applicants be registered as shareholders of the Company, since they would not in fact have any interest in Company or its assets. If, on the other hand, it does not, this would not be a valid basis for a refusal to register, and unless other reasons could be made out, the application should succeed.

17. It was suggested by Mr Lau, appearing for the Company, that the question of whether or not the Company held the properties beneficially or (as Madam Suen alleged) on trust for Madam Suen and the deceased was a matter that should be left to be determined in the context of the other proceedings between Madam Suen and the Applicants. I do not agree that such a course would be appropriate, for the following reasons:-

(1) An examination of the pleadings in HCA 1822 of 2002 shows that no claim is in fact advanced that either of the properties held by the Company is held by it on trust for Madam Suen and the deceased. As mentioned in paragraph 4 above, the relief sought relates only to the property in Joyful Villas, and to shares in Kokil Limited. Although Shop K is referred to in paragraph 28 of the Statement of Claim, there is no suggestion that it was acquired by the Company on trust for Madam Suen and the deceased. Unit 8B is not mentioned in the pleadings at all.

(2) The position in HCMP 1627 of 2003 is similar. There is no suggestion in the supporting affirmations that Shop K was ever held by the Company on trust. Unit 8B, however, is mentioned in Madam Suen's affirmation in support of her claims, in terms that are basically identical to those in paragraph 2 of the reasons for refusal to register given by the Company, which are repeated in her affirmation in these proceedings. That said, the relief sought in HCMP 1627 does not appear to extend to any determination of the status of either of the properties owned by the Company.

(3) More fundamentally, the Company is not a party to either of those proceedings. I therefore do not see how any determination in those proceedings would be conclusive so far as the position of the Company is concerned.

18. Mr Lau indicated that amendments were in the course of being proposed or applied for in relation to both of the other proceedings. However, he was unable to provide details of these amendments at the hearing before me. Even if they raised the matters put forward in these proceedings by the Company and Madam Suen, I do not see that they would overcome the problem that I have mentioned in sub-paragraph (3) above.

19. I therefore turn to consider whether or not the matters put foward by Madam Suen are such as to establish that the Company is, or could be regarded as, holding the properties of which it is the registered owner on trust for Madam Suen as alleged. In my view they are not.

20. First, it seems to me that the mere fact that the Company was established as a property holding or investment company does not of itself support any suggestion that it held all properties owned by it on trust for its shareholders. If the Company were intended to be a bare trustee, there would have been no point in its existence. Moreover, the fact that Madam Suen and the deceased did not have equal shareholdings in the Company is inconsistent with the suggestion that it held the properties owned by it on trust for both of them equally.

21. Further, the basis on which Madam Suen suggests that a trust arose in relation to Unit B8 is that although the Company acquired the property from her and the deceased for a price of HK$800,000.00, she received no part of the purchase price. If the Company were acquiring the property as trustee for her and the deceased, I can see no reason why it should have paid anything (let alone HK$800,000.00) for the property - it would have sufficed for the property to have been transferred to it for no consideration. Further, it does not follow from the fact that Madam Suen may not have received any part of the consideration for the sale of the property that the Company thereupon holds the property on trust for the deceased and her as joint tenants. The contents of the land search suggest that the Company did provide consideration for the transfer of the property to it, and that it provided the funds from its own banking facilities. If the Company in fact paid the purchase price (and there is no evidence to suggest that it did not), but Madam Suen did not receive her share of it, that would seem to be a matter between herself and the deceased, and would not render the Company a trustee of the property for her.

22. The position in relation to Shop K is similar. All that is said about this is that the deceased and Madam Suen purchased the property in the name of the Company. However, it is clear from the land search in respect of Shop K that the property was acquired by the Company from its previous owners, and that in connection with the acquisition it obtained a mortgage of HK$450,000.00, or slightly over 90% of the purchase price. There is no material before me to suggest where the balance of the purchase price came from, or where the funds used to pay off the mortgage originated. Even if it were shown that such funds came from the deceased or Madam Suen, it does not follow that the property was held by the Company on trust for them. It is common for persons to acquire property through a limited company, and to advance funds by way of loan to the company in order to enable it to acquire the property, which it will own beneficially. No material (such as the Company's accounting books and records) was put forward which might shed further light on this question.

23. Mr Lau acknowledged that the evidence which had been put forward by the Company was limited, but made it clear that he did not seek an opportunity to supplement that evidence, and that he was content for the matter to be determined on the basis of the material that was available. However, he submitted that apart from the affirmation evidence, it should be borne in mind that Madam Suen must have been given legal advice to the effect that the Company was a trustee for her. While I am prepared to accept that this may well have been the case, it seems to me that the fact that such advice may have been given cannot be conclusive, and that it is nonetheless necessary for me to consider the evidence which is before me and come to a view as to whether or not it is capable of establishing that proposition. For the reasons which I have given, it seems to me that the material which has been put forward falls well short of showing that the Company holds the properties which it owns as a trustee for Madam Suen.

24. Mr Lau also submitted that it would not be in the Company's interests for the Applicants to be registered as shareholders, since this was likely to cause problems in the running of the Company, because of the animosity which existed between Madam Suen and the Applicants. He went on to suggest that if the Applicants were registered as shareholders of the Company, Madam Suen might feel compelled to take out proceedings against the Company to establish that it was a trustee for her of the properties which it held, and this would involve the Company in inconvenience and expense.

25. I do not find either of these points persuasive. If I am right in my view that the Company is not a trustee for Madam Suen, its business is simply that of holding property by way of investment. If the two sides are able to cooperate, that is well and good. If they are not, it may be that steps will have to be taken for one side to buy out the other, or to wind up the Company - but these are not, in my view, consequences that require Madam Suen to be able to continue to run the Company as she sees fit, and to leave the Applicants out of the picture, notwithstanding that they represent the deceased's estate, which owns a majority of the shares in the Company, and are thus clearly interested in its underlying assets.

26. I do not see that the threat to commence proceedings against the Company, coming as it does from Madam Suen, is a good reason for permitting the refusal to register the Applicants as shareholders to stand. If it were, it would be open to directors or existing shareholders to justify their refusal to register a prospective shareholder by the simple expedient of threatening litigation against the company. In any event, if Madam Suen believes that the Company is her trustee, it would seem appropriate for this to be dealt with in a manner which will resolve the matter in a way that is binding on all the relevant parties.

27. Finally, Mr Lau suggested that to allow the Applicants to be registered would destroy the intimate nature of the Company, which had previously been a family company held by the deceased and Madam Suen. However, it seems to me that the character of the Company changed when the deceased died and left his shares in the Company to his son, as he was entitled to do.

28. In the circumstances, as the reasons given by the Company for refusing to register the Applicants as shareholders are based on the premise (which I have found to be insupportable) that it is a trustee for Madam Suen, and no other valid grounds for the refusal have been shown, it seems to me that the Applicants' application is well founded, and I therefore disallow the refusal, and order that the transfer be registered forthwith by the Company. As the Company has failed in its opposition to the application, I shall also make an order nisi that the Company should pay the Applicants their costs of these proceedings, to be taxed on the party and party basis if not agreed.