YEUNG SIU MING v. MAN SHING TEXTILES LTD AND OTHERS

CACV 3 /2018 AND CACV 4/2018

[2018] HKCA 521

CACV 3/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 3 OF 2018

(ON APPEAL FROM HCCW NO 425 OF 2016)

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AND

CACV 4/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 4 OF 2018

(ON APPEAL FROM HCCW NO 426 OF 2016)

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(Heard together)

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REASONS FOR JUDGMENT

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Hon Yuen JA:

1.  I agree with the Reasons for Judgment of Kwan JA.

Hon Kwan JA:

2.  These two appeals are brought by Yeung Siu Ming, who has presented petitions against Man Lung Textiles Limited (“Man Lung”) and Man Shing Textiles Limited (“Man Shing”) (collectively, “the Companies”) as a shareholder of each of the Companies.  In each petition, he seeks a winding‑up order on the just and equitable ground pursuant to section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions Ordinance), Cap 32, alternatively relief pursuant to sections 724(1), 725(1) and (2) of the Companies Ordinance, Cap 622 including an order that Tam Tak Yam and Tang Siu Choi, the 2^nd and 3^rd respondents herein, do purchase his shares.

3.  The 2^nd respondent issued a summons in each of the proceedings to strike out the petition under the inherent jurisdiction of the court “on the grounds that it is an abuse of the process of the Court and/or that the Petitioner has no locus standi to present the Petition or on such other grounds as the Court shall deem just”.  The 3^rd respondent has adopted a neutral stance throughout and has not taken part in the proceedings save to file an affirmation to dispute the allegations made against her.

4.  In a decision handed down on 30 November 2017, Deputy High Court Judge To ordered both petitions to be struck out on the ground that the petitioner has no locus standi to present the petitions. The judge did not find it necessary to consider the second ground for striking out (abuse of process of the court), except to say that the petitions are bound to fail as the petitioner has no locus standi and to commence proceedings which are bound to fail is in itself an abuse of process[1] .

5.  We are satisfied that the judge has erred in holding that the petitioner has no locus standi to present the petitions, and have allowed the appeals at the conclusion of the hearing.  These are the detailed reasons for allowing the appeals.

Background matters

6.  The relevant background matters may be stated as follows.

7.  Man Lung was incorporated on 2 January 1996.  Its share capital is divided into 100,000 shares and the amount of capital paid up or credited as paid up is $1 million.  Man Shing was incorporated on 13 October 2004.  Its share capital is divided into 12,000 shares and the amount of capital paid up or credited as paid up is $12,000.  Both companies were involved in the business of garment trading and production.  Man Shing has a wholly owned subsidiary in Dongguan, called 東莞萬禧紡織製品有限公司 (“Man Hei”), which serves as the manufacturing arm of the Companies.

8.  The petitioner, the 2^nd and 3^rd respondents became shareholders in the Companies on 1 August 2010.  The 2^nd respondent held 50,000 shares in Man Lung, the petitioner and the 3^rd respondent each held 25,000 shares.  Each of the three parties held 4,000 shares in Man Shing.  All three became the only directors of the Companies.

9.  On 15 May 2014, the petitioner resigned as a director of each of the Companies.

10.  On 30 January 2015, he entered into a Sale and Purchase Agreement (“the Agreement”) with the 2^nd and 3^rd respondents.  Subject to the terms of the Agreement, the petitioner shall sell, the 2^nd and 3^rd respondents shall purchase on equal share all the petitioner’s shares in Man Shing, and the 3^rd respondent shall purchase all the petitioner’s shares in Man Lung[2] (clauses 2.1 and 2.2).

11.  Subject to clause 3.2, the consideration payable to the petitioner shall be $3.9 million, which shall be satisfied by ten instalments in the amounts specified to be paid on various dates from 30 January 2015 to 28 May 2016 (clause 3.1).  One of the instalments, in the sum of $390,000, is to be kept by the 2^nd and 3^rd respondents and to be paid or set off in the manners as stipulated under clause 3.2(f) (clause 3.1(a)).

12.  As part of the consideration for the parties to enter into the Agreement, the 2^nd and 3^rd respondents agreed to take over the loan of $1,151,500 due from the petitioner to Man Lung (“the Loan”) (clause 3.2(a)).  Further, all parties agreed to appoint an auditor qualified under the Chinese Institute of Certified Public Accountants to carry out internal audits for Man Hei from 1 August 2010 to 20 January 2015, which shall be completed on or before 28 September 2015 (clauses 3.2(c) and (d)).

13.  Upon the completion of the internal audits, if Man Hei is found to have any profits, the 2^nd and 3^rd respondents shall return the sum of $390,000 as kept by them and pay 1/3 of such profits to the petitioner and reimburse him all the costs and expenses incurred on or before 28 November 2015.  But if Man Hei is found to suffer any losses, the petitioner shall pay the 2^nd and 3^rd respondents 1/3 of such losses and reimburse them all the costs and expenses, which shall be set off by the sum of $390,000.  In case there is outstanding balance after set off, the petitioner shall pay the balance by three equal instalments on the dates specified (clause 3.2(f)).

14.  It was provided that completion shall take place on 30 January 2015 and on completion these transactions shall take place simultaneously (clauses 4.1 and 4.2).  The petitioner shall deliver to the 2^nd and 3^rd respondents the duly executed instruments of transfer and bought and sold notes, which shall be kept by the stakeholder (the solicitors who prepared the Agreement) with non‑revocable mandates that either they shall only be released to the 2^nd and 3^rd respondents after full satisfaction of all the payments to be made by them or be returned to the petitioner upon any default in making any payment by the 2^nd and 3^rd respondents (clause 4.2(a)).  The 2^nd and 3^rd respondents shall deliver to the petitioner a cheque for the instalment in clause 3.1(b), the duly executed deed and release and transfer of the Loan with board resolution approving the same, and board resolutions appointing the petitioner as directors of the Companies which shall be kept by the stakeholder with non‑revocable mandates to be returned to the 2^nd and 3^rd respondents or be released to the petitioner in the circumstances as described above (clause 4.2(b)).

15.  The petitioner gave an undertaking that so long as the 2^nd and 3^rd respondents are not in default in making any payment, he shall not interfere with the management of the Companies and Man Hei and shall not have any right of making inspection of the books of account of the Companies (clause 5).

16.  In respect of any default in payment by the 2^nd and 3^rd respondents, the instruments of transfer and bought and sold notes shall be returned to the petitioner, the board resolutions appointing the petitioner as directors of the Companies shall be deemed to take immediate effect and released to him and the2^nd and 3^rd respondents undertake to procure the petitioner to be elected as directors of the Companies which shall be deemed to take immediate effect upon such default (clauses 6(b), (c) and (d)).

17.  The executed deed and release and transfer of the Loan dated 30 January 2015 was provided to the petitioner.

18.  In November 2015, the 2^nd respondent produced an audit report of Man Hei compiled by Dongguan Tiho Certified Public Accountants Partnership (“the Auditor”) dated 24 October 2015, in which the Auditor stated that Man Hei recorded a loss of RMB7,552,982.98 during the period of 1 August 2010 to 20 January 2015.

19.  The petitioner disputed the accuracy of the audit report in December 2015 and January 2016.  He claimed that the Auditor was appointed without his agreement.  He alleged that there were irregularities in the audit report, particularly on the amount of invoices issued by Man Hei to Man Lung, which does not match the account ledgers of Man Lung.

20.  The 2^nd and 3^rd respondents did not pay the last three instalments payable by 28 January 2016, 28 March 2016 and 28 May 2016, totalling $1 million.  With the $390,000 kept by the 2^nd and 3^rd respondents under clause 3.1(a), the total amount the petitioner did not receive as part of the consideration came up to $1.39 million.

21.  By a letter dated 4 July 2016 from the petitioner’s solicitors to the 2^nd and 3^rd respondents, the petitioner demanded payment of $1.39 million and sought to be provided with relevant documentation in respect of the audit of Man Hei.  The 2^nd respondent replied by letter of his solicitors dated 11 July 2016 denying any amount was due to the petitioner and demanding $1,530,485.60 as payable by the petitioner to the 2^nd and 3^rd respondents in light of the substantial loss of Man Hei as stated in the audit report, after setting off the balance of the consideration of $1.39 million.

22.  On 25 November 2016, the petitioner presented the petitions against the Companies, alleging unfairly prejudicial conduct of the 2^nd and 3^rd respondents in that he had not consented to the appointment of the Auditor, that there were irregularities in the audit report and the difference between the invoices issued by Man Hei and the account ledger of Man Lung resulted in a purported loss of over $13 million in Man Lung’s accounts between 2012 and 2015, that the 2^nd respondent refused to entertain the petitioner’s requests for financial documents to probe into irregularities in the accounting records, and that the 2^nd respondent had refused to hold an annual general meeting to deal with matters of the Companies.

23.  On 15 December 2016, the 2^nd respondent issued the summonses to strike out the petitions, not just the prayer for winding‑up orders, alleging that the petitioner has no locus standi to bring the proceedings since all his shares in the Companies have already been sold pursuant to the Agreement.

24.  On 23 March 2017, A Chan J made a validation order in respect of each of the Companies as regards payments into and out of their bank accounts and disposition of property in the ordinary course of their business.

If the petitioner has locus standi to present the petitions

25.  The answer to this question is clear and may be put succinctly.  For petitions of the present kind to be presented (a contributory’s petition for winding up and a member’s petition under section 724(1)), it is necessary for the petitioner to be a registered shareholder.  It is immaterial that the registered shareholder holds the share beneficially or on trust.  On the facts of the present proceedings, there is no bona fide dispute that the petitioner remains a registered shareholder in the Companies and is entitled to present the petitions.  The dispute raised on the evidence goes to the question of beneficial ownership of the shares and does not affect the locus standi of the petitioner to present the petitions.  The summonses to strike out the petitions should have been dismissed.

26.  That a registered shareholder is entitled to present a contributory’s petition for winding up and a member’s petition under section 724(1) is settled law, see Ng Yat Chi v Max Share Ltd (1997‑98) 1 HKCFAR 155 at 162B to C.  “A shareholder must be registered in order to be a member or contributory and to exercise the rights attached to that status under the articles and the Companies Ordinance.” (Ng Yat Chi v Max Share Ltd at 165E) The rights as a member, including the right to petition, are for the protection of the shares and if the shares are beneficially owned by another, they are exercisable by the registered shareholder at the direction of the beneficial owner in the same way as any other rights attached to the shares (Ng Yat Chi v Max Share Ltd at 165B).  As stated by the Court of Appeal in Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248 at 250J and 252C to D, “whether or not [the petitioner] holds those shares beneficially or upon trust would not affect his locus to present a contributory’s petition”[3] , and whether a registered shareholder has the necessary locus to present a petition notwithstanding there is dispute as to beneficial ownership is a “non‑issue”.

27.  The share register of each of the Companies was not produced in evidence.  The petitioner and the 2^nd respondent each contended that it should be incumbent on the other to produce the registers, and failure to do so in the absence of explanation should result in adverse inference being drawn against the party who has such burden.

28.  This is missing the point.  The court looks at all the evidence before it to see whether there is a bona fide dispute that the petitioner is a registered shareholder, notwithstanding that the share registers are not produced.  The evidence that the petitioner’s name has remained on the registers is overwhelming.

29.  The provisions of the Agreement have been set out in some detail.  The instruments of transfer are kept by the stakeholder with non‑revocable mandates that either they shall only be released to the 2^nd and 3^rd respondents after full satisfaction of all the payments to be made by them or be returned to the petitioner upon any default in making any payment by the 2^nd and 3^rd respondents.  It is not in dispute that the petitioner did not receive the last three instalments.  He averred that the 2^nd respondent had failed to return to him the instruments of transfer and the bought and sold notes of his shares in the Companies and “they are kept in Messrs Tang, Lee & Co”, the stakeholder[4] .  This has not been refuted by the 2^nd respondent.

30.  It is provided in section 150(1) of the Companies Ordinance that a company “must not register a transfer of shares in the company unless a proper instrument of transfer has been delivered to the company.”  As the instruments of transfer are kept by the stakeholder, it is not possible for any transfer of the shares that are the subject of the Agreement to be registered in the names of the transferees and the petitioner must have remained as the shareholder on the share registers.

31.  This is borne out by the latest annual returns of the Companies.  According to the annual return of Man Lung made up to 2 January 2016, the petitioner appeared as a member of the company and his current holding was 25,000 out of 100,000 issued shares.  The annual return of Man Lung made up to 2^nd January 2017[5] is to the same effect.  The latest annual return of Man Shing made up to 13 October 2016 showed that the petitioner was a member and his current holding was 4,000 out of 12,000 issued shares.  All these annual returns were signed by the 2^nd respondent.  It lies ill in his mouth to argue it has not been established that the petitioner was and is a registered shareholder of the Companies.

32.  The judge was clearly in error in holding that the evidence in the annual return is “rebutted by the Agreement” and “in any event, it cannot stand in the face of paragraph 9 of the petition”[6] .  He took the view that “even if for some reason the register has not been updated, the Respondents could have it updated in no time before production”[7] .

33.  On a fair and proper reading of the petitions, it is not part of the petitioner’s pleaded case that “at the time of the presentation of the petition he was not a shareholder”[8] , as the judge had put it. The petitioner asserted in §8 that although he resigned as a director he “still remains” as a shareholder of each of the Companies.  He pleaded in §9 that under the Agreement, he “will sell” his shares.  He alleged in §11 that the remaining three instalments have not been paid by the 2^nd and 3^rd respondent in breach of the Agreement.

34.  The provisions of the Agreement do not rebut the petitioner’s case that he is a registered shareholder.  To the contrary, they provide cogent support that he remains on the share registers.  In light of the provisions and the dispute of the parties as mentioned earlier concerning payment of the subsequent instalments, it is simply not a question of just updating the share registers.

35.  The 2^nd respondent’s counsel Mr Lincoln Cheung made much of the dispute of the parties on the beneficial ownership of the shares.  He contended that completion under the Agreement had taken place on 30 January 2015 and the shares had been sold.  On completion, the parties had signed all necessary documents and the petitioner had been released by deed of his obligation to repay the Loan.  And even assuming there was default in payment of the balance of the purchase price (which is denied by the 2^nd respondent), the petitioner had elected to affirm the Agreement by pressing for performance and had waived his right to accept the alleged repudiation of the purchasers.  Hence, the petitioner no longer has any or any tangible interests in the Companies.

36.  Mr Cheung further argued the court should dismiss or strike out the petitions and require the dispute on beneficial ownership to be resolved outside the petitions, citing Re JN2 Ltd [1978] 1 WLR 183 at 187 to 188 and Alipour v Ary [1997] 1 WLR 534 at 545 to 548.  He contended that the petitioner would not be without an effective remedy if the petitions were struck out, as there are more appropriate remedies for the petitioner to pursue his claim, such as bringing an action in contract for breach of the Agreement.  He asserted that the petitions were an abuse of process as they were issued to pressure the 2^nd and 3^rd respondents to pay up the balance of the purchase price.

37.  The arguments on completion of the sale and purchase of the shares, whether there was default in paying the purchase price, whether there were acts of affirming the Agreement, election and waiver cannot be resolved summarily as disputed facts are involved.  In any event, they go to the question of beneficial ownership of the shares and do not affect the locus of the petitioner to present these petitions.  As it is established there is no bona fide dispute on the locus standi of the petitioner, Re JN2 Ltd and Alipour v Ary are not of much assistance (Re Greater Beijing Region Expressways Ltd at 786I).  And whether the petitioner would have any tangible interest in the assets of the Companies if they are wound up is not appropriate to be resolved in these applications for striking out.

38.  Even though the petitioner has locus, the court still has discretion to require any dispute relating to beneficial ownership to be resolved first.  How that discretion should be exercised is a rule of practice and “a matter of procedural convenience” (Re A Company (No 001363 of 1988) ex p S‑P [1988] Ch 579 at 588F to H; Re Greater Beijing Region Expressways Ltd at 786J to 787E).  Having ordered the petitions to be struck out for lack of locus, it was not necessary for the judge to consider this.  This is not the subject of the respondent’s notice served by the 2^nd respondent in each appeal on a fair reading of these notices.  We think it best that the discretion should be exercised by a judge at first instance, who would give directions on the further conduct of these petitions, and take into account all relevant circumstances such as those considered in Re Greater Beijing Region Expressways Ltd and Mai Gou v Mak Chik Lun in deciding how that discretion should be exercised.

39.  The petitioner’s remedies in a contractual claim cannot be regarded as effective as winding‑up relief or buy‑out relief as may be ordered in a member’s petition.  As for allegations of abuse of process in issuing the petitions and acting mala fide, these are but assertions unsupported by cogent evidence.

40.  For all the above reasons, we have allowed the appeals and set aside the judge’s orders.  There is no reason to depart from the usual rule that costs should follow the event.  We have ordered the 2^nd respondent to pay the costs of the petitioner here and below.

Hon Chu JA:

41.  I agree.