STANDARD BANK OFFSHORE TRUST COMPANY JERSEY LTD as Trustee of the St George's Settlement v. BELGRAVIA PROPERTIES LTD

HCMP1148/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1148 OF 2013

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REASONS FOR JUDGMENT

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1.  By an originating summons filed on 22 May 2013 (“OS”), the applicant (“Trustee”) sought an order under s 111(2) of the Companies Ordinance, Cap 32 (“Ordinance”) to convene an AGM of the respondent (“Company”) for the removal and appointment of its directors. In the alternative, the applicant asked for an EGM to be convened for the same purpose pursuant to s 114B of the Ordinance. The alternative case under s 114B was not pursued by the applicant at the hearing on 22 August 2013.

2.  After hearing the parties, I made an order in terms of the draft order submitted by the Trustee as amended.  I indicated that the reasons for my decision would be provided later.  These are my reasons.

Material facts

3.  The material facts can be briefly stated as follows.  The Trustee owns 60% of the shares in the Company.  The other 40% is owned by Yellow Delta Investments Ltd (“Yellow Delta”) which is controlled by Mr Keith Darby. 

4.  At the material times, the Company had three directors, Mr Darby, his wife Ms Lu Shengsu and Mr Kathuria.  Mr Darby had the day-to-day management control of the Company.

5.  The Company was established in 2005 to develop a high-end hotel in Hainan together with a joint venture partner, Bloom World Inc (“Project”).   The Trustee provided the funding of the Company in the Project to the tune of over HK$120 million.  There is disagreement between the parties over this figure, but it is not a material dispute.

6.  The Project stopped in late 2008 and a dispute arose between the Company and its joint venture partner, resulting in an arbitral award against the Company which was enforced by the HK court by an order dated 12 March 2013.

7.  In order to safeguard the investment in the Project, the Trustee wished to change the composition of the Company’s board of directors so as to participate in its management and rescue the Project.

8.  The directors of the Company hold office until they are removed.  They can be removed and replaced by an ordinary resolution with special notice: Clauses 6 and 14 of the Articles of Association of the Company (“Articles”) and ss 157B and 116C of the Ordinance.

9.  No AGM of the Company has been held since that of 2009.

10.  In March 2013, the Trustee requested an AGM to be convened.  However, the directors convened an EGM to be held on 22^nd April 2013 proposing, inter alia,a resolution that all the directors should remain in office.  The Trustee then issued a notice under ss 157B and 116C of the Ordinance (“Notice”) proposing a resolution that Ms Lu and Mr Kathuria be removed and replaced.

11.  What transpired at the EGM is the subject matter of disputed evidence. For reasons stated below, it is not necessary for such dispute to be resolved for the purpose of determination of this application.  However, it is quite clear from the uncontroversial evidence that the Notice was not tabled at the EGM.  Indeed, the atmosphere at the meeting can only be described as unhappy. Yellow Delta was represented by a solicitor who objected to the presence of the Trustee’s solicitor.  The outcome of the EGM was not what the Trustee was expecting. 

S 111 of the Ordinance

12.  S 111 of the Ordinance governs the holding of AGM of companies.  Subsections (1), (2) and (5) are relevant to this application:

subs (1) & (2):

“(1) Every company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year, and shall specify the meeting as such in the notices calling it; and not more than 15 months, or such longer period as the Registrar may in any particular case authorize in writing, shall elapse between the date of one annual general meeting of the company and the next: …

(2)  If default is made in holding a meeting of the company in accordance with subsection (1), the court may, on the application of any member of the company, call, or direct the calling of, a general meeting of the company and give such ancillary or consequential directions as the court thinks expedient, including directions modifying or supplementing, in relation to the calling, holding and conducting of the meeting, the operation of the company's articles, and including a direction that 1 member of the company present in person or by proxy shall be deemed to constitute a meeting.”

subs (5):

“(5) If default is made in holding a meeting of the company in accordance with subsection (1), or in complying with any direction under subsection (2), the company and every officer of the company who is in default shall be liable to a fine; …”

13.  I should mention that the Articles reflect the provisions of s 111(1) of the Ordinance.

14.  It is perfectly plain from the above statutory provisions that it is important for a company to have at least a meeting every year.  With such a meeting, the members of the company will have an opportunity to meet and raise questions with the management over the affairs of the company (at the AGM members are entitled to be informed of the financial situation of the company: s 122 of the Ordinance).  It is a fundamental entitlement of the members.  Such entitlement is so important that the company and its officers are liable to be fined if they fail to give effect to it. 

15.  It is equally clear that the invocation of power under s 111(2) involves 2 elements – default in compliance with s 111(1) and the exercise of discretion by the court. 

16.  It was suggested in the written submissions of Mr Siu, who appeared for the Company, that the invocation of power under s 111(2), like s 114B (see below), required the Trustee to show as a prerequisite that it was impractical to call a meeting in any manner in which meetings of the Company might be called.  That argument, which is clearly untenable, was not pressed at the hearing.  However, Mr Siu relied upon that point on the exercise of discretion by the court.

17.  There can be no quarrel in respect of the first element of default given the failure to comply with s 111(1) since 2010. 

The exercise of discretion

18.  Mr Siu submitted that the exercise of discretion under s 111(2) is similar to that under s 114B(1) of the Ordinance.  In support, he relied upon a dictum in Ng Wing Hong v Choi Tak Lan, HCMP 2274/2006, unrep, 27 July 2007.  S 114B(1) provides as follows:

“If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting of the company in manner prescribed by the articles or this Ordinance, the court may … order a meeting of the company to be called …”

19.  In Ng Wing Hong, Recorder Fung SC referred to the two sub-sections in question and said at para 33:

“the principles applicable to the Court’s exercise of its discretion are not much different under both sections”.

20.  I am inclined to agree with Ms Lok, who appeared for the Trustee, that the court will, in the exercise of its discretion, take into account all relevant considerations and therefore the exercise is the same under both sub-sections. However, the statement quoted above cannot be taken to mean that the relevant considerations are the same under both sub-sections.

21.  I am unable to agree with Mr Siu.  The two sub-sections deal with very different situations.  Under s 111, members of a company have a right to have a meeting every year.  As explained above, this is an important right and sanction has been prescribed for the failure to give effect thereto.  

22.  S 114B caters for cases where the company is unable to have meetings in accordance with its constitution, typically when the members are at loggerheads.

23.  In my view, once default has been established, the court should normally exercise its discretion in favour of having a meeting which will have the effect of remedying the default, save in exceptional cases.  Exceptional cases must be established with cogent evidence. 

24.  This is certainly not an exceptional case.  None of the allegations or counter-allegations of impropriety raised in the evidence is relevant to the exercise of discretion in question.  They cannot change the fact that the Company has failed to comply with s 111(1) for a number of years. 

25.  One can well understand that Mr Darby, and possibly also Ms Lu, are unhappy with the prospects of losing control of the Company once their directorship comes to an end at the AGM, but the constitution of the Company (as well as the Ordinance) allows the Trustee to take control of the Company on the strength of its shareholding.

26.  I should mention the allegation of Mr Darby that there is an “informal” shareholders’ agreement between Yellow Delta and the Trustee which entitles the former to equal representation on the board of directors of the Company.  The evidence is, with respect, nebulous and the fact that there is a shareholders’ agreement which has never been executed militates strongly against such allegation.

27.  Finally, I do not agree that the court should only exercise its discretion under s 111(2) when it is impracticable for a meeting to be called in accordance with the constitution of the Company.  There is no such requirement in the sub-section.  This is not to say that the court will condone any unnecessary application.  An unnecessary application may constitute an exceptional case where the court will not exercise its discretion to grant relief. 

28.  The present application is not an unnecessary one.  The Trustee had tried to exercise its right in accordance with the constitution of the Company without success.  This application is justified.

29.  For these reasons, I allowed the application. 

Costs

30.  Pursuant to the directions of this court, written submissions have been filed by the parties to address the issue of costs.  Those submissions have been considered.  I agree that given the active participation by the Company to oppose this application, there is no reason not to apply the general rule that costs should follow the event.  Accordingly, the costs of this application be borne by the Company to be taxed if not agreed.              

31.  Last but not least, I am grateful to both counsel for their assistance in these matters.