XCHRX MIRACLE CHANCE LTD. v. YUK WAH HO DAVID

HCA5544/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO. 5544 OF 1998

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J U D G M E N T

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1. This is an appeal against the decision of Master Cannon dismissing the plaintiff's claim against the defendant on the ground that the name of the plaintiff, being a limited company, had been used without authority.

2. The factual background relevant to the dispute is simple. The defendant, Mr David Yuk-wah HO, David HO, is one of the only two directors and shareholders of the plaintiff, holding 35 per cent of its shares. The other director, Mr Gao Jiaren, holds the remaining 65 per cent. The plaintiff is a BVI company, intended to be the joint venture vehicle for the transactions between David HO and Mr Gao. There is a Joint Venture Agreement executed by David HO, Mr Gao and the plaintiff, with a view to develop expressways and bridge projects in the northern region of the People's Republic of China.

3. Under the Joint Venture Agreement, the plaintiff shall hold a controlling stake in another BIV company called Greater Beijing Region Expressway Limited. Greater Beijing will in turn be the holding company for the proposed expressways and bridge projects. The Joint Venture Agreement also details how the plaintiff and Greater Beijing are to be managed. For reasons which are not relevant to the present appeal, there are serious disputes between David HO and Mr Gao over the affairs of the plaintiff as well as that of Greater Beijing.

4. David HO had commenced proceedings in Singapore against Mr Gao for breaches of the Joint Venture Agreement, which proceeding had been stayed on the ground of forum non conveniens. In April 1998 the plaintiff commenced the present proceedings against David HO for breach of fiduciary duty and breach of the Joint Venture Agreement, claiming a sum of almost US$60 million, and damages to be assessed.

5. Prior to the commencement of the proceedings, Mr Gao had tried to convene a directors' meeting, to consider the institution of proceedings by the plaintiff against David HO. Mr Gao had also given notice with a view to convene a shareholders' meeting of the plaintiff. Perhaps, not surprisingly, David HO refused to attend any such meetings, hence there is no board resolution or shareholders' resolution, as such, authorising the institution of the proceedings by the plaintiff against David HO.

6. A company is, of course, separate and distinct from its shareholders and its directors. The respective powers of its directors and shareholders are defined in its articles. If powers of management are vested in the directors, they alone can exercise those powers. Shareholders who disagree with the directors can either alter the Articles or appoint a new board. If there is a deadlock, the company may have to be wound up.

7. There is no dispute that under Article 93 of the plaintiff's Articles of Association the business and affairs of the company, including commencement of proceedings, shall be managed by the directors.

8. Mr POON, on behalf of the plaintiff, argues that the power of the Board under Article 93 is subject to the resolution of members by a simple majority. As Mr Gao holds 65 per cent of its shares, he can manage the company independent of his Board. Such argument primarily offends the basic principles in Company Law. As the court has observed in the course of counsels' submissions, if the argument is correct there is no need to have a Board of Directors at all, you may as well allow the majority shareholder to have the management of the company.

9. It must be remembered that the Board primarily owes its duty to the company and not the majority shareholders, and it will be wrong for the Board to follow the wish of the majority shareholders if it is against the interest of the company generally.

10. Article 93 of the Articles of Association of the plaintiff provides that the power of the director are subject "to such requirements as may be prescribed by a resolution of the members". But it goes on to state, and I quote:

"... but no requirement made by a resolution of members shall prevail if it be inconsistent with these Articles ..."

11. Article 93 only empowers the members by resolution to prescribe the requirements by which the Board can manage the business and affairs of the company. It does not confer upon the members by resolution the right to manage the business and affairs of the company independent of its board. Further the suggestion that the power of management can be left to the members of the company instead of its Board of Directors, in my view, is inconsistent with the Articles.

12. In any event, there is no suggestion that there had been a resolution of members in accordance with the Articles of Association of the plaintiff to enable the majority shareholder to take over the power of management from the Board. It is, indeed, and it has always been the plaintiff's case, that no resolution of members is possible due to the attitudes of the only directors involved, namely Mr HO and Mr Gao.

13. Mr POON has suggested that action should be allowed to continue pending the outcome of members' meeting or resolution of members, "In order to meet the ends of justice" to use Mr POON's words. There may be cases in which, due to urgency, an action has to be bought in the name of the company before the Board had properly authorised it. When such authorisation is clearly forthcoming, the court may allow the action to continue and allow the chance for the Board to rectify the action.

14. There may also be cases where the general meeting has the undisputed right to direct an action to be brought in the name of the company, and the court is satisfied that the majority would direct that action to be brought. In those cases, justice may require that the action should continue to enable a formal meeting to be held. That appears to be the situation in Pender v Lushington (1877)6 Ch D 70. But we are not dealing with such a situation at all. The simple fact is, members have no power to manage the business and affair of the plaintiff.

15. Under Article 93, any resolution by members to the contrary shall not prevail as such resolution is inconsistent with it. There could not be any valid general meeting as the parties had agreed, and there is no dispute, that the relationship between Mr HO and Mr Gao is such that no valid general meeting could be held since they are in complete disagreement with one another. There is also no suggestion that there has been a valid resolution of members to commence proceedings against Mr HO by the plaintiff.

16. Mr POON further suggests or argues that as the Board, consisting only of David HO and Mr Gao, who are having a substantial dispute between themselves, has become ineffectual, the general meeting or the majority shareholder should be given the residual power to commence proceedings in the name of the company. Suffice it for me to say that the law on this does not seem to be well-settled, as observed in Gower's Principles of Modern Company Law, at page 187, and I quote:

"Despite what has been said above, it seems that if for some reason the board cannot or will not exercise the powers vested in them, the general meeting may do so. On this ground, action by the general meeting has been held effective where there was a deadlock on the board, where there were no directors, where an effective quorum could not be obtained or the directors were disqualified from voting. Moreover, although the general meeting cannot normally abort legal proceedings commenced by the board in the name of the company, it still seems to be law that the general meeting can, in some circumstances, commence proceedings or ratify unauthorised proceedings already commenced by someone on behalf of the company if the directors fail to pursue the claim. These exceptions are convenient, but difficult to reconcile in principle with the strict theory of a division of powers. Their exact limits are not entirely clear."

17. In the present case there has not been any valid resolution of members under the Articles of the plaintiff authorising the proceedings against David HO. The action itself, looking at it from a practical point of view, is an action by a majority shareholder and director in the name of the company against the only other director and shareholder, when the two of them are unhappily involved in disputes and other legal proceedings. It is at least open to suspicion that the proceedings may not be brought in the interest of the company as such.

18. I must not ignore the other matter heavily relied on by Mr MA, that under Article 17 of the Joint Venture Agreement in question, the parties agreed that if the plaintiff was to institute legal proceedings involving more than US$5 million, approval of a least one director appointed by each shareholder to the Board of the plaintiff is required. The aforesaid condition clearly had not been fulfilled.

19. I agree with Mr MA's observation that the situation appears to fall fairly and squarely within the ambit of Breckland Group Holdings Ltd. v London & Suffolk Properties Ltd. & Ors. [1989] BCLC 100, where it was held, and I quote:

"Article 80 confided the management of the business to the directors and in such a case it was not for the general meeting to interfere. A fortiori when the shareholders had agreed specifically that certain matters required their joint consent, and had confided the giving of that consent particularly to the directors."

20. The commencement of the present proceedings against David MA by the plaintiff for obvious reasons cannot and will not be adopted or rectified by the plaintiff's Board.

21. The present case also is unique in that David HO and Mr Gao had already agreed that there could not even be a general meeting when they disagree. The agreement between David HO and Mr Gao, as evidenced in the Articles of the plaintiff and the Joint Venture Agreement must be given effect to. Indeed, looking at the entirety of the Articles of the plaintiff and the Joint Venture Agreement, the intention of the party appears to be that, despite the difference in their shareholdings in the plaintiff, David HO and Mr Gao are, in fact, entitled to an equal say in the management of the plaintiff.

22. I have considered counsels' submissions carefully and the various authorities relied on by counsel. I am of the view that the learned Master had come to a correct decision in dismissing the plaintiff's claim on the grounds that the plaintiff is not duly authorised to bring these proceedings against the defendant. The appeal must therefore be dismissed.

23. If it is any consolation to Mr Gao, and if the action against David HO is to be pursued, in my view, the only proper person to do so will be the receiver. Anyway, that is a matter for the parties to consider.

[Discussion re costs]

24. The question of costs if always a discretionary matter. I have considered the background of this matter and I think the order I should make on costs is that the costs of the appeal is to be paid by the plaintiff's solicitor personally, to be taxed is not agreed.