XCHRX MAGNITOGORSK INTEGRATED IRON AND STEEL WORKS AND ANOTHER v. VAREX & CO. GMBH AND OTHERS

HCA17492/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.17492 OF 1999

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J U D G M E N T

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THE BACKGROUND

1. The 1st plaintiff is a Russian company. In January 1993, it established the 4th defendant in Hong Kong. Since 1993, the 4th defendant's shareholdings has been as follows :

The 1st plaintiff and its nominees	49%
The 1st defendant and 2nd defendant	51%

When the 4th defendant was established, there were five directors, four were nominees of the 1st plaintiff while the remaining director was the 2nd defendant who lives and works in Germany. The 2nd defendant had conducted business with the 1st plaintiff for many years.

2. Apart from the recent resignation of one of the Russian directors, namely Mr Belan in April 1999, the position of the directors of the 4th defendant had remained the same for the past six years until the recent Annual General Meetings ("AGMs") of 1996, 1997, 1998 of the 4th defendant held on 2nd August 1999. In the AGM of 1998, the three Russian directors and the 2nd defendant were said to have been retired and the 2nd defendant and the 3rd defendant (which is a service company of the 1st and 2nd defendants) were elected as the new directors. The AGMs were convened by the order of Le Pichon J.

THE PLAINTIFFS' CASE

3. The plaintiffs' case is that the 51% shares of the 1st and 2nd defendants are held by them upon trust for the 1st plaintiff. There was an agreement between the parties in which the 2nd defendant agreed to transfer the shares back to the 1st plaintiff. The 1st and 2nd defendants had, in breach of trust, refused to transfer back the shares to the 1st plaintiff despite repeated requests to do so by the 1st plaintiff. The plaintiffs' case is that the 51% shares were allotted to the 1st and 2nd defendants because the 2nd defendant assured the 1st plaintiff that he could obtain credit facilities for the 4th defendant and in order to do so, he had to show the bankers that he is the majority shareholder of the 4th defendant. According to the plaintiffs, he never obtained the credit facilities for the 4th defendant.

4. The plaintiffs contended that the AGMs were invalid in that proper notice was not given to the 2nd plaintiff who has since held 49% of the shares in the 4th defendant. It is now seeking an injunction to prevent the 1st to 3rd defendants from -

(1) holding out or representing that the 2nd and 3rd defendants constitute the validly appointed board of the 4th defendant, or that the plaintiffs' nominees have retired and ceased to be directors of the 4th defendant;

(2) dealing with or making demands or request for information or otherwise from the 4th defendant's bankers except with the prior approval of the 4th defendant's board duly appointed prior to 2 August 1999, and/or to make demands or request for information on the basis that the 2nd and 3rd defendants had been authorized by the 4th defendant's board to do so; and

(3) exercising any voting rights in respect of shares in the 4th defendant otherwise than in accordance with the approval of the plaintiff.

Another Extraordinary General Meeting ("EGM") of the 4th defendant is convened to be held tomorrow, 14 January 2000. The plaintiffs are also applying to restrain the holding of this meeting.

DISPUTES

5. The 1st to 3rd defendants disputed the plaintiffs' case on the shareholdings and on the agreement to transfer shares. They claimed that they became the majority shareholders in order to by-pass the Russian law, to provide trading knowledge to the 1st plaintiff and getting credit facilities for the 1st plaintiff's operation.

6. These are matters that cannot be resolved on affidavit evidence. There are obviously serious questions to be tried on these issues and on the issue of breach of trust.

21 DAYS' NOTICE FOR THE AGMS

7. The order of Le Pichon J provided that 21 clear days' notice of the AGMs was to be given to the shareholders. The 2nd plaintiff is the only shareholder not in the 1st to 3rd defendants' camp. The 2nd plaintiff is a British Virgin Islands ("BVI") company. Notices of the meetings were sent to it by post on 28 June 1999. They were received by its service company in BVI on 15 July 1999. The notices were then sent to the 2nd plaintiff and received by it on 12 August 1999.

8. The 2nd plaintiff stated that it had informed its secretary in Hong Kong of its address in Hong Kong. However, according to the search of the company record, its address is one in BVI. That being the case, the 1st to 3rd defendants could only send the notices of the AGMs to BVI.

9. However when the notices were received on 15 July 1999, it was less than 21 days before the AGMs. Unless the court expressly varies the length of the notice, then insufficient notice was given and the AGMs were invalid.

EXPRESS ORDER TO GIVE NOTICE

10. A number of points were raised by the 1st to 3rd defendants on the notice. It was said that under the articles in Table A which is incorporated by the 4th defendant, notices of the AGMs need not be given to members who do not have registered address in Hong Kong (Article 135). This is a point not pursued upon by Mr Reyes today. In fact the short answer to this is that the court order expressly provided for notice to be given to the 2nd plaintiff and this must be complied with, not as a matter of courtesy, but as a legal requirement.

DEEMING PROVISION

11. Mr Reyes submitted that Article 132 deems notice to be effected after 48 hours of posting of the letter. This article refers to service by a company of notices. In the present case, the court order required the 2nd defendant to serve the notice. In my view, Article 132 does not apply. The case of In re Warden and Hotchkiss Limited [1945] 1 Ch D 270 is not applicable because it deals with notice sent by a company pursuant to the terms of its articles.

PRESERVING STATUS QUO

12. There are serious questions to be tried on the validity of the notice and the AGM.

13. The plaintiffs' application for injunction is to preserve the status quo until these questions are determined. In my view, the plaintiffs are entitled to the injunction.

IRREPARABLE DAMAGES

14. Notwithstanding the 51% shareholding of the 1st and 2nd defendants, for the past six years the board of directors of the 4th defendant were dominated by nominees of the 1st plaintiff. The plaintiffs would clearly suffer irreparable damage if the new board of directors are allowed to operate when the very basis of its existence is being challenged. The new board has threatened to research into questions of criminal liability. It intends to conduct special audit and had asked the bankers of the 4th defendant for information. Even leaving aside the issue that the business of the 4th defendant would not be commenced, as now indicated by counsel for the 1st to 3rd defendants, the consequence of such drastic actions, if carried through by an invalid board of directors, clearly calls for the status quo to be preserved.

BALANCE OF CONVENIENCE

1) Business of the 4th defendant

15. On the question of balance of convenience, the 4th defendant had ceased trading since 1997. The granting of the injunction would have no effect on the business operation of the 4th defendant.

2) Authenticity of documents

16. The 1st to 3rd defendants challenged the authenticity of some of the documents produced by the plaintiffs, it is said that the plaintiffs did not come with clean hands. The question whether some of these documents are genuine or not cannot be resolved at this stage of the proceedings.

3) Laches

17. It is said that after receiving the notice in August, the 1st plaintiff did not challenge the meetings timeously and only commenced the present action in November 1999. The plaintiffs' solicitors did respond in August and indicate a challenge to the authority of the 1st to 3rd defendants. Considering that instructions had to be taken from parties outside Hong Kong, I do not consider that there is delay in bringing the application.

18. It is said that the 2nd plaintiff's agent received the notice on 15 July and it is really for the 2nd plaintiff to ensure that the notices would be sent to it by the agent as soon as possible. The point is that the notices were actually received by the plaintiffs after the AGMs and I think one must pay regard to the fact that the registered address in BVI belongs to a service company which was responsible for collecting mails and delays do occur in the transmission of mails.

4) Wrongdoings

19. It is submitted that despite the alleged failure of the 1st and 2nd defendants to transfer back the shares, the plaintiffs had not pursued this matter until now. It is suggested that the plaintiffs commenced the present action in order to prevent their wrongdoings from being discovered. Another company had been set up by the 1st plaintiff in Hong Kong and there may be diversification of the business from the 4th defendant to this company. If the 1st and 3rd defendants are prevented from pursuing the enquiry, evidence of wrongdoings may soon disappear.

20. What prompted the plaintiffs to take action is obviously due to the complete change in the corporate structure as a result of the AGMs. As to the question of the disappearance of evidence, the defendants had executed an Anton Pillar order on Mr Belan and the new company. As far as bank statements are concerned, they will always be available even later on when the matter is eventually resolved. The injunction does not prevent the 2nd defendant who has always been a director of the 4th defendant from seeking documents against the 4th defendant in his capacity as a director. This is not an issue that I am faced with today.

5) Overall view

21. Counsel on both sides have addressed me on various other issues. In the rather limited time I have, it is not possible for me to deal with each of them. In a case such as this, one must take an overall view of the matter and the central issue is really on the dispute on the ownership of shares. Unless this matter is resolved, there will be endless disputes on the management of the 4th defendant, and in order to ensure that the matter can be properly resolved, the balance of convenience lies in preserving the status quo prior to the AGMs in August 1999. The 2nd defendant had not taken part in the management of the 4th defendant in the past six years and to restrain him from doing so now would not cause him any harm.

EGM

22. The defendants have convened a meeting to be held on 14 January in order to rectify the problems concerning the validity of the AGMs. This meeting cannot be held pursuant to the order of Le Pichon J which had specified the nature of the business to be conducted. Nor can this be a meeting under s.114A of the Companies Ordinance because Article 51 does provide for the holding of a meeting.

23. It is not necessary for me to go into the question whether Article 51 authorizes the EGM because there is a more fundamental issue in dispute between the parties. The question of the length of the notice is not a mere irregularity as was the case in Browne v. La Trinidad (1887) 37 Ch D 1. The EGM is convened by the new board of directors whose authority is being challenged. In my view, an injunction must be granted to restrain the holding of this meeting until the issues in this case are finally determined.

TERMS OF THE INJUNCTION

24. I will now hear the parties on the exact terms of the injunction.