CHEUNG HING v. WAH FUNG FOREST RESOURCES LTD

HCMP 3/2016

[2018] HKCFI 1623

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3 OF 2016

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D E C I S I O N

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1.  By these proceedings, Mr Cheung Hing (“the Plaintiff”) seeks the following relief against Wah Fung Forest Resources Limited (“the Company”):

“(i) The plaintiff be authorised to act on behalf of and/or in the name of the defendant to take the necessary steps to effect the rectification to the documents filed by the defendant or whosoever with the Companies Registry which contain any wrongful record that the plaintiff has been removed as director of the defendant as at 27 December 2013;

(ii) A declaration that the Form D2A filed on 2 January 2014 with the Companies Registry for the purported resignation of the plaintiff as director of the defendant be null and void;

(iii) A declaration that the Notification of Changes of Secretary and Directors, Form D2, filed on 9 August 1997 with the Companies Registry for the purported appointment of the following persons as directors of the defendant be null and void, namely:

(a) Wong Yuen Wai, Rita Maria （黃婉慧）;

(b) Chan Siu Fung （陳小風）; and

(c) Chen Shulong;

(iv) A declaration that the Notification of Changes of Secretary and Directors, Form D2, dated 11 August 2000 and Consent to Act as a Director, Form D3, dated 11 August 2000 and both filed on 17 August 2000 with the Companies Registry for the purported appointment of the following person as director and secretary of the defendant be null and void, namely:

Wong Yuen Wai, Rita Maria （黃婉慧）;

(v) A declaration that the Notification of Changes of Secretary and Directors, Form D2, dated 18 April 2000 and the two Consent to Act as a Director, Form D3, dated 18 April 2000, all filed on 19 April 2000 with the Companies Registry for the purported appointment of the following corporate/ entities as directors of the defendant be null and void, namely:

(a) Hopewell Investment Inc;

(b) Success Consultants Limited;

(vi) An injunction be made restraining the defendant whether by itself its servant or agent or otherwise howsoever from appointment of director(s) or secretary to the defendant without the written consent and permission of the plaintiff;

(vii) Costs of and arising out of this application be paid by the defendant to the plaintiff on indemnity basis; and

(viii)  Further and other relief as this honourable court thinks fit.”

2.  These proceedings are brought pursuant to section 42 of the Companies Ordinance, Cap 622.

3.  In brief, the Company was incorporated on 19 February 1982.  The Plaintiff and one, Mr Wong Chor-cheung (“Mr Wong”), who at that time was his friend, have in effect been the only two shareholders of the Company, each holding 6,000 shares.

4.  The Company was used as a vehicle to acquire and hold a flat on Plantation Road, the Peak.  It is not at all clear that the Company had any other business activities.

5.  It can be seen from the relief prayer that there are two types of issues which are sought to be resolved:

(a) The first concerns relief which could be said to be of a historical nature.  In other words, declaratory relief as to what has or what has not happened in the past.  These concern, for example:

(i) whether the Plaintiff resigned on 28 December 2013;

(ii) whether Rita Wong, Chan Siu Fung, Chen Shulong, Hopewell Investment Inc, Success Consultants Limited (collectively “the five directors”) were validly appointed.

(b) The second concerns a current issue: who are the members of the present board, if any?

6.  In the defence filed on behalf of the Company, it was pleaded that the Plaintiff ceased to be director because pursuant to Article 90(f) of the Articles of Association, Mr Cheung had “for more than six months have been absent without permission of the directors from meetings of directors held during that period”.  In that case, the office of the director shall be vacated.

7.  Mr Nicholas Oh, counsel for the defendant, therefore submitted that where the Articles provide for events under which the office of a director shall become vacant, the office of director is vacated automatically and no positive act is required.  See, for example, Re The Bodega Company Limited [1904] 1 Ch 276 per Barwell J, and in Hong Kong, Samuel Tak Lee v Chou Wen Hsien [1982] HKLR 350.

8.  During the course of Mr Oh’s opening, I observed that there were no materials before the Court suggesting that there were in fact such “meetings of directors” and hence queried how it could properly be said that this article would apply.  In other words, if there had been no such meetings prior to the supposed resignation of Mr Cheung, it arguably could not be said that he had been absent from any meeting as none had been convened.

9.  There was also another argument advanced on behalf of the defendant.  Reliance was placed on clause 23 of the Articles of Association.  This clause provided that:

“The term of office of a director shall be one year and at the ordinary general meeting of every year all the directors shall retire from office, but be eligible for re-election. A director is not obliged to retire under an age limit.”

10.  The defendant thus suggested that the consequence naturally flowing from this article would be that “[b]oth the plaintiff and Wong would have retired from office throughout the years.” (See para 22 of the defendant’s opening.)  Reliance was placed on Re J & D Industrial (Hong Kong) Limited [2006] 2 HKLRD 396 per DHCJ Louis Chan (as His Lordship then was).

11.  I indicated to the parties that I was very troubled by this revelation because on the face of the materials before me there has been no AGM or EGM in the not too distant past that I could identify.  There might therefore be in fact at this time, and at least for a while, no valid board of directors or validly appointed or elected director, and therefore, no solicitors could properly represent the Company as there was no board.

12.  Questions which go to authority to sue or to defend are fundamental.  The learned editors of Hong Kong Civil Procedure 2018 have this to say at para 18/19/23:

“Authority to sue—If the court becomes aware that the plaintiff is incapable of giving a retainer, it will strike out the action at the trial without any formal application. But if the defendant desires to question the authority to sue in the plaintiff’s name, he must apply to strike out the plaintiff’s name at an early stage; he cannot by his defence dispute the authority, nor can he do so at the trial.”

13.  Reference is made to the oft-cited decision of Kammy Town Limited v Super Glory Corporation Limited (unrep, HCA 3524/2003, 14 January 2005) by Andrew Cheung J (as the learned Chief Judge then was):

“18. … where the court is unable to decide the question of authority — which is in essence a question of fact (or maybe a mixed question of fact and law), the court should not dismiss the application… nor should it try to attempt the impossible by making a finding of fact on affidavit evidence without cross‑examination. Instead it should adjourn the hearing and give appropriate directions for the determination of the objection at an adjourned hearing, such as the cross-examination of the deponents of the affidavits/affirmations that have been filed by the parties in relation to the objection.

…

21. … [Effectively] if there is any real doubt about the authority to sue, the question must be resolved first, before the case should be allowed to proceed any further; in the determination of the question, the burden is on those suing in the name of the company to establish consent to the commencement of the action, on a balance of probabilities — if the standard of proof is not achieved, then there is no consent and the name of the company must be struck out and the action dismissed.  Put another way, either there was authorization or there was not. …”

14.  The applicable test and procedures to be adopted were approved and confirmed by the Court of Appeal in Liquidation Committee of Foshan Hongda Development Limited v East Legend Investment Limited [2009] 1 HKLRD 169 per Cheung JA.  The question of authority is a fundamental one not only for the Plaintiff and the Company, but would have serious ramifications for the solicitors on record.  If they were not properly instructed then they would in effect be an agent without a principal, and therefore potentially personally liable for all the costs expended by the Company and also the costs of the other side of the litigation, here, the Plaintiff: see the decision of Poon J (as Poon JA then was) in Re Grandfield [2010] 4 HKLRD 487.

15.  As explained above, if there is any real doubt about the question of authority of the defendant’s solicitors to act, this must be determined first.

16.  Mr Cheung has been adamant that there has been no AGM or EGM and certainly none since 2014.  Since he is a 50% shareholder of the Company, one would expect him to know about it.

17.  I asked Mr Oh, for the Company, to take instructions on whether or not on the Company’s case there were in fact such meetings.  On instructions, he informed me that Mr Wong confirms there had been such meetings but that he did not inform Mr Cheung of the same as he did not consider him to be a shareholder at that time.

18.  I understand that there were disputes about certain transactions which would seek to challenge whether Mr Cheung in fact was a shareholder, or at any rate a shareholder holding all of the 6,000 shares for a period of time.  But by 14 July 2014, when DHCJ Leung handed down his judgment in HCA 829/2010, whatever doubts there were about Mr Cheung’s locus, these would have gone.

19.  It is therefore not easy to accept Mr Wong’s statement at face value.  I therefore have a very real doubt that the defendant’s solicitors in fact have authority to act.    If there were no shareholder meetings, there is a very real likelihood that there is no board who can competently give instructions.

20.  I will therefore give directions for the determination of the issue of authority.  For that reason alone, I would adjourn the proceedings.  If the proceedings were to be continued, I note that there is an issue about whether or not all the proper parties are before the Court. This is because the five directors have not been joined and this may be of importance given the nature of the relief sought.

21.  As pointed out by the learned authors of Zamir and Woolf in The Declaratory Judgment (4^th ed):

“The general rule is that it is desirable that all persons who appear to have a real interest in objecting to the grant of a declaration claimed in legal proceedings should be made defendants. As Viscount Maugham said:

‘The persons really interested were not before the court. It is true that in their absence they were not strictly bound by the declaration, but the courts have always recognised that persons interested are or may be indirectly prejudiced by a declaration made by the court in their absence, and that, except in very special circumstances, all persons interested should be made parties, whether by representation orders or otherwise, before a declaration by its terms affecting their rights is made.’

This is a sensible approach: first, as the court can take into account the interests of anyone who would be affected in reaching its decision as to whether or not to grant a declaration, it is only just that those who may be affected should be given an opportunity to present any argument which they want the court to take into account; secondly, a declaration will only bind the parties to the proceedings. If, therefore, someone who should have been joined as a defendant is not joined, there will be a danger of having to bring fresh proceedings in which he is joined, involving the expense and delay simply to re-determine a question already decided in the previous proceedings and thirdly, it is important that there is someone before the court who will properly contest the issue. …” [1]

22.  Mr Oh also properly drew my attention to the decision of Godfrey Lam J in Re China Nice Education Research Publishing Investment and Management Company Limited [2016] 3 HKLRD 525.  At para 10, His Lordship observed as follows:

“Furthermore, it seems to me, as a basic requirement of justice, that notice of proceedings of this kind should ordinarily be given to persons who would be directly affected by the order sought, at any rate where there would otherwise be no one to contest the application from their standpoint.”

23.  I note that at present there is a real question mark about whether in fact anyone is representing the Company.  I am conscious that adjourning the trial would normally have a detrimental effect on the parties, and in particular, the Plaintiff.  I note, however, that the complaints about the invalidly appointed directors are of some history; some complaints go as far back as 2002.

24.  There has also been a recent development which potentially could make these proceedings otiose.  On 26 March 2018, one Mighty Dragon International Trading Limited, presented a creditor’s winding-up petition based on a statutory demand, dated 5 December 2017.  This is said to be based on an alleged indebtedness in the sum of HK$640,000-odd.  I asked Mr Oh to confirm on instructions whether the Company’s position was that it was at present solvent or insolvent.  On instructions, he confirmed that the Company’s position was that it was insolvent.  I do not think that this is a statement from which the Company could easily resile from.

25.  The petition is to be heard next Monday.  If a winding up order is made, the provisional liquidators or liquidators (collectively “the Liquidators”) will be able to examine the affairs of the company, and in particular, the causes for its failure.  The Liquidators will have at their disposal wide powers including obtaining documents and examination under section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  These may be more effective than anyone, including Mr Cheung, trying to do the same in the present situation.

26.  I understand that Mr Cheung’s position is that the Company is, or at least should be, solvent.  His position is easy to understand.  How did the Company, which only business was to hold a single asset which has gone up many times in value, go insolvent?  On the face of it, this calls for an explanation and raises suspicions to say the least.

27.  Should the Company be wound up the Court would expect the Liquidators (whether the Official Receiver or any other appointed persons) to carefully consider all the judgments delivered by the Courts which concern the Company.  In particular, the judgment of DHCJ Burrell in HCA 925/2010 dated 7 April 2014.  The learned judge made a number of findings of fact. These include the following:

“6. (i) In August 1997 without the plaintiff’s knowledge or consent, [Mr Wong] appointed his wife and Chan Shu King ... as directors of [the Company].

7. (ii) In March 2000 without the plaintiff’s knowledge and without his consent, [Mr Wong] resigned as a director and appointed two corporate directors a month later … .

…

9. [Again,] without the plaintiff’s knowledge or consent the following mortgages or legal charges were taken out.

10. In January 1992, [Mr Wong] executed a second legal charge over the property on behalf of [the Company] to secure a loan of $2.55 million. That money was lent to a company called Wah Fu Corporation, a company owned by [Mr Wong].

11. In September 1995, [Mr Wong] executed a second mortgage on the property with the Liu Chong Hing Bank. The money again went to Wah Fu Corporation. …

12. In August 2000 [Mr Wong] executed a third mortgage with the Dah Sing Bank. Again the borrower was Wah Fu Corporation. …

13. As recently as November 2013 a second legal charge was executed in favour of a company called ‘Hong Kong Finance Company’.

…

15.    The plaintiff has on many occasions requested details of rental incomes and mortgage expenses.  None have been forthcoming.  If the rental income had ever exceeded the mortgage costs [Mr Cheung] was not informed. …”

An agreement known as the “Best Century agreement” which intended effect was to strip the Company of its assets was found to be a sham. His Lordship said this:

“70. …

(ii) …

I am satisfied that this is a case in which the corporate veil should be pierced and I am further satisfied that, once pierced, it is revealed that Best Century is a company within [Mr Wong’s] control and utilized by him to orchestrate a sham transaction.

(iii) The following factors are relevant.  Firstly, his manipulation of the directorships of [the Company] as already outlined.  Secondly, his continued control of [the Company] after his apparent resignation in 2000, again as already outlined, including a mortgage, as recently as 2013… Thirdly, his refusal to account for rental income and his failure to comply with a court (discovery) order.  Fourthly, the clear inference that he was behind vexatious legal proceedings.”

28.  It will be for the Liquidators, if the Company is wound up, to carefully consider after a thorough investigation how existing proceedings brought derivatively on behalf of the Company should be proceeded with.  It will also be for them to determine whether there have been any other wrongs committed to the Company or whether criminal offences have been committed, and if so, take appropriate action.

29.  In the light of the issues I have highlighted, both parties agreed that the proper course was for me to adjourn the proceedings sine die.