SEG INVESTMENT LTD v. SEG INTERNATIONAL SECURITIES (HK) LTD AND OTHERS

CACV 369/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 369 OF 2005

(ON APPEAL FROM HCMP NO. 4211/2003)

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AND

CACV 382/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 382 OF 2005

(ON APPEAL FROM HCMP NO. 4211/2003)

______________________

______________________

AND

CACV 383/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 383 OF 2005

(ON APPEAL FROM HCMP NO. 4211/2003)

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______________________

(Heard Together)

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J U D G M E N T

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Hon Lam J (giving the judgment of the Court):

1.  On 28 August 2003, the 2^nd, 3^rd and 4^th Defendants as directors of the 1^st Defendant purportedly passed a board resolution under Section 228A of the Companies Ordinance to wind up the 1^st Defendant. The board resolution was challenged by the Plaintiff, the 74.45% shareholder of the 1^st Defendant.

2.  The 1^st Defendant had ceased trading since 1 August 2003. A liquidator had been appointed upon the commencement of the purported winding-up. At the trial, the liquidator decided that he should take a neutral stance and the 1^st Defendant was not represented. The 2^nd to 4^th Defendants resisted the challenge of the Plaintiff at the court below.

3.  The challenge succeeded before Deputy Judge Anthony To on 14 October 2005. The judge granted a declaration that the board resolution is null, void and invalid and other consequential declarations.

4.  We were told that no action had been taken with regard to the affairs of the 1^st Defendant after the judgment below. The 1^st Defendant had not resumed trading. Apparently, there are still some assets held in the name of the 1^st Defendant that should have been transferred back to its customers. Unfortunately, no-one informed the regulatory authorities regarding the outcome below and there was no progress in respect of the return of such assets to their rightful owners. 

5.  The 2^nd to 4^th Defendants appealed against the judgment below. They also applied for additional evidence to be adduced at the hearing of the appeal.

Application for admission of additional evidence

6.  The governing principles for admission of additional evidence on appeal are well established. This court has always been adhering to the principles set out in Ladd v Marshall [1954] 1 WLR 1489. Three conditions must be satisfied before additional evidence can be admitted on appeal,

(a)	It must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial;
(b)	The evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; and
(c)	The evidence must be such as is presumably to be believed, or, in other words, it must be apparently credible though it need not be incontrovertible.

7.  First, we are not satisfied that the additional documents the Defendants now seek to adduce could not have been obtained with reasonable diligence at the time of the trial. All the documents were documents of the 1^st Defendant and they were available to them.

8.  The 2^nd to 4^th Defendants said they could not locate these documents as the 1^st Defendant had been in business for 32 years and there were quite a lot of documents scattering at different premises. They also said at the time of the litigation, they were busily engaged in dealing with customers of the 1^st Defendant and taking measures to rescue the company. They said they had no additional resources to engage lawyers and application for Legal Aid took time.

9.  We do not accept these as satisfactory account for the failure to produce these documents at the trial. The Plaintiff took out the Originating Summons on 24 September 2003 and the matter was heard by the judge on 7 September 2005. The trial ran until 23 September 2005. Judgment was given on 14 October 2005. There were several rounds of affirmation evidence. The Defendants had ample opportunity during the two years pre-trial period to locate the relevant documents for use at the trial. Even after the trial started, there was ample time for these documents to be located and produced if the Defendants considered them to be of importance.

10.  The lawyers of the 1^st Defendant only ceased to act on 6 September 2005. Hence, all the affirmations filed on behalf of the Defendants, including the 2^nd to 4^th Defendants, were prepared with the benefit of legal advice. Had they exercised reasonable diligence during the preparation for trial, we believe the 2^nd to 4^th Defendants should have been able to produce these documents at the trial.

11.  Second, all the additional documents are in respect of the financial position of the 1^st Defendant. Even if they were taken into account, for reasons given below, we do not think the documents would have an important impact on the outcome. Hence, the second condition is also not met.

12.  Therefore, the additional evidence should not be admitted as evidence for the purpose of the appeal.

The substantive appeal

13.  The judge came to his decision on these grounds,

(a)	There was inadequate notice of the board meeting of 28 August 2003;
(b)	The requirement of Section 228A was not satisfied.

14.  Regarding (b), the following are the sub-grounds,

(1)	The directors present at the meeting could not have genuinely believed that the 1st Defendant could not by reason of its liabilities continue its business;
(2)	The directors present at the meeting could not bona fide consider it necessary to have the company wound up;
(3)	The directors present at the meeting could not bona fide consider winding up should be commenced under Section 228A because it is not reasonably practicable for the winding up to be commenced under another section of the Companies Ordinance.

15.  The judge also held that the 2^nd to 4^th Defendants’ motive of the winding up was to pre-empt the extraordinary general meeting and prevent the Plaintiff from taking over the control of the board, see Paragraph 93 of the judgment.

16.  The findings of the judge were made against the background set out in details in his judgment. The more crucial events leading to the meeting of 28 August 2003 were as follows.

17.  The 1^st Defendant carried on business of securities brokerage. In 2003, the Plaintiff held 74.45% of its shares and the other 25.55% was held by Ms Hsieh Ming Chu. The 2^nd to 4^th Defendants were on the board representing Hsieh’s interest whilst a Mr Wong Kong Yui [“Wong”] and a Mr Li Jian Min were directors representing the interest of the Plaintiff. Mr Li was a resident of mainland China.

18.  There were financial problems in the 1^st Defendant (although the extent of the problem is a matter of debate) for quite some time. In 2002, there was discussion regarding the sale of the shares in the 1^st Defendant to a third party called the Champion Group. The proposed sale was not well received by the Plaintiff. The Defendants said it was due to the misunderstanding on the part of those who were handling the matter in the Plaintiff. It does not really matter for the purpose of this appeal. Whatever the reason, the Plaintiff did not agree to the proposal.

19.  On 1 August 2003, the 1^st Defendant suspended its business operation and the Hong Kong Stock Exchange was informed on 24 July 2003.

20.  On 15 August 2003, there was a board meeting at Shenzhen. The 2^nd to 4^th Defendants were present. Representatives of the Plaintiff made clear at the meeting that the Plaintiff wished to change the composition of the board by appointing more directors to represent the Plaintiff’s interest. To achieve that, an extraordinary general meeting would be held.

21.  On 16 August 2003, the Plaintiff wrote to Hsieh informing her its desire to change the composition of the board. A written notice as to the date and venue of the extraordinary general meeting to be held on 28 August 2003 was given to Hsieh on 21 August 2003. The matters to be discussed at that meeting were stated to be (a) appointment of additional directors; (b) discussion on resolving the problems faced by the company, in particular the accounting management of the company.

22.  Hsieh responded on 25 August 2003 suggesting the meeting be postponed to 29 August 2003 at Haikou. The Plaintiff acceded to that request.

23.  In the meantime, the Securities and Futures Commission monitored the 1^st Defendant closely.  On 22 August 2003, the Commission requested the 1^st Defendant not to transfer or advance any further funds to shareholders or related parties. The 1^st Defendant gave a confirmation to that effect on 25 August 2003. It shows that the Securities and Futures Commission was ready to intervene to prevent irregular dealing of the assets of the 1^st Defendant.

24.  On 26 August 2003, the 2^nd Defendant gave a written notice to Wong for a board meeting on 28 August 2003. The notice did not specify what were to be discussed at that board meeting. It was a very laconic notice and gave no hint to the recipient that the board would consider passing a resolution under Section 228A.

25.  The 2^nd Defendant testified that he had given oral notice to Wong that the board meeting was for consideration of the winding up of the company. The judge rejected his evidence in this regard. It is well established that this court would not lightly upset a finding of fact or the weighing of evidence by a first instance judge: see Ting Kwok Keung v Tam Dick [2001] 3 HKLRD 12. 

26.  In the present case, we are not satisfied that the learned judge had made any errors that warrant this court to interfere with his weighing of the evidence. The judge was well aware of the defects in the evidence of Wong. The judge had alluded to the rejection of the evidence of the Plaintiff’s witnesses in other respects. However, even under such circumstances, the judge was entitled to accept Wong’s evidence as to the lack of notification of winding-up as the item to be discussed at the meeting of 28 August 2003.

27.  In this connection, as the judge pointed out, it is inherently unlikely that Wong would withhold such crucial matter from the Plaintiff. It is also inherently unlikely that the Plaintiff would not respond to a proposal to wind-up the company under Section 228A if it had been informed.

28.  The judge had the advantage over this court in hearing the witnesses in their viva voce evidence and we do not perceive any errors made by the judge in his assessment of evidence.

29.  Thus, the appeal must be considered on the basis that there was no oral notice to Wong about the intended discussion of Section 228A winding-up at the board meeting of 28 August 2003.

30.  The written notice of 26 August 2003 plainly did not allude to Section 228A winding-up as being on the agenda. The 2^nd to 4^th Defendants were aware of the need to give notice (otherwise they would not have had such notice prepared) and we do not see any good reason why the notice should not be explicit about the business to be discussed at the meeting. As the judge pointed out, a Section 228A winding-up is a very serious matter for the company and the written notice of 26 August 2003 is clearly inadequate.

31.  We agree on this ground alone the purported resolution of 28 August 2003 must be invalid and the judge was correct in so holding. The additional documents that the 2^nd to 4^th Defendants wish to put forward on appeal have no bearing on this issue.

32.  On 27 August 2003, Hsieh wrote to the Plaintiff requesting the extraordinary general meeting of 29 August 2003 to be held in Hong Kong. The Plaintiff responded on the same day by saying that arrangement had been made for that meeting to be held at Haikou and it was not possible to change the venue.

33.  It is noteworthy that there was no reference by Hsieh in that letter of 27 August regarding the possibility of the company being wound up under Section 228A at the board meeting of 28 August 2003. She was clearly corresponding with the Plaintiff on the basis that it would be meaningful to hold an extraordinary general meeting discussing, inter alias, appointment of additional directors on 29 August. This is clearly inconsistent with a prospect of commencement of winding-up of the company on 28 August 2003. Thus, it is inconsistent with the 2^nd Defendant’s assertion that he had notified Wong as regards winding-up being on the agenda for the meeting of 28 August 2003.   

34.  The meeting of 28 August 2003 was only attended by the 2^nd to 4^th Defendants. Wong did not attend. They purported to pass a resolution pursuant to Section 228A to wind-up the 1^st Defendant.

35.  As regards the prerequisites for evoking Section 228A, it is clear from sub-section (1)(b) that Section 228A is a measure of last resort. In other words, even if it becomes necessary that the company be wound up, one must consider whether it is reasonably practicable for winding up to be commenced under another section. If the answer is yes, the directors should not resort to Section 228A to pre-empt a winding up by others.

36.  Sub-section (2) requires the directors to specify in their resolution the reasons in support of the conclusion that it is necessary that the company be wound up and that it is not reasonably practicable for the winding up to be commenced under another section.

37.  In the statutory declaration produced to the Companies Registry for registration regarding the Section 228A winding-up, the following were stipulated as the directors’ reasons,

(a)	The company was unable to pay its debts and has ceased its operation due to lack of financial resources.
(b)	No further assistance or financial support can be expected from any of the shareholders of the Company.
(c)	The majority of the shareholders of the Company refused to commence the requisite procedures to wind up the Company.

38.  Ground (c) is crucial because it is the only reason given by the directors to account for why they believed that it is not reasonably practicable for the winding up to be commenced under another section.

39.  However, the evidence before the judge was that the Plaintiff had not been asked to consider the winding up of the company voluntarily under Section 228. As the judge said in Paragraph 95 of his judgment, this completely nullified ground (c). For this reason alone, Section 228A should not have been evoked.

40.  At the appeal, the 2^nd to 4^th Defendants referred to a note of a meeting on 21 March 2003 to show that winding-up had been alluded to in meeting of the 1^st Defendant. What was actually referred to in that note was “結业清算” (cessation of business and final accounting) which is not the same as a winding-up. Further, the note recorded that it was mentioned that there were two options and the 2^nd Defendant was inclined to adopt the other option, viz. transfer of interest in the 1^st Defendant, whilst the Plaintiff had yet to decide which option to adopt. The Plaintiff asked for financial information regarding the company to enable it to decide. As outlined above, there had been developments since March 2003 and we do not think one can regard what had been said in this note as refusal on the part of the Plaintiff to go for voluntary winding-up.

41.  Furthermore, as admitted by the 2^nd Defendant at the appeal, there were statutory demands by creditors of the company. Bearing in mind the cessation of business operation of the 1^st Defendant and the monitoring of the company by the Securities and Futures Commission, it is difficult to see why a winding-up under Section 177 by a creditor was not viable.

42.  Thus, irrespective of the financial position of the 1^st Defendant, the 2^nd to 4^th Defendants had no proper basis to commence a winding-up of the 1^st Defendant pursuant to Section 228A on 28 August 2003.

43.  As mentioned, the judge also found that the 2^nd to 4^th Defendants passed the purported resolution with a view to pre-empt the extra-ordinary general meeting and to prevent the Plaintiff from taking over the control of the Board. At paragraph 96 of the judgment, the judge concluded that the purported resolution was passed in bad faith.

44.  At the appeal, the 2^nd to 4^th Defendants submitted that they did not want the 1^st Defendant to be controlled by the Plaintiff as they had reasons to be concerned with the integrity of those in charge of the Plaintiff. This is not a reason for proceeding under Section 228A. Nor was not it given as a reason in the statutory declaration. Instead, a false reason in terms of ground (c) was stipulated.

45.  In any event, had these defendants had genuine proper concern about losing control to the Plaintiff, all they needed to do was to notify the Securities and Futures Commission. In the circumstances of the present case, we do not believe the 2^nd to 4^th Defendants could legitimately evoke a Section 228A winding-up to frustrate the Plaintiff’s control of the 1^st Defendant. Bearing in mind the events leading to the purported resolution, in particular the imminence of the extra-ordinary general meeting of 29 August 2003 and the lack of concrete basis to justify a Section 228A winding-up, the irresistible inference is that the purported exercise was done with an improper motive. 

46.  Having said that, the Companies Ordinance does not set out the civil consequences for an improperly evoked Section 228A winding-up. There is no provision in the Ordinance giving the court the power to declare such winding-up to be void or invalid.

47.  If it is simply a question of whether Section 228A has been properly evoked in terms of satisfying the pre-requisites in sub-section (1), we doubt if it is appropriate to grant a declaration that such resolution is void or of no legal effect. The proper course might be to grant a stay pursuant to Sections 209 and 255 of the Companies Ordinance. In Bozell Asia (Holding) Ltd v CAL International Ltd  [1997] HKLRD 1 Rogers J (as he then was) granted a stay of the winding up under Section 228A but allowing a winding-up to proceed on grounds of insolvency. This is not an appropriate case for a stay since the purported resolution was not a resolution of the board. We are of the view that the declaration was properly granted.

48.  The 2^nd to 4^th Defendants complained about the refusal of the judge to grant them an adjournment. We do not see any merits in that complaint. The question of adjournment is a matter of case management discretion of the judge. The fact that the 2^nd to 4^th Defendants had no legal representation and the 1^st Defendant taking a neutral stance with its lawyer withdrew from the case shortly before trial do not mandate an adjournment. The Originating Summons was issued by the Plaintiff on 24 September 2003 and the trial did not take place until 14 October 2005 and several rounds of evidence had been filed. The 2^nd to 4^th Defendants had ample opportunity to get their separate legal representation had they wished to. Given the background to the proceedings, the 1^st Defendant should have taken a neutral stance right from the beginning and the 2^nd to 4^th Defendants should not assume they could use the resources of the 1^st Defendant in fighting what in substance was their battle of control over the 1^st Defendant with the Plaintiff.

49.  In addition, the litigation is about the validity of a purported winding-up of the 1^st Defendant. In the interest of all having an interest in the affairs of 1^st Defendant (including creditors and customers of the 1^st Defendant who are not parties to the proceedings), this should be decided as soon as practicable.

50.  We do not see any ground to disturb the exercise of discretion by the judge in refusing to adjourn the case.

51.  Moreover, as explained above, even with the benefit of almost two years’ preparation for this appeal, the 2^nd to 4^th Defendants failed to demonstrate any merits in their case.  

52.  For these reasons, the appeal falls to be dismissed. We also order the 2^nd to 4^th Defendants to pay the costs of the Plaintiff in the appeal, such costs to be taxed if not agreed.