LAU CHO KWAN, LEO AND ANOTHER v. CORNWALL AGENCY CO LTD

HCA 617/2020

[2020] HKCFI 2681

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 617 OF 2020

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D E C I S I O N

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1.  In this action the plaintiffs, Mr Lau Chow Kwan Leo (“P1”) and Mrs Lau Betty Barbara (“P2”) (together “Ps”), seek an order to compel the 2^nd defendant, Cornwall Agency Company Limited (“Company”), to issue replacement share certificates in respect of 464 shares and 119 shares held by P1 and P2 respectively in the Company.

2.  The bases of the application ought to be simple and straight forward: Ps had lost the share certificates previously issued by the Company to them and were willing to confirm such fact to the Company.  Upon Ps’ compliance with the requirements of article 15 of the Articles of Association of the Company (“AA”), the Company was obliged but failed to issue new share certificates to them. 

3.  However, instead of issuing an originating summons to seek an order to compel the Company to issue new share certificates to them, Ps’ legal advisers chose to issue a writ against the Company and joined Ms Lau Siu Fan Elaine (“Elaine”), one of the directors of the Company, as the 1^st defendant.  The relief sought in the statement of claim is as follow:

“(1) A declaration that the 1^st and 2^nd Plaintiffs have satisfied the requirements under Article 15, and in particular that they have proved to the satisfaction of the Directors that their share certificates have been lost [and/or unissued][1] and by paying such indemnities as the Directors [reasonably require][2], the 1^st and 2^nd Plaintiffs are entitled to issue replacement certificates and/or missing share certificates, [as this court may otherwise direct][3];

(2) A mandatory order that, upon payment of HK$5 by each of the 1^st and 2^nd Plaintiffs, the 1^st Defendant shall do any and all acts to procure or otherwise cause the 2^nd Defendant to issue a new share certificate to:

(a) the 1^st Plaintiff to specify that he has 583 Shares and denote the numbers of his Shares; and

(b) the 2^nd Plaintiff to specify that she has 250 Shares and denote the numbers of her Shares.”

4.  The relief sought is confusing and inappropriate. In particular:

(1)  Prayer §(1) is incomplete and does not contain the words marked in parentheses (see footnote 1 to 2 above) and, in any event, does not accord with the requirements of article 15. 

(2)  Prayer §(2) is unworkable.  It is directed against Elaine who, acting alone, cannot cause the Company to issue any new share certificates.  It is not clear how Ps can seek an order in terms of §(2) when they have not specified the number of shares they have in the Company. 

Procedural history

5.  This action is one of the 4 sets of legal proceedings commenced by Ps in respect of the Company within a few months in 2020.  This is despite the fact that the Company’s only business is property holding and its only income is the rent generated by a 3-storey building known as Villa Cornwall at 12 Cornwall Street, Kowloon Tong, Hong Kong (“Property”). 

6.  At the hearing on 3 September 2020 in HCCW 262/2020, being a “just and equitable” winding-up petition presented by Ps in respect of the Company (“WU Petition”), the Company sought a validation order in respect of the ordinary business expenses and the legal costs incurred and to be incurred in the petition and 4 other sets of proceedings in which the Company was named as a defendant.  This is surprising given extensive allegations have already been made by Ps in the WU Petition.  Upon this Court enquiry, it transpired that the following proceedings have been commenced by Ps against the Company and Elaine (and others):

(1)  This action commenced on 12 May 2020.

(2)  HCMP 564/2020 commenced on 12 May 2020. This is an application made by P1 qua director to compel Elaine and the Company to provide 18 categories of documents for his inspection pursuant to sections 374, 375 and 740 of the Companies Ordinance (Cap 622) (“Ordinance”).

(3)  HCA 1144/2020 commenced on 9 July 2020. This is a common law derivative action brought by Ps (on behalf of all shareholders except Elaine) against (i) Elaine for damages, equitable compensation and account of profits on the basis that she caused the Company to enter into various transactions allegedly in breach of her fiduciary duties owed to the Company; and (ii) against Cornwall Investments Limited (a 99.9% subsidiary of the Company) and Cornwall Management Limited for damages, knowing receipt and knowing assistance for their participation in such transactions.

(4)  The WU Petition presented on 18 August 2020.  The respondents to the petition are the Company, Elaine and all other shareholders of the Company.  The only substantive relief sought is a winding-up order against the Company.

7.  As the issue of replacement certificates is a matter regulated by the AA, this Court enquired with Mr Felix Ng, counsel for Ps, as to why an action had to be commenced for such purpose and what are the issues between the parties.  Mr Ng submitted that Ps had complied with the requirements of the AA but the Company refused to issue any replacement share certificates to them.  On the other hand, Mr Jason Yu, counsel for the Company, submitted that Ps had not provided the requisite confirmation that their share certificates had been lost or any indemnity as requested by the Company.  It was clear to this Court that allowing the action to proceed in its usual course would only result in delay and waste of costs, which is contrary to the underlying objectives of the Rules of the High Court.  Consequently, the parties were directed to inform the Court by 10 September 2020 whether the action could be disposed of by consent, failing which they should lodge written submissions with the Court and the action would be disposed of on paper. 

Background

8.  The Company was incorporated on 22 October 1968. It was founded by the late Mr Lau Ting Wei and his wife, the late Madam Lucy Cheng, who were its subscribers and first directors.  The Company has issued 5,000 shares of HK$100 each, all of which are paid-up or credited as paid up.  According to the Company’s register of members, there are 8 shareholders who are members of the Lau family. 

9.  Amongst the shareholders, P1 holds 583 shares, P2 holds 250 shares, Elaine holds 833 shares and Ms Lau Big Ying Rose (“Rose”) holds 714 shares.  There is a dispute as to whether the 1,000 shares previously held by the late father were distributed in accordance with his will and whether the number of shares currently held by the shareholders is correct. There is a personal dispute between Ms Hui Keng Yee (who holds 833 shares in the Company) and his son, who challenges her entitlement to receive all the shares from her late husband.  This dispute is the subject matter of HCA 561/2019, and the Company is named as a defendant.   

10.  Since 29 May 2020, the Company has 3 directors, who are P1, Elaine and Rose.  Prior to that, P1 and Elaine were the only directors of the Company.  As P1 has been residing in Australia, the day-to-day affairs of the Company have been managed by Elaine, who is the Managing Director of the Company. 

11.  The AA sets out all the regulations of the Company and Table A in the First Schedule to the former Companies Ordinance shall not apply.  The following articles in the AA govern the issue of replacement share certificates:

“13. The certificates of title to shares shall be issued under the seal of the Company and signed by the Managing Director alone or by two Directors.

14. Every member shall be entitled to one certificate for all the shares registered in his name or to several certificates each for one or more of such shares. Every certificate of shares shall specify the number and denoting numbers of the shares in respect of which it is issued and the amount paid up thereon.

15. If any certificate be worn out or defaced then upon production thereof to the Directors they may order the same to be cancelled and may issue a new certificate in lieu thereof and if any certificate be lost or destroyed then upon proof thereof to the satisfaction of the Directors and on such indemnity as the Directors deem adequate being given a new certificate in lieu thereof shall be given to the person entitled to such lost or destroyed certificate.

16. Every member shall be entitled to one certificate gratis, but for every subsequent certificate issued to him the sum of $5 or such smaller sum if any as the Directors may determine shall be paid to the Company for every certificate issued.”

12.  By letter dated 18 September 2019 issued to Elaine, Messrs Wainwright Ryan Eid Lawyers (“WRE”), former solicitors of Ps, claimed that the Company had not issued any share certificates to Ps and requested for share certificates to be issued to Ps by 27 September 2019. 

13.  Elaine responded by a letter dated 19 September 2019, pointing out that the request should be addressed to the board and not to her personally and, according to the book of share certificates, the Company had issued the following share certificates to Ps (copies of the relevant certificate stubs enclosed):

Name	Certificate number	Number of shares	Date of Issue
P1	CACL 5	464 (2857-3320)	31/12/1989
P2	CACL 6	250 (3321-3570)	31/12/1989
P1	CACL 15	119 (6076-6195)	10/4/2001

14.  Instead of making the request in accordance with the relevant regulations, WRE stated in their letter dated 25 September 2019 that Ps sought to invoke article 15 and they “are not able to prove that the Certificates were lost or destroyed save and except to say that they do not have the Certificates in their possession” and they are prepared to swear statutory declaration as per the forms provided.  They requested the Company to provide details of the indemnity required from Ps.

15.  In her email dated 27 September 2019 to WRE, Elaine drew their attention to a declaration of trust made by Lau Cho Bun in 1988 in which he stated that he held the shares in the Company on trust for P1 and such declaration of trust was referred to in a resolution dated 4 January 1988 and hence known to P1.  She urged Ps to conduct a thorough search of the whereabouts of the share certificates and provided a draft statutory declaration so that the Company can determine whether there is a sufficient basis for issuing new share certificates to Ps, whereupon she would provide details of the indemnity.

16.  In their letter dated 15 October 2019, WRE reiterated that Ps had not been provided with share certificates or if they had been provided, they were no longer in Ps’ possession.  The shares previously held by Lau Cho Bun had already been transferred to P1 and share certificate CACL 15 was issued to Ps.  In accordance with articles 14 and 15 of the AA, Ps are entitled to be issued with share certificates.  Draft statutory declarations stating that Ps had made full and exhaustive search and inquiries with bank, their solicitors and at home, but failed to locate the share certificates were enclosed.   

17.  By letter dated 18 October 2019 to WRE, Elaine on behalf of the Company, requested Ps to provide a legal opinion to confirm that the statutory declarations made and governed by the law of the State of Victoria would be enforceable in Hong Kong.  Given the confusing statements about the shares hitherto held by Lau Cho Bun and the share certificate number, Elaine suggested Ps to conduct a search at the Companies Registry to confirm the actual number of shares held by them from 1968 to 2001. 

18.  No further correspondence was exchanged between the parties before Ps commenced this action.  The writ was endorsed with a statement of claim (“SOC”).

19.  In response to the commencement of this action, the Company issued a summons dated 3 July 2020 requiring Ps to provide security for costs.  On 28 August 2020, Ps filed a notice to discontinue the action against Elaine.

20.  At the hearing of the Company’s validation summons (in WU Petition) on 3 September 2020, this Court reminded the parties and their legal representatives to act in accordance with their duty to assist the Court to further the underlying objectives of the Rules of the High Court[4] and act in a constructive manner. 

21.  As it turns out, far from acting sensibly and reasonably, in their letter dated 7 September 2020, Messrs. Oldham, Li & Nie (“OLN”), solicitors for Ps, invited the Company to “concede judgment” in terms of a consent summons with costs to Ps on an indemnity basis, on the basis that the Company had unreasonably refused to issue share certificates to Ps even after commencement of the action (“Consent Summons”).  In the Consent Summons, OLN still sought an order in terms of prayer (1) and (2) of the SOC but with the amendments identified in footnotes 1 to 3 above. 

22.  By letter dated 8 September 2020 (which runs to 6 pages excluding the enclosures), Messrs Hugill & Ip (“HI”) confirmed that the Company would issue replacement share certificates to P provided that the following conditions are satisfied:

(1)  Ps to identify which of the share certificates have been lost;

(2)  Ps to provide brief explanation of the efforts made to locate the share certificates and why they cannot be found and, if they were lost during a journey to Hong Kong, brief explanation of the reason for bringing the certificates with them to Hong Kong, how Ps discovered the loss and the reason for not mentioning such reason in the draft statutory declaration provided to the Company on 15 October 2019;

(3)  each of Ps to provide a statutory declaration or notarised affirmation, which is valid and enforceable in Hong Kong, containing the information set out in sub-§§(1)-(2) above;

(4)  Ps do execute the 2 draft Deeds of Indemnity (“DOI”) in the form provided.  Each of the DOI contains a requirement of a bank or insurance guarantee, which HI claims is a “usual requirement unless the value of the shares is very small”; and

(5)  the action be discontinued with costs reserved to the hearing on 29 September 2020.

23.  In their letter dated 9 September 2020, OLN reiterated Ps’ request that the Company should “concede judgment” with indemnity costs payable to Ps forthwith and confirmed that Ps would provide “a statutory declaration or notarised affirmation to the effect that any and all share certificate(s) of the Company have been lost or destroyed” and that Ps would execute the 2 DOIs (with amendments marked) but without “banker’s guarantee”.  In the DOIs to be executed by Ps, the details of the lost or destroyed certificates are as follows:

Name	Certificate number	Number of shares
P1	CACL 5	464 (2857-3320)
P2	CACL 6	250 (3321-3570)
P1	CACL 15	119 (6076-6195)

Discussion

24.  In his written submissions, Mr Ng (rightly) abandons the declaratory relief sought in the SOC.  He submits that there is no mandatory requirement for Ps to provide any bank guarantee to the Company.  He contends that the passages in the textbooks cited by Mr Yu all stated that bank guarantee may be required.  Although in Mayson, French & Rayn on Company Law, 36^th ed, 2019, §8.2.2 the learned editor stated that it is usual for the company to require a bank guarantee “if the sum involves is large”, no authority has been cited in support of the proposition.  Mr Ng submits that Ps’ shares have never been transferred to any third parties, and there is “no realistic chance that there is a claim by outsiders against the Company for entitlement to those shares”.  In any event, as any transfer of shares required to be done in accordance with article 28(a) of the AA , there is “no realistic risk” that the Company would be exposed to any claim by any third parties as a result of issuing replacement share certificates to Ps.

25.  Mr Yu submits that the issuance of share certificates is not a trivial or routine matter, given that the statements in share certificates may estop the Company from denying the truth of such statements and may give rise to liability on the part of the Company to pay damages upon rectification of the share register, relying on Re Ottos Kopje Diamond Mines [1893] 1 Ch 618 at 625 and section 633(2)(b) of the Ordinance. Article 15 stipulates 2 conditions for issuance of replacement certificates, viz, an “indemnity as the Directors deem adequate being given” and “proof … to the satisfaction of the Directors” that the share certificates in question have been “lost or destroyed”.  It is incumbent upon the Company to request for proof of the alleged loss of share certificates and for an indemnity to be given so as to protect the interests of the Company. 

26.  Mr Yu contends that Ps have provided inconsistent explanations as to the loss of the share certificates and it is reasonable to require Ps to provide a valid statutory declaration to confirm such fact, which is the usual requirement (The Law & Practice of Hong Kong Companies, 3^rd ed, (2017), §5.069; Mayson, French & Ryan on Company Law, §8.2.2).  A statutory declaration made outside of Hong Kong, as previously proposed by Ps, is not a valid statutory declaration under the Oaths and Declarations Ordinance (Yiu Ping Fong v Lam Lai Hing [1998] 4 HKC 476 at 481, per Yuen J (as she then was)).  It is doubtful whether any sanction or penalty is available in Hong Kong under the criminal law in the event that the matters declared were false (Top Flying v Open Mission [2006] 4 HKLRD 83 at §§33-34, per Recorder McCoy QC).  To-date, Ps have not provided any constructive answer to the Company’s requests for a valid statutory declaration or provided any executed statutory declarations to the Company.

27.  Mr Yu further submits that there are fundamental problems with the SOC in that:

(1)  The practice of the Court is not to grant declaratory relief by consent without a trial.  This is particularly so where there are problems on the face of the SOC (Cheung Yau Hing v Derek Cheung [2020] HKCFI 1965, §§9-11, per K Yeung J). 

(2)  The action is premature as the directors have yet to come to a determination on whether any replacement certificates should be issued to Ps, given that its request for proof of loss and an indemnity remain outstanding. 

(3)  The relief sought is defective, given that (i) the declaration does not identify which share certificates have been lost; (ii) the declaration contains the garbled phrase “paying such indemnities as the Directors” which appears incomplete; (iii) the mandatory order seems to assume that the requirement of an indemnity would be fulfilled upon payment of HK$5, which is without precedent and is contrary to the requirements of article 15; and (iv) the mandatory order requires a share certificate to be issued to P1 in respect of 583 shares, which does not tally with the number of shares that Ps claim to have lost in §14 of the SOC (which states that 250 shares and 119 shares were lost);

(4)  The SOC contains unaccountable inconsistencies and inaccuracies in that: (i) P1 claims that the certificate in respect of 250 shares allotted to him in 1968 was lost.  However, the certificate in respect of 250 shares had already been cancelled and replaced by a new certificate CACL 5 for 464 shares issued on 31 December 1989.  There is no suggestion that CACL 5 has been lost; (ii) P2 claims that the certificate in respect of her 250 shares allotted to her in 1968 was lost.  However, the certificate in respect of these 250 shares had already been cancelled and replaced by a new certificate CACL 6 issued on 31 December 1989; and (iii) the assertion that Ps had lost their certificates during a journey to Hong Kong in 2017 was not raised in correspondence or the draft statutory declarations provided by WRE and is inconsistent with some of Ps’ initial explanations. 

28.  It is reasonable for the Company to have requested a bank or insurance’s guarantee in respect of the indemnity and to have offered to assist Ps in procuring the same.  Ps’ failure to provide the guarantee is unreasonable as it is usual for companies to request such a guarantee unless the value of the shares is very small (Practice Law UK, Standard Document (2020), The Law & Practice of Hong Kong Companies, §5.069; Compliance and Company Secretarial Practice of Hong Kong Private Companies (2017), section 7(IX); Mayson, French & Ryan on Company Law, §8.2.2). 

29.  I agree with Mr Yu that the prayers in the SOC are defective and the averments in the SOC are plagued with inconsistencies and inaccuracies.  I also agree that it was reasonable for the Company to require Ps to provide valid and effective statutory declarations to confirm that they have lost their share certificates issued by the Company, which accords with the requirements of article 15.  However, as Ps have already indicated their agreement to sign the 2 DOIs prepared by the Company (as amended by OLN) which contain confirmation that the specified shares have been lost or destroyed, it would be superfluous to require Ps to execute statutory declarations for the same purpose.  

30.  I do not agree that it is reasonable for the Company to require Ps to provide a bank or insurance guarantee as suggested in §5 of the DOIs.  This is because the Company is a private company and by virtue of section 11(1) of the Ordinance, its articles can restrict a member’s right to transfer of shares. 

31.  The transfer of shares in the Company is governed by articles 27 and 28 which provide as follows:

“27. The instrument of transfer of any share shall be signed by both the transferor and the transferee, and the transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof.

28(a) A share may be transferred by a member or other person entitled to transfer to any member but no share shall be transferred to a person who is not a member or who is not a person selected by the Directors as one whom it is desirable to admit to membership except as hereinafter provided.

(b) Except where the transfer is made to a member or person selected as aforesaid or pursuant to sub-paragraph (i) [5] hereof the person proposing to transfer any share (hereinafter called the proposing transferor) shall give notice in writing (hereinafter called the transfer notice) to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as the fair value and shall constitute the Company as his agents for the sale of the share to any member of the Company or any other person whom the Directors (other than the proposing transferor if he be a Director) shall approve as a fit person to be admitted to membership of the Company at the price so fixed or at the option of the purchaser at the fair value to be fixed by the Company’s auditor who shall act as an expert and not as an arbitrator.

(c) …

(d) For the purposes of paragraphs (a) to (c) of this Article only, ‘the Directors’ shall mean the Director or Directors excluding the proposing transferor if he be a Director and notwithstanding anything in these Articles contained, the Director or, if more than one, a majority of the Directors, as so defined shall constitute a quorum”. (underlined added)

32.  The combined effect of the requirements of articles 27 and 28(a), (b) and (d) is that the shares held by Ps will be transferred if and only if Ps have signed the instrument of transfer for transferring their shares to another person and, if the shares are to be transferred to a non-member, the transfer will not be effective unless and until the requisite notice and procedure have been followed and share certificates issued by the Company.  There is no risk of any person who can produce a share certificate issued by the Company in support of his claim that he is the holder of any shares without the consent of Ps and of Rose and Elaine (being the directors other than the proposing transferor).  That being the position, I do not think there is a proper basis for the Company to require Ps to provide a bank or insurance guarantee as security for the DOIs.   

33.  For the above reasons, I make an order that within 7 days  after Ps have provided the DOIs (in the forms appended to OLN’s letter dated 9 September 2020) duly executed by them and tendered payment of HK$5 in respect of each certificate to be issued by the Company, the Company shall issue replacement certificates in respect of the shares identified in §23 above to Ps.

34.  As for costs, I make a costs order nisi that Ps shall pay 60% of the costs of the action to the Company (including any costs reserved) on a party and party basis, to be assessed by way of gross sum assessment.  This reflects the fact that Ps have not pleaded a reasonable cause of action or any viable  relief in the SOC and have raised issues and made allegations against the Company improperly and unnecessarily.  Had Ps’ legal advisers acted reasonably and responded to the Company’s requests in a constructive manner, the matter could have been resolved without the commencement of this action.  Even if the parties could not resolve their dispute on the question of the guarantee (which was never canvassed in correspondence), the issue could readily be resolved at the first hearing of  an originating summons.  I consider this is a case which falls within Order 62 rule 7(1) where the Court may deprive the “successful” parties of their costs and order them to pay costs on the basis that they have raised issues and made allegations improperly and unnecessarily, both in correspondence and in the SOC. 

35.  The 40% deduction reflects the fact that the Company (1) has failed in its argument on the requirement of a guarantee; (2) has issued a summons for security for costs, which I consider to be wholly unjustified, given that Ps’ shares are valuable assets within the jurisdiction; and (3) has incurred costs unnecessarily in its 6-page letter  to recount the history of the matters when such matters are self-evidenced from the correspondence exchanged between the parties. 

36.  I direct the Company to lodge its statements of costs, if any, within 3 days of this Decision, and Ps to provide their comments on the statements within 3 days thereafter.