YICK HOK WING v. CHAN YOOK MING and Others

1995, No.A7200

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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Background

1. The Plaintiff and the 1st Defendant are directors and shareholders of the 6th Defendant Au Trou Normand Limited ("the Company") which carries on the business of a restaurant. The paid up capital of the Company is $1,000,000 divided into 100,000 shares of $10 each all of which had been issued and paid up.

2. Since the Company was acquired from the previous owners in 1990 the 1st Defendant was entrusted with the day to day management of the Company.

3. According to the Annual Return filed with the Company Registry there are three members and their respective shareholdings are : the Plaintiff 1,000 shares, the 1st Defendant 54,000 shares and one Mr Wong Hon Fung who is also a director, 45,000 shares. It is not in dispute that Mr Wong was holding the 45,000 shares on trust for the Plaintiff. The Plaintiff says, based on a Deed of Trust and Instrument of Transfer executed by the 1st Defendant on 31 January 1990, that the 1st Defendant was holding 5,000 shares registered in his name on trust for him. This is, however, disputed by the 1st Defendant who claims that the two documents dated 31 January 1990 were not supported by any consideration.

4. The Company's bankers, the Belgian Bank Limited is the 5th Defendant in this case.

5. In the beginning of 1995 a dispute arose between the Plaintiff and the 1st Defendant over the distribution of dividends as a result of which the Plaintiff took a more active part in the management of the Company. In June the Company's bank mandate, which had previously required only either the Plaintiff or the 1st Defendant's signature to draw on the cheques, was changed to require their joint signatures.

6. The relationship between the two parties continued to deteriorate. On 11 July, the Plaintiff gave notice for a Directors Meeting to be held on 18 July 1995. The proposed resolutions included appointing the Plaintiff as the Managing Director, the transfer of 5,000 shares of the Company held in the name of the 1st Defendant to the Plaintiff to be approved and that the employment of the 1st Defendant as the Managing Director be terminated.

7. On 15 July the Plaintiff's solicitors sent to the Company a document signed by Mr Wong in which he appointed the Plaintiff as his alternate director.

8. While fully aware that the meeting called by the Plaintiff was scheduled for the next day, late in the morning of 17 July, the 1st Defendant called for a Directors Meeting to be held at 1:15 p.m. on the same day. The Notice of Meeting was delivered by hand to the Plaintiff's office on the same morning at which time the Plaintiff was not in his office. The meeting was duly convened in the afternoon at the appointed time and a number of resolutions were passed. The Plaintiff was unable to attend the meeting as it was not until well after 1 p.m. that he became aware of it.

Resolutions Passed in the Meeting on 17 July

9. The Articles of the Company provides that the quorum of a Directors Meeting shall consist of one director. The 1st Defendant constituted the requisite quorum at the meeting and the following purported resolutions were passed :

1. that the 2nd Defendant be appointed as an additional director of the Company;

2. that the bank mandate for cheques to be signed jointly by the Plaintiff and the 1st Defendant be cancelled;

3. that the 1st Defendant be authorized to sign the Company's cheques singly;

4. that the Plaintiff be removed as the secretary of the Company; and

5. the 3rd Defendant be appointed the secretary of the Company.

10. The effect of the first resolution was such that the 1st Defendant, together with the 2nd Defendant, would always out-vote the Plaintiff 2-1 in any meeting. The effect of the second and third resolutions were that the Company's bank account would come under the sole control of the 1st Defendant.

11. On the same day after the meeting had concluded, the Plaintiff's solicitors wrote to the 1st Defendant's solicitors in protest of the short notice given for the meeting and contended that any resolutions passed therein were void.

Meeting on 18 July

12. On the following morning the parties, accompanied by their legal representatives, attended the meeting convened by the Plaintiff. It would be suffice for me to say the 1st Defendant together with the 2nd and 3rd Defendants contested every resolution proposed by the Plaintiff in his Notice of Meeting. The atmosphere of the Meeting was one of utter chaos and confusion with cross accusations liberally slung at each other by those present. At the conclusion of business the positions of the two opposing camps were that each claimed that the resolutions passed by the other were invalid and had no effect.

13. The Plaintiff had purportedly passed the following resolutions :

1. that he was appointed Managing Director;

2. that the transfer of the 5,000 shares previously held on trust by the 1st Defendant for him be approved;

3 that the employment of the 1st Defendant as the Manager of the business be terminated with one month's notice.

14. At the same meeting the 1st Defendant had appointed the 4th Defendant Ms Fung as an additional director of the Company.

15. What took place in the days that followed saw the involvement of the Belgian Bank. On 18 July, the Bank received a certified true copy of the minutes of the meeting on the 17th from the solicitors of the 1st Defendant. The Bank's attention was drawn to the resolution altering the mandate of the bank account of the Company.

16. The Plaintiff, who was determined in not having the 1st Defendant to have his own way, forwarded the certified copies of the meeting of the 18th and requested the Bank to treat the meeting on the 17th as invalid. The Bank was further instructed to hold the Company's account in abeyance.

17. Faced with conflicting instructions from the Company the Bank maintained that in accordance with Section 119 of the Companies Ordinance the Meeting on the 17th was deemed to have been duly held and was in order until the contrary is proved.

Withdrawal of $140,000 by the 1st Defendant

18. On 20 July 1995 the 1st Defendant withdrew $140,000 from the Company's bank account with the Belgian Bank. The reason put forward at the time was that he had to settle the accounts with the restaurant's suppliers as the Plaintiff was unco-operative in counter-signing cheques issued by the Company. The 1st Defendant admits that he still has the amount with him. The Plaintiff claims that this amount together with a sum of $220,000 which the 1st Defendant had withdrawn from the Company earlier should be returned to the Company. This is not disputed by the 1st Defendant.

Injunctions against the Defendants

19. On 20 July the Plaintiff commenced legal proceedings against the Defendants and obtained an ex parte injunction restraining them to carry out the resolutions passed in the meeting on 17 July.

20. On 27 September the parties went before Deputy Judge Maria Yuen who saw fit to preserve the status quo by extending the injunctions.

The Issues

21. There are three issues in this case between the 1st to the 4th Defendants and the 6th Defendant. They are :

1. Whether the 1st Defendant held 5,000 shares in the Company on trust for the Plaintiff?

2. Whether the purported meeting held on 17 July was valid?

3. Whether the resolutions were validly passed in the meeting held on 18 July?

22. As between the Plaintiff and the 5th Defendant the only issue is whether the Bank was proper in purporting to act in accordance with the minutes of the meeting held on 17 July which directed the Bank to alter the mandate of the account of the Company.

The Shares

23. It is not in dispute that there is a Declaration of Trust dated 31 January 1990 signed by the 1st Defendant to the effect that he was holding 5,000 shares on trust for the Plaintiff. According to the 1st Defendant he holds 54,000 of the 100,000 issued shares of the Company. In or about January of 1990 the Plaintiff told him that he would like to borrow some shares from him in order to impress his bankers and that he would return them immediately after his purpose had been achieved. It was under such a belief that the 1st Defendant executed the Declaration of Trust and the Instrument of Transfer in question. As it turned out the Plaintiff never returned the documents in question to him and over the years the 1st Defendant had forgotten about the matter altogether. I find the 1st Defendant's account of how the Plaintiff had induced him into executing the trust instruments to be inherently incredible. The documentary evidence before me suggests that the Plaintiff was a man of fairly substantial means and it was most unlikely that the additional 5,000 shares could have any positive impact on his financial status at the time.

24. The version of the Plaintiff on this issue is quite different. He told the Court that he alone was responsible for raising the $2.5 million in 1989 required for purchasing the Company from its previous owners. Apart from putting up $100,000 as working capital the 1st Defendant had made no financial contribution towards the purchase. I have no difficulty in accepting this part of his evidence as there is an abundance of documentary evidence to support his oral testimony.

25. Subsequent to the acquisition of the Company, according to the Plaintiff, it was agreed that he would take up only 1,000 shares in his own name. It was arranged that Mr Wong would take up 45,000 shares on trust for the Plaintiff and the 1st Defendant would take up 54,000 shares of which 5,000 share were to be held on trust for the Plaintiff. Under this arrangement the Plaintiff would own a total of 54% interest in the Company and the 1st Defendant's holding would be 46%. I find that the Plaintiff's alleged majority interest in the Company is consistent with him having to put up with the entire capital required to finance the purchase of the Company. In January 1990 the parties were plainly on good terms and I do not think it was likely that the Plaintiff had to resort to tricking the 1st Defendant for the 5,000 shares. I find that the Defendant was fully aware of the legal effects of the two trust documents at the time when he executed them back in January 1990.

26. The explanation given by the Plaintiff as to why he would have a substantial part of his shareholding to be held on trust was far from convincing. It was through his fear of friends asking him to treat them to free meals at the restaurant, he claimed, that he decided to have Mr Wong and the 1st Defendant to hold the shares for him. I do not think the Plaintiff is entirely forthcoming in this part of his evidence.

27. Be that as it may, the only pleaded defence on this issue is that the Declaration of Trust and the Instrument of Transfer was not supported by any or any sufficient consideration. This with respect, is not a defence in law. Once the 1st Defendant, being sui juris, declared the trust for the Plaintiff, although for no consideration, the trust is binding on the Defendant and irrevocable unless he had expressly reserved the power of revocation. There is no power of revocation in this case. I find that as soon as the 1st Defendant had executed the Declaration of Trust on 31 January 1990 the Plaintiff had taken an equitable and enforceable interest in the 5,000 shares. At all material times since then the Defendant was holding the shares on trust for the Plaintiff.

Meeting on 17 July

28. The issue that requires to be resolved here is whether the time given for notice of the meeting was so short that the meeting and the resolutions passed therein were invalid.

29. Article 123(1) of the Company provides :

"... Unless otherwise determined one director shall constitute a quorum. Questions arising at any meeting shall be decided by a majority of votes. A director may, at any time, summon a meeting of the Directors."

30. The Notice in question was delivered to the office of the Plaintiff at 12:10 p.m. of the same day on which the meeting was to be held and it only allowed the recipient of less than two hours to respond to the notice. In my view it was unreasonably short.

31. Mr Chan for the Defendants argued that it was the practice of the Company that previous Directors Meetings had been convened on short notice and that the Plaintiff had never raised any objections in the past. That being the case he must necessarily be treated as having waived his rights to a proper notice.

32. One of the arguments pursued by Mr Chan was that a short notice does not in itself render the subsequent meeting invalid. This I accept. He relied on the case of Browne v. La Trinidad [1887] 37 Ch D 1 in which the English Court of Appeal held that a notice of meeting given only four minutes before the scheduled time of the meeting, though irregular, did not render the resolutions passed in the subsequent meeting void. No immediate objection was taken by the aggrieved party in that case. It was held by Lindley L.J. that :

" ... if the Plaintiff had complained that the meeting of directors convened at such a short notice was not duly convened, and had sought the interference of the Court to prevent the directors from acting on a resolution passed at it, I can understand that he would have had a plausible case. But he did nothing of the kind. He took no notice of the matter. He did not say that it was inconvenient for him to attend, and he did not ask the directors to adjourn it. He does nothing at all until this notice convening the extraordinary meeting has been issued and circulated, nor until four days before the meeting. His contention now is that what he calls this irregularity in serving the notice upon him, renders it incompetent for the shareholders to pass the resolution to consider which they have had notice to meet. It appears to me that, if we gave effect to such an argument as this, we should be paralyzing the whole course of business of these companies. It is competent for directors to call meetings, it is competent for shareholders to pass resolutions, and the most that can be said here is that there is or may be some irregularity, but an irregularity (if such it be) which can be cured at any moment. In such cases the Court never interferes. I think it is most important that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of can be set right at any moment.... I am not prepared, however, to say that in consequence of the shortness of that notice the shareholders were incompetent to pass the special resolution they were convened to consider."

33. While I accept that a directors meeting held on very short notice does not render the resolutions so passed per se invalid, the intention of those directors who called the meeting on such short notice is one of the factors which the Court has to consider in deciding whether the directors were competent to act at the meeting.

34. In re Homer District Consolidated Gold Mines Ex Parte Smith (1888) 39 Ch D 546 there were five directors in the company and only several hours' notice was given for a meeting to be held at two o'clock. One of the directors did not receive the notice of meeting until the next day and another director gave notice that he could not attend the meeting until later at three o'clock on the same day. A third director was out of the country. Only two directors out of the five were present at the meeting and resolutions were passed regarding allotment of shares. In holding those resolutions passed at the meeting to be void North J. made the following observation at p.550 :

"... It seems to me that what was done was as irregular as possible. Without wishing to suggest any fraud on the part of the two directors present, the conclusion I come to as to their acts is that they did think it desirable that the shares should be allotted as soon as possible .... They proposed to do what they may have thought they could do; they thought they could get rid of the opposition of their co-directors, and pass a resolution that would bind the company."

Later on the same page he went on to say :

"... No doubt a bare quorum is capable to act and bind the company at a meeting duly convened, with proper notice given to the other directors, at which therefore all the other directors may, if they please, be present; but, these two directors met, having abstained from telling the others what they intended to do, and proceeded to pass these resolutions in the full belief, and, I think, knowledge, that if the others had had notice and been able to be there they would have objected; and further than that, with notice as to one that he would be there at three, they proceeded to pass their resolution at two. They ought certainly to have waited. I do not say that would have been enough. I come to the conclusion that what was done on that occasion was not the act of the board of directors, and did not bind the company, ..."

35. I think in cases where there is prima facie evidence to suggest that the notice of meeting were highly irregular, the Court is entitled to examine the intention of those convening the meeting and in this case, that of the 1st Defendant's. What could throw light on his intention would of course be the nature and the effect of the resolutions passed. As mentioned earlier the effect of the first resolution passed would be that the 1st Defendant together with the 2nd Defendant would always out-vote the Plaintiff in any meeting. With the second and third resolutions the Company's bank account would be under the sole control of the 1st Defendant. Further, with the removal of the Plaintiff as the Company Secretary, the Plaintiff's participation and influence in the company's administration would be reduced to a minimal.

36. The 1st Defendant admitted that upon receiving the Notice of Meeting dated 11 July, he was concerned with the security of his future position as manager of the Company. He also admitted in no uncertain terms in cross-examination that in order to preserve his interest and administrative influence in the Company he had to make a pre-emptive strike by calling a meeting to be held on the 17 July while at the same time he had to do everything within his power to forestall the appointment of the Plaintiff as an alternate director of Mr Wong. The reason behind was simply this : if the Plaintiff was successfully appointed as an alternate director, then in the meeting on 18 July, and indeed in all future meetings, the 1st Defendant would always be out voted 2 to 1. In light of the 1st Defendant's admissions, can the meeting on 17 and the resolutions passed be bona fide and in the best interest of the Company? I think not. By giving such short notice the 1st Defendant clearly did not want the Plaintiff to attend the meeting. If the Plaintiff was present the 1st Defendant could never have passed the resolutions as he did.

37. For the reasons given I hold that the meeting on 17 July and the resolutions passed therein are not valid and therefore do not bind the Company.

Meeting on 18 July

38. The determination of the previous issue really disposes of this one. The Notice for this Meeting was not served on Mr Wong who was in Canada at the time. The only point raised by the defence, although never pleaded, is that the procedures provided in Articles 123(2), whereby Directors for the time being shall be entitled to notices of meetings, had not been strictly complied with. Mr Wong is not a party to this action. Even if this point has been pleaded I am of the view that the passage in Browne v. La Trinidad quoted above would apply to the present case in that the Court would be reluctant to interfere with an irregularity which can be cured at any time.

39. I find that the meeting was properly convened and that the resolutions passed are binding on the Company.

Whether the Bank had acted properly?

40. It is common ground that Article 123 of the Articles of Association of the 5th Defendant provides that the quorum for directors meeting of the Company was one and that the Minutes of the meeting on 17 July when received by the Bank was signed by the Chairman of the Meeting.

41. The stance adopted by the Bank was clearly in accordance with Section 119(2) & (3) of the Companies Ordinance which provided :

"(2) Any such minute if purporting to be signed by the chairman of the meeting at which the proceedings were had, or by the chairman of the next succeeding meeting, shall be evidence of the proceedings.

(3) Where minutes have been made in accordance with the provisions of this section of the proceedings at any general meeting of the company or meeting of directors or managers, then, until the contrary is proved, the meeting shall be deemed to have been duly held and convened, and all proceedings had thereat to have been duly had, and all appointments of directors, managers, or liquidators shall be deemed to be valid."

In the circumstance I doubt whether there was any other possible position which the Bank could have taken as there was no legal basis for the Bank to treat the minutes of the meeting as other than valid.

42. Despite repeated demands from the Plaintiff's solicitors the Bank stood firm on its decision.

43. Being dissatisfied with the Bank's stance the Plaintiff, through his solicitors, made various allegations against the Bank and threatened court action. Thereafter he commenced the present proceedings and on 20 July 1995 obtained an injunction against it in relation to the accounts held by the Company with the Bank. The Bank had indicated on the return date, and I think quite rightly, that they would abide by the Court's eventual ruling in this case.

44. It is clear from the evidence that the Plaintiff had not, at any time before this court hearing, proved that the meeting held on 17 July was invalid and of no legal effect. In the circumstances I find that the Bank had acted properly at all material times in refusing to comply with the Plaintiff's request on 18 July 1995. The action against the Bank is therefore dismissed.

Declarations

45. I make the following Declarations :

1. The 1st Defendant holds 5,000 shares of and in the Au Trou Normand Limited (the 6th Defendant) on trust for the Plaintiff.

2. The resolutions passed at the purported Directors' Meeting held on the 17 July and all acts and deeds purportedly done in pursuance thereto are null and void and of no legal effect.

3. The resolutions passed at the Directors' Meeting held on 18 July 1995 had been validly passed and are binding on the Company.

Orders

46. I make the following orders :

1. The 1st Defendant do forthwith repay the 6th Defendant the sum of HK$220,000 and HK$140,000 with interest thereon as to HK$220,000 from 14 February 1995 and as to HK$360,000 from 20 July 1995 at the rate of 2% above prime rate.

2. The Notice given to the Companies Registry that the 2nd and 4th Defendants were appointed directors of the Au Trou Normand Limited and that the 3rd Defendant was appointed Secretary of the same be removed from the records of the Companies Registry.

3. Upon the 6th Defendant filing an Annual Return made up to 4 August 1996 within 21 days hereof with the Companies Registry, the Annual Return filed with the Companies Registry on 11 October 1996 be removed from the record of the said Registry.

Costs

1. As between the Plaintiff and the 1st, 2nd, 3rd and 4th Defendants, costs to the Plaintiff.

2. As between the Plaintiff and the 6th Defendant, I make no order as to costs.

On the issue of the costs between Plaintiff and the 5th Defendant the Belgian Bank, Mr Chain submits that the Plaintiff should not bear the costs of the 6th Defendant. His criticism appears to be that if the position adopted by the Bank was to abide by any rulings made by the Court at the end of this trial, then they had no reason to incur extra cost by appearing at the trial and that should be reflected in the Court's determination of costs between the parties. I can see no merit in this argument. The Bank is at all material times one of the Defendants in this case at the suit of the Plaintiff and I would be most surprised if the Bank had chosen not to be represented at the hearing when the propriety of its decision was in issue. It was only after the commencement of the trial that I was informed by Mr Chain that the Plaintiff would not be asking for any relief from the Bank. Had the Plaintiff's position been made clear to the Bank well in advance it would never have to go through the process of preparation for this trial.

3. In the circumstance I am of the view that the Plaintiff should bear the cost of the 5th Defendant in this action and I so order.

I further order that the 1st, 2nd, 3rd and 4th Defendants to pay to the Plaintiff costs so paid by the Plaintiff to the 5th Defendant.