MODERN GALA (MODELS) LTD v. TSE FUNG CHIU AND ANOTHER

HCMP 1547/2018

[2018] HKCFI 2352

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1547 OF 2018

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REASONS FOR DECISION

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1.  This was an application by an originating summons dated 21 September 2018 (“the OS”) by Modern Gala (Models) Ltd (“the Company”) seeking leave to extend the time period for AGMs of the Company for the years 2016 and 2017 from their respective statutory deadlines to 6 months from the date of the order with no order as to costs.

2.  The Company was incorporated in 2009.  The respondents Tse Fung Chiu (“R1”) and Kwok Man Hei (“R2”) are the only two shareholders of the Company, each holding one of two issued shares.  Thefather of R2 (“Kwok Senior”) is currently the sole director of the Companyand has been such since November 2014 when Tse Senior (the other director) resigned.

3.  At the conclusion of the hearing the court:

 (a) allowed the reconstitution of the application by substituting R2 as the applicant in place of the Company and by joining the Company as the 2^nd respondent and granting the necessary leave to amend the OS, and dispensing with service;

 (b) granted leave to extend the time period for holding the 2016 and 2017 AGMs to 3 months from the date of the order;

 (c) ordered that (i) the costs of R1 (in respect of the original application and of this hearing) be paid by the Company, to be taxed if not agreed; (ii), subject to (i), there be no order as to costs; and (iii) there be liberty to apply.

Background

4.  There is a history of disputes and litigation between the Kwok and Tse families over the last few years.

5.  In November 2014, Tse Senior (R1’s father) retired as one of the directors leaving Kwok Senior (R2’s father) as the only director.  Despite many requests from R1, the Company procrastinated in holding its 2015 AGM.

6.  The ostensible reason given by the Company for the delay was its inability to persuade the Company’s auditors (who had been preparing the Company’s financial statements for several years) to prepare the 2015 financial statements so that the 2015 AGM could be held.  The reason advanced was that their reluctance was due to issue being taken over one item of the accounts showing a loan of over $12 million due to Tse Senior.  Allegedly, the Company was unable to find any other firm to undertake the work. 

7.  The parties eventually settled their dispute and resolved the auditor issue by a consent order dated 28 June 2018, allowing the 2015 AGM to be held on 8 August 2018.

Events leading to the OS

8.  On 21 August 2018, R1’s solicitors (“JYJL”) requested (i) the production of the 2016 and 2017 financial statements to which as shareholder he was entitled and (ii) that the 2016 and 2017 AGMs be convened.

9.  On 28 August 2018, the Company’s solicitors (“OLN”) replied to the effect that an application would be made pursuant to section 610(5) of the Companies Ordinance (Cap 622) for extension of time to convene therelevant AGMs and that such application would be made by mid-September. 

10.  On 24 September 2018, the Company served the OS and supporting affirmation on the respondents.  (Pausing there, having regard to OLN’s letter of 28 August, the reference to section 610(5) of the High Court Ordinance in §3 of the supporting affirmation must have been an error: clearly the intended reference was to the Companies Ordinance.)  The Company also invoked the inherent jurisdiction of the court.  The return date of the OS was 15 October 2018.

11.  After considering the papers served, R1 took legal advice and replied on 3 October 2018 on a “without prejudice save as to costs” basis to the effect that R1 would agree to a 2-month extension and his costs and would take appropriate action if no reply were received by 5 October 2018.

12.  On 4 October 2018, the Company rejected R1’s proposal out of hand, indulging in a long exegesis of why 6 months was appropriate andwhy R1 should not be asking for his costs until the final paragraph when it indicated a willingness to shorten the extension to 3 months and imposing a deadline of 8 October 2018 for R1’s response.

13.  Upon receipt, JYJL promptly responded stating its reasons for the 2-month period but indicating that R1 would consent to a 3-month extension plus his costs and stating that appropriate action would be taken to protect R1’s interest unless a reply was forthcoming by 5 October 2018.

14.  As no response was forthcoming from the Company on 5 October, on 8 October R1 filed his affirmation in opposition.

15.  R1’s written submissions dated 11 October 2018 highlighted aprocedural irregularity and/or jurisdictional problem that came to light whenpreparing for the hearing in that the Company is plainly not within section 610(5) and so does not have locus standi.  While there is jurisdiction in section 610(7) to deal with the situation that has arisen in the present case, the application has to be made by a member and not the Company.

16.  At the time of R1’s written submissions, the parties had not yet resolved the procedural conundrum except that both respondents and the Company were anxious to obtain leave to hold the overdue AGMs.

This hearing

17.  At the hearing, Mr Goh of OLN for the Company proceeded with its original application notwithstanding the matter set out in the preceding paragraphs and without as much as alluding to the issue raised and as if there was no doubt as to the appropriateness of its original application.  It would appear that Mr Goh was invoking the exercise of the Court’s inherent jurisdiction to get him out of his difficulty.

18.  Mr Lee of JYJL for R1 reiterated his position as spelt out in his written submissions and invited the court’s attention to Ng Yat Chi v Max Share Limited [2005] 1 HKLRD 473 at §§10 and 80 as well as the English Court of Appeal’s decision in Ebert v Venvil & Another [2000] Ch 484 at 493F–G regarding statutory displacement or implied abrogation of inherent jurisdiction situations.  The court was also informed that R2 has intimated its willingness to be added as an applicant to resolve the procedural difficulty.  Ms Kung of Wellington Legal for R2 confirmed her client’s willingness to be joined as an applicant in the proceedings.

19.  On further consideration, the addition of an applicant who hasa different locus standi from the Company would create problems in terms of the relief to be granted.  In the result, the court allowed the application of R2 to be substituted in place of the Company as the applicant and for the Company to be joined as the 2^nd respondent to that amended application.

20.  Accordingly, the order took the form as set out in §3 above.

Costs

21.  It remains to mention the reasons for awarding costs to R1.

22.  The Company had seen fit to cast aspersions on JYJL’s professional integrity for filing R1’s affirmation unnecessarily “as a tactic to beef up costs”.  But for Mr Lee’s helpful assistance in the form of his written submissions on behalf of R1, the Company’s application would havegone nowhere.  The Company and the respondents have been ill-served by OLN adopting an overly belligerent and aggressive stance to any request (however justified and reasonable) from R1.  It is high time for OLN to re-assess its approach.

23.  Mr Goh’s accusation/remark in his written submissions to the court is false and unwarranted in that regard.  JYJL deserves a written apology from OLN which should be copied to the court.  That should take place as soon as possible and in any event within 7 days of the Reasons for Decision. 

24.  That aside, having read R1’s affirmation, it is clear that he took issue with a number of assertions made in the Company’s supporting affirmation which were relied on as justification for the 6-month extension originally sought.  In the absence of any response from the Company to R1’s letter of 4 October, it was perfectly reasonable for JYJL to protect R1’s interest by filing R1’s affirmation and appearing at the hearing today.

25.  R1 had bona fide reasons to challenge the assertions underpinning the Company’s original application for the 6-month extension.  The procedural/jurisdictional difficulties presented by the original application were simply ignored.  In so far as the Court’s inherent jurisdiction is concerned, that is a matter of last resort, all available avenues of achieving the desired outcome having been exhausted.

26.  In answer to the court’s question as to whether the Company had ever approached either of the shareholders as to their willingness or otherwise to make an application pursuant to section 610(7) prior to issuing the OS, Mr Goh accepted that the firm had not. 

27.  That aside, Mr Goh appeared to suggest that the original application was made following observations to that effect by Harris J at the hearing on 16 August 2018. However, it is clear from the Judge’s Decision that his comment was that the problems be resolved “in accordance with the mechanisms” contained in the Companies Ordinance. No specific provision was mentioned. 

28.  Suffice to say that I consider JYJL to have acted impeccably and honourably throughout its handling of this matter. 

29.  For the reasons stated, R1 is entitled to have his costs paid by the Company.