DONG CHENGTIAN AND ANOTHER v. CHONG CHA HWA AND OTHERS

HCMP 738/2018

[2018] HKCFI 1184

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 738 OF 2018

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AND

HCMP 740/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 740 OF 2018

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AND

HCA 1282/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1282 OF 2017

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(Heard Together)

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REASONS FOR DECISION

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1.  At the end of the hearing in the evening of 18 May, I ordered an EGM of China Shanshui Investment Company Limited (“CSI”) to be held on 20 May and granted an injunction restraining the existing directors of CSI from acting as such. These are the reasons which I indicated would be handed down in writing.

2.  The hearing on 18 May was another one that arose in connection with the EGM of CSI scheduled for 8 May 2018.  It had sprung from the situation described in the decision of DHCJ Keith Yeung SC in HCA 2880/2015 dated 3 May 2018 [2018] HKCFI 973 and in my decision in HCA 1282/2017 and HCA 2648/2017 dated 7 May 2018 [2018] HKCFI 1042, to which I refer.

3.  What had happened was that, despite and after:

(1)   DHCJ Keith Yeung SC, in his decision of 3 May, refused, inter alia, to restrain CSI from holding the EGM on 8 May already requisitioned by Zhang Caikui (“Zhang Snr”),

(2)   I refused, on 7 May, Chen Hongqing’s (“Chen HQ”) application filed on 4 May for an order that the EY Receivers vote the shares of 1,878 SH plaintiffs at the EGM on 8 May to seek an adjournment thereof (or to vote against all the proposed resolutions), and

(3)   the Court of Appeal (Lam VP and Kwan JA) also on 7 May refused to grant any interim relief to prevent the EGM from proceeding pending the application of CSCG and others for leave to appeal against DHCJ Keith Yeung SC’s decision (which, incidentally, was heard and dismissed by the Court of Appeal on the morning of 18 May),

at the EGM of CSI on 8 May, the chairman of the meeting, Mr Chong Cha Hwa (“Chong”), refused to recognise and admit the proxies of Zhang Snr, Dong Chengtian (“Dong”) and Wang Yongping (“Wang”), and declared the meeting inquorate.

4.  At that time, the only directors of CSI were:

(1)   Chong (who had been nominated by the EY Receivers[1] to the CSI board since 12 August 2015 and had for some time from 1 December 2015 onwards also served on the CSCG board);

(2)   Zhao Yongkui (“Zhao YK”), one of the original 7 minority shareholders of CSI who had since around end of 2016 been at loggerheads with, among others, Zhang Snr, Dong and Wang[2]; and

(3)   Ronominees Limited (which was the corporate vehicle of the BDO Receivers[3]).  I was told that it had resigned on the morning of 18 May 2018 following the discharge of the BDO Receivers the day before (in HCMP 962/2017).

5.  The grounds on which the proxies were rejected were as follows.  In relation to Zhang Snr’s proxy, namely, Mr Cheung Kwok Kit, a partner of Deacons, he was told by Chong that his proxy form would be rejected.  Chong said he would not say what the reason was since it was sensitive.  Upon Mr Cheung’s insistence, Chong said: (1) he did not know where the proxy form was signed; (2) the proxy form was not notarised; (3) there was dispute on the ownership of Zhang Snr’s shares; and (4) other sensitive reason(s) which he would not disclose.

6.  In the case of Dong’s and Wang’s proxies, Chong rejected them on the grounds that (1) the proxy forms had not been notarised; and (2) there were two sets of proxy forms and he did not know which set was valid. 

7.  On this basis, the proxies were expelled from the meeting.  Zhang Snr, Dong and Wang had subsequently been informed that the meeting was inquorate.  They felt aggrieved and by solicitors’ letters dated 11 May they gave indication of the legal proceedings that would be issued and the relief sought. 

8.  Eventually, on 15 May, Dong and Wang presented a petition (HCMP 738/2018) for relief against unfairly prejudicial conduct of the affairs of CSI pursuant to s 724 of the Companies Ordinance (Cap 622) (“the Ordinance”) against the directors and shareholders at the time of CSI (with CSI being the 11^th respondent). At the same time, Dong and Wang also issued a summons in those proceedings for directions for an EGM to be held and injunctive relief restraining the existing board of directors of CSI from acting pending the new EGM. 

9.  On the same day (15 May), Zhang Snr brought proceedings by way of an originating summons (HCMP 740/2018) for an order pursuant to s 570 of the Ordinance against CSI and its then directors that an EGM of CSI be convened by the Court with ancillary directions.  Dong and Wang applied to be joined as interveners to support this originating summons, which I allowed, there being no opposition to the joinder.

10.  In my opinion, a strong case has been made out that the grounds relied upon by Chong were not valid.  In the case of the proxy of Zhang Snr:

(1)   There was no requirement under the law or the Articles of CSI as to where the proxy form must be signed.

(2)    There was no requirement under the law or the Articles of CSI that a proxy form had to be notarised.  The validity of the proxy was not governed by Mainland law so the practice there was in my view not relevant.  There was no previous practice in relation to CSI meetings of requiring notarisation of proxy forms and, furthermore, the notice of EGM dated 10 April 2018 specified that the original proxy form or a notarially certified copy should be deposited with the company.  The evidence was that Zhang Snr’s proxy form deposited with CSI was the original.  Article 74(b) of CSI’s Articles simply provides:

“ …an instrument appointing a proxy shall be in writing in any usual or common form or in any other form which the Directors may accept, and shall be deemed, save where the contrary appears on the face of the instrument of proxy, to confer authority…and to include power to act generally at the meeting…”

(3)    As for the suggestion that there was a dispute over the ownership of Zhang Snr’s shares, this was apparently based on an allegation by Zhao YK (through his proxy at the meeting) that some of the shares registered in Zhang Snr’s name had been sold to Chen HQ and Jinan Industrial Development Investment Group Co Ltd.  But no legal action had been brought by Chen HQ for such claim (despite numerous other proceedings had been instituted by him) and it seems to me wholly wrong for a chairman to exclude a shareholder merely on the say‑so of someone alleging that beneficial ownership was in dispute.  In any event, it is trite that a company generally does not look behind the share register to see who are beneficially interested in the shares: s 634 of the Ordinance; Re Universal Horizon Investment Ltd [2000] 3 HKC 627, 630D; Re Perkins (1890) 24 QBD 613, 616. 

(4)    In his affirmation placed before the court at the hearing, Chong raised a further concern that the whole proxy form including Zhang Snr’s signature was in black‑and‑white so that he was unable to see if the document was an original or a copy.  He also raised doubt as to Zhang Snr’s signature and as to the fact that the proxy form and Deacon’s cover letter were both dated 25 April 2018.  But as counsel pointed out, there could be nothing improper about Zhang Snr signing the proxy form first and his solicitors or agents putting a later date on it.  The points about the document being in black‑and‑white and the signature were not mentioned at the meeting.  Anyhow they had little force in the light of the fact that (a) the form was delivered to CSI by Deacons, Zhang Snr’s long‑standing lawyers in Hong Kong; (b) the proxy appointed was Mr Cheung, a partner of Deacons who has been acting for Zhang Snr throughout related proceedings since at least 2015; (c) the form had been delivered to CSI almost two weeks before the meeting and no query whatsoever had been raised about it; and (d) there is no suggestion that Chong ever tried to ascertain the position from Deacons.

11.  As to Dong and Wang’s proxy forms:

(1)   There was no requirement for notarisation of the proxy form under the law or in CSI’s Articles; see above.

(2)   Chong’s decision to invalidate both sets of proxies in these circumstances is both wrong and irrational.  Mr Edward Chan SC, who appeared for Chong, relied on Article 78(a) of CSI’s Articles which provided that a proxy form may be revoked by forwarding to the company written notification of such revocation signed by or on behalf of the person who issued the proxy.  Dong’s and Wang’s second set of proxies were clearly dated subsequently (3 May) to the first set (19 April), in writing, signed by them, and delivered to CSI.  As such, it seems to me that they were effective to revoke the first set by implication and to authorise the new proxies: see Shackleton on the Law and Practice of Meetings (14^th ed) at §14‑25: Halsbury’s Laws of England (5^th ed), vol 15, §737.

(3)    In any event, the holders of the new proxy had informed Chong at the meeting on 8 May that if he considered the new proxies not valid, the holder of the original proxies could attend.  She was on standby in the same building in which the meeting was being held in case anyone took issue with the second set of proxies.  It seems to me irrational for Chong to exclude both sets of proxies. 

12.  Further, in my view, the flimsiness of these grounds has to be seen against the backdrop of a plethora of recent steps which counsel characterised as a campaign to entrench the control by Tianrui[4] of the board of China Shanshui Cement Group Limited (“CSCG”) — the “entrenchment campaign”, which include:

(1)   The recent court applications made by CSCG and others, based on a previously obtained Mareva Injunction in HCA 2880/2015, to restrain Zhang Snr from “(i) requisitioning and/or (ii) taking any further steps in relation to any prior requisition or call for any [general] meeting… for the appointment and/or removal of directors of CSI” and to restrain CSI from holding the EGM convened pursuant to Zhang Snr’s requisition dated 20 March 2018 whether on 8 May 2018 or thereafter and for an order that CSI be directed to adjourn the EGM until a date to be specified.  By his decision dated 3 May 2018 [2018] HKCFI 973, DHCJ Keith Yeung SC rejected those applications.

(2)   Immediately thereafter, on 4 May, CSCG and others applied to DHCJ Keith Yeung SC for leave to appeal and again applied for interim orders pending their leave application.  These applications were dismissed by the learned Deputy Judge on the same day.

(3)   Chen HQ made an eleventh‑hour allegation (made in his affirmation of 4 May 2018 for the hearing in HCA 1282/2017 and HCA 2648/2017 on 7 May 2018) that, out of the 36.11% stake held by Zhang Snr in CSI, he had purchased some 10%, which had hitherto be unheard of.

(4)   The surprising attempt by CSCG and Pioneer[5] to wind up CSI by issuing statutory demands dated 13 April 2018 to CSI for $10,717.4 and HK$819,650.75 respectively and their unwillingness to withdraw the statutory demand even when Dong and Wang offered full payment on behalf of CSI, which led to an urgent application by Dong and Wang to Deputy Judge Keith Yeung SC on 4 May 2018 for an injunction to restrain CSCG and Pioneer from presenting a petition to wind up CSI, and eventually an undertaking by CSCG and Pioneer not to present such a petition until the application for injunction has been disposed of.

(5)   The last minute application by Chen HQ in HCA 2648/2017 for an order to direct the EY Receivers to seek an adjournment of the 8 May EGM.  On 7 May, I dismissed that application; see my decision [2018] HKCFI 1042.

(6)   On the same day (7 May), at 4 pm, CSCG etc appeared before the Court of Appeal (Lam VP and Kwan JA) on their application for an interim order (to restrain Zhang Snr from voting at the 8 May EGM of CSI and to direct CSI to adjourn that EGM) pending their application to the Court of Appeal for leave to appeal from the decision of DHCJ Keith Yeung SC.  Such interim relief was refused by the Court of Appeal at the hearing.  The Court of Appeal gave CSCG until 5 pm the next day (8 May) to confirm whether they still wished to pursue their leave application, which if necessary could be heard on 18 May.

(7)   Despite all lawful attempts to prevent the 8 May EGM were exhausted and failed, by the steps taken by Chong as chairman, that EGM was aborted within less than an hour of its appointed time (3 pm).

(8)   Shortly thereafter, at around 4:47 pm, CSCG informed the Court of Appeal that they would continue to proceed with their leave application.

13.  It is not necessary for me to make actual findings of bad faith and I think that in these applications which have been brought on with some urgency I should avoid doing so.  But the fact that Chong’s acts have come hot on the heels of a glut of actions by the then CSCG board, the then CSI board and Chen HQ to prevent shareholders’ meetings from taking place or to prevent these boards from being reconstituted, coupled with the spurious reasons given for rejecting the proxies, are in my view sufficient to show a strong case that he was acting for improper purposes in conducting the EGM in the way he did.  In fact, the affirmation of Chong placed before this court made it abundantly clear that he was determined to prevent Zhang Snr, Dong and Wang from voting to remove the existing directors and to appoint their nominated persons to the board of CSI. 

14.  Dong and Wang have applied for an order for an EGM to be held under ss 725 and 729 of the Ordinance but I am not sure these provisions empower the court by way of interim relief to order general meetings and give directions that override the requirements of the articles: see Re Hong Kong Chung Shan Lung Chan Clan Association (unrep, HCMP 1989/2004, 9 August 2005), at §11.  The urgent hearing on 18 May was not an appropriate occasion to consider the submissions made by Mr Westbrook SC, who appeared for Dong and Wang, to distinguish that case.

15.  There is no doubt, however, that the court has specific power to order meetings under s 570 of the Companies Ordinance, which provides:

“ (1) This section applies if for any reason it is impracticable—

(a) to call a general meeting of a company in any manner in which general meetings of that company may be called; or

(b) to conduct the meeting in the manner prescribed by the company’s articles or this Ordinance.

(2) The Court may, either of its own motion or on application—

(a) by a director of the company; or

(b) by a member of the company who would be entitled to vote at the meeting, order a general meeting of the company to be called, held and conducted in any manner the Court thinks fit.

(3) If the order is made, the Court may give any ancillary or consequential directions that it thinks expedient.

(4) Directions given under subsection (3) may include a direction that one member of the company present at the meeting in person or by proxy is to be regarded as constituting a quorum.

(5) A general meeting called, held and conducted in accordance with an order under subsection (2) is to be regarded for all purposes as a general meeting of the company duly called, held and conducted.”

16.  The power only arises if there is impracticability as prescribed.  Mr Chan, relying on Re Success Plan Limited [2002] 3 HKLRD 560 at §42, submitted that it would only come into play if it was impossible to call a meeting.  This is, with respect, not quite accurate, because there are two limbs in s 570 (to “call” and to “conduct” a meeting).  In Success Plan Yuen J was only concerned with the first limb, as can be seen from the fact that her Ladyship did not include the second limb in the quotation of s 114B (the predecessor of s 570) at p 568, obviously because it was not relevant in that case.

17.  In considering this provision, it is useful to bear in mind what Wynn‑Parry J said in In re E1 Sombrero Ltd [1958] Ch 900 at 904:

“ It is to be observed that the section opens with the words ‘If for any reason,’ and therefore it follows that the section is intended to have, and, indeed, has by reason of its language, a necessarily wide scope. The next words are ‘…it is impracticable to call a meeting of a company…’. The question then arises, what is the scope of the word ‘impracticable’? It is conceded that the word ‘impracticable’ is not synonymous with the word ‘impossible’; and it appears to me that the question necessarily raised by the introduction of that word ‘impracticable’ is merely this: examine the circumstances of the particular case and answer the question whether, as a practical matter, the desired meeting of the company can be conducted, there being no doubt, of course, that it can be convened and held. Upon the face of the section there is no express limitation which would operate to give those words ‘is impracticable’ any less meaning than that which I have stated, and I can find no good reason in the arguments which have been addressed to me on behalf of the respondents for qualifying in any way the force of that word ‘impracticable’ or the interpretation which I have placed upon it, and therefore upon that point I am in favour of the applicant.”

18.  In Re Yaumati Kai Fong Welfare Advancement Association Ltd [2007] 4 HKLRD 643, Kwan J, as she then was, also said:

“ …the section is intended to have a wide scope. Further, the court should examine the circumstances of the particular case and ask, as a practical matter, if the desired AGM could be conducted.”

In that case, Kwan J held that if the defendants followed proper legal advice, it might not be impracticable for a meeting to be properly convened but that had not happened, and on the evidence, her Ladyship could not but think that if the matter were left wholly to the defendants, no or no proper steps would be taken for an AGM to be properly convened.  It was held that in the peculiar circumstances of that case, it was impracticable to convene a meeting and that the court should “take a firm line”, and exercise its discretion to order a meeting (see §§43‑45).

19.  I accept that the jurisdictional threshold would not be met merely because it would be impracticable to call an immediate meeting: Hong Kong Estates Ltd & Others v San Imperial Corporation Ltd [1980] HKLR 386.  But given that the chairman had on 8 May gone to such lengths to prevent a meeting from taking place at which the voting rights of the shares held by Zhang Snr, Dong and Wang would be recognised, and given the whole history of the matter including another incident of disenfranchisement of Zhang Snr in February 2017 (on a ground based on a Mareva injunction which was subsequently in effect accepted to be indefensible), and given the chairman’s deep‑rooted antagonism (as admitted in his own affirmation) against Zhang Snr and those he referred to as the “Mi Camp” (referring to Mi Jingtian, one of the minority shareholders of CSI, and his associates), it would be wholly unrealistic to expect any meeting to be effectively conducted which involved resolutions to remove the existing directors and to appoint any person nominated by Zhang Snr, Dong and Wang.  Article 62 of CSI’s Articles required that the chairman of the board shall preside as the chairman of every EGM.

20.  In the unusual circumstances of this case, I was satisfied that it was impracticable to conduct a meeting in the manner prescribed by CSI’s articles and the Ordinance, which of course provide that members are entitled to vote their shares and further that they may vote by proxy and do not allow a member’s voting rights to be denied simply because there is a dispute over the ownership of his shares.  The factual situation might be novel here but the purpose of an order under s 570 extends to such a situation.  In Re Mandarin Capital Advisory Co Ltd [2011] 2 HKLRD 1003 at §19, Harris J said:

“ A majority shareholder, such as the plaintiff, has by virtue of s 157B of the Companies Ordinance[6] a statutory right to remove the first defendant. Section 114B is the procedure provided by statute for addressing problems, inter alia, in realising the right given by s 157B caused by the impracticability of conducting a general meeting of a company. Section 157B expressly states that the right that it confers cannot be excluded by anything in the memorandum or articles of agreement or any agreement between the company and a shareholder.”

21.  It is clear that Zhang Snr, Dong and Wang, together with the 321 employee-plaintiffs in the Trust Actions whose shares were not claimed by Chen HQ (see my decision of 7 May 2018) all wished to vote for the removal of then directors of CSI.  They would form a clear majority at a general meeting on the present shareholding structure of CSI.  Indeed, if the shares of 4 other minority shareholders, namely, Mi Jingtian, Yu Yuchuan, Li Maohuan and Zhao Liping (who had undertaken in HCMP 962/2017 not to vote their shares pending the arbitration between them and Chen HQ) were taken into account, they would form an absolute majority.  Who should be directors of CSI is a matter for the company in general meeting.  Chong’s acts, as an unlawful attempt to usurp that function and to prevent his own removal as director by the shareholders of the company, cannot be allowed to prevail: China Investment Fund Co Ltd v Guang Sheng Investment Development Group Ltd & Others (unrep, HCA 411/2016, 27 May 2016), at §§24‑25.  In these circumstances the court should not, in my view, shrink from using its available power under s 570.

22.  Mr Chan submitted that even if a meeting was to be ordered, there was no urgency and that any EGM ordered should follow the provisions in the Articles as regards the period of notice.  I did not agree.  The 8 May EGM of CSI should have taken place on that day, well before the EGM of CSCG scheduled on 23 May.  To require strict adherence to the original notice period in these circumstances would be tantamount to adjourning the original 8 May EGM of CSI until after the EGM of CSCG, which CSCG and Chen HQ had tried but failed to obtain from three different courts. 

23.  In Chong’s affirmation much was said about the damage that would be caused if Zhang Snr and the so‑called “Mi camp” were permitted to gain control of the board of CSI.  Mr Westbrook submitted that it would be unreal to suggest CSCG could simply “scupper” extant proceedings brought in its name without Tianrui complaining, and that the board proposed for the EGM of CSCG on 23 May included representatives from all major shareholders including Tianrui.  In any event the short answer is that the point had already been considered by DHCJ Keith Yeung SC: see his decision of 3 May 2018 at §§58‑66.  The learned Deputy Judge rejected the contention that there would be irreparable damage if the CSI EGM was to be permitted to proceed, saying (at §64):

“ … [Zhang Snr] is a shareholder of CSI. He has the right to requisition for its EGM. I bear in mind the fact that the composition of the present board of CSI was very much affected by the appointment of the EY Receivers. On 16 October 2015, Deputy Judge Seagroatt permitted the EY Receivers to vote in CSI to cause a change in the composition of the CSC board and to become directors of CSC themselves. G Lam J has made findings on the circumstances in which those and some other directions were given. He observed that “the picture presented to the Court by those using the names of the plaintiffs verged on the misleading” (paragraph 67 of his Reasons for Decision dated 31 January 2018). For that and other reasons, he allowed [Zhang Snr]’s application for the discharge of the EY Receivers. Now that they have been discharged, it is not unnatural that shareholders of CSI may want to re‑constitute the Board. In fact, some of the Employee Plaintiffs have expressed similar wishes … [They] may even want to nominate their allies into the Board. Those are commercial decisions which the Court is ill‑equipped to intervene, let alone used as the basis to infer the existence of any ulterior purpose.”

CSCG and others have since failed to obtain from the Deputy Judge and the Court of Appeal leave to appeal against that decision.

24.  As to the injunction sought by Dong and Wang, if the proxies were not rejected by Chong acting in the way he did, on the evidence the resolutions proposed would clearly have been passed at the 8 May EGM with the result that the then directors of CSI would no longer have been directors.  In these circumstances there was clearly available power by the grant of an interlocutory injunction in Dong’s and Wang’s petition to prevent the board of directors (consisting of only two remaining directors at the time of hearing, namely, Chong and Zhao YK) from continuing to act as such pending the meeting ordered: King Pacific International Holdings Ltd v Chun Kam Chiu & Others [2002] 3 HKLRD 49.  Considering the strength of the case against them and the balance of convenience, I so ordered accordingly.

25.  For these reasons I granted an order under s 570 for an EGM of CSI to be held on 20 May 2018 and gave ancillary directions, and an injunction to prevent Chong and Zhao YK from acting and holding themselves out as directors of CSI pending that EGM.  I also varied the direction to the EY Receivers given on 7 May 2018 in HCA 1282/2017 to extend it to the EGM ordered.