SHENG DA INVESTMENT HOLDING (HONG KONG) LTD v. WAN QING HUA AND OTHERS

HCMP 838/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 838 OF 2012

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D E C I S I O N

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1.  This is an application by originating summons for a declaration that the shareholders’ resolution passed at the extraordinary general meeting of Sheng Da Investment Holding (Hong Kong) Limited (“the Company”) held on 5 March 2012 is valid and effective.

2.  The Company, which is incorporated in Hong Kong, is itself the plaintiff.  The defendants are three individuals who are shareholders of the Company, holding in aggregate 44.32% of its issued share capital.  There are two other shareholders in the Company, namely, Kippton Limited (“Kippton”) and Styland Infrastructure Limited (“Styland”), holding 51% and 4.68% of the issued share capital respectively.

3.  The Company was established in 1995 for the purpose of investing, by way of a sino-foreign cooperative joint venture, in a toll road project near Wuhan in the Mainland. The project was apparently successful, though eventually the Company’s stake was acquired by the Mainland joint venture partner.  The compensation payable to the Company for the acquisition was determined by arbitration.  An arbitral award was given in favour of the Company on 18 April 2006 for the sum of over RMB 157 million.  RMB 75 million had been paid in 2007.  A balance of over RMB 82 million remains to be paid.

4.  On 9 December 2005, while the arbitration was going on, the shareholders of the Company, ie the three defendants herein and Kippton and Styland, entered into a shareholders agreement written in Chinese.  Broadly speaking, that agreement (the precise meaning of which is in dispute) provides:

(1) Out of the amount received from the joint venture partner, repayment would be made to ICBC in respect of a loan. Loans due to the shareholders and certain expenses would then be repaid.  RMB 2 million would be retained as a reserve fund.  Any loans due from shareholders would be taken into account.  The total amount to be distributed to the shareholders would then be calculated.

(2) Each of the shareholders would designate a bank account.  Based on a unanimous resolution signed by all the shareholders setting out the bank account details, the Company would notify the joint venture partner so that the amount due to the shareholders would be paid into those accounts respectively.

(3) After such distribution and payment, steps would be taken for the dissolution or deregistration of the Company and its subsidiary.

(4) The shareholders agreement can only be amended or supplemented with the unanimous consent of all the shareholders.

5.  The sum of RMB 75 million paid in partial satisfaction of the award as mentioned above was paid to ICBC in repayment of a bank loan.  However, the majority shareholders (Kippton and Styland) have since taken the view that the balance of the arbitral award should not be paid directly by the joint venture partner to the shareholders’ own accounts but should instead be paid into the Company’s account maintained with HSBC in Hong Kong.  Mr Che, a director of the Company, explained the plan in this way:

“Upon receipt of such funds, the Company plans to settle the account payables and outgoings and expenses, and after taking into account such liabilities and the possible profits tax payable to the Inland Revenue Department of Hong Kong, the Company expects to declare a dividend in very substantial amounts to its shareholders.”

6.  The defendants are opposed to that proposal and insist that the amount should be divided and paid into the shareholders’ accounts as envisaged in the shareholders agreement. Underlying their position is the fact there are disputes concerning, among other things, (i) whether the 2^nd and 3^rd defendants owe certain amounts to the Company as alleged by the majority shareholders, and (ii) whether the Company owes HK$14,885,696 to a company called Lucky Global Investments Limited, which appears to be a parent company of Kippton and Styland.

7.  On 5 March 2012, at an extraordinary general meeting of the Company convened for that purpose, the majority shareholders voted in favour of, and the defendants voted against, a resolution in these terms:

“Appointing lawyer Zhang Xiaolu and lawyer Zhang Yan of Wubei DinglizhongBang Law Firm, either one of them, to be the Company’s lawful agent with full power to represent the Company in the Award (2005 Wuhan Arbitration Award No. 1041) in respect of the rights and obligations under such Award to liaison and negotiate, and represent the Company to enter into repayment agreement and handle payment currency exchange to the Hong Kong dollars bank account of the Company maintained with HSBC in Hong Kong territory, A/C No. 004-572996-001. Either one of them can be the Company’s authorized agent to represent the Company to make application to Wuhan Intermediate People’s Court for enforcement or execution of investment upon return payment and/or take other legal measures in related works.”

8.  The resolution was therefore passed for the purpose of procuring payment of the balance of the award into the HSBC account of the Company.  If that is implemented it would mean that the money would not be paid directly from the Mainland into the bank accounts designated by the shareholders pursuant to the shareholders agreement.

9.  The resolution, however, has not yet been carried into effect.  It appears that before the Mainland joint venture partner would recognise and act on that resolution, it had to be attested by a Chinese attesting officer and endorsed by a company called China Legal Service (H.K.) Limited (“CLS”) authorised by the Ministry of Justice of the People’s Republic of China for the purpose of authenticating documents.

10.  The Chinese attesting officer engaged by the Company had filed the relevant documents with CLS, but the documents were rejected with a note issued by CLS dated 21 September 2011 which stated as follows:

“因董事及股東內部有糾紛,存在重大風險;應按法院命令行事,故暫不予以轉遞。”

which can be freely translated as:

“Because of internal disputes among directors and shareholders, huge risks exist; any act should be based on court order; accordingly [the documents] would provisionally not be forwarded”.

11.  It was against this background that the Company had begun the proceedings herein by originating summons dated 30 April 2012, seeking a declaration of the validity of the resolution in question.

12.  Mr Chang, appearing on behalf of the Company, submits that notwithstanding the possible inconsistency between the course contemplated by the resolution and the shareholders agreement, the court should make the declaration sought because:

(1) The Company not being a party to the shareholders agreement, it is not bound by it.  The validity of the resolution as a corporate act is not affected by the shareholders agreement.

(2) The shareholders agreement only provides one non-exclusive method of collecting the balance of the award.  It does not prevent receipt of the sum via the Company’s own account.  In other words, the course of action embodied in the resolution will not amount to a breach of the shareholders agreement.

(3) If the shareholders agreement does require the payment of the balance of the award directly to the shareholders, then it is illegal and unenforceable because it fails to provide for all the liabilities of the Company and purportedly sanctions an unauthorised return of capital to the shareholders.

13.  Ms Eu, who appears on behalf of the defendants, draws my attention to the fact that there are now at least four sets of proceedings that concern the payment of the balance of the award, namely:

(1) On 7 November 2011, the minority shareholders commenced an action in the People’s Court of Dong Hu New Technology Development District of Wuhan, against Kippton and Styland, for a declaration that the shareholders agreement is valid and binding.  Ms Eu informs me that judgment was recently given in favour of the minority shareholders on 8 June 2013, though the majority shareholders have lodged an appeal.  There is no evidence of the precise issues and disputes arising in those proceedings, or the findings made by the Mainland court.

(2) On 2 April 2012, the Company commenced an action in Hong Kong against the same three defendants herein (HCA 543/2012).  Paragraph 12 of the Writ alleges that the defendants had taken steps to prevent the joint venture partner from paying the balance of the award to the Company.  The relief sought includes an order that the defendants shall not prevent the joint venture partner from releasing the relevant sum to the Company.

(3) On 30 April 2012, the Company commenced the proceedings herein by originating summons.

(4) On 28 June 2013, a few days before the hearing of the originating summons, the three minority shareholders presented a petition to the High Court of Hong Kong, complaining of various matters and seeking the winding up of the Company, alternatively relief under s 168A of the Companies Ordinance (HCCW 175/2013).

14.  In particular, it is alleged in the petition in HCCW 175/2013 that Kippton and Styland are acting in anticipatory breach of the shareholders agreement of December 2005 by passing the resolution of March 2012 and seeking payment of the balance of the award into the Company’s account.  In other words, the resolution in question and the originating summons here are relied upon as conduct by the majority shareholders of the affairs of the Company in a manner unfairly prejudicial to the interests of the minority, and as conduct warranting the winding up of the Company on the just and equitable ground.

15.  The minority shareholders further allege in the petition that when the shareholders agreement was entered into, it was estimated and agreed by all the shareholders that a reserve fund in the amount of RMB 2 million would be sufficient to cover all the liabilities of the Company.

16.  They also complain that the majority shareholders have wrongfully (i) caused an accountants firm to be appointed as auditors of the Company without a two-thirds majority approval of the shareholders of the Company, (ii) obtained sole control of the Company’s bank account with HSBC, (iii) refused to provide books and accounts of the Company to the minority for inspection, and (iv) misappropriated monies by causing sums totalling over HK$44 million to be paid to themselves or related parties.

17.  Turning to Mr Chang’s arguments, his first point is tantamount to this: although the shareholders agreement is enforceable between the shareholders inter se, and so the minority shareholders could have obtained an injunction to restrain the majority shareholders from passing the resolution on 5 March 2012, they did not obtain any such injunction and it is now too late for them to do so.  Since the Company is not a party to that agreement, the resolution passed by the members (with the majority shareholders voting in favour, and even assuming they acted in breach of the shareholders agreement) is, as an act of the Company, valid and effective.

18.  I am unable to accept that submission and to take such a blinkered view of the matter.  It is not in dispute that declaration is a discretionary remedy.  The court’s discretion is a very wide one.  It seems to me that in deciding whether to exercise that discretion in this case, the court is entitled to examine whether the resolution was passed in breach of the shareholders agreement which is prima facie binding on the majority shareholders even if it is not binding on the Company as such, and also whether the planned course of action in implementation of the resolution is likewise in breach of the shareholders agreement.  If the purpose of obtaining the declaration is to enable something to be done which would constitute a breach of contract, surely that is a matter I ought to take into account in deciding whether to grant the declaration in the first place. 

19.  Similarly, it seems to me that whether the course of conduct (including proposed future conduct) relating to the award, of which the resolution forms part, is such as to be unfairly prejudicial to the minority shareholders’ interests, is a matter that ought to be taken into account in the exercise of discretion whether or not to grant the declaration sought.  It is well established that in the context of section 168A of the Companies Ordinance, a person’s conduct may be unfair if it contravenes some mutual understanding or agreement he has with the petitioner even if it does not amount to an enforceable contract in law.  Mr Chang submits that the petition is no more than a tactical move the sole purpose of which is to derail the hearing of the originating summons.  On the evidence I am not prepared to draw that inference.

20.  As at present advised, I am not overly impressed by Mr Chang’s argument on construction.  I have heard no satisfactory explanation why the shareholders would have gone to the trouble of drawing up the shareholders agreement in 2005 (which expressly provides that it can only be varied with unanimous consent) if it did no more than set out an optional, non-exhaustive way of handling the proceeds of the award.  However, because of the conclusion I have come to as to how these proceedings should be disposed of, I need not come to a definitive conclusion on this point.

21.  The Company’s main argument on illegality is that the shareholders agreement does not deal with or make provision for any of the Company’s liabilities beyond RMB 2 million. However, Ms Eu explains that the RMB 2 million was inserted because that was the sum thought sufficient to cover the maximum aggregate amount of the liabilities of the Company then.  It may well be argued, on that footing, that there is an implied term that the amount of the reserve fund should be adjusted if the liabilities were in fact greater.  Indeed, Mr Che himself seems to suggest (in paragraph 28 of his second affirmation) that if the Company’s liabilities exceed that figure, the reserve fund should simply be “revised to match the outstanding liability of the Company”.  As mentioned above, there is an underlying dispute regarding the liabilities of the Company, and why, the Company having ceased business by 2005, its liabilities had increased substantially thereafter.

22.  In all the circumstances, it seems to me that the declaration sought cannot properly be granted without an examination of the issues pertaining to the alleged breach of the shareholders agreement and the allegation that the resolution constitutes unfairly prejudicial conduct.  Some of the facts relevant to these matters are in dispute, including the existence of the Company’s liabilities to the ultimate holding company.  In my judgment, the originating summons should be adjourned.  While there is something to be said for it to be heard either together with or after the petition in HCCW 175/2013, I shall not give any directions that may affect the petition since two of the respondents there, namely, Kippton and Styland, are not represented before me.

23.  I make an order nisi that the costs of the hearing before me be in the cause of the originating summons.

(Godfrey Lam) Judge of the Court of First Instance High Court