HSU PO WEN v. CHANG HSUEH CHUAN AND ANOTHER

HCMP 2313/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2313 OF 2009

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D E C I S I O N

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Application

1.  The applicant, Hsu Po Wen, seeks an order under section 114B of the Companies Ordinance, Cap. 32, that an extraordinary general meeting of the 2^nd Respondent (“Company”) be convened for the purpose of considering and resolving that the applicant be authorised to represent the Company in legal proceedings in Heilongjiang Province in the Mainland and associated orders.

The Parties and Background

2.  The Company was incorporated in Hong Kong in 2004.  Since its incorporation the applicant and the 1^st respondent have been its only shareholders and directors.  They hold 60% and 40% respectively of the shares of the Company.

3.  The Company does not carry on business in Hong Kong.  It was set up to invest in property in the Mainland.  On 17 July 2009 the applicant received a copy of an enforcement order issued by a Mainland Court, which it transpired had been issued pursuant to a judgment in civil proceedings between a Mr Zhang Bing Yu and the Company (“judgment”).  The Mainland action arose from an agreement alleged by Mr Zhang to have been made between himself and the Company on 10 February 2008 pursuant to which the Company was to acquire a 10% stake in a project in the Mainland for RMB40,000,000.  The Company did not complete the agreement and as a consequence Mr Zhang sued for what appears to have been liquidated damages.  It is the applicant’s case that until he received a copy of the enforcement order he knew nothing about either the project or the action.  The applicant wishes the Company to apply for a retrial.  This he says he is unable to do because he is unable to convene a meeting of the Board or Company to pass the necessary resolutions because the 1^st respondent will not attend a meeting and therefore it is not possible to achieve a quorum as required by article 5 of the Company’s Articles.  The reason that the 1^st respondent is preventing the passing of the necessary resolution becomes apparent as the facts of this case unfold.

4.  The 1^st respondent says that she was authorised to make the agreement with Mr Zhang on behalf of the Company.  She appears to accept that the applicant had no active role in the negotiation of the agreement or involvement in the Mainland action, although she says that she told the applicant about it.  The 1^st respondent has not, however, produced any documents sent by her to the applicant referring to either of these matters.  The 1^st respondent also accepts that she did not actively defend the Mainland action, because, so she says, she was advised that there was no viable defence to the claim.  The 1^st respondent says that the claim arose because of the failure of the applicant to provide finance for the transaction, which is why it was not completed.

5.  The applicant does not accept that the Mainland proceedings could not be defended.  He says that he has received advice that there were legal defences to the claim, but more importantly he says that Mr Zhang and the 1^st respondent had conspired together to obtain the judgment as a means of extracting value from the Company.  The applicant says that the agreement and the claim are bogus.  He goes further and says that the 1^st respondent only holds 40% of the shares of the Company in order to satisfy what he understood at the time the Company was incorporated was the requirement that it have 2 shareholders and the assertion in these proceedings that 1^st respondent has a significant financial interest in the Company in her own right is another falsehood.  The 1^st respondent not only disputes this, but also argues that she was intended to hold 50% of the shares.  On 28 September 2009 the 1^st respondent issued a petition under section 168A of the Companies Ordinance seeking an order that the applicant purchase her shares alternatively an order that the Company be wound up.  The 1^st respondent relies in the petition on the various matters of which she complains in the evidence that she has filed in these proceedings.

6.  The question of the nature of the 1^st respondent’s interest in the Company is relevant to the present dispute.  The 1^st respondent not only disputes the allegation that she has attempted to misappropriate the Company’s assets, but she says that on the contrary this is what the applicant has been doing and that the reason he wishes to challenge the Mainland proceedings is because the enforcement order has prevented a transfer by the applicant of the Company’s only asset, namely, an interest in a real estate joint venture to the partner in the joint venture in return for consideration that was to be paid to the applicant rather than the Company.  The applicant does not dispute that this is the case.  His response is that as he is the beneficial owner of the Company this is unobjectionable.

7.  Ms Janet Ho and Mr William Wong who appeared for the applicant and 1^st respondent respectively accept that the court should not in these proceedings attempt to determine whose version of what has taken place is correct, which in any event would not be possible on affirmation evidence.  They also accepted that the evidence had to be taken into account in so far as I have to determine what the consequence would be of making or refraining from making the order that the applicant seeks.  In other words each party’s case has to be taken into account in assessing who might benefit and who might suffer as a consequence of a particular order being made.  Fairly obviously if the applicant’s version of events is correct it would be unjust if he were to be deprived of the opportunity to have the enforcement order set aside.

8.  It seems to me that the applicants case as put by Mr Wong in the 1^st respondent’s written submissions can be summarised and grouped into the following arguments:

(1)  Section 114B is not to be used to resolve a deadlock at board or general meetings or to make a new shareholders’ agreement and impose it on the parties.  The Company had been operated as a quasi partnership by the parties with each enjoying equal powers of management as provided for in article 5 of the Company’s Articles, which provided for a quorum of 2 at both directors and members meetings.  The application involves changing this arrangement and handing to the applicant control of one aspect of the Company’s operations.

(2) Section 114B is an equitable remedy and the court should not grant such a remedy if to do so were to aid one shareholder to oppress another shareholder.

(3) Section 114B is only engaged if it had been demonstrated that it is not possible to convene a general meeting and this has not been demonstrated.

(4) The application if successful would not benefit the Company.  The purpose of the application is to allow the applicant to contest the Mainland judgment with a view, if he is successful in so doing, to the applicant receiving the proceeds of the sale of the Company’s interest in the joint venture.  The court’s power to order a meeting of a company under section 114B should only be exercised if it has been demonstrated that it would secure a benefit for the Company or, presumably, its proper governance and operation and this has not, for the above reason, been demonstrated in the present case.

(5) Generally it would be wrong for the court to grant an equitable remedy in the present case because the applicant is not coming to court with clean hands and is not only making the application to further his scheme to misappropriate the assets of the Company, but he has also taken unjustified steps to pressure the 2^nd respondent to acquiesce to his scheme to misappropriate the Company’s assets.  Those steps include (A) making a report in Taiwan that the 1^st respondent had committed a crime, (B) trying at one stage to remove her as a director and (C) proposing to join her as a proposed third party in the application for a retrial.

(6) The Mainland lawyers that the applicant has already arranged to represent the Company in relation to the proposed retrial are not independent and objective and in particular have made reports of criminal conduct by the 1^st respondent to the authorities.

9.  As I have already mentioned despite the way in which the 1^st Respondent put its case in its written submissions Ms Ho and Mr Wong accepted at the hearing that I should not attempt to resolve the factual disputes.  Mr Wong did, however, apply for leave to rely on the affidavit of Kan Ka Chong Frederick and more particularly an exhibit containing a ruling by the Public Prosecutor of the Taiwan Taipei District Prosecutor’s Office (as the document describes itself) concluding that charges of fraud and related offences should not be pursued against the 2^nd Respondent.  Ms Ho objected to the admission of this evidence principally on the grounds that the court should not go into the factual dispute in detail and in any event the document was self-serving and not conclusive.  I allowed Mr Wong to rely on it although in my view its value is limited to adding detail to the background against which this application has to be assessed.

10.  The parties’ respective factual cases are entirely inconsistent, which suggests that one or other of them is lying.  As I have already noted and the parties accept, it is not appropriate for me to try and determine whose case is to be preferred on this application, which in any event would be an impossible task.  A consequence of the parties’ factual cases being diametrically opposed is that depending on which case one assumes to be correct when assessing how the relevant principles apply one reaches a completely different conclusion.  In my view this results in the court having to assess the application on the basis that it should be determined in the way which comes closest to ensuring that the parties’ rights are left intact, whilst being consistent with principal, pending the ultimate resolution of the differences between.  I now turn to address Mr Wong specific objections.

Section 114B should not be used to resolve deadlock

11.  The parties accept that section 114B confers a discretionary power on the court to resolve practical problems that prevent holding a meeting of a company.  Mr Wong argued section 114B should not, however, be used to break a numerical deadlock between shareholders.  He referred to me various authorities, which I accept demonstrate this principle: Re Success Plan Ltd. [2002] 3 HKLRD 560 per Yuen JA at 568F-G; Ma On Shan Whitehead Gold Centre Ltd. [2001] 4 HKC 582 per Yuen J at 584G-H.  Mr Wong further argued that the court should respect the shareholders’ agreement and not exercise its power under section 114B in such a manner as would be inconsistent with the terms of that agreement.  He referred me to a number of authorities, which I also accept demonstrate this principle: Harman v BML Group [1994] 2 BCLC 674 (C.A.) per Dillon L.J. at 679h-680a; Manfield Coatings Co. Ltd. v Springfield Coatings Co. Ltd. [1995] 1 HKC 74 at 78G-I.

12.  Mr Wong argued that it was intended by the 2 shareholders in the present case that they have equal control over the affairs of the Company and that if they disagree over an issue it is inconsistent with principle for the court to make an order under section 114B, which has the affect of giving one shareholder control over one of the Company’s affairs.  As a general statement I accept it.  However, the principle’s application in the present case is unclear.  The applicant and the 1^st respondent are registered holders of 60% and 40% of the shares of the Company respectively.  The 1^st respondent says that in fact they are equal owners of the Company and that both of them were intended to have an equal say in the running of the Company albeit with different areas of responsibility, but the applicant’s case is different.  He says that he provided the financing for the Company and is its beneficial owner and that half the shares in it were allotted to the 1^st respondent simply because he was told that the Company had to have 2 shareholders.  His case is that the 2^nd respondent holds shares in the Company as his nominee.  As I have already noted I cannot decide on this application whose case is to be preferred.  They are clearly diametrically opposed and at this stage I do not have evidence before me which suggests that either case is sufficiently doubtful that it should to some degree be discounted when assessing what order to make.  This means that I cannot assume at this stage that making the order sought by the applicant would be breaking a deadlock or altering the agreement concerning the management of the Company that the parties made when the Company was established.

Section 114B is an equitable remedy that should not be used to allow one party to oppress another

13.  I have some doubts as to whether or not Mr Wong is correct in characterising section 114B as an equitable remedy but be that as it may I accept that it should not be used to oppress one shareholder.  I cannot assess whether or not granting the order that the applicant seeks would have such an effect.  Whether or not it does depends on which of the parties is telling the truth about their agreement when setting up the Company and the transaction which has given rise to the judgment.  If the applicant’s version of events is correct then there will be no oppression in granting him the relief that he seeks.

Section 114B is only engaged if it has been shown that it is not possible to convene a meeting

14.  Mr Wong argued that the applicant’s steps to convene a meeting was procedurally defective and that the court should not assume that if the correct procedure were to be followed the 1^st respondent would not attend and thus create a quorum and perhaps vote in favour of a compromise resolution.  In these circumstances, so he argued, section 114B was not engaged.  I accept that the applicant’s original attempts to convene a meeting were defective.  However, it seems clear to me that the 1^st respondent will not attend a meeting and vote on a resolution acceptable to the applicant.  Had there been any doubt about this at the time of the hearing, and in practice in my view there was not, it was removed by the failure of the parties to agree a compromise after the hearing in an exchange of correspondence copied to me.  In these circumstances I am of the view that Mr Wong’s objection is at best one of form rather than substance.  In my view if the court is satisfied on the evidence before it that the parties are unable to agree a resolution necessary to solve the practical problem facing a company the fact that at the time of the hearing neither party has correctly implemented the procedure for convening a meeting of members is not in itself a ground for refusing to make an order under section 114B.

A meeting would not benefit the Company

15.  The 1^st respondent argues that the applicant is seeking to set aside the judgment in order to release money to himself.  In other words the proposed application to set aside the judgment is not intended to secure a benefit for the Company.  Mr Wong argued that it is a prerequisite of obtaining an order under section 114B that the applicant demonstrates that the Company will benefit.

16.  I accept that an applicant needs to demonstrate that the order he seeks is necessary and that in assessing whether or not he has done so the court will have regard to what will be achieved if the meeting that the applicant wishes to take place is convened and the relevant resolution is passed.  Mr Wong seeks to draw a distinction between a benefit which accrues directly to the Company and one which accrues in reality to a shareholder.  The distinction he seeks to drawn in the present case is in my view illusory.  Assuming that the applicant is, as he says he is, the beneficial owner of the Company his explanation for the transaction the completion of which he seeks to obtain by setting aside the judgment is in my view unobjectionable.  The fact that the money released if the judgment is set aside will, as I understand the arrangement, be released to him rather than back to the Company is not in my view a reason to refuse to make an order convening a meeting in order that the necessary steps can be put in motion to set aside the judgment.

Applicant not coming to court with clean hands

17.  Assessing this objection necessitates determining which of the parties is telling the truth about the underlying dispute.  As I have already observed Mr Wong and Ms Ho both accept that this I should not do.  I am certainly not satisfied at this stage that the applicant’s case is inherently improbable.

Proposed lawyers not independent

18.  This criticism relates to the identity of the lawyers that it is proposed are instructed by the Company.  The 1^st respondent objects that they are not impartial and cannot be trusted to give the Company truly independent legal advice about the claim against her.  In my view given the nature of the issues it necessarily follows that whatever firm of lawyers is instructed at the applicant’s instigation will to some degree be influenced by the way in which he explains the case to them.  It does not seem to me that the position will be materially improved by requiring the Company to appoint a new firm to represent it in the proceedings to set aside the judgment or against the 1^st respondent.  To some extent the court and the parties have to rely on the professionalism of whatever firm of lawyers is appointed to give fair and sensible advice.

Decision

19.  As I said earlier in this judgment it seems to me that in the final analysis the court has to assess this application by considering which course will produce a solution that is most likely to protect the parties’ interests.  This involves balancing the need for the judgment to be set aside if as, the applicant contends, it was obtained as a result of a dishonest scheme involving the 1^st respondent and the potential unfairness to the 1^st respondent, if as she argues, the applicant is trying to misappropriate the assets of the Company of which she is part owner.  In my view ordering a meeting to go ahead will best achieve this balance.  It remains open to the 1^st respondent to challenge any claim against her in the Mainland.  Ordering a meeting does not prejudge the merits of the parties’ respective cases in relation to either ownership of the Company or the transaction of which the applicant complains.  These are matters to be resolved on other occasions in different proceedings.  Granting an order allows the Company to challenge a judgment, which if the applicant is correct, clearly should be set aside.  Granting an order will facilitate the clarification of the Company’s rights in this regard, which ultimately is to its benefit and the benefit of its shareholders.

20.  I make an order in the terms of paragraphs 1 and 2 of the originating summons.  I also make the following orders:

(1) that 7 days notice to the members of the 1^st respondent shall constitute notice of the meeting;

(2) there be liberty to apply;

(3) a costs order nisi that the 1^st respondent pay the applicant’s costs of this application such costs to be taxed unless agreed.  This order shall become final unless either party notifies the court within 7 days of the date of handing down of this judgment that it wishes to contest the order.