DR. CHEUNG TSE-MING, ALEXANDER & OTHERS v. MISS CHEUNG YUK MAY, IDA & OTHERS

1995, No. A9995

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

_______________

J U D G M E N T

_______________

1. This is an application to strike out a Statement of Claim and a corresponding application by the plaintiff to join further parties to this action, amend the Statement of Claim and also to be granted an indemnity by the Third Defendant as to the costs of this Action.

2. Briefly this Action is a derivative action brought by the Plaintiff who is the owner of 14 shares of what is in effect a family company. The other shareholders are his 4 sisters and another person, Mr Ho. The late father of the Plaintiff and of his 4 sisters owned the remaining 38 shares of the Company.

3. The First Defendant is one of the sisters. She also happens to be the administratrix of the estate of the father. The shares which were in the father's name have not yet been transferred to the administratrix.

4. As I will come to later the curious feature of this case is that all parties agree that the Company should be wound up. Matters have not progressed as fast as the Plaintiff would have liked. The Plaintiff complains in this Action that there has been deliberate delay in the winding up, and in the company securing the repayment of a loan of some $23 million which was made interest free by the Company to the father. This the Plaintiff says, benefits the 4 sisters since they are the beneficiaries under the will, whereas he is not.

5. The difficulties in this case stem from the fact that the Plaintiff is the sole remaining director of the 3rd Defendant Company. As such the Company does not have a full quota of directors required under Article 6 of the Articles.

6. Whilst in normal circumstances, the directors are in control of a company and a company cannot in general meeting instruct the directors how the company should be run, because there can only be an ineffective quorum of directors the Company in general meeting can authorise commencement of proceedings or ratify unauthorised proceedings commenced on behalf of the Company. This as Lord Hailsham explained in Alexander Ward & Co. Ltd. v Samyang Co. Ltd [1975] 1 W.L.R. 673 @ 679 is brought about because a company in general meeting retains a residual authority to use the company's powers in the absence of an effective board.

7. The Statement of Claim in this case seems to me to be objectionable for a very simple reason. It is the subject of the complaint that the 1st Defendant who is sued in her personal capacity as the 1st Defendant and in her capacity as the administratrix of the estate of the father as the 2nd Defendant is in effective control of the 3rd Defendant, namely the Company. That was probably the view that was held by the shareholders of the Company but it is clearly in my view erroneous. Article 22 of Table A which is incorporated into the Articles of the Company makes clear that without the shares being transferred the administratrix is not entitled to exercise any rights conferred by membership in relation to meetings of the Company. In those circumstances, the 2nd Defendant as administratrix has no right to exercise voting rights in respect of the 38 shares and there is no basis as pleaded in the Statement of Claim for alleging that the 1st and 2nd Defendants do have control of the Company. Indeed, paragraph 3 of the Statement of Claim is in this respect clearly wrong if by that allegation it is intended to show control simply because the 2nd Defendant is administratrix. Furthermore it cannot be said that the 1st and 2nd Defendants control the Company because control in this context must mean control in relation to a specific act. The acts of which complaint is made in paragraphs 9, 10 and 11 of the Statement of Claim are a failure to pay the loan following demands to those who are alleged to be the company's solicitors. An analysis shows that instructions of only a limited extent were given to those solicitors. There were instructions authorised by the Company in general meeting to do very specific and limited acts. Hence the solicitors could have no power to act generally.

8. The attempt to amend the Statement of Claim fares no better. It is predicated on the joining of all shareholders other than the Plaintiff as Defendants and the allegation is that the Company has been requested in general meeting to demand payment from the estate of the father and has failed or refused to do so. On the basis of the documents which I have seen I am by no means satisfied that there has been a valid meeting at which such request has been made still less one where such a request has been turned down.

9. It may be that the Plaintiff can formulate further amendments that can overcome these difficulties. However, whilst striking out the original Statement of Claim, refusing the draft amendments that have already been proposed and making an Order that unless amendments are applied for which satisfactorily correct the situation within 28 days the Action be struck out, I am disposed to stay the whole Action for a period of 3 months. The reason for that is this. It became quite obvious that all the shareholders are desirous of having this Company wound up. That had been agreed at a general meeting earlier this year. It seems that largely because of a misconception of what had to be done and what could be done that has not proceeded up until now. There are however, good reasons to suppose that matters can be progressed very quickly and indeed Mr Poon on behalf of the 1st and 2nd Defendants has undertaken to take steps to see that is done. In those circumstances, it seems to me to be a total waste of time and costs to proceed with a derivative action which is likely to be of purely academic interest only and will ultimately serve no purpose.

10. Finally, as regards the application for the Plaintiff's costs to be borne by the Company, I consider it would wrong to order that at this stage. Until the Court can see that there is a derivative action which is viable then it would be wrong to order the Company to bear the costs of such an application. Furthermore I am troubled that the course of commencing a derivative action seems to me to have been quite unnecessary. The Company in general meeting had apparently evinced an intention of winding up the Company. The correct course was to pursue that. If there were difficulties over calling the necessary meetings to appoint directors that could have been solved very easily. It does not seem to me to be correct to order that the costs of what seems to me to be an unnecessary action should fall on to the company. Should matters turn out that this Action has to be continued then the application can be renewed at a time when the matter has become clearer.