K VISION INTERNATIONAL INVESTMENT (H.K.) LTD v. LAM YIN a female AND ANOTHER

HCA 2710/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2710 of 2004

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R U L I N G

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1.  This matter is now coming to the boil. A brief history may be helpful. It first came ex parte before Stone J on 26 November last when he restrained the 2nd defendant from acting or purporting to act as a director of the plaintiff company or to hold himself out as one of its directors, and he also directed that the 1st defendant who, it is accepted, is a validly appointed director of the plaintiff to give the plaintiff’s solicitors access and to take copies of books and records of all documents held by her on behalf of the plaintiff at the company’s offices at 139 Hennessy Road. The order was expressed to remain in force until last Friday, 3 December, when I became seized of the matter.

2.  The action is brought at the behest of Mr Qu Hong who, overwhelmingly, is the plaintiff’s majority shareholder.  The company records show that he has 97 per cent of its shares. What has brought matters to a head was that Mr Qu was saying that the two defendants were depriving him of access to the plaintiff’s records in Hong Kong, that they were acting together to deprive him and the plaintiff of interests in property investments in Beijing.  I need only state it in this general way for present purposes.  There was also the separate point that the 2nd defendant was purporting to hold himself out as a director of the plaintiff, when, in fact, he had no such appointment.  Hence the ex parte order by Stone J which came before me inter partes on 3 December.

3.  Having regard to what Mr Qu and his solicitors discovered on having had access to the plaintiff’s records pursuant to the ex parte order which included board resolutions and powers of attorney which purported to give the 1st defendant, Madam Lam, exclusive and wide-ranging powers to act on the plaintiff’s behalf in Hong Kong and in Beijing on a wide range of matters, the application before me on 3 December was widened to, amongst other things, restrain her from acting or purporting to act as a director of the plaintiff until further order.  The basis of that application was that she allegedly had caused Mr Qu’s signatures on these board resolutions to be forged.  There were other applications as well of a more draconian type which, as things turned out, fell away on that occasion.  In the event, I was persuaded to restrain the 1st defendant from exercising any of her powers under the challenged board resolutions and I continued the other parts of Stone J’s order.  The restraining order against the 1st defendant I treated as ex parte (albeit on notice) because the application had been issued short without sufficient notice given to the 1st defendant to answer the serious allegations made against her.  Further directions were given as to the filing of the statement of claim and of the defence and affirmations in reply to the affirmation of Mr Qu.

4.  What I had not been asked to do at the time when I delivered my ruling was to discharge the plaintiff from its standard undertaking under Stone J’s order not to commence separate proceedings in another jurisdiction nor to seek to enforce the order elsewhere.  This is precisely what the plaintiff (through Mr Qu) would wish to do having regard to the nature of the case against the two defendants that they have hatched a plan between them to sell the plaintiff’s China assets (its only meaningful assets) under the nose of Mr Qu, its main shareholder.  Mr Qu would wish the company to enforce this order in Beijing and/or to start a fresh action there and to use the information obtained in these proceedings for that purpose.

5.  Late on Friday, the application to be discharged from the undertakings was made which I adjourned to yesterday so that proper notice could be given to the defendants.  Yesterday I had that application before me together with the defendants’ summons of 6 December for me to strike out the action on the basis that it has not been properly authorised.  Following this rather lengthy preamble, I now come to the application which is the subject of this ruling.  Miss Priscilla Wong, who appears for the defendants, had indicated last Friday that this was one of a number of applications that her clients were minded to make.  Both Mr Zhang, the 2nd defendant, and Madam Lam, the 1st defendant, have filed lengthy affirmations in response to those of Mr Qu which put the contrary case as to who has been misbehaving in relation to the company, although the matters there go more to the application by the company to discharge itself from its undertakings under Stone J’s order and also in support of an application to discharge the injunctions for want of full disclosure and perhaps more generally as to the continuation of Stone J’s and my order of 3 December.

6.  It is helpful to embark on this application by considering the basic legal principles. One can conveniently start with the text in Gore‑Browne on Companies at Chapter 28.11 which is in these terms:

“The proper persons to give instructions for the commencement of an action to enforce any right of a company or to obtain redress for a wrong done to the company or to recover its property are the directors, and the company itself is the only proper claimant in such an action.”

From this Miss Wong submits that there is no valid resolution by the directors to bring this action and therefore that should put an end to the matter.

7.  Mr Lo, who appears for the plaintiff, says that it is not a bit surprising that there has been no such resolution by the directors.  The company’s articles require a resolution to have been made by two directors.  There are only two and they are, in effect, at war with each other.  He submits that the answer is provided in the following paragraph a Chapter 28.11 supra which is in these terms:

“Although the directors are the proper persons to give instructions for commencing such an action, it was long ago held that effect should be given to the wishes of a majority of the shareholders when they desire that proceedings should be taken to protect the company’s right and that an action may be commenced in the company’s name as claimant by such majority or even in case of urgency by one more shareholders who believe that they have the support of a majority and subsequently obtain the sanction of a resolution of the company.

The interim injunction may be obtained in such an action before their sanction has been procured but if it ultimately appears that the majority is not in favour of the proceedings, the name of the company as claimant will be struck out. If the company was the sole claimant, the solicitor who has used its name or if there is a co‑claimant who instructed the solicitor, then that co-claimant will be ordered to pay the costs of the company as between solicitor and client and the costs of the defendants as between as party and party, and this order will be made even after the action has been discontinued.

In cases such as the above, it is sometimes suggested that in ascertaining whether the majority of the company approves of the action, the votes of any directors or shareholders whose conduct is impugned in the action should be ignored but this is, in effect, to determine the question of wrongdoing in advance and is inadmissible.”

8.  Mr Lo therefore submits that all the required elements are present in this matter.  Mr Qu is the 97 per cent shareholder - what more is required, he asks?  He has sanctioned this action in compliance with long‑established principle as the passage that I have just read requires.  The passage also contemplates circumstances where in an emergency a prospective majority of shareholders may apply for an interim injunction before the sanction of the majority has been obtained with consequences as to costs and so forth as the latter part of the quoted passage makes clear.

9.  Miss Wong submits that the matter is not as simple as Mr Lo suggests.  Minority shareholders have rights which cannot be ignored.  She has drawn attention to the well known exceptions to the rule in Foss v Harbottle which permit the bringing of derivative actions by shareholders to protect themselves and the company.  The second exception set out at Chapter 8.808 in the current edition of Palmer by which the majority cannot confirm an act of the company; “In cases which constitute a fraud against the minority and the wrongdoers themselves are in control of the company”, is also relied on by her.  Fraud on the minority and the expression “fraud” in this context are described at 8.813 and 8.814 which I should set out here.

“Fraud on the minority. The most important exception to the rule in Foss v Harbottle states that an individual shareholder may bring a derivative action on behalf of his company against the wrongdoers who have committed a fraud on the minority if the wrongdoers are in control of the company. The phrase ‘fraud on the minority’ is doubly misleading. First, ‘fraud’, in this context is not confined to Common Law fraud, that is deceit, but embraces a wider, equitable meaning. Secondly, the fraud is not so much committed on the minority as on the company. Hence, where the exception operates, the plaintiff/shareholder brings a derivative action for the benefit of is company.

Fraud. It is not possible to give a single comprehensive definition of the equitable meaning of fraud for the purposes of this exception to the rule in Foss v Harbottle. The most frequently cited statement is that of Lord Davey in Burland v Earle that:

‘Fraud embraces all cases where the wrongdoers are endeavouring directly or indirectly to appropriate themselves money, property or advantages which belong to the company or in which the other shareholders are entitled to participate. Derivative actions have thus been allowed where the wrongdoers made a concealed profit on the sale of property to the company or where they diverted business from the company to another in which they were interested as well as in cases of fraudulent misappropriation of corporate assets. On the other hand, even the equitable concept of fraud has not been extended so as to embrace negligence except in those cases where the negligent conduct involves some misappropriation of corporate assets by the wrongdoers.”“

Miss Wong’s point is that when one attends to the detail of Madam Lam’s affirmation and that of Mr Zhang, it is clear that Mr Qu has been guilty of precisely the behaviour that Lord Davey had in mind in Burland v Earle supra.

10.  She has also made reference to cases in Hong Kong where the court has refused to allow an action to proceed before a resolution of the majority of shareholders has been obtained of which the decision of Yuen J, as she then was, in the matter of Citiform Ltd HCCW1107/99 is an example.

11.  Where is this resolution asks Miss Wong - this should be obtained at an EGM of the shareholders.  One has been purportedly fixed for 20 December 2004 but this matter is not on the agenda.

12.  Nevertheless, it should be remembered, I think, that on the face of it this is a matter that comes about as a matter of urgency.  There is no doubt that a minority shareholder who anticipates carrying a majority with him can apply for an interim injunction - see Gore-Browne supra.  In this matter, Mr Qu commands a massive majority.  The cases to which I have been referred do not relate to a situation concerning a clear-cut majority.  Notwithstanding that, Miss Wong says that is not good enough.  Where his fellow director is opposing him, Mr Qu should go to the Companies Court and obtain that court’s sanction which it can give by a variety of means such as, for example, the appointment of provisional liquidators.  He cannot simply ride roughshod over the minority without a resolution where he is at loggerheads with his co-director and minority shareholder.  In such circumstances, he is not able to validly convene an EGM.  Consequently, he must go to the Companies Court - he is not entitled to take this route.

13.  In my view it is, of course, important to distinguish between the valid bringing of an action and the hearing of an interlocutory injunction within that action or even more so the hearing of the action itself.  The valid bringing of the action is entirely procedural, the latter substantive to be decided on the evidence.  I am satisfied that Mr Qu can bring this action - he clearly commands the majority of the shares - and the passage in Gore-Browne above states the clear and longstanding practice that he may do so.  It would be intolerable if a small minority and an adverse co-director could prevent the passing of the necessary resolutions and thereby block his route to this court.  I hold therefore that this is a validly constituted action.  All this does is to get him and the company to the starting gate.  It remains to be seen what progress the company can make from there having regard to the evidence now that Mr Qu and the company are faced with impressively detailed affirmations from Mr Zhang and Madam Lam which oppose the application to discharge the company from its undertakings to Stone J and also stand in support of applications to have the injunctions set aside for want of full disclosure.  It is to these substantive matters that I must now turn.