LIU JINJING, THE ADMINISTRATRIX OF THE ESTATE OF LEUNG WING KEUNG, DECEASED AND ANOTHER v. WAI HING ENTERPRISES LTD

CACV 278/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 278 OF 2015

(ON APPEAL FROM HCMP NO 2915 OF 2014)

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R E A S O N S   F O R  J U D G M E N T

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Hon Yuen JA:

1.  This is the appeal of the plaintiff Liu Jinjing, in her capacity as administratrix of the estate of Leung Wing Keung (“the Deceased”) as well as in her personal capacity as residuary legatee, from a Decision of Au-Yeung J given on 2 December 2015 (“the Decision”) dismissing her Originating Summons (“OS”) for an order requiring the defendant company (“the Company”) to register her as a member of the Company. At the conclusion of the appeal, we dismissed the appeal with costs. My reasons appear below.

Background

2.  The Company is a private company limited by shares.  It is in the business of investment in real estate and listed companies.  It was founded 48 years ago by the Deceased’s father who was a successful banker.  The shares were allotted to the founder and his eight children.  Three sons were appointed first directors.

The Company’s Articles of Association

3.  It may be convenient first to set out some material parts of the Company’s Articles of Association and to discuss their meaning before returning to the facts of this case.

Article 5

4.1.   “The right of members to transfer their shares shall be restricted as follows:

(a) No share shall be transferred to a person who is not a member, so long as any member, or any person selected by the directors as one whom it is desirable in the interests of the company to admit to membership, is willing to purchase the same at the fair value herein provided.  

(b) The directors may in their absolute and uncontrolled discretion, and without assigning any reason, refuse to register any transfer of shares, but this provision shall not apply where the proposed transferee is already a member or to a transfer pursuant to Article 12 hereof.

Save as aforesaid articles 17 to 22 of Table A shall apply”.

4.2.   Pausing there, it would be noted that these are two separate and free standing restrictions.

(A1)  Article 5(a) restricts transfers in that there is a right of first refusal in favour of not only other existing members, but also persons selected by the directors as those whom it is desirable in the interests of the company to admit to membership (“selected persons”). In my view, the inclusion of selected persons does not make Article 5(a) any less a right of pre-emption; it is obviously intended to restrict the member’s choice of transferee and fortifies the directors’ power to keep the membership of the company within a select group even if existing members are not willing or able to take up another member’s shares;

(A2) where there are willing purchasers of the shares (whether existing members or selected persons), Article 5(a), which is binding on the member, limits his choice of transferee to them.

(B1) Under Article 5(b), even when no existing members are willing or able to purchase the shares and there are no selected persons, the directors still have the power in the exercise of their discretion to refuse to register the transferee as a member[1];

(B2) the directors’ power to refuse registration only falls away if:

(a) the proposed transferee is an existing member, or

(b) as can be seen from Article 12 below,

(i) if a member transfers the shares to a person in the “family member category” referred to below, or

(ii) if a deceased member had made a specific bequest of the shares to such a person.

Article 12

5.1.  

“Any share may be transferred by a member to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife or husband of such member, and any shares of a deceased member may be transferred by his executors or administrators to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, widow or widower of such deceased member, to whom such deceased member may have specifically bequeathed the same, and shares standing in the name of the trustees of the will of a deceased member may be transferred upon any change of trustees to the then trustees for the time being of such will and the restrictions in Article 5 hereof shall not apply to any transfer authorised by this Article”.  (Emphasis added).

5.2.   For convenience, I shall refer to “child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife or husband/widow or widower” as “the family member category”.

6.  Further, Article 5 provides that Articles 17 to 22 in Table A applied[2].  The following articles of Table A are relevant. 

Article 20

7.1.  

“The legal personal representatives of a deceased sole holder of a share shall be the only persons recognized by the company as having any title to the share. ...”.

7.2.   Pausing there, it is important to distinguish between title to shares and registration as a member in respect of those shares, because title, without more, does not give a personal representative an absolute right to be registered as a member.     

Article 21

8.1.  

“Any person becoming entitled to a share in consequence of the death ... of a member shall ... have the right ... to be registered as a member in respect of the share ...  but the directors shall ... have the same right to decline ... registration as they would have had in the case of a transfer of the share by the deceased ... before the death ...”. (Emphasis added).

8.2.   In other words, the personal representative (being a person having title to shares as a consequence of a shareholder’s death under Article 20) is regarded as similar to a person to whom the shareholder wished to transfer his shares before his death.  So if the personal representative is not an existing member and falls outside the family member category, the directors have the right to decline registration (as discussed earlier).

8.3.   Even if this is read, in conjunction with s.153 of the Companies Ordinance Cap. 622 (set out and discussed below) to refer to a transfer by a personal representative to a beneficiary (whether herself in the capacity of beneficiary or another), this preserves to the directors the right to refuse registration in accordance with the articles of the Company.  

Article 22

9.1.  

“A person becoming entitled to a share by reason of the death ... of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not before being registered as a member in respect of the shares, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company”.

9.2.   This article sets out the entitlement to dividends^[3].  It does not mean that a person having title to shares as a consequence of a shareholder’s death (as discussed above) has an absolute right to be registered as a member in respect of the shares.  Indeed it accentuates the difference between having title to shares and registration as a member in respect of those shares.

Shareholding

10.  It is not disputed[4] that all the shares in the Company have throughout been held by members of the Leung family, whether personally or through corporate vehicles which they control. 

11.  The board of directors has hitherto approved transfers of shares, whether between individuals or between individuals and corporate vehicles they control.  The uncontradicted evidence of the Company was that individual members had given oral warranties and undertakings that the corporate vehicles to which they wished to transfer their shares would continue to be controlled by members of the family[5]. 

Madam Liu’s acquisition of the Shares

12.1.   The Deceased was a director of the Company.  He started cohabiting with Madam Liu in 2006 but they did not marry.  He made a will on 27 October 2010 under which he gave his residuary estate to her but did not make a specific bequest of any shares in the Company to her.  Madam Liu was therefore not a person within the “family member category”, nor had any shares been specifically bequeathed to her, both conditions being necessary for a transfer under Article 12 beyond the ambit of the discretionary powers of the directors.    

12.2.   The Deceased died eight months later.  He had 3,900 shares, or about 8% of the Company’s shareholding, registered in his name (“the Shares”). 

12.3.   As a result of renunciation of probate by the executors named in the will, on 29 July 2014 Letters of Administration with the will annexed were granted to Madam Liu.

Statutory provisions regarding shares of deceased shareholders

13.  It may be convenient to set out here the statutory provisions regarding shares of deceased shareholders.  All references are to the Companies Ordinance Cap. 622, unless otherwise specified.  Division 4 deals with Transfer and Transmission of Shares, with Sub-division 1 dealing with Transfer of Shares, and Sub-division 2 dealing with Transmission of Shares by Operation of Law.

14.  In Sub-division 1, sections 150 and 153 are relevant to our case.

Section 150

15.1.  

“(1) A company must not register a transfer of shares in the company unless a proper instrument of transfer has been delivered to the company.       

(2) Subsection (1) does not affect any power of a company to register as a member a person to whom the right to shares has been transmitted by operation of law”.

15.2.   The “person to whom the right to shares has been transmitted by operation of law” means the personal representative of the deceased member[6].  However it should be noted that s.150(2) only gives the company the power to register a personal representative as a member even though there is no instrument of transfer.  It does not oblige the company to do so (and in our case, that would be contrary to Article 21 above). 

Section 153

16.1.

“A transfer of a share ... of a deceased member of a company by his or her personal representative is as valid as if the personal representative had been the registered holder of that share ... at the time of execution of the instrument of transfer”.

16.2.   Pausing there, this means that a transfer by a personal representative who has not been registered as a member would be as valid (or as invalid) as if she had been registered as a member.

16.3.   However in my view this section does not mean that a personal representative herself has an absolute right to be registered which she can enforce against the company, as that would be inconsistent with s.158 which is set out and discussed below.  As noted in para. 153.03 of Butterworths Hong Kong Company Law Handbook, 18th Ed. “... s.153 does not itself extend the meaning of the word ‘member’ in a company’s articles of association”. 

16.4.   In any event this section does not mean that a transfer of shares by a personal representative is necessarily valid.  It would still be subject to the articles.

17.1.   In Sub-division 2, sections 158-159[7] should first be read together.

17.2.   Sections 158 and 159 apply “if the right to shares is transmitted to a person by operation of law and the person notifies the company in writing that the person wishes to be registered as a member of the company in respect of the shares”.  In other words, the sections apply to a personal representative who wishes herself to be registered as a member.

18.  Section 158 provides for a procedure under which, upon a personal representative notifying the company that she wishes herself to be registered as a member:

- the company must either register her as a member, or if it refuses to do so, send her notice thereof within a stipulated period[8];

- if the company refuses registration, the personal representative may request a statement of reasons; and

- the company must supply the statement of reasons within a stipulated period[9].

19.1.   Section 159 provides that when the company has refused registration under s.158, the personal representative may apply to the court for an order that the company register her, and the court would make such an order if it is “satisfied that the application is well-founded”.

19.2.   This procedure of notification and supply of reasons, which is similar to provisions for the procedure for inter vivos transfers by members[10], supplements the typical articles of many companies which would otherwise permit directors to ignore or “stonewall”[11] requests for inter vivos transfers or registration of personal representatives. 

20.  Section 160[12] recognizes and expressly preserves a right of pre-emption in the articles.  It provides:

“(1) This section applies if a company’s articles give a member or class of members of the company a right of pre-emption or right to purchase shares in the company on the occurrence of an event that constitutes a transmission of the right to the shares by operation of law.

(2) If this section applies, the registration as a member of the company of the person to whom the right to the shares is transmitted is subject to the right of pre-emption or right to purchase shares contained in the articles and that right may be enforced against the person”. (Emphasis added).

Madam Liu’s request for registration as member

21.  On 26 August 2014, Madam Liu’s solicitors wrote to the Company’s solicitors requesting that the Company register her name as the owner of the Shares.

The Company’s response and subsequent correspondence

22.  On 2 September 2014, Madam Liu’s request was tabled at a meeting of the board and it was resolved that the request be declined.

23.  On 11 September 2014, the Company’s solicitors wrote to Madam Liu’s solicitors, referring to the binding nature of Article 5(a) and suggesting that Madam Liu sell the Shares to existing members.

24.  On 12 September 2014, Madam Liu’s solicitors replied asserting that Article 5(a) had been waived or not adhered to, as there had been transfers of shares from individuals to corporate entities since 1986. 

25.  The allegation of waiver was denied in a letter from the Company’s solicitors dated 19 September 2014, who said the directors had exercised their discretion in approving the previous transfers between individuals and corporate vehicles.  They also said the matter would be discussed at a further meeting of the board.

Commencement of the OS

26.  On 11 November 2014, Madam Liu commenced proceedings[13] in the Court below.

The Company’s reasons for refusal to register Madam Liu as a member

27.1.   On 2 December 2014, the Company’s solicitors wrote to her solicitors saying:

- the board had resolved to decline registration of the transfer of the Shares to Madam Liu, whether in her capacity as personal representative or as residuary legatee;

- Article 5(b) of the Company’s Articles provided that the directors may, in their absolute and uncontrolled discretion, and without giving any reason, refuse to register any transfer of shares, subject only to two situations: (i) where the proposed transferee was an existing member; and (ii) where the transfer was pursuant to Article 12;

- the board had exercised its discretion and refused Madam Liu’s request to be registered as a member as:

(a) the Company was a family business and the management did not wish outsiders to become members.  Madam Liu was not an existing member, nor a family member of an existing member.  Besides, she was not a specific legatee of the Shares.  Accordingly, neither the transmission of the Shares to her by operation of law, nor their transfer to her in her capacity as residuary legatee, fell within the exceptions in Article 12;

(b) Article 5(a) provided that no shares shall be transferred to a person who is not a member, so long as a member is willing to purchase the same, and an existing member had already indicated his willingness to purchase them;

(c) certain articles in Table A (specified in the letter) applied. 

27.2.   The Company’s solicitors invited Madam Liu to withdraw the Originating Summons.

28.  Madam Liu proceeded with the litigation.  On 17 September 2015 she sent to the Company an instrument of transfer of the Shares from herself in her capacity as administratrix to herself as transferee.

Decision of Au-Yeung J

29.  At the hearing of the OS, the learned judge considered Articles 5 and 12 of the Company’s Articles, as well as the relevant articles of the relevant version of Table A. 

30.  The judge considered:

(A) whether Madam Liu was entitled to be registered as a member in her capacity as administratrix (paras. 14-41);

(B) whether she was entitled to be registered as a member in her capacity as residuary legatee (paras. 42-56). 

31.1.   As for (A), it was one of the contentions of Mr KM Chong[14], counsel for Madam Liu, that the articles of the company were irrelevant once the applicant proved that she was the administratrix.  The judge held that that was a misreading of the judgment in Re Yuen Kiu Kwan [2009] 3 HKLRD 371.  In that case, the company had failed to provide any reasons within the time prescribed in s158 and further, the reasons provided subsequently were not bona fide and were not good grounds.  For those reasons, Kwan J (now Kwan JA) held that the directors’ reference at the hearing to the article under which they had a discretion to decline registration without reason was of no relevance[15].  I agree with the judge’s understanding of Kwan J’s judgment.

31.2.   The judge held that:

- the articles could not be circumvented by Madam Liu as administratrix transferring the Shares to herself as beneficiary[16];

- Article 5(a) contained a right of pre-emption and Madam Liu was not an existing member[17];

- the reason given by the directors for refusing to register Madam Liu as a member (ie to maintain the company within the Leung family) could not be said to be lacking in good faith[18];

- Madam Liu did not fall within the exceptions to Article 5 set out in Article 12[19].

32.  As for (B), apart from the above discussion, the judge rejected Madam Liu’s argument of estoppel by convention or common mistake in respect of the approval of transfers to corporate vehicles as it was contradicted by evidence from the Company regarding the undertakings given for the family’s retention of control of the corporate members.

33.  For these reasons set out in detail in the Decision, the judge came to the conclusion that Madam Liu was not entitled to have the Shares registered in her name in either capacity.              

Appeal

34.  Madam Liu appealed.  Essentially Mr Chong’s arguments are repetitions of his submissions before the judge.  

Discussion

35.  Mr Chong’s primary contention was that directors’ discretion simply did not come into play in the situation where Madam Liu sought registration of herself as a member in her capacity as administratrix.   

36.1.   In my view, even though Madam Liu had legal title to the Shares as administratrix (under Article 20), it is clear from Article 21 above that title does not give a member’s personal representative an absolute right to be registered as a member.  As explained earlier, s.153 does not assist her and s.158 reinforces the view that there is no automatic or absolute right to registration. 

36.2.   Under that Article (21), the directors have the same right to decline registration as they would have had if the Deceased had during his lifetime transferred the Shares to her.  Since she was not an existing member or a person within the “family member category”, the directors had the power under Article 5(b) to exercise their discretion to decline registration. The reason they gave in the statement of reasons is perfectly legitimate in the context of a small private company founded and maintained to provide for members of a family, of which she is not one.  In these circumstances, I think discussions whether the statute gives the owner of the shares a prima facie right to registration (as held in some Australian cases) would be merely academic. 

37.  I do not think however that Article 5(a) is engaged because it does not expressly include a right of pre-emption in cases of transmission by operation of death, unlike the article (36) in Lee Chee Ngor Moreta v Prudential Enterprise Ltd [1991] 2 HKC 499, which stated “if any person shall become entitled to any share by reason of the death or bankruptcy of any member, he shall be bound forthwith to offer the same for sale to the members of the company ...”.   In that case (Lee), s.160 would apply.  In contrast, in our case, Article 21 gives the personal representative the right to be registered, subject however to the directors' right to decline registration as discussed above.

38.  The discussion of Article 5(b) also applies to Madam Liu’s argument as transferee and I shall not repeat it.  Indeed, Mr Chong accepted that the directors did have a discretion. 

39.  As for the argument of estoppel by convention or waiver or common mistake (since the Company cannot recognise a trust of the shares transferred to corporate vehicles), there was simply no evidence to contradict the Company’s evidence that those transfers had been approved by the board on the basis of undertakings given by individual members that the transferee companies would continue to be controlled by members of the family.  That being the case, no issue of lack of bona fides has been made out. 

Order

40.  For the reasons set out above, I dismissed the appeal with costs to the respondent.  We did not consider the case suitable for two counsel.

Hon Kwan JA:

41.  I agree with the reasons for judgment of Hon Yuen JA.

Hon Chu JA:

42.  I agree with the reasons given by Hon Yuen JA.