YU ZHONGMIN v. SINODRAGON MARITIME LTD AND OTHERS

HCMP 1813/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO1813 OF 2014

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D E C I S I O N
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1.  I have before me an originating summons dated 25 July 2014 by which the plaintiff, Madam Yu Zhongmin, seeks declarations that an annual general meeting held on 7 July 2014 and an adjourned annual general meeting held on 14 July 2014 and a directors’ meeting held on 23 July 2014 of the company, Sinodragon Maritime Limited, are invalid and that all resolutions passed thereat are null and void and, in particular, a declaration that the appointment of Tian Yuchen, the 3^rd defendant herein, as a director of the company is invalid.

2.  The papers are voluminous but since I have come to a clear view on this matter, I shall give my decision now, giving such reasons as are necessary to put my decision in its proper context.  There are also references in both sides’ submissions and affirmations to events and facts that are in dispute.  In the context of a hearing of the originating summons on the documents only, without cross-examination, it would, in my view, be inappropriate for me to try to resolve seriously disputed facts.

3.  The background of the matter can be shortly stated.  Madam Yu and the 2^nd defendant herein, Mr Tian Yinxian, were married in 1988 in the Mainland.  They have two daughters, one of whom is the 3^rd defendant, born in 1990.  There is no dispute that Yu and Tian have established and developed a shipping business over the years and have incorporated various shipping enterprises both in Hong Kong and in the Mainland for the purpose of carrying out the shipping business.  Among these enterprises are the company and a number of its subsidiaries incorporated in Hong Kong.  The company was incorporated under the laws of Hong Kong on 28 September 1998 as a holding company of various ship-owning companies, each of which holds an ocean liner.

4.  Yu and Tian have been the only two shareholders in the company.  They had also, until the disputed events I shall come to a little later, been the only two directors of the company.  The registered shareholding of Yu and Tian in the company was 49% and 51% respectively.

5.  There is no dispute that Yu and Tian became estranged in around 2010, the main reason apparently being the discovery by Yu that Tian had an intimate relationship with another lady by whom he also has a child.

6.  Divorce proceedings were commenced by Tian in the Mainland but the parties came to a settlement in September 2011.  By the settlement agreement dated 7 September 2011, it was agreed that the shareholding of a number of companies, including the company, should be divided between Yu and Tian in the proportion of 60% to 40% respectively.  It was agreed that there would be a separate agreement dealing specifically with matters pertaining to the relevant transfers of shares.  The settlement agreement provided that after the transfers of shares had been registered, the parties would attend the relevant departments in the Mainland to take steps for their divorce.

7.  Pursuant to the settlement agreement, on 27 September 2011, the parties entered into a share transfer agreement which provided, in relation to the company, that Mr Tian should hold 40% of the issued shareholding and Madam Yu 60%.  It was also provided that Mr Tian, Madam Yu and one Wang Jing Bin should be the directors of the company.  The share transfer agreement has not, however, been implemented for reasons that I need not go into in detail. 

8.  Shortly after the settlement agreement was entered into, Mr Tian obtained, in Hong Kong, in proceedings HCMP 2131/2010, in the absence of Madam Yu, an order appointing another person, namely one Hong Zhen, to be a director of the company.  At about the same time, Madam Yu began to have concerns as to whether the affairs of the company and other group companies were being conducted in a manner unfair to her.  She also objected to the appointment of Hong Zhen as a director of the company, who eventually resigned in July 2012. 

9.  With there being only two directors, Tian then issued proceedings in HCMP 1856/2012 for an order that an extraordinary general meeting of the company be convened by the court for the purpose of considering and, if thought fit, passing a resolution that the 3^rd defendant be appointed director of the company.  Those proceedings were vigorously opposed by Madam Yu who took the view that Mr Tian had been acting contrary to and in breach of the settlement agreement and share transfer agreement entered into between them.

10.  Eventually, in April 2014, the originating summons in HCMP 1856/2012 came on for hearing.  The matter was eventually disposed of by consent and the consent order provided as follows:

“1. An annual general meeting of the 1^st Respondent, Sinodragon Maritime Limited, be held on a date on or before 14 July 2014 at a place to be agreed by the Applicant and the 2^nd Respondent on or before 29^th April 2014 (“the Meeting”).

2. The Meeting shall be treated as the annual general meeting of the 1^st Respondent for the years 2010, 2011, 2012 and 2013.

3. At the meeting, the following matters shall be considered and voted upon:

(i) To receive, and consider the audited accounts of the 1^st respondent for the period:

from 1st April 2009 to 31st March 2010,

from 1st April 2010 to 31st March 2011,

from 1st April 2011 to 31st March 2012, and

from 1st April 2012 to 31st March 2013.

(ii) The appointment of auditors for the next financial year.

4 The draft financial statements of the 1^st Respondent for the period from 1^st April 2009 to 31^st March 2013 be provided by the Applicant to the 2^nd Respondent through her solicitors at least 21 days before the Meeting.

5. Leave to the Applicant to withdraw the Originating Summons dated 31^st August 2012.

6. There be no order as to costs.

7. Liberty to apply.”

11.  Pursuant to the order, on 11 June 2014, Tian caused a notice of the general meeting to be issued for a meeting to be held on 7 July 2014 at 10 am in certain premises in Harbour City, Tsim Sha Tsui, Hong Kong.  The agenda on the notice contained four items, the second of which was election of directors and the authorisation of the board to determine remuneration.

12.  On 4 July 2014, Madam Yu’s solicitors wrote a letter to Mr Tian’s solicitors, complaining that the proposed item relating to the election of directors and directors’ remuneration was beyond the scope of the court order and was contrary to an agreement reached outside court on 15 April 2014 between the parties that Tian would not attempt to appoint any additional directors.

13.  On 7 July 2014, despite her objection as set out in her solicitors’ letter, Madam Yu attended the venue designated for the meeting and Mr Tian was also present.  I shall come to the details of that meeting.  Suffice it at this point to say that there seems to be no dispute that, after about 30 minutes of apparently heated argument, Mr Tian left the room and, subsequently, Madam Yu also left.

14.  On 11 July 2014, Mr Tian’s solicitors replied to Madam Yu’s solicitors denying that the meeting was beyond the scope of the court order and denying that there was any agreement outside court in April as alleged.

15.  Meanwhile, on 8 July 2014, Mr Tian caused another notice, a notice of the adjourned annual general meeting, to be issued.  This notice stated that the adjourned meeting would be held at 3 pm on 14 July 2014 and stated again four items of agenda, the second of which is the authorisation of the board of directors to determine directors’ remuneration.

16.  On 14 July 2014, that meeting went ahead without Madam Yu’s attendance.  At that meeting, Mr Tian, being the only member present, resolved that the 3^rd defendant be appointed an additional director of the company.

17.  The grounds for challenging these meetings and resolutions in this application are as follows:  (1) that the business transacted was outside the scope of the order of the court made pursuant to section 114B of the previous Companies Ordinance; (2) that the first meeting on 7 July 2014 was not in fact inquorate and that there was therefore no basis for it to be adjourned pursuant to article 56 of the Articles of Association of the company; (3) that in any event the second adjourned meeting was not convened and held at the same time of the day as the first meeting in accordance with article 56 of the Articles of Association; and (4) that the notices of the meeting were deficient.

18.  In relation to the first ground, it is not in dispute that the construction of the terms of a consent order is subject to the same ordinary principles governing the construction of contracts (see Hady v Bazar [2012] 3 HKLRD, 29, at paragraph 60). 

19.  The parties have advanced conflicting versions of the facts in relation to what they have orally agreed immediately prior to the consent order being made.  On the part of Madam Yu, what is said is that there was a discussion between her counsel (Miss Connie Lee) and Mr Tian’s counsel (Mr Samuel Sung), as a result of which it was agreed that Mr Tian would not seek the appointment of an additional director to the board of the company.  In contrast, Mr Tian has filed evidence, including an affirmation of his solicitor, Mr Lai, to the effect that there was no such agreement and that, instead, Mr Tian had proposed that the question of the appointment of directors be left out of the consent order and to the parties themselves. 

20.  In the absence of cross-examination of the deponents, which neither party has sought, this court is not in a position to resolve such factual differences.  The point has to be determined, in my judgment, as a matter of construction of the consent order in the light of so much of the factual background that is admissible and not in serious dispute.  In that context, it is not in dispute that I am entitled to look at the position taken by the parties and the arguments they were advancing for the hearing in April 2014 in construing the consent order.

21.  It appears from the skeleton submissions filed on behalf of Mr Tian that he was seeking an order in terms of the originating summons in those proceedings, but he also pointed out that the company was in default of sections 111 and 122 of the previous Companies Ordinance by reason of the default in holding annual general meeting since 2010 and in placing audited financial statements before the members within the prescribed periods. 

22.  On behalf of Madam Yu, her counsel, in her skeleton submissions, opposed the making of an order in the exercise of the discretion of the court for a meeting which, she submitted, would allow the passing of the proposed resolution contrary to the written agreements between the shareholders relating to the company’s ownership and control.  She referred to a number of authorities, including Cheng Yuk Lin v Chan Choi Wah [1993] 1 HKC 52, for the proposition that the court should not exercise the discretion to order a meeting where there is a dispute as to the beneficial ownership of the shares held by the parties.  She also referred to the case of Re Rich Treasure Enterprises Limited [2001] 3 HLRD 769 where the Court of Appeal considered that new directors should not be appointed if the result would be to disturb the balance of powers stipulated in a shareholders’ agreement.  However, perhaps recognising the fact that the company was in default of compliance with statutory requirements, counsel submitted, at the end of the skeleton, that the court should dismiss the application or, alternatively:  “The meeting could still be called but the proposed resolution to change the composition of the board contrary to the Sinodragon shares transfer agreement should not be authorised”.

23.  There seemed to me to be reasonably arguable points available to be made at that stage on behalf of Madam Yu that a meeting should not be ordered by the court, for example, because the ownership over the shares still had to be resolved.  In those circumstances, it would not be sensible, in my view, to regard the consent order as an order to hold a meeting with Mr Tian being at liberty to add whatever proposed resolution to the agenda he might desire.

24.  In these circumstances, in my view, where the court has ordered a meeting, directing certain matters to be discussed and, if thought fit, resolved upon, it is not to be assumed that some other special business could be added by either party, except perhaps those which, by statute or by the articles, must be transacted by the company at such meeting.  This is not, with respect to Miss Fong, a question of implying a term into the order that only the items expressly mentioned can be raised or that no other matters can be raised, but a matter of recognising that but for the order of the court, a meeting could not be held and would not be held, as was indeed the basis of Mr Tian’s application under section 114B.  This, in my view, entails recognition that the scope of the meeting is defined by the order of the court.

25.  The first ground taken by Miss Liu on behalf of Madam Yu in this application is therefore sustained. 

26.  The second ground relates to the quorum of the first meeting on 7 July 2014.  According to the letter of Madam Yu’s solicitors dated 11 July 2014, what happened was this: 

“9. When Mr Tian entered into the conference room, he was fully aware of the presence of our client’s legal representatives. He indicated to our client and her legal representatives that he had no objection that our client’s legal representatives to stay at the meeting if they wanted.

10. However, when Ms Chan subsequently entered into the conference room, Ms Chan demanded and insisted our client’s legal representatives to leave the conference room which she did not have any right to do so. Mr Tian then changed his stance and objected the presence of our client’s legal representatives.

11. During the meeting, Ms Chan constantly interrupted and broke the discussions between Mr Tian and our client her legal representatives. She acted as if she were the lawyer of Mr Tian, defending for him including but not limited to criticising our client at the meeting for not sending the objection letter to the Company earlier (which we deny that our client has any such legal obligation).

12. Our client’s legal representatives had raised objection several times that Ms Chan had no right to make any representation at the meeting but that was ignored by Ms Chan. The conduct of Ms Chan had grossly exceeded the proper duties of a company secretary.

13. Given that the parties still could not resolve their differences on the validity of the AGM Notice and the purported AGM, Mr Tian left the conference room at about 10.30 am.  The meeting came to an end without any declaration of adjournment of the meeting.  Therefore, our client and her legal representatives also subsequently left.”

27.  There is some difference in recollection of the course of the meeting on the part of Mr Tian as appears from his solicitors’ letter dated 16 July 2014.  In particular, at paragraph 13 of that letter, it is stated:  “As your client did not signify her presence by signing her attendance, the AGM could not have been convened, and our client therefore had to adjourn the AGM after your client’s departure for no quorum was present there”. 

28.  It does not seem to be in dispute that Madam Yu was there for over 30 minutes from 10 am, the time appointed for the meeting. Accordingly, it seems to me a quorum was present, there being no requirement for any document to be signed before Madam Yu could be counted towards the quorum.  In any event, it is in dispute whether Madam Yu was in fact asked to sign any attendance record that morning.

29.  Miss Fong, on behalf of Mr Tian, accepts that Madam Yu was there but says that she was there only to protest against the validity of the meeting.  She submits that Madam Yu could not both approbate and reprobate.  I am unable to accept that submission.  I see no reason why a member cannot attend a meeting, under protest, which he or she considers to have been invalidly convened, and still challenge the validity of the meeting, perhaps afterwards.  If Madam Yu had only wanted to contest the validity of the meeting, there is no reason, as it seems to me, why she would personally attend the premises that morning.  A solicitors’ letter would have been sufficient for that purpose.

30.  It follows, therefore, that there was no basis to invoke article 56 of the Articles of Association of the company which provides as follows:

“If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of members, shall be dissolved; in any other case it shall stand adjourned to the same day in the next week, at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the members present shall be a quorum.”

31.  In my view, therefore, the adjourned meeting has not been validly convened pursuant to article 56 because the basis for invoking article 56 did not exist in the first place.

32.  But even if article 56 was applicable, it provides only that the meeting may be adjourned to the same date at the same time, or to such other date and at such other time as the directors may determine.  Under that article, if applicable, the meeting should have stood adjourned to 10 am, 14 July 2014, being the same time on the same day in the following week as the first meeting.  As I have already stated, however, the second meeting was convened to be held at 3 pm on 14 July 2014, contrary to article 56. 

33.  As accepted by Miss Fong, there had been no determination by the directors under that article for the meeting to be held at a different time from that stated in article 56.  Miss Fong relies on the implied residual power at common law for the chairman of a meeting to adjourn a meeting as referred to in, for example, Company Law in Hong Kong, Practice and Procedure 2015, page 137.  But it seems to me the circumstances are very different here.  On the defendant’s case, the meeting was inquorate and article 56 was invoked.  On his own case, therefore, this is not a case where a meeting had begun and, for some special unforeseen reason, had to be adjourned and the chairman exercised his residual power in that context.

34.  For this reason, I would also uphold the third ground relied upon by Miss Liu for the plaintiff for the reason that the adjourned meeting was not held at a time in accordance with the articles.

35.  Finally, I come to the notices of the meeting. It is not in dispute that a general meeting is only competent to deal with businesses properly notified to the members.  Here, two points have been taken.  First, the name of the additional director to be appointed was not mentioned at all in the first notice of meeting so that it was not clear to Madam Yu there was a proposal to appoint the 3^rd defendant as an additional director. 

36.  The second point is that for the adjourned meeting, the notice which contained the agenda again did not specify the election or appointment of directors.  So far as directors are concerned, only their remuneration was mentioned.  In fact, it might not have been necessary for a new agenda to be issued.  A notice of the date, time and place might have been sufficient on the basis that the second meeting was simply the adjourned meeting held automatically in accordance with article 56.  But in my view, having been issued, the new agenda had to be accurate and Mr Tian should be held to it.  There is simply no mention of any resolution for the election or appointment of directors in that notice.  In my view, Madam Yu cannot fairly be expected to have known from that notice that a resolution would be proposed at the adjourned meeting for the election of the 3^rd defendant as an additional director of the company. 

37.  For this reason also, the adjourned meeting and the resolution passed thereat must also be regarded as invalid.

38.  The 2^nd defendant, Mr Tian, submits, through his counsel, Mr Sung, that even if the meeting is invalid for the reasons I have given above, it is a mere irregularity and because the 2^nd defendant is the majority shareholder, the court ought to ignore such irregularity.  But in my view, whether or not Mr Tian should, in light of the settlement agreement and share transfer agreement, be regarded as the majority shareholder is very much in dispute.  It seems to me the evidence relied on by the 2^nd defendant on that question falls far short of what is required to persuade the court to determine in these proceedings, summarily and without cross-examination, that Madam Yu has been in breach of the agreement.

39.  I should also mention that there was a faint suggestion that the agreements are void for illegality.  However, the point was raised far too late.  In any event, I cannot see how the fact that some contract with a third party may be affected by a change in shareholding of the group companies could give rise to illegality in this context.