Miracle Chance Ltd. v. Yuk Wah Ho David

CACV 298/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 298 OF 1998

(ON APPEAL FROM HCA 5544 OF 1998)

----------------------

----------------------

J U D G M E N T

----------------------

Rogers, J.A. :

Introduction

1. This is an appeal from a decision of Yeung J. whereby he dismissed an appeal against the decision of Master Cannon dismissing the Plaintiff's claim against the Defendant on the ground that the Action had been commenced in the name of the Plaintiff without authority.

2. The Defendant, Mr. Yuk-wah Ho, is one of the only two directors and shareholders of the plaintiff. He holds 35 per cent of its shares. The other director, Mr Gao Jia ren, holds the remaining 65 per cent. The Plaintiff is a BVI company and it was intended to be the joint venture vehicle for the transactions between Mr. Ho and Mr. Gao. There is a Joint Venture Agreement dated the 16th August 1996. The parties to the original Joint Venture Agreement were Mr. Gao and the Plaintiff and another company, Carnation Developments Limited, which it is agreed was the alter ego of Mr. Ho. By a later agreement, Mr Ho was substituted for that company. The Joint Venture was to develop expressways and bridge projects in the northern region of the People's Republic of China and such other parts of the country as became feasible.

3. Under the Joint Venture Agreement, the Plaintiff was to hold a controlling stake in another BVI company called Greater Beijing Region Expressway Limited. That company would, in turn, be the holding company for other companies concerned with the proposed expressways and bridge projects. Disputes arose between Mr. Gao and Mr. Ho over the affairs of the Plaintiff and those of the Greater Beijing Region Expressway Limited more than 2 years ago.

4. Mr. Ho commenced proceedings in Singapore against Mr. Gao for breaches of the Joint Venture Agreement. Those have been stayed on the grounds of forum non conveniens.

5. In April last year, the present proceedings were commenced. The claim against the Defendant is for breach of fiduciary duty and breach of the Joint Venture Agreement. The claim is substantial. It totals almost US$60 million, and damages to be assessed.

6. Prior to the commencement of the proceedings, Mr. Gao had tried to convene a directors' meeting, to consider the institution of proceedings by the Plaintiff against Mr. Ho. Mr Gao had also given notice with a view to convening a shareholders' meeting of the Plaintiff. Mr. Ho refused to attend any such meetings, hence there was no board resolution or shareholders' resolution authorising the institution of the proceedings by the Plaintiff against Mr. Ho.

7. The point taken against the company and Mr. Goa in commencing these proceedings is that only the Board of Directors may authorise the commencement of proceedings in the name of the company. In this case, it is said that since the Board has not met, the directors cannot have given their consent. Moreover, because of the terms of Article 17(c) of the Joint Venture Agreement, the parties had bound themselves that proceedings would not be brought in the name of the company unless directors appointed both by Mr. Goa and Mr. Ho consented.

The Articles

8. The Articles of the Plaintiff, of course, govern the mode in which the company will be operated. Article 93, which is relevant to this case, reads as follows :-

"93. The business and affairs of the Company shall be managed by the directors who may pay all expenses incurred preliminary to and in connection with the formation and registration of the Company and may exercise all such powers of the Company as are not by the Act or the Memorandum or these Articles required to be exercised by the members of the Company, subject to any delegation of such powers as may be authorized by these Articles and to such requirements as may be prescribed by a resolution of members; but no requirement made by a resolution of members shall prevail if it be inconsistent with these Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made."

9. That Article can be contrasted to Regulation 82 in Table A which is similar but in a slightly different form. That reads :-

"82. The business of the company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the company, and may exercise all such powers of the company as are not, by the Ordinance or by these regulations, required to be exercised by the company in general meeting, subject, nevertheless, to any of these regulations, to the provisions of the Ordinance and to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in general meeting; but no such regulation made by the company in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation had not been made."

10. In my view, the difference in wording gives scope for the argument that the Company in general meeting could prescribe requirements, which are different to regulations as referred to in Table A and the directors would have to observe those requirements.

11. However, the more pertinent question in this case is as to whether the directors were in fact exercising the powers of the Board and whether they were acting. In this case, clearly, on the allegations in the Statement of Claim and insofar as the evidence shows, the directors were not exercising their powers and were not acting. The question then arises as to whether, in those circumstances, the company in general meeting could exercise the power of control of the company. The Judge in the Court below quoted from Gower's Principles of Modern Company Law at p.187, where it is said :

"Despite what has been said above, it seems that if for some reason the board cannot or will not exercise the powers vested in them, the general meeting may do so. On this ground, action by the general meeting has been held effective where there was a deadlock on the board; where there were no directors; where an effective quorum could not be obtained or the directors were disqualified from voting. Moreover, although the general meeting cannot normally abort legal proceedings commenced by the board in the name of the company, it still seems to be the law that the general meeting can, in some circumstances, commence proceedings or ratify unauthorised proceedings already commenced by someone on behalf of the company if the directors fail to pursue the claim. These exceptions are convenient, but difficult to reconcile in principle with the strict theory of a division of powers. Their exact limits are not entirely clear."

12. That passage from Gower, as it existed in the 3rd Edition, was approved by the House of Lords in the case of Alexander Ward v. Samyang [1975] 1 W.L.R. 673.

13. The position of the company in general meeting exercising the powers which otherwise might have been exercised by a board had they been effective, seems to me to be quite different from the position of a company in general meeting purporting to usurp the powers of the board which is effective. It seems to me that the line of cases which is exemplified in the case of Breckland Group Holdings Limited v. London and Suffolk Properties and others [1989] BCLC 100, exemplifies the latter proposition that where there is an effective board, the company in general meeting cannot usurp its powers but if the board is ineffective, the power which in effect has been delegated by the Articles to the directors reverts to the person or persons who delegated, namely the company in general meeting.

14. I see no conflict with those propositions and this is a case where the Board of Directors is clearly alleged to have been ineffective. There is, however, on the pleadings, no resolution of the company in general meeting. I say in the pleadings because as has been pointed out by Mr. Poon who appears on behalf of the Appellant the pleadings so state.

15. However, if the matter had remained there, it seems to me that the proper course to have taken, given the fact that Mr. Gao clearly has 65 per cent control of the company, would have been for the Court to have stayed the proceedings but to have ordered a meeting of the company to see whether any resolution of the matter could have been arrived at by the company in general meeting. As matters have turned out, however, that in itself appears to be unnecessary.

16. Mr. Poon on behalf of the Appellant has drawn our attention to Article 1 of the Articles which is the definition section in the Articles. The definition of resolution of members includes as the second alternative :-

"(b) a resolution consented to in writing by

(i) an absolute majority of the votes of shares entitled to vote thereon, or

(ii) an absolute majority of the votes of each class or series of shares entitled to vote thereon as a class or series and of an absolute majority of the votes of the remaining shares entitled to vote thereon."

17. Today, Mr. Poon has indicated to the Court that the Plaintiff is indeed in possession of a document which constitutes a resolution of the company as defined in the definition section of the Articles. We have not been shown that resolution but we are told that that ratifies the commencement of these proceedings in the name of the Plaintiff.

18. The other point that was taken against the Plaintiff in this action in the Court below turned on Article 17(c) of the Joint Venture Agreement. That reads as follows :-

"Art 17 For each of Miracle and a member of the GBRE Group (the 'Relevant Company') the following shall be matters which require the approval of at least one Director appointed by each of the Shareholders to the board of directors of Miracle or (in the case of a member of the GBRE Group) GBRE as the case may be :

.....

(c) Decisions regarding the institution, abandonment or compromise of any legal proceedings on behalf of the relevant Company which involve amounts in excess of US$5,000,000 or a PRC state-owned entity (including a corporation substantially owned by such an entity) as a defendant or third party;"

19. The second part of Article 17(c) of course is inapplicable but the first part would clearly apply to this Action. However, as Mr. Poon has pointed out, it would appear that Article 17 might, at least arguably, be said to be predicated upon the directors acting in a Board meeting and since as has already been explained, the Board is ineffective, the restriction under Article 17 would be inapplicable but that would bring into play Article 18 which reads as follows :-

"Art 18 For each Relevant Company the following shall be matters which require the approval of both Shareholders :

.....

(f) All other important matters bearing on the operation or management or structure of the Relevant Company which have a material effect on the Shareholders or their ownership rights including those from time to time reflected in statements of the full Board of Miracle or GBRE."

20. The point taken on the Joint Venture Agreement, however, seems to be not a matter of lack of authority but a matter of a potential breach of the Joint Venture Agreement. If action were brought in circumstances said to have been in breach of the Joint Venture Agreement, unless the matter were clear, it would seem to me that it would be open to the Defendant to apply to restrain the Action or to have it stayed or to take whatever proceedings in that direction were advised. But if any such proceedings were instituted, the question would be as to whether it would be right for the Court to grant such relief having regard to the Defendant's conduct as can be shown to have occurred.

21. In those circumstances, it seems to me, unless as I say, the matter is clear, the Action should not be struck out at this stage.

22. In those circumstances, in my view, the decision in the Court below should be reversed and this Action should not have been struck out but the parties having reached the position where there is a resolution apparently in effect, have agreed that should this appeal be allowed, the following order would be appropriate. That is to say :-

"The action no. HCA 5544/98 be stayed pending the service upon the Defendant's solicitors, within 14 days from today, of a copy of a document signed by Mr. Gao Jiaren, also known as Mr. Gao Kun, also known as Mr. Karl Golden, purporting to be a resolution of the Plaintiff ratifying the commencement of the action and, if such document is served, pending the determination of any proceedings contesting the validity or effectiveness of such resolution (such proceedings to be commenced within 14 days of the service of the document), or until further order."

23. I would, for my part, allow the appeal and make such an order.

Godfrey, J.A. :

24. I agree.

25. On consideration of the form of the order suggested by counsel, I would only add this; that, as it seems to me, a minor improvement might be made by substituting for the word "such" proceedings in the concluding part of the order the word "being" and deleting the following words "to be" so that the conclusion would read "(being proceedings commenced within 14 days of the service of the said document)".

26. I say this only because the words "such proceedings to be" suggest a mandatory effect which I do not think is intended.

27. I have nothing further to add.

Mortimer V-P:

28. I also agree that this appeal should be allowed. I agree with the amendments suggested by Godfrey JA that we should make the order agreed by counsel.

29. I would simply add this. For the sake of clarity, we are not to be taken as deciding anything upon the true meaning or effect of the Articles of Association of Miracle Chance Limited or upon the articles of the joint venture agreement such as may arise for future decisions of the court.

30. In those circumstances the appeal is allowed. The orders of the master and the judge are set aside. The action will be stayed upon the agreed terms between counsel subject to what counsel may say about the amendments suggested by Godfrey JA.

[Counsel]

31. We make the agreed order with the amendment.

32. We think the justice of the case requires us to leave the orders for costs below as they are and to order no costs on the appeal.