CONNECT PLUS LTD v. LAU WING YAN AND OTHERS

HCMP 2263/2018

[2019] HKCFI 70

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS No 2263 OF 2018

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1.  D5 (“the Company”) was to hold an EGM at 3:00 pm on 4 January 2019 (“the Jan EGM”) to decide whether or not D1 – D3 should be removed as directors.  The Plaintiff took out an originating summons (“OS”) for an order that D1 – D4 and one Mr Yang, being the directors of the Company, should not be appointed as chairman at the Jan EGM.  Three clear days after service of the OS, the Plaintiff sought a final order under the OS, on an urgent basis.

2.  D1 – D4 opposed the application on the ground that there was no urgency.  There were various disputes as to facts.  It would be breach of natural justice to deprive the Defendants of a fair opportunity to put forth evidence properly in opposition.  Further, the application lacked merits.  There would be no irreparable prejudice to the Plaintiff even if a final order was not made.  The Plaintiff could always go to court for redress even after the EGM.  Moreover, the court should not make an order affecting Mr Yang, who was not a party to the OS.

3.  After hearing submissions, I declined to make a final order on urgent basis and adjourned the OS to 12 March 2019 for directions.  The OS will be heard with the Defendants’ summons seeking an order for converting the OS into a writ action (“the Conversion Summons”).  Here are my reasons.

The facts

4.  Mr Chu Kong together with his nominees (collectively “Mr Chu’s Camp”) held 45% beneficial shareholding in the Company.  The nominees included the Plaintiff (being 30% registered shareholder) and Eagle Valour. 

5.  Similarly, Mr Lau Wing Yan (D1) together with his nominees (collectively “Mr Lau’s Camp”) held a total of 45% beneficial shareholding of the Company. 

6.  The rest of the 10% shareholding in the Company was held by Mr Yang (ie Mr Yang Haitao).

7.  The background to the parties’ dispute was complicated and this court was informed that there are 4 sets of related proceedings. 

8.  In brief, Mr Lau was the founder of a business engaged in shipping and logistic operations which, since 2000, has been operated through a group of companies known as the PB Group.

9.  In 2004, Mr Chu and Mr Lau became joint owners of all of the shares and interests of the companies (including the Company) within the PB Group.  The beneficial ownership was as aforesaid.

10.  In late 2009, Mr Chu and Mr Lau jointly invested into a joint venture business then known as Beibu Gulf Ocean Shipping which operated through the BBG Group.

11.  Since late 2013, serious conflicts had arisen between Mr Chu and Mr Lau in relation to, amongst others, the PB Group and BBG Group.  The relationship irretrievably broke down in 2014.

12.  By a PB Restructuring Agreement between Mr Chu and Mr Lau in early 2014, Mr Chu agreed to, amongst others, withdraw from management and assign his interests in the PB Group to Mr Lau with effect from 1 January 2014.  The price was to be decided by reference to the total audited net asset value of the PB Group as at 31 December 2013.

13.  At the same time, Mr Lau entered into a mirror arrangement asregards the BBG Group pursuant to a BBG Group Restructuring Agreement.

14.  Performance of the 2 Restructuring Agreements encountered difficulties when there were cross allegations of unlawful transfer of funds to the other Camp’s nominees.  Mr Chu also refused to carry out a joint audit of the PB Group in order to determine the value of the shares.  He wanted to investigate into the affairs of the Company. 

15.  Meanwhile, from early 2014, the shipping business of the PB Group began to be operated by Mr Lau.  On the other hand, Mr Chu moved out of the PB Group offices and established a shipping business in competition with the PB Group.

16.  What followed were a series of litigation and holding of EGMs whereby each Camp wanted to entrench control on the Company’s board. 

17.  The litigation includes HCA 227/2017 and HCA 228/2017, of which the core issue was whether or not Mr Chu had an interest as shareholder of the Company in view of the PB Restructuring Agreement.  There are hotly disputed issues of fact.

18.  The relevant EGMs were held on 29 August 2018 (“the Aug EGM”), 19 December 2018 (“the Dec EGM”) and 4 January 2019 (“the Jan EGM”). 

19.  The day before the Aug EGM, the Company (then comprising D4 and Mr Yang) appointed D1 – D3 as new directors.  The resolution was undated, which became dated when the Plaintiff queried the resolution.

20.  At the Aug EGM, Ms Sun was elected as chairman.  There were cross allegations of interruptions from each Camp in relation to the meeting.  Mr Chu purported to (i) elect himself and people from his Camp as directors; and (ii) resolve for the provision of books and accounts by the directors.  Despite resolution no (ii), Mr Chu had been unable to obtain the books and records of the Company and had to apply to the court pursuant to his statutory right as a director.  The validity of these appointments formed the subject matter of HCMP 1939/2018. 

21.  The Dec EGM was held at the request of the Plaintiff; with notice given by D3 on behalf of the Company.  Again, Ms Sun was elected as Chairman.  The Plaintiff and Eagle Valour’s proxies were barred from voting.  Following voting, the proposals to remove D1 – D3 were not carried.  Further, the Company’s shareholders passed a resolution stating that no legal or valid resolutions were passed at the Aug EGM.

22.  In relation to the subject Jan EGM, the validity of its notice was disputed by Mr Lau’s Camp in HCMP 2267/2018. That Camp’s case was that the Plaintiff’s purported notice to convene the EGM was invalid.  This was because members’ power to call a general meeting under s 568 of the Companies Ordinance, Cap 622, could only be exercised if the directors failed to do so under s 567.  As the directors had duly convened the Dec EGM, the Plaintiff’s purported notice of the Jan EGM must be invalid.

23.  To “ensure that the meeting could be conducted in a lawful, fair and open manner”, the Plaintiff took out the present OS to bar the Defendant Directors and Mr Yang from being the chairman.  The bases of the application were:

(1)  Conflict of interest if the Defendant Directors, who were the directors subject to removal resolutions at the Jan EGM, were to take the chair;

(2)  A history of events which demonstrated that the Defendant Directors, if allowed to be chairman, would quite certainly abuse the powers of a chairman. These included frustrating the Plaintiff’s proper voting at the Aug EGM and Dec EGM. In particular, Ms Sun invoked the wide-ranging powers of a Chairman to carry out such frustration.  The Defendant Directors had also obstructed the legitimate rights of Mr Chu’s Camp, whether as director or shareholder, to investigate the suspicious financial affairs of the Company and to remove D1 – D3 (all of Mr Lau’s Camp).

24.  Before issuing the OS, the Plaintiff had tried to elicit an undertaking from the Defendant Directors and Mr Yang not to take the chair in the Jan EGM and to agree to appoint an independent third party solicitor to take the chair instead, but to no avail. On the other hand, the Plaintiff has undertaken to this court that if the order sought was granted, it would undertake to allow every shareholder and validly appointed proxies to vote.

25.  The Defendant Directors opposed the OS on the grounds set out in paragraph 2 above.  Having regard to the disputes of facts, D1 – D3 had issued the Conversion Summons, which would be heard on 12 March 2019 as directed by Harris J.

Legal principles

26.  The court has power, on application by a member of a company, to grant an injunction to restrain breaches of fiduciary duties by directors: Butterworths Hong Kong Company Law Handbook, 20^th ed, §§728.05, 729.02 and 729.03.

27.  If the court is satisfied that a director is about to commit a misfeasance or that a wrongful act is imminent, the court has jurisdiction and power to grant a quia timet injunction to restrain the wrongful act or misfeasance, if it is necessary and just to do so: Lee Chi Yuen Arctic v Lau Siu Ming HCMP 778/2016, 6 May 2016, §9.

28.  Here, the Plaintiff was not seeking interim relief but a final order on the OS upon 3 clear days’ notice.  That deprived the Defendant Directors of the right to file and serve affirmations in opposition within 28 days of service, ie by 25 January 2019: Order 28, rule 1A(4).

29.  In my view, the Plaintiff had to show (i) urgency, (ii) a strong case on the merits; and (iii) irreparable prejudice if an order was not granted.

30.  In Li Ming v Zhang Caikui HCA 1282/2017, 7 May 2018, G Lam J has this to say on the need to show urgency and irreparable prejudice:

“ To justify applying with such urgency it is usually necessary to show some irreparable prejudice. But there is none suggested. All that Mr Mok said was the reconstitution of the board should be done on a proper basis. But there can be EGMs after EGMs, and directors appointed can be removed, and those removed, re-appointed. The EGM to be held tomorrow, if not adjourned, will not render Chen HQ’s application for receivership or injunction nugatory.”

31.  With regard to the merits, the court has to have a high degree of assurance that the plaintiff has a strong case to justify a summary disposal of the OS, without full evidence from the Defendant Directors.

32.  I would deal with the elements in paragraph 29 one by one.

Urgency

33.  Mr William Wong SC, counsel for the Plaintiff, explained that the Dec EGM was the event that triggered the issue of the OS.  Ms Sun, as chairman, had denied the Plaintiff and Eagle Valour the right to vote because of typo in the name of one proxy and alleged false address of the other, despite no ambiguity as to identity of the proxies.  She also claimed that the proxy had not obtained the consent of the beneficial shareholder to appear, when in fact the Plaintiff was the registered shareholder and had theright to vote in law.  Mr William Wong SC submitted that those were invalid reasons.  I shall assume that he was right for present purposes.

34.  Mr William Wong SC pointed out that there were only 5 working days between 19 and 28 December 2018 when the OS was issued. 

35.  Each case turned on its own facts.  However, with respect, the notice here was not sufficient. If something was so urgent as claimed, the Plaintiff should have prepared its case expeditiously and given notice to the Defendant Directors earlier, especially since Mr William Wong SC submitted that this OS involved only a simple application.  In So Kuen Kwok v Pearl Oriental Oil Ltd [2018] HKCFI 2559, 19 November 2018, the defendants had had 14 days to prepare before the OS was heard.

36.  This lateness on the Plaintiff’s part had deprived the court and other parties of the time to consider the application together with relevant evidence: Li Ming, §14.  Any urgency was self-induced by the Plaintiff. The court should not accommodate the Plaintiff’s request for an expedited hearing.

Merits of the OS

37.  I just wish to make some preliminary observations on the merits (which should not bind the trial judge) in order to explain why I decided to adjourn the OS for substantive arguments instead of summarily disposing of it.

38.  Firstly, the court should not dictate who should be a director or chairman of a company.  That was entirely a matter of internal management of the Company: Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd [2009] 2 HKLRD 11, §§19 – 21.

39.  It may be otherwise if there was a convincing case that the directors had acted in breach of their duties: Re Tysan Holdings Ltd [2013] 4 HKC 425, §§35 – 36, Mimmie Chan J.

40.  In the present case, the order sought was not about election of directors but a chairman.  The concern was abuse of a chairman’s power and frustration of shareholders’ rights.

41.  Secondly, if the Plaintiff were to challenge Ms Sun’s decision as depriving it of its proprietary right as a shareholder, the Plaintiff had to show fraud or bad faith on the part of Ms Sun: Kwok Hiu Kwan v Johnny Chen & ors [2018] HKCFI 2112, §§33, 50 and 53, 29 August 2018, Harris J.

42.  However, it was not even alleged that Ms Sun’s conduct amounted to fraud or bad faith.  Till this hearing there had been no application to overturn her decision at the Dec EGM. 

43.  Thirdly, showing that a chairman had interest in the outcome of any EGM or had conflict of interest with another camp of directors or shareholders was not enough to bar him/her from becoming a chairman:  Briggs, N, Modern Law of Meetings, 3^rd ed, §7.30:

“ The fact that the Chairman has an interest in the outcome of a decision does not, in itself, impugn the integrity of the process at a meeting. No company contemplates that the Chairman will be totally disinterested in every matter, and he is presumed to act in good faith unless it is proven otherwise.”

44.  In the present case, Mr William Wong SC accepted that in accordance with Article 57 of the Articles of Association of the Company, a chairman could only be elected among the directors.  There was no such thing as an “independent third party” who could be a chairman.  The Articles of Association did not require the chairman to be neutral. 

45.  Mr William Wong SC relied on the authority of So Kuen Kwok wherein the directors faced a similar proposal for removal.  A similar order was made to restrain them from being a chairman because there was potential conflict of interest between the directors and the interest of the Company, breach of fiduciary duty and sweeping powers of the chairman which may potentially influence the voting results (§38).

46.  With respect, that case could be distinguished on the facts.  There, Recorder Stewart Wong SC found that (i) the directors had evaded service of the originating summons; (ii) there was a prior board resolution that the chairman would not be selected from the current directors but, rather, the board would appoint an independent third party to act as the chairman; and (iii) there was a probability that one of the directors might seek to act as a chairman, contrary to the prior board resolution. 

47.  In any case, the concern of conflict would not apply to D4, who was not one of the directors to be removed at the Jan EGM.

48.  Fourthly, Mr Anson Wong SC leading Mr Martin Kok (counsel for D1 – D3) pointed out that the order sought was also to restrain Mr Yang from taking the chair.  The court should not grant the order that would affect Mr Yang’s rights when he was not a party to the OS.  I agree that this was arguable even though Mr Yang had indicated in correspondence that he would not attend the Jan EGM and had taken sides with Mr Lau's Camp as regards the legal validity of the PB Restructuring Agreement.

49.  Fifthly, since 28 August 2018, there have been 5 directors on the board of the Company—D1 to D3, Mr Yang and Mr Yan. Making an order in terms of the OS would mean giving chairmanship to Mr Chu’s Camp and excluding Mr Lau’s Camp before the fundamental issues as to (i) Mr Chu’s beneficial shareholding in the Company; (ii) validity of appointment of Mr Chu’s Camp of directors; and (iii) the validity of the Jan EGM notice, were resolved.  The court could not form a provisional view on which Camp had stronger merits in view of the dispute over facts.

50.  Sixthly, the Defendant Directors accused the Plaintiff of material non-disclosure and asserted how the Plaintiff had failed in many past applications.  I do not need to go into them since the Plaintiff had not had the opportunity to answer them by evidence. This point would not have affected my overall view of this application. The first 5 points were enough for me to find that the Plaintiff did not have a strong case on the merits to justify summary disposal of the OS.

Irreparable damage to the Plaintiff

51.  If this court were to refuse the relief, what prejudice would thatcause to the Plaintiff?  The prejudice, taken at the highest, would be that thePlaintiff’s concerns in paragraph 23 above would come true.  The Plaintiff’s Camp would likely be excluded from the board. 

52.  There was no dispute that the Company has been dormant for years since 2014.  The “substantive benefit” which the Plaintiff sought to obtain from the Company was to investigate the Company’s affairs following suspicions of misappropriation of assets. 

53.  Exclusion from the board would create more difficulty for the Plaintiff in terms of gaining access to documents or information that might assist in investigation of misconduct in Mr Lau's Camp.  However, the Plaintiff could always go to court for redress, such as by derivative action or discovery applications.  In fact DHCJ Saunders had devised an elaborate mechanism whereby documents of companies jointly owned by Mr Chu and Mr Lau would be preserved and both Camps could apply to the court for disclosure of documents: Canton Plus Enterprise Limited v Tong Zhenjun & ors [2018] HKCFI 1402, §72.  It would also be entirely open to the Plaintiff to subsequently challenge any resolution reached at the Jan EGM. 

54.  Mr William Wong SC queried what prejudice would be caused to the Defendant Directors if an order in terms of the OS was made, especially since the Plaintiff had undertaken to let Mr Lau’s Camp vote at the Jan EGM.  With respect, that question of balancing of convenience would only come into play if the Plaintiff had shown a strong case on the merits.

55.  Applying Li Ming, whilst some prejudice was shown, the Plaintiff had not begun to show that the prejudice would be irreparable.

Conclusion

56.  Given the self-induced urgency, lack of strong merits and lack of irreparable prejudice, this was not a case where the court could have a high degree of assurance that making an order summarily was a just result.  I therefore made the order as I did.

57.  On costs, as the Plaintiff had insisted on proceeding on an urgent basis but failed, it should bear costs of the hearing.  I make an order nisi that the Plaintiff do pay costs of D1 – D3, summarily assessed (according to items D2 – 4 and E in the statement of costs) at $283,600; and of D4, summarily assessed at $50,000.

58.  I thank counsel and Mr Gary Yin for their assistance.