XHCRX PETER H. YIP v. ASIAN ELECTRONICS LTD.

1997, No.MP3773

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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

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

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

D E C I S I O N

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

1. I have before me an application by the Defendant, Asian Electronics Limited ("the Company") to strike out the Originating Summons issued on 7 November 1997 under Order 18, rule 19 of the Rules of the High Court.

2. The Plaintiff is a director of the Company. The Originating Summons seeks :

1) rectification of the register of members of the Company; and

2) declarations that a board meeting held on 30 or 31 July 1997 was void because the Plaintiff was not given due notice of the meeting, that the register be restored to the position pertaining immediately prior to that board meeting and that the resignation and appointment of directors effected at the meeting were void.

3. So far as the meeting in question is concerned, a fax was sent to the Plaintiff at 19:07 hours on 30 July 1997 summoning him to a meeting convened for 19:30 hours that same evening.

4. On 7 August 1997, a set of minutes was received by the Plaintiff which referred to the meeting having been held on 31 July at 10 a.m. Subsequently, on 16 October, the Plaintiff received minutes with a covering letter saying that the earlier set of minutes was wrongly dated. The subsequent set of minutes refers to the meeting having been held at 7:30 p.m. on 30 July. For the purposes of this application, I will assume that the Plaintiff was not in the office at the time the fax arrived, that he did not know about the meeting that was to be convened for 7:30 and that, in any event, notice of some 23 minutes was inadequate. The Plaintiff also alleges that one of the directors stated in the minutes as having been present was not in fact present at the meeting. But this allegation is not substantiated by any evidence. In any event, it will not affect the outcome.

The state of the Company immediately prior to the meeting

5. There were in total five shareholders :

		Shares
Infotech Holdings Limited ("Infotech")	60%	3,600
Chan Ting Yen, Dickson	16%	960
Man Fuk Yee	8%	480
Chan Wing Yuen	8%	480
Wong Wai Sing, Peter	8%	480

6. There were nine directors including the Plaintiff. Here again, the Plaintiff, I think, alleges that there were only six directors, but the minutes named the eight who actually attended the meeting. Again, I do not think that the actual number (whether six or nine) will affect the outcome.

7. Wang Pacific Limited agreed to acquire the shareholdings of all the shareholders referred to above other than that held by Mr Dickson Chan. In other words, Wang acquired 84% of the shareholding, with Mr Chan retaining the remaining 16%. Four separate agreements were entered into and completion took place on 31 July.

8. So far as the resolutions passed at the meeting were concerned, I need only refer to the following.

* The board approved the instrument of transfer whereby Infotech's shares in the Company were to be transferred to Wang. The company secretary was authorised to amend the register to reflect the transfer.

* Six directors resigned and their resignations were to be effective from the completion of the agreement between Infotech and Wang which in fact took place on 31 July.

* Three new directors were appointed and their appointments were also to be effective from the completion date.

So immediately after the transaction, there were only two shareholders in the Company, namely Wang and Dickson Chan.

9. Although the Plaintiff is a director of the Company, he is not a shareholder and was never a shareholder. He is indirectly interested in Infotech in that he owns shares in a company which through another company is a minority shareholder of a Cook Islands company that is the holding company of Infotech. The Plaintiff is also a director of Infotech and it is common ground that he considers the sale by Infotech to Wang to be at an undervalue. In the final analysis it is that transaction that he seeks to avoid.

The rectification issue

10. Section 100(1) of the Companies Ordinance provides as follows :

"100(1) If -

(a) the name of any person is, without sufficient cause, entered in or omitted from the register of members of a company; or

(b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member;

the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register."

The question is whether the Plaintiff comes within the meaning of "person aggrieved" of that section. Counsel for the Company submits that he is not, that an aggrieved person means someone within sub-paragraphs (a) and (b) of that subsection, and who has a right to complain because of something done or omitted to be done thereunder. Counsel for the Plaintiff submits that the Plaintiff is such a person because he is interested as a director and has a beneficial interest, albeit an indirect and a minority interest, in Infotech.

11. There does not appear to be any decided case on the meaning of "person aggrieved", but the decision of Millett J. (as he then was) in Re Piccadilly Radio plc (1989) 5 BCC 692 is of some relevance.

12. The company in that case operated a commercial radio station under a licence from the Independent Broadcasting Authority ("IBA"). The company's Articles of Association prohibited transfers of voting shares without the IBA's approval. In December 1988, the company proposed a merger with another radio station, "Midlands" and in February 1989, a rival bidder "Miss World" announced its intention to make an offer for the company's shares. Before the holding of meetings convened to vote on the rival offers, a subsidiary of "Miss World" which held non-voting shares and a company which held voting shares applied to the court to restrain two other shareholders, Allied and Albion, from voting shares held in the company. These shares were purchased by Allied and registered as to the substantial part in Allied's name and to an insignificant portion (22,000) in the name of Albion. The two applicants claimed the shares had been transferred to Allied and Albion in breach of the company's articles and sought rectification of the register so as to delete the names of Allied and Albion and substituting that of the vendor of the shares, namely Virgin. The learned judge said (at 703D) that :

" There remains the question whether relief should be granted in respect of the 22,000 shares transferred in breach of art.34(A). Relief is discretionary, and is not the automatic consequence of a breach of the articles."

13. For present purposes, it is the second ground for his refusing the grant of relief which is relevant. As noted above, the applicants were seeking an order for the rectification of the company's share register by deleting the name of Albion and substituting the name of Virgin. Millett J. (as he then was) held (at 704H-705B) that :

" That remedy is discretionary, it is not automatic. The court must consider the circumstances in which the purpose for which the relief is sought.

The case was unusual for the applicants were not seeking restoration of their own names to the register. They had no interest in the shares and claimed none. They sought the restoration of Virgin's name; yet Virgin itself did not. It was embarrassed by the applications. It made no complaint to what had happened. The applicants alleged breaches of article 34(A), which is designed to protect the company from the risk of losing its licence; but the company did not support the application, the IBA was aware of the facts and made no complaint and the directors had ample powers to remedy the situation should the IBA require it.

But, of course, the applicants were not aggrieved by the fact that the shares had been transferred without the consent of the IBA but by the fact that they had been transferred to a company which was unwilling to support the 'Miss World' offer. They were searching for a means to disenfranchise the expected opposition to their offer and they seized on a breach of article 34(A) which did not endanger the licence because of failure to obtain the IBA's consent of which the IBA itself did not complain, a less meritorious claim was difficult to imagine. Their purpose in making it was foreign to the statutory remedy which they invoked. In my judgment, it would not be a proper exercise of judicial discretion to grant the statutory remedy of rectification in such circumstances."

14. The Piccadilly Radio case supports the view that an "aggrieved person" is the person whose name ought to be entered in or omitted from the register within para. (a) or (b) of section 100(1). In my judgment, as a matter of construction, there is no doubt that on the facts of this case the Plaintiff cannot possibly come within the term "person aggrieved" since it is not his name that is to be restored to or omitted from the register : an indirect interest is not sufficient. He is thus not entitled to seek any relief under section 100, and for that reason, the Originating Summons, in so far as it seeks rectification of the register, is bound to fail.

(I will add a note on the procedure for rectification of registers. In England, the correct method is to proceed by way of originating motion. This is so because of Order 102, rule 3(1)(g) of the Rules of the Supreme Court. The Hong Kong provisions are different. Rule 102(3) of our rules gives the applicant the option of proceeding by way of originating motion or originating summons. If the latter is chosen, he has to use the expedited form. So in the present case, there is a technical procedural defect inasmuch as the form of originating summons used is the general form rather than the expedited form.)

Was there a breach of the Articles?

15. So far as the articles of the company are concerned, as one would expect in the case of a private company, there are pre-emption provisions. These are to be found in article 25. Article 24 is also relevant. It provides as follows :

"24 (1) No member shall sell, assign, transfer or mortgage any of the shares owned by him or the beneficial interest in any such shares except in accordance with Article 25 and any agreement, if any, between the members of the company.

(2) The provisions of this Article and Article 25 may be relaxed or varied to any extent by agreement in writing between all the members for the time being of the company."

16. On 30 July, Mr Dickson Chan gave a written waiver of the rights of pre-emption under the articles. So far as the other four shareholders are concerned, there is an express waiver in each of the four sale agreements that were completed on 31 July. As I understand the objection, it is that a series of waivers is not equivalent to an agreement in writing. I do not agree. There is no requirement that the agreement be contained in a single document : it can be inferred by reading all these separate agreements together. There is no doubt that there is writing by each of the shareholders waiving the right of pre-emption.

17. I have come to the conclusion that there has not been a breach of Article 24, and in any event, no member of the Company entitled to complain is in fact complaining. It is not for the Plaintiff to complain since he has no interest to advance in making such complaint, not being entitled to be on the register himself.

Validity of the resolutions passed on 30 July

18. The next question I have to consider is whether the resolutions passed on 30 July were valid on the assumption that due notice of the meeting had not been given to the Plaintiff.

19. In MacDougall v. Gardner (1875 - 76) 1 Ch 13, Lord Mellish L.J said :

"..... if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed? If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that the thing which they are entitled to do has been done irregularly; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston 1 Ph. 790 and Foss v. Harbottle 2 Hare, 461. In my opinion, that is the rule that is to be maintained...."

More recent cases such as Hodgson v. National‘Local Government Officers Association [1972] 1 All E.R. 15 at 22 F-J and Cane v. Jones [1981] 1 All E.R. 533 at 536 B-C have approved this passage.

20. The irregularity principle really comes to this : the lawfulness of a decision taken by a meeting of members or board cannot be questioned if the only facts alleged to make it unlawful is a mere informality and irregularity and the intention of the meeting is clear. This is particularly so if there is no evidence that the decision of the meeting would have been different if the correct procedure had been observed. In this connection, it is appropriate to refer to what Cotton L.J. observed in Browne v. Le Trinidad (1888) 37 Ch. D. 1 at page 10 :

"A Court of Equity refuses to interfere where an irregularity has been permitted if it is within the power of the persons who have permitted it at once to correct it by calling a fresh meeting and dealing with the matter with all due formalities."

21. Quite apart from the irregularity principle, article 88 of the Articles of Association provides :

" A resolution agreed upon by at least 75% of the directors shall be valid and effectual whether or not it shall be passed at a meeting of the directors duly convened and held."

There can be no doubt that the resolutions in question were agreed upon by over 75% of the directors.

22. In those circumstances, I have no doubt that by virtue of article 88 of the Articles and/or the irregularity principle, the resolutions passed by the board on 30 July are valid. In these circumstances, I will order that the Originating Summons be struck out as disclosing no reasonable cause of action.

Costs

23. The Plaintiff accepts that costs should follow the event. Where the parties differ is whether costs should be on an indemnity basis.

24. In the Piccadilly Radio case, the real grievance of the applicants was not because the shares had been transferred in breach of the articles but for some ulterior purpose which is the fact that they had been transferred to a company unwilling to support the "Miss World" offer. On that basis, the court concluded that the application was wholly unmeritorious and awarded costs on an indemnity basis.

25. Here, it is common ground that the Plaintiff who has an indirect minority beneficial interest in Infotech considers the price at which Infotech agreed to sell its 60% shareholding to Wang to be wholly inadequate. In the words of Plaintiff's counsel, the Plaintiff seeks to "reverse, halt or render void the effects of the sale". That of course is a reference to the sale transaction entered into between Infotech and Wang for Infotech's 60% shareholding in the Company. I do not accept that the Plaintiff's reason for issuing the Originating Summons was in order to discharge his fiduciary duties as a director. Given the fact that as none of the former shareholders entitled to complain wishes to do so and there is no evidence that any of them has any desire to be restored to the register of members, it is not apparent how the relief sought could be in furtherance of the Plaintiff's discharge of his fiduciary duty as a director. It is quite obvious that the real purpose here is to "unscramble" the Infotech/Wang transaction. That is not a legitimate purpose and it seems that the present case is not distinguishable from Piccadilly Radio, and accordingly I come to the conclusion that costs should be on an indemnity basis.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court