TSE WING YIN, IRENE v. CHAN WAI KEUNG AND ANOTHER

HCMP5085/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.5085 OF 2000

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

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

J U D G M E N T

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

1. I shall call them Irene, Dick and Silvia. Irene knew Dick as a friend in July 2000. Dick knew Irene was planning to open a coffee shop in Wan Chai and he indicated to her that he wished to participate. Then Dick introduced his friend, Silvia, to Irene and indicated that the capital he would put into the coffee shop was partly owned by Silvia. Eventually in late July 2000, they decided to open a Japanese restaurant instead. Between 27 July 2000 and one month later, i.e. 29 August 2000, they discussed on a Shareholders Agreement ("the Agreement") and eventually the document was signed on 29 August 2000 although it was backdated to 27 July 2000.

2. Basically, the Japanese restaurant was to be owned by a limited company which was incorporated on 16 June 2000. The shareholdings of the company are as follows :

Irene - 60%

Dick - 20%

Silvia - 20%

All three of them are directors of the company.

3. Two clauses in the Agreement in Chinese are relevant in the application before me and I shall quote them in the original Chinese as follows :

「3. 立約人的職位及職權：

A) IRENE為當然董事局成員為執行董事，並於召開股東大會及董事會議時為當然主席。

B) DICK及SILVIA為董事，董事成員為於董事會議中協商與制訂公司經營方針及政策。日常公司之業務運作及員工之招聘與管理，概由執行董事全權負責，其他董事對公司有任何意見或問題應該在每星期之董事例會中提出商討，如有任何爭議必須按公司法以投票方式決定。在特殊或緊急情況下，必須先行聯絡[執行董事]，不得私自行動。

...

10. 股東/董事違反守則：

任何董事/股東違反上述守則，公司會先給予口頭警告，警告無效便會發警告信給該名董事/股東，在警告信發出後的一個星期內須[召]開特別股東大會，決議該名董事/股東是否需要退股/離職。公司將不會向違反守則者作出任何補償/賠償。如有股東/董事作出任何不合法行為而有損害公司利益的，會送官究治。」

4. It was provided by the Agreement that the three parties shall contribute to the working capital of the company in the following manners :

	Irene	Dick	Silvia
	$	$	$
On or before 3 August 2000	100,000	50,000	50,000
On or before 15 August 2000	100,000	50,000	50,000
On or before 30 August 2000	100,000	50,000	50,000
On or before 15 September 2000	150,000	-	-
	--------------------------------------
	450,000	150,000	150,000

The total capital would be $750,000. It is quite apparent from the provision that in total, Irene would have to contribute $450,000 according to the schedule, Dick $150,000 and Silvia another $150,000.

5. However, the co-operation between the parties was of a short life. There are varied allegations made by the parties. It is not my duty here to resolve the dispute on paper but it can be safely said that there are some hard and bare facts before this court which will be the basis for exercising my discretion in the application herein.

6. It is quite clear by now or at least by 14 October 2000, Irene has contributed nearly $625,000 by way of various payments, whereas Dick and Silvia have contributed about $214,000 only. It was the allegation of Dick and Silvia in the petition under section 168A and also in the application before me that the dispute between the parties started in early September 2000 when they suspected that Irene has not contributed her share according to the Agreement. Further, there was an allegation that Irene has paid certain sums not for the benefit of the company or otherwise inflated certain sums. All these were bare allegations in the papers before me.

7. The bare fact was that by the end of August 2000, Irene has contributed $270,000 and shortly thereafter, by 7 September 2000, her contribution was about $375,000, whereas it is quite clear that Dick and Silvia have so far contributed $214,000 and they were late in the final contribution of $50,000 each which should be by 30 August 2000 which sparked off the dispute between the parties.

8. I have said earlier that it is not my duty in the application here to resolve the dispute but the basic facts presented by the parties are helpful.

9. In the end, Irene considered that it was useless or futile to convene a directors' meeting since she would be outvoted and it was anticipated as contended by Mr Paul Wong, solicitor for Irene, that she intended to hold a shareholders' extraordinary general meeting ("EGM") and has given notice to the other side. However, it was impracticable for the directors to pass a resolution to convene an EGM since Irene would be outvoted by the two other directors. Consequently Irene applied herein under section 114B of the Companies Ordinance, Cap.32 for a court order to call for such a shareholders' meeting to allow two further directors to be appointed.

10. It should be noted here that it was not an application to dismiss the existing directors, Dick and Silvia, but to provide for two other directors since it was contended by Irene that Dick and Silvia have refused to sign cheques at an very early stage which would disable the company as a going concern to run the Japanese restaurant, and the whole assets of the company are now at stake. Section 114B provided as follows :

" (1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting of the company in manner prescribed by the articles or this Ordinance, the court may, either of its own motion or on the application of any director of the company or of any member of the company who would be entitled to vote at the meeting, order a meeting of the company to be called, held and conducted in such manner as the court thinks fit, and where any such order is made may give such ancillary or consequential directions as it thinks expedient, including a direction that 1 member of the company present in person or by proxy shall be deemed to constitute a meeting."

11. I shall now deal with certain authorities decided under this section to indicate how a court should exercise its discretion in a section 114B application which is equivalent to section 371 of the Companies Act 1985 in England. The case of In re Whitchurch Insurance Consultants Ltd [1993] BCLC 1359 was heavily relied on by Mr Wong for Irene. The facts are contained succinctly in the headnote. In this case it was decided that the mere existence of a section 459 petition at the date of a hearing of the application under section 371 of the 1985 Act (and they are equivalent to our section 168B petition and our section 114B of the Companies Ordinance) was not an inevitable bar to the court making an order under that section to hold a meeting, but was something which the court would take into account in considering whether to exercise its discretion to make such an order. I shall add here that Dick and Silvia have already petitioned for the winding up of the company or otherwise for an order that Irene should buy out the shares of Dick and Silvia.

12. The fact in the case of Whitchurch was Mr R has two-third of the shareholdings and Mrs R has one-third of the shareholdings. On the facts, it was impracticable to hold a meeting and the order sought would be made to allow a board of directors which would be quorate to be appointed.

13. The second case is In re Opera Photographic Ltd [1989] BCLC 763. The fact was again succinctly stated in the headnote that one side was 51% shareholders and the other 49%. It was decided in that case the quorum requirements in the company's articles of association could not be treated as conferring on the 2nd respondent (a minority shareholder) a form of veto to prevent the holding of a shareholders' meeting to consider removing him from office as director. Accordingly, since the applicant held a majority of the shares and possessed a statutory right to remove the 2nd respondent from office but it was impracticable to hold a meeting because of the quorum requirements, the court would make the order sought. It should be noted here that the application was to remove the director in that case.

14. The third case relied on by Mr Wong is the Court of Appeal case of In re Universal Horizon Investment Limited ("UHIL"), CACV 99 of 2000. It was said by Rogers JA (as he then was) at page 6 that :

"... I have no doubt, in my mind, that that discretion [i.e. the discretion to be exercised under section 114B] should be exercised by ordering the holding of a meeting. In many ways, the sooner a meeting is held, the better : the affairs of the company can be properly sorted out for the benefit of the shareholders. If the shareholders cannot get on amongst themselves, there are other ways of resolving that matter, but preventing the company from holding meetings is not a way of sorting out shareholders' disputes.

In indicating that I consider that this court should allow this appeal and order the holding of a meeting as prayed, I consider that it may be sensible that the order should lie in chambers for a period of say, 14 or 21 days, to enable the parties, perhaps, to come to some agreement as to who may be elected as directors at the meeting which should be held."

Godfrey VP at page 7 said as follows :

" The gravamen of the charge against Madam You is that she is acting in bad faith, or for a collateral purpose, in seeking to persuade the court to order this meeting of the company. I am not satisfied that that charge has been made out. The plaintiff has satisfied all the formal requirements for an order of the court directing such a meeting, and, in the absence of any good reasons to the contrary, the proper course, for the reasons given by Rogers JA, is to order that the meeting be held."

15. As I have said earlier that it is quite clear from the papers before me that by 30 August 2000, Dick and Silvia have not paid the required $100,000 more by way of contribution to the working capital. Mr Leung, counsel for Dick and Silvia, has ably argued that there are factors which I have to consider and also certain decisions which decided that such a meeting should not be held. On the factual issue, he pointed out that by 30 August or by the end of 31 August 2000, Irene has not paid the required $300,000 in full either and she was short by about $30,000. Mr Wong however submitted that at least by 7 September 2000, she had made up the rest or, I should say, more than making up the rest and this was the time the dispute started and Dick and Silvia indicated their refusal to sign cheques. They did not pay up their agreed contribution in full. This, I must say, is a breach of the Agreement.

16. The second thing pointed out by Mr Leung is that the original agreement was to pay all these monies into a designated bank account, but now Silvia put forward the case that her payment was by way of disbursements for the company as evidenced by the general ledger. However, I think Mr Wong has rightly pointed out that in the petition of Dick and Silvia, they have said that their own payment of this aggregated sum of $214,000 was by way of depositing the same on different occasions to the company's bank account and also by issuing personal cheques paid directly for the price of goods for settling the company's expenses in pursuance of the oral requests made by Irene. In other words, it must be by conduct or by implied agreement that the parties have changed the mode of the payments and no point should be taken by them.

17. The case, I must say, is similar to what Godfrey VP said in UHIL. The gravamen of the charge against Irene is that she is acting in bad faith or for a collateral purpose in seeking to persuade the court to order this meeting of the company. He was not satisfied in that case that charge that director has been made out. Similarly, in the case before me, I am not satisfied that charge has been made out either.

18. The clear evidence before me is that the balance of the capital contribution has not been paid by Dick and Silvia and in the affidavit and the petition, there are various excuses made as alleged by them. I am not deciding the case nor the section 168B petition but the bare fact of non-payments and different excuses put forward to explain the non-payments are factors I can take into account in exercising my discretion. In short, the alleged misconduct on the part of Irene was not supported by any documentary evidence apart from bare allegations from Dick and Silvia but they, on the other hand, were late in their contributions and even up till now have not fully paid up their agreed contributions.

19. Mr Leung relied heavily on the case of Manfield Coatings Co. Ltd v. Springfield Coatings Co. Ltd & Anor [1995] 1 HKC 74 decided by Cheung J on 13 December 1994. I will not repeat the facts of the case. It was held in that case :

" (1) In the circumstances of the case, it was impractical to hold the extraordinary general meeting of the company due to the absence of a quorum ...

(2) The general right to have a quorum in a general meeting of a company could not be regarded as a class right attached to the shares of the minority shareholders ...

(3) It was not the function of the court to make a new shareholders' agreement between the parties and impose it on them by extracting various undertakings from the parties. There was no written shareholders' agreement in the present case but it was contended that there was an agreement regarding the management and control of the company between C and Y, which the court should take into account in the exercise of the discretion to order a meeting. ...

(4) The court's discretion should not be exercised in favour of the plaintiff. To do otherwise would override the agreement reached between C and Y on the management and control of the company."

Mr Leung relied on that decision and submitted that it is not impracticable to hold a directors' meeting. It was agreed under the Agreement that everything should be decided in the weekly directors' meeting. It was just that Irene considered it pointless to consult two other directors or otherwise to hold a directors' meeting because she would be outvoted in the directors' meeting. The short answer to that is Irene was not asking this court to hold a directors' meeting. She was asking this court to call a shareholders' meeting in order that the deadlock between two camps of directors would be resolved by an EGM which would enable the majority shareholders to control the company. This is the effect of the application.

20. The fact that she could call a directors' meeting but would be outvoted by the other directors in trying to pass a resolution to call an EGM means that it is impracticable to hold an EGM. As decided by various cases, apart from Manfield Coatings, the general right to have a quorum in a general meeting of the company could not be regarded as a class right attached to the shares of the minority shareholders. In other words, minority shareholders could not just veto an EGM by not attending the EGM so that it would be inquorate. In my view, the applicant has fulfilled the first criteria and, that is, it is impracticable to hold the EGM of the company due to the absence of a quorum or the refusal to co-operate from the other two directors to hold such a meeting.

21. The main bone of contention, I think, in this case is the decision in Manfield Coatings which says that it was not the function of the court to make a new shareholders' agreement between the parties and impose it on them by extracting various undertakings from the parties. However, I consider the Manfield Coatings case is distinguishable in that there was no written shareholders' agreement in the Manfield Coatings case. There is one in the case before me. The application now before me was not to oust clause 3B thereof whereby Dick and Silvia could not have a say in the running of the company. At page 79 of Manfield Coatings, it was said that :

" The second defendant referred to the unauthorised withdrawal of money by Mr Yuen from the first defendant's account. The first defendant's assets had deteriorated from a healthy state to a negative value. The second defendant expressed his doubt about the probity of Mr Yuen's conduct of the company's affairs. These allegations had not been denied by Mr Yuen. If the second defendant was ousted as a director, the management would be in the hands of someone who is accused of such misconduct. Dillion LJ in Harman v BML Ltd, above, held that he attached great importance to the fact that there were allegations of unauthorised payments from the company. He said that 'You do not want in charge of the company's business people who are strongly suspected of having stolen the company's moneys." (emphasis applied)

It was said by Cheung J at page 78 that :

"I accept that the general right to have a quorum could not be regarded as a class right attached to the shares of the minority shareholders. However, in the present case, the second defendant is saying that he and Mr Yuen, when they formed the first defendant, agreed to do so on the basis of a partnership and they had the joint control and management of the company and they agreed that, without the prior consent of the other party, there would not be any change in the directorship and the ownership of the shares of the company. This was also the agreement between them when Mr Yeung joined the company in 1992 and remained to be so when the second defendant signed the resolution consenting to Mr Yuen and Mr Yeung transferring their shares to the plaintiff.

While the partnership factor was disputed by Mr Yuen and Mr Yeung in the correspondence, this is one of the issues that the court has to adjudicate in the winding up petition. To install an additional director at this stage would override the agreement reached between the second defendant and Mr Yuen regarding the control and management of the company."

Then Cheung J went on to say :

"... Although in Re Sticky Fingers Restaurant Ltd [1992] BCLC 84, the court was only prepared to order a meeting for the purpose of appointing an additional director upon the applicant's undertaking not to remove the other director, Dillion LJ in Harman v BML Ltd [1994] 1 WLR 893 was of the view that it was not the function for the court to make a new shareholders' agreement between the parties and impose it on them by extracting various undertakings from the parties. I will respectfully follow this approach. In that case, the Court of Appeal reversed the judge's decision to call for a meeting because to do so would override class rights deliberately entrenched for the protection of a minority shareholder and recorded in a shareholder's agreement."

Apparently, this case was decided in favour of Dick and Silvia. However, the case here is, to my mind, quite different. Mr Wong submitted that the court should look at the basic facts of the case. Irene has fulfilled her promise to contribute to the capital and, in fact, because of the refusal of Dick and Silvia to sign cheques, she has contributed much more up to $625,000 as appeared by general ledger. Her original contention was backed up by a firm of accountants who audited the account. The auditors said this could not be an audited account simply on the ground that an audited account required to be signed by two directors but apparently according to his instructions the other two other directors refused to sign the account. The anticipated working capital was only $750,000 and Irene has contributed much more than the $450,000 required of her.

22. The other bare fact is the other two directors did not come up with $300,000 required of them and is about $85,000 short of their contribution on or before 30 August 2000 and, thereafter even up to to-date. The company could not go on without another director signing cheques for various payments. The deadlock could only be resolved by appointing two further directors and, here the plaintiff, Irene, was not to oust the other two directors, they could still participate in the daily running of the company.

23. It is provided by clause 10 which says that if there is a breach of the aforesaid clauses, there will be a warning and, if after the written warning which has been given in this case, the whole matter should be resolved by shareholders' EGM and she was just working according to the Agreement.

24. In the end, I consider that I should exercise my discretion in favour of the plaintiff, Irene. In so doing, I am also conscious that the cash at hand in the company now is only $40,000. The risk of further dissipation of assets of the company will be quite minimal. It is not a case as in Manfield Coatings where the allegations of impropriety have not been denied by the other party. The undertaking to be given in terms of the case of In re Sticky Fingers Restaurant Ltd [1992] BCLC 84 at page 90 subparagraphs (a) and (c) would be sufficient to safeguard any risk and subparagraph (b) is irrelevant to the case before me.

25. The order I am making is as follows :-

that an EGM may be convened by the court for the purpose of considering and if thought fit passing as ordinary resolutions as set forth in the schedule hereto; i.e.

(a) that the company to appoint two new directors in addition to the existing directors until further order of the court and, in particular, the court hearing the petition under section 168A of the Companies Ordinance; and

(b) that the quorum for the said EGM of the company be one member present in person or by proxy.

26. As decided in UHIL, there should be 14 days before such meeting to be held so that parties can come to view some senses of putting an end to this saga involving not a considerable amount of money. The EGM shall be convened at 4:00 p.m on 6 February 2001 at the plaintiff's solicitors' office. Of course, this is upon the undertaking of the plaintiff in terms of paragraph (a) in Sticky Fingers case, i.e. at any meeting, the plaintiff herein will provide that any directors appointed pursuant to the order will be restrained from acting as such director unless and until that is delivered to the defendants' solicitors an undertaking signed by the director to the effect that pending the outcome of the section 168B petition proceedings, he or she will not at any meeting vote in such fashion as to dismiss the two defendants from their directorships or to exclude them from their rights and duties as such directors or to diminish such rights or duties in any way and paragraph (c), vote to effect any alteration in the constitution or capital of the company. In Schedule (1) of the originating summons, in addition to the existing directors, the new directors shall also be the authorised signatories to the issuance of cheques of the company. I also order "liberty to apply" for any unforeseeable and incidental matter.

27. Costs should follow the general rule that costs should follow the event as decided in UHIL, and costs for the application shall be to the plaintiff, to be taxed if not agreed.

28. Lastly I would like to add that litigation is a very expensive exercise and I implore parties to come to certain terms in this kind of dispute which does not involve too much but the injury to them by way of costs would be quite enormous. I hope parties will make some senses out of the dispute.