KWONG SIU KUEN v. JORIS (INTERNATIONAL) LTD AND OTHERS

HCMP2420/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2420 OF 2012

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J U D G M E N T

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1.  By an Amended Originating Summons dated 1 November 2012 (“Summons”), the applicant (“Kwong”) seeks a rectification of the 1^st respondent’s (“Joris”) register of members.

2.  An interim injunction was obtained by Kwong on 29 November 2012 (“Injunction”) against the 2^nd and 3^rd respondents (“Yu” and “Kung”) in their capacity as directors of Joris to restrain them from allotting any shares of Joris.  The Injunction continues until the determination of these matters.

3.  These matters turn, mainly, upon the proper construction of an article in the constitution of Joris.

4.  There is no material factual dispute and the background of this case can be briefly stated as follows.  Joris was established in 1983 by Kwong’s husband, who had passed away (“Deceased”), together with 3 other persons. As of 18 July 2007, the 400,000 issued shares of Joris were held by the Deceased, Kung, Yu (the eldest son of the Deceased and Kwong) and Kung’s ex-wife (“Chan”).  Their respective shareholding was 150,000, 150,000, 50,000 and 50,000.

5.  On 19 July 2007, the Deceased transferred all his shares in Joris to Yu to hold on trust for him.  In 2011, Chan transferred all her shares to Kung.  From then on, Joris has only 2 shareholders, Kung and Yu, each holding 200,000 shares.  They are also the only directors of that company.

6.  The Deceased passed away in August 2007.  Letters of Administration were granted to Kwong in June 2008 by which she became the sole Administratrix of the estate of the Deceased.

7.  In September 2010, Yu executed an instrument of transfer to transfer the 150,000 shares, which were held on trust, to Kwong.  In February 2011, Kwong lodged the transfer with Joris.  In December 2011, Joris refused to register the transfer.

8.  Joris is a private company.  It is unsurprising that the registration of transfer of its shares is subject to the unfettered discretion of the directors – Article 22 of its Articles of Association (“Articles”).  However, under Art. 22, the directors must give notice of their refusal to register the transfer to the transferee within 2 months after the transfer was lodged with the company.

9.  The refusal here was outside the 2 month period and therefore the registration of the transfer cannot be declined under Art. 22 (see Palmer’s Company Law, 25^th edn, Vol , §6.404).  This is not disputed.

10.  However, Joris and Kung contend that the transfer is in breach of the Articles (the pre-emption right provisions under Art. 25) and Joris is unable to register such a transfer at all (see Tett v Phoenix Property and Investment Co Ltd & Ors [1986] BCLC 149).  Kwong does not quarrel with the principle of law but argues that Art. 25 has no application to the transfer.

The Articles

11.  The provisions in the Articles are not uncommon amongst private companies. Art. 1 excludes the application of Table A in the First Schedule to the Companies Ordinance, Cap 32.  Art 4(c) provides that the right to transfer shares is restricted in accordance with the Articles.  Art. 10 stated that Joris is under no obligation to recognise any trust regardless of any notice thereof on its part.

12.  The “transfer and transmission of shares” is governed by Arts. 20 to 25. The relevant provisions are set out below:

“20. The instrument of transfer of any Share in the Company shall be in writing, and shall be executed by or on behalf of the transferor, and transferee, and duly attested, and the transferor shall be deemed to remain the Holder of such Share until the name of the transferee is entered in the Register in respect thereof.

…

23. On the death of any Member (not being one of several joint Holders of a Share) the legal personal representative of such deceased Member shall be the only person recognised by the Company as having any title to such Share subject always to Articles 22 and 25 hereof.

24. Any person becoming entitled to a Share or Shares by reason of the death or bankruptcy of a Member shall upon such evidence being produced as may from time to time be required by the Directors, have the right to make such transfer of the Share or Shares as the deceased or bankrupt person could have made, and in the case of a deceased shareholder the Directors shall have no right to refuse the registration of a transfer to a person or persons entitled under the will or intestacy of the deceased.

25. (1) Save as provided by clause (6) hereof, no Share shall be transferred to a person who is not a Member so long as any Member (or any person selected by the Directors as one whom it is desirable in the interests of the Company to admit to membership) is willing to purchase the same at the fair value.

(2) Except where the transfer is made pursuant to clause (6) hereof, the person proposing to transfer any Share (hereinafter called the ‘proposing transferor’) shall give notice in writing (hereinafter called a ‘transfer notice’) to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as the fair value, and shall constitute the Company his agent for the sale of the Share to any Member of the Company (or person selected as aforesaid) willing to purchase the Share (hereinafter called the ‘purchasing Member’) at the price so fixed, or, at the option of the purchasing Member, at the fair value to be fixed by the auditor in accordance with clause (4) hereof. A transfer notice may include several Shares, and in such case shall operate as if it were a separate notice in respect of each. A transfer notice shall not be revocable except with the sanction of the Directors.

…

(6) If the Company shall not, within the space of twenty-eight days after being served with a transfer notice, find a purchasing Member and give notice in manner aforesaid, the proposing transferor shall at any time within three months afterwards be at liberty subject to Article 22 hereof, to sell and transfer the Share (or where there are more Shares than one, those not placed) to any person and at any price.

(7)   The Directors may call on the executors or administrators of a deceased Member to transfer the Shares of the deceased to some person to be selected by such executors or administrators and approved by the Directors, and if the executors or administrators do not comply forthwith with such call within 60 days from the date of receipt of such call they shall be deemed to have served the Company with a transfer notice, under clause (2) hereof and to have specified therein a sum equal to the amount paid up on the Shares as the fair value, and the subsequent provisions of that clause and other clauses of this Article shall take effect.”

Law

13.  Mr Chain, who appeared for Kwong, relied upon 3 principles set out in Hurst v Crampton Bros (Coopers) Ltd & Ors [2003] 1 BCLC 304 at 308h to 309f, which may assist this court in the construction of Art. 25.  Ms Eu SC, who appeared with Mr Chau for Joris and Kung, took no issue with those principles. Mr Chow, who appeared for Yu, took a neutral stance in respect of the Summons. I have no difficulty accepting the 3 principles and they are set out below:

“[13] The question turns on the true construction of the pre-emption clause. Before I consider that, however, it is helpful to consider some of the cases cited to me, though, save for one, they were concerned with differently worded clauses. The reason the cases are of some assistance is to show the approach to be adopted to this sort of clause. They cannot, of course, determine how this particular clause is to be understood.

[14] First then, there are two principles which are somewhat in contradiction of one another. The first principle is based on the fact that a share is property. People are entitled to do what they like with their profits, subject to any restraints. Restraints must be accordingly construed restrictively. This is the Greenhalgh v Mallard principle [1943] 2 All ER 234. Lord Greene MR said (at 237):

‘Questions of construction of this kind are always difficult, but in the case of the restriction of transfer of shares I think it is right for the court to remember that a share, being personal property, is prima facie transferable, although the conditions of the transfer are to be found in the terms laid down in the articles. If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that that was the intention.’

[15] The counter-principle runs thus: clauses restricting who may be members of a company such as a small private company have the clear purpose of keeping the membership to the privileged class defined in the article - an outsider can only come in if no member is willing to buy. This principle was best expressed by Lord Reid in Lyle & Scott Ltd v Scott's Trustees [1959] 2 All ER 661 at 667, [1959] AC 763 at 777:

‘The purpose of the article is plain: to prevent sales of shares to strangers so long as other members of the appellant company are willing to buy them ... ’

[16] Next there is the principle that this sort of clause should be construed as a business document:

‘I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the article, in preference to a result which would or might prove unworkable.’ (per Jenkins LJ in Holmes v Keyes [1958] 2 All ER 129 at 138, [1959] Ch 199 at 215).”

14.  I bear in mind those principles.  However, it appears to me that the terms of Art. 25 are reasonably clear and their natural meaning is plain.  On its face, a transfer of shares by a trustee to a beneficiary of the trust is caught by Art. 25.  In other words, there is no exception provided for such circumstances.  I see nothing wrong or illogical or lacking in business efficacy about it.  All transfers are treated equally (with the exception of transfer between members) so as to preserve the right to exclude people who are not regarded as acceptable to the company. 

15.  Mr Chain argued that Art. 25 does not apply to an “involuntary transfer”. By that he meant that the transfer by a bare trustee would be a matter of direction by the beneficiary.  It is to be distinguished with a sale, which is a voluntary transfer and would fall within Art. 25.  Mr Chain relied heavily upon Safeguard Industrial Investments Ltd v National Westminster Bank Ltd & Anr [1982] 1 WLR 589.  To that authority I now turn.

Safeguard Industrial Investments Ltd

16.  It will become apparent that this authority has to be read carefully.  The facts of that case are rather complicated.  However, the relevant facts are that one the shareholders had passed away and his shares were then held by his executor on trust for G and her brother.  There were pre-emption provisions in the articles of the company, which are not dissimilar to some of those found in Art. 25.  One of the other shareholders sought a declaration to the effect that on the completion of administration the executor was obliged to give a transfer notice to the company thereby triggering the pre-emption right.  The executor’s position was that the administration was complete, it was holding the shares on trust for G and her brother, but they did not want the executor to transfer the shares to them, and the executor did not propose to do so unless so directed. 

17.  It was held that on the true construction of the pre-emption provisions a member holding shares registered in his name as bare trustee for non-members was not deemed to be desirous of transferring his shares whilst the beneficiaries expressed no desire to exercise their right to compel a transfer to them.  It can readily be seen that the ratio of that case is not applicable to the present circumstances.  That is common ground.

18.  However, there is an obiter dictum in the judgment which Mr Chain relied upon to support his involuntary transfer argument.  To understand the dictum properly, one needs to examine the context in which it was expressed.  I quote from the judgment of Oliver LJ at 594E-G, 595E-H and 598D:

“ The key article is article 7. I need not read the whole of the article but I should read in full paragraphs (A) and (B) (a) and (b). They are in the following terms:

‘(A) The preference shares may be transferred without restriction except as provided by clause 3 of Part II of Table A. (B) A member shall not be entitled to transfer an ordinary share except subject to clause 3 of Part II of Table A and in accordance with the following provisions:- (a) An ordinary share may be transferred by a member or other person entitled to transfer to the other members in the proportions between them (if more than one) as nearly as may be to the number of ordinary shares held by them respectively, but no ordinary share shall be transferred to a person who is not a member as long as any member is willing to purchase the same at the fair value. (b) Except where the transfer made is pursuant to article 8 hereof, in order to ascertain whether any member is willing to purchase an ordinary share, the proposing transferor shall give notice in writing (hereinafter called ‘the transfer notice’) to the company that he desires to transfer the same. Such notice shall constitute the company his agent for the sale of such share to any member of the company at the fair value.

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Finally, sub-paragraph (h) contains special, and even more severe, provisions relating to a member who is employed by the company. If such a member ceases to be employed then he comes under an obligation to serve a transfer notice. I will read the last part of this sub-paragraph because it may have some significance in relation to the question for decision in this appeal, inasmuch as it contains at least an indication that a proposing transferor in sub-paragraph (b) is one who voluntarily assumes that position. The relevant part of the sub-paragraph is in these terms,

‘and such person or member shall give to the company a transfer notice in the manner provided by clause (b) of this article, and the same results shall follow as in the case of a notice which is voluntarily given, and if such person or member as aforesaid shall fail to give such transfer notice the directors may, as his agents, give the same for him and complete on his behalf the appropriate declarations (if any) required of a transferor by the Exchange Control Act 1947 and regulations made thereunder.’

This much can be deduced from this sub-paragraph, that the draftsman clearly did not contemplate a proposing transferor under sub-paragraph (b) who did not propose voluntarily.

…

 

Whatever may be said about the effect of an uncompleted agreement to sell shares - and it is unnecessary for the purposes of this appeal to express any concluded view about that - I find myself quite unable to construe the article in the instant case in a way which would make a person who involuntarily comes under an obligation to transfer, if called upon, a ‘proposing transferor.’”

[emphasis added]

19.  Properly understood, the quoted passages demonstrate that (a) the involuntary transfer point arose out of the construction of the provisions in that case and (b) it was based upon article 7(B)(h) because that sub-paragraph referred to “notice … voluntarily given”, and from that Oliver LJ took the view that “the draftsman clearly did not contemplate a proposing transferor under sub-paragraph (b) who did not propose voluntarily”.

20.  There is no equivalent or similar provisions to be found in Art. 25. In any case, an authority on the construction of a document is, with respect, of assistance only when a similar provision is being considered.  In the premises, I see no ground for accepting Mr Chain’s involuntary transfer argument.  I see no reason why the transfer in question is not caught by Art. 25.

21.  My conclusion is fortified by the other provisions in the Articles which govern the transfer of shares upon the death of a member.  Firstly, upon the death of a member, his legal representative will be the only person recognised as having title to the deceased’s shares.  However, the twin restrictions of Arts. 22 and 25 will apply (see Art. 23).  In other words, according to Art. 23 if those shares are to be transferred, the pre-emption right may be triggered and the registration of the shares will be subject to the absolute discretion of the directors. 

22.  Further elaboration on the rights to have the deceased’s shares transferred is provided in Art. 24.  It may be read as containing two limbs. Firstly, the legal representative is entitled to make such transfer of the shares “as the deceased could have made”.  In other words, he stands in the shoes of the deceased in respect of any transfer (the twin restrictions will apply).  Secondly, the directors will have no right to refuse to register the shares if they are transferred to the beneficiaries of the deceased’s estate. However, this only removes the restriction under Art. 22, but not Art. 25.  In other words, if the shares are to be transferred to a non-member beneficiary, the pre-emption right will be triggered. 

23.  Finally, Art. 25(7) provides that the directors may take the initiative and ask the legal representative to transfer the shares to someone they find acceptable and if the request is refused the pre-emption right will be triggered.  In other words, even if the legal representative decided to do nothing about the transfer of the shares, they may be forced to do so. 

24.  These provisions of course do not apply to the presence circumstances. However, they do not allow any distinction to be drawn between voluntary and involuntary transfer, and they are consistent with the above construction of Art. 25.

25.  For completeness, I agree with Ms Eu that the involuntary transfer argument is unsustainable because the company does not recognise any trust (Art. 10).  If only voluntary transfer (eg, under a discretionary trust) will trigger off the pre-emption right, it would impose an obligation on the part of the directors to investigate the details of the trust.  Further, it is unclear what comes within “involuntary transfer” and no attempt has been made to define it. 

Art. 20

26.  There is a controversy concerning the non-compliance with Art. 20.  It is undisputed that the instrument of transfer filed by Kwong was not duly attested.  Although I have some sympathy with Mr Chain’s submission that it was a simple matter and had any objection been raised at the material time it would have been put right easily, I do not see that there is an answer to this deficiency.  It is not suggested that there is any estoppel or any legal reason why Joris or Kung cannot rely on the strict compliance of Art. 20.  In the circumstances, the Summons should be dismissed on this ground also.

Conclusions

27.  For the reasons stated above, the Summons is dismissed.  I make an order nisi that the costs of and occasioned by the Summons be borne by Kwong.  I grant a certificate for two counsel in favour of Joris and Kung. 

28.  There is no dispute that the costs of and occasioned by the Injunction should be borne by Kwong also in the event that the Summons failed, and I so order.