HAO XIAO YING AND ANOTHER v. HUANG KWANG MIN AND OTHERS

HCMP 5905/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5905 OF 2001

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JUDGMENT

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1. This is the Plaintiffs' application by originating summons for a declaration that an extraordinary general meeting of shareholders of the 4th Defendant company ("the Company") held on 2 May 1998 was invalid as being contrary to the articles of association of the Company and the Companies Ordinance as they had not been given notice of the EGM.

2. At that meeting, it was resolved that lawyers in Shanghai be authorized to act for the Company in legal proceedings there, and that the 1st and 2nd Defendants, who are directors of the Company, be authorized to handle those proceedings. The Plaintiffs have sought orders that those resolutions be declared void as well.

3. The Defendants' case is that

(i) the Plaintiffs were, under the articles of association, not entitled to notice of the EGM;

(ii) but if the Plaintiffs had been entitled to notice of the EGM, notice had been given to them in accordance with the articles of association of the Company;

(iii) in any event, even if the Plaintiffs had been entitled to notice of the EGM and even if no valid notice had been given, the failure to give notice was a mere irregularity, which could be cured as the majority shareholders supported the resolutions which were for the benefit of the Company.

The Company

4. The matter arises in the following way. The Company was incorporated in 1991 in Hong Kong. It was involved in a joint venture for a development project in Shanghai, the joint venture vehicle being called Shanghai Green Villas Ltd ("the JV company").

5. The shares in the Company were initially held as to 20% by each of 5 persons, viz. the 1st Plaintiff, the 2nd Plaintiff, the 1st Defendant, the 2nd Defendant and Lau Kin Kwok. In 1996, Lau Kin Kwok transferred his shares to Lau Yan Yin, the 3rd Defendant, so that at the material time, each of the 2 plaintiffs and the 3 defendants held 20% of the Company's shares.

6. Initially, there were 6 directors of the Company, viz. the 1st and 2nd Plaintiffs, the 1st and 2nd Defendants, Lau Kin Kwok and Madam Chiu Ching Ching, the wife of the 1st Plaintiff. When Lau Kin Kwok transferred his shares to the 3rd Defendant, Lau Kin Kwok ceased to be a director and the 3rd Defendant was appointed a director, but there was no change in the other directorships.

7. In July 2000, the Plaintiffs and Madam Chiu were removed as directors, but no relief regarding this removal has been sought in the present proceedings.

Background Facts

8. The present case arose after the 1st Plaintiff caused the Company's interest in the JV company to be transferred to a Canadian company controlled by himself called Green Valley (International) Investment & Management Ltd ("the Canadian company"), apparently on the pretext that the Company had changed its name and domicile.

9. As a consequence, the Defendants considered that the Company should issue proceedings on the Mainland to recover its interest in the JV company from the Canadian company.

10. On 15 April 1998, the board of directors of the Company resolved that lawyers in Shanghai be authorized to issue proceedings. That meeting was attended by the three Defendants, but not the Plaintiffs. Although the Plaintiffs have also alleged in their affirmations that they (and Madam Chiu) had not received notice of the board meeting, no relief regarding the resolutions passed at this board meeting has been sought in these proceedings.

11. On 16 April 1998, a notice of an EGM of the Company to be held on 2 May 1998 was issued by the 2nd Defendant as the Company Secretary. This was posted to the Plaintiffs in an envelope addressed to each of them at 6/F, 73A Blue Pool Road, Hong Kong ("the Blue Pool Road address"). That was in fact the residential address of the 1st and 2nd Defendants, not of the 1st or 2nd Plaintiffs. The reason why the 2nd Defendant caused these notices to be sent to his own address appears below.

12. When the letters were received at the Blue Pool Road address, the Filipino domestic helper employed there put them inside the building's "public mail-box", which was said by the helper in her affidavit to be "the common practice in the building, whenever the addressee is not staying in the address written on the envelope". It has not been suggested that any instructions had been given to her by the 1st or 2nd Defendants to do otherwise.

13. There was no evidence as to what then became of these letters, but the 1st and 2nd Plaintiffs say they have never received them, and that has not been challenged.

14. On 2 May 1998, the EGM of the Company was held. The 1st and 2nd Plaintiffs did not attend as they had not received notice of the meeting. The 1st and 2nd Defendants attended, with a proxy given by the 3rd Defendant to the 2nd Defendant. They resolved unanimously to approve the resolution of the board of directors passed on 15 April 1998 to instruct lawyers in Shanghai to act for the Company in the proceedings referred to above. Proceedings were duly commenced in the Shanghai court in 1998.

15. On 8 November 2001, the proceedings here were issued by the Plaintiffs against the Defendants.

16. On 11 December 2001, the Higher People's Court of Shanghai City gave judgment restoring the JV shares to the Company. It appears from the reasoned judgment of the Shanghai court that one of the contentions of the Canadian company, which was one of the defendants in those proceedings together with the 1st Plaintiff, was that the Company's resolution at the EGM was invalid for lack of proper notice. The Shanghai court rejected that submission on the basis that the resolution had in any event been passed by 60% of the shareholders of the Company.

17. On 31 December 2001, an appeal from the judgment of the Shanghai court was lodged, but as at the date of the hearing, the appeal had not been heard.

Issues

18. The issues that arise are therefore:-

(a) Were the Plaintiffs entitled to notice of the EGM?

(b) If they were, was notice validly given by post to the Blue Pool Road address?

(c) If they were entitled to notice, but no valid notice had been given, was the failure to give notice only an irregularity which could have been cured by a subsequent regular EGM, at which the Company would have passed the same resolution, because the 1st - 3rd Defendants held the majority shares?

(a) Were Plaintiffs entitled to notice of EGM?

19. The 1st issue is whether the Plaintiffs were entitled to notice of the EGM. This depends on the articles of association of the Company.

- Articles of association

20. Article 1 of the Company's articles provides that Table A should apply save in so far as they were expressly excluded or modified.

21. Article 52 of Table A provides:-

"A ... meeting of the company other than ... a meeting for the passing of a special resolution shall be called by 14 days' notice at the least. The notice ... shall be given, in manner hereinafter mentioned ... to such persons as are, under any regulations of the company, entitled to receive such notices from the company".

22. A member's entitlement to receive notice from the Company is provided in Article 135 of Table A:-

"Notice of every general meeting shall be given in any manner hereinbefore authorised to -

(a) every member except those members who (having no registered address within Hong Kong) have not supplied to the company an address within Hong Kong for the giving of notices to them;

...

No other person shall be entitled to receive notices of general meetings".

23. Thus, every member would be entitled to receive notices of general meetings, except for members who (a) have no registered address within Hong Kong and (b) who had not supplied to the Company an address within Hong Kong for the giving of notices to them.

24. The question then is: did the Plaintiffs fall within this exception? That is a question of law and fact. The question of law is first, what is the meaning of "registered address" in Article 135? The question of fact is then, did the Plaintiffs have a "registered address" in Hong Kong, and if not, had they supplied to the Company an address within Hong Kong for the giving of notices to them?

- Meaning of "registered address"

25. As to what is the meaning of "registered address" within Article 135, no definition has been given in Table A or in the Ordinance or Regulations. Before me, it has been submitted that it could mean (i) the address of the member in the register of members required (under s.95 CO) to be kept by the Company, alternatively (ii) the address of the member contained in the Annual Returns required (under s.107 CO) to be made by the Company.

26. Whilst the address of a member on the register of members and on an Annual Return might be the same, it is not invariably so. An Annual Return needs to be made only once a year, whereas the information on the register of members kept by a company should be current.

27. In my judgment, it is clear that "registered address" within Article 135 refers to the address of the member in the register of members kept by the Company under s.95 CO. Since the article governs the giving of notices by a company to its members, it makes sense for it to refer to an address in a document that is meant to be kept current, rather than to an address in a document that only needs to be reported once a year to the authorities.

- Register of members blank

28. In fact however, in the present case, the register of members had not been properly kept by the Company. No names or addresses had been entered at all in the register produced in Court.

29. This default on the part of the Company rendered it, and every officer of the Company, liable to a fine under s.95(4) CO. But apart from that, it has been submitted on behalf of the Defendants that since the Plaintiffs did not have any "registered address" (whether in Hong Kong or elsewhere), they were not entitled to notice of the EGM.

30. With respect to Mr Chow counsel for the Defendants, I cannot accept that contention. It was the Company's statutory obligation to keep a register of its members containing, amongst other things, the address of its members. It cannot rely on its own default to excuse non-compliance with its own regulations. Besides, since the entire register was blank, that contention calls into question the basis for the giving of notice of the EGM to the other shareholders, i.e. the 1st -3rd Defendants.

31. The question must therefore be, if an address for the Plaintiffs had been entered in the Company's register pursuant to the Company's statutory obligation, would that address have been within Hong Kong? If the address would have been within Hong Kong, then the Plaintiffs would have been entitled to notice under Article 135. If the address would not have been within Hong Kong, and if the Plaintiffs had not supplied to the Company an address within Hong Kong for the giving of notices to them, then the Plaintiffs would not have been entitled to notice.

- Address on register would have been within Hong Kong

32. In my judgment, taking into account the evidence of the Plaintiffs as set out in their affirmations and the evidence of the 2nd Defendant in his capacity as Company Secretary, the address that would have been entered for the Plaintiffs in the register of members, had the Company not been in default, would have been within Hong Kong.

33. This can be inferred from the fact that the Plaintiffs left matters of the "handling of the company's records" to the 2nd Defendant as Company Secretary, and the 2nd Defendant had inserted the Blue Pool Road address as the Plaintiffs' addresses in their acceptance of appointment as directors for the Company and in the Company's Annual Returns. Therefore, the likelihood on the balance of probabilities is that the register of members would have contained the Blue Pool Road address as the address of the Plaintiffs.

34. That would have been the situation at the time when the shares were allotted, as neither of the Plaintiffs nor the 1st Plaintiff's wife Madam Chiu, resided in Hong Kong then. When the 1st Plaintiff's wife later emigrated to Hong Kong, there would have been even more reason for the 1st Plaintiff's address to be within Hong Kong if it had occurred to him to effect a change in the address that should have been entered in the register.

35. I find therefore that although no address had been physically entered in the register of the Company by reason of its default, the address that would have been entered, had there not been a default, would have been an address within Hong Kong, with the result that the Plaintiffs were entitled to notice of the EGM under Article 135.

- No supply of address within Hong Kong for giving of notice

36. As a matter of completeness, I would record my finding that the Plaintiffs had not supplied to the Company an address within Hong Kong for the giving of notices to them. Whilst the 1st Plaintiff in his affirmation had said that the 2nd Defendant ought to have known of his wife's address in Plantation Road as the 2nd Defendant was a friend (that evidence not having been challenged in cross-examination) and even though the 2nd Defendant knew of the Plantation Road address when a writ in other proceedings was served on the wife in October 1998, that is not the same as saying that the 1st Plaintiff (or the 2nd Plaintiff) had "supplied" that address to the Company "for the giving of notices" to them.

37. The "supply" of an address within the meaning of Article 135 requires a positive act on the member's part. Further, even if an officer of a company knew the address of a member's wife for social or even business purposes, that is not equivalent to his having been supplied with that information "for the giving of notices" to the member.

(b) Was notice given?

38. Having found that the Plaintiffs were entitled to notice as the register of members should have contained an address for them within Hong Kong, the next question is whether the Company had validly given notice in accordance with the articles of association by having posted the notice to the Blue Pool Road address.

39. Article 132 provides:-

"A notice may be given by the company to any member either personally or by sending it by post to him or to his registered address, or (if he has no registered address within Hong Kong) to the address, if any, within Hong Kong supplied by him to the company for the giving of notice to him. Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, prepaying, and posting a letter containing the notice, and to have been effected in the case of a notice of a meeting at the expiration of 48 hours after the letter containing the same is posted, and in any other case at the time at which the letter would be delivered in the ordinary course of post".

40. It is clear that there are 4 modes of service: - (a) personal service; (b) service by post to the member; (c) service by post to the member's registered address; and (d) service by post to the address within Hong Kong supplied by the member to the company for the giving of notice to him. (Although article 132 does not repeat the words "by post" expressly for modes (c) or (d), that is assumed as it is difficult to envisage any other mode of service, historically, other than personal service or service by post. The same assumption was made in Parkstone Ltd v Gulf Guarantee Bank plc [1990] BCLC 850, 866 f-g, when Warner J construed regulation 131 of Table A of the Companies Act 1948, which is identical to Article 132 save for the substitution of "24 hours" for "48 hours" in Article 132).

41. The difference between modes (a) and (b) of the one part, and modes (c) and (d) of the other part, is that modes (a) and (b) place a higher administrative burden on the Company in that there must be actual receipt of the notices by the members, even if sent by post ("sending it ... to him"); the burden is lower for modes (c) and (d) where receipt by the member is presumed at the registered or "supplied" addresses.

42. In Parkstone, it was held that the choice of the mode of service of the notice lies with the Company. As a matter of construction of Article 132, that must be so. However, in my judgment, that choice must be made in good faith. Whilst the Company had a choice of mode of service under Article 132, that choice must be exercised under the overriding principle that the member was entitled to notice if he fulfills the prerequisites in Article 135. The opening words of Article 135 are that "notice ... shall be given" albeit "in any manner hereinbefore authorized ...". It cannot be properly suggested that where the purpose of an article is to provide for the sending of notices to members, that a company can be allowed to deliberately choose a method so that the notice would not reach the member. In Parkstone, there was no evidence that the notice sent to the Plaintiff's Gibraltar registered address would not have been received by it, or would not be received by it in time, for its representatives to attend the meeting.

43. In the present case, the 2nd Defendant's evidence was that he acted under the advice of accountants who advised him that it was adequate to send notices to members at the addresses appearing on the Annual Returns, and he had done that from as early as 1992 through till 1998. That part of his evidence was not challenged by any evidence from the Plaintiffs.

44. If the Blue Pool Road address had been the address of a third party, and if the Company had not been aware that the member would not receive the notice if posted there, the Company would indeed have properly served the notice by posting it to the Blue Pool Road address (the registered address) under mode (c). It would not have had to consider another mode of service, such as posting the notice to the member under mode (b), in the 1st Plaintiff's case, by posting it to his address in Beijing and in the 2nd Plaintiff's case, by posting it to his address in Shanghai.

45. However the Blue Pool Road address was the address of the 1st and 2nd Defendants. By allowing their own address to be used by the 2nd Defendant as the Plaintiffs' registered address for service of notices, the 1st and 2nd Defendants had made themselves the Plaintiffs' agents for the receipt of notices from the Company. They thus had a personal duty to their principals (for this limited purpose) to pass on the notices. They did not do that.

46. They must be deemed to know the "common practice" deposed to by the domestic helper but there was no evidence that they had given instructions to her to deal with the letters otherwise, such as to collect those notices for their onward transmission to the Plaintiffs.

47. The 1st and 2nd Defendants therefore knew if the notices were posted to the Plaintiffs at the Blue Pool Road address, i.e. mode (c), they (the Plaintiffs) would not receive them. Mode (b) could have been employed, as the 1st and 2nd Defendants knew that documents sent to Beijing and Shanghai had been received by the Plaintiffs.

48. As the 1st and 2nd Defendants were directors of the Company, their knowledge is imputed to the Company. Accordingly, I find that the choice of service of the notice under Article 132 was not made in good faith. Since the Plaintiffs were entitled to notice under Article 135, the Company's duty was to choose in good faith one of the modes of service under Article 132, but not one that it knew would not achieve that end. I accordingly find that no valid notice of the EGM had been given.

(c) "Irregularity" principle

49. However that is not the end of the matter. It has been well-established since MacDougall v Gardiner [1875] 1 Ch D 13 that the majority shareholders are the only persons who can complain about a technical miscarriage of a meeting.

50. James LJ expressly rejected the suggestion (put forward in the present case by counsel for the Plaintiffs) that minority shareholders are entitled to have a meeting held in strict form so that they could try to persuade the majority shareholders their way (at 23).

"Has a particular individual the right to have it [a meeting held in strict form in accordance with the articles] for the purpose of using his power of eloquence to induce the others to listen to him and to take his view? That is an equity which I have never yet heard of in this Court, and I have never known it insisted upon before; that is to say, that this Court is to entertain a bill for the purpose of enabling one particular member of the company to have an opportunity of expressing his opinions viva voce at a meeting of the shareholders. If so, I do not know why we should not go further, and say, not only must the meeting be held, but the shareholders must stay there to listen to him and to be convinced by him. The truth is, that is only part of the machinery and means by which the internal management is carried on".

51. In any event, as a matter of fact, it is unlikely that the Plaintiffs would have been able to persuade the Defendants the other way. They had all voted in favour of the Shanghai proceedings at the board meeting on 15 April 1998. In his proxy for the EGM, the 3rd Defendant had instructed the 2nd Defendant to vote in favour of the resolutions. The three Defendants have all acted in unison in these proceedings.

52. The classic definition of the rule in Foss v Harbottle as stated in Edwards v Halliwell [1950] 2 All ER 1064 was repeated in Prudential Assurance v Newman Industries [1982] 1 Ch 205, 210. Irregularities in matters affecting internal management can be regularized by the majority shareholders in a properly convened meeting, so long as it would not constitute fraud on the minority. In the well-known case of Browne v La Trinidad (1887) 37 Ch D 1, Lindley LJ held:

"... it is most important that the court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of can be set right at any moment".

53. In the present case, there is no fraud on the minority, because the resolutions were for the benefit of the Company, even though against the personal interest of the 1st Plaintiff.

54. In the circumstances, it is clear that the resolutions passed at the meeting of 2 May 1998 could always be confirmed by a majority vote of the 1st - 3rd Defendants at a meeting properly called with notice given to the Plaintiffs.

Order

55. I would therefore dismiss the Amended Originating Summons with an order nisi that costs be to the Defendants to be taxed if not agreed.