LEE LEUNG NANG STEWART v. KAREN LEE AND OTHERS

HCA 1496/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1496 OF 2006

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D E C I S I O N

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1.  The Plaintiff applied for default judgment by summons dated 9 October 2006. The Statement of Claim was filed on 8 September 2006 and no defence had been filed within the time prescribed by the rules. On 7 November 2006, the Defendants issued a summons seeking extension of time to file defence. A draft defence was exhibited to the Defendants’ evidence. The Plaintiff contended that the draft defence is without merits in respect of two matters and invited the court to give judgment on that basis.

2.  Although this is not an Order 14 or Order 14A application, the Defendants accepted that the court should have regard to the merits of the draft defence in dealing with the application for default judgment and the cross-application for extension of time (see California Insurance Co Ltd v Choung Suk Wah HCA 172 of 2002, 19 Sept 2002, Deputy Judge A Cheung (as he then was), Para.20 and Gibbings v Strong (1884) 26 Ch D 66).

3.  At the hearing on 13 December 2006, Mr Mok SC indicated on behalf of the Plaintiff that he would not proceed with the application for default judgment regarding the appointment of the 1^st Defendant as director of the 4^th Defendant. Counsel however contended that the materials filed by the Defendants did not disclose any meritorious defence regarding the retirement of the Plaintiff as director and the appointment of the 2^nd and 3^rd Defendants as directors of the 4^th Defendant.

Retirement of the Plaintiff

4.  The defence case is that the Plaintiff was not re-elected as director in the annual general meeting of 4 November 2004.

5.  The Plaintiff contended that that annual general meeting had not been properly convened and as such had no legal effect. It is said no notice had been given to the Plaintiff about that meeting.

6.  The requirement for notice for annual general meeting to be given is set out in Section 114(2) of the Companies Ordinance. There should be 21 days’ notice in writing. Counsel did not suggest that there is any provision to the contrary in the Articles of Association of the 4^th Defendant.

7.  The Defendants did not dispute that the requirement of Section 114(2) was not complied with regarding the meeting of 4 November 2004. Ms Chan contended that the meeting was nevertheless because the conduct of that meeting was in accordance with past practice adopted by the 4^th Defendant.

8.  That contention overlooks an essential ingredient in the Defendants’ own evidence regarding the past practice. The 1^st Defendant set out the past practice in Paragraphs 23 and 24 of her affirmation. In a nutshell, she said that the affairs of the 4^th Defendant had all along been conducted by paper minutes and no actual meetings were held and notices were not given for any meetings. An important element in such practice is, as stated in Paragraph 23,

“This means that for all matters requiring the consideration and approval of the Board and the shareholders, the Secretary would prepare the minutes in accordance with the instructions given by the directors in charge of the day-to-day affairs and then circulated the minutes to other directors and shareholders for signature.”

9.  With the signature of all directors (in case of board minutes) and all shareholders (in case of minutes for general meetings), it is well settled that the procedure would be regarded as valid. Mr Mok did not dispute this.

10.  However, it is common ground that the minute for the general meeting of 4 November 2004 was not circulated for signatures. It was only signed by 2 shareholders out of 14 shareholders of the 4^th Defendant. Hence, the Defendants simply failed to establish that the annual general meeting of 2004 was “held” in accordance with the past practice alluded to by the 1^st Defendant.

11.  Ms Chan advanced a submission that at some stage in the 1990’s the 4^th Defendant had ceased to circulate minutes for signatures and despite that the Plaintiff continued to endorse the validity of such meetings by signing on the financial statements. In my judgment, the evidence produced by Defendants does not support this contention. In the course of submission, Ms Chan accepted that the Defendants were unable to prove positively that there was no circulation of paper minutes in the 1990’s. The person who kept the minutes had passed away and the Defendants simply do not know whether the minutes for the relevant period were lost or they were simply not prepared. The 1^st Defendant did not assert in her affirmation that minutes were not circulated for signature during that period. Hence, the signature of the accounts by the Plaintiff during that time is neither here nor there.

12.  It is therefore plain that there had not been any valid annual general meeting held on 4 November 2004.

13.  Ms Chan urged this court to refuse relief to the Plaintiff on account of equity. She submitted that the evidence shows that the Plaintiff had not been interested in the affairs of the 4^th Defendant and he had not fulfilled his duty as director over the years. The Plaintiff raised objection about lack of notice for meetings regarding the 4^th Defendant as early as 10 October 2000 and challenged the appointment of another director Sammy in June 2001 in correspondence through lawyers in June 2001. However, after a board meeting on 19 June 2001 (that ended unhappily without achieving anything fruitful), the Plaintiff did not take any further action.

14.  The Plaintiff is seeking declaratory relief. Equitable considerations should be taken into account in the exercise of the discretion in deciding whether such relief should be granted. However, Ms Chan had not been able to persuade me that this is a proper case where the court could withhold relief on equitable grounds. Once it is concluded that the Defendants were not following past practice in dealing with meetings of the 4^th Defendant, there is not justification whatsoever for not giving notice to the Plaintiff in accordance with Section 114(2). The cases cited by Ms Chan could not assist her at all.

15.  Ms Chan submitted that the Defendants had tried to phone the Plaintiff and it was the Plaintiff who chose not to answer nor return calls. I do not see how this could be an excuse for not giving notice to the Plaintiff in writing. To the contrary, it seems to me that a notice in writing sent by post is the best way to deal with such a situation.

16.  In 2003 and 2004, the Plaintiff and the 1^st Defendant were litigating with each other and both were legally represented. Ms Chan told the court that they were not on speaking term. Against such background, the Defendants should have conducted the meetings more cautiously in terms of proper notice being given to the Plaintiff. They had no right to sideline the Plaintiff.

17.  The lack of follow-up action on the part of the Plaintiff between 2001 and 2006 will be material if the Plaintiff seeks to set aside transactions that had been conducted in the past. However, insofar as the Plaintiff is trying to reinstate himself as a director of the 4^th Defendant and to participate in the affairs of the 4^th Defendant as a director in the future, I do not think the court should withhold relief on the ground of equity.

18.  I do not see any arguable defence to the Plaintiff’s claim regarding his own directorship. Adopting the test of the Lord Chancellor in Gibbings v Strong (1884) 6 Ch D 66 at p.69, I am of the view that the draft defence and the evidence filed on behalf of the Defendants do not reveal anything which, if proved, would be material by way of defence to this head of claim.

19.  I am prepared to grant relief in terms of Paragraph 1 of the Plaintiff’s summons. Ms Chan indicated on behalf of the 4^th Defendant that the company would take the necessary steps to give effect to the declaration that this court is minded to grant. In the circumstances, instead of making orders in terms of Paragraphs 4(a) and 5(a) of the summons, I will simply give the parties liberty to apply in case of problems encountered in giving effect to the declaration. 

The directorship of Wong and Lai

20.  Wong and Lai were first appointed as directors at a board meeting of 16 September 2003. The Plaintiff’s case is that he had not received notice of that meeting nor was he given a minute of that meeting for signature.

21.  After the appointment of Wong and Lai, Sammy resigned as director on 20 September 2003.

22.  Wong and Lai were re-elected as directors at the annual general meetings in 2003 and 2004. Although the minute for the annual general meeting in 2005 is not exhibited, the annual return filed on 21 April 2006 shows that they remain as directors in 2006.

23.  The Plaintiff’s case is that he had not received notice for the relevant board meeting and annual general meetings.

24.  I have dealt with the issue of notice regarding annual general meetings. Given my conclusion above, the Defendants cannot rely on the resolutions passed at the annual general meetings to support of the validity of Wong and Lai’s directorship.

25.  As regards the board meeting of 16 September 2003, the Defendants said it was a paper meeting (see Paras. 48 and 49 of the Affirmation of the 1^st Defendant). Although the 1^st Defendant tried to call the Plaintiff to inform him of the meeting and proposed resolution, the Plaintiff “chose not to accept the calls or return our calls”. The upshot is that no notice was given to the Plaintiff.

26.  Section 114 does not apply to board meetings. Articles 87 to 92 of the Articles of Association of the 4^th Defendant deal with proceedings of directors. There is no express provision prescribing for notice of board meetings although Article 87 ended with this sentence,

“Notice of a Meeting of Directors need not be given to a Director who is not in Hong Kong.”

27.  By implication, notice should be given to directors who are in Hong Kong.

28.  Palmer’s Company Law Para.8.304 set out the position regarding notice of board meetings,

“Prima facie, due notice must be given convening a meeting of directors, and in default the meeting is irregular; but this is not always necessary, for, by the articles, or by the determination of the directors, meetings may be held at fixed times, in which case no notice of each separate meeting need be given. Where notice has to be given, it may be given verbally unless the articles require it to be given in writing, and it must be given a reasonable time before the meeting. Otherwise it will be invalid, unless, indeed all the directors are present at the meeting. Notice must be given even to a director who has stated that he will be unable to attend.”   

29.  For reasons given above, the Defendants cannot rely on the past practice to justify the omission to give notice to the Plaintiff of the board meeting of 16 September 2003.

30.  However, Article 92 provides,

“A resolution in writing signed by either the Permanent Managing Director or his substitutes, and one other Director shall be as valid and effectual as if it had been passed at a meeting of the Directors duly called and constituted.”

31.  The minute of 16 September 2003 was signed by the 1^st Defendant and Sammy.  If it is arguable that the 1^st Defendant was at the material time the Permanent Managing Director and Sammy was a director, the minute would be effective by reason of Article 92.

32.  Although the Plaintiff had challenged the appointment of Sammy in previous correspondence, that challenge is not made in these proceedings. The arguments focused on whether the 1^st Defendant was the Permanent Managing Director on 16 September 2003.

33.  On the evidence before me, it is at least arguable that the 1^st Defendant had been recognized by all concerned as de facto Managing Director even though this is disputed by the Plaintiff and there was no formal document recording such appointment. But had she been appointed as the Permanent Managing Director?

34.  Referring to Articles 68 and 70, Mr Mok submitted that the articles only provide for the appointment of Mr Lee Chi Ho as Permanent Managing Director and the appointment by him of a substitute or alternate Permanent Managing Director. Upon his demise, counsel submitted that no-one could be appointed as the Permanent Managing Director since the articles do not contain provision for making such appointment.

35.  Whilst it is correct that there is no express provision governing the appointment of Permanent Managing Director apart from Mr Lee Chi Ho in the articles, reading as a whole it is at least arguable that the articles envisage that the company would have a Permanent Managing Director at all time. Article 88 sets the quorum for a board meeting to be two directors, one of whom must be a Permanent Managing Director or his substitute. Article 93 provides that all deeds or instruments requiring the Seal of the company shall be signed by the Permanent Managing Director or such other person or persons appointed by the Permanent Managing Director. Article 94 provides that all cheques of the company shall be signed by the Permanent Managing Director or such other person or persons appointed by the Permanent Managing Director.

36.  At the same time, reading Articles 68 to 70 together, two points can be noted,

(a)     Permanent Managing Director under the Articles is an office as opposed to a designated person;

(b)    There shall be a difference between the position when Mr Lee Chi Ho held that office and the position after Mr Lee ceased to hold that office (see Articles 69 and 70).

37.  It is also evident from Article 70 that the company shall not be dissolved after Mr Lee Chi Ho ceased to hold office as Permanent Managing Director. Hence, the reference to Permanent Managing Director should not be read as an exclusive reference to Mr Lee Chi Ho. It could be a reference to any person holding that office.

38.  In my view, it is arguable that on proper construction of the articles as a whole, in those articles governing the day to day operation of the company, the reference to Permanent Managing Director should, after the vacation of office of Permanent Managing Director by Mr Lee, be construed as a reference to the Managing Director.  Article 92 is one of those articles.

39.  Hence, I cannot conclude at this stage that there is no merit in the defence regarding the appointment of Lai and Wong.

Outcome of the proceedings

40.  In the circumstances, I grant leave to the Defendants to file and serve a defence regarding the appointment of the 1^st to 3^rd Defendants as directors within 14 days.

41.  Apart from a declaration in terms of Paragraph 1 of the Plaintiff’s summons, I refuse relief under the other paragraphs.

42.  I make an order nisi the Plaintiff shall have the costs of its summons up to and inclusive of 13 December 2006 in any event and each party shall bear his or her own costs thereafter.