SCE CONSTRUCTION MATERIAL LTD v. CHOI CHUNG BUN VINCENT AND ANOTHER

CACV 34/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 34 OF 2011

(ON APPEAL FROM HCA NO. 1806 OF 2009)

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REASONS FOR JUDGMENT

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Hon Tang VP:

Introduction

1.  The Plaintiff (SCE Construction Material Limited) is a company incorporated in the British Virgin Islands ("BVI").

2.  On 23 January 2001, the Plaintiff commenced legal proceedings in Hong Kong (HCA 423/2001) against Tan Kin George ("Tan") and another as guarantors of a loan of HK$4,000,000 advanced by the Plaintiff to a company called Theodore Developments Ltd in 1998.  On 13 December 2002, the Plaintiff obtained judgment against Tan for the sum of HK$7,285,393 together with further interest and costs.

3.  On 26 March 2003, Tan was adjudged bankrupt upon the Plaintiff’s petition in HCB 1873/2003.

4.  A 1^st dividend was payable in the bankruptcy of Tan in the sum of HK$1,647,029.89 to the Plaintiff ("the 1^st dividend").  However, that amount was paid by the trustees in bankruptcy to the 2^nd Defendant. The 2^nd Defendant was incorporated in Hong Kong and on 3 December 2008, changed its name to SCE Construction Company Limited, a name identical to that of the Plaintiff.  As a result, the 1^st Defendant (Vincent Choi) was able to procure the trustees to pay the 1^st dividend to the 2^nd Defendant.

5.  After that was discovered by the Plaintiff, on 21 August 2009, the Plaintiff commenced the present action against the Defendants to recover the amount paid and ancillary reliefs.

6.  In this action, the Defendants have put in issue the question whether the present proceedings have been instituted without the authority of the Plaintiff.  On 21 January 2010, Mr Justice Au ordered that the question to be tried as a preliminary issue.

7.  The preliminary issue was tried before Mr Recorder A Chow, SC on 1 – 3 December 2010. 

8.  The learned Recorder, in his judgment dated 8 February 2011, concluded that the present action was commenced with the authority of the Plaintiff.

9.  This is the Defendants' appeal.  At the conclusion of this hearing, we dismissed the appeal indicating that we will give our reasons in due course.

Background

10.  The background is complicated but has been set out in detail in the judgment of the learned Recorder.  That being the case, a brief summary is sufficient for the purpose of this judgment.

11.  The first directors of the Plaintiff were Chiu Hon Sang ("Nelson Chiu") and Vincent Choi.

12.  At a meeting of the first directors of the Plaintiff held on 22 June 1995, 1,000 shares of US$1.00 each in the Plaintiff were issued to SSI China Enterprises Ltd.  That was evidenced by Certificate No.1 dated 22 June 1995.

13.  SSI China Enterprises Ltd has changed its name a number of times.  Its current name is Australia China Holding Limited ("ACHL").  The learned Recorder has, in his judgment, referred to it as "ACHL".  I shall do the same.

14.  On 28 February 2001 ACHL transferred the 1,000 shares in the Plaintiff to Total Linus Solutions Ltd ("Total Linus"), a BVI company and a subsidiary of ACHL.

15.  On 27 March 2001, ACHL transferred Total Linus to Acepec, a company which is beneficially owned by Fu Rong Lin ("Fu").  Up to that date only 1,000 shares had ever been issued.

16.  The learned Recorder, after hearing oral evidence from both Nelson Chiu and Vincent Choi, found as a fact that Nelson Chiu resigned as a director of the Plaintiff on 27 March 2001.  Para. 39 of the judgment.

17.  The learned Recorder also held that on 4 April 2001, the Plaintiff had only one shareholder, i.e. Total Linus, which was beneficially owned by Fu.  Para. 47.

18.  On 4 April 2001, there were minutes of a meeting of the sole director, namely, Vincent Choi, which recorded that on 4 April 2001, the following resolution was passed.

"In satisfaction of outstanding director remuneration of HK$1,039,500 for the period from 22 June 1995 to 31 March 2001 based on the rate of HK$15,000 per month payable to Mr. Chung Bun Vincent CHOI, IT WAS RESOLVED THAT 4000 fully paid ordinary shares of US$1.00 each be issued to Metropolis Enterprises Limited ('MEL').  It was declared that Mr. CHOI is a director and a beneficial shareholder of MEL.  And that the share certificate be issued under the common seal of the Company and be signed by any one director."

19.  The learned Recorder said:

"53. As mentioned above, I find that as at 4 April 2001:-

(1)   The Plaintiff had only 1 shareholder, ie Total Linus, which was beneficially owned by Fu.

(2)   The Plaintiff had only 1 director, ie Vincent Choi.

(3)   The Plaintiff was not indebted to Vincent Choi in respect of outstanding director’s remuneration in the amount of HK$1,039,500 or any amount.

54.  Also, I am not satisfied that Fu had knowledge of, or had given his consent to, Vincent Choi allotting shares in the Plaintiff to himself or his company.

55.  The effect of the aforesaid resolution was to vest majority ownership and control of the Plaintiff to Vincent Choi.  Although Vincent Choi, by virtue of his position as sole director of the Plaintiff, had power to allot shares under Article 6 of the Plaintiff’s Articles of Association, the exercise of power by Vincent Choi to allot the 4,000 shares in the Plaintiff to his own company was, by reason of the above findings, wrongful and improper and, vis-à-vis the Plaintiff, not binding on it."

20.  On 1 August 2003, Total Linus transferred the 1,000 shares to ACHL.  As the learned Recorder said:

"13. … The validity of this transfer is disputed by the Defendants."

21.  Whether this action is authorized depends largely on the validity of the 1 August 2003 transfer.

22.  The learned Recorder was of the view that the transfer was valid because it had been duly entered in the Plaintiff's register of members.  Also that the transfer had been approved by Total Linus, then the only shareholder of the Plaintiff.  Para. 61.  Hence, it did not matter, and the learned Recorder did not find, whether Nelson Chiu had been reappointed a director in 2002.

23.  Under BVI law, a person who is not on the register of members is not a shareholder.  See para. 44 of the Expert Report of Mr Victor Joffe QC filed on behalf of the Plaintiff.  The expert evidence filed on behalf of the Defendants appeared to have accepted that implicitly.  See page 7 of Harney's letter of 30 November 2010.

24.  The dispute at first instance was over who had the share register.  The learned Recorder found as a fact that the register of members produced by the Plaintiff was "the original and authentic register" Para. 57 and that the register produced by the Defendants was not "the true register of members of the Plaintiff."  Para. 58

25.  It is not disputed that the share register produced by the Plaintiff was the original share register.  Mr Nigel Aiken SC, for the Defendants, nevertheless submitted that the learned Recorder erred when he said it was produced "from proper custody, and accept(ed) it as being the original and authentic register".  Para. 57. 

26.  Mr Aiken submitted that, on the learned Recorder's finding, Vincent Choi was at least for some time the only director of the Plaintiff, thus Vincent Choi might have adopted a new share register. We do not know whether under BVI law he might have done so.  Moreover, the learned Recorder was unwilling to rely on Vincent Choi's evidence and said in this context:

"58. … The register of members produced by the Defendants has no greater weight than the oral evidence of Vincent Choi. …"

27.  Mr Aiken then relied on the share certificates produced by the Defendants as evidence that Vincent Choi's company MEL was a shareholder, and by transfer the 2^nd Defendant had also become a shareholder.

28.  For the purpose of the preliminary issue, agreed questions were put to experts in BVI law.  Question 6 was:

"Please advise the legal status of a shareholder who has acquired shares by allotment and/or share transfer:

(a) whose name has never been entered in the Company's Share Register; …"

29.  Mr Joffe's opinion was that :

"44. … a person who is not on the register of members (…) is not a shareholder; …"

30.  Mr S. L. Lau of Harneys for the Defendants was less specific, but had not disagreed with Mr Joffe.  Mr Lau said at Question 6(a) of his report that:

"… If a shareholder whose name is not recorded on the Shares Register can produce credible evidence of payment for the shares in the Company allotted to him, or consideration paid …, he would be entitled to request that the Company rectify the register …"

And that an aggrieved shareholder might apply to the Court for rectification of the register.

31.  As I have said above, at first instance, the context between the parties centred on whose register of member was the authentic register of members.  That the learned Recorder resolved in favour of the Plaintiff.

32.  Counsel have confirmed that it was not argued that a share certificate was sufficient to show MEL and/or the 2^nd Defendant were shareholders.  Had the point been taken, maybe further expert evidence would have been adduced.

33.  Mr Aiken referred to a passage in National Westminster Bank plc and Another v Inland Revenue Commissioners [1995] 1 AC 119, where Lord Templeman said:

"… The certificate declares to all the world that the person who is named in it is the registered holder of certain shares in the company and that the shares are paid up to the extent therein mentioned. …"

34.  But that does not help the Defendants, as the headnotes made clear:

"… that in the context of company law shares were 'issued' when the entire process of application, allotment and registration had been completed; that the same meaning attached to the word when used in sections 289 and 299A of the Act of 1988, with the result that when registration had taken place at a later date than allotment the date of registration was the date of issue; and that, accordingly, the shares in the schemes sponsored by the banks had not been issued before 16 March 1993 …

35.  The Defendants also submitted that if the Plaintiff or Total Linus wished to challenge the issuance of the 4,000 shares, they should do so by proceedings in the BVI.  I do not agree.  Having regard to the finding of the learned Recorder, it is clear that the issue of the 4,000 shares was voidable because they were issued in breach of fiduciary duty, and must be taken to have been avoided.  Moreover, as noted already, since the 4,000 shares were never recorded in the register of members, neither MEL nor the 2^nd Defendant was a shareholder.

36.  Another fact to note is that on 1 November 2001, the Plaintiff was struck off the BVI register of companies for non-payment of annual fees, but was restored on 14 August 2009.  This is what the learned Recorder said:

"16.     … According to the unchallenged expert evidence of Mr Victor Joffe QC on BVI law, the effect of restoration is that the Plaintiff will be treated as if it had never been struck off.  It is not suggested by counsel for the parties that the striking off and subsequent restoration of the Plaintiff has any legal consequence bearing on the issues to be determined by the court in this trial. …"

37.  The relevant legislation is:

"Where the Registrar issues a certificate of restoration under subparagraph (3), the company is deemed

(a) never to have been struck off the CapCo Register …"

38.  Not surprisingly, Mr Joffe expressed the view that:

"The effect of restoration will therefore be for the Company to be treated as if it had ever been struck off."

39.  There was no contrary expert evidence from the Defendants.

40.  Mr Aiken sought to argue that as a matter of BVI law, the restoration of the company in the BVI did not mean that any act in the intervening period is validated and made binding on the company. 

41.  Mr Bell SC, for the Plaintiff, objected to this as a new point.  It is accepted that the point had not been taken before the learned Recorder.  Had it been taken, no doubt further evidence on BVI law would have been adduced.  That being the case, we refused to permit the new point to be taken.

42.  For the above reasons, I have dismissed the appeal with costs.

Hon Fok JA:

43.  I agree.

Hon Lam J:

44.  I agree.