KAIS BIN TARIK AL SAID v. CANAMERICAN HOLDINGS LTD AND OTHERS

HCMP 2767/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2767 OF 2004

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D E C I S I O N

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1.  This is a summons for an interlocutory injunction taken out in a petition under Section 168A of the Companies Ordinance, Cap. 32.

2.  It is convenient that I mention the terms of injunction sought in the summons, although Mr Thomson for the petitioner has asked for a different form of injunction today.  In the summons, the petitioner, Kais Bin Tarik Al Said, seeks an interlocutory injunction against the company concerned, Canamerican Holdings Limited (“the Company”), the 2^nd respondent Brian Chang and the 3^rd respondent Malcolm Chang, restraining them in these terms:

(1)	taking any or any further steps for the purpose of changing or actually changing or which will have the direct or indirect result of changing the structure of the share capital of the Company as provided in the memorandum of agreement (“the MOA”) dated 9 October 1992, namely an authorised share capital of US$1 million divided into 1 million ordinary shares of US$1 each; and
(2)	taking any or any further steps for the purpose of reducing or actually reducing or which will have the direct or indirect result of reducing the percentage of the shareholding of the petitioner in the Company to anything less than the existing level of 25.5%.

3.  The relevant background matters giving rise to the application may be as stated as follows.

4.  The Company was incorporated in Hong Kong on 1 October 1992 to acquire the business and assets of a company of the same name incorporated in the Cayman Islands.  Before or at the time of incorporation of the Company, the MOA was entered into between the petitioner, the 2^nd respondent and another entity Balmoral Atlantic Investments SA (“Balmoral”).  The Company was not a party to the MOA.

5.  The MOA provided for the agreement of the parties to incorporate a new company in Hong Kong for the purpose mentioned.  Clause 2 provided that the Company will have an authorised share capital of US$1 million divided into 1 million ordinary shares of US$1 each and to be issued to the parties as follows: 255,000 shares to the petitioner (25.5%), 255,000 shares to Balmoral (25.5%) and 490,000 shares to the 2^nd respondent (49%).  Clause 5.2.2 provided that voting at shareholders meetings shall be by majority in number present in person or by proxy, save with respect to five matters which shall only be undertaken by a resolution of all the shareholders.  One of the five matters is any increase or variation in the Company’s share capital.  Clause 15 provided that if there should be any conflict or ambiguity between the provisions of the MOA and the provisions of the memorandum and articles of association, then the provisions of the MOA shall prevail.

6.  Pursuant thereto, the Company was incorporated with the authorised share capital as stated and the shares were issued in the manner aforesaid.  The shares of Balmoral were transferred to the 2^nd respondent in 1994 or 1995.  By the articles of association and the governing law, the Company’s power to increase its share capital is provided for in article 4 and sections 53 and 57B of Cap 32.

7.  The petitioner, the 2^nd respondent and his son the 3^rd respondent are the only directors of the Company.  The 2^nd and 3^rd respondents have day-to-day management of the Company.

8.  The only asset of the Company is its share in a company which operated an oil terminal in Pakistan, called Fauji Oil Terminal and Distribution Company Limited (“FOTCO”).  It is not in dispute that of the 36% shareholding in FOTCO held by the Company, the beneficial shareholding of the Company is 25% of the shareholding in FOTCO, and the remaining 11% is held by the Company on trust for the 2^nd respondent.

9.  Audited accounts for the financial year ended December 2003 were prepared in April 2004.  Draft financial statements were sent to the petitioner for approval.  The board of directors proposed to declare dividends for this financial year of US$3.1 million.  It was mentioned in the financial statements that the Company has a capital commitment in that it had entered into agreements dated 6 February 1994 (“the Put Agreements”), under which 3 shareholders of FOTCO have the right to require the Company and Fauji Foundation, another shareholder of FOTCO, jointly and severally to purchase from these shareholders some or all of their shares during the period from 18 April 1998 to 15 February 2005, or 90 days after the shares of FOTCO are listed by the Karachi Stock Exchange, whichever is the sooner.  It was further stated that the directors considered that FOTCO will not be listed before 15 February 2005 and the total possible commitment contracted but not provided for under the Put Agreements in respect of the shares registered in the name of the Company is estimated to be approximately US$4.9 million.  In respect of the FOTCO shares registered in the name of the Company but held in trust for the 2^nd respondent, the 2^nd respondent has a possible commitment liable to the Company of approximately US$1.5 million.  Thus, the possible capital commitment of the Company is approximately US$3.4 million.  The financial statements were approved by the board on 25 April 2004.

10.  One of the complaints of the petitioner in the petition is that the dividends for the financial year ended December 2003 should not have been declared by the board, in view of real and imminent possibility of the Company being liable to pay US$3.4 million.

11.  Another complaint of the petitioner of unfair prejudice is that the dividends declared were not paid to him but used to set off the amounts allegedly due from him to the Company which was inflated, as he was wrongly charged compound interest.

12.  On 19 July 2004, a put notice was served on the Company under one of the Put Agreements by Asian Finance and Investment Corporation Limited (“AFIC”).  The total put price was US$2,682,704.38, of which US$1,808,668.21 would have to be paid by 17 September 2004 and US$874,036.17 by 5 February 2005.

13.  On 20 August 2004, the petitioner received a notice to attend a board meeting of the Company in Singapore on 27 August 2004, to pass a resolution to hold an extraordinary general meeting to consider and pass 2 resolutions, one of them was to increase the authorised share capital of the Company from US$1 million to US$6 million by creation of 5 million additional shares of US$1 each.

14.  At the board meeting on 27 August 2004, the petitioner was represented by his alternate director, Simon Tang Shu Pui, a solicitor of Messrs PC Woo & Co.  Mr Tang proposed that the increase of the authorised share capital should be US$1.5 million to cover the rights issue, instead of the proposed increase by US$5 million.  The proposal was put to the meeting but Mr Tang abstained from voting and the motion was declared by the 3^rd respondent to be carried.  The 3^rd respondent proposed an extraordinary general meeting to be held on 17 September 2004 to consider inter alia a resolution to increase the share capital to US$2.5 million.  Again, Mr Tang abstained from voting when the proposal was put and the motion was carried with the votes cast by the others.

15.  There was tabled before the board meeting the put notice of AFIC.  It was noted at the meeting that the Company also expected to receive notices from the other lenders under the Put Agreements for payment by 5 February 2005 at the latest, and thus the Company would need to raise US$1.5 million to meet the potential demand for payment before that date.  It was further noted that banks within and outside Pakistan had been approached for loan facilities, but in addition to offering FOTCO shares as collateral, the banks wanted to receive shareholders’ guarantee.  The 3^rd respondent proposed that in order to raise the required funds, a rights issue of 1.5 million ordinary shares of US$1 each on the basis of 3 new ordinary shares for every 2 ordinary shares presently held in the Company at a subscription price, payable upon application, of US$1 per share be approved and the proposal was put to the meeting.  Again, Mr Tang abstained from voting and the motion was carried by the votes of the other directors.

16.  The extraordinary general meeting was eventually held on 24 September 2004.  By the majority of the votes cast by the 2^nd respondent as against the votes cast by the petitioner by his proxy, it was resolved to increase the share capital to US$2.5 million.

17.  On 27 September 2004, the petitioner received a notice of the rights issue informing him that he had been allotted 383,500 ordinary shares and unless he subscribed to the said allotment by 25 October 2004, his allotment will be offered to the other member, namely the 2^nd respondent.

18.  The 2^nd respondent received a similar notice of the rights issue.  On 25 October 2004, he paid US$1,117,500.00 to subscribe for 1,117,500 shares in the rights issue.

19.  On 21 October 2004, the petitioner sought to apply ex parte for an injunction against the Company from changing the existing share structure.  I did not think it appropriate to hear the application ex parte and directed a summons to be issued.  The summons first came before me on 3 November 2004.  It was adjourned to today on the undertaking of the 2^nd respondent that he will not subscribe for the 383,500 ordinary shares of the Company that were allotted to the petitioner, pending the hearing of the summons.

20.  The petition was presented on 29 October 2004.  A number of complaints were made in respect of unfair prejudice.  Additional allegations were made in the affidavit filed in reply on behalf of the petitioner in this application.  The petition would need to be amended at some stage if the petitioner should wish to pursue these additional allegations.  There is no draft amendment before me.  So for the present application, I would confine myself to the complaints in the petition.

21.  The allegations of the unfair prejudice germane to this application are these.  It was alleged that there was no proper need for the rights issue, as the Company did not and does not need the rights issue to satisfy its potential liability under the put options.  The rights issue was designed to dilute the petitioner’s shareholding in the Company.  Dividends should not have been declared for the financial year ended December 2003, when the board knew at all times of the real and imminent possibility of the exercise of the put options and the capital commitment of the Company to the tune of US$3.4 million.  Further, dividends that should have been paid to the petitioner were wrongly withheld from him to deprive him of funds, so he was in no position to subscribe for these shares in the rights issue. And the increase of the authorised share capital is in conflict with Clause 5.2.2.2 of the MOA.

22.  In his written submissions, Mr Thomson stated that he would not pursue the first part of the injunction in the summons, to restrain the respondents from changing the share capital structure, recognising that the resolution had been passed at the extraordinary general meeting on 24 September 2004 and the 2^nd respondent had already taken up and paid for his subscription.  He indicated in his written submission that the petitioner would only pursue the second part of the injunction in the summons, to restrain the respondents from taking steps that would have the effect of reducing the petitioner’s shareholding to less than 25.5%.  There is a difficulty here as the 2^nd respondent has already taken up his subscription and his shares are increased from 745,000 to 1,862,500.  Of the total issued shares of 2,117,500, the petitioner’s shareholding has been reduced to 12.4%.

23.  At the hearing today, Mr Thomson informed the court that the petitioner would not pursue the second part of the summons either.  Instead, the petitioner would seek an interlocutory injunction to restrain the 2^nd respondent from taking up new shares which the petitioner has not subscribed in the rights issue and which would have the effect of reducing his shareholding from 12.4% to 10.2%.

24.  Another twist in the development is that after the hearing on 3 November 2004, the Company has recognised that it should not have charged compound interest on the money allegedly owed by the petitioner.  As a result, the petitioner should have been paid US$223,199.00 in respect of the dividends declared for the financial year of 2003, after setting off the total amount of dividends against the sums owing.  The respondents’ solicitors informed the petitioner’s solicitors in mid November 2004 of the revised calculation and offered to extend the period by which the petitioner could take up his subscription of the rights issue to 30 November 2004, but the petitioner did not use the proceeds to subscribe for 223,199 shares or at all and he has opted to receive cash.

25.  I turn to consider triable issues.

26.  I was referred by Mr Carolan for the respondents to Russell v Northern Bank Development Corporation Limited [1992] 1WLR 588.  This was concerned with a similar situation in which a shareholders’ agreement prevented an increase in share capital without the written consent of the parties to the agreement.  Mr Carolan made the point that unlike Russell, the Company was not a party to the shareholders agreement in the MOA, so the Company cannot be subject to an injunction here which would prevent it from exercising its rights under the articles of association to increase its share capital.  In any event, he submitted that the contravention of the clause in the MOA was but a technical breach, and would not have constituted conduct unfairly prejudicial.

27.  I have not come to a firm view that there is no triable issue in respect of the above or any of the complaints raised in the petition, although I do have some reservations if there are triable issues on the allegations identified as germane to this application.

28.  It would appear from the documents disclosed that in respect of the declaration of dividends for the financial year of 2003, this was consented to and ratified by the petitioner in writing, with knowledge of the capital commitment as noted in the draft financial statements sent to him.

29.  It would also appear from the minutes of the board meeting that the proposal to increase the share capital to US$2.5 million instead of to US$6 million was made by the petitioner’s alternate director, although he had abstained from voting.  I am mindful that the petitioner had voted by proxy against the resolution at the extraordinary general meeting on 24 September 2004 to increase the share capital, but the earlier proposal made by the petitioner’s alternate director at the board meeting may cast doubt if there was unfair prejudice in these circumstances.

30.  As for the allegation there was no need for there to be a rights issue to satisfy the capital commitment, this has not been demonstrated on the evidence, as at least without the subscription of the 2^nd respondent of US$1.1 million, which the 2^nd respondent has paid, it did not appear that the Company would be able to meet its commitment.

31.  More importantly, I do not think the balance of convenience is with the petitioner.

32.  The petitioner has now received dividends of US$223,199.00.  He chose not to use any of this amount to take up at least part of the new shares to prevent dilution of his shareholding.  No reason was given for this.  It would seem that the dilution of the shareholding has been to a large extent his own choice.

33.  Mr Thomson submitted that I should not be looking at the possibility of any other put notice that might be served between now and February 2005, and that I should confine myself only to the Company’s liability to meet the put notice of AFIC.  I do not see why I should not take into account the possibility of other options that may be exercised under the Put Agreements.  It has not been suggested there would only be a remote possibility of that happening.

34.  On the respondents’ estimate, if the other put options are exercised, the Company would require US$2.82 million to meet its commitment.  The petitioner has estimated this at US$2.58 million.  I understand the difference in put price is due to the difference in value of the FOTCO shares at the relevant time.

35.  The Company has reserves of US$1.9 million, reduced from US$2.1 million after payment of the dividends to the petitioner recently.

36.  Mr Thomson has raised the possibility that the Company may receive further dividends from FOTCO for the financial year ended June 2005.  I have looked at the correspondence and I am not satisfied I could legitimately take that into account.

37.  It seems to me there is a reasonably clear case that funds would be required by the Company.  If an injunction were to be granted, this would affect the Company’s ability to meet its potential imminent commitments.  The injury to the Company could be grave in that situation.

38.  If an injunction were not granted to the petitioner, the petitioner’s shares would be further diluted from 12.4% to 10.2%.  Any loss he may suffer as a result would in my view be compensated by the relief he seeks in the petition.  There is no suggestion that the respondents are not in a position to meet such claim for compensation.

39.  Finally, Mr Thomson suggested that the court could grant the injunction first and that the respondents could apply to have injunction lifted if it should transpire that the Company should need funds if and when other put options are exercised.  The petitioner has offered an undertaking not to oppose the lifting of the injunction in that situation.

40.  I do not think this is the right way of approaching this.  If the court is not satisfied the balance of convenience is in favour of the petitioner, the injunction should not be granted in the first place.

41.  So for the above reasons, I refuse the petitioner’s application for an interlocutory injunction.  Costs of the application should follow the event.  I order the petitioner to pay the respondents’ costs of this application in any event, including the costs reserved on the previous occasion on 3 November 2004.