SHIH PAK TAU v. SZE SHUN KIT AND ANOTHER

HCMP 495/2024

[2025] HKCFI 1912

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 495 OF 2024

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J U D G M E N T

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1.  By originating summons dated 25 March 2025 (“OS”), Shi Pak Tau (施北斗)  (“P”)  seeks relief against Sze Shun Kit (施纯杰)  (“D1”)  and JC Motor Limited (联大汽车有限公司)  (“D2”)  (collectively, “Ds”)  under 3 main heads of claim:

(1)  Breach of the agreement dated 30 March 2022 made between P and D2 (the “Agreement”)  by issuing new shares of D2 without P’s prior consent.

(2)  Further and/or alternatively, the notice for the EGMs held on 15 and 22 May 2023 was irregular.

(3)  Further and/or alternatively, D1’s decision to convene the EGM to pass resolutions (“Resolutions”)  for the issuance of 5 million new shares in D2 (the “New Shares”)  was made in bad faith and/or for an improper purpose.

Factual background

2.  Since 7 September 2021, D1 has been the sole director and sole shareholder of the shares in D2.

3.  On 30 March 2022, (a)  D2 (as Party A)  and P (as Party B)  executed the Agreement for P to provide D2 with a loan of $5 million (the “Loan”)  upon certain conditions; and (b)  D1 executed a guarantee in favour of P for, inter alia, D2’s repayment obligations under the Loan.

4.  The conditions include the following:

“(6)  [D2] needs to issue 1,400 new shares to [P] before receiving the Loan. For the avoidance of doubt, the 1,400 shares issued to [P] are not required to be transferred back to [D2] or any person upon repayment of the Loan made pursuant to this Loan Agreement.

(7)  If [D2] is to issue new shares or introduce new shareholders/investors, [A]’s consent shall be obtained before this can be proceeded with, otherwise it would be regarded as a breach of this Loan Agreement.

(8)   During the Loan Period, if [D2] is to transfer shares, [P]’s consent shall be obtained before this can be proceeded with, otherwise it would be regarded as a breach of this Loan Agreement.”

5.  Pursuant to clause 1 (6)  of the Agreement, on 6 April 2022, P was allotted 1400 shares in D2 resulting in D1 holding 10,000 of 11,400 shares (or 87.7%)  in D2 and P the remaining 1400 shares (or 12.3%)  in D2.

6.  D2’s breach of its repayment obligations resulted in statutory demands made by P on 28 September 2022 and 14 November 2022. P and D2 reached a final settlement on 6 January 2023 when D2 deposited its cheque for $5,014,246.58 (the “Settlement Sum”)  and P subsequently withdrew the statutory demands.

7.  On 29 April 2023, D2 as sole director sent out a notice dated 28 April 2023 (the “Notice”)  for an EGM to be held on 15 May 2023 (the “1^st EGM”)  which set out the following proposed resolution(s):

“ORDINARY RESOLUTION: ALLOTMENT OF SHARES

(e)  the sole director of the Company be and is hereby authorised to allot and issue 5,000,000 new ordinary shares of the Company (the “New Shares”)  at the subscription price of HK$5,000,000 (HK $1 per New Share)  to the shareholders on the Register of Members as at 28 April 2023 in proportion to their shareholdings to provide additional working capital for business expansion of the Company;

(f)  the New Shares, when pursued and allotted, shall rank pari passu in all respects with the existing issued ordinary shares of the Company;

(g)  the sole director of the Company be and is hereby authorised to do all such acts and things and execute all necessary documents he considers necessary, desirable or expedient to give effect to the issue of the New Shares under the authority given to them and paragraph (a)  above; and

(h)   the capital contribution amount to HK$5,000,000 payable by the subscriber (s)  of the New Shares shall be satisfied in cash.”

8.  On 4 May 2023, P’s former solicitors complained by letter that the Notice and the issue of New Shares proposed in the Resolutions would be in breach of the Agreement.

9.  P did not attend the 1^st EGM, causing the meeting to be inquorate.  D1 as Chairman declared the meeting adjourned.

10.  Pursuant to Article 36 (1)  (b)  of the Articles of Association (“Articles”), the EGM was adjourned to 22 May 2023 at the same time and place stated in the Notice. The 2^nd EGM notice dated 15 May 2023 was sent to P by courier although Article 36 (8)  did not require the sending of such notice.

11.  P did not attend the 2^nd EGM.

12.  On 22 May 2023, after the 2^nd EGM, D1 informed P that the Resolutions were passed and invited him to apply for a pro rata share of the Allotment failing which those New Shares would be allotted to others.

13.  As P did not respond, on 3 July 2023, all the New Shares were allotted to D1 who paid the capital contribution of $5 million to D2 on 14 August 2023.

I. Whether D2 is in breach of clause 1(7)  of the Agreement

14.  The issue that arises is one of construction, namely, whether clause 1(7)  ceased to have legal effect upon satisfaction of D2’s repayment obligations under the Agreement.

15.  Ms Teresa Leung, counsel for P, submits that clause 1(7)  cannot be discharged by settlement of the Loan.  It serves to protect P’s interests as a minority shareholder and not as a lender. Settlement of the Loan is therefore irrelevant and can have no impact on the operation of clause 1(7)  absent any express or implied restriction or qualification on its validity and enforceability.

16.  She contrasted that with clause 1(8)  the operation of which was confined to “the Loan Period” and to clause 6 of the Guarantee which operates until all due payables in the Agreement have been paid off.  On that basis, she considered that clause 1(7)  imposes a continuous obligation on D2 to seek and obtain consent from P to any issuance of new shares or the introduction of new shareholders/investors.

17.  P also relies on sub-clauses (3), (5)  and (8)-(9)  of clause 3[1] that set out D2’s “promises”.  They are said to reinforce P’s contention that short of any express agreement terminating clause 1(7), it remains effective for so long as P is alive, irrespective of whether he remains holder of his 1400 shares in D2.

18.  The Agreement is not a well drafted document. For example, clause 1(8)  can never be operative because D2 is not itself a shareholder.  That provision is nonsensical. For the same reason, it is unclear how sub-clauses (3)-(5)  and (9)  are meant to operate.

19.  Ms Deanna Law and Ms Nicole Chui, counsel for Ds, submit that there was no breach of the Agreement because clause 1(7)  remains in legal effect only for the duration of D2’s repayment obligation under the Agreement.

20.  They submit that the objective facts known to both parties at the time they entered into the Agreement are as follows:

(a)  On 29 April 2021, D1 secured a dealership agreement whereby D2 was appointed exclusive distributor in Hong Kong of BYD vehicles from 1 May 2021 to 20 April 2026;

(b)  In December 2021, D1 approached P (whom D1 had previously met)  for a loan of $5 million to D2. By February 2022, D2 required more working capital to operate its expanding business, especially to cover the expenses of opening new showrooms including one in Wanchai.  Negotiations between D1 and P ensued in March 2022.  

(c)  P eventually agreed to lend D2 $5 million on condition, inter alia, that (i)  interest would be at 8% per annum; (ii)  D1 would provide a personal guarantee and (iii)  1400 shares in D2 would be allotted to P.

(d)  The 1400 shares allotted to P pursuant to the Agreement constituted 12.28% of D2.

21.  Ds submit that one could discern from those facts that clause 1(6)  and (7)  served 2 purposes:

(a)  to provide P with a mechanism (via clause 1(7))  to ensure that the shareholdings in D2 cannot change without P’s prior consent during the currency of the repayment obligations; and

(b)  to provide P with extra comfort in the form of a stake in D2’s business as a passive shareholder and to give him an upside should D2’s business become successful.

22.  Ds also rely on pre-contractual negotiations in the form of WeChat messages exchanged between P and D1 on 17 and 23 March 2022.  As a matter of law, evidence of pre-contractual negotiations could be admitted as part of the factual matrix to establish the “genesis or object” of a contractual position: Ah-Fat Jean Max v Xian Corp Ltd [2021] HKCFI 22 at §17(1)  and (3).

23.  In summary, the WeChat messages show that on 17 March 2022 P sent D1 a draft commercial loan contract.  It provided for the outstanding loan having to be secured by 60% of D2’s shares as collateral.  On 23 March 2022 at 12:23 pm, the following exchange took place:

“D1: Because clause will hinder the company from raising funds, so we need to clear risk

$5 million is a loan, not an investment, but 72%[2] of the shares will be frozen accordingly, which basically amounts to giving away the company

P:  All of these pertain to guarantee. Typically, contracts focus on repayment, and normal repayment should not pose a problem. If you are unable to repay, then this is a safeguard against that, you can not use the shares as collateral and can use other assets or property as collateral as they (sic)  must always be collateral sufficient value.”

24.  On P’s construction of clause 1(7), P’s prior consent is required so long as he is alive, even after he has disposed of his 1400 shares in D2 and is no longer a shareholder.  But what would be the point from a lender’s perspective?

25.  Ds submit that there can be no commercial justification for Ds to give P a permanent power to veto an allotment of shares or the introduction of a new investor.  It is tantamount to conferring a power of veto on P, a one-off lender and minority member (holding 12.3% of the issued shares)  to any future allotment of shares which defies common sense.

26.  In my view, I have no doubt that Ds’ construction of clause 1(7)  is correct.  While it made sense to give P the power of veto over the future allotment of shares or the admission of new investors/shareholders so long as any part of the Loan remains outstanding, it is otherwise after the Loan has been repaid.

27.  I can conceive of no rational basis for P to continue to have the power of veto after repayment of the Loan in circumstances where the parties never intended that P should have any role in the running of D2’s business.

28.  Accordingly, I hold that D2 was not in breach of the Agreement.  The Allotment did not require P’s prior consent and was not made in breach of clause 1(7).

29.  It follows that P’s complaint that D1 assisted, procured and/or induced D2 to breach the Agreement must fall away as would the issue of quantum of damages which would only arise had there been a breach of the Agreement.

Whether Notice convening the EGM invalid

30.  P submits that the Notice convening the EGM (the “Notice”)  did not comply with section 576(1)(e)(ii)  of the Ordinance and Article 29(4)(e)(ii)[3] for failing to include in the Notice information or explanation that was reasonably necessary to indicate the purpose of the proposed resolutions or to accompany the Notice with a statement containing such information or explanation.

31.  In order for a notice to be valid it must state the purpose of the meeting, that is to say, it must specify the general nature of the business to be transacted: see Kosmin and Roberts on Company Meetings and Resolutions, 3^rd Edn., at §2.18 which cited reg. 38, 1985 Table A[4].

32.  Choppington Collieries Limited v Johnson [1944] 1 All ER 762 illustrates what information is sufficient for the purposes of a valid notice.  In that case, the purpose stated in the notice included “To elect directors”.  It included a statement that a named director retired and, being eligible, offered himself for re-election.

33.  At the meeting, the retiring director was proposed for re-election but an amendment was moved for 3 other persons to be elected as directors.  The Court of Appeal held that the chairman was wrong to reject the amendment: the notice of the meeting was sufficient in that it sufficiently specified the general nature of the business to enable the meeting to elect directors up to the number permitted by the articles.

34.  In my view, the Notice adequately stated “the general nature of the business to be transacted” for the purposes of the Ordinance, namely, a rights issue to be made to the shareholders on the register of members as at the date of the Notice in proportion to their shareholdings “to provide additional working capital for business expansion of [D2]”. It also set out the proposed resolutions. Contrast Lohas Holding Limited v The Registrar of Companies and Anor [2022] HKCFI 3358 at §§24 and 31 where the notice failed to refer to any proposed appointment of directors. That was held to be a substantive defect and the appointment was held invalid.

35.  As I understand it, it is P’s case that the Notice failed to provide relevant information or explanation regarding the matters set out in §43 of P’s skeleton submissions[5].

36.  There is no prescribed statutory format. Whether or not the notice is sufficient is a question of fact.  In the context of a private company with a small number of members, the necessity for the board to send an explanatory statement is rare and infrequent[6].  If the information contained in the Notice enables a member to make further enquiries if he so wishes, it is sufficient[7].

37.  As noted by Kosmin and Rogers, with the benefit of hindsight, it can probably always be said that something further could, or should, have been contained in the text of the document[8].  The court adopts a practical and commonsense approach and will only hold a notice or statement as inadequate if there is compelling evidence that some recipients had been misled: see Kosmin and Rogers at §§3.04-3.05.

38.  I do not read Article 29(4)(e)(ii)  as mandating a statement to accompany the notice so long as the notice itself contains sufficient information to indicate the purpose of the resolution.  Where a notice and proposed resolution(s)  are self-explanatory, no additional statement is necessary: see Shackleton on The Law and Practice of Meetings, 16^th Edn., at §13-17.

39.  Ds submit that in the event of the Notice being held to be irregular, it does not render any resolutions passed thereunder invalid because of the irregularity principle which operates to cure a procedural defect. The only question for the Court when considering whether it applies is whether the same result would inevitably have been obtained had the correct procedure been followed.: see Zhong Da Mining Limited v Lam Wo Ping [2024] HKCFI 1613 at §§42-43.

40.  P’s stance is that the irregularity principle does not apply in circumstances that involve an oppression on the minority: see Zhong Da Mining at §41(3).

41.  Leaving aside the “oppression” issue which is considered in §§43-45 below, I consider that the information P complains is missing is not necessary in determining “the general nature of the business to be transacted” to render Notice invalid. P could have made further enquiries but chose not to do so.

III. Whether D1 breached his director’s duties

42.  P’s case is that D1’s decision to convene the EGMs and proposing to pass the resolutions to authorise D1 to allot and issue the New Shares was made in bad faith and/or for the improper purpose of entrenching D1’s control over D2 and/or materially diluting P’s shareholding in D2.  P cites Tse Yun Lam Aries v Haine International Investment Consultants v Ors [2024] HKCFI 2070 for the proposition that the fiduciary power to issue new shares must be exercised for a proper purpose.  That statement of law is plainly correct.

43.  P’s complaint is premised on his erroneous belief that the issuance of the New Shares without his prior consent was in breach of the Agreement.  In the absence of any breach, and given my conclusion that the Notice was valid, P’s complaint boils down to nothing more than the inevitable consequence of any minority shareholder deciding not to take up his entitlement in a rights issue.

44.  That is evident from P’s reliance on §§124 and 135 of the Tse case which set out the Judge’s conclusion after trial of 2 petitions (an unfair prejudice petition and a winding up petition)  over 6 hearing days.  Based on the evidence adduced, Linda Chan J found that the allotments in question were implemented not for the purpose of raising funds required by the company but for the improper purpose of diluting, inter alia, the petitioner’s shareholding in the company.  Obviously, such cases are highly fact sensitive and the conclusions reached in the Tse case can offer P no assistance.

45.  P also relies on the statement in the Tse case at §90 that although a rights issue raises capital from shareholders on an equal basis, it is still capable of amounting to unfair prejudice.  That does not take P’s case much further since the present case is not concerned with unfair prejudice.  That statement cannot be taken to mean that every time there is a rights issue, one has to assume that the real purpose is to dilute the minority’s shareholding or that it evidences “oppression”.

46.  The objective facts are that by the end of April 2023, the five- year period of D2’s exclusive distributorship for BYD had another 3 years to run.  In January 2023, it had repaid the Loan obtained from P in March 2022.  Several months later, D2 sought to raise $5 million by a rights issue “to provide additional working capital for business expansion of the Company.” While D1’s affirmation in opposition to the OS states the reasons[9], P dismisses those reasons as ex post facto justification.  Nevertheless, against the backdrop outlined, the raising of additional capital is hardly surprising.

47.  It is incumbent on P to show that D1’s motive for the proposed new issue was improper and made in bad faith. As there is no such evidence before the Court, P has not made out his claim that D1 has breached his director’s duties.

Disposition

48.  For the reasons stated above, the OS is dismissed.

49.  There is to be an order nisi of costs in favour of Ds, with certificate for two counsel, such costs to be summarily assessed and payable forthwith.

50.  Directions for summary assessment will be given on a costs order becoming absolute.