CHOI TAK LAN AND OTHERS v. NG WING HONG AND ANOTHER

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HCMP 2671/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2671 OF 2006

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HCMP 2672/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2672 OF 2006

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(CONSOLIDATED BY THE ORDER OF THE HONOURABLE
MR JUSTICE BARMA DATED 1^st MARCH 2007)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was an appeal from an order of Mr Recorder Jat SC of 17 July 2008 dismissing the plaintiffs’ claims in three consolidated actions with costs.  At the conclusion of the hearing the appeal was dismissed with written reasons to be handed down, which we now do.

Background

2.  The consolidated proceedings relate to the shareholdings in Data World Computer & Communication Ltd (“Data World”) and in two affiliated companies, namely, Nexus Solutions Ltd (“Nexus”) and Data World Technology (China) Ltd (“Data China”), (collectively “the affiliated companies”).  The three companies have identical directors and shareholders.

3.  The five plaintiffs and the first defendant are the registered shareholders of Data World.  Each of them has corresponding shareholdings in the affiliated companies.

4.  The main issue before the recorder was the “November Allotment” which, in § 4 of the judgment, was stated in these terms:

“ … whether the issue and allotment of 237,436 new shares in Data World, effected on or about 30 November 2004, pursuant to shareholders and board resolutions signed by its registered shareholders and directors, and corresponding transfer of shares in Nexus and Data China consequent on the change in the shareholding percentages in Data World, are valid.”

5.  To avoid confusion between the third plaintiff (who is the second appellant) and the first respondent, the English renditions of whose Chinese names are the same, they will be referred to as “WH Ng” and “Ben Ng” respectively.

6.  Since November 1987, Data World has carried on a computer-related services business.  It succeeded the business that previously had been carried on in partnership by Denny Ngo Tak Wah (“Denny Ngo”), William Lee (“William Lee”), Ho Kwok Kit (“KK Ho”) and KK Ho’s brother-in-law WH Ng.

7.  Ben Ng became a shareholder in 1990.  The shareholders at the time were:

Denny Ngo	18.98%
William Lee	18.98%
Madam Lee Kit Mui (William Lee’s sister)	5.09%
Madam Leung Yok Mui (KK Ho’s mother)	18.98%
Madam Tam Pik Chung (WH Ng’s mother)	18.98%
Ben Ng	18.98%

8.  At all material times up till June 2005, the de facto directors were Denny Ngo, William Lee, KK Ho, WH Ng and Ben Ng (collectively “ the directors”).  It is common ground that although Denny Ngo’s wife was on record as a director, it was Denny Ngo who had acted in her place.

9.  The recorder found that Data World’s business was run on a very tight cash flow basis and the directors were frequently required to provide loans which, by the end of 2003, had exceeded $5 million.  At about this time, Denny Ngo, KK Ho and WH Ng indicated their reluctance to provide further finance and wanted the existing loans repaid.  In fact, two calls for subscription were made in 2004 (about which there is no dispute) with a view to repaying those loans.

10.  By 30 September 2004, through allotments and transfers made, the shareholding ratio had become thus:

Madam Choi (Denny Ngo’s wife)	16.67%
Madam Suen Kit Yee Kitty(the fourth plaintiff and William Lee’s wife)	10.43%
Lee Yeung Fai(the fifth plaintiff and William Lee’s son)	2.29%
KK Ho	10.43%
WH Ng	10.43%
Ben Ng	49.76%

The large increase in Ben Ng’s shareholding was due to the fact that only he and Denny Ngo had applied for the new shares in the first round of the September subscription and only he had subscribed for any of the new shares in the second round.  While the 2004 subscriptions enabled the directors’ loans to be repaid, not much was left for business operations.  Not long afterwards, by November 2004, it became apparent that additional capital needed to be raised.  A board meeting was therefore convened for 12 November 2004 to address the problem.

11.  Meanwhile, it had come to WH Ng’s attention that the relevant documentation to implement the September allotment had not been prepared: his concern had arisen from the fact that it had been agreed in late October 2004 that he would leave Data World’s employment after the repayment of his loans.  He raised the matter with Ben Ng whose reply, copied to all the directors, was that they would be prepared by “Jenny” (the principal of JK Asia Company Ltd which provided company secretarial services to the companies), and to avoid unnecessary duplication of effort and to save costs, they should

“wait until the end of November when everything is clear so that we can give a single clear instruction to Jenny to get everything settled in one action.”

12.  The board meeting duly took place on 12 November 2004 and one of the matters the recorder had to decide was what (if anything) was agreed to at that meeting.  Subsequent events then followed, culminating in the November Allotment.

13.  As regards events subsequent to the November Allotment, differences between the plaintiffs and Ben Ng, which had been simmering since 1998, came to a head.  At a board meeting held in his absence on 30 May 2005, Ben Ng was removed from the post of managing director with immediate effect and KK Ho appointed in his place.  At the same meeting, WH Ng was appointed general manager.

14.  Ben Ng sought to convene an EGM in June 2005 and an AGM in June 2006.  None of the other shareholders attended the meetings and, in their absence, at the EGM of 27 June 2005, resolutions were passed appointing three new directors and declaring the decision of 30 May 2005 ultra vires and, at the EGM held on 15 June 2006, a resolution was passed re-electing directors who had retired from the board in accordance with the articles.

15.  Prior to the current proceedings, Ben Ng had commenced proceedings for convening AGMs pursuant to section 114B of the Companies Ordinance (HCMP 2274 to 2276 of 2006).  Mr Recorder Patrick Fung SC, who had dealt with the prior proceedings, found that there had been a “concerted effort” on the part of the plaintiffs “not to attend general meetings and directors’ meetings”.  In those circumstances, about a year before the present proceedings, in July 2007, he ordered that meetings be convened.

16.  The plaintiffs brought the consolidated proceedings against Ben Ng and the companies in December 2006.  The relief sought included declarations that (1) the November Allotment was invalid; and (2) resolutions passed at, inter alia, an EGM held on 27 June 2005 and an AGM held on 15 June 2006 were invalid.

17.  The plaintiffs contended that no agreement was reached on 12 November and, on that basis, sought to set aside the November Allotment.  Madam Choi, Madam Suen and YF Lee who were the first fourth and fifth plaintiffs did not appear at the trial.  They are not parties to this appeal which has been brought by KK Ho and WH Ng, the second and third plaintiffs (“the appellants”).

18.  As regards the validity of the November Allotment, Ben Ng’s case below was summarised by the recorder in § 51 of his judgment as follows:

“the Directors agreed to call for additional capital of $300,000 by issuing and allotting 300,000 new shares to the existing shareholders on a pro-rata basis.  KK and WH Ng declared in the meeting that they would not be subscribing for any more shares, so only Ben Ng, Denny and William subscribed for the new shares.”

19.  The recorder found as a fact that the directors did agree at the 12 November 2004 meeting to the issue and allotment of 300,000 shares, and rejected the evidence of KK Ho and WH Ng that they did not agree to the November Allotment.

20.  The judgment of the recorder did not address the relief sought concerning the validity of the annual general meetings held in June 2005 and June 2006 and the appointment of additional directors made at those meetings.

This appeal

21.  Two issues are said to arise:

    (1)   whether the November Allotment was a breach of section 57B of the Ordinance; and

    (2)   whether the recorder should have dealt with the validity or otherwise of the resolutions passed at the meetings held on 27 June 2005 and 15 June 2006.

Section 57B

22.  As earlier noted, the recorder rejected the appellants’ evidence concerning the November meeting and upheld the validity of the November Allotment. Mr KM Chong, who appeared for the appellants, confirmed at the outset of the appeal that he was not seeking to disturb any finding of fact made by the recorder.  In those circumstances, how the first issue could arise was not readily apparent since, in my view, compliance with section 57B would appear to be integral to the validity of the November Allotment itself.  Be that as it may, it becomes necessary to go into the recorder’s findings in some detail concerning the November agreement and subsequent events, culminating in the November Allotment.

23.  As regards the November agreement, Ben Ng’s version which the recorder accepted, has already been set out in § 18above.  The first matter to note is that there were two aspects to the November agreement.  Apart from the agreement to issue and allot 300,000 shares to existing shareholders on a pro rata basis, two of the existing shareholders, namely the appellants, declared that they would not be subscribing for any more shares.  It is therefore not correct, as Mr Chong sought to do, to confine the November agreement to the former aspect only.

24.  As regards events subsequent to the November agreement, they are recorded in §§ 54 to 71 of the judgment which, in pertinent part, are set out below:

“54.  … on 13 November 2004, Ben Ng sent an email to Jenny, copied to all Directors, in the following terms:

“Jenny,

Please carry out and complete the following change of shares and directorship for us within November:

1.   Allotment of 2,300,000 shares for [Data China] with figures previously given to you by Doris

2.   Issue of additional 300,000 shares at par value according to the new ratios subsequent to the above allotment

3.   After (1) & (2), determine the final share ratios between shareholders; then transfer shares in [Data World] and Nexus among the shareholders to match the same final ratios of [Data China] that you have calculated;

4.   Arrange for resignation from directorships by [WH] Ng from all the companies with effect from 1 Dec 2004.

…

Directors, should I have any thing missed or misrepresented, please feed back immediately.  Otherwise, Jenny will proceed accordingly with the above instructions on Monday.

…”

55.   No one responded to this email except Jenny, who on 15 November 2004 (the following Monday) sent an email to Ben Ng, copied to all Directors, confirming that she would prepare the documents accordingly.

…

58.   … on 19 November 2004 at 4.13pm, Jenny sent an email to all the Directors, asking them to review the share allocation worked out by her pursuant to Ben Ng’s instructions on 15 November.  She attached to this email a worksheet setting out the shares allocation.  In this worksheet, Jenny correctly calculated the number of new shares issued and allotted to Ben Ng and Mdm Choi in the September allotment.  She, however, thought that all 6 registered shareholders subscribed for the $300,000 further capital in the November Allotment.

59.       Ben Ng immediately responded to Jenny by email at 4.55pm on the same day, also copied to all the Directors.  In this email, Ben Ng informed Jenny that:

“As KK and [WH] Ng have declared not to subscribe for any additional shares, please adjust your calculation to show zero subscription form both of them and proceed accordingly.”

60.       Jenny then reworked the worksheet and sent the revised version to Ben Ng and all the Directors at 5.32pm on 22 November 2004.  The revised worksheet showed that only Ben Ng, Mdm Choi, Mdm Suen and YF Lee participating in the $300,000 subscription, with a total of 237,436 new shares issued and allotted to them.  The revised worksheet also set out the new shareholding percentage after completion of the November Allotment, stating unequivocally that Ben Ng’s shareholding became 50.18%.

61.   At 12.59am on 23 November 2004, Ben Ng sent an email to Jenny, copied to all Directors, instructing her to proceed.  At 5.28pm on 23 November 2004, Jenny sent an email to William, copied to all Directors, informing William that all the documents had been prepared and would be sent to William the following morning, and asked him to have the documents signed and returned to her for filing.

…

65.   By letter dated 23 November 2004, Jenny sent to William 3 sets of documents (1 set each for Data World, Nexus and Data China) for execution.  The documents included Minutes of Extraordinary General Meetings, Consent to Short Notice, Board Minutes approving the allotment of new shares, Application for Shares, documents for transfer of shares of Nexus and Data China, share certificates, etc, to implement the September and November allotments in one go.

66.       The Directors and all the shareholders signed these documents where their signatures were required.  In the case of KK and WH Ng, they assert that they signed those documents they were asked to sign in great hurry thinking that they were for the September allotment only.  The documents that stated the issue of 237,436 new shares did not require their signature and they did not know that those new shares had been allotted.

…

70.   On 30 November 2004, Jenny sent an email to Ben Ng, copied to all the Directors, informing them that the documents effecting the November Allotment had been filed and stamped, and summarised the work done as follows:

“ 1.   [Data World] issued addition shares 237,436;

  2.   [Data World] allotted the new additional shares accordingly;

  3.   [Data China] transferred the shares according to [Data World] ratio;

  4.   Nexus transferred the shares according to [Data World] ratio; and

  5.   Mr Ng Wing Hon resigned the directorship from [Data World],[Data China] ad (sic) Nexus.

The new share proportion is the same in [Data World], [Data China] and Nexus which is:

Ben Ng:	50.18%
Choi Tak Lan:	16.81%
Kitty Suen:	10.52%
Lee Yeung Fai:	2.31%
KK:	10.09%
Ng Wing Hon:	10.09%

For your information, we also attached the detailed calculation for you. [The revised worksheet showing the allotment as previously emailed to the Directors on 22 November 2004 was attached to the email.] Please do not hesitate to contact me for any further clarification.”

71.   No one responded to raise any query or objections.”

In fact, no issue was raised as to the validity of the November Allotment until May 2005.

25.  As I understand it, Mr Chong’s submission was that the ‘declaration’ by the appellants at the November meeting of not subscribing for the new shares did not form part of the November agreement and that, accordingly, the appellants should have been, but were not, offered the new shares on a pro rata basis.  Hence, there was a breach of section 57B of the Ordinance.  On being asked to elaborate on the ‘offer’ that should have been made to the appellants pursuant to section 57B, Mr Chong drew attention to the “Application for Shares” from the shareholders who ultimately subscribed, namely, Madam Choi, Ben Ng, Madam Suen and YF Lee and submitted that the appellants should have been, but were never, sent a similar document.

26.  Whether, in any particular case, section 57B has been complied with is fact-sensitive.  Section 57B(1) reads:

“   (1)    Notwithstanding anything in a company’s memorandum or articles, the directors shall not without the prior approval of the company in general meeting exercise any power of the company to allot shares:

    Provided that no such prior approval shall be required in relation to the allotment of shares in the company under an offer made pro rata by the company to the members of the company, excluding for that purpose any member whose address is in a place where such offer is not permitted under the law of that place.”

It will be seen that there are two separate limbs to subsection (1).  The allotment of shares under an offer made pro rata by the company to its members does not require the prior approval of the company in general meeting.  Prior approval is only necessary where the proviso does not apply.

27.  If prior approval were required, that had been given and no breach of section 57 arises.  That much is apparent from the findings and conclusion of the recorder when he upheld the validity of the November Allotment.  Not only did the appellants give written consent to short notice for an EGM to be held on 30 November 2004, their signatures also appear on the written resolutions of 30 November 2004 of the board to allot 237,436 new shares.  The November Allotment did no more than implement what had been agreed at the November meeting.

28.  It is apparent from the chronology of events set out in extenso above that the appellants were kept informed of each and every step taken and copied on all written communications regarding implementation of the November agreement and were asked for “feed back” in the event of there having been any misunderstanding.  In the circumstances, the appellants’ silence is only consistent with their agreeing to what was being done.

29.  The appellants did not see fit to avail themselves of the opportunities they had between the November meeting and the November Allotment to advise the other shareholders including Ben Ng that they were having any ‘second thoughts’ on the subject.  They knew full well what was happening, especially upon receipt of Ben Ng’s e-mail of 19 November 2004 to Jenny and/or receipt of Jenny’s revised worksheet of 22 November 2004 showing the further injections of capital and resulting shareholding ratios.  Yet, they chose to remain silent.  In those circumstances, it ill becomes them to complain that they had been deprived of the opportunity of changing their minds as to whether or not to take up the pro rata allotment.  Their complaint is singularly devoid of merit.

30.  Insofar as it is suggested that there had been a failure to comply with the proviso to section 57(1) in that the appellants who were some of the shareholders were not ‘offered’ their pro rata entitlements, it is irrelevant, having been superceded by the November Allotment.  In any event, an ‘offer’ has to be viewed in context.  On the facts of this case, the appellants could have changed their minds and taken up their pro rata entitlements at any time before the November Allotment.  They did not.  I therefore have no hesitation in rejecting the submission that there had been any breach of section 57B.

Validity of the resolutions

31.  The recorder was criticised for failing to address the validity of the resolutions passed on 27 June 2005 and on 15 June 2006.  It was said that their validity or otherwise remained of relevance to:

    (1)   whether the appellants had been wrongly deprived of their salaried posts as managing director and general manager respectively between 1 June 2005 and 6 August 2007;

    (2)   whether Ben Ng’s reinstatement and assumption of a salaried post during that period was valid; and

    (3)   the validity of the appointment of three additional directors during the period in question.

32.  It is to be noted that the recorder, while well aware of the relief sought in relation to the resolutions passed, inter alia, on 27 June 2005 and 15 June 2006, considered it “academic”.  This observation was made in § 7 of his judgment which formed part of the “Introduction”.  Mr Lawrence Ng, who appeared for Ben Ng, submitted that there was good reason for the recorder’s view.

33.  Mr Chong’s written submissions below had identified five issues that required determination.  When the court observed during counsel’s opening on the first day of a five day trial, that there appeared to be only two major factual issues for determination, both relating to the events of November 2004, there followed the following exchange: