FONG YOCK YEE v. HONG KONG CHUNG SHAN LUNG CHAN CLAN ASSOCIATION

HCA2883/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2883 OF 2003

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REASONS FOR RULING

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1. On 11 March 2003 I made the following orders :

(1) An order in terms of the defendant's summons dated 2 March 2004 for leave to amend its Defence and Counterclaim, with leave to the plaintiff to file and serve an amended Reply and Defence to Counterclaim within 14 days from the date of the order; and

(2) A mandatory injunction in terms of paragraph 2 of the defendant's summons dated 28 November 2003, ordering that the plaintiff forthwith deliver up the official chop of the defendant to its Board of Directors.

I also made orders in terms of summonses by both parties for leave to file affidavit evidence out of time. These orders were made by consent. Costs orders were also made by consent in respect of those summonses and the two substantive summonses in respect of which the above orders were made. I now give reasons for the making of the above orders.

Background

2. The defendant is a clan association. It is a company limited by guarantee and incorporated under the Companies Ordinance. The plaintiff is its chairman. The defendant's Articles of Association provide for it to have not less than 40 or more than 60 directors. The quorum for a meeting of the Board of Directors is 25. There is a dispute between the plaintiff and his supporters on the one hand, and the Vice-Chairman, Mr Lam Kit Sing and his supporters on the other. As appears from the Statement of Claim there are allegations of financial mismanagement by the plaintiff particularly in respect of a donation to the Yan Chai Hospital, but it is not necessary to examine that dispute here.

3. On 18 July 2003 the defendant's Board of Directors passed a resolution to (a) remove the plaintiff as a director and the chairman of the defendant and (b) expel the plaintiff as a member of the defendant. On 4 August 2003, Hartmann J having heard the plaintiff's application ex parte on notice, granted an injunction restraining the defendants from implementing and/or enforcing the resolutions of the Board. On 8 August 2003 Hartmann J by consent ordered that the injunction remain in force until otherwise varied or discharged by further order of court, and gave directions for further hearing. I am advised that the further hearing was fixed for 26 February 2004 but was adjourned to a date in June 2004.

4. Following the granting of the injunction on 4 July 2003 the defendant's Board passed the following resolution :

"Hire lawyer to resolve the matter in Court. Mr Shamson Zeall is duly authorised to handle and/or defend the case, fees for which are to be borne by the Association."

Mr Shamson Zeall is a solicitor and the principal of the firm Messrs Shamson Zeall & Co.

5. There is no dispute that this resolution was validly made. However problems have arisen in putting Mr Zeall's firm in funds for the defence of the plaintiff's action. In brief, the money could not be paid over because the plaintiff took possession of the defendant's chop which had to be affixed to its cheques, and refused to chop a cheque or cheques in favour of Mr Zeall's firm. Hence the defendant's application for the mandatory injunction.

6. On 6 August 2003, Mr Zeall requested a payment of $500,000.00. By virtue of Article 39 of the defendant's Articles of Association all cheques must be signed jointly by any one of the chairman and vice-chairmen; and any one of the manager and vice-managers of the Management Committee; and any one of the manager and vice managers of the Finance Sub-Committee of the Association, as well as being chopped with its chop. At that stage, the cheque books and the chops were under the de facto control of an elderly employee of the defendant, Mr Tsui Kwong, who lived in a flat attached to the defendant's premises. It is alleged that on 15 August 2003 Mr Tsui refused to release a cheque and the chop, thereby obstructing payment to the solicitor. The defendant's witness says that this was done on the plaintiff's instructions.

7. The plaintiff called a Special Board Meeting on 19 August to discuss the payment of the legal fees. Messrs Shamson Zeall & Co. wrote to the directors taking exception to the agenda set out in the notice convening the meeting. The directors stayed away; the necessary quorum of 25 directors was not reached.

8. In the meantime, the directors were trying to get the cheque books out of Mr Kwong, but he would not hand them over. A meeting was called by the directors under Article 23 of the Articles of Association, and the meeting was held on 9 October 2003. Article 23 provides :

"The Chairman may, when he thinks fit or at the written request, which shall specify the proposed agenda, of not less than 25 Directors shall, at any time convene an Extraordinary General Meeting...."

9. It is not in dispute that the Article is intended to provide for the holding of an Extraordinary Board Meeting rather than a General Meeting.

10. The agenda for this meeting did not specifically refer to the proposed payment to the solicitors, nor did they specifically refer to custody of the cheque books and the chop of the Association but did contain the following agendum :

"4. Review the financial problem of the Association and the proper guideline regarding the handling of income and expenditure."

At the meeting the plaintiff was chairman. Resolution No.9 was passed by 15 votes to 10 in these terms :

"Suggest our Association's financial operation: the Board of Directors should first recover the cheque book, the Seal and then authorise the Finance Sub-Committee to keep the cheque book, the Management Sub-Committee to keep the Seal."

11. The minutes also show that the plaintiff had objected to the making of any resolution about the keeping of the cheque books and chop by Mr Kwong on the ground that the agenda did not mention it.

12. Following the meeting the plaintiff apparently took the chop from Mr Kwong. The other directors - a faction led by the Vice-Chairman, Lam Kit Sing - retrieved the cheque books from Mr Kwong. Messrs Shamson Zeall & Co. demanded the return of the chop. Through solicitors the plaintiff replied that the matter of the cheque books and chop had not been in the agenda, he as chairman had ruled that it should not be discussed and he reserved the right to challenge the validity of the resolution. However he put on record that he was willing to put the chop on any cheque for payment of the legal costs which was approved by a board resolution. He said that he was not prepared to fix the hearing date for argument on the original injunction until such a board resolution had been passed.

13. Messrs Shamson Zeall & Co. presented its bill for $619,089.00 to the defendant on 29 October 2003. Thereafter the plaintiff convened a Board meeting on 18 November in order to discuss the fees. A quorum was not reached. However another meeting was convened on 22 November 2003, again at the request of directors. The plaintiff says that they did this knowing that he would be at his son's wedding, and unable to attend. He says the meeting is invalid. There was a flurry of solicitors' correspondence about the validity of the meeting and the resolutions which were sought. In any event, the Board passed a resolution authorising the recovery of all chops by the Management Sub-Committee. The defendant then on 25 November filed the summons applying for a declaration that the resolution passed at the meeting on 9 October was valid; a mandatory injunction for delivery of the chop; and an injunction restrain the plaintiff and his servant or agent from interfering with the payment of legal fees.

14. At this stage there was nothing in the pleadings about the chop. On 15 October 2003 the plaintiff filed its Statement of Claim by which it claimed a declaration that the resolutions passed on 18 July 2003 were null, void and of no effect; an injunction restraining the defendant from removing the plaintiff as chairman, expelling him as member, or implementing the resolutions; and damages. The plaintiff pleaded the background to the resolutions purporting to remove him, denied the allegations which led to them and claimed that they were invalid. The defendant on 3 December 2003 filed its Defence and Counterclaim in which it counterclaimed for $300,000.00 being the intended donation and $550,672.80, being the amount paid over in excess of the agreed sum. At that stage the matter of the chop was not pleaded. However on 2 March 2004 the defendant filed its summons for amendment of the counterclaim to include a further cause of action, namely conversion by the plaintiff of the chop, and to claim for delivery thereof.

15. In the meantime, however, the Board of Directors did not stand still. Another meeting was convened on 6 January 2004; this time, a monthly meeting. The agenda included an item No.7, to approve the bill of Messrs Shamson Zeall & Co. and to sign and chop and issue a cheque in payment of it. The plaintiff did not object to the meeting; he chaired it. Beforehand, through solicitors, he stated that provided the resolution could be validly passed, he would consent to the cheque being issued, and would hand over the chop provided it could be kept at the secretariat in according with usual practice or kept in such manner as the Board should resolve. When the business of the meeting got to item No.5 of the Agenda an argument broke out, and the plaintiff declared the meeting at an end. He and some ten-odd other directors who had, according to the minutes, not signed the attendance book, left. However a quorum remained and carried on with the meeting under the chairmanship of Lam Kit Sing. They went on to consider and to pass a resolution approving the payment of the legal fees.

16. Further meetings were called in January and February 2004 but a quorum was not reached. The plaintiff blames the other faction for this; Mr Lam has filed an affirmation explaining his side of it. I do not need to go into this.

17. No one has ever challenged the appointment of Messrs Shamson Zeall & Co. as the defendant's solicitors to handle this litigation. A date has been fixed for the adjourned hearing of the original injunction. Lawyers do not work for nothing. The fees need to be paid. The plaintiff acknowledges this; but he insists that the Board consider and pass a resolution to pay them, before he will chop the cheque. Attempts to get to that point have ended in chaos. Rightly or wrongly, however, a quorum of directors has agreed to pay the fees. The situation was, to my mind, a rather ridiculous one. I said so. Mr Yuen SC for the plaintiff suggested that the power of the court to order a meeting be invoked under section 114B of the Companies Ordinance. But the defendant would not agree to that, taking the view, as I understand it, that the matter had already been validly decided and the earlier meetings could not simply be swept under the carpet.

18. I considered the possibility of making an order under section 114B; the court may make such an order of its own motion, even if the parties do not agree. Given the situation between the factions, I do not think it would do any good. Even if a neutral chairman could be found one side or other would be quite capable of provoking the collapse of any meeting; or they could simply stay away in sufficient numbers to make a quorum unreachable, unless of course I ordered a quorum of one. The exercise would potentially raise many more problems than it would solve.

19. Mr Yuen attacked the defendant's applications on two major grounds, the first being that the counterclaim could not be amended so as to add a cause of action which was not in existence at the date of the Writ; and therefore there was no cause of action on which to base the application for the mandatory injunction to hand over the chop; and the second being that Resolution No.9 of the meeting of 9 October 2003 was invalid.

Amendment

20. The defendant's cause of action came into being on 9 October 2003 when the plaintiff took control of the chop. This was after the date of the Writ but before the date of the counterclaim. A Statement of Claim cannot be amended to add a cause of action which accrued after the issue of the Writ. See Lark International Finance Ltd v. Lam Kim Marisa [2004] 4 HKC 688; Wing Sui Co. Ltd v. Goldquest International Ltd [2002] 4 HKC 408.

21. For the rationale behind the principle Mr Yuen cites Eshelby v. Federated European Bank Ltd [1932] 1 KB 256 and Roban Jig & Tool Co. Ltd v. Taylor [1979] FSR 130. None of the English or Hong Kong cases cited deals with the amendment of a counterclaim but in Eshelby at 261 Swift J quoted a passage from Original Hartlepool Collieries Co. v. Gibb (1877) 5 Ch D 713 in which Jessel MR had held precisely that a defendant could only bring a counterclaim for damages up to the date of the Writ.

22. The learned authors of the Hong Kong Civil Procedure 2004 at para.15/2/2 take the view that a counterclaim may have arisen since the Writ and for this they rely on Beddall v. Maitland (1881) 17 Ch D 174. By reference to Original Hartlepool Collieries Co. Mr Yuen argues that this view is wrong. In Beddall, Fry J said that he disagreed with the view taken by the Master of the Rolls in Original Hartlepool Collieries Co. and desired to encourage an appeal so that the Court of Appeal would finally determine the matter; but it never did. Fry J found nothing in the wording of the relevant section of the Judicature Act 1873 to confine the right of the defendant to some cause of action vested in him when the plaintiff commenced his original action. Nor could he find anything in the words of the relevant Order or Rule to interfere with the generality of the words of the Act.

23. Per Bowen LJ in Amon v. Bobbett 22 QBS 543 at 548 :

"A counterclaim is to be treated, for all purposes for which justice requires it to be so treated, as an independent action."

24. On that basis, it seems to me, there is no foundation for saying that a defendant is restricted in his counterclaim to causes of action which came into being before the date of the Writ. There is no Hong Kong authority which categorically says so and the one persuasive English authority which says so is contradicted by another, equally persuasive. In fact in Vax Appliances Ltd v. Hoover plc, unreported, Chancery Division, 25 July 1990, Mummery J allowed a defendant to introduce by re-amendment a cause of action which had arisen since the date of the original counterclaim. His lordship referred to Order 18, rule 9 which allows a party to plead any matter which has arisen at any time, whether before or since the issue of the Writ. He "did not find in the rules or in the cases any absolute rule against granting leave to amend to introduce a new cause of action which has arisen since the date of the Writ or the relevant pleading." That I think would be contrary to Hong Kong authority, though the relevant Rule is the same as in England. If a plaintiff cannot plead a cause of action which comes after the Writ it seems to follow that a defendant cannot plead a cause of action which comes after the counterclaim because the counterclaim is what initiates the defendant's cross-action as the Writ initiates the action. But I do not need to go so far. In this case the cause of action came into being before the counterclaim was filed. It could then have been pleaded; for whatever reason, it was not. There is no difficulty in amending the pleading now.

Resolution No.9

25. The plaintiff's argument is that this was invalid because notice of it was not given as required by Article 23. The plaintiff relies on Young v. Ladies' Imperial Club Ltd [1920] 2 KB 523 in which a resolution of a special executive committee meeting was held invalid because the notice did not state the object of the meeting with sufficient particularity.

26. The defendant relies on La Compagnie de Mayville v. Whitley [1896] 1 Ch 788 as authority for the proposition that directors may transact any business at a board meeting, with or without notice.

27. Article 23 requires that the proposed agenda be specified. I have set out above the notice that was given. It was accepted that I could not give a declaratory judgment at this stage on the validity of the resolution because this was not an Order 14 application so my view can only be tentative but it seems to me that given the background facts which must have been known to all the directors at the time, any decision which the Board made about the handling of expenditure would necessarily involve a decision as to who was to be able to make that expenditure and that would involve deciding who kept the chop. So the specification may in the circumstances be regarded as sufficient.

Injunction

28. In any event it is not necessary to decide whether the resolution was valid for the purposes of injunction. It is necessary to decide whether there is a serious question to be tried on the question of conversion and to my mind there obviously is one. I have set out the provisions of Article 39 above and it seems to me obvious that whoever signs the cheques - and that includes all the alternates - must have access to the chop or else no cheque can be drawn; or no cheque that the bank will recognise. I do not see that Article 31(b) which provides for the Chairman to "assume the control of all [the Association's] internal affairs "necessarily gives him the right to the sole custody of the chop."

29. The next question is whether the defendant could be compensated adequately by damages for any loss caused by the refusal to grant the injunction. Obviously it could not. If it cannot pay its lawyers then unless it can get one to act for nothing it will have appear in person at the next hearing; and who knows what will happen then. In any event whatever the outcome it will not be possible to quantify damages.

30. The final question is the balance of convenience; or the balance of the risk of injustice. It is true that this is a mandatory injunction and that the court should consider than an order which requires a positive step may carry a greater risk of injustice if it turns out later to be wrong; and that the court "must feel a high degree of assurance that at the trial it will appear that the injunction was rightly granted"; see Shepherd Homes Ltd v. Sandham [1971] Ch 340 per Megarry J at p 351G. For the reasons given above in my treatment of the question of validity of the resolution, I feel a high degree of assurance that the defendant will establish at trial that the plaintiff has no right to the sole custody of the chop and therefore that the injunction was rightly granted.

31. The injustice to the defendant if it cannot pay its lawyers is obvious. The injustice to the plaintiff is not. It is argued that if the chop is given to the directors behind this application they will no doubt affix it to such cheques for the payment of legal fees as they see fit, without any board approval. They will have a blank cheque. If that is right, then no doubt there will be injustice to the defendant. The plaintiff as a member will suffer that injustice; but only as a member, for there is no personal injustice to him which can follow from his being made to hand over the chop. But there is nothing to support this suggestion. As I have said, rightly or wrongly, a quorum of directors on 6 January approved the payment. There is nothing to suggest that the provisions of Article 40 vesting the control of the money and assets of the defendant in its board or directors will not be followed. I do not see any real risk of injustice to either to the defendant itself or to the plaintiff as one of the members; which is, ultimately, the only way he could suffer an injustice visited on the defendant.

32. In any event, I have not heard any evidence to suggest that the figure is excessive even if it does appear to be a large one. Solicitors and leading counsel do not come cheap. I would have thought that if the plaintiff's concern is really to protect the Association of which he is chairman from being overcharged, more consideration to that practical question, rather than to the letter of this or that Article, or the requirements of procedure should have been given.

33. For these reasons I granted the mandatory injunction sought.