HO WONG MARY MEE TAK AND ANOTHER v. WONG SHIK HO TONG AND OTHERS

HCMP 1853/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1853 OF 2005

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D E C I S I O N

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1.  There are five summonses.  Three of them were issued by the 1st and 2nd plaintiffs to amend the originating summons.  Two of them are withdrawn with costs to the 1st to 3rd defendants (“the 3 defendants”) in any event.  The third one is to amend the originating summons by deleting (i) the 1st plaintiff from the proceedings and (ii) the reference to sections 121, 124 and 129 of the Companies Ordinance from the title of the proceedings.  The 3 defendants consent to this summons with costs to them in any event.

2.  The remaining two summonses are issued by the 3 defendants.  One of them is to discharge an ex-parte injunction granted by Deputy Judge Saunders against them on 2 September 2005.  That injunction expired on 9 September 2005 without any application for continuation or renewal.  The outstanding question in this summons is thus on costs only.  The second summons is for striking out or stay of these proceedings.

No more striking out

3.  The 1st ground for striking out is that the plaintiffs by the originating summons have sought relief under the Companies Ordinance, but the 2nd plaintiff is a BVI company and not a company as defined in the said Ordinance.  It has not even registered under Part XI the Ordinance as an oversea company.  It therefore cannot seek relief as a company under the Ordinance and the proceedings should be struck out.

4.  The 2nd ground for striking out is made pursuant to Order 18 Rule 19 of the Rules of High Court and the inherent jurisdiction of the Court.  It is mounted on the same basis as the 1st ground. 

5.  The amendments to the originating summons under the third summons of the plaintiffs, which have been consented to by the 3 defendants, have removed from the title of the proceedings all the references to the Companies Ordinance.  The basis for these two grounds for striking out have therefore also been removed.  The 3 defendants therefore do not pursue them, but they ask for the costs incurred under these two grounds as the plaintiffs’ third summons to amend was issued after the defendants had issued the summonses to strike out or stay.  The plaintiffs do not oppose the application for costs and I order that costs of paragraphs 1 and 2 of the summons of the 3 defendants dated 8 September 2005 be to the 3 defendants in any event. 

6.  The matters to be dealt with are the costs of the summons for discharge of the ex-parte injunction and the remaining parts of the summons for stay of the proceedings.  There is no more application to strike out.

Background for stay and costs for discharge of injunction

7.  The 2nd plaintiff is a holding company with subsidiaries operating in Hong Kong.  The businesses of the subsidiaries are in the manufacture of computer parts and computer products.

8.  One Perfect Choice Limited (“Perfect”) and one Classic Venture Limited (“Classic”) together own 51% of the shares of the 2nd plaintiff.  Perfect and Classic used to be owned by one Bosco Ho (“Ho”).  Ho unfortunately passed away in March 2004.  His wife the 1st plaintiff became their beneficial owner.

9.  The 3 defendants are also shareholders of the 2nd plaintiff.  After the death of Ho, they are also the only directors of the Company. 

10.  Sometime this year, the shareholders of the 2nd plaintiff planned to list it in the stock exchange. 

11.  In May this year, there was also a discussion for the sale of 10% each of the shares held by Perfect and Classic to a company nominated by the 3 defendants.  One of the terms of sale imposed by Perfect and Classis was that the 3 defendants should undertake not to dilute the percentage shareholding of Perfect and Classic in the 2nd plaintiff.  The negotiation for sale did not bear fruit.  On about 16 June, the solicitors of the 3 defendants informed the solicitors of the 1st plaintiff that they would not negotiate for the purchase any more.

12.  There was a further meeting between the 1st plaintiff and the 1st defendant on 8 August.  The 1st plaintiff was accompanied by her financial adviser, one Mei Leung of Somerley Limited.  The 1st plaintiff told the 1st defendant that she was desirous of selling all the shares held by Perfect and Classic to the 3 defendants, but in the meantime would like to be appointed a director of the 2nd plaintiff. 

13.  Before the 1st plaintiff had received any response from the 3 defendants on her proposed sale, she learnt on 25 August from one Harry Lam of the 4th defendant that the 4th defendant had received certain documents relating to a subscription by a third party Successfield Investment Limited (“Successfield”) of 500,000 ordinary shares of the 2nd plaintiff.

14.  The 4th defendant is said to be the Hong Kong contact agent for the 2nd plaintiff’s registered agent in the BVI.  Lam told the 1st plaintiff that the 4th defendant had been advised by the 2nd plaintiff that 500,000 shares of 2nd plaintiff had been allotted to Successfield at HK$60 per share and the 2nd plaintiff had further instructed the 4th defendant to prepare the share certificate for Successfield.

15.  The 1st plaintiff thought that the subscription was not in the best interest of the 2nd plaintiff as the 2nd plaintiff was cash rich.  The draft audited accounts dated 25 April 2005 contained a consolidated balance sheet for the year ending 31 December 2004 which showed a total net asset of over $259 million and cash at banks and in hand of over HK$169 million.

16.  The 1st plaintiff also took the view that the allotment was not at the fair value.  She thought that the market value of the shares of the 2nd plaintiff was at least HK$70 per share. 

17.  She also regarded the subscription as unfairly prejudicial and oppressive to the 2nd plaintiff’s shareholders including Perfect and Classic as it resulted in dilution of their shareholding without any good cause.  It would have diluted the combined holdings of Perfect and Classic from their original absolute majority to 44.83%.  She viewed it as initiated with bad faith and to damage the 2nd plaintiff’s shareholders including Perfect and Classic.  She through her solicitors asked the 4th defendant not to update the 2nd plaintiff’s register of members so as not to give effect to the allotment.

18.  Her solicitors further prepared a resolution by Perfect and Classic as the absolute majority of the shareholders to remove the 3 defendants as directors of the 2nd plaintiff.  The resolution also appointed her as its sole director.

19.  The solicitors also prepared a resolution by the 1st plaintiff as the sole director to revoke the previous directors’ resolution by the 3 defendants in connection with the subscription agreement.  Her resolution also demanded the 4th defendant to deliver up all the books and records of the 2nd plaintiff to her or her solicitors.  However, the 3 defendants regarded the resolution of Perfect and Classic as invalid and maintained that they were still directors of the 2nd plaintiff and the 1st plaintiff was not.  They also denied the 1st plaintiff’s access to the books and accounts of the 2nd plaintiff or to the premises of the 2nd plaintiff’s subsidiaries. 

20.  The 4th defendant also did not deliver any books or records to the 1st plaintiff.  The 1st plaintiff was then concerned that the 2nd plaintiff’s register of members, which was probably in the possession of 4th defendant, would be updated to reflect Successfield’s subscription.  Harry Lam of the 4th defendant also told the 1st plaintiff on 30 August that the 3 defendants had asked the 4th defendant for the register of members. 

21.  The 1st plaintiff thought that it was a matter of urgency that she should obtain possession of the register or that the register should be kept in the custody of the Court to maintain the status quo.

Ex parte injunction

22.  The 1st plaintiff’s lawyers on her behalf and on behalf of the 2nd plaintiff applied to this Court on 2 September for an order against the 4th defendant for delivery up of the properties, books, records and accounts including the register of members of 2nd plaintiff.

23.  The 1st plaintiff did not intent to ask for any interim relief against the 3 defendants because their solicitors had not confirmed instructions to accept service and they had not been served with the papers.  Only the 4th defendant had been served and it was represented at the hearing which was before Deputy Judge Saunders.  The learned Deputy Judge acceded to the inter partes application relating to the 4th defendant. 

24.  The learned Judge also indicated his preparedness to make an ex-parte order against the 3 defendants restraining them until the return day on 9 September from taking any steps to register the allotment of 500,000 shares of the 2nd plaintiff to Successfield pursuant to the subscription agreement.  The 1st plaintiff’s counsel thus applied for and was granted the ex-parte order against the 3 defendants in those terms.

Ex parte injunction expired

25.  The 4th defendant pursuant to the inter partes order of the Deputy Judge delivered up the register of members to the 1st plaintiff.  The 1st plaintiff, having confirmed that the register had not been updated and the allotment to Successfield had not been recorded therein, did not ask for the continuation of the ex-parte injunction against the 3 defendants on the return day.  By the order of Chung J. on the same day, the register was deposited with this Court.

26.  Since the ex parte order against the 3 defendants has already expired on 9 September 2005, the only thing to be determined on their summons to discharge is costs.  There is no summons by the 4th defendant for discharge of the inter-partes order made against it. 

Grounds for costs for application and discharge of injunction

27.  The summons for discharge pleaded four grounds for discharge.  Two more grounds were added at the hearing for costs.

                   First ground

28.  The 3 defendants say that the Court had no jurisdiction to grant the order.  They referred to the title of proceedings as presented to the Deputy Judge.  It bore the reference to sections 121, 124 and 129 of the Companies Ordinance.  They thus said that the application was made pursuant to these sections of the Ordinance.  They further said that the 2nd plaintiff, being a BVI company, is not a company within the meaning of the Ordinance (see Insurance Company of the State of Pennsylvania v. Grand Union Insurance Company Limited [1988] 2 HKLR 541 and 544 E-F and Charter View Holdings BVI Limited re Corona Investment Limited [1988] 1 HKLRD 469 at 472g-473b).  These sections therefore do not apply to it.  The Court thus had no jurisdiction to grant it any relief pursuant to these sections.

29.  The plaintiffs however argued that the reference to these sections in a title of the proceedings was included erroneously.  They further argued that these sections were not invoked and the ex-parte order against the 3 defendants (and indeed the inter-partes order against the 4th defendant) was not made under these sections.  The plaintiff further said that had this error been pointed out at the hearing before the Deputy Judge, an application would have been made to delete the reference and the same orders would have been made. 

30.  The 3 defendants argued in reply that had they been notified of and attended that hearing, they would have argued against the application to amend and asked for the application for interim injunction to be dismissed.  But they did not say on what ground would they oppose the application to amend.

31.  I agree with the plaintiffs that the reference to the three sections in the Companies Ordinance was an error and it did not affect the jurisdiction of the Court or the merit of the application.  I do not see any reasonable ground for the 3 defendants to oppose any application to amend if the error had been pointed out and such an application had been made before the Deputy Judge.

                   Second ground

32.  The 3 defendants further argued that there is no serious question to be tried in these proceedings.  They argued that the 1st plaintiff has no locus in the proceedings as she is not a shareholder of the 2nd plaintiff.  She is only a beneficial owner of Perfect and Classic.  They further argued that the 2nd plaintiff does not occupy any premises in Hong Kong and only its subsidiaries have premises here.  Relief no. 2 in the originating summons, which seeks an order for the 1st plaintiff to enter the 2nd plaintiff’s premises in Hong Kong, is thus flawed.

33.  The plaintiffs accepted that the 1st plaintiff she had no locus.  She is now deleted from the proceedings by the latest amendment.  However, the plaintiffs argued that the 2nd plaintiff has locus and there were reliefs properly pleaded on its behalf in the original originating summons that are still present after the amendments.  The first relief in fact asks for delivery up by the 1st to 4th defendants of all properties books, records and accounts of the 2nd plaintiff.

34.  I accept the arguments of the plaintiff and am of the view that even if the 1st plaintiff was not a party to the original application before the Deputy Judge.  The same ex parte order would have been made on that occasion.  The deletion of 1st plaintiff would not have affected the merit of the ex parte application.

Third ground

35.  The 3 defendants say that the plaintiff had applied for the ex parte order in a clandestine manner.  They relied on the correspondence.  On 26 August, their solicitors already sensed that litigation might arise from the dispute.  They wrote to the 1st plaintiff’s solicitor on that day asking for ample prior notice if Perfect and Classis should make any application to Court because the 3 defendants intended to oppose such application.

36.  In the morning of 30 August, the 1st plaintiff’s solicitors wrote and asked them to confirm by 1 p.m. on the same day whether they had instructions to accept service for the 3 defendants.  They replied on the same day and disputed that Perfect and Classic were the majority shareholders and said that the dispute had to be decided in the BVI.  They further said that any proceedings in Hong Kong would depend on the result of the BVI proceedings.  There was thus no urgency for any Hong Kong proceedings.  They further pointed out that any urgent application by Perfect and Classic was unjustified.  They finally complained that the time given for confirmation of instructions to accept service was too short to be meaningful especially when two of the 3 defendants were out of Hong Kong.

37.  The 1st plaintiff’s lawyers then went to Court on 2 September intending to ask for an inter partes order against the 4th defendant only for delivery up of the register of members.  Though they did not at the start seek any order against the 3 defendants, when they took up the suggestion of the Court and applied for the order, they knew that it was an ex-parte order.  However in the light of the urgency for getting hold of the register to preserve the status quo and the earlier correspondence between the parties, I would not say that the application for the ex-parte order in these circumstances was made in a clandestine way. 

38.  Mr Chow, leading counsel, for the plaintiff also argued that costs were only incurred in the application for the inter partes order against the 4th defendant and no costs had been incurred for the ex-parte order against the 3 defendants as such order was not within the 1st plaintiff’s contemplation when her party went to Court.  But that is beside the point, the 3 defendants had indeed incurred costs before 9 September to prepare for the discharge.

Fourth ground

39.  The 3 defendants also submitted that there was material non-disclosure.  Though the ex-parte order was first suggested by the Court, the plaintiffs were under the same obligation to make full and frank disclosure of all relevant facts.  The 3 defendants complained of six matters of material non-disclosure. 

40.  The first matter was a memorandum of understanding (“MOU”).  It was signed by the 1st plaintiff and the 3 defendants in January 2005.  It provided for the sale and purchase of shares that was still being negotiated in May 2005.  The 3 defendants said that by the MOU, Perfect and Classis were prepared to let go of their status as majority shareholders.  However, I note that by 16 June, the 3 defendants’ solicitors had told the 1st plaintiff’s solicitor that they would not negotiate any further on this purchase.  Hence, with the cessation of negotiation, whatever intent or agreement as contained in the MOU had become irrelevant.  I cannot see any relevance of the MOU to the grant of the ex-parte order by the learned Deputy Judge.

41.  The second matter was the conduct of the 1st plaintiff which, according to the 3 defendants, had thwarted the IPO by breaching the listing rules of the Stock Exchange.  The alleged conduct was the 1st plaintiff’s attempt to increase the price of the share to be sold to the 3 defendants to HK$70 per share and her intention on 8 August of selling all the shares held by Perfect and Classic.

42.  Since the previous negotiation for sale had stopped on 16 June and the fresh initiative on 8 August had received no response, I do not see why these matters or their effect on the proposed IPO would be relevant on the consideration of whether to preserve the status quo and not to permit the register of members to record the allotment to Successfield.

43.  The third matter is that the 1st plaintiff had failed to inform the Court that she had demanded and received a repayment of US$1.7 million loan from the 2nd plaintiff.  The 1st plaintiff said that she had never made the demand and this allegation was new to her.  In the premises I cannot conclude either way.  Since the parties do not intend to leave this question of costs to a later stage, there is no means for me to resolve this issue and conclude that the 1st plaintiff is guilty of material non-disclosure of this matter.  In any event, I do not comprehend why this matter was material for the consideration on whether to grant the ex-parte order.

44.  The fourth complaint is the lack of notice to the 3 defendants despite the letter of their solicitors of 26 August asking for amply prior notice.  I do not see how this lack of notice on its own was a material consideration on whether there was sufficient merit to justify the ex-parte order.  In any event, a copy of the letter has been exhibited in the supporting affidavit of the 1st plaintiff.  Even if this letter requesting for prior notice was material and the mere production of it as an exhibit was insufficient disclosure, I still do not think that this non-disclosure alone is sufficient for me to decide against the plaintiffs.

45.  The 5th compliant is the failure to draw the attention of the Deputy Judge to the existence of an arbitration clause in the 2nd plaintiff’s Article of the Association.  The arbitration clause governed disputes between the 2nd plaintiff and its shareholders.  The present dispute is between Perfect and Classic and/or the 2nd plaintiff on the one hand and the 3 defendants as directors or former directors of the 2nd plaintiff on the other.  I do not think it is within the scope of the arbitration clause.  It was unnecessary to refer to it in making the ex-parte application.

46.  The last complaint is the failure to explain to the Deputy Judge that the 4th defendant was not the contact agent or representative of the 2nd plaintiff’s BVI agent.  However, the 4th defendant was keeping all the books for the 2nd plaintiff.  The 3 defendants also instructed the 4th defendant to prepare the share certificate for Successfield and to update the register of members to reflect the allotment to Successfield.  If the 4th defendant was not the agent of the 2nd plaintiff BVI agent, it must have been the direct agent of the 2nd plaintiff.  There is no merit in this point.

Fifth ground

47.  Mr Whitehead, leading counsel for the 3 defendants, also submitted that the Court should not have granted a stand alone injunction which is not incidental to or dependant on a substantive relief to which the plaintiff’s cause of action entitled them (see Mercedes-Benz AG v. Leiduck and another [1995] 1 HKC 448).

48.  Though there is no express averment in the originating summons to attack the subscription agreement, the reliefs pray therein are on the basis that Perfect and Classic are still the majority shareholders.  The Originating Summons is thus pregnant with the claim that the subscription agreement is ineffective and/or should be set aside.  All parties agree that the Court at the trial of these proceedings will have to resolve this issue first before dealing with other matters.  Indeed whether there is authority from the 2nd plaintiff for it to be represented in these proceedings also depends on the ruling on this agreement.  I am therefore satisfied that the injunction as granted was not a stand alone one. 

                   Sixth ground

49.  The 3 defendants’ skeleton submissions also contained the point that if the Companies Ordinance has no application to the 2nd plaintiff.  The Court would have no jurisdiction to grant any substantive relief.  The injunction would then become a stand alone one and thus should not have been granted.  I have already accepted that the reference to the Companies Ordinance was an error and did not affect the grant of the injunction.  This point is therefore also unmeritorious.

Decision on costs of the injunction

50.  In the light of my analysis above, I do not think the 3 defendants would have succeeded in their application to discharge the ex-parte injunction.  In the circumstance, I accept the suggestion of Mr Chow and order that the costs of the application for the ex-parte order against the 3 defendants and their summons for discharge be in the cause.

Stay of proceedings

51.  I now deal with the application by the 3 defendants for stay of these proceedings.  There are two grounds in the summons for stay; namely: for arbitration and for forum non-convenience.  Mr Whitehead added a further ground of case management in the skeleton submissions.

Arbitration

52.  This ground was not referred to in oral submissions.  I have also observed above that the clause does not cover the present dispute.  I say no more about it. 

Forum non-convenience

53.  Mr Whitehead referred to rule 154(2) of Dicey and Morris on the Conflict of Laws 13th edition which says:

“All matters concerning the constitution of a corporation are governed by the law of the place of incorporation.”

54.  There is no dispute that the corporate law governing the present dispute is that of the BVI.  The dispute is whether the courts in the BVI are the natural or appropriate forum. 

55.  There is also no dispute on the law applicable for this ground (see The Spiliada [1987] 1 AC 460 and The Adhiguna Meranti [1987] HKLR 904).  The first issue to be decided is whether the courts in Hong Kong are the natural or appropriate venue to decide these disputes.  If I should decide it in favour of the 2nd plaintiff, I will dismiss the 3 defendants’ application.  If I should decide it in favour of the 3 defendants, I will go to the second issue. 

56.  The second issue is whether there is any legitimate personal or juridical advantage for the 2nd plaintiff to have the disputes resolved in the Hong Kong courts.  If I should decide this in favour of the 3 defendants as well, I will stay the further proceedings of the 2nd plaintiff’s claim. 

57.  If I should however decide this second issue in favour of the 2nd plaintiff, I would have to balance the advantages of having the disputes decided in the foreign venue against the disadvantages of depriving the 2nd plaintiff of the advantages.  If substantial justice will not be done to all the parties in the foreign venue, I will dismiss the 3 defendants’ application. 

58.  Mr Whitehead said that insofar as the disputes are questions of internal management of companies, the principal of law has been qualified by Lawrence Collins J. in Konamaneni and Others v. Rolls-Royce Industrial Power (India) Limited and Others [2002] 1 WLR 1269 at paragraphs 51 to 61 which says that courts of the place of incorporation are best suited to give decisions on the control and the extent of the powers of the management. 

59.  If a company is managed at its place of incorporation, then the application of the principle in the Spiliada will usually result in the conclusion that the courts of the place of incorporation are the natural or appropriate forum and are best suited to decide on internal management disputes.  However, if a company is exclusively managed in a place which is not its place of incorporation, then the application of the Spiliada principle may not favour the courts of the place of incorporation.  I also note that Lawrence Collins J. did not say in Konamaneni that the Spiliada principle should in any way be qualified when the dispute is on the internal management of the company.  The learned Judge in fact followed the Spiliada closely in that case which concerned the internal management of a company.  I therefore apply the Spiliada principle here.

60.  There is no dispute that the subscription agreement was made in Hong Kong by the solicitors of Successfield who are also the solicitors of the 3 defendants.  This agreement was submitted to the 2nd plaintiff’s board in Hong Kong which comprised the 3 defendants.  The board pursuant to this agreement allotted 500,000 shares to Successfield in Hong Kong.  Instructions to update the register of members and to issue the share certificate to Successfield were given and received in Hong Kong. 

61.  Regarding the events as between the 1st plaintiff and the 3 defendants, they all took place in Hong Kong. 

62.  In a nutshell, all the relevant acts and events took place exclusively in Hong Kong rather than in the BVI.  All the protagonists are also present in Hong Kong.  The place of business of the 2nd plaintiff or its subsidiaries is also in Hong Kong.  Part of the relief as against the 3 defendants, if granted, will also have to be enforced in Hong Kong.  The Hong Kong courts are not unfamiliar with the laws of the BVI which also has a common law jurisdiction.  Obviously the courts in Hong Kong are the natural and appropriate forum for resolving the issues in these proceedings.  This is an inescapable conclusion.

Case management

63.  Finally, the 3 defendants submitted that the first and foremost issue to be resolved was the validity of the subscription agreement.  They further said that there was already an action in the BVI brought by Successfield against the 2nd plaintiff.  The present proceeding should thus be stayed pending the outcome of the BVI action. 

64.  The plaintiff did not dispute that the first and foremost issue was the validity of the subscription agreement.  However, Successfield in its BVI action has not joined Perfect or Classic as a defendant.  Whilst the validity of the subscription agreement is a pending issue, the authority of the 1st plaintiff to act for the 2nd plaintiff in the BVI action is in doubt.  I have already noted that the subscription agreement was made in Hong Kong.  The agreement also provided that the Law of Hong Kong is its governing law and the parties thereto have submitted to the non-exclusive jurisdiction of the courts of Hong Kong.  All in all, I am not convinced that I should stay these proceedings pending the outcome of the BVI action.

Undertaking of Perfect and Classic and the 2nd plaintiff

65.  I also record here that in the course of the hearing, Perfect, Classic and the 2nd plaintiff have through leading counsel given an undertaking to this Court that they will apply within 14 days to re-amend the Amended Originating Summons to include Perfect and Classic as plaintiffs, to join Successfield as an additional defendant, to add a relief to set aside the subscription agreement and thereafter to exercise their best endeavours to effect service on Successfield either within jurisdiction or to obtain leave to effect service out of jurisdiction.  This undertaking gives further assurance to this Court that all relevant parties will be joined in these proceedings and all relevant issues will be ventilated herein.

66.  I also record here that when the undertaking was furnished, I advised the parties that it would not prejudice any fresh application by any defendant to stay the proceeding as re-amended whether for or arbitration or otherwise.

Decision on stay

67.  I have indicated above that I am not convinced that these proceedings should be stayed before I referred to the undertaking.  I do not think that there is any ground to stay the proceedings even without the undertaking.  I therefore dismiss the summons of 3 defendants to strike out or stay. 

68.  I also make an order nisi that the costs of the part of the summons of the 3 defendants dated 8 September 2005 for stay of proceedings be paid by them to the 2nd plaintiff in any event.