CNT RESOURCES LIMITED AND ANOTHER v. LAM BILL AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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RULING

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1. This was the hearing of an inter partes Summons of an application by the 1st and 2nd Plaintiffs for certain injunctions to be issued against all Defendants to this Action, injunctions identical to those which had been obtained on an ex parte application by the plaintiffs on 23rd July 1985 as amended on 24th July 1985.

2. The background to this application is as follows.

3. A Director of the 1st plaintiff Company, one Tsui Tin Tong ("Tsui") had by the time of the ex parte application and the concurrent issue of the generally endorsed Writ acquired and/or agreed to purchase about 49.38% of the 7th Defendant Company ("The China Paint Company") by himself, through his nominees and by the 1st Plaintiff Company ("CNT Resources").

4. The shares in The China paint Company held by its Directors, the 1st, 2nd, 4th and 6th Defendants, represented about 25.16% of its equity and Tsui had been in active negotiation for the purchase of this additional percentage, collectively referred to as the 1st Defendant's block shares ("the block shares").

5. Whilst negotiations for the block shares were still continuing a meeting of all of the first 6 Defendants, representing all the Directors of The China Paint Company in Hong Kong at the time, was held at which it was resolved, inter alia, to pay out to the Directors and Promoters not less than $4 million and some $7 million to its shareholders as interim dividends. This meeting was held and these resolutions were passed on 22nd July 1985.

6. The 2nd Plaintiff, one Lam Cho Yiu, was a shareholder of the China Paint Company, holding 360 shares in that Company, a figure representing just over 1% of the total issued share capital. He was one of those who had agreed to sell his snares to CNT Resources thus forming part of the 49.38% holding mentioned earlier.

7. Essentially the injunctions sought by Tsui, on behalf of CNT Resources, and Lam were to put a stop to the resolutions passed on 22nd July 1985.

8. Many arguments were advanced in support of the sought-after injunctions, and a number of additional affidavits were put before the Court at the hearing, both in opposition to the injunctions and insupport of them.

9. Counter arguments were advanced in favour of dismissing the application for the injunctions or any of them. One of those counter arguments went to the verb, root of the case:'

10. Mills-Owens, who was addressing me on behalf of those Directors who were the owners of the block shares, argued that neither the 1st Plaintiff Company nor the 2nd Plaintiff had any locus standi, and that the application ought therefore to be dismissed in limine.

11. By agreement between Mills-Ovens and Kotewall, on behalf of both plaintiffs, the hearing and my subsequent ruling were thereafter confined to this point, namely the locus standi, or lack of it, of both Plaintiffs.

12. This submission first arose in the course of submissions by Mills-Owens, and he put it this way.

13. Whether or not CNT Resources had or had not acquired the shareholding said to amount to 49.38% of the total issued capital it was unchallenged that at no time to date had CNT Resources even sought to lodge an instrument of transfer which was the only way by which any transferee could become a shareholder on the Register of The China Paint Company. There was thus, it was said, no attempt to comply with Articles 37, 41 or 42. Thus CNT Resources could not be looked upon in any other light than an entity that might at some time or another become an equity shareholder, and, it was argued, such a wholly futuristic possibility could not conceivably permit them to interfere with or attempt to interrupt the commercial decisions of The China Paint Company.

14. In parenthesis here, because it was not one of the arguments advanced before me, I noticed that of the 16 Bought and Sold Notes constituting Tsui's Exhibit "TTT-2" no less than 11 of them mentioned no figure whatsoever against 'Consideration'. Of the other 5 Notes 4 showed a consideration of $2,271 per share and one showed a consideration of $1,800 per share. On drawing attention to Counsel for the Plaintiff to the absence of consideration on many of the Notes I was told they were only samples. This information certainly helped to show me that it was entirely possible that all the Notes were in some way or other 'conditional, or 'in escrow' as it was put in one of the affidavits.

15. So much for the initial argument against CNT Resources having any locus standi.

16. The standing of Lam Cho Yiu, the 2nd Plaintiff, was, so it was argued, undermined by the fact that an oppressed minority claim, such as Lam was instituting, must be made on behalf of the Company, and must be a derivative action. The well-known precedent for such an action in Palmer's Company Law, Precedent Number 640, was cited in support. In the present case there was no suggestion in the Writ itself or in Lam's supporting affirmation that he was instituting a derivative action.

17. That in essence was the case against Lam Cho Yiu having any locus standi.

18. To tackle these arguments it was first suggested, I think, that Lam's action was a derivative action, and that Lam had made his claim in that form. There was some backtracking from this position and the argument was then advanced as follows. It was quite clear that Lam was taking action on behalf of The China Paint Company, and he did not have to say so expressly. In support of this viewpoint I was referred to Denning M.R's comments in Wallersteiner v. Muir (1975) 1 Q.B. at page 390.

19. The argument in support of the standing of CNT Resources was to cite the well-known passage in Palmers Company Law 24th Edition Vol. 1 at paragraph 64-04 to the effect that bearing in mind that Directors owe a fiduciary duty to their Company, the powers conferred on them must be exercised by them for the purpose and benefit of the Company and that includes the benefit of present and future shareholders in other words the 2nd and the 1st plaintiffs respectively.

20. With great respect to Counsel advancing such views I was totally unpersuaded by their validity. Whilst it is true to say that Denning's obiter dicta in The Wallersteiner Case certainly can be used to support the view that a slavish adherence to Palmer's Company Precedent Number 640 is not a sine qua non to launching a derivative action, there must be some evidence, either in the pleadings or in the supporting affirmation that indeed and not just in theory the action instituted is seeking a remedy for the benefit of the Company. Here there is none. In the Wallersteiner Case, despite the deviation from the strict form there was ample evidence from the manner of wording the claims that they were being made for the benefit of the Company.

21. To argue that an entity that might some day in some as yet unfulfilled circumstances become a shareholder ought thereby to be entitled to be joined as a party in attempting to put a stop to the internal resolutions of a limited company is, so far as I am concerned, to argue from no starting-point at all. Such would have to be the starting point if CNT Resources were to be allowed to claim entitlement to the injunctions sought or any of them.

22. Accordingly I dismiss the application by the plaintiffs for the injunctions sought, but nevertheless I order that to preserve possible options open to the plaintiffs on any appeal they might be considering I order that those injunctions obtained on an ex parte basis on 23rd July and as amended on 24th July continue in force until 4.30 p.m. on Thursday 1st August 1985.

23. Defendants costs of this application to be costs in the cause Certificate for 2 Counsel.