UNIVERSAL HORIZON HOLDINGS LTD. v. SHI HAN WEN

HCMP 3887/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3887 OF 1999

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J U D G M E N T

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1. This is an application under section 114B of the Companies Ordinance by the plaintiff, who claims to be a shareholder in Universal Horizon Investment Ltd (UHIL) for an order that an Extraordinary General Meeting of UHIL be convened and that one member do constitute a quorum for the meeting. The declared purpose of the proposed meeting is to remove the defendant, together with a Mr Ip Fai and a Mr Mao Shu Zhong as directors of the company, and replace them with Ms You Li and Mr You Bin.

2. Ms You is the widow of a Mr Tong Kwan who died on 6 February 1999. Prior to his death Mr Tong was also a director of UHIL.

3. The issued share capital of UHIL is 10000 of which at one time Mr Tong held 9000 and the defendant holds 1000. In 1997, Mr Tong, as part of a tax saving scheme on his acquiring Canadian resident status, executed a transfer of his 9000 shares to the plaintiff, which is a company incorporated in the British Virgin Islands. There may, at some stage, be a question as to whether the transfer of those shares was valid, but for the purpose of the present application I will assume that it was. These proceedings have been brought at the instigation of Ms You Li who claims to be the sole director of the plaintiff.

4. UHIL is a company with substantial assets both in Hong Kong and Mainland China. It owns inter alia a residential property in Stubbs Road, Hong Kong, and, through its wholly owned subsidiaries Full Dragon Enterprises Ltd and Universal Horizon Finance Ltd, holds large deposits at banks and investments in joint ventures. These businesses were, prior to Mr Tong's death, actively managed by him and the other directors. Following his death, Ms You Li, as a beneficiary of his estate, although there is as yet no grant of probate or administration, sought access to the records of the three companies and to involve herself in them. This was resisted by the directors, who, apart from being unwilling to have the affairs of the companies dealt with by someone who had no experience of managing them, and being suspicious of Ms You Li's motives, claimed that the beneficial ownership of the plaintiff, and consequently the 90% share of UHIL, had been transferred to a family trust set up by Mr Tong. Ms You Li in turn claimed that assets of the companies were being diverted by the directors for their own use. Ms You Li then sought to call an extraordinary general meeting of UHIL, but as no other shareholders attended, there was no quorum sufficient to pass the intended resolutions to remove the directors. Ms You Li accordingly commenced proceedings on 3 July 1999, in HCA 8981 of 1999 (the first proceedings) with the plaintiff herein as 2nd plaintiff, seeking inter alia a declaration of the court that she is the sole director of the plaintiff and authorized to represent and act for it. Two days later these proceedings were commenced.

5. Miss Wee, on behalf of the defendant, bases her opposition to this application on three principal grounds: first, the defendant denies that Ms You Li is a director, and therefore has no authority to bring these proceedings on behalf of the plaintiff. He claims that the only directors appointed in accordance with the law of the British Virgin Islands were Mr Tong, himself and Mr Mao; second, this application is premature, as the question of whether Ms You is a director and has authority to act on behalf of the plaintiff is the principal issue in the first proceedings; and third, she says that even if Ms You Li is the sole director, the discretion of the court should not be exercised in her favour in respect of this application.

Ms You Li's status as director

6. I have had the benefit of expert evidence from two eminent lawyers from the British Virgin Islands, Mr Michael Riegels and Mr Paul Webster, both of whom were involved to some degree in the drafting of the International Business Companies Act which makes provision for the incorporation of the so-called international business companies (IBC's). They are largely in agreement on the principal matters required to set up such a company, although they are not entirely at one on the appointment of directors.

7. An IBC can only be incorporated by a registered agent who subscribes his name to the Memorandum and Articles of Association (the subscriber). At this stage the company has no directors or shareholders. The first directors can only be appointed by the subscriber, who usually does so in writing, although there is no requirement in the IBC Act. Once directors have been appointed, the company is legally functional and shares can be allotted by a resolution of the directors, and the directors and shareholders can appoint other directors. It is however possible to purchase an IBC in Hong Kong or elsewhere through an agent of a British Virgin Islands subscriber, and it is not unusual, although, I gather, not encouraged, for the registered agent/subscriber to supply the agent, with the documents of incorporation, a letter of appointment of directors signed in blank, for the agent to complete on being informed by the purchaser of the company who the directors are to be. In this case, the agent would keep a copy of the letter and return it to the subscriber so that he will know who he has appointed.

8. In the case of the plaintiff, it was incorporated by AMS Trustees Ltd, a registered agent in the British Virgin Islands, and sold to Mr Tong by their agent in Hong Kong, Smartcom Secretaries Ltd (Smartcom). Although no oral evidence has been given before me as to the circumstances of this sale and the procedure adopted by Smartcom, I have been referred to an affidavit of a Ms Ip Tsui Shan, an employee of Smartcom, filed in the first proceedings. Ms Ip says that when Mr Tong purchased the plaintiff, he was given a number of documents for execution and return. These were three consents to act as directors from 5 September 1997, two in Mr Tong's name, albeit with a different address and ID/passport number on each, and one in the name of Mr Mao, an application to the board of directors by the Tang Family Trust for allotment of one share, and a form of adoption of resolutions without a meeting, including the allotment of the share to the Tang Family Trust, all dated 5 September 1997. These were never returned to Smartcom, and there is no evidence at all that any written appointment of directors was made by the subscriber.

9. Following Mr Tong's death, a search was made by Ms You Li in the area of his property in Stubbs Road that he used as an office, and the above forms were discovered, duly signed. In addition there was also found minutes of a purported meeting of the plaintiff's board of directors on 6 September 1997, naming them as Mr Tong, Mr Mao and the defendant, and minutes of the "Shareholder of the Company", which I take to mean a meeting of the shareholder, held on 1 September 1997, at which it was resolved to appoint Mr Tong, Mr Mao and the defendant as directors.

10. From a perusal of the sequence of events above, and on the evidence before me, it is apparent, first, that no appointment was made in the usual way of a first director as required by British Virgin Islands law; second, that no allotment of shares was made until 5 September 1997 at the earliest, after the so-called shareholder purported to appoint directors. If Mr Tong and Mr Mao, who signed the resolutions allotting the share, were not properly appointed, then no shares at all were allotted.

11. I am told by Mr Webster that, although the first directors can only be appointed by the subscriber, if it were done by his agent, that would equally be valid. However, both he and Mr Riegels agree that no director can be appointed without his consent, and on the evidence before me, the agent had no consents. Mr Webster takes it further and says that the appointment of directors can be inferred from (i) the fact that the names of Mr Tong and Mr Mao were already typed on the consents and the board resolution when handed to Mr Tong by Ms Ip, and (ii) that they clearly acted as if they were directors. This seems to me, however, to bring a whole new concept into the law of appointment of first directors of a IBC. From the initial requirement of appointment by the subscriber in the British Virgin Islands, whether orally or in writing, this is extended to appointment by the subscriber's agent, who, Mr Webster says, steps into the shoes of the subscriber, even thought the subscriber does not know himself of the appointment. He now says that just knowledge of the intention of the purchaser as to who will be directors is enough, together with the inference that they were appointed by acting as such.

12. I have to say that I find this going a step too far. It is unfortunate that no other evidence was adduced before me as to what transpired on the purchase of the plaintiff by Mr Tong, either from Smartcom or AMS Trustees Ltd, the subscriber, and it may be that in the first proceedings more evidence will be available to make the situation clearer. I can only come to a conclusion for the purpose of this application on what I have had produced to me, which leads me inevitably to find that there was no appointment of first directors as required by British Virgin Islands law, that there was consequently no valid allotment of shares, and the purported shareholder had no right to appoint directors. The plaintiff thus remained an inactive shell until the death of Mr Tong in 1999. Upon his death, Ms Ip says that they were advised by a Mr Albert Tam, who they believed to be Mr Tong's authorized representative, and had been instrumental in the initial purchase of the plaintiff, to act on the instructions of Ms You Li, his widow, and, at her request appointed her sole director of the plaintiff. AMS Trustees Ltd then issued a "Certificate of Incumbency" confirming that Ms You Li was, as at 31 May 1999, the sole director of the plaintiff, and another confirming that no allotment of shares had been made since the incorporation of the company.

13. On this evidence, I have to come to the conclusion that Ms You Li is the only director of the plaintiff, and accordingly entitled to act on its behalf. I stress, however, that that finding is for the purpose of this application only and on the evidence I have seen, and I do not intend by it to bind another court hearing the first proceedings with the benefit of more complete evidence than I have had before me.

14. This to some extent also deals with Miss Wee's second point, that the application is premature in the light of the first proceedings which seek a declaration as to Ms You Li's status as a director. I consider it extremely unfortunate that this application has been made before that issue has been tried in those proceedings. There is, after all, no urgency, given that an injunction is in force in those proceedings to protect the interests and assets of UHIL. However, I do not consider that alone a good enough reason for dismissing this application.

Merits of this application

15. The application before me is to order an extraordinary general meeting to be held, that one member of the company can constitute a quorum, and the purpose of the meeting to be to dismiss the present directors, the defendant, Mr Mao and Mr Ip, and replace them with Ms You Li, and Mr You Bin, who I understand to be her brother. In effect, Ms You Li is seeking control of UHIL. Under section 114B, the court has a discretion whether or not to make such an order, and it must accordingly look at all the circumstances, including the motives of the applicant, who I take here to be Ms You Li, as far as possible.

16. From my findings above on the evidence so far, it may well be that the transfer of Mr Tong's shares in UHIL to the plaintiff was ineffective. This is something which will have to be dealt with on proper evidence by another court, but it is inevitable that there is at this point considerable doubt on the matter, and consequently whether the plaintiff is entitled to act as a shareholder of UHIL in these proceedings. While making no finding on this, it is a matter I must take into account in the exercise of my discretion.

17. UHIL and its subsidiaries are clearly successful and well run companies, which have been under the active management of the defendant, Mr Mao, Mr Ip and, prior to his death, Mr Tong, all experienced businessmen.

18. While Ms You Li complains that she has been kept out of the affairs of the company, the defendant fears that her only reason for seeking control is to have access to the considerable assets it holds, and that the company will cease to trade. There is some support for the defendant's concern in Ms You Li's own evidence. When asked what she would do if she had control of UHIL, she said she had no specific plans and admitted that she had no experience in running a company, had never taken part in the company's affairs, and, indeed, did not know details of what the company did. Her brother, although she says he is a businessman, does not live in Hong Kong. Ms You Li further admitted that stopping the present directors from running the company would bring the business to a halt. This can hardly be in the interests of the other shareholder, the defendant, and may well not be in the interests of the Tong Family Trust which was clearly intended by Mr Tong to be the beneficial owner of the shares in UHIL, and of which Ms You Li is one of several beneficiaries.

19. A further matter for consideration is the question of Mr Tong's estate over which I understand that there are disputes with the rest of his family. There is as yet no executor or administrator, and accordingly no-one who has authority to act for the estate. If the transfer of Mr Tong's shares was invalid, they remain part of his estate, and it will be a matter for the executor or administrator to decide how the control of UHIL, which the shares give, is to be used. By making the order sought in these proceedings, I would be giving the plaintiff de facto control of UHIL to which it may not be entitled, and deciding a matter of Mr Tong's estate which should be for another court.

20. A final matter raised by Miss Wee which she says I should take into account in the exercise of my discretion is the transfer of a large amount of funds from UHIL by Mr Tong prior to his death to his account in Canada held jointly with Ms You Li, and of which she now has control. There is no evidence that this transfer was authorised, or the nature of it. Miss Wee says that, at its highest, it was a loan by UHIL to a director, which is prohibited under section 157H of the Companies Ordinance, unless it has the approval of the company in general meeting, to meet expenditure incurred on behalf of the company, or to purchase his only or main residence. There is no evidence of the first two exceptions, and although Ms You Li said that he had bought "properties" in Canada, he also bought a Ferrari and a BMW, and the rest is still in her bank account and she has no intention of returning it. This is another matter which ought to be investigated in due course, and I consider it unlikely that this will happen were I to give control to Ms You Li. Further, it is clearly undesirable that, while there are allegations of unauthorized payments, control of the company should be given to the person who is in receipt of those payments and has declared an intention not to repay them.

21. For these reasons I agree with Miss Wee that this is not a proper case for such an order to be made. This is not a case of a company being mismanaged to the detriment of a majority shareholder; rather the opposite, it has all the hallmarks of a well run and successful company which will cease to exist were I to give Ms You Li the control she seeks. This may be in her short term interests, but it is not in the interests of the minority shareholder, and may not be in the interest of the Tong Family Trust or Mr Tong's estate.

22. There are a number of matters here which will no doubt be resolved by the courts in due course concerning not only the trust and the estate, but the beneficial ownership of the UHIL shares themselves. Were I to make the order sought, I would be assisting Ms You Li to make a pre-emptive strike before these other matters have been decided, and may well affect the interests of others who are found to be entitled under the estate or the trust.

23. The application by the plaintiff is accordingly dismissed and I make an order nisi that the costs of these proceedings be to the defendant to be taxed.