KARUPAYEE AMMAL (as administratrix of the estate of KARUPAYA SELVARAJ, deceased) v. G TOYS MANUFACTURING LTD

HCMP 1444/2019

[2020] HKCFI 912

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1444 OF 2019

_______________

_______________

AND

HCMP 1445/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1445 OF 2019

_______________

______________

J U D G M E N T

______________

1.  By 2 originating summonses filed on 10 September 2019 (“OS”), Madam Karupayee Ammal, in her capacity as administratrix of the estate of Mr Karupaya Selvaraj (“Father”), applies under sections 159 and 633 of the Companies Ordinance (Cap 622) (“Ordinance”) for an order to (1) compel G-Toys Manufacturing Limited (“G-Toys”) and Global Gain Enterprise Limited (“Global Gain”) (together “Companies”) to register her name as the holder of the shares currently registered in the name of Father, and (2) rectify the share registers of the Companies to reflect the same.

2.  The OS were scheduled to be heard on 21 April 2020 but were adjourned due to the General Adjourned Period.  By letters dated 6 April 2020, the parties agree that the OS are suitable for determination on paper, thereby waiving their right to an oral hearing.

Background

3.  The following fact and matters are not in dispute.

4.  The plaintiff and Father have begotten 4 sons who are Selvam Selvaraj (“Selvam”), Mohan Selvaraj (“Mohan”), Moorthy Selvaraj (“Moorthy”) and Shivkumar Selvaraj (“Shiva”). 

5.  G-Toys was incorporated on 26 November 1992 with Father and Selvam as founding members and first directors.  The 1,000 shares in G-Toys were (and still are) held by Father (650 shares), Selvam (130 shares), Mohan (120 shares) and Moorthy (100 shares).   

6.  Global Gain was incorporated on 9 January 2002 with Father and Moorthy as founding members and directors.  The 1,000 shares in Global Gain were (and still are) held by Father and Moorthy as to 250 shares and 750 shares respectively.

7.  Father died intestate on 22 February 2003.  On the same day, Moorthy was appointed as director of G-Toys, while Selvam was appointed as director of Global Gain.

8.  On 13 November 2006, letters of administration of Father’s estate (“Estate”) were granted to Selvam.  Selvam died on 19 May 2008.  At the time of his death, the Estate has not been administered. 

9.  On 20 August 2008, Ms Ngan Hing Ngor, Moorthy’s wife, was appointed as a director of G-Toys and Global Gain.

10.  On 13 March 2009, letters of administration of Selvam’s estate were granted to his wife, Ms Fan Rong Li (“Ms Fan”), and Mr Yau Paul.  The latter subsequently resigned from the position. 

11.  Since the death of Selvam, the arguments between Moorthy and Mohan over the running of the family business have escalated.  At the suggestion of Moorthy, the plaintiff applied for and obtained letters of administration de bonis non of the Estate dated 12 October 2009 under grant no. HCAG006972/2009 (“LoA”).   

12.  According to the annual returns filed by the Companies, since 2010, Moorthy has been the only director of G-Toys and Global Gain. 

13.  Despite the plaintiff’s appointment as administratrix of the Estate on 12 October 2019, the 650 shares in G-Toys and 250 shares in Global Gain remain registered in the name of Father (collectively “Shares”). 

14.  By letters dated 17 May 2016 and 6 June 2016 to Messrs Cheung & Choy (“CC”), former solicitors of the Companies, Messrs Haldanes on behalf of the plaintiff requested the Companies to transfer the Shares to the plaintiff as administratrix of the Estate.  The requests were ignored by the Companies.

15.  In January 2017, Moorthy commenced HCA 413/2016 seeking, inter alia, an order to remove the plaintiff as administratrix of the Estate and to appoint him as administrator.

16.  On 7 March 2017, the plaintiff commenced HCMP 522/2017 for an order to compel GMT Industrial Limited (“GMT”) [1], another company owned and controlled by members of Selvaraj family in which Father was then the registered holder of 65% of its issued shares, to register the 65% shares in her name. 

17.  By another letter dated 24 July 2017 to CC, Haldanes reiterated the plaintiff’s request for registration of the Shares in the name of the plaintiff.  In response, CC on behalf of Global Gain, stated in their letter of 25 July 2017 that it would only consider the plaintiff’s request after determination of HCA 413/2016.  G-Toys did not respond to the request.

18.  By a settlement deed dated 17 November 2017, Mohan, Moorthy, Shiva, the plaintiff and GMT agreed to settle (inter alia) their disputes relating to the Estate and the affairs of the Companies in consideration of a division of the Estate set out therein.  It is the plaintiff’s case that no distribution could be made unless and until agreement has been reached with Ms Fan. 

19.  In his Judgment dated 4 December 2017 in HCMP 522/2017, DHCJ Sherrington held that the plaintiff, as administratrix of the Estate, was entitled to have the 65% shares in GMT registered in her name and that the share register of GMT should be rectified to reflect the same. 

20.  Despite the settlement deed, on 18 March 2019, Moorthy restored the proceedings in HCA 413/2016 against the plaintiff. 

21.  The plaintiff through Haldanes’ letter of 19 July 2019  repeated the request for registration of the 650 shares in G-Toys in the plaintiff’s name in order to fulfil her obligation to transfer the same to Moorthy as the parties agreed under the settlement deed.  In their letter dated 1 August 2019 CC, on behalf of the Companies, rejected the request on the basis that the plaintiff had failed to administer the Estate and in particular, had not distributed the shares in GMT registered in her name to the beneficiaries of the Estate and, therefore, the status quo of the Shares should remain unchanged pending determination of HCA 413/2016.

22.  Against the above background, the plaintiff issued the OS.  On 27 September 2019, CC filed acknowledgement of service (“AoS”) on behalf of the Companies stating that they intended to defend the proceedings. This led to the plaintiff issuing 2 summonses to strike out the AoS on the ground that CC had no authority to act for the Companies.  On 11 October 2019, directions were given for the parties to file evidence on the striking out summonses and the OS. 

23.  The Companies did not file any evidence in opposition to the OS, notwithstanding the time limit imposed by the “unless” orders of 29 November 2019. 

24.  In their letters dated 3 and 6 April 2020, CC indicated that they would not contest the striking out summonses and did not have instructions to act for the Companies in respect of the OS.  On 9 April 2020, I ordered the AoS filed by CC be struck out with costs to be paid by the Companies to the plaintiff.

Discussion

25.  It is well established that upon the death of a member, the shares or interest he held in a company devolves by operation of law to his personal representative.  This is generally described as “transmission” of shares, which is to be distinguished from a “transfer” of shares from a member to another person, which requires execution of a proper instrument of transfer (see section 150 of the Ordinance). 

26.  The personal representative is entitled to full ownership of the property of the deceased’s estate, without any distinction between legal and equitable interest.  He is to hold the property for the purpose of carrying out his duties and function as administrator, subject to the directions of the Court (Re Yuen Kiu Kwan [2009] 3 HKLRD 371, §30, per Kwan J (as she then was).  That the personal representative is recognised by law as the full owner of the shares or other interest held by a deceased member in a company is enshrined in section 153 of the Ordinance, which provides:

“A transfer of a share or other interest of a deceased member of a company by his or her personal representative is as valid as if the personal representative had been the registered holder of that share or interest at the time of execution of the instrument of transfer.”

27.  The personal representative does not become a member of a company unless he consents to be registered as a member (Re Bowling and Welby’s Contract [1895] 1 Ch 663 (CA), at 670, per Lindley LJ), and his name is entered in the company’s register of member (see definition of “member” under section 2, and section 112 of the Ordinance). 

28.  Registration or refusal of registration of shares transmitted by operation of law is governed by section 158, which provides as follows:

“(1) This section applies if the right to shares is transmitted to a person by operation of law and the person notifies the company in writing that the person wishes to be registered as a member of the company in respect of the shares.

(2) Within 2 months after receiving the notification the company must either—

(a) register the person as a member of the company in respect of the shares; or

(b) send the person notice of refusal of registration.

(3) If a company refuses registration, the person may request a statement of the reasons for the refusal.

(4) If a person makes a request under subsection (3), the company must, within 28 days after receiving the request—

(a) send the person a statement of the reasons; or

(b) register the person as a member of the company in respect of the shares.

(5)   ...”

29.  If a company refuses registration under section 158, the person to whom the right to the shares was transmitted may apply for an order under section 159, and the court may order the company to register the person as a member of the company in respect of the shares, if the application is well founded.   

30.  As for rectification of share register, section 633 of the Ordinance provides that if the name of any person is, without sufficient cause, entered in or omitted from the register of members of a company, the person aggrieved may apply to the court for rectification of the register.  However, it seems to me that where, as here, a personal representative applies for an order under section 159, it is unnecessary for him/her to also seek an order under section 633, at any rate as an additional order.  This is because once the Court makes an order requiring the company to register the personal representative as a member in respect of the shares, the company is obliged to enter the name of the personal representative in the share register as holder of such shares.  There would be no need for the company to rectify the share register by adding the name of the personal representative as holder of the same shares.   

Discussion

31.  The articles of association of the Companies adopted Table A in the First Schedule to the former Companies Ordinance (Cap 32) (“Table A”) as their regulations save where such regulations are specifically excluded or modified by the relevant articles.  The regulations prescribed by the articles of association constitute a statutory contract between the Companies and all their members, and are binding upon them.

32.  As the articles of association of the Companies do not contain any regulation dealing with transmission of shares, regulations 29 to 33 of Table A, which govern transmission of shares, apply to the Shares held by Father.  Of particular relevance is regulation 29, which provides:

“In case of the death of a member the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognized by the company as having any title to his interest in the shares; but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by him with other persons.” (underlined added)

33.  Although regulations 30-33 of Table A also deal with transmission of shares, they must be read subject to sections 158, 159 and 161 of the Ordinance, which prevail over the regulations of the Companies. 

34.  Although the Shares have since 12 October 2009 been transmitted by operation of law to the plaintiff, it was only until 24 July 2017 that the plaintiff notified the Companies that she wishes to be registered as a member in respect of the Shares.  The earlier requests were couched in terms requiring the Companies to “transfer” the Shares to the plaintiff which, in my view, did not constitute a notice prescribed by section 158(1) of the Ordinance. 

35.  As G-Toys did not send any notice of refusal of registration within the 2 months’ period prescribed by section 158(2)(b), from 24 September 2017, it came under an obligation to enter the name of the plaintiff as holder of the 650 shares.  The failure on the part of G-Toys and Moorthy (as its only director) to register the name of the plaintiff as holder of such shares prima facie constitutes an offence under section 158(5) of the Ordinance.   

36.  I turn to Global Gain.  I consider that CC’s letter dated 25 July 2017 constituted a notice of refusal of registration under section 158(2)(b).  The only issue is whether the reason given is a proper ground for refusing the request.   

37.  In my view, Global Gain had no proper basis to refuse the plaintiff’s request for registration as member in respect of the 250 shares held by Father, for the following reasons.

38.  First, there is no basis for Global Gain to refuse to recognise or accept the plaintiff’s right to be registered as a member.  As administratrix of the Estate, she is the only person recognised by law as the full owner of the shares (see §26 above).  Such right is also enshrined in regulation 29 of Table A, which is binding upon Global Gain.

39.  Second, the mere fact that Moorthy (qua beneficiary of the Estate) commenced HCA 413/2016 for an order to remove the plaintiff as administratrix is not a ground to refuse the plaintiff’s request because:

(1)  unless and until Moorthy succeeds in the proceedings, the plaintiff remains the administratrix of the Estate; and

(2)  section 161 of the Ordinance provides that for the purposes of a transfer of shares or transmission of the right to shares, a company must accept as sufficient evidence of the grant of probate of the will or letters of administration of a deceased person the production to the company of a document that is by law sufficient evidence of that grant.  There is no basis for Global Gain to ignore or refuse to recognise the grant  adduced by the plaintiff.

40.  Third, the power to refuse registration is given to the board, being the organ vested with the general power of management of the Companies.  Regulation 8 of Table A, which applies to Global Gain, provides that the quorum of any directors meeting is 2 directors.  As the sole director of the Companies, Moorthy could not cause any resolution to be passed at any board meeting or signed any written resolution for the purpose of exercising the power to refuse the plaintiff’s request for registration. 

Disposition and costs

41.  I make the following order in respect of the OS in both proceedings:

(1)  In HCMP 1444/2019, G-Toys do forthwith register the plaintiff (in her capacity as administratrix of the Estate) as member in respect of the 650 shares held by Father in G-Toys from 24 July 2017.

(2)  In HCMP 1445/2019, Global Gain do forthwith register the plaintiff (in her capacity as administratrix of the Estate) as member in respect of the 250 shares held by Father in Global Gain from 24 July 2017.     

42.  As for costs, I make a costs order nisi that the costs of and occasioned by the OS be paid by the Companies, to be taxed on a party and party basis.  This is the costs order sought in the OS and in the written submissions of counsel for the plaintiff.  I assessed the costs of the two OS at $200,000, given that the applications are straight forward and the submissions are largely the same as those advanced in HCMP 522/2017.

43.  I have considered but decided not to join Moorthy, who is not a party to these proceedings, for the purpose of costs only[2], primarily because he has not caused the Companies to file any evidence in opposition or be represented in these proceedings. It would only prolong these proceedings and occasion further costs for the parties to argue on costs. 

44.  I would add that in future, if an application of this nature comes to the Court where it is clear that the company has no valid ground to refuse the personal representative’s request for registration, it is likely that the Court will order the costs of the application to be paid by the directors personally and be taxed on a higher scale, as it is their action or inaction which led to the plaintiff having to incur significant costs in pursuing the application.  The Court’s time should not be wasted on application where there is no real ground for refusing the request in the first place.