CHENG CHIEN KUO v. NEW RESOURCES HOLDINGS LTD

HCMP 2985/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2985 OF 2014

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R U L I N G

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Introduction

1.  By an Originating Summons dated 14 November 2014, the Plaintiff seeks orders under sections 151 and 152 of the Companies Ordinance, Cap. 622, to disallow the Defendant Company’s decision to refuse to register the transfer of 60,000 shares from Mr Chang Yue Tien (“Mr Chang”) to the Plaintiff; and to require the Defendant Company to register the transfer forthwith.

2.  The substantive matter of the Originating Summons has yet to be heard.

3.  What is before this court today is the Plaintiff’s application to strike out various paragraphs and exhibits of the affirmations filed by the Defendant in opposition to the Originating Summons, essentially on the grounds that they are hearsay, they have no evidential value and are scandalous and oppressive. As clarified by Mr Wong for the Plaintiff, his main ground is that the offending paragraphs and exhibits have no evidential value and are irrelevant to the substantive issues in the Originating Summons.

4.  Mr Wong, for the Plaintiff, has helpfully set out the offending paragraphs and exhibits in his skeleton submissions.

5.  Under his first position, the offending paragraphs and exhibits are:

(1)   paragraph 7 of the First Affidavit of Tang Shu Pui Simon (“Mr Tang”) and exhibit “TSPS-2” therein;

(2)   paragraph 11 of the Affirmation of 廖文智 (“Mr Liu”) and exhibit “LMC-4” therein; and

(3)   paragraphs 23 – 24 of the Affirmation of 呂承璋 (“Mr Lui”) and exhibit “LCC-10” therein.

6.  These paragraphs and exhibits are said to be offending because they contain newspaper articles and references to such articles on the “suspected” illegal activities of the Plaintiff and his “suspected” relationship with a Gang in Taiwan called the “Four Seas Gang”. 

7.  For instance, paragraph 7 of Mr Tang’s affidavit says:

“Liberty Times, a newspaper in Taiwan, reported in 2007 that the Plaintiff together with some other members of the ‘Four Seas Gang’ were allegedly involved in conducting illegal lending business and other gambling and securities offences, and were criminal charged by the Taiwan authorities.”

And then the newspaper article was exhibited.

8.  Under his second position, the offending paragraphs are:

(1)   paragraphs 13 and 27 of Mr Liu’s affirmation; and

(2)   paragraphs 23 to 25 of Mr Lui’s affirmation.

9.  These paragraphs are said to be offending because they contain arguments or purported conclusions drawn from the newspaper articles exhibited.

10.  Mr Wong’s third position is that the entirety of Mr Lui’s affirmation should be struck out on the ground that it contains inadmissible opinion evidence. Upon clarification from Mr Wong in court, his real concern is really with paragraphs 23 – 25 of Lui’s affirmation ie the same as his second position.

11.  In these circumstances, it is not necessary for this court to express a firm view on whether the entirety of Mr Lui’s affirmation ought to be struck out.

Background

12.  The background of the disputes between the parties is this.

13.  The Defendant is an investment holding company in the business of property development in the PRC. 

14.  In 2005, Mr Chang as the vendor agreed to transfer 60,000 shares of the Defendant to the Plaintiff as purchaser (“Transfer”).  In April 2007, the representatives of Mr Chang and the Plaintiff wrote to the Board of the Defendant requesting for approval of the Transfer.  The request was refused by the Board in May 2007.  No reasons were given.

15.  In July 2010, Mr Chang and the Plaintiff made another request for approval and registration of the Transfer.  Such request was again refused by the Board in September 2010.  In the reply letter, it was stated that at a Board meeting on 2 September 2010, it was discussed and resolved unanimously by the directors that registration of the Transfer be refused.  It was also stated that more than 80% of the shareholders of the Defendant did not agree to the Transfer. According to the Board minutes dated 2 September 2010, the directors appeared to be concerned with the rather complicated background of the Plaintiff and the opposition of 80% of the shareholders.

16.  Lastly, in March 2014, the Plaintiff’s solicitors again requested for registration of the transfer of the shares to the Plaintiff’s nominee. 

17.  In January 2015, the Defendant’s solicitors sent a copy of the Board’s Statement of Reasons for refusal to register the Transfer to the Plaintiff’s solicitors (“Statement of Reasons”).

18.  For the present purpose, it is only necessary to refer to the first reason given:

“The Board had reason to believe that the Plaintiff and/or his nominee were suspected to be related to the “Four Seas Gang” in Taiwan, their gang members and/or involved in other illegal activities.  It was also stated that the Plaintiff’s background was complicated. In order to avoid any adverse effect on the reputation and operation of the Defendant, and the cooperation among the existing shareholders, the registration of the said Transfer was refused.”

Discussion

19.  It is trite law that the court will not interfere with the exercise by directors of a discretion not to register a transfer if their decision was one which a reasonable board of directors could bona fide believe to be in the interests of the company. If the discretion is an unfettered one and not limited to specific grounds of refusal, the court will not compel the directors to give their reasons for their refusal. If their decision was one which a reasonable board could consider to be in the interests of the company, then the court presumes that they acted bona fide and had good grounds for their decision. However, if the directors once give their reasons, the court can consider how far those reasons did justify their decision: Tett v Phoenix Property Co Ltd [1984] BCLC 599 at 621b to c, applied in Re Yuen Kiu Kwan [2009] 3 HKLRD 371.

20.  In Chan Woon Fui v Chan Wing Suen and others unrep. HCCW 350/2004, 11 July 2005,  Barma J (as he then was) set out at paragraph 4 the principles on which the Court acts when considering whether or not to strike out scandalous, irrelevant or oppressive matters in an affidavit under RHC O 41 r 6:

“(1) Scandalous has the same meaning in Order 41 rule 6 as it does in Order 18 rule 19 dealing with the striking out of pleadings. Thus, degrading, indecent and offensive charges made in an affidavit will be regarded as scandalous if they are irrelevant or inadmissible in evidence to prove any material allegation in the petition (see e.g. Cashin v Cradock (1877) 3 Ch 376; Christie v Christie (1873) LR 8 Ch App 499, in the context of striking out a pleading);

(2) Matters which are material will not generally be struck out even if they are offensive, although where unnecessary detail is given, that may be susceptible to being struck out (see e.g. Blake v Albion Assurance Society (1846) 45 LJCP 663, also in the context of striking out of pleadings).

(3) Irrelevant matter may be struck out even if not scandalous ( Re J (An Infant) [1960] 1 All ER 603).

(4) It is wrong to include argumentative material in affidavits and such material may be struck out (see e.g. Deak v Deak Perera Far East Limited [1991] 1 HKLR 551).

21.  As I said, the main complaint of the Plaintiff is that these newspaper articles contained no evidential value and are irrelevant to the substantial issues of the Originating Summons.  The Plaintiff relies on Jademan (Holdings) Ltd v Francis Leung Pak To and Others [1989] 2 HKLR 151 at 158H, and two other cases by Deputy District Judge Kot and Deputy High Court Judge Marlene Ng, which followed Jademan Holdings.

22.  Mr Cheng for the Defendant submits that, in the cases relied upon by the Plaintiff, the newspaper articles were sought to be relied upon as evidence of the truth of their contents. This much is not disputed by Mr Wong.

23.  Mr Cheng then submits that, in the present case, the Defendant relies on the newspaper articles not for the purpose of proving the truth of their contents ie the Plaintiff was indeed related to the Four Seas Gang, or he was indeed involved in illegal activities.

24.  The existence of these news reports, Mr Cheng submits, would be relevant only to the concern of the Board about the Plaintiff’s suspected relationship with the Four Seas Gang and his suspected involvement in illegal activities, the complicated background of the Plaintiff, the possible adverse effect on the reputation and operation of the Defendant, and the opposition by the majority of the shareholders. This in turn would be relevant to the ultimate question ie whether the Board’s refusal to register the transfer is one which a reasonable board of directors could bona fide believe to be in the interest of the Defendant Company.

25.  In my judgment, it is up to the Defendant’s legal advisers to decide how to deploy evidential materials in its opposition to the Originating Summons.

26.  If the Defendant intends to use the offending paragraphs and exhibits to prove the truth of their contents, then the Jademan Holdings line of cases will be directly in point and this court would be inclined to agree with Mr Wong that the offending paragraphs and exhibits are indeed irrelevant, scandalous and should be struck out.

27.  Now that Mr Cheng, for the Defendant, has confirmed in court that that was not the Defendant’s intention, and the use of the offending paragraphs and exhibits is going to be for the said limited purpose, then the Jademan Holdings line of cases becomes clearly distinguishable. How useful those offending paragraphs and exhibits will be for the said limited purpose is a matter of weight which can be decided after hearing the parties’ submissions at the substantive hearing of the Originating Summons. It is not a matter of admissibility. 

Conclusion

28.  Looking at the matter in this light, and following the principles laid down by Barma J in Chan Woon Fui v Chan Wing Suen, I shall now state my conclusions and reasons as follows.

29.  Back to Mr Wong’s first position, in my judgment, paragraph 7 of the First Affidavit of Mr Tang and exhibit “TSPS-2” therein; paragraph 11 of the Affirmation of Mr Liu and exhibit “LMC-4” therein; and paragraph 23 of the Affirmation of Mr Lui and exhibit “LCC-10” therein simply refer to and exhibit certain newspaper reports. They are not irrelevant for the limited purpose relied upon by the Defendant, and should not be struck out.

30.  Referring to Mr Wong’s second position, in my judgment:

(1)   Save for the first complete sentence, the balance of paragraph  13 of Mr Liu’s affirmation contains his own conclusions or speculations based on the newspaper reports exhibited.  They are wholly irrelevant to the substantive issues of the Originating Summons and in any event have no probative value whatsoever.  It should be struck out.

(2)   As for paragraph 27 of Mr Liu’s affirmation, I agree with Mr Wong that the first complete sentence also contains his own conclusions and speculations based on the newspaper reports. It is irrelevant, scandalous and has no probative value and should be struck out.  Regarding the balance of paragraph 27, it seems to this court what it deals with is to set out the reasons of the Board of Directors in refusing to register the Transfer. Since Mr Liu said he had attended the relevant Board meeting, he should have direct knowledge of the Board’s thinking. And of course the Board’s thinking is directly relevant to the substantive issue in the Originating Summons. I will not strike out the balance of paragraph 27.

(3)   With regard to Mr Lui’s affirmation, Mr Cheng for the Defendant has conceded that paragraphs 24 to 25 should be struck out. In my judgment, that concession has been made advisedly. The two paragraphs contain Mr Lui’s own conclusions from the newspaper reports or his own research into the public records. These conclusions have very little probative value and do not assist the court in determining the substantive issues of the Originating Summons. I shall therefore strike them out.

31.  To re-cap, except for the first complete sentence, paragraph 13 of Mr Liu’s affirmation is struck out as irrelevant and scandalous.  For the same reason, the first complete sentence of paragraph 27 of Mr Liu’s affirmation is struck out. Paragraphs 24 – 25 of Mr Lui’s affirmation are struck out.

[Submission on costs]

32.  It seems to me that each side is partly successful. The Plaintiff has managed to strike out certain paragraphs of the Defendant’s affirmations and affidavit, the Defendant managed to salvage the exhibits because of the concession or clarification made by Mr Cheng that the purpose of the exhibits is not to prove the truth of their contents, but for the limited purpose explained by Mr Cheng. Otherwise, the exhibits and the other paragraphs of the Defendant’s affirmations will also be struck out.  It seems to me that it is essentially a draw, so my order is that each side should bear its own costs.

33.  Order in terms of paragraph 6 of the Plaintiff’s Summons dated 26 May 2015, save that 21 days be replaced by 30 days.