J T LTD v. KUNG TAT CHOW

HCMP 435/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 435 OF 2013

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D E C I S I O N

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Introduction

1.  This is an application by the Plaintiff (“JT”) for an Order under section 114B of the Companies Ordinance, Cap. 32 (“Ordinance”) that an extraordinary general meeting (“EGM”) of e-Harbour Services Limited (“Company”) be convened and that one member of the Company present in person or by proxy at the meeting be deemed sufficient to constitute the required quorum. According to JT, the purpose of the EGM is to:

(1) remove the Defendant (“Kung”) as a director;

(2) appoint Ms Lo Wing Yan Gloria, the present wife of Mr Tso Hiu Chi Jimmy (“Tso”), as a director;

(3) determine whether legal proceedings should be brought in the name of the Company against Kung, Leaguer Shipping Limited and nine ex-employees of the Company;

(4) discuss the financial loss and damage suffered by the Company as a result of Kung's alleged breaches of duties and wrongdoings.

2.  The application is opposed by Kung.

Background

3.  The Company was incorporated on 4 July 2001. Initially, it was based in Hong Kong and engaged in the business of providing shipping and associated services. In or about July 2006, the Company set up a representative office in Shanghai. In or about August 2009, a joint venture in the name of e-Harbour Services Limited Shanghai, in which the Company had a 49% stake, was registered in Shanghai.

4.  The share capital of the Company is HK$200,000.00 divided into 200,000 shares of HK$1.00 each, of which 175,000 shares have been issued and credited as fully paid up. As at 2 November 2007, Tso was its sole shareholder holding all the 175,000 shares in his own name. At that time, the Company’s three directors were Tso, Lam Cho Yu (“Josephine”) Tso’s wife at the time, and Chan Hiu Kwong (“Chan”).

5.  In about May and June 2008, Tso and Kung were in negotiations about selling 30% of Tso’s shares in the Company to Kung (“Negotiations”). As will be seen later in this Decision, what was eventually agreed between the two is a matter of contention. By an Instrument of Transfer and Bought and Sold Notes dated 3 September 2008, Tso transferred his 52,500 shares in the Company to Kung. On the same day, Kung was appointed a director of the Company. At that time, Josephine and Chan remained directors of the Company – they only resigned as directors in July 2009.

6.  Subsequently, on 24 June 2011, Tso transferred his remaining 122,500 shares in the Company to JT, of which Tso is a director and shareholder.

7.  Presently, the Company has two shareholders: JT is the registered holder of 122,500 shares i.e. 70% of the issued share capital, while Kung is the registered holder of 52,500 shares i.e. 30% of the issued share capital. The only two directors of the Company are Tso and Kung.

8.  According to Tso’s first affirmation filed in these proceedings, what appears to have triggered the present application by JT are the following events.

9.  On 4 September 2012, nine employees of the Company suddenly resigned by letter with immediate effect without any prior notice. They included inter alia several managerial/ senior staff: (i) Cheng Wai Chung Tyler (“Cheng”), Regional Director and Branch Manager, (ii) Yu Wai Cheung Coins (“Yu”), Manager; (iii) Lai Ho Wang Larry, Senior Boarding Officer; (iv) Man Yuen Ki Kawaii, Assistant Logistics Manageress. All the nine employees were subsequently found to be working for Leaguer Shipping Limited, a company in which Yu and his wife are directors.

10.  Since 4 September 2012, Kung has not returned to the Company’s office.

11.  In that evening, none of the remaining staff could receive any emails from the Company’s email domain viz. e‑harbour.biz.  Later that evening, the Company was informed by its customer that Cheng, via the domain “e-harbour.biz” had sent an announcement to all customers that Cheng and Yu had been newly appointed as general managers in Hong Kong and Shanghai respectively.

12.  On 6 September 2012, Techson Consultants Limited (“Techson”), the company secretary, resigned without giving any reason or written notice. Tso subsequently found out that Kung was a director of Techson. On or about 5 or 6 September 2012, the Company’s accountants, M. H. Hung & Company, sent a notice of resignation to the Company.

13.  Tso says in his first affirmation he believes Kung is the boss of Leaguer Shipping Limited and the mastermind of all the aforesaid incidents. Tso further says that he believes Kung has been in breach of his fiduciary duties to the Company for inter alia (i) enticing away the nine employees to work for Leaguer Shipping Limited; (ii) operating the business of Leaguer Shipping Limited in a way which targets the Company’s customers in direct competition with it; (iii) interfering and tampering with the Company’s communication system. According to Tso, a total of 139 customers have stopped dealing with the Company since September 2012 - only four customers maintain their business relationship with it.

14.  It is not seriously in dispute that Tso and Kung have fallen out since September 2012 and whatever mutual trust and co‑operation there might have been is now replaced by mistrust and suspicion. On 28 October 2013, Kung presented a section 168A Petition in HCMP 2857 of 2013 against JT, Tso and the Company.

The Law

15.  Section 114B is a procedural section intended to enable company business which needs to be conducted at a general meeting of the company to be so conducted.  The thinking behind it is that a company should be allowed to get on with managing its affairs and that should not be frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Ordinance: Union Music Ltd v Watson [2004] BCC 37, 44G-H.

16.  In order to obtain an Order under section 114B, the applicant must satisfy the two-fold test explained by Yuen JA in Success Plan Ltd. [2002] 3 HKLRD 560, 568C:

(1) First, it is “impracticable” to call a meeting.

(2) Second, the court must be satisfied that it should exercise its discretion to convene a meeting.

17.  In Re El Sombrero[1958] Ch 900, 904, Wynn-Parry J concluded that the question raised by the word “impracticable” is simply whether, in the circumstances of the particular case, the desired meeting of the company can, as a practical matter, be convened, held or conducted in the manner prescribed by the articles. In practice, this means convening a meeting that can consider and pass resolutions, which necessarily means a meeting at which a quorum is present: Re Mandarin Capital Advisory Ltd. [2011] 2 HKLRD 1003 at [9].

18.  The refusal of another shareholder to form a quorum for a meeting is a classic example of a situation where it would be impracticable to call a meeting of the company: Re Success Plan Ltd supra at 568E.

19.  A quorum requirement in the articles does not confer on a minority shareholder some form of veto in relation to the company’s business by giving him the ability to prevent the holding of a general meeting: Re Opera Photographic Ltd. [1989] 1 WLR 634, 637B; Re Success Plan Ltd supra at 568E-F. However, if there is an arrangement between the shareholders which effectively gives a right in the nature of a class right to the minority shareholder, then the court may refuse to make an Order under section 114B if the result of that Order would be to infringe that class right: Harman v BML Group Ltd [1994] 1 WLR 893 at 898F‑H.

20.  The mere existence of a concurrent section 168A petition, while a matter to be taken into account, is not necessarily a bar to an application under section 114B. Further, the possibility that ordering a meeting under section 114B may result in unfair prejudice proceedings, again a matter to be taken into account, should not of itself deter the court from granting the Order: Re Whitchurch Insurance Consultants Ltd. [1994] BCC 51, 53H-54A; Re Success Plan Ltd. supra at 569A-B.

21.  Section 157B of the Ordinance gives a majority shareholder a right to remove directors and appoint others in their place – this must be borne in mind in considering the exercise of the discretion under section 114B: Re Woven Rugs Ltd [2002] 1 BCLC 324 at [14].  

Impracticability of calling/ conducting a meeting

22.  Under article 10(b) of the Articles of Association of the Company (“Articles”), the quorum for the transaction of business at any general meeting shall be two members present in person or by proxy. Similarly, pursuant to article 31(d) of the Articles, the quorum for the meeting of directors shall be two. In the absence of Kung, neither shareholders meetings nor board meetings can be held.

23.  Tso anticipates, not unreasonably, that Kung will not attend any EGMs at which resolutions for the purpose referred to at paragraph 1 above will be proposed and passed by virtue of JT’s majority shareholding. This is borne out by the evidence which reveals that JT/Tso has convened or tried to convene an EGM on 30 October 2012 and another EGM on 20 February 2013. Both EGMs were inquorate due to the absence of Kung. According to the notice of EGM dated 22 January 2013, the business proposed at the 20 February 2013 EGM was precisely for the purpose referred to at paragraph 1 above.

24.  The evidence also reveals that, pursuant to a notice dated 3 June 2013 issued by Tso purportedly “by Order of the Board” of the Company, an Annual General Meeting (“AGM”) was held on 4 July 2013. According to the notice, the agenda of the AGM was to inter alia:

(1) re-elect Tso as executive Director;

(2) re-elect Kung as executive Director;

(3) appoint Cheung Chi Wai as executive Director.

25.  On 4 July 2013, a Mr Pang Yan Lun, a trainee from the solicitors firm acting for Kung, attended the said AGM as Kung’s proxy. There is a legal issue concerning the validity of the notice since no validly constituted board meeting has ever been held to authorise the issue of the notice owing to the lack of quorum. This was raised in correspondence and repeated by Mr Pang at the AGM.

26.  What exactly happened at the AGM is also a matter of contention. There is a factual dispute between the parties as to whether Mr Pang attended the AGM for the purpose of transacting the business on the agenda or simply to repeat Kung’s stance that the notice of AGM was invalid and hence the AGM itself was irregular. There is also a factual dispute between the parties as to whether Tso had ordered Mr Pang to leave the AGM venue. For the present purpose, it is not necessary for this court to resolve these factual disputes. Suffice it to say that it is not in dispute that Mr Pang left the AGM before any business on the agenda was discussed and the AGM then became inquorate.

27.  In light of the above, and notwithstanding the contrary suggestion by Ms Chow, there is no doubt in my mind that it is impracticable for a general meeting of the Company to be convened and conducted in accordance with the articles. If  so, the court has a discretion whether to order a meeting under section 114B.

Discretion

28.  The next question is whether the court should exercise its discretion to order a meeting in all the circumstances.

29.  Ms Chow has referred this court to a number of authorities which demonstrate that, in an appropriate case, the court will refuse to order a meeting under section 114B when such an order would override the class rights of a shareholder, deliberately entrenched in a shareholders’ agreement for his protection, which require his presence in general meetings in order to form a quorum: Harman v BML Group Ltd supra at 898F-H, Mansfield Coatings Co Ltd v Springfield Coatings Co Ltd & anor [1995] 1 HKC 74 at 78D-79B; Re Rich Treasure Enterprises Ltd [2001] 3 HKLRD 769 at 771G-772B, Re Woven Rugs Ltd supra at [14] & [22].  

30.  As Harris J noted in Re Mandarin Capital Advisory Ltd supra at [14], the problematic situation is one, like the present case, in which the defendant contends that it has been agreed orally between the only two shareholders that the company will be operated on the basis of joint control and management, but the agreement has not been reduced into writing and the applicant disputes its existence. At [16], Harris J cited with approval the following passages from the judgment of Morritt J (as he then was) in Re Opera Photographic Ltd. supra  635F to 637C as follows:

“The provisions of section 371 are:

‘(1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called or to conduct the meeting in manner prescribed by the articles or this Act, the court may, either of its own motion or on the application – (a) of any director of the company or (b) of any member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit. (2) Where such an order is made the court may give such ancillary or consequential directions as it thinks expedient; and these may include a direction that one member of the company present in person or by proxy be deemed to constitute a meeting.’

The provisions of the statutory predecessor of section 371(1) (section 135(1) of the Companies Act 1948) have been considered twice in reported cases. The first is Re El Sombrero [1958] Ch 900, a decision of Wynn-Parry J in which, as summarised by the headnote, he concluded that the question raised by the word ‘impracticable’ was merely whether in the particular circumstances of the case the desired meeting of the company could, as a practical matter, be conducted. Secondly, that that case was eminently one in which the court ought to exercise its discretion because otherwise it would be depriving the applicant of his statutory right under section 184(1) of the Companies Act 1948 to remove the respondents as directors. The facts in that case were, for present purposes, merely that the applicant held 90 per cent of the issued shares; the two respondents held the remaining 10 per cent and were the only directors, and by seeking to absent themselves from any meetings that were convened effectively prevented the majority shareholder from exercising the rights attached to his 90 per cent holding.

The section also came before the court in the subsequent case of Re H & R Paul & Son Ltd (1974) 118 SJ 166. In that case there had been provisions for some form of takeover and the consequence had been that directors ceased to be qualified and amendments were proposed to the articles of association so that directors could be properly appointed. There had been a dissentient minority who did not like the takeover or the merger and who by absenting themselves from the meetings convened for the purpose of amending the articles and other purposes effectively frustrated anything being done. In his judgment Brightman J is reported as saying:

‘The jurisdiction conferred by the section was discretionary and his Lordship was therefore not bound to make an order. But to refuse B. Ltd’s application would deprive a majority shareholder of the right to alter the articles of association and confer on the minority a right of veto not commensurate with their shareholding. His Lordship did not accept that the quorum provisions should be regarded as a right vested in the minority to frustrate the wishes of the majority and he would therefore grant the relief sought.’

….

The plain fact of this matter is that deadlock exists between the two individuals which has to be resolved one way or another. It is either capable of being resolved by ordering a meeting, at which no doubt Mr Martin will be removed, and which will then no doubt result either in him exercising the pre-emption rights under the articles of selling his shares, or presenting a petition for the winding-up of the company, or presenting a petition under section 459 based on unfair prejudice to him. Equally, if no order is made the deadlock will continue because no meetings can be conducted which are going effectively to manage or procure the management of this company, and if that persists for any length of time then no doubt one or other of the individuals will again be presenting a petition based on that deadlock in order to provide some form of resolution.

In the circumstances I do not think that the distinction which Mr Instone seeks to draw is a valid one. The point still remains that the applicant, as the 51 per cent shareholder, has the statutory right under the Companies Act 1985 to remove the second respondent as a director. As Brightman J’s decision in Re H & R Paul shows, the quorum provisions cannot be regarded as conferring upon the second respondent some form of veto as being his entitlement. If he is, as no doubt he will be, removed if I make the order sought it may then well be that further proceedings will have to be undertaken by one side or another to procure the purchase of the other’s shares, but that seems to me to be inevitable in any event. It would be in those proceedings that the wrongfulness or otherwise of the conduct of either of the individuals would have to be determined in order to decide what order to make and what form the relief should be.” (emphasis added)

31.  At [17], Harris J again cited with approval the following passage in Re Woven Rugs Ltd. supra at [32]:

“[32] That evil day is the day of the commencement of proceedings under s 459. I can see that, if the parties do not resolve their disagreements shortly, such an application is more or less inevitable. That does not deter me from exercising the discretion in favour of Miss Roberts’ client any more than it deterred Morritt J in the Opera Photographic case ([1989] BCLC 763 at 765, [1989] 1 WLR 634 at 637). It may well be that the removal of Mr Sharafi from the board will be the trigger for those proceedings; but while no one would want to encourage the start of such notoriously expensive and difficult proceedings as those, such proceedings do seem to me to be the proper forum for adjudicating on a question of whether, in the circumstances, and in the absence of a shareholders agreement as to directorships, it is unfair to remove the Sharafi representative from the board and/or appoint additional directors, and if so what the appropriate relief is. If there has to be a forum for resolving the corporate dispute between the parties, then that seems to me to be it. Much of what Mr Chivers submitted to me in this hearing amounted to an invitation to embark on that sort of inquiry on the basis of something less than the full picture that will doubtless be presented to the court hearing a s 459 petition, and without the flexibility of the sort of remedies available in such proceedings. While determining s 459 petitions on full evidence and with a full range of remedies is bad enough, determining them on insufficient evidence (which is what the evidence in the present hearing amounted to) and with only a blunt instrument at the court’s disposal is even worse.”

32.  Like Harris J, I find the reasoning in Re Opera Photographic Ltd and Re Woven Rugs Ltd. persuasive. In my view, these two authorities, as well as Re Mandarin Capital Advisory Ltd., stand for the proposition that the mere assertion of a quasi-partnership or an oral agreement or understanding between the only two shareholders as to joint management of the company is normally not a sufficient ground for refusing to order a meeting under section 114B which will enable a majority shareholder to exercise his statutory right to remove a director.

33.  It may be otherwise if the respondent minority shareholder can demonstrate to the satisfaction of the court that he will be entitled to an injunction to restrain the applicant from convening a meeting and passing a resolution to remove him as a director: Re Mandarin Capital Advisory Ltd supra at [20]. I say “may be” because it is highly questionable whether a statutory right conferred by section 157B of the Ordinance can be circumvented or abrogated by an unqualified agreement between shareholders not to remove a particular person as a director. The reason is that any such agreement would constitute an unlawful fetter on the statutory power conferred by section 157B to remove a director: Muir v Lampl [2005] 1 HKLRD 338 at [21] & [25] per J. Lam J (as he then was).

34.  Even assuming, for the sake of argument, that such a contractual restriction on the exercise of the statutory power under section 157B is legally permissible, it will require (i) “strong evidence” of an unqualified right to participate in the management of a company while the respondent minority remains a shareholder - what will normally be required is a written agreement between shareholders, to which a company is not a party, containing an express prohibition against his removal as a director which can be enforced by injunction: Re Mandarin Capital Advisory Ltd. supra at [20]; and (ii) “very clear and unambiguous wording” in order to arrive at that result: Muir v Lampl supra at [10]. 

35.  In the present case, Kung’s evidence, at paragraph 18 of his first affirmation, is that in the course of the Negotiations in June 2008, Tso and him reached an oral agreement the relevant terms of which are:

(1)   Kung would be appointed a director of the Company immediately upon the transfer of Tso’s 30% shareholding to him and the other directors of the Company would resign.

(2)   The two of them would be the only two directors of the Company and they would share its management by joining managing and controlling it. Neither of their wives (at that time or in the future) would become a director of the Company.

(3)   Kung would be based mainly in Hong Kong to manage the Hong Kong operation of the Company while Tso would be based mainly in Shanghai to focus on the setting up of the Shanghai office.

(4)   When Tso and Kung retire as directors in the future, the next management tier including Cheng and Yu might succeed them and be appointed as directors.

36.  It is also Kung’s evidence, at paragraph 27 of his first affirmation, that in early March 2011, Tso gave him an assurance that “there would not be any change in the directorship and management of the Company” after Tso’s transfer of his shares to JT and that “the two of us would continue to share the management of the Company together”. In reliance of Tso’s assurance, Kung did not object to the proposed share transfer which eventually took place in June 2011.

37.  Tso, in his second affirmation, is categorical that there was no mention, let alone agreement, of the term referred to in paragraph 35 (2) above.  Tso also denies having given any assurance to Kung in March 2011 as alleged.

38.  In my view, Kung’s evidence is hardly “strong evidence” of an unqualified right to jointly participate with Tso in the management of the Company so long as he remains a shareholder. Apart from Kung’s own assertion, there is nothing to support the existence of the alleged agreement. The fact that Josephine and Chan continued as directors of the Company until July 2009, almost a year after Kung had become shareholder of the Company, militates against the existence of the alleged agreement.

39.  Further, I do not find Kung’s description of the term of the alleged agreement either “clear” or “unambiguous”. It does not contain, expressly or impliedly, an unqualified promise that Tso would under no circumstances exercise his statutory right to remove Kung as a director. In particular, it cannot be construed as an unqualified promise, express or implied, that, in the circumstances of the present case where Kung was suspected of wrongdoings, Tso would not exercise his statutory right to remove him as a director. In my view, the alleged oral agreement should be regarded as little more than an initial understanding between Kung and Tso as to how the business of the Company was to be managed.

40.  Lastly, it seems to me highly doubtful whether the alleged oral shareholders agreement can be regarded as binding not just on Tso and Kung, but also on the future shareholder of the Company viz JT.

41.  First, there is no suggestion that, at the time of the alleged oral agreement in June 2008, the parties contemplated, let alone intended, their agreement would bind future shareholders.

42.  Second, all that Kung deposed to in paragraph 27 of his first affirmation is that Tso assured him in early March 2011 that after the transfer of shares, the directorship and management structure of the Company would remain unchanged so that Tso and Kung would continue to jointly manage the Company. Quite apart from the uncertainty as to whether Tso intended and was duly authorised to give that assurance on behalf of JT – according to JT’s form D2A, as from 16 March 2011, Tso was only one of two directors of JT – the generality of the assurance is such that it is neither clear nor unambiguous that the assurance has the effect, contended for by Ms Chow in paragraph 25 of her written submissions, of conferring on Kung a special class right to participate in the management and control of the Company, so long as he remains a shareholder.

43.  To conclude, notwithstanding the alleged oral agreement between Tso and Kung, I am of the view that it is proper to exercise my discretion to allow the present application.

44.  In closing, I would respectfully adopt the sentiment expressed by Harris J in Re Mandarin Capital Advisory Ltd. supra at [26] that it is undesirable for section 114B applications to be allowed to develop into an investigation into the conduct of a company’s shareholders/directors in managing its affairs. For reasons already explained in the passage in Re Woven Rugs Ltd. supra at [32] and quoted above, the proper forum in carrying out that sort of investigation should be in a section 168A petition, if a respondent is so advised to take that course, a course which, in the present case, Kung has already taken.

Disposition and costs order nisi

45.  For the above reasons, I would allow the application and make an order that:

(1) an extraordinary general meeting of the Company be convened for the purpose or substantially the purpose stated in paragraph 1 above;

(2) the attendance by one member either personally or by proxy shall constitute a quorum at the said extraordinary general meeting;

(3) liberty to apply.

46.  There shall also be an order nisi that costs of the application be to the Plaintiff, to be taxed if not agreed, with certificate for counsel.