KAO SHIH YI v. LIN CHIEN KUO GERY

HCMP 598/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 598 OF 2003

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REASONS FOR DECISION

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1. This is the hearing of an Amended Originating Summons taken out by Mr Kao Shih Yi, who is a shareholder and director of Rich Long Limited ("the Company"), under section 114B of the Companies Ordinance, Cap. 32, for an order to convene an extraordinary general meeting of the Company and a direction that one member of the Company present in person or by proxy at the meeting be deemed sufficient to constitute the required quorum. The 1st defendant is Mr Lin Chien Kuo Gery, who is the other director and shareholder of the Company. The Company has been joined as the 2nd defendant so as to be bound by the order sought.

2. The background to this application may be stated as follows. The Company was incorporated in Hong Kong in 1991. At the time of this application there are only two shareholders, being the plaintiff and the 1st defendant and as mentioned earlier they are the only directors. The plaintiff is the majority shareholder, holding 66% of the shares. The 1st defendant holds the remaining 34%. Since the incorporation of the Company, the 1st defendant was given the responsibility of the day to day management until disputes arose between them in about October 2002.

3. As a result of the disputes, the plaintiff has brought a derivative action against the 1st defendant and others in High Court Action No. 4134 of 2002, alleging misappropriation of the funds of the Company and diversion of the Company's business to another entity. The plaintiff has obtained an interlocutory injunction in that action to restrain the 1st defendant from dealing with the bank accounts of the Company and from holding himself out as acting on behalf of the Company for whatever purposes. The plaintiff has also made complaints against the 1st defendant to the Independent Commission Against Corruption and charges of theft have been laid against the 1st defendant. There are pending criminal proceedings against the 1st defendant in the District Court.

4. On 8 January 2003, a writ was issued against the Company in High Court Action No. 70 of 2003 by a client of the Company known as China Treasure Limited ("China Treasure") claiming HK$1,000,000.00 being an unauthorised transfer of money from the bank account of China Treasure into the Company's bank account on or about 4 November 2002. The plaintiff has caused an acknowledgment of service to be filed in that action to contest the same in order to safeguard the Company's position. He then took steps to convene a directors' meeting and later a shareholders' meeting to authorise the board of directors to defend the High Court action, but to no avail. It is not in dispute that the 1st defendant had received the letters and notices convening the meetings. The 1st defendant, however, refused to attend as he takes the view that the Company would have no defence to the claim of China Treasure. As the quorum for holding the directors' meeting and shareholders' meeting is two, the 1st defendant's refusal to attend had rendered the meetings inquorate.

5. Mr Roland Lau, who appeared for the 1st defendant, urged me to take into account the merits of the claim of China Treasure and the proposed defence of the Company before exercising my discretion to order that an extraordinary general meeting is to be convened. It seems to me on the available information there is a dispute whether the Company was duly authorised by China Treasure to operate its bank account.

6. According to the plaintiff, since 1994 China Treasure had appointed the Company to act as its agent to handle all its business matters, including keeping its money, dealing with its money received from its Mainland customers, and making payments on its behalf. It is the Company's contention that in accordance with this authorisation, the Company had kept accounting records which set out all the receipts of money from the customers of China Treasure and all the payments made on behalf of China Treasure.

7. It is further alleged by the plaintiff that according to the accounting records kept by the Company, China Treasure should have a balance of HK$244,432.92 in its bank account as at 31 October 2002. However, the bank passbook of China Treasure showed that as at that date, the bank balance stood at HK$1,255,961.92. The plaintiff, who had by then taken over by the management from the 1st defendant, came to the view that the shortfall of HK$1,011,529.00 had not been reimbursed by China Treasure to the Company and he caused HK$1,000,000.00 to be transferred from the bank account of China Treasure to the bank account of the Company on 4 November 2002.

8. I have been referred by Mr Lau to the Statement of Claim of China Treasure and various statements to the police given by a director of China Treasure, as well as the police statement of the 1st defendant. It would appear to be the case of China Treasure that the mandate and authority to operate the bank account of China Treasure was given to the 1st defendant personally, not to the Company. On the case of China Treasure, it would appear that the alleged authorisation given to the 1st defendant personally was not in writing.

9. On the available information, there would appear to be a dispute as to whom the authorisation was given, the extent of the authorisation and whether China Treasure was under any obligation to reimburse the Company. There is no need to go into any greater detail about the merits or otherwise of the defence to be raised by the Company against the claim of China Treasure. Suffice it to say that the 1st defendant has failed to satisfy the court that the Company's proposed defence is so entirely devoid of merits to render it a pointless exercise for the Company to defend the High Court action.

10. As there is a conflict between the only two directors whether the High Court action should be defended, and the board is unable to act, to resolve this conflict, it is proposed to put the resolution to a vote at the general meeting of the shareholders. Clearly, the shareholders in general meeting can act where the board of directors is unable or unwilling to do so.

11. The refusal of the 1st defendant to attend the general meeting has made it impracticable for a meeting to be held. By refusing to attend the meeting, the 1st defendant has in effect turned the quorum requirement in the articles of association into a right of veto not commensurate with his shareholding as a minority shareholder (Re HR Paul & Son Ltd (1974) 11 8 Sol J 166; Re Opera Photographic Ltd [1989] 1 WLR 634; Re Success Plan Ltd [2002] HKLRD 560).

12. At the general meeting to be convened, it is proposed that the shareholders would be asked to vote on resolutions relating to the defence of the High Court action by the Company. Further, it is proposed that the plaintiff's wife should be appointed as an additional director.

13. Mr Lau submitted that in so far as the appointment of an additional director is concerned, there is no evidence before the court that there is any specific business to be transacted that would require the appointment of an additional director other than the matter of defending the High Court action brought by China Treasure. There is no suggestion in the plaintiff's evidence that the Company's operations have been paralysed since the 1st defendant was excluded from the management in October 2002 or that the 1st defendant has been obstructive or uncooperative in any transaction (with the exception of the matter of defending the claim of China Treasure) that would require his co-operation or participation. I understand there is a dispute whether the 1st defendant was wrongfully excluded from the management of the Company and he has alleged that he has an entitlement by reason of an agreement or understanding with the plaintiff to be involved in the active management of the Company. In the circumstances, I propose to exercise my discretion to order an extraordinary general meeting be convened with a direction that the business to be conducted at the meeting is to be limited to matters relating to the proposed defence of the High Court action brought by China Treasure.

14. I have made the following orders:

(1) an extraordinary general meeting of the Company be convened and held by the plaintiff as soon as practicable pursuant to section 114B of the Companies Ordinance for the purpose of considering, and if thought fit, passing the resolutions set out in paragraphs 1 to 3 in the schedule attached to the Amended Originating Summons;

(2) that fourteen days' notice in writing of the convening of the extraordinary general meeting shall be given by the plaintiff to the 1st defendant;

(3) that one member of the Company present in person or by proxy at the meeting shall be deemed to be sufficient to constitute the requisite quorum;

(4) the costs of and incidental to the application be paid by the 1st defendant to the plaintiff; and

(5) there be liberty to apply.