ZPMC OFFSHORE SERVICE CO LTD (Formerly known as SHANGHAI ZHENHUA HEAVY INDUSTRIES SHIPPING CO LTD) v. PHILIP JEFFREY ADKINS AND OTHERS

HCMP 426/2017

[2018] HKCFI 2291

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 426 OF 2017

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D E C I S I O N

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1.  On 24 February 2017 the Plaintiff issued an originating summons seeking declarations to establish that a board resolution of the 4^th Respondent (“Company”) passed at a meeting on 14 February 2017 and the ratification by the board of the resolution on 25 April 2017, removing the chief executive officer (“CEO”) of the Company were valid (“contentious resolutions”). The CEO was Phillip Adkins. Mr Adkins was a director at the time. He was not removed as a director. Mr Adkins is the beneficial owner of the majority interest in one of the three shareholders in the Company, RBF Hong Kong Limited (“RBF”). RBF owns 32.5% of the Company. The remaining shares are owned by the Plaintiff as to 51% and by Lihua Logistics Company Limited (“Lihua”) as to the 26.5%. The board consisted of seven directors. Four were nominated by the Plaintiff (“majority directors”), RBF nominated two and Lihua nominated one. The contentious resolutions were passed at the majority directors’ behest.

2.  On 18 April 2018 I ordered that the proceedings continue as if commenced by writ.  On 27 June 2018 the Plaintiff issued a summons pursuant to O 14, r 1 seeking summary judgment against the Respondents in the following terms:

“1. Final declaratory judgment be entered against the Respondents that:-

1) The Board Meeting of the 4^th Respondent held on 14 February 2017 was a valid meeting of the directors of the 4^th Respondent;

2) The resolutions passed at the Board Meeting and/or April Board Meeting are valid and effective decisions of the 4^th Respondent, in particular declarations that:-

a. The 1^st Respondent is and was as of 14^th February 2017 no longer the Chief Executive Officer of the 4^th Respondent; and

b. Mr Chen Bin is and has since 14^th February 2017 been the interim Manager of the 4^th Respondent;

c. The only signatories to the bank accounts of the 4^th Respondent or any of its subsidiaries shall be the Financial Controller, the Chief Operating Officer and the Chief Financial Officer, Mr Li Chun Kai.

2. Final injunctive relief be ordered against the 1^st and/or 2^nd Respondent that:-

1) They or each of them shall not hold Mr Philip Adkins out to be the Chief Executive Officer of the 4^th Respondent or any of its subsidiaries; and/or

2) Mr Philip Adkins be restrained (whether by himself, servants or agents) from being involved in the day to day management of the 4^th Respondent or any of its subsidiaries; and

3) The 1^st and/or 2^nd Respondent shall do all things necessary and incidental to give effect to the resolutions passed at the Board Meeting;

…”

3.  The principles by reference to which the court assesses applications for summary judgment are not contentious.  To the extent relevant to this application they can be summarised as follows:

(1)  Once a plaintiff has established a prima facie case the burden passes to the defendant to establish a triable issue, failing which summary judgment will be entered.[1]

(2)  If there is a legal issue, which needs to be determined it should be a crisp one and not one that requires mature and detailed consideration.[2]

(3)  If summary judgment is declined the court should not produce reasons that express a view on the merits of the evidence and the various arguments that have been advanced.

4.  In my view RBF and Mr Adkin have demonstrated triable issues.  I will explain briefly why I have reached this conclusion.

5.  As can be seen from the relief that is sought the Plaintiff seeks declarations that bind the shareholders of the Company and Mr Adkin.  RBF and Mr Adkin contest the Plaintiff’s right to the declarations on the grounds pleaded in para 30 of their Defence and Counterclaim:

“In purporting to pass the Purported CEO Resolution at the 14/2 Board Meeting and in subsequently issuing a purported notice of termination of Mr. Adkins’ employment dated 16 February 2017 (‘Termination Notice’), it is averred that (a) the ZPMC‑nominated directors exercised their powers as directors in bad faith, primarily, predominantly or substantially for the improper purpose of entrenching or enhancing the control of ZPMC to the prejudice to RBF, with a view to disrupting and ignoring the pre-agreed Constitutional Division (‘ZPMC Improper Purpose’), and/or (b) the ZPMC‑nominated directors were not acting bona fide in the best interests of the Company, and/or (c) they were otherwise acting in breach [of] their duties owed to the Company as averred at paragraph 27 above. The best particulars which the 1^st and 2^nd Respondents are presently able to provide are as follows, and the 1^st and 2^nd Respondents reserve the right to plead further, pending discovery, interrogatories, inspection and exchange of witness statements:

…”

It is not necessary to set out the particulars.

6.  The Plaintiff argues that:

(1)  The board of a company is entitled to remove the CEO if the majority sees fit.

(2)  The removal was in accordance with articles 104 and 108.  This was initially controversial, but I understand that as a consequence of the ratifying resolution it is not now argued that the controversial resolutions were procedurally defective.

(3)  The shareholders agreement entered on 23 April 2014 expressly gives the board the right to dismiss the CEO: clause 9.5 of the shareholders agreement and appendix 4 to the agreement subsequently signed on 26 July 2015 between the shareholders and the Company.

(4)  The decision to remove the CEO was, therefore, a power given to the board and it was exercised for a proper purpose.

(5)  The decision to remove the CEO was a matter of the internal management of the Company and it is well established that the court will not interfere in matters of internal management: see, for example, Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd.[3]

(6)  RBF is a shareholder.  It has no right qua shareholder to challenge a decision of the board.

(7)  Even if the majority directors were motivated in causing the resolution to be passed by bad faith in the sense that they sought to advance the Plaintiff’s interest rather than those of the Company to which they owed fiduciary duties, it is immaterial because even assuming, which as I have noted is disputed, that RBF qua shareholder can challenge a decision of the board what is relevant is whether the majority directors’ decision is unjust.[4] The Plaintiff argues that there was nothing unjust in the majority of directors, who represented its interests, removing the CEO, because the Plaintiff does not dispute that under the shareholders agreement RBF is entitled to nominate a replacement and, consequently, RBF’s interests have not been adversely effected in a relevant way.

7.  It seems to me that there is a triable issue in respect of the majority directors’ motives in passing the resolution and whether they acted in accordance with their fiduciary duty to act bona fide in the best interests of the Company.  The material issue is whether or not this is relevant.  Mr Zimmern argued that it is not principally because RBF could not as a shareholder challenge the controversial resolutions and obtain the declarations, which are the converse of those sought by the Plaintiff, pleaded in its Counterclaim.  However, this overlooks the fact that RBF has not commenced proceedings against the Plaintiff seeking orders establishing that the controversial resolutions are invalid and joining the Company as a necessary party.  RBF and Mr Adkin are defendants raising the alleged mala fides of the majority directors as a defence to a claim against them.  It may be, but I do not have to decide this question, that RBF could not properly issue proceedings seeking the orders that it does in its Counterclaim for the reasons advanced by Mr Zimmern, but it does not follow that having been made defendants to proceedings the purpose of which is to establish whether the controversial resolutions are valid and enforceable that they are prohibited from advancing by way of defence the matters on which they seek to rely.  A similar distinction was drawn by DHCJ Au (as he then was) in Hong Kong Century Property Development Ltd v Hui Nei Na.[5]  The Plaintiff’s argument amounts to suggesting that RBF has been joined simply so it is bound by the decision and that it is not able to dispute the validity of the controversial resolutions.

8.  It might be suggested, although it was not, that even if RBF and Mr Adkin are able to advance the defences to the Plaintiff’s claims pleaded in the Defence they are not able to pursue a counterclaim.  This seems to me a rather academic way of looking the matter.  Essentially what is sought is the converse of the relief the Plaintiff seeks.  Particularly as it was not argued that even if I was of the view that a triable issue had been shown in respect of the issues pleaded in the Defence, the Counterclaim should be struck out, I will not give judgment dismissing the Counterclaim.  This is an issue that should be left to trial.

9.  I dismiss the Plaintiff’s summons and make a costs order nisi that the costs are in the cause with a certificate for two counsel.