TSAO CHIN LAN v. TIN KA KUNG and Others

IN THE COURT OF APPEAL

1995, No.10
(Civil)

(On Appeal from High Court

Action No.7605 of 1991,
Action No.7723 of 1991,
Action No.7724 of 1991 and
Action No.7725 of 1991)

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J U D G M E N T

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Godfrey, J.A.:

1. This is the plaintiff 's appeal from the dismissal by the judge of her claims against the defendants made in a consolidated action, tried last year by Liu J. over no less than 12 days, with judgment being given on 20 December 1994; the defendants support the judge's decision, but in addition contend, by a respondents' notice, that that decision ought to be affirmed on grounds which the judge rejected.

2. The plaintiff is the widow of TIN Kar-pun ("the deceased"), who died on 17 November 1983. One of the four defendants is a brother of the deceased; the others are sons of the deceased and step-sons of the plaintiff. Since the death of the deceased, the parties have been locked in litigation over a number of matters; these include the subject of the consolidated action, in which the plaintiff challenged the validity of an issue and allotment of shares to the defendants in a company called Tin's PVC Compound Company Limited ("the Company"). At the date of the issue and allotment of the shares, in 1981, the plaintiff and the deceased were the only members, and the only directors, of the Company; and, said the plaintiff, the issue and allotment of these shares was effected by the deceased acting on his own and without her concurrence. The defendants' answer was that the plaintiff did concur in the issue and allotment of these shares; but that, even if she did not, "in all the circumstances it was unconscionable" (I quote from the respondents' notice) for her now to challenge the issue and allotment of the shares. The judge, inferring "from all circumstances" (as he put it) that the deceased must have "obtained consensus from the plaintiff" found for the defendants on the first point. He went on to say (on that basis, correctly) that it was "quite unnecessary" for him to consider the second point. Nevertheless, he did consider it; and, treating the point as if it were a plea of estoppel by representation (which, properly analysed, it was not) he rejected it. He made no order as to costs.

3. We have to decide whether the evidence justified the judge's holding that the deceased must have "obtained consensus from the plaintiff" for the purposes of the issue and allotment of these shares. In this connection, I would stress that this holding was an inference on the part of the judge, not a finding of primary fact. The judge did not find as a fact that the plaintiff had consented to the disputed issue and allotment; nor could he properly have done so, since (unsurprisingly) there was no evidence before him on the point other than the plaintiff 's evidence that she had not so consented. It is true that, in the course of his judgment, the judge said that he preferred the defendants' evidence to the plaintiff 's evidence; but, on this particular point, there was no evidence from the defendants which he would have been entitled to prefer over that of the plaintiff. The defendants did not lead, and were clearly unable to lead, any evidence to rebut the plaintiff 's evidence that she had not consented to the issue and allotment of the shares. While, of course, an appellate court will always be reluctant to disturb a judge's finding of primary fact, it is well-settled that it is entitled, and indeed bound, to form its own, independent, opinion as to the proper inference drawn from the facts proved in evidence. Our task, then, is to consider whether the inference drawn by the judge here, that the plaintiff must have concurred with the deceased in the issue and allotment of these shares, was or was not a justifiable inference from the facts proved.

4. The plaintiff 's evidence (challenged but unshaken in cross-examination) was to the effect that she had not concurred with the deceased in the issue and allotment of the shares. In answer to the plaintiff 's evidence, the defendants were unable, in relation to this issue, to do more than produce a return made to the Registrar of Companies concerning the issue and allotment of the shares; but the return was signed only by the deceased, and is not evidence as against the plaintiff that she had concurred with the deceased in the issue and allotment of the shares. The defendants were unable to produce minutes of the meetings (if any) held to satisfy the relevant provisions of the Companies Ordinance, Cap.32; such minutes, if they had been available, would, until the contrary were proved, have been evidence that the relevant meetings had been duly held and that all proceedings thereat had been duly had : see s.119(3). In the absence of such minutes, the court has only the evidence of the plaintiff, with no evidence to prove the contrary from the defendants. Indeed, the only other relevant evidence was that (as the judge found) "the Company was treated by the deceased as his very own" (emphasis added). This finding does not of course detract from the plaintiff 's case that she was not consulted at all about the issue and allotment of these shares; rather, it supports it. For these reasons, I am quite satisfied that the judge was unjustified in drawing the inference he did that the plaintiff must have concurred with the deceased in the issue and allotment of these shares. But I would affirm on different grounds the decision of the judge to dismiss the action, as will appear below.

5. In the course of his argument for the defendants, Mr Robert Tang, Q.C. pressed us with the argument that the Company was a private, family, company and accordingly one would not have expected it to comply with the formalities required by the companies legislation in connection with such matters as an issue and allotment of shares. I would, for my part, expect the court to exercise a considerable degree of caution before accepting this argument for the purpose of validating a transaction of otherwise questionable validity. An incorporated company, even a private family company, necessarily involves formalities throughout its active life. These can be burdensome. Registers have to be maintained; documents filed with the Registrar of Companies; accounts kept and audited; and so on. Publicity has to be given to the constitution and officers of the company, and to its financial statements. The affairs of an incorporated company are of concern to the public generally, and to creditors in particular. They are not a matter of purely private concern as between the shareholders; and indeed the issue and allotment of shares in a private company is as much a matter of public record as an issue and allotment of shares in relation to a public company. While the members of private companies cling to the protection of limited liability, they cannot be expected to conduct their affairs with the same freedom as a sole trader or as traders in partnership. Of course everybody knows that, in practice, small private companies do not hold meetings at all; the records of such meetings, usually drafted by accountants or other professional advisers, are works of fiction. This is undesirable; and sometimes disastrous, as in the present case. Some attempt has been made, in England and Wales, to meet the needs of small private companies, by enabling them to dispense in most cases with formal meetings and accordingly with the pretence that they had held them when in fact they had not : see s.381A(1) and Schedule 15A of the Companies Act 1989. It is now provided, in England and Wales, that anything which may be done by a private company by a resolution of the company in general meeting may instead be done, without a meeting and without any previous notice being required, by a resolution in writing signed by or on behalf of all members entitled to vote on that resolution. This is not, or at any rate is not yet, the law in Hong Kong.

6. It is however true that, in Hong Kong as well as in England and Wales, a unanimous agreement of all the members entitled to vote, if established by the evidence, may sometimes be treated as equivalent to a resolution in general meeting (unless a specific statutory provision provides otherwise).

7. In In re George Newman Limited [1895]1 Ch.674, Lindley L.J. (at p.686) said:

"Individual assents given separately may preclude those who have given them from complaining of what they have sanctioned, but for the purpose of binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting."

8. Despite this, in a series of later cases, the courts have from time to time treated "individual assents given separately" by all the members entitled to vote as equivalent to the assent of a meeting. This development started with In re Express Engineering Works Limited [1920]1 Ch.466, in which a resolution of a board meeting was held to bind the company, notwithstanding that it was beyond the directors' powers, when the directors were the company's only members and all were present. It was then held that articles of association could effectively provide that a written resolution signed by all the members entitled to vote at general meetings was equivalent to one passed at a general meeting : see In re Oxted Motor Co. Ltd. [1921]3 KB 32. Finally, it has occasionally been held that there need be no sort of "meeting" or "resolution" at all if all members entitled to vote on the matter conc erned have informally ratified or acquiesced in what has been done : see, e.g.,Parker and Cooper Limited v. Reading [1926] Ch.975; In re Duomatic Limited [1969]2 Ch.365. Perhaps, for present purposes, the most important case is In re Bailey Hay and Co. Ltd. [1971]1 WLR 1357. There, notice of a meeting to consider a resolution to wind up the company had been given which was one day short of the required period of notice. The meeting was attended by all five members and a resolution was passed, two voting in favour, and three abstaining since they did not consider that they knew sufficient about the company's financial position to judge whether it was necessary to wind it up. Had they voted against the resolution it would have been defeated. Shortly afterwards, one of the three discovered that the notice had been inadequate and expressed the view that he and his two fellow abstainers should reserve the right to dispute the validity of the liquidator's appointment. Not until some three months later did he draw the inadequacy of the notice to the attention of the liquidator. And, apparently, the liquidator was not told that the validity of his appointment was disputed until, three years later, he applied to the court for a declaration that certain payments made by the company to one of the three abstainers were void as fraudulent preferences and was met with the defence that the company was not and never had been in liquidation. The judge rejected this. In his view, all the members had agreed to the winding-up resolution, since they had suffered it to be passed with knowledge of their power to stop it. But, apart from that, the judge held that the delay in asserting that the liquidation was invalid gave rise to the application of the equitable doctrine of laches. Laches (like the similar equitable bar of acquiescence) has affinities with estoppel, but is wider in its scope. It is particularly useful where, as in the instant case, and in the case of many other corporate irregularities, there is no period of limitation within which actions have to be brought. In Erlanger v. New Sombrero Phosphate Co.(1878)3 App.Cas.1218, Lord Blackburn (at p.1279) described the doctrine of laches as follows:

"A doctrine which, if founded on mere delay, must be tried upon principles essentially equitable and invoked only where it would be practically unjust to give a remedy ... because one party has by his conduct and neglect ... put the other party in a situation in which it would not be reasonable to place him if the remedy was afterwards to be asserted."

9. This does not support the proposition that anything less than clear proof of unanimity will suffice to make the actions of the members an act of the company itself; it merely bars those guilty of laches from the remedy to which they would otherwise have been entitled, and, in contrast with clearly proved unanimous agreement, does not validate the transaction, which remains liable to attack by anyone with locus standi (e.g. a creditor or liquidator) who is not guilty of laches. The practical effect of laches will be much the same as validation in a case in which no one else has any interest in attacking its validity. This, however, will not always be so. Creditors as well as members may sometimes have locus standi to complain of corporate irregularities; the court may be prepared to hold in a particular case that it would be "practically unjust" to allow anyone to complain of an irregularity if an unreasonable length of time has elapsed since the irregularity occurred, but one cannot be sure that it will.

10. Turning to the facts of the present case, I am satisfied that whether or not the plaintiff concurred in the issue and allotment, it is now much too late to uphold her challenge to it. It is clear (if only because the plaintiff has admitted and indeed asserted it) that the plaintiff found out about the issue and allotment of shares which she now disputes a few days after the death of the deceased on 17 November 1983. But she did not commence these proceedings until 1991. Even then, the original complaint made by the plaintiff appeared to be that the defendants had not paid for their shares, rather than a complaint that the shares had never been validly issued or allotted to them at all. The challenge to the issue and allotment was not made until the plaintiff amended her statement of claim some considerable time later. The plaintiff says (although the defendants dispute it) that she protested from time to time about the issue and allotment of the shares, but was unable to obtain sight of the necessary documents to prosecute her case against the defendants. Even if that is so, the plaintiff, on her own admission, knew by the end of November 1983 that these shares had been issued and allotted and knew, of course, if her own case is to be believed, that she had not consented to the issue and allotment. It emerged, at a late stage in the appeal, that the real reason why the plaintiff had taken no steps to challenge the issue and allotment for so long was that her solicitors had advised her to put the matter on one side until after the other matters in which she was locked in litigation with the defendants had been disposed of. That was extremely bad advice. The result of it was to expose the defendants to the risk of considerable prejudice. For years she stood by while they continued to manage the business and (as the plaintiff knew) to declare and receive dividends (which they would have to repay if the plaintiff 's claim is upheld). They gave personal guarantees to secure the Company's debts. The Company had the benefit of the capital ($400,000) paid up in respect of the disputed shares. In my opinion it would be not only inequitable, it would be iniquitous, after all this long delay, for the court to allow the plaintiff to succeed in this claim and to rectify the Company's register (the only relevant relief) against the defendants. I am prepared to accept that it would not, or would not necessarily, be right to find the plaintiff estopped from prosecuting this claim (because I do not think her conduct amounted to a clear and unequivocal representation that she was not proposing to challenge the issue and allotment of the shares) but that she was guilty of laches I have not the least doubt. As I have already said, I would affirm the decision of the judge, although for reasons quite different from those which he has given in his judgment. I would award the defendants their costs in this court, and leave undisturbed the decision of the judge to make no order as to the costs below.

Mayo, J.A.:

11. The reasons given by the learned trial judge for drawing the inferences he did that the appellant consented to the allotments of shares to the respondents are insufficiently compelling to support that conclusion. The simple fact of the matter was that there was no direct evidence to rebut the appellant's evidence that she had no knowledge of the allotments to the respondents and therefore had not consented to it.

12. Having regard to the highly unsatisfactory state of the company's records there was insufficient evidence to impose a burden of proof upon the appellant requiring her to prove that she had not consented to the allotments.

13. The consequence of this was that the allotment was irregular and had the plaintiff made the company a party to the litigation, and applied to the court for rectification of the company's register within a reasonable period of time, some appropriate form of relief would have been forthcoming.

14. Sir John Swaine submitted that it would be unfair to place reliance upon parts of the appellant's evidence and reject other parts. If the court rejected her evidence concerning her protestations and objections to the allotments of shares it should not accept her evidence that she knew about the allotments shortly after the death of her husband in November 1983. I can see no merit in this submission.

15. It is always open to a court to accept some evidence of a witness and reject other evidence. Unless this was the case a highly artificial situation would arise. It must obviously be the case that the appellant did know about the allotments at this time as she has admitted this fact.

16. Equally this should not place a court in a strait jacket and require it to accept all the evidence the appellant may choose to give concerning all the surrounding circumstances. Liu J as he then was considered all of the evidence carefully and preferred the evidence of the respondents to the effect that the appellant had acquiesced in the affairs of the company being continued to be undertaken by the respondents who discharged duties as Directors. He generally did not accept the appellant's evidence concerning her protestations about the allotments and the failure of the company or the respondents to provide her with access to the company's records. I do not think that Liu J's conclusion in this respect can be faulted.

17. It seems to me that the main issue in this case is whether relief can properly be given to the appellant having regard to the passage of time which has elapsed since she admitted that she had knowledge of the alleged allotments to the respondents.

18. On the basis of Liu J's analysis of the evidence it would seem to be clear that the appellant did indeed acquiesce in the situation and failed to take any effective steps until the commencement of the litigation in 1991.

19. It is equally clear that this failure on the part of the appellant to act with reasonable dispatch has been severely detrimental to the interests of the respondents.

20. During this period of inactivity the respondents as Directors of the company have built up its business and greatly enhanced its prospects financially. They all gave evidence that had the appellant called in question their title to the shares allotted under the allotment they would not have been prepared to continue to discharge their duties as Directors of the company. This is quite understandable.

21. Upjohn J considered the principles which should apply in such a situation at 821 of In re Jarvis, Decd [1958]1 WLR 815:

"In dealing with the business, the principles applying are quite different from those in the case of a specific asset, such as a renewed lease. The principle was stated in Clegg v. Edmondson by Knight Bruce LJ: 'A mine which a man works is in the nature of a trade carried on by him. It requires his time, care, attention and skill to be bestowed on it, besides the possible expenditure and risk of capital, nor can any degree of science, foresight and examination afford a sure guarantee against sudden losses, disappointments and reverses. In such cases a man having an adverse claim in equity on the ground of constructive trust should pursue it promptly, and not by empty words merely. He should show himself in good time willing to participate in possible loss as well as profit, not play a game in which he alone risks nothing.' No doubt that was the case of a mine, which may be regarded as an exceptionally hazardous undertaking, and the delay which was held to be fatal in that case was ten years, four more than here; but, nevertheless, the principle as stated is of general application.

The plaintiff is seeking to say that the defendant has been a trustee for her of one moiety of this highly successful business, although she has never been at risk for one penny. I have been referred to a number of textbooks and authorities on this question of laches, acquiescence and delay, but I forbear from referring to them, for in this realm of law each case depends so much on its own facts that the citation of other cases having some points of similarity and some of difference does not really assist. I do not overlook the circumstance that the plaintiff has said she could not afford a solicitor; but I have to try to do justice to both sides. In my judgment, on the whole of the circumstances of this case, in relation to the business the plaintiff by waiting until 1951, has not been sufficiently prompt in seeking her remedy, and this part of the action fails."

22. Applying these principles to the present case it is clear that the appellant has been guilty of laches and did acquiesce in the situation. It is also clear that the delay of almost 8 years was seriously prejudicial to the respondents who have acted to their detriment as a result of this.

23. The consequence of this is that it would be inequitable to grant the appellant the relief she is seeking. I agree that the respondents should have their costs in this court. I would not disturb the judge's decision to make no order as to the costs below.

Nazareth, V.-P.:

24. I fully agree with Godfrey and Mayo JJA that, for the reasons they have given, the appellant has been guilty of laches, and that therefore the decision of the judge should be affirmed.

25. It is therefore not necessary to address her grounds of appeal nor the main plank of the judge's rejection of her claim, i.e. that "the deceased must have ... liaised with the [appellant] with regard to [the respondents'] shares" and that meetings must have purportedly been held for the allotment of the 400 shares that she questioned. For the deficiencies in the judge's reasoning that they have identified, my Lords have rejected his conclusion.

26. However, since it is not necessary to address that conclusion, I content myself with merely saying the following. I have not found the position in that regard as clear as my Lords have. The judge plainly paid close attention to the witnesses and their evidence given over many days before him. His rejection of the plaintiff's evidence and preference for and acceptance of the defendants' evidence is made in terms so broad as seem to me to render implicit the rejection of allegations and averments of the plaintiff that are essential to the success of her case (and that she relies upon because of the fortuitous failure of the judge to dismiss them in express and specific terms). However that may be, given the unlimited nature of its rejection, the plaintiff's evidence would not displace the presumption of regularity that must flow generally from the prolonged operation of the company's business on the basis of the 400 shares being validly held and specifically from the return of allotment filed by the deceased, which would be available and must be intended for public inspection. That consideration is not nullified by the existence of statutory provision enabling the existence of a valid resolution, increasing the company's nominal capital and allotting 400 new shares to the defendants, to be proved conclusively. Nor, likewise, would her evidence discharge the onus that lies upon her to establish her claim and averments.

27. However may be those and other matters that point to the judge's conclusion being right, since it is not necessary to rely upon or indeed examine that conclusion, I do not press my doubts to the point of dissent from the view of Godfrey and Mayo JJA on the main ground of the plaintiff's appeal.

28. We will make an order nisi that the respondents have their costs in this court, leaving undisturbed the costs order below.