HUANGFU CHUANGXIN v. NI YONGKANG AND OTHERS

HCMP 1259/2021

[2022] HKCFI 1721

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1259 OF 2021

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DECISION ON COSTS

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1.  By an Originating Summons dated 31 August 2021 (the “OS”), the Plaintiff (“P”) seeks declaratory and other consequential reliefs that the following resolutions concerning Vogsun International (HK) Co., Limited (the “Company”) are invalid and of no legal effect:-

(1)  An ordinary resolution passed on 21 February 2021 removing the Plaintiff as a director of the Company (the “Director Removal Resolution”).

(2)  A special resolution passed on 24 January 2021 amending the Company’s Articles of Association (the “Articles Amendment Resolution”).

2.  The P’s complaint, in gist, concerned various alleged irregularities affecting the notices of the respective meetings for the Director Removal Resolution and the Articles Amendment Resolution.

3.  Subsequently, P discontinued the present proceedings under Order 21 Rule 3. The only outstanding matter between the parties is the costs of these proceedings.

4.  As P has applied to discontinue the present proceedings without going to trial, both counsel agreed that this Court will not be asked to determine disputes of fact at the present hearing. I will therefore merely set out a brief background.

Background

5.  the shareholding and corporate structure of the Company may be summarized in table form below:

Shareholders		Directors
P	25% (2,125,000 shares)	On 21 February 2021, P was removed as a director pursuant to the Director Removal Resolution
D1	40% (3,400,000 shares)	D1
D2	20% (1,700,000 shares)	D2
D3	10% (850,000 shares)	D3 is not a director of the Company
D4	5% (425,000 shares)	On 21 February 2021, D4 was appointed as a director of the Company.
NI KAN is not a shareholder of the Company.		NI KAN

6.  The Company has a wholly-owned subsidiary, Hangzhou Wushang Biotechnology Co. Ltd. (“Wushang Biotechnology”), a company incorporated in the PRC. Wushang Biotechnology in turn wholly owns Hangzhou Wushang Food Co. Ltd. (“Wushang Food”), also a company incorporated in the PRC.

7.  The following is a chronology of key events:-

6 Mar 2013	D1, P, D2, D3 and D4 agreed to an “Investment Shareholding Agreement”, pursuant to which the Company was formed.
25 Apr 2015	At the 4th Shareholder’s Meeting of the Company (“2015 Amendment Meeting”), P forcibly[1] requested to amend the Articles and required all decisions made by the directors of the Company to be made with unanimous consent (the “2015 Amendment”).   The notice for the 2015 Amendment Meeting did not specify the contents of the 2015 Amendment or provide any draft of the 2015 Amendment before the meeting.   The 2015 Amendment was ultimately effected by, inter alia, amending Clause 6 of the Articles, requiring directors’ decision to be reached unanimously.
31 Mar 2018	It is Ds’ case that at the 8th Shareholder’s Meeting of the Company, D1 requested that the Articles be amended to reverse the 2015 Amendment on the grounds that the requirement of unanimous consent was (i) contrary to law and (ii) causing substantial delay and disruption to the Company’s affairs. This request was refused by P. P denied there were such discussions.
11 May 2019	It is Ds’ case that at the 9th Shareholder’s Meeting of the Company, D1 again requested that the Articles be amended to reverse the 2015 Amendment for the same reasons. This was again refused by P.  P’s case is that there were no such discussions.
24 Jan 2021	At the 10th Shareholder’s Meeting of the Company (the “Articles Amendment Meeting”), there were discussions on amending Clause 6 of the Articles reverting to majority decision of the board. There was no draft alterations on the table. It is D’s case that a valid special resolution was made, i.e. the Articles Amendment Resolution.  P seeks a declaration of its invalidity.
2019 – 2021	It is Ds’ case that P carried out numerous obstructive acts which harmed the Company during this period of time, leading to the Director Removal Resolution. This is a matter in dispute.
21 Feb 2021	It is Ds’ case that at this Shareholder’s Meeting, the Director Removal Resolution was passed. P challenges this purported meeting saying he was not given notice and thus did not attend. P said he was deprived of the right to make representations to the shareholders. P seeks a declaration of its invalidity.
8 Oct 2021	After the issuance of the OS on 31/8/2021, Ds issued a Special Notice of a proposed resolution at a General Meeting to remove P as director. D1[2] explained that after obtaining legal advice, Ds understood that the procedure for the removal of P as director “…可能出現了瑕疵, 為了及早確認[P]在[Company]並沒有董事的身份,我們認為[Company]應盡早從新發出特別通知…”. P argues that to be an admission of irregularity. Ds argues that they were only acting out of prudence in the light of P’s continued obstructive behaviour.
9 Oct 2021	P was delivered a copy of the special notice [B2/72/669-672].
10 Nov 2021	At the Shareholders’ Meeting, P was removed as director by ordinary resolution(the “Subsequent Director Removal”).  P did attend this meeting and made his case opposing his removal.

8.  Against the above background, P’s case against Ds is as follows:-

(1)  Director Removal Resolution – no special notice was given prior to the Director Removal Resolution as required under section 462 CO.

(2)  Articles Amendment Resolution:-

(a)  The Articles Amendment Resolution was inconsistent with the agreement and/or mutual understanding of the shareholders of the Company that the Articles may only be altered with the unanimous consent of all the directors-cum-shareholders (the “Unanimous Consent Argument”).

(b)  The notice for the Articles Amendment Meeting (the “Articles Amendment Meeting Notice”) did not specify that the Articles Amendment Resolution was intended to be a special resolution, as required under section 564(4)(a) CO (the “Lack of Specification Argument”).

(c)  The Articles Amendment Meeting Notice did not record the text of the Articles Amendment Resolution, as required under section 564(4)(b) CO and no draft text was tabled at the relevant meeting (the “Lack of Text Argument”).

9.  P applies for costs against Ds on the following grounds[3]:

(1)  The Director Removal Resolution and the Article Amendment Resolution were indeed invalid;

(2)  The discontinuance was due to Ds’ acts subsequent to the OS rendering it unnecessary or academic for P to proceed with the OS;

(3)  On 20 December 2021, Ds unreasonably rejected P’s offer of “no order as to costs”; and

(4)  On 22 and 24 December 2021, Ds unreasonably refused P’s request for statement of costs for P’s consideration of potential settlement of costs.

10.  On the other hand, Ds insisted that P should pay for the costs of discontinuance.

Applicable legal principles

11.  Generally speaking, upon an application for leave to discontinue, the discontinuing party will be required to pay the costs of the other party.

12.  Whilst costs is ultimately within the discretion of the Court, there are well established principles governing the award of costs in the context of discontinuance of proceedings. As summarized in Hong Kong Civil Procedure 2022 at §21/5/12A:

“The burden of persuading the court to depart from the general rule rests on the party who seeks to withdraw. Good reason ought to be shown for departure.”

13.  In China Baoli Technologies Holdings Ltd. v. Orient Equal International Group Ltd. & ors.,CACV 34/2018, [2021] HKCA 1609, at §17, the Court of Appeal held that “exceptional circumstances” need to be shown to justify a departure from the general rule. The fact that the discontinuance was caused by the issues becoming academic does not by itself justify departure from the general rule.  The dicta of Recorder Shieh SC in Anmol Kumar Sawlani v. Yeshma Gobindram Sawlani, unreported HCA 2231/2011, 9 May 2013, at §§10 to 15 were approved.

14.  In the Anmol case, Recorder Shieh SC quoted the dictum of Mortimer VP in Ta Chung China and Arts Limited v. Fontana Restaurant Limited [1999] 1 HKLR 404, at 406:-

“There is no doubt that there are two ways in which a party can have the matter of costs determined if the liability issues of the action have become academic. First, he may apply for leave to discontinue the action and ask for costs to be determined. In those circumstances, although it would not be impossible for the plaintiff to ask for an order for the payment of costs by the party against whom he is discontinuing, it undoubtedly would be most unusual. For my part, I have never come across such a case.”

There was an attempt on the part of counsel to argue that the above dictum of Mortimer VP did not survive after the CJR.  At §14, the learned Recorder rejected such argument. Then the learned Recorder concluded in §15:-

“…if the parties were not to go to trial to resolve a costs dispute in an application for leave to discontinue, then the normal rule should apply, namely a discontinuing plaintiff should pay costs unless it can be demonstrated, without the need to go to trial, that his case is so strong that he is bound to win had it gone on a trial and therefore he was justified in commencing the action in the first place. I cannot see how a lesser standard such as he may be 70 per cent right would suffice, because at the end of the day to award costs to a party is to recompense him for the fact that he was justified in issuing the writ in the first place.”

15.  Mr Mok for P argued, similar to counsel in Anmol’s case, that the dictum of Mortimer VP in Ta Chung’s case did not survive the CJR. I reject Mr Mok’s argument in the same way as Recorder Shieh SC did in Anmol. I am comforted by the fact that the dicta of Recorder Shieh SC had received endorsement by the Court of Appeal by which I am bound. In any event, the basis of P’s application for costs is that the subject resolutions were “indeed invalid”. In my view, in order to persuade this Court to exercise its discretion to order costs of discontinuance in P’s favour, P has to satisfy me that it is bound to win in the first place.

16.  Mr Mok relies on Re Peaktop Technologies (USA) HK Ltd. [2007] 4 HKLRD 207. In that case, the plaintiffs (directors) applied for leave to discontinue the originating summons which sought inspection of books and records of the Company. The plaintiffs applied for discontinuance because subsequent to the originating summons, they were removed from directorship and hence lost locus. Barma J (as he then was) granted leave and awarded costs in favour of the plaintiffs. His Lordship said:-

“7. …It is clear from O.21 r.3(1) of the Rules of the High Court (Cap.4, Sub.Leg.) that the court has a wide discretion as to what, if any, terms should be imposed when giving leave to withdraw. The court also has a wide discretion as to costs. It seems to me that if the circumstances are, exceptionally, such that a costs order should be made in favour of an applicant who has obtained leave to withdraw his application, there is no jurisdictional bar to the court making such an order.

8. Further, it seems to me that when an applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the respondent which is within its control and out of the hands of the applicant and is, further a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimize the cost associated with it, it may well be appropriate to recognize this by an appropriate costs order.

9. I therefore turn to consider whether or not there are, in this case, grounds for making an exceptional costs order in favour of the applicant…” [emphasis added]

17.  Mr. Mok seemed to read Re Peaktop as saying that once the situation mentioned by Barma J in §8 has arisen, the party seeking discontinuance is automatically entitled to a costs order in its favour. With respect, that is an erroneous reading of the case. It is important to note that in Re Peaktop, Barma J was satisfied, based on the materials and arguments before him, that but for the removal of the applicants as directors of the Company, it would have been appropriate to make an order substantially in terms sought (see §37). In other words, there is no real conflict between the Anmol’s case and Re Peaktop.

18.  Finally, in respect of the analysis as to whether a plaintiff or a defendant is bound to win in a postulated trial, both counsel agreed that this court can and should take a broad brush approach as enunciated by To J in Re Fook Lam Moon Restaurant Ltd. (unreported HCMP 438/2010, 8 December 2015) at §41.

Discussions

The Director Removal Resolution

19.  Mr Mok submitted that P was bound to succeed (but for the Subsequent Director Removal) since Ds had admitted that there was flaw in the procedure adopted. In D1’s affirmation[4] , he effectively admitted that no notice of shareholders’ meeting was given to P.

20.  Firstly of all, Mr Lai, Counsel for Ds submitted and I accept that the Defendant’s letter dated 18 Oct 2021[5] does not constitute admission that the Director Removal Resolution was invalid. It was made clear in the said letter that the Notice for EGM dated 8 Oct 2021 (seeking ratification of the earlier removal) was issued with a view to avoiding further dispute.

21.  Secondly, Mr Lai submitted that even if there were flaw in the procedure, P’s case is not bound to win (but indeed doomed to fail) because of the “irregularity principle”. Mr Lai relied on Lam Hon Keung Keith v. Dalny Estates Ltd & ors [2018] 1 HKLRD 409 at §18 per G Lam J (as he then was):-

“Notwithstanding a breach of the articles, however, there is no dispute that in general, the court may refuse to intervene in an internal dispute and set aside the proceeding in question as null and void merely because of an irregularity such as in the conduct of a general meeting, if the same result would have obtained had the correct procedure been followed. Thus the irregularity principle has been applied in Hong Kong in relation to an inquorate general meeting, so that the court refused to declare that the directors there elected were invalidly appointed: Lim Jonathan v She Wai Hung [2011] 1 HKLRD 305; to a general meeting of which requisite notice had not been given, so that the court refused to strike down resolutions passed there to authorise specified directors to handle legal proceedings against the plaintiff: Re Green Valley Investment Ltd [2003] 2 HKLRD 915; to a general meeting where the chairman wrongly called for a poll a day before the meeting, so that the court refused to declare void the resolutions passed there: Re Hong Kong Sailing Federation [2010] 1 HKLRD 801.”

22.  Mr Mok then submitted that the “irregularity principle” cannot apply in this case because the irregularity was one of “substance” instead of a mere procedural irregularity. Mr Mok relied on sections 462(1) and (4) of the Companies Ordinance (Cap. 622) which provides that a company may by an ordinary resolution remove a director, and a special notice is required for such a resolution. Section 463 further provides that the company must send a copy of such notice to the director concerned who is entitled to be heard on the resolution at the said meeting and to make representations. Mr Mok further relied on Yeung Bing Kwong Kenneth v Mount Oscar Ltd [2019] 3 HKLRD 575 to demonstrate that section 463 guaranteed certain protections to a director who faces removal.  Mr Mok submitted that the failure to give notice of the Shareholders’ Meeting to P was an irregularity of substance for which the “irregularity principle” could not apply.

23.  When being challenged by Mr Lai as to the lack of authority to support his limitation of the application of the “irregularity principle”, Mr Mok relied on one paragraph in Law of Companies in HK, 3rd ed, Lo and Qu, pg. 414, where the author said "Where the matter in question is not merely an irregularity in the internal management of the company but one of substance, and tintured with oppression, the irregularity principle does not apply." The case of Baillie v. Oriental Telephone and Electric Co Ltd [1915] 1 Ch 503 was quoted in support of that proposition.

24.  In Baillie, company X wholly owned a subsidiary Y. In 1907, directors of X (in exercise of the voting powers of X in Y) obtained the passing of resolutions whereby the articles of Y were altered so as to increase the fixed remuneration of the directors.  In 1913, an EGM of X was convened by the directors with the object of passing special resolutions ratifying what had been done by the directors in 1907, authorizing them to retain all remunerations received and to be received by them as per the 1907 articles modification.  The notice convening the EGM and an attached circular set out the proposed resolutions but did not give particulars as to the amount (which was very large) of the remunerations which had been received by the directors. The resolutions were passed by the requisite majority and subsequently confirmed.  A shareholder (by way of a derivative action) sought a declaration that the resolutions were not binding on the ground of insufficient notice of the meeting.  The evidence revealed that at the meeting, the chairman gave no detailed information as to the directors’ remunerations from Y but merely stated that the directors’ fees had averaged since 1881 the sum of £320 per annum for each director. No statement was made at the meeting by the chairman as to the amount of the sums of the payment of which was proposed to be confirmed by the resolutions. In fact, some shareholders had previously made objections and sought for information. One of them even wrote to the directors complaining that no full disclosure had been made and that the real amount of the remunerations asked to be voted was so concealed and wrapped up that no one could know what it really was. The chairman did not in his reply disclosure the figures, but informed the meeting that he had sufficient proxies to carry the resolutions and proceeded to put them to the meeting.

25.  In the judgment of Lord Cozens-Hardy MR, his Lordship held[6], that if any attempt is to be made by the directors to get the sanction of the shareholders, it must be made on a fair and reasonably full statement of the facts upon which the directors are asking the shareholders to vote. On the facts of that case, his Lordship held that the notice and the accompanying circular was “not open, not clear and not in any way satisfactory”. His Lordship even described the notice and the circular as “tricky” by reason of its suppression of information. His Lordship then held that the resolutions, obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported.

26.  It can be seen from all 3 judgments given in Baillie’s case that there was no discussion at all on the irregularity principle let alone the proper limits of such a principle. It was simply a case on whether a shareholders’ resolution, obtained through trickery or suppression of relevant information by the directors, can be sustained. When I put this observation to Mr Mok, he fairly accepted that.  In my judgment, Baillie’s case does not support the aforesaid proposition made by the learned authors. Having said that, I of course agree with the proposition that if the effect of applying the irregularity principle (i.e. by the majority shareholders) amounts to an oppression of the minority shareholders, the court will not uphold its application. This will be incidental to the court’s equitable jurisdiction of protecting minority shareholders from oppressions by the majority, see Re Green Valley Investment Ltd.  [2003] 2 HKLRD 915, §49-53.  Yet, this was neither the argument of Mr Mok nor the case of P.  Mr Mok argued that the irregularity principle has no application simply on the basis that the irregularity was a matter of “substance”. In my view, there is no basis for such a distinction. I agree with the submission of Mr Lai, who relied on the Dalny’s case, that the sole question is whether the same result would have been obtained had the correct procedure been followed. The majority shareholders can validly exercise their voting powers to ratify an irregularity, whether or not it is trivial or of substance, so long as they exercise their voting power fully aware of the nature of that irregularity and in circumstances that do not involve an oppression on the minority. 

27.  Mr Lai further relied on Tam Tak Yam v. Man Shing Textiles Ltd. [2019] HKCFI 1449 which is a case specifically on the application of the irregularity principle in a situation where no special notice of EGM was given in relation to a resolution to remove a director.  It was also argued in that case that such irregularity deprived the said director of his right to protest against removal under section 463. DHCJ Patrick Fung SC rejected the argument that the irregularity principle only applies to “a mere formality and irregularity” (see §§53-55) which I respectfully agree.

28.  In any event, Mr Mok has failed to persuade me that P is bound to succeed on its argument that the irregularity principle has no application to the facts of this case. On the contrary, I agree with Mr Lai that P’s case is bound to fail by reason of the irregularity principle. The events leading to the 21 Febuary 2021 Director Removal Resolution were explained in §60-68 of the D1’s affirmation[7]. D1 described the various disruptive conducts of P since around May 2019. These allegations are of course denied by P[8]. I am in no position to resolve such factual disputes. Yet, it is clear that the schism between P and his fellow directors were open, full blown and had lasted for quite some time. There were a number of direct altercations or clashes between them. It is inconceivable that either side would not have known exactly the differing points of view of the other.  It must have been apparent to P that his fellow shareholders were determined to remove him from the board. P should have realized that even if he could point to some irregularities in the process, that could not alter Ds’ determination to remove him. Consequently, at the 10 Nov 2021 Shareholders’ Meeting, P did attend the meeting to fully make his case opposing his removal and the majority shareholders nonetheless ratified the 21 Feb 2021 Director Removal Resolution. 

29.  In the circumstances, Mr Lai reminded me of the following dictum of Keith J in Trend Publishing (HK) Ltd. v. Vivien Chan & Co. [1996] 2 HKLR 227 at 231:-

“In the final analysis, I do not see why a defendant should be deprived of costs of an action which it was bound to win, merely because the plaintiff discontinued the action for reasons unconnected with the likelihood of ultimate success or failure in the action. If a plaintiff starts an action which is bound to fail, it would be wrong to deprive a defendant of its legal costs of the action simply on the basis that, irrespective of the merits, it made commercial sense for the action to be discontinued at an early stage.”

The Articles Amendment Resolution

30.  In the OS, P relied on 3 grounds to attack the validity of this resolution.  The first ground is the “Unanimous Consent Argument”. This argument is based on P’s factual assertion that there was all along an agreement and/or mutual understanding of the shareholders of the Company that the Articles may only be altered with the unanimous consent of all the directors-cum-shareholders. Ds’ case is that factually, there was never such agreement or mutual understanding. This is a dispute that can only be resolved after trial. P has chosen not to take the matter to trial. I agree with Mr Lai that this issue has simply not been rendered academic.  Mr Mok tried to argue that the Subsequent Director Removal rendered this issue academic in that P is no longer a director and he is no longer concerned with the amendments to the Articles. I agree with Mr Lai that this argument is unmeritorious. Although P has been removed as a director, he is still affected by the Articles Amendment Resolution as a shareholder. Therefore, P’s unilateral decision to discontinue these proceedings should be regarded as “having been made out of his private pragmatic consideration”. This is insufficient to displace the normal incidence of costs (see Re China Solar Energy Holdings Ltd., HCCW 108/2015, 1 March 2016, per DCHJ Le Pichon at §17).

31.  As for the other 2 arguments, i.e. the “Lack of Specification Argument” and the “Lack of Text Argument”, they are equally covered by the irregularity principle.  The fact is: given that the Articles Amendment Resolution was passed as a special resolution by 75% of shareholders, the result of the Articles Amendment Meeting would be the same if the alleged proper procedure was followed. P has thus wholly failed to demonstrate that he is bound to win. In fact, there is positive evidence that P clearly knew that Ds were seeking to revert to the majority rule (the situation prior to the 2015 change). At B2/608 is an explanatory letter circulated to all shareholders including P. This letter, though dated 24 January 2021 (the intended date of the meeting) was in fact circulated on 4 January 2021 as shown by a WeChat record at B2/598-599). D1’s Affirmation at §§43-44[9] also deposed that this explanatory letter was actually sent out to shareholders including P together with the Notice of EGM.  This has not been disputed in P's reply affirmation.  It is also clear from the Minutes of the meeting on 24 January 2021[10] that the resolution sought to revert the Articles back to original position and so as to conform with the Companies Ordinance. It was recorded that P disagreed with the amendment.

32.  These reasons are sufficient to dispose of the matter and it is unnecessary for me to resolve those other arguments arising out of certain emails exchanged in relation to the 2015 Amendment Meeting Notice which involve disputed issues of fact.  It is obvious that in the light of the factual disputes, P cannot possibly demonstrate that he is bound to win.

Disposition

33.  In the premises, P has failed to persuade me to depart from the general rule that P, being the party seeking to discontinue these proceedings, should pay costs to Ds. There is nothing unreasonable in Ds’ rejection of P’s offer of “no order as to costs”. Neither do I find that Ds’ refusal to provide a statement of costs has any material bearing.

34.  I therefore order that P do pay Ds costs of the action, including the costs of discontinuance and the costs of this hearing, to be taxed if not agreed.