BEST & BEST INTERNATIONAL INVESTMENT LTD. v. RICHARD TAI & CO., SOLICITORS (A FIRM)

CACV 143/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. CACV 143 OF 2001

(ON APPEAL FROM HCMP NO. 5268 OF 2000)

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D E C I S I O N

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Hon. Rogers VP:

1. This is an application in respect of the costs of the appeal which this Court decided on 18 September. As matters have turned out, affidavits have been filed and it is not possible for this Court to take the matter further in respect of the matters raised on those affidavits, although those matters may well become relevant when the case goes to the Court below.

2. Mr Chow, on behalf of the 1st respondent, the firm of solicitors, asked that their costs be paid out of the fund which is now in Court, on an indemnity basis. No objection has been made to the fact that it should be paid out of the fund, although brief objection was made that it should be on an indemnity basis. It should be stated, however, that the grounds upon which it was said that those costs should not be on an indemnity basis were eventually withdrawn.

3. As regards Mr Chan Tak's costs, again, he is entitled to his costs, such costs as he can obtain on taxation. Those too should be paid out of the sum of money which has been paid into Court.

4. I would only add this, that this may not be the end of the orders as to costs in this matter. As indicated in the judgment which we gave on 18 September, at the root of the dispute between the appellant and the 2nd respondent is the validity of the resolution which appointed Mr Lam Wai Hong, or purported to make Mr Lam Wai Hong a shareholder and backdate that shareholding and to appoint him a director.

5. If Mr Lam Wai Hong never was a shareholder, as this Court considered must have been the case because one cannot backdate a shareholding, the validity of his appointment as a director may be in doubt. If that were so, any action which Mr Lam Wai Hong has taken as a director would be invalid, and any resolution of the directors based upon Mr Lam Wai Hong's acting as a director would also be invalid.

6. This, in turn, may impinge upon the validity of the appointment of the solicitors who have acted on behalf of the company. If that be so, the appointment of those solicitors to act on behalf of the company in this action and in the appeal would be invalid and the costs could then be ordered to be paid by the solicitors personally.

7. In those circumstances, as I say, this might not be the end of the matter if, at the end of the day, Mr Lam Wai Hong's appointment as a director fails.

Hon. Le Pichon JA:

8. I agree.

Representation:

Ms Annie Lai, instructed by Messrs Christopher K Y Wong & Associates, for the Plaintiff/Appellant

Mr Kenneth C K Chow, instructed by Messrs Edmund W H Chow & Co., for the Defendant/1st Respondent

Chan Tak, the Claimant/2nd Respondent, in person

CACV 143/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. CACV 143 OF 2001

(ON APPEAL FROM HCMP NO. 5268 OF 2000)

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_______________________

_____________________

J U D G M E N T

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Hon. Rogers VP:

1. This is an appeal from a judgment of Kwan J, following a hearing which took place on 23 January this year. She handed down the reasons for her decision on 2 February 2001.

2. Before going into the details of this appeal, it is necessary to give a short history of the background to it. The present plaintiff, Best & Best International Investment Limited, was a company formed with three shareholders. It was incorporated on 31 March 1999. The nominal capital was $10,000 divided into 10 shares of $1 each. Only three shares were issued, one to each of the three shareholders, Mr Chin Luen Cheung, Mr Chan Tak, and Mr Lam Sai Fat.

3. The company appears to have been dealing in sand and rocks and was apparently successful. On 8 December 1999, there was a board meeting where the three shareholders and directors were present. It is unnecessary to go into all the matters that were discussed at the board meeting, but paragraph 8 of the translation that we have reads:

"The company agreed to withdraw HK$1,200,000 from the bank and send to Messrs Richard Tai, Solicitors, together with the above $200,000 repaid by Mr Chan Tak and the sum of $118,595.29 collected by Mr Lam Sai Fat on behalf of the company. The total of the dividend distribution would be HK$1,518,595.29 and (it was) agreed to distribute as follows:

A.	Mr Chin Luen Cheung	HK$379,648.82
B.	Mr Chan Tak (HK$379,648.82 - 200,000)	HK$179,648.82
C.	Mr Lam Sai Fat (HK$379,648.82 - 118,595.29)	HK$261,053.54
D.	Mr Lam Wai Hong	HK$379,648.82*
		HK$1,200,000.
		============

*Since Mr Lam Wai Hong's identity had not been confirmed, his share was held by Messrs Richard Tai & Co. as stakeholder until his identity was confirmed. Any withdrawal or transferral of the sum was subject to the confirmation of the three directors with their signatures."

This somewhat cryptic statement as to the identity of Mr Lam Wai Hong is apparently really a reference to whether Mr Lam was a shareholder or to be treated as a shareholder.

4. During the course of argument this morning, we were shown a print-out - it can only be referred to as that. It is corrected in pen in certain parts. It was headed as minutes, but they were unsigned, of what was said to be a duly convened directors' meeting of the company on 26 January 2000. Present were Mr Lam Sai Fat and Mr Chin Luen Cheung, but Mr Chan Tak was absent. It is said, under paragraph (b), that -

"It was resolved: (1) rectify and backdate the allotment of one ordinary share as fully paid to the entitlement of Mr Lam Wai Hong since the date of incorporation of the company."

5. This appears to me to be a most extraordinary document. I know of no power of a company to backdate a shareholding. It would simply be impossible, it seems to me, to re-write history and to treat a person as having been a shareholder when he was not a shareholder. The procedure simply does not make sense. It appears to me to be impossible in company law. But this is apparently the root cause of the dispute between the parties.

6. On 15 September of last year, Mr Chan Tak presented a petition against the company claiming various relief. That petition has subsequently been struck out because Mr Chan did not appear in court on one occasion. He says that he was unaware that he had to appear on that occasion and he does not have the funds to instruct solicitors on his behalf. Be that as it may, one of the complaints in the petition is precisely this, the purported making of Mr Lam Wai Hong a shareholder and backdating it.

7. Of course, the comparison of what is the effect of the meeting in December and the meeting in January shows straightaway that what would have happened is that Mr Lam Wai Hong would have contributed $1, as his contribution to the paid-up capital of the company, and then would immediately have been entitled to a shareholder's loan of nearly $400,000. That, in itself, appears to me to be quite outrageous.

8. Meanwhile, it is clear that the other two shareholders were seeking to retrieve the money which had been given to the solicitors. On 13 October last year, the originating summons in these proceedings was issued on behalf of the company. In view of the dispute between the shareholders, it has become apparent that there might have been difficulties in the authorisation of these proceedings.

9. We have been shown a copy of what was said to be the minutes of a board meeting which was said to have been held on 25 July 2000. That records that Mr Lam Sai Fat was present and Mr Chin Luen Cheung was present. Against Mr Chan Tak's name it says, "present (abandoned)", and Mr Lam Wai Hong was present. Now, we have been informed by Mr Chan Tak, who appears in person today, that he was neither given notice of this board meeting, nor was he present at that meeting.

[Judgment interrupted by counsel for the plaintiff/appellant handing up a further document to the Court]

10. I have just been passed by counsel on behalf of the company a document said to demonstrate that Mr Chan was present on 25 July. Since that document is dated 24 July and it is, in any event, unsigned, I cannot see how it shows that at all.

11. Be that as it may, this was a board meeting where apparently Mr Chan was not present but Mr Lam Wai Hong was present. Again, following on what has already been said about the meeting of 26 January, it appears to me impossible that Mr Lam Wai Hong could have been either a shareholder, still less a director, at that stage and his appointment, or purported appointment as such must have been invalid.

12. In any event, the only resolution which is pertinent is that:

"Messrs Alan Wong & Co. were appointed as the company's solicitors to be our company annual legal adviser, such appointment to take effect immediately and then withdraw Messrs Richard Tai & Co., Solicitors, to be our legal adviser."

That goes nowhere to showing that these proceedings were authorised by a resolution at a validly convened and held board meeting. In those circumstances, the question now will arise, and will have to be determined at a later stage in the Court of First Instance, as to whether these proceedings had been properly authorised by the company. If they have not been properly authorised, the usual consequences are likely to follow: the solicitors may well find themselves liable for the costs of these proceedings and the proceedings are likely to be struck out.

13. The originating summons in this case was brought against the solicitors who had been given the $379,648.82. It sought an order that the money be released to the plaintiff. On 17 November the solicitors took out an interpleader summons. The interpleader summons sought interpleader relief between the plaintiff and Mr Chan Tak, who was named as the claimant, that they wanted an order that:

"The plaintiff and the complainant appear and state the nature and particulars of their respective claims to the subject matter of this action, namely the stakeholders' money held by the defendant as stakeholders in the sum of $379,648.82, and maintain or relinquish the same and abide by such order as may be made hereon."

14. The matter came before Sakhrani J on 21 November. At that hearing the Judge gave directions, notably that the plaintiff and the claimant should file evidence in answer to the solicitors' affirmation, which had been filed in support of the interpleader summons. The Judge adjourned the summons for argument. Unfortunately, the Judge's directions in this regard appear to have been ignored. When the matter came before Kwan J on 23 January of this year, the Judge's order as to the filing of affidavits had not been complied with.

15. Kwan J records at page 8 of her reasons that Mr Chan wished to pursue his claim, and she also records as follows:

"I have also ascertained from Mr K. W. Luk, who appeared on behalf of the Plaintiff at this hearing, that the Company would not undertake not to release the money in question as a shareholder's loan to Mr Lam Wai Hong as the directors had resolved to do in December 1999."

16. The judge then made the following orders. First, she stayed all proceedings in the originating summons. Secondly, she ordered that the solicitors against whom the originating summons had been brought to pay into Court the sum of $379,648.82 after deducting therefrom the costs of this application which were assessed at $50,000 on a gross sum basis. Then she ordered that the plaintiff and the claimant do proceed to the trial of an issue to inquire "whether Mr Lam Wai Hong was, and is, a shareholder of the plaintiff, so that the said sum for which this action is brought is to be released to Mr Lam Wai Hong as a loan by the plaintiff to each of its shareholders pursuant to the resolution of the plaintiff's directors on 8 December 1999".

17. In my view, what the Judge did was, very succinctly, to crystallise the issue between the parties, which was as to the validity of the resolution purporting to make Mr Lam a shareholder and having backdated it to, according to the resolution, the date of incorporation of the company, and according to submission by counsel, it should be some later date, the date of allotment.

18. The matter can be viewed in this way, that, clearly, if Mr Lam was not properly a shareholder of the company and was not entitled to his shareholder's loan, the amount which had been allocated in respect of his shareholder's loan would be split between the other three shareholders and this would make a substantial difference to the amount of money which they were entitled to receive.

19. The Judge then went on to give directions. She ordered that there should be a statement of claim and a defence filed, and a reply, if any, and there should be discovery of documents, and these were to be within the usual time scale. That was ignored. None of that took place. No statement of claim was filed and, instead, this appeal was brought. The upshot of that has been that the solicitors, who were the defendants to the originating summons, and whose immediate reaction was that they had no claim over the money and they simply wanted to do what the Court directed with the money in view of the conflicting claims, and who complied with the order of the Court by paying the money into Court, have been dragged back to this Court quite unnecessarily. In my view, bringing them back to Court on this appeal is tantamount to an abuse.

20. Miss Lai, who has appeared on behalf of the appellant, has sought to argue that Mr Chan has no claim at all to the money. If that be so, that could have been established by complying with the Judge's directions and having any defence filed by Mr Chan in the interpleader proceedings struck out. This matter could thus have been concluded many months ago.

21. In my view this appeal should be dismissed. The matter should go back to the Court of First Instance to carry out the orders of Kwan J. The only further thing that, in my view, now falls for the Court of First Instance is to determine whether the original proceedings by originating summons were validly brought and validly authorised on behalf of the plaintiff.

Le Pichon JA:

22. I agree and have nothing to add.

Representation:

Ms Annie Lai, instructed by Messrs Christopher K Y Wong & Associates, for the Plaintiff/Appellant

Mr Kenneth C K Chow, instructed by Messrs Edmund W H Chow & Co., for the Defendant/1st Respondent

Chan Tak, the Claimant/2nd Respondent, in person