HCA 1724/2014
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1724 OF 2014
________________________
BETWEEN
| | HANSEN INTERNATIONAL LIMITED
(suing in its personal capacity, and on behalf of itself and all other shareholders in the 4th Defendant other than the 1st Defendant) | Plaintiff |
| | and | |
| | HIGH FASHION APPAREL LIMITED | 1st Defendant |
| | LAM FOO WAH | 2nd Defendant |
| | LAM GEE YU, WILL | 3rd Defendant |
| | HIGH FASHION NEW MEDIA CORPORATION LIMITED | 4th Defendant |
______________________
| Before: Deputy High Court Judge B Chu in Chambers |
| Dates of Hearing: 5 September 2014 |
| Date of Decision: 8 September 2014 |
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D E C I S I O N
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Introduction
1. Last Tuesday, 2 September 2014, Au-Yeung J granted an ex parte order (“Injunction Order”) restraining the 2nd and the 3rd defendants (“Lams”) from, among other things, acting on or procuring the removal of Leong Ma Li Mary (“Leong”) as the CEO of D4 (“New Media”), pursuant to a purported meeting of the board of directors of the New Media and a purported resolution on 22 August 2014.
2. There are at present altogether 3 summonses before this court as follows:
i. A summons issued by the plaintiff (“P”) on 3rd September 2014 to, among other things, continue the Interim Injunction granted by Au-Yeung J on 2 September 2014 (“P’s 1st Summons”);
ii. A summons issued by P on 4 September 2014, for, among other things, Lams to hand over finance chops and to withdraw any notice or instruction they gave to any bank concerning the removal of Leung as the CEO of the 4th defendant (“New Media”) (“P’s 2nd Summons”);
iii. A summons issued by the Lams on 4 September 2014 to, among other things, discharge the Injunction Order (“D’s Summons”).
3. In the main action, P’s is suing the 1st defendant (“HF Apparel”) and the Lams broadly under two separate categories of causes of action[1], namely (i) P challenges the validity of the purported resolution to remove Leong as CEO of New Media as a matter of law and also sues HF Apparel and the Lams for breach of contract; and (ii) P is bringing a common law derivative action on behalf of all other shareholders of New Media other than HF Apparel, against the Lams for breach of fiduciary and various other duties said to be owed by them to New Media, as P alone will be unable to secure a resolution for New Media to issue proceedings against the Lams.
4. Leong had filed two affirmations in support of P’s summonses. Due to the urgency of P’s Summonses, no evidence had yet been filed on behalf of the Lams, although their Counsel, Mr Maurellet, had appeared before Au-Yeung J and at the hearing before this court, mainly to submit on legal and/or technical grounds that the Injunction Order should be discharged and/or orders sought by P should not be granted.
5. The immediate question before this court is whether there should be an interim injunction in place with the orders as sought by P, pending the substantive hearing of P’s Summonses and D’s Summons. P’s Leading Counsel Mr J Mok SC and Mr Maurellet have agreed all three summonses should be adjourned for substantive argument on the earliest possible date to be fixed with 1 day reserved, and that directions should be given for the filing of further affidavits.
6. Although at the hearing, Mr Maurellet indicated orally the undertakings that the Lams were prepared to offer, they were general and there was no evidence and nothing in writing. After the completion of oral submissions in the morning, in the afternoon Mr Maurellet submitted in writing the undertakings that the Lams were prepared to give, and Mr Mok SC submitted the draft order containing those interim orders and directions P was seeking.
7. As the Injunction Order was to have effect until the hearing, this court subsequently ordered it should continue in the meantime pending this decision on the interim orders sought by P.
BriefBackground
8. As no evidence has been filed by the Lams, the background information is mainly gathered from the two affirmations and exhibits filed by Leong, and may thus be one-sided.
9. According to Leong, she had extensive experience in business management and marketing operation, especially in e-commerce, and it was against such background that the Lams solicited her help in the business venture in 2013, the she and the Lams, who are father and son, the 2nd defendant being the father (“Lam Senior”) and the 3rd defendant being his son (“Will Lam”), agreed to a joint venture to be set up for the purpose of developing, managing and operating an e-commerce platform for the retail of apparel and other related merchandise under the brands owned by the High Fashion Group.
10. As a result, a joint venture agreement was entered into on 26 November 2013, by Leong through P holding 35% stake, and the Lams through HF Apparel holding 65% stake, to establish a joint venture company in Hong Kong and a wholly foreign owned enterprise in PRC (“JV Agreement”)[2].
11. New Media, the joint venture company or “the Company” referred to in the JV Agreement, was in fact incorporated in Hong Kong on 24 September 2013. Longford Information and Technology Co Ltd (“Longford”) is the “PRC Company” set up after the JV Agreement.
12. P contributed HK$14m to the share capital of New Media. Pursuant to Clause 4.3 of the JV Agreement, Leong was appointed the first CEO at New Media (“Clause 4.3”).
13. Leong was appointed a director of New Media, at the same time as the Lams on 18 December 2013.
14. According to Leong, as further agreed, the joint venture took over the management, operation and development of the “brand centre” of the High Fashion Group, which stands for the entire retail and e- commerce business for a few lines of clothing under the brands “Theme”, “CSLR”, “AS Cluny”, “acelledesoie”, “Silk One” and “August Silk” (“Brand Centre”), which had been making losses for a long period of time. Leong was appointed the Chairman of the group of companies within the Brand Centre, and in this respect, Lam Senior, on behalf of the High Fashion Group had issued a circular dated 29 October 2013 to all Brand Centre staff in relation to Leong’s appointment (“Circular”)[3].
15. New Media subsequently also acquired Will Top Resources Limited (“Will Top”), the holding vehicle of various companies within the Brand Centre from Theme International Holdings (BVI) Limited by an agreement date 26 February 2014 (“Will Top Agreement”).
16. A corporate structure after the execution of the Will Top Agreement was produced by Leong in her 1st affirmation (“Corporate Structure”)[4]. After the Will Top Agreement, New Media became the holding company of both Will Top and also Longford, holding 100% of the shareholding of both companies.
17. Under Will Top, there are a number of companies, in particular a PRC company called Shenzhen Huijian Fashion Co Ltd深圳市慧簡服飾有限公司 (“Huijian”) and a BVI company called Theme (SZ) Limited, the Chinese name of which is榮暉服飾 (深圳) 有限公司. What is somewhat confusing is that there is another PRC company by the name of 榮暉服飾 (深圳) 有限公司, which is a separate company (“Shenzhen Company”), and which according to Leong was also part of Brand Centre.
18. Leong had said that since the inception of the joint venture in late 2013, the New Media team and Leong had strived for reorganizing and resuscitating the Brand Centre toward a profitable trend, but unfortunately, areas of conflict began to surface, which according to Leong, were as follows[5]:
i. The Lams did not respect the fact that P had also made financial contributions to New Media and the need for New Media to have financial independence from the High Fashion Group, and that the finance team of the Brand Centre, headed by Angela Yau (“Yau”), had remained unchanged after New Media was to take over the Brand Centre. Even after Leong had become Chairman of the Brand Centre, the Board of Directors had never instructed Yau to execute Leong’s directives and instead Yau carried out the directives of the High Fashion Group;
ii. Under the direction of Lam Senior, the accumulated revenues of the Brand Centre were to be transferred to the High Fashion Group;
iii. Revenues from the “Theme” and “CSLR” flagship online shops, which had been transferred to New Media pursuant to the agreement and understanding in the JV Agreement, were still going into the bank accounts of High Fashion (China) Co Ltd (“HF China”), another company of the High Fashion Group, with the result that New Media bore the costs and yet the revenues went to HF China;
iv. During a meeting on 12 August 2014, Leong talked about the New IT system, which required the accounting and finance functions of the Brand Centre to be integrated into it, and when Lam Senior realised that the new IT accounting system required the accounting and finance functions of the Brand Centre to be integrated into it, he categorically refused to have the new IT system installed;
v. After that meeting, Leong discovered that other garment units in the High Fashion Group were preparing for their own online sales points in competition with New Media.
19. Leong had produced emails setting out her complaints to the Lams but she said there was no satisfactory response. Leong had said that feeling devastated she then sent an email to the Lams on 19 August 2014 to which she heard nothing in response. She said she thus had no option but to re-organize the finance arm of the Brand Centre herself. She then issued a circular on 22 August to disengage three of the finance team personnel, including Yau. Those three personnel then left office and withheld the finance chops, the USB tokens and bank account passcodes, and the Brand Centre was left without those items and information necessary for operating its bank accounts as a result.
20. Then, on the same day, the Lams took a series of steps including :
i. On 22 August 2014, the Lams purported to have held a meeting (“Purported Meeting”) and pass a resolution (“Purported Resolution”) to remove Leong as CEO of New Media. By a circular issued on the same day 22 August 2014, the Lams notified all the staff of New Media of Leong’s removal from the position of CEO;
ii. The Lams further purported to dismiss one Daniel Lee (Special Assistant to the CEO) and Jiang Junhui (Finance Manager) on the same day, and Kelvin Shen, the Head of IT, the following day.
iii. Various other steps including placing additional locks on Longford’s warehouse in Hangzhou to prevent staff of Longford access, and further from gaining entry and access to Longford’s inventory and computer system;
iv. Shutting down of New Media’s IT system;
v. Refusal to deliver goods ordered by New Media from another subsidiary Yihao Fashion Co Ltd (“Yihao”) of the High Fashion Group;
vi. Siphoning Brand Centre’s cash into Yihzo’ bank account, and the total transfer out amounted to RMB 10,800,000;
vii. Refusal to hand over finance chops and other items.
21. P challenged the validity of the Purported Meeting and the Purported Resolution, namely:
i. No prior notice was given to Leong, and the Purported Meeting was passed in her absence and without her consent;
ii. There was no prior written approval by the shareholders of New Media, and in breach of Clauses 5.2, 5.3, Clause 7 of the JV Agreement.
22. The above acts of the Lams led P to apply for an ex parte injunction on 2nd September 2014 with notice to the Lams. The Injunction Order was later granted, to the following effect:
i. acting on, implementing or carrying into effect the Purported Resolution passed during the Purported Meeting;
ii. procuring the removal of Leong as the CEO of New Media in breach of the terms of the JV Agreement; and
iii. taking any action or continuing to take any action to prevent, obstruct or delay Leong or the staff of New Media and the following companies, namely, the Shenzhen Company, Huijian, and Angel Star Investment Limited 仕駿投資有限公司, Stage II Limited, Theme (SZ) Limited, Theme Fashion (Singapore) Pte Ltd, Da Fu Li Co Limited 達富利有限公司, Longford Information and Technology Co Ltd上海梁富信息科技有限公司 and Will Top Resources Limited 香港商威鋒資源有限公司 (collectively the “Companies”) from having full access to New Media’s group’s online information technology system and network, including email accounts, computer and information network and system, and access to the work email network “@theme.com.hk” (“Network”).
23. After the granting of the Injunction Order, Leong then discovered that she was not able to operate or access the bank accounts of Longford, Huijian and the Shenzhen Company due to notice given by the Lams to the banks in relation to her removal as CEO. As a result, Leong was not able to pay various salaries of employees and expenses including rent and taxes.
24. This led to the issue of P’s 2nd Summons, seeking the following orders :
i. An order that the Lams (or do procure their proxy or agent or servant to), on or before noon on 8th September 2014, hand over to P, Leong or Ms Cai Rui, Phoebe (or another person P or Leong may designate) the finance chops (財務章), permits for Seal Engraving (刻章許可証), bank account opening permits (開戶許可證), organization credit code certificate (信用代碼證), seal/signature specimen reserved with the banks (銀行預留印鑑), cheque books and stubs of used cheques (銀行未用支票及已開票存根) and banking USB devices (銀行U盾), and release all bank account payment and enquiry passwords (支付密碼跟查詢密碼) of the following:
(a) Huijian; and
(b) the Shenzhen Company.
ii. An order that the Lams do (or do procure their proxy or agent or servant to), on or before noon on 8th September 2014, withdraw any notice or instruction they have given to any bank to notify the same that Leong had been removed as the CEO, or to freeze the bank accounts or otherwise disrupt the provision of banking facilities and services to New Media and the Companies;
iii. An interim injunction be granted restraining the Lams, whether by themselves or their proxy or agent or servant or howsoever, until determination of P’s Summonses or until further order, from:
(a) giving any bank, at which New Media or the Companies have maintained their bank accounts, notice or instruction that Leong had been removed as the CEO, or to freeze the said bank accounts or otherwise disrupt the provision of banking facilities and services by such bank to New Media and the Companies;
(b) taking any action or continuing to take any action to prevent, obstruct or delay the provision of banking facilities and services by such bank to New Media.
Legal Principles
25. The principles for granting an injunction are trite, and Mr Mok SC had set them out in his 1st skeleton submissions. P must show that (1) there are serious issues to be tried; and (2) the balance of convenience lies in favour of granting the injunction sought, in that damages are not adequate remedy.
26. Further, for an ex parte application, it is well established that an application has to be of real urgency in a sense that giving the respondent an opportunity to be heard appears likely to cause the applicant injustice, and any damage to the respondent is compensatable by way of a cross undertaking from the applicant.
27. Where the injunction sought is of a mandatory nature, the applicant’s case must be made out to a higher standard of proof than required for a prohibitory injunction, and the court must feel a high degree of assurance that at the trial it will appear the injunction has been rightly granted, and this has been interpreted as requiring a ‘strong prima facie case’[6].
Lams’ Grounds for Discharge
28. The Lams have in the meantime issued D’s Summons to discharge the Injunction Order. Mr Maurellet submitted that the Injunction Order should be discharged, or should not be continued on the legal basis that P’s claims for the Injunction Order were unfounded by reason of the following matters :
i. Prior written approval of all the shareholders is not required for the removal of Leong as CEO under the terms of the JV Agreement;
ii. The Purported Resolution removing Leong as CEO can, in any event, be ratified by a subsequent board meeting in which the Lams hold the majority vote;
iii. It is contrary to principle to impose Leong as CEO on New Media and the Court should be extraordinarily cautious before doing so by way of an interim remedy;
iv. Even if the removal of Leong as CEO were to be considered a reserved matter under the JV Agreement, this provision should not be enforced by way of an injunction, it being a fetter on New Media’s corporate powers and;
v. Damages are an adequate remedy for P’s claim against HF Apparel and the Lams for breach (and procuring the breach) of the JV Agreement.
Whether Breach of the JV Agreement in Removing Leong as CEO
29. P had relied on Clause 7 and Schedule 3 paragraph (k) of the JV Agreement in arguing that HF Apparel breached the JV Agreement by passing the Purported Resolution.
30. Clause 7 of the JV Agreement states that “The provisions of the schedule headed “Reserved Matters” shall apply” (“Reserved Matters”)[7]. Schedule 3 is the schedule headed Reserved Matters, and it states that “Each of the Shareholders and the Company, respectively, covenants that they shall procure that the Company and the PRC Company and any other Group Company shall not do any of the matters listed in this schedule without the prior written approval of all the Shareholders”, and further under (k) thereof “change of the CEO of the business direction of the Company” is listed as one of the Reserved Matters[8]. (emphasis added)
31. Mr Maurellet, however, referred this court to Clause 4.4 of the JV Agreement, which states “The Company shall have one (1) CEO who shall be appointed by the Board (with the corresponding right of removal) and shall be responsible …”[9], and submitted that Clause 7 and Schedule 4 paragraph (k) would not be consistent with Clause 4.4, under which the Board had the right to remove the CEO.
32. It was Mr Maurellet’s submission that the most sensible way to interpret Schedule 3 paragraph (k) and Clause 4.4 together and having regard to these provisions, and he submitted that while the change of the CEO would be one of the Reserved Matters requiring the prior written approval of all the shareholders, the removal of the CEO merely required an ordinary board resolution.
33. Clause 4.4 clearly recognizes that the Board of Directors has the power to both (a) appoint and (b) remove the CEO of New Media. However, as submitted by Mr Mok SC, it is a separate question that P and HF Apparel, as shareholders of New Media, had agreed between themselves as an additional requirements, that such power be exercised only upon the prior written approval of all shareholders, and this was expressly provided in Clause & and the Schedule 3 paragraph (k).
34. As had been said by Lord Hoffmann in his judgment in Jumbo King Ltd v Faithful Properties Ltd & Ors (1999) 2 HKCFAR 279, the construction of a document is not a game with words, and it is an attempt to discover what a reasonable person would have understood the parties to mean[10].
35. As pointed out by Mr Mok SC, the construction put forward by Mr Maurellet may result in a situation that if the Board removes an existing CEO, it does not constitute a “change” of the CEO, and then if some time later, the Board appoints a new CEO, again it does not constitute a “change” of the CEO either. Then Clause 7 and Schedule 3 paragraph (k) will never be triggered.
36. Having considered those clause, it is my view at this preliminary stage that the natural and ordinary meaning of “change” of CEO would include “appointment” and/or “removal” of the CEO.
37. Further, Leong’s evidence was that she was invited to run the New Media group as a substantial minority shareholder through P and as the CEO and for her efforts, she would not be receiving a salary, and she had not, but would only look to the success of the joint venture for her reward.
38. At this preliminary stage, having considered the JV Agreement as a whole, it would appear that the Reserved Matters in Schedule 3 were there to afford some protection for the minority shareholder and/or Leong, and, in my view, the more sensible way of construing the Clause 4.4 and Clause 7 and Schedule 3 paragraph (k) would be that on top of the approval of the Board, the JV Agreement had imposed an additional requirement, that the removal and/or appointment of the CEO would also require the prior written approval of all the shareholders.
39. Under Clause 5.2 of the JV Agreement, “At least 48 hours” notice of each Board meeting shall be given to each Director (wherever he may be) unless in any particular case all the Directors otherwise agree...”. No such notice was given of the Purported Meeting.
40. Further, as pointed out by Mr Mok SC, under Clause 5.3 of JV Agreement, the quorum at meetings of the Board shall be two Directors, of which at least one shall be a representative of P and at least one shall be a representative HF Apparel.
41. On the present evidence before this court, I accept that the Purported Meeting and the Purported Resolution passed to remove the CEO would fall foul of the above provisions.
Whether the Purported Resolution Can be Ratified
42. It was Mr Maurellet’s submission that the Purported Resolution was ratifiable and could be ratified by the Lams who hold the majority vote on the Board of New Media.
43. Mr Maurellet had referred to Palmer’s Company Law Volume 2 at 8.2138 and submitted that a procedural irregularity in a board meeting could be ratified and confirmed by a subsequent regularly constituted board meeting. Further, any alleged irregularity of the Purported Resolution could also be validly ratified by the Board of New Media, under the terms of the JV Agreement:
i. Under Clause 5.2 of the JV Agreement, a Board meeting can be convened by the Lams by giving the requisite 48 notice;
ii. If Leong decides to attend the Board meeting, the quorum requirement under Clause 5.3 of the JV Agreement will be satisfied (at least one director from each of P and HF Apparel).
iii. If Leong decides not to attend the Board meeting, the Board meeting will not be quorate but Clause 5.4 will operate to adjourn the meeting for seven business days. Thereafter, the directors present at the adjourned meeting shall be a quorum.
iv. The Board of New Media is comprised of the Lams and Leong, and the Lams have the majority vote to pass a Board resolution to ratify the Purported Resolution under both scenarios (ii) and (iii) above.
44. What is stated in the paragraph in Palmer’s Company Law is: “Sometimes, for example by an accidental omission to give due notice to a director, a meeting of directors is rendered irregular, but the directors nevertheless transact business on behalf of the company… in such a case, the rule in Royal British Bank v Turquard applies and outsiders will not, as a general rule, be prejudiced by such irregularities.” (emphasis added). Thus, Palmer seemed to be referring to accidental omission being ratifiable.
45. Mr Mok SC had in fact addressed the “irregularity principle” point in his 1st skeleton submissions when he appeared before Au-Yeung J in obtaining the Injunction Order. He referred to the decision in Billion Express Industrial Ltd v Tsang Hung Kong [2012] 5 HKC 51 and submitted that the “irregularity principle” applied where the only facts alleged to make a decision taken at a meeting unlawful was a “mere informality and irregularity”.
46. Mr Mok SC had quoted a number of paragraphs from the judgment of Recorder H Wong SC in Billion Express, which I will not set out here. Recorder H Wong SC reviewed the relevant authorities, and had said one particular difference between a directors’ meeting and a shareholders’ meeting arose from the fact that the board of directors was charged with the power and duty to manage the company, and a director had a much greater right than a shareholder to insist on participation in board meetings not merely to vote, but also to express his views on any matters to be discussed in the meetings[11]. Further, the Learned Recorder had said that “This being the position, it is necessary, in a case where a decision made allegedly in a directors’ meetings is challenged on the ground that notice has not been properly given to a director, to examine the facts carefully in order to determine whether the defect in giving notice is truly a “mere informality and irregularity”. In my judgment, where the lack of notice is the result of a deliberate decision to withhold notice from a director so as to prevent him from attending the meeting, it is generally wrong, barring exceptional circumstances, to regard the deliberate attempt to exclude a director’s participation as a mere informality or irregularity. The meeting so held is not merely informal or irregular but fundamentally defective”[12] (emphasis added).
47. Mr Mok SC had further referred to Yuen Minghwa Francois v Lo Mei Kin Stella CACV 225 of 2011, 1 August 2012 where the Court of Appeal had echoed what was said by the Learned Recorder, and the Court of Appeal had said that “Further, it is no answer to the lack of notice to say that the director in question would have been outvoted had she attended the meeting. The company is entitled to the collective wisdom and contribution of all the directors. The powers of management are delegated to the board of directors as a whole, not to individual directors. A director is entitled to attend at the meeting of directors, not merely to vote, but also to provide his views to the board and to persuade his fellow directors on matters raised for discussion.”
48. In the present case, as earlier mentioned, it would appear no notice at all was given of the Purported Meeting to Leong, and it would also appear from Leong’s evidence that this was deliberate. At this stage, it would thus appear that the failing to give notice was not simply a case of accidental omission, or an irregularity which could be simply ratified.
Imposition of CEO on New Media Contrary to Principle
49. Mr Maurellet submitted that the court would not lightly impose a director on a company in controversial circumstances in interlocutory proceedings, and he had referred this court to H v H (Public Company: Imposed Director) [2011] 1 HKLRD 1048. In that case, Yuen JA held that it was contrary to principle to impose a director on a company and the courts would be extraordinarily cautious before doing so by way of an interim remedy[13]. In short, the courts would not lightly impose a director on a company in controversial circumstances in interlocutory proceedings
50. Mr Maurellet submitted that such principles and rationale would apply a fortiori to the imposition of a CEO on New Media, as the rights and responsibilities of the CEO of New Media, as set out in Clause 4.4 of the JV Agreement, were in fact more extensive than those of a director, and thus, the court should similarly be extraordinarily cautious before imposing a CEO on New Media, especially when both sides were making allegations of improper conduct against the other.
51. Mr Maurellet had further submitted that this would be in line with the general principles governing specific remedies in relation to contracts regulating relationships of trust and confidence, and that in such cases, the proper remedy for the aggrieved party would be to claim for damages or seek a just and equitable relief by way of a petition.
52. Another case which was relied on by Mr Maurellet was Re Tottenham Hotspur [1994] 1 BCLC 655 which concerned the removal of the CEO. Sir Donald Nicholls VC had expressed in that case that the greater the level of mutual trust required by the contract, the less desirable it would be to keep the parties harnessed together[14]. For the same reason, Tomlinson J (as he then was) in Internet Trading Clubs Limited v Freeserve (Investments) Limited [2001] All ER (D) 185 (Jun) refused to grant specific performance when “the court is being asked, in effect, to enforce an ongoing business relationship”[15].
53. Mr Maurellet had argued that in light of the above decisions, as a matter of principle, the Court should be slow to grant an injunction which, in effect, would compel P and HF Apparel to continue in their joint venture under the JV Agreement, as there was evidence of a clear breakdown of trust and confidence between them, and that in these circumstances, the proper remedy for P would be to claim for damages for any alleged breach of the JV Agreement.
54. Mr Mok SC distinguished the facts in the present case from those in H v H, which is a public company. More importantly, as pointed out by Mr Mok SC, the wife in that case was validly removed as chairman of the board and re-designated a non-executive director. Further, she did not in those proceedings challenge the board’s power to remove her as chairman.
55. The CEO in Re Tottenham was also validly removed in a valid board meeting of the company. There was no reliance on a shareholders’ agreement in that case, and the case was brought under s 459 of Companies Act 1985 on the basis that the minority shareholder had a “legitimate expectation that V would participate in the affairs of the company” and that there was nothing in that case to suggest that the board had anything other than the normal right to hire and fire, whereas in the present case, P relied on the JV Agreement.
56. I accept that the circumstances in the present case can be distinguished from those cases relied on by Mr Maurellet.
Unlawful Fetter on New Media’s Corporate Powers
57. As seen earlier, the contention of HF Apparel and the Lams was that the JV Agreement would not require prior written approval of all the shareholders for the removal of the CEO. However, Mr Maurellet submitted that, even if written approval were in fact required, such a requirement may fall foul for the reasons set out in Muir v Lampl [2005] 1 HKLRD 338 and would be unenforceable against HF Apparel.
58. Mr Maurellet referred to a number of factors mentioned by Lam J, as he then was, in Muir, which would be of relevance in the present case:
i. It is questionable whether absolute immunity from removal from the board could ever be justified. Such immunity would mean that even a majority of shareholders could not remove a director who acted seriously in breach of his duties towards the company. If such a right is upheld, the only solution when shareholders are faced with such a situation is to petition for winding-up, which seems to be too drastic[16].
ii. The running of a company affects not only its shareholders but also creditors of a company. Hence, the management of a company cannot be regarded as a purely private matter between its shareholders[17].
iii. A director holds a fiduciary position. When a majority of shareholders cease to have confidence and trust in a director and express the corporate wish of having such director removed, an essential foundation for continuing such fiduciary relationship is gone. To impose such a director on the shareholders artificially is a recipe for future disputes and could not be in the best interest of the company[18].
iv. The proper way to resolve a dispute between shareholders is a corporate divorce, whether by way of an unfair prejudice petition or a just and equitable winding-up[19].
59. Mr Maurellet submitted all of the above factors relating to directors apply equally to the position of CEO. Furthermore, the CEO indisputably owed a fiduciary duty to New Media[20], and in light of the disputes between the parties, HF Apparel as majority shareholder of New Media had completely lost trust and confidence in Leong as the CEO. In these circumstances, P should not be able to rely on a provision in the JV Agreement to entrench Leong as the CEO, or to obtain an interim injunction to impose Leong as the CEO on New Media. As Lam J stated in Muir v Lampl, the proper way to resolve this corporate divorce dispute is for P to issue an unfair prejudice or winding-up petition, and that P’s attempt to seek a remedy by way of a mandatory injunction, compelling D1 to cooperate with P under the JV Agreement and imposing Leong as the CEO on New Media was inappropriate and not conducive to the interests of either side.
60. Further, Mr Maurellet submitted that any alleged breach suffered by P as a shareholder of New Media could be adequately compensated by a buy-out order and thus, in unfair prejudice cases, it would be rarely necessary for the court to grant injunctions imposing a minority shareholder back in control of the company, when the inevitable outcome is that it would not be in control of any part of the business after a buy-out order[21].
61. However, as pointed out by Mr Mok SC, and as seen from Clause 4.15, the JV Agreement did not purport to give an absolute immunity from removal of the office of the CEO, and further there is a procedure for the change of directors nominated by either shareholder.
62. Also, in relation to the remedies of an unfair prejudice or winding-up petition, as pointed out by Mr Mok SC, this would suit the Lams’ agenda as the evidence from Leong was that the Lams wanted to kill off New Media, and also Mr Maurellet did not address the possibility of P seeking to buy out HF Apparel. Further, New Media is a holding company, with various operating subsidiaries, and even if a winding-up petition is the proper way as alleged, the business of the operating subsidiaries would and should continue as a going concern.
Whether Damages would be adequate
63. Mr Maurellet submitted that P had failed to demonstrate why damages would be inadequate to compensate P and New Media.
64. The above issues had been addressed by Mr Mok SC at the time of the granting of the Injunction Order, and I accept that at this stage, the evidence from Leong showed that she looked to the success of the joint venture for her reward, having received no salary, and it would not adequately compensate her by trying to value the joint venture at this stage, as it was in early days, and her rewards would lie in the future.
Conclusion on the Grounds for Discharge
65. In my view, at this preliminary, or interim stage, without any evidence from the Lams, the main issue is whether the status quo, pre the Purported Meeting and the pre the Purported Minutes ought to be preserved, until the substantive hearing of the 3 summonses. There are serious questions to be tried, in my view, the normal operations and businesses of New Media should be restored and maintained in the meantime, and damages would not be sufficient. In light of the present evidence, I have come to the view the balance of convenience lies in favour of granting the Injunction Order. I am thus not prepared to discharge the Injunction Order at this stage and will order that to continue, save that for the reasons set out below in this decision, as the Shenzhen Company does not appear to be part of the “Group” under the JV Agreement, or the “Group Companies” under the Will Top Agreement, the Injunction Order should be varied to delete the reference to the Shenzhen Company.
Other further interim relief sought by P
66. According to Mr Maurellet, P’s 2nd Summons was not served on their solicitors by the close of business on 4 September 2014. So far as the further orders sought by P under the 1st Summons, the Lams had not yet been able to file any evidence. Thus, Mr Maurellet submitted that the hearing before this court was really at the ex parte stage. This I accept.
67. The effect of the Injunction Order was for Leong to be reinstated as CEO of New Media and for New Media and the Companies to regain full access to online information technology system and the network, including email accounts, computers etc.
68. According to Leong, having obtained the Injunction Order, she then took steps to resume her duties as CEO of New Media and to put the affairs of the New Media group in order, and to arrange for staff to be paid their salaries before the Mid Autumn Festival. As earlier mentioned, Leong then discovered that the bank ICBC refused to allow her access to Longford’s bank account with them by reason of the account having been suspended due to notice from the Lams that Leong had been removed as CEO. According to Leong, New Media itself also has an account at Standard Chartered Bank and the money from that account was used to pay rent to the New Fashion Group for office space and other minor administrative expenses, and although Leong is a signatory of this account, but she would also need the company stamp, which is part of the signature.
69. Leong had exhibited a letter before action dated 27 August 2014 from P’s solicitors to HF Apparel (“Letter Before Action”) alleging, among other things, that on 22 August 2014, Lams had removed the finance chops of Huijian and the Shenzhen Company and the USB devices necessary for operation on-line banking operations for the two companies’ bank accounts (at least 14 in number), and that Lams had caused the whole of the finance team of New Media not to report to work, thereby depriving New Media of the use of the bank account passwords for the 14 accounts, as such passwords were not known to the rest of the New Media’s staff[22]. It was further stated in that letter that as Leong was the legal representative of both Huijian and the Shenzhen Company, Lams had no right or legitimate reason to remove the companies’ finance chops and banking USB devices or withhold the bank account passwords from Leong, and that such acts were purely calculated to make it impossible for the two companies to operate their bank accounts and thus disabled the two companies from conducting their usual business. According to Leong, there was no reply to the Letter Before Action.
70. Leong did produce another letter of the same date addressed to her personally from the Lams’ solicitors acting on behalf of HF Apparel, Longford, and also New Media (“W & G Letter”). According to the W & G Letter, P has no interest in the Shenzhen Company, which is a PRC company owned 100% by HF Apparel and further the Shenzhen Company holds various properties in Shenzhen.
71. It was set out in the W & G Letter those alleged matters which led to the Purported Meeting and the Purported Resolution to remove Leong as CEO and those matters alleged included that (i) on about 1 July 2014, unknown to and without due authorization from HF Apparel or the Shenzhen Company, Leong had unlawfully effected a change of the appointment of the Legal Representative of the Shenzhen Company from Will Lam to that of Leong herself, and that she had misappropriated the legal chop and other chops of the Shenzhen Company without due authorization of HF Apparel and/or the Shenzhen Company, and that the board of the Shenzhen Company had reported the matter to the Shenzhen police; and (ii) in relation to Longford, it was alleged that Leong had without the authorization of Longford wrongfully changed the signing instructions with Longford’s bank account with ICBC by removing Will Lam as a joint signatory to one of sole signatory by Leong; and (iii) Leong had attempted to remove all legal financial chops and documents of the New Media Group.
72. P’s solicitors had replied on 28 August 2014 to deny the various allegations in the W & G Letter and in particular, pointing out that pursuant to the articles of the Shenzhen Company. The Chairman shall be the Legal Representative, and thus in both those capacities, Leong was entitled to possess and safe keep the legal chop of the Shenzhen Company[23].
73. Leong had relied on the Circular to say that she was to manage and operate the business of the Brand Centre, which according to Leong, included the businesses of Huijian and the Shenzhen Company. The Circular appeared to be issued by Lam Senior on behalf of the Board of the High Fashion Group. The Circular announced the appointment of Leung as Chairman/董事長of the Brand Centre, and stated all staff in the Brand Centre should obey Leong and follow her leadership.
74. What Leong herself had said in her 1st affirmation was that the Brand Centre stood for the entire retail and e-commerce business for a few lines of clothing under those brands set out by her. She had said the actual entities within the Brand Centre were set out in the Corporate Structure[24]. However, the Shenzhen Company is not on the Corporate Structure, although Huijin appears to be.
75. There is no definition of Brand Centre in the JV Agreement. The joint venture was set up for the purpose of developing and operating the “Business”, which is defined as having the meaning given to it in Clause 3.1[25].
76. Clause 3.1 states that the business of New Media is to be the holding company of the PRC Company, namely Longford and then to manage the business of the Group. According to the definition of the “Group” in the JV Agreement, it means “the Company and the PRC Company and its respective subsidiaries (if any) from time to time and “Group Company” means any of them”[26].
77. New Media holds Will Top and Longford. There are no subsidiaries under Longford, whereas under Will Top, there are 6 subsidiaries, two in PRC of which one is Huijin. Mr Mok SC had referred to the Will Top Agreement in which all the issued shares of Will Top were sold/transferred to New Media, and Will Top was stated to be the legal and beneficial owner of the shares or equity interest in each of the other Group Companies set out in Schedule 2 of the Will Top Agreement. Schedule 2 includes Huijian but does not appear to include the Shenzhen Company.
78. From the information available so far, notwithstanding what was said by Leong, it does not appear to this court thatthe Shenzhen Company is part of the Corporate Structure of New Media, nor does it appear to be part of the “Group Companies” under the Will Top Agreement, or the “Group” of “Group Company” under the JV Agreement.
79. According to the Letter Before Action, Leong was exerting the right to the finance chops and banking USB devices being the Legal Representative of the two PRC companies, namely Huijian and Shenzhen Company. There is a clear dispute as to Leong’s appointment as the Legal Representative of the Shenzhen Company with some serious allegations from the Lams and which seem to be now also subject to a report to the Shenzhen police.
80. Having considered the above, I am not prepared at this stage to grant any injunction orders in respect of the Shenzhen Company.
81. Mr Maurellet had mentioned at the hearing that Leong had been removed as the Legal Representative of both Huijian and the Shenzhen Company, but there was no evidence from the Lams. The allegations in the W & G Letter concerned mainly the Shenzhen Company.
82. The present interim orders sought are essentially in connection with access to bank accounts, and the urgency is said to be that there are salaries due before the Mid Autumn Festival, or about to be due and also expenses which have to be paid, in particular in relation to two of the Companies, namely Huijian and the Shenzhen Company.
83. The undertakings offered by the Lams are that they will procure on behalf of New Media the following payments:
i. Payment of salaries of all employees of New Media, and 6 of the Companies as defined in the Injunction Order, with the exception of the Shenzhen Company by 10 September 2014;
ii. Payment of salaries of all employees of Longford by 15 September 2014;
iii. Rent payable under the lease of premises at 深圳福田區濱河大道9003號湖北丈厦北座 20樓 A和 C室 for the month of September by 11 September 2014;
iv. Monthly business tax payable to 待核對税款專户by due date.
84. Lams’ undertakings (i), (ii) and (iii) do not extend beyond 15 September 2014. I am of the view that the above undertakings are not sufficient to meet Leong’s or P’s concerns.
85. Having considered the present evidence, I am of the view that there are serious issues to be tried, and damages will not be an adequate remedy. In my view, the balance of convenience tilts in favour of P and towards maintaining the status quo of New Media and the Companies[27] (except the Shenzhen Company) prior to the Purported Meeting and the Purported Resolution to enable normal operations of the New Media and the Group to continue, until the substantive hearing of the 3 Summonses.
86. I am therefore prepared to grant the orders sought in paragraphs 1 to 4 of P’s revised draft order, with the exception of the Shenzhen Company and with the deadline extended to on or before noon on 10 September 2014, pending the substantive hearing of the 3 Summonses. I am also of the view that the hearing of the 3 Summonses should take place as soon as possible, and thus I have amended the directions sought to the following:
i. All 3 summonses be adjourned to a date to be fixed for substantive argument on the earliest date with 1 day reserved;
ii. Leave to the 1st and 3rd defendants to file and serve affirmations in opposition within 21 days from the date of this order;
iii. Leave to P to file and serve its affirmation in reply within 21 days thereafter;
iv. No further affirmation shall be filed unless with leave of court;
v. Liberty to apply;
vi. Costs reserved.
| | (Bebe Pui Ying Chu) |
| | Deputy High Court Judge |
Mr Johnny Mok SC and Mr Jenkin Suen, instructed by Winston & Strawn, for the plaintiff
Mr Jose Maurellet and Mr Justin Lam, instructed by Wilkinson & Grist, for the 1st, 2nd and 3rd defendants
The 4th defendant was not represented and did not appear
[1] See para 17, P’s 1st skeleton submissions
[2] B:390-419
[3] B:388-389
[4] B:465
[5] See paras 17-22, B:265-267
[6] See Re Hong Kong Century Property Development Limited, HCMP 3216 of 2004, 20 April 2005, per Kwan J, as she then was, at para 8
[7] B:398
[8] B:412
[9] B:395
[10] At 296 D-E
[11] At para 94
[12] At para 98
[13] See Holding in Headnote
[14] At pg 658
[15] At para 32
[16] At para 25(b)
[17] At para 25 (c)
[18] At para 25(f)
[19] At para 27
[20] see Daley v Environmental Recycling Technologies Plc [2009] All ER (D) 241 (Jun).
[21]See Mission Capital plc v Sinclair [2010] 1 BCLC 304 at §31; Re Canterbury Travel (London)
Limited [2010] EWHC 1464 (Ch) at §31
[22] B:579-585
[23] B:570-571
[24] B:465
[25] B:394
[26] B:416
[27] As defined in the Injunction Order