CHEN SHENG KUEI also known as ARISTO CHEN v. FULLY HONG KONG LTD AND OTHERS

HCA 735/2019

[2021] HKCFI 2680

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 735 OF 2019

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BETWEEN

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D E C I S I O N

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1.  The background relevant to this action has been set out in §§3-11 of the Reasons for Decision dated 3 February 2021 in HCMP 2174/2017 (“HCMP”) [2021] HKCFI 299 (“Decision”)[1] and will not be repeated here. At §45 of the Decision, I directed D1 in HCMP (P in this action) to inform the defendants whether he intends to continue with this action. P indicated he intends to continue with this action whereupon directions were given for the parties to file evidence with a view to dispose of the action summarily.

2.  I considered that this action is suitable for summary determination as it appears that P, not being a shareholder or director of the Company, does not have locus standi to pursue the claim and the relief sought in the statement of claim filed herein on 26 September 2019 (“SOC”).

3.  In any event, as a result of the declaration made in HCMP, which is binding upon P, it would be pointless for P (or any party) to pursue this action, which concerns the validity of the “Purported 2018 Resolutions” (as defined in §11 of Decision). This is because:

(1) The Company only has 2 shareholders, Full Kang and Father holding 90% and 10% of its issued shares respectively (§6 of Decision). 

(2) Prior to the Purported EGM (held on 14 September 2017), the only directors of the Company were D2 (who is P in HCMP) and Father (§5 of Decision). 

(3) At the Purported EGM, the Purported Resolutions were passed to remove D2 as director of the Company, and to appoint P and 2 other members of Chen family (D2 and D3 in HCMP) (collectively “Impugned Directors”) (§8 of Decision).

(4) On 8 March 2018, D2 caused the Company to pass the “Purported 2018 Resolutions” to remove Father and the Impugned Directors as directors of the Company. Thereafter, D2 caused documents to be filed at the Companies Registry to reflect the change in directors (§11 of Decision).

(5) P commenced this action on 26 April 2019 to seek a declaration that the Purported 2018 Resolutions are null and void and other ancillary relief to reverse the changes made pursuant to such Resolutions. 

(6) In HCMP, this Court held that the Purported Resolutions are void and of no legal effect and made a declaration to that effect (“Declaration”) (§§39-40 of Decision). I also ordered (a) the removal of the Form filed pursuant to the Purported Resolutions, and (b) rectification of all information contained in any subsequent documents filed at the Companies Registry insofar as they relied on the Purported Resolutions (§§41-42 of Decision).

4.  The upshot of the above is that the Impugned Directors (including P) have never been validly appointed as directors of the Company.  It is unnecessary to determine the validity of the Purported 2018 Resolutions as they were passed on the assumption that the Impugned Directors had been properly appointed as directors of the Company pursuant to the Purported Resolutions[2].

5.  Nevertheless, P insists on pursuing this action.

6.  Worse still, P ignored the Declaration and continued to act as if he were a director and chairman of the board of the Company, and dealt with its properties without the authority of the Company. This led to Ds issuing a summons dated 4 May 2021 for interlocutory injunction to (1) restrain P from acting or holding himself out as director of the Company; and (2) compel P to deliver up the Company’s assets in his possession, power or control (“Injunction Summons”). 

7.  By Order dated 7 May 2021, Lisa Wong J granted an interim injunction to restrain P from acting or holding himself out as a director of the Company and dealing with its assets pending determination of the Injunction Summons. 

8.  On 17 May 2021, Ds filed their Defence & Counterclaim (“D&CC”) and seek, inter alia, a “declaration that [P] is and has never been a duly appointed director, chairman of the Board of Directors or officer, or actual controller of [the Company]” and an injunction to restrain P from acting as such director and to compel P to deliver to the Company all its assets in his possession, power or control. In light of the holding in the Decision and the Declaration, it is superfluous for Ds to seek another declaration to confirm the same fact.

9.  It is not clear (nor has it been explained) why Ds considered it necessary or appropriate to file the D&CC, given that P has never been validly appointed as a director, and the action will soon be determined summarily. 

10.  Nevertheless, the parties saw fit to incur further costs in this action in that:

(1) Ds filed a summons dated 13 August 2021 for leave to amend the D&CC (“Ds’ Amendment Summons”); and

(2) P belatedly filed a summons dated 30 August 2021 for leave to amend the SOC by adding new allegations relating to the “2016 Resolutions” (as defined in §9F of the draft ASOC), and seeking “an order compelling specific performance of the 2016 Resolutions”, alternatively, an order to compel D2 to procure a board resolution to be passed to give effect to the 2016 Resolutions (“P’s Amendment Summons”).

11.  Consequently, there are 4 applications before the Court:

(1) Summary determination of the action;

(2) Injunction Summons;

(3) Ds’ Amendment Summons; and

(4) P’s Amendment Summons.

Summary determination of the action

12.  It is clear from the skeleton argument of Mr Vincent Lung, counsel for P, that he is unable to demonstrate that P has locus to pursue the claim and the relief sought in the SOC. All that it said is that if and when the “2016 Resolutions” are carried into effect, P will become a director of the Company. This is a tacit acknowledgement that P does not have locus to pursue the claim and the relief sought in the SOC. For this reason alone, the action must be dismissed in limine.

13.  In any event, I do not think the relief sought in the SOC will be granted by the Court for the following reasons:

(1) Prayer §§1-2 concern the validity of the Purported 2018 Resolutions and the documents filed at the Companies Registry which reflected such Resolutions. As explained in §§3-4 above, as a result of the finding in the Decision and the Declaration, it is unnecessary and pointless to decide whether the Purported 2018 Resolutions are valid;

(2) Prayer §3 is directed at removal, or rectification of, the information contained in the documents in the Companies Register insofar as they referred to the Purported 2018 Resolutions. It is common ground that after the information in reliance on the Purported Resolutions have been removed pursuant to the Order made in HCMP, there is no document or information in the Companies Registry which referred to or reflected the Purported 2018 Resolutions;

(3) Prayer §4 seeks an injunction to enjoin D2 and D3 from acting as directors of the Company or relying on the Purported 2018 Resolutions. No such relief will be granted by the Court for the same reason explained in sub-§(1) above;

(4) Prayer §5 seeks an order to allow P to inspect all corporate documents of the Company. Such relief will not be granted by the Court as P has never been a shareholder or director of the Company; and

(5) Prayer §6 seeks damages for unlawful means conspiracy. The relief is bound to fail as the requisite elements of the alleged unlawful means conspiracy have not been pleaded in the SOC. Indeed, such relief has been deleted in the ASOC. 

14.  That being the position, it is unnecessary to deal with the argument relating to the 2016 Resolutions. Nevertheless, to avoid the parties having to incur further time and costs in dealing with the same allegations in future, I will decide the issue and explain why I consider the argument to be wholly without merit. 

15.  As far as I understand Mr Lung’s submissions, his argument runs like this:

(1) the “2016 Resolutions” consisted of 2 shareholders’ resolutions said to have been passed by Full Kang on 29 April 2016 and 24 June 2016;

(2) first, by the resolutions passed on 29 April 2016, it was resolved that (a) 7 members of Chen family (including P and D2) were appointed as directors of Full Kang; and (b) the same 7 persons should be appointed as directors of the Company (§9B of ASOC);

(3) second, by the resolutions passed on 24 June 2016, it was resolved that (a) the directors of Full Kang be reduced from 7 to 3 (being P, D2 and another brother), and (b) the same 3 persons should be appointed as directors of the Company (§9E of ASOC);

(4) the 2016 Resolutions were and are “in effect shareholders’ agreements amongst all the shareholders of Full Kang and Full Kang itself”. There is an implied term that Father and D2 (as only directors of the Company and parties to the shareholders’ agreement) shall implement the 2016 Resolutions by appointing the persons nominated by Full Kang to become directors of the Company (§9F of ASOC);

(5) further or alternatively, the 2016 Resolutions “took effect as shareholders’ resolutions (passed by a 90% majority) of [the Company], which Father and [D2] (as the only directors of [the Company] at the time) were bound to carry into effect”. D2 is estopped from denying the existence of the 2016 Resolutions (§9G of ASOC);

(6) P is entitled to specific performance of the 2016 Resolutions. D2 shall be compelled to procure a board resolution to be passed by the Company to give full effect to the 2016 Resolutions (§9I of ASOC);

(7) D2 should not be allowed to take advantage of his own wrong and advance any locus argument against P;

(8) so long as the argument is not hopeless, the action should not be dismissed; and

(9) in any event, the subject matter of this action is not the mirror image of the Purported Resolutions. The Purported 2018 Resolutions were deficient but the Company under the control of D2, will not bring proceedings to challenge the same. Hence, if P lacks locus or is not allowed to ventilate the issue, there is no one else who can bring the matter to the Court. 

16.  In my view, Mr Lung’s argument is plainly unsustainable. 

17.  First, the 2016 Resolutions are resolutions of Full Kang, not the Company. They are not binding upon the Company or its directors (D2) unless and until the Company passes a resolution to give effect to the 2016 Resolutions. Mr Lung has not identified any basis, be it under the Companies Ordinance (Cap. 622) or the articles of association of the Company, which empowers the Court to compel D2 to pass any board or shareholders’ resolution of the Company so as to give effect to the 2016 Resolutions of a different company (Full Kang). 

18.  Second, Full Kang is a Seychelles company. It is not alleged, let alone demonstrated, that under the law of Seychelles (which governs the internal affairs of Full Kang), the 2016 Resolutions have the effect alleged in §§9A-9I of the ASOC. 

19.  Third, even assuming the law of the Seychelles is the same as that of Hong Kong, as a matter of Hong Kong law, P’s contention that the 2016 Resolutions are or should be treated as an agreement amongst all the shareholders of Full Kang is plainly wrong:

(1) as shown by the minutes adduced by P, not all the shareholders of Full Kang attended the meetings at which the 2016 Resolutions were passed;

(2) there is no legal basis to elevate a resolution passed by the majority shareholders to a resolution passed by all the shareholders; and

(3) in any event, it is well established that a resolution passed by the shareholders of a company can be reviewed or overridden by a subsequent resolution passed by the shareholders in accordance with the legal requirements. See the discussion on amendments to company’s resolutions in Shackleton on the Law and Practice of Meetings, 15^th ed., §§15.09-15.10.

20.  Fourth, the proposed relief sought in prayer §1A of the ASOC is not a relief which will be granted by the Court against the Company, as it effectively requires the Court to by-pass or circumvent the regulations governing the internal affairs of the Company when there is no proper basis to do so.

21.  Fifth, from the perspective of Full Kang, it is clear that the proposed relief sought in prayer §1A of the ASOC is not a relief which will be granted by the Court given that:

(1) not all shareholders agreed to the 2016 Resolutions. There is thus no basis for P to contend that there was informal unanimous consent amongst all shareholders (cf. Re Duomatic Ltd [1969] 2 Ch 365, at 373, per Buckley J). Indeed, even if P were able to show that there had been informal unanimous consent amongst all shareholders, the assent would only be binding as a resolution in general meeting, which can be reviewed and amended by a subsequent resolution passed in general meeting;

(2) the 2016 Resolutions were passed in April and June 2016. None of the shareholders or directors of Full Kang (including P) has taken any step to give effect to such Resolutions in the past 5 years. Given the long lapse of time, it would be a matter for Full Kang’s shareholders to consider whether it is still appropriate to give effect to the 2016 Resolutions. P has not identified any basis or justification for the Court to interfere with the right of the shareholders to consider and decide the matter having regard to what had happened in the past 5 years;

(3) according to the minutes produced by P, at the time the 2016 Resolutions were passed, Full Kang had 18 shareholders, but only 3 of them are parties to this action (i.e. P, D2 and D3). Full Kang itself is not named as a party. It is difficult to see how P can claim specific performance when all the parties privy to the alleged agreement are not before the Court; and

(4) it would be a waste of time and costs for the Court to determine the issue concerning the 2016 Resolutions when such determination and any relief to be granted by the Court will not be binding upon Full Kang and the other 15 shareholders.

22.  For the reasons set forth above, I hold that the claim and the relief sought in the SOC and the new allegations proposed to be added to the ASOC are plainly unsustainable. The action should be dismissed. 

Injunction Summons

23.  Mr Lung (rightly) indicates that P does not oppose the continuation of the interim injunction but submits that it should be continued pending determination of the action or the counterclaim. 

24.  On the other hand, Mr Lo asks for continuation of the interim injunction and a mandatory injunction requiring P to return and deliver up all assets of the Company, which was not granted by Lisa Wong J as part of the interim injunction. 

25.  In light of P’s conduct in ignoring the Declaration and purporting to act as if he were a director of the Company, it is necessary for the Court to grant a permanent injunction in the same terms as the interim injunction.

26.  As P is not and has never been validly appointed as a director of the Company, it is just and convenient to grant an injunction to compel P to deliver up all the assets and properties of the Company (including its company seals and chops) which are in P’s possession, power or control, to the Company within 14 days of this decision.

Ds’ Amendment Summons

27.  In light of the Decision, it is clear that the question whether P has locus to pursue this action is a matter which can be dealt with by the parties by way of submissions and the evidence to be filed pursuant to the directions I gave on summary determination of the action. 

28.  At most, it would be necessary for the Company to file a counterclaim and seeks injunctive relief against P on the basis that P is not and has never been a director and shareholder of the Company. Beyond that, I am unable to see any justification for Ds to incur costs in preparing and filing the D&CC. For taxation purpose, I apportion 30% of the costs incurred by Ds in preparing the D&CC as the costs of preparing a counterclaim to seek the injunctive relief against P.

29.  There is no justification for Ds to issue their Amendment Summons which seems to me to be a complete waste of time and costs. 

P’s Amendment Summons

30.  P’s Amendments Summons was issued at the eleventh hour of the hearing. Mr Lung has not put forward any explanation as to why the Summons was not issued earlier. For this reason alone, P’s Amendment Summons should be dismissed. 

31.  Even if there were any justification for the inordinate delay in issuing P’s Amendment Summons, for the reasons stated in §§14 - 21 above, I consider that the proposed amendments are plainly unsustainable. P’s Amendment Summons should be dismissed for this additional reason.

Disposition and costs

32.  I make the following order:

(1) the action is dismissed;

(2) a permanent injunction on the terms set out in §§1-2 of the draft order submitted by Ds’ solicitors, as amended in the manner described in §§25-26 above, is granted against P;

(3) P’s Amendment Summons is dismissed; and

(4) Ds’ Amendment Summons is dismissed.

33.  As for costs, I make a costs order nisi that:

(1) Ds shall pay the costs of Ds’ Amendment Summons to P, to be taxed if not agreed, on a party and party basis;

(2) P shall pay the costs of the action up to 10 February 2021 (being 7 days after the Decision) to Ds on a party and party basis and, thereafter, on an indemnity basis, to be taxed if not agreed. For the avoidance of doubt, such costs include the costs of the Ds’ application for injunction (interim and permanent) against P but do not include 70% of the costs of and occasioned by the preparation of the D&CC; and

(3) P shall pay the costs of P’s Amendment Summons to Ds on an indemnity basis.

34.  It seems to me that it is appropriate to order P to pay the costs incurred by Ds after 7 days of the Decision (being the time period for P to consider whether to continue with this action) on an indemnity basis. This accords with my view that there is no basis for P to pursue the claim and the relief in this action and it is unreasonable for P to have insisted on pursuing the same.

Mr Vincent Lung, instructed by Guantao & Chow, for the plaintiff

Mr Benny Lo and Mr Jiang Zixin, instructed by Terry Yeung & Lai, for the 1^st – 3^rd defendants

The 4^th defendant was excused

HCMP 2174/2017 and
HCA 735/2019
(Heard Together)

[2020] HKCFI 1518

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2174 OF 2017

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ACTION NO 735 OF 2019

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(Heard Together)

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DECISION

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INTRODUCTION

1.  This Court is faced with a case management decision which arises out of the background as set out below.

2.  PT Chen and CF Chen are defendants (“the HCA Defendants”) in HCA735/2019 (“the HCA”). They are seeking a stay of the HCA pending the final determination of HCMP 2174/2017 (“the HCMP”) [1].

3.  PT Chen is the plaintiff in the HCMP.

4.  SK Chen on the other hand sought to convert the HCMP into a conventional High Court Action, and then to have the two proceedings heard together.

5.  Mr Benny Lo (appearing together with Mr Lawrence Pang) persuasively sought to argue that the HCMP could be dealt with conveniently and expeditiously first.

6.  In the event his clients were to succeed, he submits this would deal a knock-out blow to SK Chen and therefore bring a swift end to the HCA, since SK Chen would be shown not to have any locus as a director to pursue the HCA, and this would thus for practical purposes determine the HCA.

7.  There was no need to waste time and costs on the HCA when this could be disposed of finally in the HCMP which he submitted could be determined summarily at a hearing with one day reserved (if not shorter) which could be fixed for (hopefully) sometime in this calendar year.

8.  What led to the present litigation was a purported extraordinary general meeting on 14 July 2017 (the “EGM”) of Fully Hong Kong Ltd (“the Company”).

9.  The Company owns a number of mainland Chinese subsidiaries which operate a fertilizer and chemicals business. There is some disagreement as to which camp controls those subsidiaries but this is not something which is of significance for today’s purposes.

10.  At that EGM, a number of resolutions were passed whereby (a) PT Chen was removed as a director and (b) SK Chen and HC Chen were appointed as new directors.

11.  On 9 October 2017, PT Chen took out the HCMP to challenge the validity of the resolutions passed at the EGM as well at the registration of the ND2A form which was filed on 18 September 2017. It is fair to say that the HCMP did not proceed speedily. Mr Lo explained this was partly due to the need to serve on various parties.

12.  In so far as the HCA is concerned, an unless order was made by Master Chow on 20 November 2019 for the defendants therein including PT Chen and CF Chen to file a defence but this was not done by the deadline of 18 December 2019 (“the Deadline”).

13.  I understand that HCA Defendants have apparently taken the view that as they have already applied prior to the Deadline for a stay of the HCA pending the determination of the HCMP, this would have effectively “varied” the Master’s Order. Since there is no formal application by either party seeking a determination on this specific matter I will refrain from saying anything more about it.

APPLICABLE PRINCIPLES

14.  There Court is expressly empowered pursuant to RHC O1B r1(2)(e) to order that the whole or part of any proceedings be stayed either generally or until a specified date or event.

15.  In addition, RHC O4 r9 also expressly empowers the Court to stay one of two pending causes or matters until after the determination of the other cause or matter.

16.  I specify that those are express instances where the Court is empowered to stay proceedings or part of proceedings, in contradistinction to where the Court can pursuant to its inherent jurisdiction stay proceedings, to prevent for example an abuse of process, in which case different principles would apply.

17.  The correct approach in an application such as the present was conveniently set out by Kwan J (as Kwan V.P then was) in Re Chime Corporation Limited & Anon (unrep judgment dated 11^th March 2005) at paragraph 14:

“14.  The correct approach…in an application for a temporary stay of proceedings is “to consider the balance of convenience and fairness as between the parties” (Alfred McAlpine Construction Ltd. v Unex Corporation Ltd. (1994) 70 BLR 26 at 45C to D, per Glidewell LJ; applied in Clinton Engineering Ltd. v B-Tech (Holdings) Ltd. [2001] HKCU 1002 at para. 9 and SWE Ltd. v Chong Lai Fun, HCA No. 1064 of 2004, 28 October 2004, Reyes J, pages 5 and 6; see also Halsbury’s Laws of Hong Kong, Vol. 5(2), footnote 7 to para. [90.0938]) and the court should exercise its discretion in such a manner “to ensure that its procedures are used in a logical, fair and cost-efficient manner” (SWE Ltd., page 5). The question at hand is not a question of deprivation of the right of a litigant to proceed altogether, but a question of case management.”

18.  It seems to me that whenever the Court is considering the exercise of such case management powers, the Court of course always has to balance the interests of the parties before it, but also take into consideration the resources of the Court as this would have an impact on other litigants.

DISCUSSION

19.  Mr Lo fairly recognizes that the HCMP as originally framed would probably not have been suitable for summary determination.

20.  In his skeleton he submitted that it was indeed the position that “‘at one stage’ PT Chen had sought to impugn the validity of the September 2017 resolution by challenging Full Kang’s authority to issue the notice of the shareholders meeting dated 25 August 2017..however [PT Chen] clarified in [his 4^th affirmation] the specific legal grounds he relies upon are only those” which have to do with either (1) quorum (2) failure to give sufficient notice under S.462 of the Companies Ordinance (Cap.622).

21.  At paragraph 4 of that affirmation it was affirmed that:

“But after having taken further legal advice on the matter, I wish to state that the legal grounds I specifically rely on include:

(a) First, the General Meeting was inquorate. As the purported minutes of the 914 General Meeting show, only proxies representing one member, namely Full Kang Co Ltd, attended the meeting. This fell foul of the quorum requirement of 2 members under Article 6 of the [Company]’s Articles of Association…

(b) Second, as one of the purported resolution...was to remove me as director of [the Company] a special notice was required to be given to me pursuant to section 462..and at least 28 days notice for passing the same was required. However, as the relevant notice of the “914 General Meeting” shows ...only 20 days notice was given i.e 8 days short of the requirement.”

22.  In the light of this fine tuning (as Mr Lo suggests) or a change of position, as Mr Benjamin Lam who ably represented SK Chen suggests, the attraction of dealing first with the HCMP substantively therefore significantly increased. This clear indication also meant that it was more realistic for the matter to come on for substantive determination earlier.

23.  As a result of this development, while Mr Lam submitted that his primary position was for both proceedings to proceed by way of pleadings and that there should be no stay, he very fairly and properly accepted that given the indication regarding the limited scope of the HCMP, the idea of a short case management stay would be harder to resist.  He also submitted that notwithstanding he accepted that if the HCMP were determined against his client this would have a significant impact, he intimated this may not be the end of the matter.

24.  It seems to me that balancing the considerations as set out in Re Chime and in light of the indication given by Mr Lo’s client, the Court should exercise its case management powers to stay the HCA for a short period of time.

25.  I should further point out that while the “indication” is not one set out in the form of an undertaking to the Court, should there be any attempt to resile from it later I have no doubt that this would be reflected in consequences in terms of costs and in the exercise of other case management powers to make up for the lost time.

26.  It seems to me that upon the determination at the Substantive Argument of the HCMP, the Court will be in much a better position to case manage these proceedings and determine what would be the most cost effective and efficient case forward.

27.  Should there be any material change of circumstances SK Chen (and other interested parties) would obviously be at liberty to seek an uplift of this short stay.

DISPOSITION

28.  For these reasons, I will make the following directions:

(1)   In so far as the HCMP is concerned:

(a)   Leave be granted for the defendants to file evidence within 28 days from today;

(b)   Leave for PT Chen to file evidence 21 days thereafter;

(c)   No further evidence to be filed without leave of the court;

(d)   Leave to set down the matter immediately for substantive argument before a Judge with 1 day reserved, in consultation with counsel’s diaries if possible, not earlier than 1 October 2020 (“the Substantive Argument”);

(2)   The HCA be stayed pending the determination of the Substantive Argument or further Order of the Court; save that the HCA Defendants be at liberty to, if so advised to deal with such applications they see fit regarding their failure to comply with the Order of Master Chow dated 20 November 2019;

(3)   There be liberty to apply in both proceedings.

Mr Benny Lo and Mr Lawrence Pang, instructed by Terry Yeung & Lai, for the Plaintiff in HCMP 2174/2017; 2^nd and 3^rd Defendant in HCA 735/2019

Mr Benjamin Lam instructed by S.K. Lam, Alfred Chan & Co., for the 1^st Defendant in HCMP 2174/2017; Plaintiff in HCA 735/2019

The 2^nd Defendant in HCMP 2174/2017 was not represented and did not appear

The 3^rd Defendant in HCMP 2174/2017 was not represented and did not appear

The 4^th Defendant in HCMP 2174/2017 and 1^st Defendant in HCA 735/2019 was not represented and did not appear

The 6^th Defendant in HCMP 2174/2019 and 4^th Defendant in HCA 735/2019 was excused