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HCA 1985/2012
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1985 OF 2012
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BETWEEN
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WONG MING BUN suing on behalf of himself and all other shareholders in the 4th Defendant(except the 1st, 2nd and 3rd Defendants) |
Plaintiff |
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and
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WANG MING FAN (王明凡) |
1st Defendant |
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WANG MING YOU (王明優) |
2nd Defendant |
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QIAN WU (錢武) |
3rd Defendant |
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CREATIVE CHINA LIMITED
(創華有限公司) |
4th Defendant |
| ____________ |
| Before: Hon Ng J in Chambers |
| Dates of Hearing: 23 and 24 July 2013 |
| Date of Judgment: 21 January 2014 |
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J U D G M E N T
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Introduction
1. The present action was commenced by Writ on 24 October 2012. As was apparent from the description of the Plaintiff in the title and the contents of the Statement of Claim, he was bringing a derivative action as a shareholder on behalf of the 4th Defendant (“Company”). It was common ground that this was not a statutory derivative action under section 168BC of the Companies Ordinance, Cap. 32 and no leave had been obtained by the Plaintiff under that section.
2. There were three applications before this Court:
(1) The Company’s summons to strike out the Statement of Claim on the ground that the Plaintiff had no locus standi to sue derivatively on behalf of the Company. In his written submissions, Counsel for the Company had made it abundantly clear that he did not wish to go into the substantive merits of the Plaintiff’s claim.
(2) The 1st and 3rd Defendants’ summons to strike out the Statement of Claim on the ground that the Plaintiff had no locus standi to sue derivatively on behalf of the Company, as well as on the merits, relying on all the grounds listed in RHC Order 18 r 19.
(3) The Plaintiff’s summons for leave to add Li Qing Long (“Li”) as the 5th Defendant, to add to the Plaintiff’s capacity to sue in his own personal capacity and to amend the Writ and the Statement of Claim.
3. The 2nd Defendant (“D2”) had indicated no intention to defend the proceedings herein and was not present at the hearing.
The Plaintiff’s case as pleaded in the Statement of Claim
4. The Company was incorporated in January 2005 under BVI laws. Its principal asset was its majority shareholding (over 50%) in China Flavors and Fragrances Company Limited (“China Flavors”) which was listed on the main board of The Hong Kong Stock Exchange Limited in December 2005.
5. The Plaintiff, the 1st Defendant (“D1”), D2 and Wang Ming Qing are brothers.
6. As at November/December 2008, the Company had six shareholders viz. the Plaintiff, D1, D2, the 3rd Defendant (“D3”), Wang Ming Qing and Li. According to a Certificate of Incumbency, as at 8 December 2008, their shareholdings in the Company were as follows:
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No of shares |
Percentage holding |
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Plaintiff |
3477 |
34.77% |
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D1 |
3391 |
33.91% |
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D2 |
1068 |
10.68% |
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D3 |
338 |
3.38% |
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Wang Ming Qing |
1239 |
12.39% |
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Li |
487 |
4.87% |
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7. On 7 November 2008, all the six shareholders of the Company resolved (“the 2008 Resolutions”) inter alia that shares in China Flavors, although registered in the name of the Company, would be beneficially owned by each shareholder according to the proportion of funds each of them provided to the Company and that an agreement would be entered into between the Company and those shareholders who decided to provide funds to the Company.
8. The Plaintiff then pleaded a loan agreement dated 10 November 2008 between D1, D2 and D3 and the Company (“November 2008 Agreement”) pursuant to which D1 to D3 advanced a loan in the total sum of HK$26,500,000 (“Loan”) to the Company for the acquisition of shares in China Flavors. The Loan carried interest at 3% per month and was to be repayable within 14 days (or such other date to be agreed in writing by the parties). If by the due date, the Company could not repay the Loan with interest, then it should transfer the China Flavors shares to D1 to D3 in proportion to the individual loan amount of each of them.
9. Between 14 and 19 November 2008, D1 to D3 duly advanced the Loan to the Company. On or about 27 November 2008, the Company used the Loan to acquire over 28 million shares in China Flavors at the average price of HK$0.92 per share.
10. The Plaintiff went on to plead that on 1 June 2009, the six shareholders discussed a proposed announcement of China Flavors relating to the shareholding structure of the Company and the Company’s acquisition of shares back in November 2008. At the end of the discussion, they unanimously resolved (“2009 Resolution”) that their shareholdings in the Company would be adjusted by share transfers among themselves to reflect each of their relative contribution in funds, if any, prior to March 2009 to the Company to enable it to acquire shares in China Flavors. The 2009 Resolution was recorded in the minutes of a shareholders’ meeting dated 1 June 2009 (“the 2009 minutes”).
11. The English translation of the 2009 Resolution was in these terms:
“The number of shares increased by the shareholders before 30 March 2009; issue new announcement on the shareholding percentages and the shares held by the shareholders, the number of shares and the percentages are as follows:-
1. [the Plaintiff] shareholding 89,215,509.99 shares, shareholding percentage is 31.10%;
2. [D1] shareholding 108,865,753 shares, shareholding percentage is 37.95%;
3. [D2] shareholding 29,309,030 shares, shareholding percentage is 10.22%;
4. [Li] shareholding 12,495,816.01 shares, shareholding percentage is 4.36%;
5. [D3] shareholding 15,173,687 shares, shareholding percentage is 5.29%;
6. [Qing] shareholding 31,791,204 shares, shareholding percentage is 11.08%.”
12. At around the same time, the Plaintiff was informed that D2 had agreed to hold the shares of Wang Ming Qing on his behalf.
13. On or about 29 June 2009, pursuant to the 2009 Resolution and the arrangement between D2 and Wang Ming Qing, various share transfers among the shareholders took place. As a result, Qing ceased to be a registered shareholder and the % shareholding of the remaining five became as follows:
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(1) The Plaintiff |
31.1% |
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(2) D1 |
37.95% |
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(3) D2 |
21.3% |
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(4) D3 |
5.29% |
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(5) Li |
4.36% |
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14. The Plaintiff averred that the 2009 minutes recorded an agreement between the Company and D1 to D3 to vary the terms of the November 2008 Agreement. The Plaintiff further averred that the effect of the 2009 Resolution and the subsequent increase in D1 to D3’s shareholding in the Company was that the Company’s obligation to repay the Loan under the November 2008 Agreement had been waived or discharged. There was therefore no further obligation on the Company’s part to repay the Loan.
15. What followed in the Statement of Claim was the Plaintiff’s complaint.
16. On or about 1 March 2012, the Company entered into a written Supplemental Agreement with D1 to D3 (“Supplemental Agreement”).
17. By the Supplemental Agreement, D1 to D3 purported to waive their rights to the repayment of the Loan under the November 2008 Agreement in consideration of the Company issuing new shares credited as fully paid up to them (“New shares”). Pursuant to the Supplemental Agreement, new shares in the Company were issued to them as follows (“Purported Capitalisation”):
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(1) D1: |
764 shares |
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(2) D2: |
69 shares |
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(3) D3: |
234 shares |
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Total: |
1067 shares |
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18. The Supplemental Agreement was purportedly approved by the Company by:
(1) two written resolutions of allthe shareholders of the Company, one in English and one in Chinese, both purportedly signed by all shareholders (the “2012 Shareholders’ Resolutions”),
(2) two written resolutions of all the directors of the Company, one in English and one in Chinese, both purportedly signed by all directors (the “2012 Board Resolutions”).
(Collectively “the 2012 Resolutions”).
19. New shares were indeed issued to D1 to D3 and as a result, after 1 March 2012, the Company’s shareholding structure became as follows:
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(1) Plaintiff |
3,110 shares/ 28.10% |
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(2) D1 |
4,559 shares/ 41.19% |
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(3) D2 |
2,199 shares/ 19.87% |
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(4) Li |
436 shares/ 3.94% |
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(5) D3 |
763 shares/ 6.89% |
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20. In gist, the Plaintiff’s complaint in the Statement of Claim was that by reason of the 2009 Resolution and the increase in D1 to D3’s shareholding in June 2009, the repayment of the Loan had already been waived by D1 to D3. Alternatively, the Company’s obligation to repay had already been discharged. The Supplement Agreement and the issue of New shares to D1, D2 and D3 in March 2012 were thus invalid, void or voidable as they were not supported by consideration and were beyond the powers of the directors of the Company and contrary to the Articles.
21. On 24 October 2012, the Plaintiff issued the Writ herein with the Statement of Claim endorsed. In the prayer for relief, the Plaintiff sought to rescind the Supplemental Agreement executed by the Company pursuant to the 2012 Resolutions and to declare void the 2012 Resolutions. The other reliefs claimed were essentially for the cancellation of the New shares issued to D1 to D3 and rectification of the share register.
Whether Common Law Derivative Action available to a BVI Company
22. The present action by the Plaintiff is admittedly a common law derivative action.
23. Mr Trehey, a practising BVI lawyer engaged by the Company, explained that the BVI had codified in statute the rights of members of a BVI company to bring a derivative action. The common law principles relating to derivative actions are now contained in...
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