Title The company law and division of powers; 公司的權力劃分問題

Author(s) Smart, P

Citation Hong Kong Lawyer, 2000, Feb, p. 29-31; 香港律師, 2000, Feb, p.29-31

Issued Date 2000

URL http://hdl.handle.net/10722/53384

Rights This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Corporate Practice

The Company Law andDivision of PowersPhilip Smart examines the recent judgment in Miracle Chance Ltdv Ho Yuk Wah and argues that it serves as a useful reminder topractitioners not to assume that the provisions of the CompaniesOrdinance apply in the same way to foreign incorporatedcompanies as they do to locally incorporated companies

The division of powers, and hencecontrol of a company between its

shareholders and the board ofdirectors, has long been a topic ofinterest to both academic andpractising company lawyers. From theacademic perspective the division ofpowers debate raises key issues as tothe nature of a modern company.Whereas practitioners are well awarethat if an action is commenced in thecompany's name but without properauthorisation - the question beingwhether due authorisation comesexclusively from the board or may alsoderive from the shareholders - not onlyis that action wrongfully brought butthere may be personal liability as tocosts. It is therefore of interest to notethat the division of powers controversyrecently received the attention ofRogers JA in Miracle Chance Ltd v HoYuk Wah, David [1999] 3 HKC 811.

Miracle ChanceGao and Ho were respectively themajority and minority shareholders inMiracle Chance Ltd, a BVI companyformed as a joint venture vehicle forprojects contemplated by Gao and Ho.There were no other shareholders.After a while the relationship betweenGao and Ho broke down and, inparticular, Ho refused to co-operatewith Gao's attempts to convenedirectors' or shareholders' meetings.Ul t imate ly , proceedings werecommenced in Hong Kong in the nameof the company against Ho alleging,

inter alia, breaches of fiduciary duty.Ho sought to have the action struckout on the basis that the company hadnot duly authorised the proceedings -there having been no resolution of theboard of directors to commence theaction in question.

... the relevant point is

that s 114B concerns the

calling of 'a meeting of a

company' and 'company'

prima facie means a

Hong Kong incorporated

company ...

The Court of Appeal held thatwhereas management powers -including the power to use thecompany's name in litigation - wouldunder the company's constitutionnormally be regarded as vested in theboard and could not be usurped bythe shareholders in general meeting,the position was otherwise where therewas no effective board of directors. Insuch a situation, management powersreverted to the shareholders (see [1999]3 HKC 811 at 815 D-F, per Rogers JA):

'It seems to me that the line ofcases which is exemplified in thecase of Breckland Group HoldingsLtd v London and Suffolk Properties& Ors [1989] BCLC 100,

exemplifies the ... propositionthat where there is an effectiveboard, the company in generalmeeting cannot usurp its powersbut if the board is ineffective, thepower which in effect has beendelegated by the articles to thedirectors reverts to the personor persons who delegated,namely the company in generalmeeting.'

Having held that management powersreverted to the shareholders onaccount of the total deadlock on theboard, the court looked at the expressterms of the company's articles, whichprovided that a written consent by anabsolute majority of the shareholders(ie Gao) would be regarded as aneffective shareholders' resolution.Such a document - rat i fying thecommencement of the action againstHo - apparently existed (see [1999] 3HKC 811 at 816A), therefore, the actionagainst Ho was not struck out.

CommentThere is no doubt that the Court ofAppeal was on firm legal ground inholding that the absence of an effectiveboard of directors resulted inmanagement powers reverting to theshareholders (see Alexander Ward & CoLtd v Samyang Navigation Co [1975] 2All ER 424). It might also seem thatthe approval by Rogers JA of BrecklandGroup Holdings is not remarkable - forthere is a long line of English cases(see, in particular, Scott v Scott [1943] 1All ER 582, Shaw v Shaw [1935] 2 KB113 and, more recently, Mitchell &Hobhs (UK) Ltd v Mill [1996] 2 BCLC102), which assert that an exercise ofmanagement powers by the directorscannot be 'overruled' by a resolutionof the shareholders in general meeting.In particular, Harman J in BrecklandGroup Holdings refused to follow themuch debated decision of Neville J inMarshall's Valve Gear Co Ltd v ManningWardle & Co Ltd [1909] 1 Ch 267, wherethe oppos i te v iew had been

HONG KONG LAWYER FEB2000 29

Corporate Practice

maintained. Yet while the Englishjudges appear to have abandonedMarshall's Valve completely, Neville J'sview - namely that the shareholdersin general meeting can overrule avalidly taken decision of the board -was once supported by anotherdecision of the Court of Appeal inHong Kong. Rogers JA in MiracleChance makes no reference to theearlier decision in Tang Kam-yip v YauKung School [1986] HKLR 448. Insummary, Rogers JA has adoptedBreckland Group Holdings, yet Marshall'sValve is supported by Tang Kam-yipand that case was apparently not dealtwith by Rogers JA.

Of course, the approval of BrecklandGroup Holdings in Miracle Chance wasmerely obiter - for the facts in MiracleChance did not involve any decisiontaken by the board of directors. Yet, ashas been argued elsewhere (see Smart,Lynch and Tarn, Hong Kong CompanyLaw: Cases, Materials and Comments(1997) at p 157), the approval ofMarshall's Valve in Tang Kam-yip wasitself obiter and perhaps not consistentwith comments that were made byLord Wilberforce in the Privy Councilin Howard Smith Ltd v Ampol PetroleumLtd [1974] AC 821 at 837. In short, thiscommentator would argue that thestatus of Marshall's Valve has yet to beconclusively determined in HongKong, but that there is every reason tohope that a Hong Kong court woulddistinguish the decision in Tang Kam-yip and reject Marshall's Valve -certainly the attitude of Rogers JA inMiracle Chance points this way. (For areview of all the earlier Hong Kongcases on this point, see Tyler (1987) 17HKLJ 230.)

BVI Companies:A Note or CautionIn Miracle Chance a valid decision wastaken by the shareholders since, it willbe recalled, the company's articlesprovided that written approval by amajority of the shareholders was to beregarded as an effective shareholders'

resolution. If there had not been sucha provision in the company's articles,Rogers JA expressed the view that the'proper course':

'...would have been for the courtto have stayed the proceedingsbut to have ordered a meeting ofthe company to see whether anyresolution of the matter couldhave been arrived at by thecompany in general meeting',(see [1999] 3 HKC 811 at 815G)

This comment, which was only madein passing, must be treated withcaution.

The court has a broad discretionarypower to convene a shareholders'meet ing under s 114B of theCompanies Ordinance (Cap 32) and,in particular, may exercise that powerwhere a quorum cannot be obtainedbecause the minority shareholderrefuses to attend any proposedmeetings: see Re Opera Photographic Ltd[1989] 1 WLR 634 and Manfield CoatingsCo Ltd v Springfield Coatings Co Ltd[1995] 1 HKC 74. However, therelevant point is that s 114B concernsthe calling of 'a meeting of a company'and 'company' prima facie means aHong Kong incorporated company(see s 2). This commentator would

suggest that any reading of theCompanies Ordinance provisions onmeetings (including s 114B) make itunarguable that the prima faciemeaning of 'company' has beendisplaced. In brief, the court has nopower to convene a meeting of a BVIor other foreign company pursuant tos 114B of the Companies Ordinance.

It may well be tha t whenmentioning the calling of a meeting,Rogers JA had in mind not s 114B butrather the court's inherent power toregulate the conduct of litigationbefore it. Nevertheless, it is not clearto this commentator how the courtcould rule what the quorum at such ameeting should be without relying ons 114B. In any event, Miracle Chanceserves a useful reminder that althoughthe use of BVI companies has beenpopular in Hong Kong in recent years,practitioners should not assumewithout question that all the provisionsof the Companies Ordinance apply tosuch companies in just the same wayas they do to locally incorporatedcompanies.

Philip SmartFaculty of Law

University of Hong Kong

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