Dispute over Control of Hong Kong Companies: Litigation on the Removal of Documents Registered with the Companies Registry
Introduction: Disputes over Control of Hong Kong Companies and Removal of Company Registration Documents
When the control of a company is disputed among the insiders of the company, a situation often arises where one party to the dispute unilaterally files a document with the Companies Registry to remove the other party’s director, appoint a new director, or change the company secretary to someone who listens to him or her, or change the address of the company, or issue new shares to dilute the other party’s shareholding, etc. The other party to the dispute finds out that he or she has not consented to the removal of the other party’s director, and that he or she has no knowledge of or consent to the removal. And the other party to the dispute may apply to the court to order the Registrar of Companies to strike out such unauthorized registration documents after discovering that the company’s registration information with the Registrar of Companies has been changed without his/her knowledge or consent, resulting in a loss of control of the company. This article is intended to introduce the relevant legal principles and procedures.
Removal of Documents under Section 42 of the Hong Kong Companies Ordinance
Under section 42 of the Hong Kong Companies Ordinance, if an application is made to the Court of First Instance of the High Court of Hong Kong and the Court is satisfied that a document registered by a company in the Companies Registry is invalid, void, not made under the authority of the company, or that the registration is inaccurate or forged, the Court may order that the document be corrected or struck off by the Companies Registry. The court may also make an order declaring the documents invalid or an injunction prohibiting the person concerned from registering the documents again until the dispute is resolved.
Are documents registered in contravention of the internal procedures of a Hong Kong company invalid, void or voidable?
Where there is a dispute over the control of a company, a resolution made in the name of the company by one of the parties to the dispute (e.g. to remove a director of the other party) may be in breach of the company’s internal procedures because it is not co-operated with by the other party (e.g. a board resolution to remove a director is made with less than the minimum number of persons present as required by the company’s articles of association, or there is no board resolution made at all), in which case In this case, if such a resolution (e.g. a resolution of the board of directors to remove a director) which does not comply with the internal procedures of the company is registered in the Companies Registry, when can the other party use the non-compliance of the resolution with the internal procedures of the company as a ground to apply for the invalidation or striking off of the relevant registered document?
Legal Principle: Whether a document that does not comply with the internal procedures of a Hong Kong company is invalid
According to the principle of law set out in Zhong Da Mining Holding Ltd v Lam Wo Ping [2024] HKCFI 1613] citing the Court of Appeal case of Re Dalny Estates Ltd, where a Hong Kong company has registered a document on the Companies Registry that does not comply with the internal procedures of the company, the only issue for the court to consider is whether the document is invalid if the court rejects the non-compliance. The only question for the court to consider is: if the court strikes down the non-compliant corporate resolution, can the company make the same corporate resolution again in a procedurally correct manner?
For example, if there is a dispute over the control of a company where A has 80% of the company’s shares and B has 20% of the company’s shares, and the directors of the company are also A and both of them. If A decides to remove B as a director without holding a shareholders’ meeting and submits the removal to the Registrar of Companies for registration, will B be able to successfully apply to strike out the removal resolution which is in breach of the company’s internal procedures? According to the above legal principles, even if the court strikes down the dismissal in violation of the Mainland procedures, since A holds 80% of the shares of the company, A can always make another resolution to dismiss A in a manner that complies with the procedures stipulated in the articles of association, and therefore the resolution to dismiss A is unavoidable in any event, and thus the court should uphold the company’s resolution to dismiss B, even if there are procedural irregularities in the resolution. was procedurally irregular. (See [2024] HKCFI 1613 at para 43 of the judgement.)
On the contrary, in the above hypothetical case, if B decided to remove A from the board of directors without a general meeting and A went to court to seek to strike out the procedurally non-compliant removal, the court would not have upheld the resolution to remove A from the board of directors but would have declared it invalid and struck it out because B, with only 20% of the shares, could not make a shareholders’ resolution to remove A in the normal course of the company’s business. Therefore, the nullity of the resolution is irremediable.
If the shareholding or ultimate control of the company is in dispute
In similar cases, it is often the case that the shareholding or control of a company is in dispute, e.g. A claims to hold 80% of the shares, but B claims that 60% of A’s 80% has been transferred to B, and that A in fact holds only the remaining 20% of the shares. Where such disputes over shareholdings have not been resolved, the court, when faced with an application by one party to strike out a company’s registration documents, is often faced with a dilemma: because the actual dispute over shareholdings or control has not been resolved, it is difficult for the court to apply the above principles of law in order to determine whether the inconsistent and procedural company resolutions in dispute could have been made in the proper course of proceedings (as the votes of the shareholders are not clear, it is of course impossible to determine whether they could have been made in the proper course of proceedings). clear, it is of course impossible to judge whether the resolution can be made properly). In such cases, the court should wait for the resolution of the litigation concerning the shareholding dispute before dealing with the action to strike out the registration document or may proceed if no shareholding dispute exists.
(Bob Yan, principal solicitor of Yan Lawyers, solicitors. Email: [email protected], WhatsApp: +852 51039249)