As evident from the previous discussion, distribution of power has created confusion and the terminology is still a mystery to understand. However, post 1985 era did something towards providing solution. UK’s model articles tried to sum up the doctrine of distribution power by conferring statutory powers to the general meeting as per which power of directors are subjected to the directions via special resolution of general meeting. In 2003, HK company registration process did adopted same provisions, in predecessor companies ordinance and in today’s ordinance, directors are meant to act upon instructions of general meeting via special resolution.
There is the new formula which permits members to dismiss any director, by acquiring consent of majority however commentators believe that, doing so will make them liable for the damages as if director is to be dismissed before his or her term, then subsequent payments for his or her remaining term will have to be paid. Legal commentators, leaves the question of significance on the part of court as besides legal and financial compensations, significance of new formula cannot be neglected.
Re Frontsouth (Witham) Ltd is found to be the case of this category, where BHWL the defendant, had the sole shareholder which too was a company named FWL and matter of fact reported of both companies to be in the administration of the company. To make the sale of assets owned by company, it was necessary to extend the tenure of both BHWL and FWL. There was no issue in extending the tenure of BHWL but as per para 77(1)(b) of Schedule B1 of the UK’s Insolvency Act 1986 it was impossible to extend the tenure of FWL on expiry of original appointment. Henderson J held that: matter of placing company to the administration, in the presence of willingness of the subject, should solely be taken by directors and not through ordinary resolution of general meeting. But, Justine Henderson do accepted the power of general meeting to direct, directors to take any step in light of their resolution and by this, Henderson declined to say further in argument that, unanimous decision of the general meeting is sufficient and it seems as if he had recognised the provision of statutory power to the general meeting to direct, directors for any act via special resolution- as per company’s article.
The matter was quite solved by UK’s Supreme Court where they validated the powers of general meeting by saying that:
“where the general meeting is to direct board regarding any issue, they must attain 75% of majority”.
It has been quite established with the decision of UK’s superior court i.e. Supreme Court of England and the provisions in Model Articles that, general meeting reserves the right to instruct board of directors to take or refrain from taking any step through special resolution, but it must be noted that there is still the provision in ordinance which gives prior decisions of board, an immunity and general meeting cannot make their prior decisions insolvent. Practically this borderline has somehow narrowed the race for power between general meeting and board of directors by increasing adherence of directors to the general meeting, as they can remove any director by overwhelming majority pursuant to the matters of management, and a win-win situation for directors by giving their prior decisions, an immunity.
Matter of Residual Powers
As the principles set up above, intervention of general meeting in matters of management has been reduced much but for the matters, where board cannot act, general meeting can act there by the virtue of company’s inherent power to them after HK company registration is completed.
Limitations of the director(s)
The board will be non-functional, if it either does not exist or if exists, does not have the authoritative powers to act in various matters. Non existence of director(s) may be due to the fact that, may be general meeting had not arranged the meeting to appoint new director(s). possibility exists where opposing directors do not want to sit together due to the internal clashes of the board or where the office of director is vacant and yet, no appointment has been made.
Barron’s case presented of the situation where, deadlock between the board existed and hence no decision could be taken, court suggested to appoint new director in general meeting, irrespective of the fact that, centre for such appointments is board of director(s). In another case of Alexander Ward & Co, legal proceeding against one company was initiated by another company. But at the time of such legal action, plaintiff’s company had no directors, as all the directors retired on completion of their term and subsequently their replacement was not appointed. In these circumstances, company’s matter was being governed by two persons, who do not have any authority. During this course of time, company went into liquidation and the liquidator sought to ratify the proceedings by these two governing individuals. But, defendant objected that proceeding cannot be initiated as company has no director(s) and in absence of the competent authority, such proceedings cannot be commenced. Noting all the happenings and presentation of facts from both sides, Lord Hailsham communicated:
“The argument that, company does not have the competent authority, has no sound base. Because general meeting has the residual power(s) in such circumstances to act as a competent authority and authorise proceeding”.
In Hong Kong, this decision of the House of Lords is taken as the beacon of light in deciding matters, where there is absence of director(s).
Hong Kong legal constituencies exemplifies Miracle Chance Ltd, where Mr. Gao owned 65% of the company’s share and the rest was possessed by Mr. Ho. Mr. Gao called board meeting and a general meeting to initiate proceedings against Mr. Ho, but he refused to attend both meetings. So, in competency of Mr. Gao being the majority shareholder, and in this capacity resolution was passed, as Mr. Gao had majority of votes. Hong Kong’s court of appeal accepted this competency of Mr. Gao to initiate proceedings against defendant as he had the majority votes to him within the capacity of being the owner of 65% of company’s shares. Justice Rogers communicated that:
“If the board in ineffective then as per the articles of company, general meeting reserves the right to initiate proceeding on the subject of their residual powers, with majority”.
The one basic problem is still the determination of sanctity of board of directors decision, question arises that: will the fate of boards decision be decided from members in form of any resolution? Legislators are still wandering in a phrase of Reg.82 of predecessor Companies Ordinance for company formation Hong Kong, which poses two different narratives, one narrative presents of the situation as per which director’s decision can be overruled by member’s resolution in general meeting while the second narrative supports directors and give their decisions immunity. Because of this confusion, two lines of authorities have been formulated in the context of company formation Hong Kong. The first line of authority denies the role of general meeting and rejects the intervention of general meeting via any resolution in the way of directors while the second one emphasised on determination of role of general meeting through the language of power-allocation clause.
First Line of Authority
Collins MR in Automatic Self-Cleansing Filter Syndicate Co Ltd decided that only special resolution can restrict imposition of directors decision, on part of managerial powers given to them and in another case of John Shaw and Sons where few directors of the company prayed to authorise them to proceed against the Shaw Brothers but the Shaw brothers argued that general meeting has already passed special resolution to discontinue such proceedings, in response to this Greer LJ held that: Managerial powers of director are exercisable nothing but special resolution can control their power, this was the basis on which defendants won the case and as the result the proceedings against them were stopped.
Breach of Company’s Law
In Scott v Scott circumstances reported of the situation as per which resolution was passed by general meeting to appoint external investigator for the audit of company’s financial affairs but plaintiff challenged this by arguing that resolution was not passed as per the instruction laid out in Section 137 of Companies Act 1929 and accepted that company’s articles permits to get services from external investigator. Lord Clauson found plaintiff to be correct but formed his verdict on the basis of division of power. Critics believed that this conclusion could have been reached by simply accepting plaintiff argument on account of this to be the case of violation of Section 137.
Breaching Articles of Association
Court verdict in Shaw was not because general meeting has no power to direct directors through special resolution but because of Reg.86A of company’s articles which restricted defendant to vote against directors decision to retrieve company’s debts and as defendant was in debt towards company so this act was found to be breach of articles.
Breaching agreement of shareholder
In Breckland Group Holdings Ltd, defendant company has two shareholders, say A and B, who owned 49 and 51 percent of the company’s share capital respectively in defendant’s company. As per shareholder agreement, institution of material legal proceeding will have one nominee director from A and one from B. B took steps against principal shareholder of A’s company, in the capacity of defendant’s company. Principal shareholder of A’s company was also the managing director of defendant’s company and this action of B against A’s principal shareholder was not authorised by the board of defendant company. Harman J instead of granting decision on the basis of breach of shareholder’s agreement, gave decision on the basis of Reg.80 of company’s article as per which directors were not under control of general meeting by ordinary resolution.
Critics believed that giving decision on this basis would create more confusion and will open up more horizons for principle’s abusers, there was no need to decide on this base where, there was clear way of regarding this case to be of Breach of Shareholder’s agreement.
Power of the Management
Hodgson JA held in Massey v Wales that: articles of the association of company clearly mentioned management of company to be under directors and in this way general meeting has no provision to intervene in their decisions and their independency except for the conditions where board could not vest its powers. In response to the issue of deadlock, his honour suggested to appoint new director to have the fresh opinion and breakage of deadlock.
Second Line of Authority
As mentioned earlier, confusion on distribution of powers created two lines of authority pursuant to HK company formation. Out of these two’s one has been discussed above and second is being discussed here. This line of authority believes that determination of power be evaluated by the distribution of power in company’s articles of association at the time of HK company formation.
In Cuninghame case, Reg.90 of company’s article vested managerial powers to the board subjected to the control of general meeting by special resolution. In this case, ordinary resolution related to the selling of company’s asset was presented in general meeting and upon pass of this resolution, directors were directed to act upon resolution, for which Collins MR held that: it is the violation of Reg.90 of company’s article as ordinary resolution was passed instead of a special one, as mentioned in articles though majority passed this resolution but still on grounds of violation, this act is invalid.
Proceedings of Marshall’s Valve reported of the circumstances as per which Marshall was the majority shareholder and the managing director of the company, and in this capacity he can pass the ordinary resolution to initiate proceeding on behalf of company against the company who intruded his patent. Three of Marshall’s colleagues who had the interest in defendant’s company too, passed board resolution to make act of Marshall null and void as he done so without the consent of the members and through an external solicitor they requested to struck off name of the company from the case. In response to these circumstances, Neville J held request to struck off company’s name from the case to be invalid and he further said that; as per the articles of the company, general meeting can impose decision on the management through an ordinary resolution, not through special resolution thus it is not be found against company’s articles.
Neville J further elaborated difference in case of Cuninghame and Marshall’s Valve by stating former to have compulsion of special resolution while the latter has the provision of ordinary resolution, in their articles of association. Both affirms the view that decision regarding distribution of powers be subjected to the powers conferred in company’s articles.