Must reasons be given for removing a director: Hong Kong High Court takes a closer look

In Kenneth Yeung Bing Kwong v Mount Oscar Ltd [2018] HKCFI 2763, the Court of First Instance (“Court“) held that a Hong Kong company is not required to give any reasons for the removal of a director.

The Court rejected a contention that such an obligation should be read into the Companies Ordinance (Cap 622) (“CO“), and, in doing so, reviewed the statutory framework under the CO for the removal of a director and the relevant principles of statutory interpretation.

Facts

Mount Oscar Ltd (“Company“) is a private limited company incorporated in Hong Kong and Kenneth Yeung (“Applicant“) was a director of the Company. The Company’s majority shareholder requested the Company’s board of directors to call an EGM to consider the removal of the Applicant as a director. At the EGM convened by the board, an ordinary resolution was passed to remove the Applicant as a director.

The Applicant complained that he had not been told of the reasons for his removal, and requested that these be provided to him. Despite his request, no reasons were provided. The Applicant brought proceedings in the Court seeking (i) a declaration that the ordinary resolution to remove him as director is invalid or otherwise null and void, and (ii) an injunction to restrain the Company from implementing the resolution. His application was dismissed.

Statutory regime under the CO

The Court considered the statutory regime under the CO on the removal of a director, including the following key provisions:

  • Section 462 provides that a company may, by ordinary resolution passed at a general meeting, remove a director before the end of the director’s term of office. The Court observed that this entitlement is an important provision governing the power structure of a limited company, which cannot be circumvented or abrogated by agreement.
  • Section 463 provides, among other things, that the director concerned is entitled (i) to be heard on the resolution to remove him/her, at the meeting at which the resolution is voted on; and (ii) to make representations in relation to the resolution, a copy of which must be circulated to the shareholders by company upon the request of the director, or otherwise read out at the meeting.

The Court also noted the following relevant principles of company law:

  • A director has no statutory right or entitlement to hold on to his office before the end of its term. This is the corollary of section 462 of the CO.
  • The Court will not interfere with the internal management of a company acting within its powers and has no jurisdiction to do so.

A matter of interpretation

It was common ground at the hearing that (i) nothing in section 463 of the CO expressly provides for the giving of reasons to an affected director; and (ii) all the express statutory requirements in the CO for the Applicant’s removal had been complied with.

The Applicant argued that, as a matter of statutory interpretation, a requirement to give reasons should be read into section 463 of the CO by necessary implication. One of the Applicant’s contentions (relying on a South African authority) was that, if reasons were not given, the affected director would not know on what issues to state their case, and would therefore be deprived of his/her right to make meaningful representations.

Having considered the Hong Kong case law on statutory interpretation, the Court rejected the Applicant’s argument. The common law threshold for reading an additional requirement into a statutory provision by necessary implication is very high.  It is not enough for the Applicant to show that the additional requirement is reasonable, sensible or, if the legislature had thought about it, would probably have included this requirement. An additional requirement will not be implied unless it is clear from the express language of the statutory provision that the additional requirement must have been included.

As the Court saw it, the gist of the Applicant’s arguments was that a requirement to give reasons ought to be read into section 463 of the CO because it was sensible and reasonable, but that was not the test. In the Court’s view, the Applicant did not even come close to reaching the high threshold required for a necessary implication. His application was therefore dismissed.

Key takeaways

This case reiterates the Hong Kong court’s general reluctance to interfere in the internal management of a company, provided that all the relevant statutory provisions are complied with, and is a welcome reminder that no reasons are required to be given for the removal of a director. It also highlights the difficulty that a party will face trying to argue a necessary implication as a matter of statutory interpretation.

 

 

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
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Dominic Geiser
Dominic Geiser
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Peter Ng
Peter Ng
Associate, Hong Kong
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Priya Aswani
Priya Aswani
Professional Support Lawyer
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