Ng Yat Chi v. Max Share Ltd. and Another

CACV000204/2000

CACV 204/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 204 OF 2000

(ON APPEAL FROM HCCW 321/1996)

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Coram: Hon Rogers VP, Stock and Le Pichon JJA in Court

Date of Hearing: 31 October 2000

Date of Handing Down Judgment: 23 November 2000

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J U D G M E N T

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Hon Rogers VP :

1. This is an appeal from a judgment of Madam Justice Yuen. In a hearing which lasted 11 days in September 1999, the judge heard a petition seeking winding-up of the 1st respondent, Max Share Limited ("the Company"), and in the alternative an order under section 168A of the Companies Ordinance for purchase of the petitioner's shares. In the judgment handed down on 24 May 2000, the judge ordered the 1st respondent to be wound up under the just and equitable provisions. From that order the respondents appeal.

The facts

2. Max Share Limited was formed on 4 February 1986. On 12 May 1986 the share capital was allotted. The capital was $200,000 divided into shares of $1 each. The petitioner Mr Ng Yat Chi held 49% of the shares. The remaining 51% were allotted to a Mr Bao Feng and Mr Wang Hong Ling. On 2 September 1986, Mr Bao and Mr Wang executed declarations of trusts of their shares in favour of Strong Progress Limited ("Strong Progress"). Strong Progress was a wholly owned subsidiary of China Resources (Holdings) Company Limited, the 2nd respondent. The 2nd respondent was owned by the State and apparently under the control of the State Council. The petitioner became the Managing Director of the Company.

3. The following year Mr Kei Kwong Chuen was appointed a director. Some 26,500 shares of the Company in Mr Bao's name and 24,500 in Mr Wang's name were transferred to Mr Kei in November 1988 and on the same day Mr Kei executed a declaration of trust in favour of Strong Progress.

4. The arrangement appears to have been that there were five directors. There was Mr Ng, who was the managing director, and his son on the one part and Mr Kei who was the chairman, Mr Bao and Mr Wang on the other. The Company was involved in the construction and property development businesses. It acquired, in particular, a subsidiary T.S. Wong & Co. which was concerned with building construction.

5. Far from being a straightforward venture, the Company soon became a directors' benefit. On pages 3 and 4 of the judgment, the judge summarizes the ways in which Mr Ng made profits from dealing with, and at the expense of, the Company. It is unnecessary to recite the facts here. The conclusion which the judge drew, however, was that those transactions were known to Mr Kei who received a share of the profits which were made by Mr Ng through the companies which he used to make them. On page 62 of the judgment, the judge held that Mr Ng knew that Mr Kei was keeping those profits for himself and not passing them on to Strong Progress or the 2nd respondent.

6. The judge concluded that the Company itself suffered quite substantial losses and had to be supported by large injections of funds by way of loans from the 2nd respondent. The arrangement at the commencement was therefore an understandable one which would have been for the benefit of the Company as well as the petitioner and the 2nd respondent. That, however, as the judge found, did not last long. The petitioner and those entrusted by the 2nd respondent to oversee its interests in the Company, acted to defraud the Company of its profits and line their own pockets in a manner which can only be regarded as dishonest.

7. Mr Zhou Chuan-ru was appointed Deputy General Manager of the 2nd respondent in February 1989. He came to Hong Kong in April 1989. In about October 1990, he took over the responsibility in the 2nd respondent's organization for supervising the operations of the Company. It should be said at once that there is no suggestion that Mr Zhou ever acted improperly in relation to the Company or condoned such conduct.

8. A crucial date in the case was 29 November 1990. On that day, there was a meeting attended by Mr Ng at which Mr Ng agreed to sell his shares in the Company to Strong Progress by 31 December. The minutes of that meeting were signed by Mr Zhou and Mr Ng. The judge held that to be an unconditional agreement which Mr Ng had entered into voluntarily and not as the result of any representations which had been made to him. Although the shares were to be valued, the judge also did not accept Mr Ng's evidence that he would only sell his shares if he, Mr Ng, were satisfied with the assessed value. As a result, the judge found that there was a binding obligation on Mr Ng to transfer his shares in the Company to Strong Progress on 31 December 1990.

9. It should be mentioned that clause 3 of the agreement provided that any profits or deficit shown in the accounts and valuations and agreed by both parties would be shared by the parties according to their percentage shareholdings.

10. The valuation of the shares of the Company was not as swift, perhaps, as the parties had anticipated. That valuation was completed in May 1991. It is convenient here to refer to some of the matters contained in the valuation report.

The report dated 29 May 1991

11. The report considered the various bases upon which a valuation of the Company could be made. Since losses had been sustained in the period between 1987 and 1990 and there had been no dividend payments, there was no way in which a capitalization of the value of dividends could form the basis for a valuation. Similarly, because of the substantial losses sustained by the Company in the same period, the valuation could not be made on an earnings basis. The report concluded that the only way in which the Company could be valued was on an asset basis.

12. The report found that there was an adjusted capital deficiency of HK$202,155,901 which had been sustained as at 31 December 1990. That represented HK$1,011 per share.

13. The report then considered the question of goodwill which was taken to be the excess value of the business as a going concern over the fair value of its accountable and net identifiable assets. Because of the sustained losses over the previous years, the report concluded that there was a negative goodwill which amounted to some HK$272,805,736.

14. The report then considered the capital structure of the Company and in particular the gearing ratio: that is the ratio between the long term external debts and the shareholders' funds. Since the shareholders' funds amounted to HK$29,232,330, the gearing ratio was a negative figure which was calculated as -8.74:1. This, the report suggested, represented a highly geared company which was heavily tied up by a substantial amount of external debts. The report then considered the ability of the Company and its group to meet the interest charges on the debts. Clearly since the Company was in a period of loss, again the figure of interest cover ratio was negative and it worked out to be -2.87:1. As a result, the report concluded that the shareholders would be required to inject additional capital or loans to finance interest payments. Unless that were to happen, the group would be exposed to a risk of compulsory winding-up by the bankers and the creditors. The liquidity ratio, which represented the value of the current assets in relation to the current liabilities, worked out at 0.89:1. The report suggested that a ratio of 2:1 was considered to be normal. The report then referred to the shareholders' loan of HK$174,399,489 which had been borrowed from Strong Progress. In view of the capital deficiency of over HK$200 million and the adverse liquidity position, the report concluded that repayment of the loan in the near future was impossible.

15. The recommendation of the report was that the value of the shares in Max Group was nil and that the shares should be transferred at a nominal value of HK$1. Furthermore, since the share transferee was obliged to take over the financial burden of the Company and its Group proportional to the shares transferred, it would have to be compensated by the transfer for the capital deficiency carried in the shares, together with an amount to compensate for the negative goodwill.

16. At the end of the valuation report was a reiteration that the financial position of the Max Group was unstable. The report concluded with the recommendation that Strong Progress Ltd should strengthen the financial position by an injection of capital through a capitalisation of the loans once the share transfer had been completed.

Events following the Valuation Report

17. At a board meeting on 1 June 1991, Mr Ng expressed himself to be unhappy about three things. The first was the valuation of certain properties; the second was that a "C" licence held in the name of T.S. Wong & Co. had not been fully valued; and the last was that there were pending claims by T.S. Wong & Co. against the Government which were not sufficiently reflected in the valuation. Nevertheless, Mr Ng confirmed his agreement to sell the shares. As recorded by the judge, the resolution at the directors' meeting recorded that the parties would sign an agreement in respect of the transfer of the shares "as soon as possible based on the principles of fairness and reasonableness, friendly negotiations and observance of the law". As a result, the judge came to the conclusion that not only was there an unconditional agreement reached on 29 November 1990, but, on 1 June 1991, the parties were still proceeding on the basis of an existing agreement.

18. It is clear that Mr Ng left the management of the Company shortly after 1 June 1991. Indeed, he ceased to be Managing Director and the judge records that Mr Ng and his son had their executive functions withdrawn with effect from 8 June 1991. Moreover, the Company moved offices from Melbourne Plaza to China Resources Building and there were no offices for either Mr Ng or his son at the new address. A draft sale and purchase agreement was prepared sometime in June or July of 1991. It might be mentioned that that draft agreement was based on a lower figure of capital deficiency than the HK$202 million. The figure had been reduced by approximately $30 million.

19. Were there any question as to whether Mr Ng had ceased to take any part in the conduct of the affairs of the Company, the matter would be concluded by the fact that in early January 1992 Mr Ng left Hong Kong. At that stage he was under pressure from his creditors and, indeed, apparently his home was repossessed by the bank.

20. The judge held that the conduct of the parties showed that both regarded the agreement for the transfer of the shares as aborted. However, there is no indication of when the termination of the contract occurred. Clearly, the contract was on foot in June/July 1991 when the draft sale and purchase agreement was prepared. There is no suggestion that there was any specific agreement that the sale would not take place. In very early 1992 Mr Ng left Hong Kong. Simply not following the matter up before he left does not seem to me to dictate that there was any agreement to abort the agreement. In the end, the matter is, perhaps not determinative of the issues in the case.

21. In March 1992, Mr Choy Bing Wing, who was at one stage the 2nd petitioner, obtained a charging order over Mr Ng's shares in the Company. That charging order was made absolute on 9 April 1992.

22. On 21 April 1992, a notice of a meeting to raise the capital of the Company was issued. The meeting took place on 1 May 1992. At the meeting a resolution was passed to increase the Company's share capital from $200,000 to $50,200,000. The new shares were to be offered to existing shareholders pro rata to their shareholdings, and on failure of full subscription, the directors were to be permitted to allot the new shares at their discretion. The proceeds of the issue were to be applied to repay part of the debt which was owed to the 2nd respondent.

23. On 17 June 1992, Mr Ng committed an act of bankruptcy which resulted in a receiving order being made against him on 29 July. The shares over which the charging order had been made were sold to Mr Choy at public auction on 13 August and on 28 August Mr Ng was adjudged bankrupt. The Official Receiver disclaimed any interest which Mr Ng had in the shares on 28 January 1993.

24. Mr Zhou was appointed a director of the Company in August 1992.

25. Mr Choy had applied to be registered as a member of the Company, but the directors exercised their discretion under the Articles of Association and refused his request. The Official Receiver's application to be registered in place of Mr Ng also failed and that was followed, on 28 January 1993, by the Official Receiver disclaiming any interest that he might have in the shares in the Company. Litigation was commenced to compel the 1st respondent to register the transfer of shares to Mr Choy. In a judgment of remarkable clarity Rhind J dismissed that application on 31 August 1993.

The petition

26. This petition seeking winding-up of the Company and, in the alternative, an order that the shares be bought was presented on 10 June 1996. As indicated above, originally there were two petitioners, Mr Ng and Mr Choy. Since Mr Choy was not a registered shareholder, he had no locus standi. The matter was decided summarily and Mr Choy took the matter to the Court of Appeal but his appeal failed.

27. The question of Mr Ng's right to present a petition under section 177 of the Companies Ordinance, on the basis that he was a contributory and under section 168A on the basis that he was a member of the Company was considered by the Court of Final Appeal in their decision reported as Max Share Limited v. Ng Yat Chi (1997-98) 1 HKCFAR 155. At the top of p.165, Li CJ said :

"Mr Ng's rights as a member (including the right to petition) are for the protection of the shares (which are beneficially owned by Mr Choy) and are therefore held in trust for Mr Choy and exercisable at his direction in the same way as any other rights attached to the shares (such as the right to vote)."

Since the matter before the Court of Final Appeal was simply the summary consideration as to whether Mr Ng had lost the right to petition for winding-up and relief under section 168A once the Official Receiver had disclaimed his interest in the shares, the question of whether the petition itself disclosed a sound basis for relief was not considered.

The basis of the petition for winding-up

28. The petition avers that when the Company was first incorporated, it was intended to be a joint venture between Mr Ng and the 2nd respondent. The petition states that because of a variety of wrongful acts, Mr Ng had no confidence in the conduct and management of the Company and in its affairs and on that basis, it was just and equitable that the Company should be wound up.

29. It is unnecessary to enumerate in detail all the allegations made by Mr Ng in the petition. The judge summarized them on page 7 of the judgment as follows :

(a) he had been unjustifiably excluded from management;

(b) the Company had failed to disclose its ownership of a property in Hennessy Road;

(c)the Company's accounts did not present a true and fair view of its assets;

(d) by reason of (b) and (c) above, the increase in the share capital in May - August 1992 was unnecessary as the Company had sufficient funds to repay the 2nd respondent;

(e) the increase in share capital was for the purpose of diluting Mr Ng's shareholding; and

(f) the Company has been improperly managed.

30. The judge examined each of the allegations which were made. She came to the conclusion that Mr Ng had failed to establish his case in relation to all save one of the allegations. The judge held that the purpose of the increase in the capital was to dilute Mr Ng's shareholding at a time when he was unable to pay for any further shares. The judge held that the 2nd respondent's conduct in engineering the resolution to increase the capital, thereby diluting Mr Ng's shareholding, was unfair and prejudicial. In that respect she named two cases : Re a Company [1986] BCLC 362 and Tseng Yueh Lee Irene v. Metrobilt Enterprise Limited [1994] 2 HKC 684. It will be necessary to consider the judgments in these cases later in this judgment.

31. Lord Wilberforce's speech in the House of Lords in Re Westbourne Galleries [1973] AC 360 is unquestionably regarded as the leading authority in relation to the meaning and application of the provisions relating to the court's power to order the winding-up of a company in circumstances where it is just and equitable. At the commencement of the passage in his speech which deals with the analysis of the application of the provision in previous cases, the judge emphasized that whereas a petitioner must qualify as a shareholder, he could rely upon circumstances of justice or equity which affect him in his relations with the company, or, with other shareholders. At page 379B, having concluded his assessment of the authorities, he said

"The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure."

By the company structure, he explained that he was referring to the statutory law relating to companies as well as the articles of association by which the shareholders had bound themselves. He went on to explain that the just and equitable provision enables a court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. He emphasized that it was "impossible, and wholly undesirable to define the circumstances in which these considerations may arise". He then went on to say that one or more of three factors may have to be present in order for such circumstance to exist. These factors were considered in the judgment below, but it must be noted here that Lord Wilberforce did not say that because one or more of those factors existed, the just and equitable clause would be brought into play, rather he said that their existence "may bring it into play".

32. As I have indicated, the petition is founded upon the basis that there was a joint venture between Mr Ng and the 2nd respondent. At page 11 of the judgment, the judge referred to the special relationship which Mr Ng had with the persons who controlled the management of the 2nd respondent. It needs hardly to be stated that this special relationship in relation to the Company was abused in a way which did credit neither to Mr Ng nor Mr Kei. On the judge's findings, both persons benefitted personally and wrongfully at the expense of the Company.

33. However, in referring to this special relationship, the judge then went on to refer to Mr Ng's political background. She said :

"... In Mr Ng's oral evidence, he related how he had been encouraged by the then head of the New China News Agency [Mr Xu Jia Tun] to form the Company, and he was also able to take his complaints after 1991 all the way to the top of the state leadership. This part of his evidence was not challenged in cross-examination."

34. Quite apart from the dishonest nature of the cooperative relationship between Mr Kei and Mr Ng, I find it difficult to ascertain from the judgment the nature of the personal relationship which was held to have existed. One can, however, glean this much. The Company was to be concerned in the property sector and it very soon also acquired a construction company as a subsidiary. Mr Ng was to be, and in fact was, the managing director. He was to be the manager of the company. In that respect there is one observation which should be made, namely that the board was at all times composed with a majority of directors who were nominees of the 2nd respondent. Although the judge referred to the board as being more or less equally divided, it is clear that the 2nd respondent had a majority of the shares and a majority on the board.

35. Apart from the $98,000 share capital, it is clear that the petitioner contributed no capital to the Company. On the other hand, the 2nd respondent apparently contributed more that $170 million in loans and finance to the Company as well as keeping it afloat. This correlation of management input on the one side with the capital input on the other together with a nearly, but not quite, equal shareholding and board control seems to me to lie at the root of the arrangement between Mr Ng and the 2nd respondent. Looked at from the point of view of the share capital, it must be self-evident that for a property company in Hong Kong in 1986 $200,000 was merely a token amount.

36. It is common ground that the 2nd respondent is a state-owned company of the People's Republic. It is common ground that the 2nd respondent is directly answerable to and under the control of the State Council. In those circumstances, Mr Kei, and indeed Mr Bao and Mr Wang, were merely temporary nominees. They were nominated directly by the 2nd respondent and therefore acting indirectly on behalf of the State Council being put in charge for the time being of the relevant asset. Whatever relationship Mr Ng had with persons who controlled the management of the 2nd respondent, that relationship never was, and could never have been expected to be, a permanent one. Although senior political figures in the People's Republic were referred to as being persons with whom Mr Ng had contact and dealings and to whom he could complain, it seems to me to be impossible that there was an entity or person with whom Mr Ng could have formed a permanent personal relationship through the agency of the 2nd respondent which could give rise to personal rights which would bring into play the just and equitable clause. His arrangement could only have been temporary to the extent that his political and other connections remained. But the repose of political power in one or more individuals is only temporary. I consider that it is stretching the concept of a quasi-partnership too far to consider that a State could be such a partner. It seems to me impossible for a State to exhibit the qualities of mutual trust and confidence for that to happen for the reason that these are personal qualities and the State is impersonal.

Mr Ng's position in the management of the Company

37. The facts which I have outlined above demonstrate clearly that after at the latest June 1991, Mr Ng no longer had a position in the management of the Company. This was a matter of his own making and choice, even if his choice was dictated by his personal circumstances. Indeed that was the finding of the judge. In 1990, he had chosen, as the judge found, voluntarily to sell his shares to Strong Progress. That intention he still maintained in June 1991 at the board meeting. There is no suggestion that he was pressured or induced to sell his shares. He left the management of the Company and gave up his position as Managing Director voluntarily. More than that, he never attempted to have or complained of not having a place to work at the Company's offices. In early 1992 he left Hong Kong of his own choice. Thereafter he allowed Mr Choy to obtain a charging order which was made absolute. As a result, his shares were sold to Mr Choy at a public auction.

38. In the light of those findings, the judge could come to no other conclusion than that Mr Ng was not excluded from management against his will. Whether it was his personal financial circumstances, or even his ill health which caused him not to remain in Hong Kong, he agreed to give up his role in the management of the Company.

39. In those circumstances, it seems to me to follow inevitably, that for that reason as well Mr Ng could no longer maintain that there was some special relationship between himself and the Company or between himself and the 2nd respondent. Even were there circumstances which could have given rise to a special relationship between Mr Ng and the 2nd respondent, any such arrangement had to have been founded upon the basis that Mr Ng would be responsible for the management and operation of the Company and would therefore be the Managing Director, and that the other shareholder would provide the necessary finance for the Company. Once Mr Ng had evinced a clear intention of no longer being Managing Director and no longer being involved in the management or affairs of the Company, any such special relationship would have had to have come to an end.

Abuse of position in the Company

40. Quite separately from the foregoing considerations, there is also the question of whether any special relationship could be prayed in aid by Mr Ng given his conduct in defrauding the Company of its profits and assets and sharing the spoils with Mr Kei. At page 14 of the judgment, the judge referred to the argument by counsel on behalf of the 2nd respondent that Mr Ng's real objective was not to further the Company's prosperity but to siphon off the profits. The judge dismissed the point on the basis that there was no evidence that this was Mr Ng's intention when forming the Company. That is, to all appearances, correct. However, in my view, it is reading Lord Wilberforce's speech too literally to hold that simply because at the formation of the Company there was a personal relationship which involved mutual confidence which may have been intended to be faithfully carried out, that relationship survived a blatant abuse of confidence on the part of the person seeking to found his case of justice and equity upon it. In short, by abusing his position and siphoning off profits, Mr Ng had destroyed the basis of the mutual trust and confidence.

41. Whether one considers this to be an application of the equitable maxim of 'clean hands' in my view matters not. The judge below dismissed the application of the maxim on the basis that the petitioner's misconduct was only relevant if it was causative of the breakdown in confidence on which the petition was based. Of course, if the misconduct were causative of the breakdown, that in itself would be conclusive. But I do not consider that a petitioner can consistently and persistently abuse his position to defraud the Company and then rely upon some prior arrangement based upon mutual confidence, to which he had not adhered, to found his claim.

42. There is a clear distinction between such a concept and the one which Lord Oliver was dealing with in the case of Vujnovich v. Vujnovich (1989) 5 BCC 740. In that case, the misconduct complained of was not merely not causative of the breakdown, but had taken place after the events which gave rise to the action in the first place.

43. Whilst the dictum of Lord Cross in Ebrahimi v Westbourne Galleries Ltd at page 387F:

"A Petitioner who relies on the "just and equitable" clause must come to court with clean hands, and if the breakdown between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue."

addresses the position of misconduct that was causative of the breakdown, the judge's statement was not directed to misconduct which negatived the original agreement of mutual trust and confidence. It does not avail the petitioner in this case to say that the 2nd respondent was not aware of his misconduct. The reason that the 2nd respondent was not so aware lay in the fact that the petitioner cooperated with the 2nd respondent's agent to deceive the 2nd respondent. It seems to me that it cannot be right that a person can rely on principles of justice and equity when he founds his claim on an agreement which not only has he not honoured but has deliberately abused.

44. For this reason also, I consider that Mr Ng cannot bring himself within the just and equitable provisions of section 177.

45. In those circumstances, it is unnecessary to examine what effect the disclaimer by the Official Receiver of Mr Ng's interest in the shares might have had upon any special relationship had one ever existed. If Mr Ng had no interest in the shares other than as a bare trustee on behalf of Mr Choy who was unable to be registered as a member, the question would arise as to whether there could be any legitimate expectations which could survive the absence of any personal interest in the shares on the part of Mr Ng.

46. In relation to Mr Choy, in my view, the provisions of section 177 in relation to the just and equitable ground cannot begin to apply. Mr Choy was in no position to become a member of the Company. Article 6 of the Articles of Association incorporated the standard form restriction on the transfer of shares. It provided "the directors may at their discretion and without assigning any reason therefor, refuse to register a transfer of any share whether or not it is a fully paid share". Mr Choy, therefore, could have no legitimate aspiration to become a member of the Company. Were there any doubt about this, this was resolved in the judgment of Rhind J to which I have already referred. Even more importantly, Mr Ng's position at the formation of the Company was that he would be the key figure in the management. This was totally absent in relation to Mr Choy.

The dilution of the shareholding

47. It is necessary, however, to go further and to analyze the basis upon which it was said that the conduct of the 2nd respondent was unfair and prejudicial. The judge held :

"In my judgment, the evidence shows clearly that the purpose of the increase in capital was to dilute Mr Ng's shareholding at a time when he would have been unable to subscribe for more shares and to render the shares unattractive and worthless to Mr Choy."

As the facts show, at the time of the increase in the share capital, the charging order had been made absolute in favour of Mr Choy. He had not of course, by then, purchased the shares at auction. It could, nevertheless, be said that Mr Choy had an interest in the maintenance of the value of those shares. In so far as Mr Choy is concerned, and it must be remembered that this petition is being presented on the basis of the protection of the shares held in trust for Mr Choy, the question is simply one of value. The question, therefore, is not so much a question of the special relationship between Mr Ng and either the 2nd respondent, or one or more political figures of the People's Republic of China in the mid-1980s or indeed the State Council, but one simply of equity and fairness between shareholders.

48. In reaching her conclusion that the shares would have been rendered unattractive and worthless to Mr Choy, the judge did not embark upon any analysis which showed that the underlying asset value per share would have been any different after the increase in the number of shares and the consequent injection of capital than it was before. When the point was put to Mr Yip who appeared on behalf of the petitioner, he was not able to point to anything, whether it be in the accounts or anywhere else, which would have shown that the value of the shares as quantified on an asset valuation basis, or any other basis, had been affected by the increase in the share capital.

49. As has already been referred to, the valuation report of May 1991 had concluded that the only possible valuation of the shares was on an asset value basis and since the shares had no value, the injection of capital could only have increased the value of the shares.

50. The judge used a process of deduction to arrive at the conclusion that the purpose of the increase in capital was to dilute Mr Ng's shareholding at a time when he would have been unable to subscribe for more shares and to render the shares unattractive and worthless to Mr Choy. Whilst the judge apparently accepted that the Company's interest liability would be reduced and that the banks would have greater confidence in the Company, stress was laid in the judgment on the fact that these circumstances had existed for some time. The judge emphasised the fact that there had been no internal memorandum and that the 2nd respondent had been apparently content to continue with the situation for a long time, and for something like a year after the valuation report.

51. It would seem from the judgment that it was the dilution in the percentage shareholding which the judge considered was unfair. Indeed, the judge having held that the petitioner had failed to establish any material discrepancies in the accounts, and even given an allowance for the fact that the draft sale and purchase agreement which was produced after the June 1991 meeting was on the footing of a lower figure of overall loss, there can have been no basis for holding that the net asset value of the shares had been reduced.

52. In saying, however, that the 2nd respondent had always supported the Company with shareholders' loans and that there was no evidence that the 2nd respondent had threatened to withdraw its support, the judge made no reference to the fact, as was evident in the valuation report, that the Company was only kept afloat if the interest commitments of the Company were met by further loans from the 2nd respondent. It was clear from the valuation report that if the Company were to survive, it would almost inevitably have had to have a capital injection. In those circumstances, any revival of the financial well being of the Company would be based upon such new capital injection. Furthermore, the Company's capital structure was seriously deficient. Hence the recommendation in the valuation report of a capitalisation of the loans.

53. It would, in my view, be quite unrealistic to have expected the 2nd respondent alone to make such capital injection which would have had the result that any person acquiring Mr Ng's shares would gain 49% of the benefit of the revival of the Company without their contributing anything, whether it be in the form of management services or capital.

54. Therefore, even if it could be said that the value of the shares, which Mr Ng had, and which Mr Choy was in the process of acquiring, were in some way prejudiced because the percentage shareholding would drop unless substantial capital contributions were made, by no stretch of the imagination could that be said to be unfair.

55. Nor, in the circumstances of every private company, could it be said that the creation of a rights issue would give rise to circumstances in which the just and equitable provision, or for that matter unfair prejudice, would come into play.

56. As has been referred to above, the judge below named two cases at the conclusion of the passage of the judgment which related to this. The first was the case of Re a Company [1986] BCLC 362. This was a decision of Hoffmann J (as he then was) in which he dismissed the petition. In the course of his judgment, the judge said at page 367B :

"If the majority know that the petitioner does not have the money to take up his rights and the offer is made at par when the shares are plainly worth a great deal more than par as part of a majority holding (but very little as a minority holding), it seems to me arguable that carrying through the transaction in that form could, viewed objectively, constitute unfairly prejudicial conduct."

The guarded nature of those comments shows that in the first place, the circumstances of each case must be carefully examined; but importantly, the judge was not there saying that simply a rights issue which one of the shareholders could not take up would be unfairly prejudicial. It was a combination of factors which would lead to unfair prejudice. The other case was the case of Tseng Yueh Lee Irene v. Metrobilt Enterprise Limited [1994] 2 HKC 684. In that case, Godfrey J (as he then was) was dealing with an application to strike out a petition in which the allegations made turned upon the question of whether a rights issue had unfairly prejudiced the interest of the petitioner. Godfrey J cited not only from Hoffmann J's decision in Re a Company to which I have referred, but also a decision of Harman J in Re a Company [1985] BCLC 80. In that case, Harman J was dealing with an application for an injunction. He considered that it was arguable that it might be unfairly prejudicial that there should be a rights issue where a member was unable by reason of his own circumstances to take up the rights and that that knowledge was a factor leading to the making of an offer which was in truth illusory because it could not be accepted.

57. In the case before him, Godfrey J likewise refused to strike the petition out because he considered that the matters which the petitioner wished to raise were arguable. In so saying, Godfrey J was careful to be tentative in his conclusions and a fair reading of his judgment shows that he had by no means drawn a firm conclusion on the matter.

58. The judge came to the conclusion that the notice which the 2nd respondent received that the petitioner's shares had been charged, prompted, almost immediately, the calling of the general meeting leading to the increase in share capital. That, however, is not the end of the matter. It seems to me that the judge overlooked a number of factors. First, and most importantly, was the question of the continuation of the Company, not least in terms of paying interest payments. Without the 2nd respondent continuously putting more money into the Company and financing the interest payments, the Company's continued existence was not viable. The auditor's report in the accounts for many years, including 1991, 1992 and 1993, contained the statement :

"In view of the significant and accumulated losses and total net liabilities as at 31st December _______, continuance in business as a going concern is dependent upon the Group and the Company maintaining future profitable operations and the continuing financial support of their ultimate holding company."

59. An almost identical statement appeared in later years after the auditors had been changed to a totally different firm of accountants.

60. It seems to me that no person purchasing Mr Ng's shares could, in the circumstances pertaining in June 1992, have any claim or right to such continuing support and capital injection from the 2nd respondent. The remedy for the Company was clearly an increase in the paid up capital and that was, as the judge acknowledged, overdue. There can be no cause for complaint that by calling a meeting and passing a resolution for a rights issue the 2nd respondent made it abundantly clear to any person who might have wished to acquire the petitioner's shares which had been charged, that new capital had to be raised.

61. In the second place, the circumstances of the Company must be considered. Although the petitioner's shares represented 49%, in the circumstances of this Company, they represented, first of all, a minority shareholding which had at best only attracted a minority board representation. Importantly, they, in common with shares of other private companies, could not be transferred without the consent of the board. The petitioner's shares attracted no management control or control either in general meeting or at board level. In other circumstances, a 49% shareholding often does attract those benefits. The mere dilution of this 49% shareholding to something less than 1% could, in the present circumstances, only have affected the possibility that the 2nd respondent could use its voting rights to secure approval of some scheme of arrangement. However, even in such hypothetical circumstances, the matter would be subject to the court's approval and the minority shareholder would be in a position to establish its rights if necessary.

62. Hence, on the basis that the petition was to protect the value of the shares held on trust for Mr Choy, the rights issue was neither prejudicial nor was it unfair. On the basis that there was a right in Mr Ng to complain whether on his own behalf or that of Mr Choy in the diminution in the percentage shareholding, again no prejudice which the Court should guard against has been established and in any event what was done was not unfair.

The need to show a tangible interest

63. The ground of objection based on the absence of any tangible interest was rejected by the judge, largely, it seems, on the basis that the dilution of the petitioner's shareholding was such a grave offence that it merited a winding-up. The judge referred to the long-standing rule in England stemming from Rica Gold Washing Co. (1879) 11 Ch D 36 that it was necessary for a petitioning creditor to show a tangible interest to be entitled to a winding up order. This decision has been followed in particular by the decision of Buckley J in Re Othery Construction Ltd [1966] 1 WLR 69 and the decision of Plowman J in Re Expanded Plugs Ltd [1966] 1 WLR 514. Indeed the rule appears to be confirmed in the case of Re Commercial & Industrial Insulations Ltd [1986] BCLC 191. In that case, Hoffmann J (as he then was) referred to the rule in Re Rica Gold and to the statements of Oliver J in Re Chesterfield Catering Co. Ltd [1977] Ch 373. The effect of his decision was that although at the preliminary stages a petitioner might not be able to show with any clarity the tangible interest which gave rise to his right to present a petition, once the matter came to trial, it was necessary for him to do so.

64. The judge below referred to two Hong Kong cases, the first In the matter of D.J.H. Consultants Ltd, Civil Appeal 164/1984 and the second Re Cirtex Co. Ltd [1987] 3 HKC 13. In the former case, the Court of Appeal in a statement which was clearly obiter raised the question as to whether section 180(1) of the Companies Ordinance which read :

"On hearing a winding-up petition, the court may dismiss it or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit, but the court shall not refuse to make a winding-up order on the ground only that .... the company has no assets."

altered the principle stated in Re Rica Gold. The Court of Appeal considered that this section presented a formidable hurdle to the adherence to the doctrine in Re Rica Gold. In so saying, the Court of Appeal specifically did not decide the matter and did not refer to any later authorities in England and Wales.

65. In my view, the Court of Appeal in making the observations in the DJH Consultants case overlooked the distinction that had been drawn in the cases between a "tangible interest" and a "surplus of assets for distribution amongst the shareholders". That distinction was emphasised by Oliver J (as he then was) in Re Chesterfield Catering Co. Ltd. see page 379. He said there that it was unduly restrictive of the concept of a tangible interest that it should be regarded as being limited to a surplus of assets. Hoffmann J (as he then also was) in Commercial and Industrial Insulations referred to Oliver J's judgment and said that although the tangible interest will usually mean surplus for distribution of assets that is not the only instance of a tangible interest.

66. Were it necessary to decide the matter in this case, I consider that it would be necessary for the petitioner to show a tangible interest in the Company being wound up and that the petitioner has failed so to do.

67. Finally, I would draw attention to the number of documents that have been copied for the purposes of this appeal. In addition to the core bundle, there were some 27 box files containing altogether more than 5,600 pages. These were provided for each of the 3 judges and no doubt a number of copies for each of the parties. During the course of the hearing only one of the bundles, other than the core bundle, was referred to on one occasion. Although, in the course of the preparation of this judgment reference was had to a few of the other documents, the waste both of time and paper is self-evident. In cases where the documentation used in the court below is extensive, the parties must endeavour to limit the preparation of the papers for an appeal to what is necessary. Should they find themselves in difficulty as to knowing whether reference might have to be made to a document, which their counsel does not intend to use, the appropriate course would be to ensure that one set of documents that are not intended to be referred to should be held available.

68. In the circumstances, in my judgment, this appeal should be allowed, the order in the court below should be set aside and the costs of this appeal and of the hearing below should be to the respondents.

Hon Stock JA :

69. I agree with the judgment of the Vice President and have nothing to add.

Hon Le Pichon JA :

70. I agree with the judgment of the Vice President and there is nothing I can usefully add.

Representation:

Mr Simon Yip, instructed by Messrs Ho, Lo & Yeung, for the Petitioner/Respondent

Mr Alan Leong, SC and Mr Anselmo Reyes, instructed by Messrs Johnson, Stokes & Master, for the Respondents/Appellants

Remarks:
Application for leave to appeal by the Petitioner to the Court of Final Appeal. Application for leave to appeal dismissed. Please refer to the appeal judgment FAMV000019/2001.