Choi Chi Wai v. Cheng Ka Shing and Others
Read the full judgment text of HCMP 729/2012 on BabelCite. This High Court CFI judgment was delivered on 28 April 2017.
1. The dispute between the parties in these 4 proceedings arose out of the affairs of a company, Hong Kong Agriculture Special Zone Limited (香港農業專區有限公司) (“Company”), which engages in importing pigs from the Mainland and selling them by public auction in Hong Kong in return for commission. The Company has always been owned by 3 shareholders, who are Mr Choi Chi Wai (蔡志偉) (“Mr Choi”), Mr Cheng Ka Shing (鄭嘉誠) (“Mr Cheng”) and Mr Lee Pak Kee (李伯驥) (“Mr Lee”) (collectively “Shareholders”), and their
Cited by 8 cases · Cites 11 cases
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HCMP 729/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 729 OF 2012 ________________________
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ACTION NO 1441 OF 2012 ________________________
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ACTION NO 126 OF 2013 ________________________
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ACTION NO 2147 OF 2013 ________________________
________________________ (Heard Together) Before: Madam Recorder Linda Chan SC in Court Dates of Hearing: 20 – 28 February, 1 – 2 and 8 March 2017 Date of Further Submissions: 11 April 2017 Date of Judgment: 28 April 2017 ________________________ JUDGMENT ________________________ A. INTRODUCTION 1.The dispute between the parties in these 4 proceedings arose out of the affairs of a company, Hong Kong Agriculture Special Zone Limited (香港農業專區有限公司) (“Company”), which engages in importing pigs from the Mainland and selling them by public auction in Hong Kong in return for commission. The Company has always been owned by 3 shareholders, who are Mr Choi Chi Wai (蔡志偉) (“Mr Choi”), Mr Cheng Ka Shing (鄭嘉誠) (“Mr Cheng”) and Mr Lee Pak Kee (李伯驥) (“Mr Lee”) (collectively “Shareholders”), and their shareholding is equal. Since 8 March 2008 when Mr Choi was removed as a director, Mr Cheng and Mr Lee have been the only directors of the Company. 2.HCMP 729/2012 is an “unfair prejudice” petition presented by Mr Choi on 16 April 2012 on the basis that the affairs of the Company have been conducted by Mr Cheng and Mr Lee in an unfairly prejudicial manner (“Petition”). The primary relief sought is an order that Mr Cheng and Mr Lee do sell their shares in the Company to Mr Choi, alternatively, Mr Cheng and Mr Lee do purchase his shares in the Company. Pursuant to the order of Harris J made on 24 February 2016, this trial is only concerned with “liability” including issues as to the date of valuation and whether there should be a minority discount. 3.HCA 1441/2012 (“1st Company’s Action”) is an action commenced on 14 August 2012 in the name of the Company against Mr Choi for breach of fiduciary duties and breach of trust qua director. The alleged breaches included Mr Choi’s acts in (a) diverting the profits generated during the first 34 days of the Company’s operation (“34 Days’ Profits”), (b) making a donation of $500,000 on 21 February 2008, (c) refusing to hand over the business to Mr Cheng and Mr Lee after he had been removed as a director on 8 March 2008, (d) applying for a branch office for the Company on 13 March 2008, and (e) failing to make proper declaration of the pigs imported which led to a fine imposed against the Company. Extensive relief in the form of declarations, account of profits and equitable compensation is sought against Mr Choi, and the aggregate amount claimed is $3,381,411.66. 4.HCA 126/2013 (“Derivative Action”) was commenced by Mr Choi on 21 January 2013 against Mr Cheng and Mr Lee (with the Company as a nominal defendant) for breach of an agreement made on 20 December 2007 whereby the Shareholders agreed “to substantiate the Company’s share capital” by paying a “reasonable sum as price for so many new shares so as to properly capitalise the Company to ensure that it operated its business on a sound financial footing without resort to borrowing” (“Capitalisation Agreement”). This action is described in §§1 and 2 of the statement of claim as a “derivative claim” brought by Mr Choi for the benefit of the Company and a “personal claim” brought by Mr Choi against Mr Cheng and Mr Lee for breach of the Capitalisation Agreement and breach of fiduciary duties as directors. The primary relief sought is a mandatory injunction to compel Mr Cheng and Mr Lee to accept the payment tendered by Mr Choi for the shares allotted by the Company to him and a prohibitory injunction to restrain the Company from borrowing any monies which carry interest. 5.HCA 2147/2013 (“2nd Company’s Action”) was commenced in the name of the Company on 8 November 2013 against Madam Chan Oi Kuen, the wife of Mr Choi (“Mrs Choi”), for repayment or account of the 34 Days’ Profits received by her on the bases of breach of fiduciary duties qua employee of the Company and dishonest assistance in assisting Mr Choi to act in breach of his fiduciary duties owed to the Company. 6.At trial, Mr Choi and Mrs Choi are represented by Mr Albert Yau who appear with Mr Chan Chun Sang in all the proceedings. Mr Bernard Mak appears for Mr Cheng and Mr Lee. The Company is represented by Mr Dixon Co. 7.Upon enquiry by the Court as to his role in this trial, Mr Co acknowledges that the Company is only a nominal defendant in the Petition and the Derivative Action and, as such, he will not take any stance in such proceedings. He says that his presence at trial is to pursue the claims made by the Company against Mr Choi and Mrs Choi in the 1st and 2nd Company’s Actions and his involvement will be limited as such. Nevertheless, it is clear that throughout the trial, Mr Co has been assisting Mr Mak, both when he is addressing the court and in cross-examining Mr Choi and his witnesses. This is not surprising, given that the stance adopted by the Company in these proceedings is based the instructions of Mr Cheng and Mr Lee who are the only directors of the Company. 8.Although extensive pleadings were filed in the 3 actions, very little, if any, submissions have been made by counsel on these actions. In the Agreed List of Issues submitted by counsel at Day 9 of the trial, it is clear that the issues in the 3 actions completely overlap with the issues raised by the parties in the Petition. In my view, it is wholly unnecessary for the parties to have commenced the 3 actions, which do not assist the parties to resolve their dispute and only serve to escalate costs. 9.I will deal with the following matters in this order:
B. ASSESSMENT OF WITNESSES B1. Mr Choi and his witnesses 10.In the Petition, the Derivative Action and the 1st Company’s Action, Mr Choi gives evidence for himself. In addition, he adduces witness statements from 5 factual witnesses, who are Mrs Choi, Mr Mak Kwong Yuen (麥廣源) (“Mr KY Mak”), Mr Wong Wing Nam (黃詠楠) (“Mr Wong”), Mr Lam Yu Cheung (“Mr Lam”) and Madam Yeung Yuk Ling. Mrs Choi also gives evidence for herself in the 2nd Company's Action. At trial, Madam Yeung is not called to testify, after this court indicates to Mr Yau that the matters set out in her witness statement are hearsay evidence and, therefore, not admissible as her evidence-in-chief. 11.Mr Choi is an honest witness. Although he received little formal education, it is clear from his demeanour that he tries his utmost to answer all the questions put to him during cross-examination, even though when the questions are put in an offensive or condescending tone or are put on a wrong factual premise. His answers are clear, straight forward and candid, as the following examples show:
12.Indeed, Mr Choi’s evidence is consistent throughout his cross-examination, which lead to Mr Mak trying to stop him from completing some of the answers on the basis that they are well rehearsed. With respect to Mr Mak, I do not think it is fair to criticise Mr Choi for giving consistent answers or to state what he has said in his witness statements. Overall, I find Mr Choi’s evidence to be credible and I prefer his evidence to the extent that it is inconsistent with the evidence of Mr Cheng. 13.Mrs Choi is also a candid and straight forward witness. She provides clear answers on matters which she has personal knowledge. When it comes to matters which she does not have personal knowledge, she readily says so. Her evidence mainly relate to the operational matters of the Company which are largely not in dispute. In fact, her witness statements have not been subject to much cross-examination, and her answers are mostly unchallenged. I accept the evidence of Mrs Choi. 14.Mr Lam is a director and founder of Sam Ran China–Hong Kong Transportation Limited (三然中港運輸有限公司) (“Sam Ran”) and thus an independent witness. His witness statements have not been subject to much cross-examination and are largely unchallenged. For the few questions put to him during cross-examination, Mr Lam provides his answers in a direct manner and I accept his evidence. 15.Mr Wong is also a director and founder of Sam Ran and is an independent witness. The matters stated in his witness statement have not been challenged in cross-examination. Mr Wong is mainly asked about his involvement in assisting Mr Choi to obtain the agency business, what happened at the meeting on 30 December 2007 and the reason for Mr Choi to engage his family members to assist in the operation, and his answers have not been challenged. I accept his evidence. 16.Mr KY Mak is the proprietor of Fairview Accountancy Services Ltd (確達會計事務有限公司) (“Fairview”), which was the company secretary of the Company from its inception to 13 February 2008. He is an independent witness. He comes across as a truthful witness. He gives direct and clear answers to all the questions put to him. He has been cross-examined on his involvement in assisting Mr Choi and Mr Cheng in preparing documentation for the Company, his participation at the various meetings leading to the 1st to 3rd Proposals as well as his response to the request made by Mr Cheng and Mr Lee for inspection of the documents of the Company. His evidence is consistent with contemporaneous documents. I accept Mr KY Mak’s evidence, and I prefer his evidence to the extent that it is inconsistent with the evidence of Mr Cheng. B2. The Company’s witnesses 17.The Company calls 3 factual witnesses in the 1st and 2nd Company’s Actions, namely Mr Cheng, Mr Fok Hei Yuen (“Mr Fok”) and Mr Chan Man Fai (“Mr Chan”). In addition, Mr Cheng gives evidence for himself in the Petition and the Derivative Action. 18.Mr Fok is a partner of Messrs Tang & Fok, which was (and still is) the auditor of the Company. He is an independent witness. Mr Fok gives his evidence in a careful and candid manner. His evidence mainly relates to the general process of auditing the Company’s accounts as he did not carry out the actual audit work. Despite the assertion in his witness statement that he has never been provided with any documents pertaining to the income of the Company before 1 January 2008, he confirms in his oral evidence that in fact all the daily sales records prepared by the auction agent (Hop Kee) were provided to the auditor. Mr Fok also confirms that he did not give advice to the Company to the effect that it could not declare dividend unless and until its issued shares have been paid-up. I accept Mr Fok’s evidence. 19.Mr Chan is a partner of Hop Kee Sam Yick Laan (合記三益生豬欄)[1] (“Hop Kee”). He is an independent witness. His evidence relates to the amount of the 34 Days’ Profits which he confirms to be $2,778,678.66. He is asked by the court about the actual operation of the agency business and he gives direct answers on how it works on a daily basis. He confirms that the involvement of the Company is minimal, especially when Hop Kee implemented an automation system a few months after it had been appointed as the Company’s agent in carrying out the auction. I accept Mr Chan’s evidence. B3. Mr Cheng 20.Mr Cheng comes across as a sophisticated businessman who has ample experience on matters concerning management and proper governance of unincorporated association and company. He strikes me as a meticulous person who is alert to details. He has been subject to extensive cross examination on his dealings with Mr Choi and the matters complained of by Mr Choi in the Petition. While Mr Cheng appears to be willing to answer the questions put to him, it is obvious that when he is asked to explain or justify his actions or decisions which are the subject matters of Mr Choi’s complaints, he often gives vague and general answers apparently to avoid having to commit to a particular stance or fact. It is only when the questions are put by the court that Mr Cheng gives direct answers. In his oral evidence, Mr Cheng has a tendency to put the blame on others, including Mr Choi, the members of the Association and China Liaison Office[2] (“CLA”) even though his assertions have never been mentioned at any meetings of the Shareholders or in correspondence. In particular, I find his evidence on the reasons for reneging on the various agreements reached with Mr Choi on 20 December 2007 and the agreement made with a strategic investor (a subsidiary of Wens) to be wholly incredible, as they fly against the documents signed by the parties and the evidence of the independent witness, Mr KY Mak. I also find his evidence on the reasons for removing Mr Choi as director to be untrue and disingenuous, for the reasons discussed in section D1 below. Overall, I consider Mr Cheng’s evidence to be unreliable and I do not accept it to the extent that it is inconsistent with the evidence of Mr Choi or the evidence of the independent witnesses. B4. Mr Lee 21.Mr Lee did not file any witness statement. Nor does he testify at trial. There is no suggestion that Mr Lee is unable to give evidence. Indeed, Mr Lee is present in court during the trial. Upon the court’s enquiry, Mr Mak confirms that Mr Lee elects not to give evidence on his defences filed in opposition to the Petition and the Derivative Action. He submits that Mr Lee is entitled to rely on the evidence of Mr Cheng as his stance is identical to that of Mr Cheng and “his case stands or falls together with that of [Mr Cheng]”. I disagree. 22.Leaving aside the Derivative Action, which I consider to be demurrable and wholly unnecessary for the reasons explained in section E2 below, unless it can be said that the matters complained of by Mr Choi in the Petition do not raise a prima facie case of unfair prejudice (no such suggestion has been made), Mr Lee’s election not to give evidence has the effect of depriving the court of the evidence which is relevant to the complaints and the reliability of the evidence of Mr Cheng. It is well established that where, as here, a defendant elects not to adduce evidence which is material to the issue, the court is entitled to draw from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold. The principles were stated by Lord Diplock in British Railways Board v Herrington [1972] AC 877 at 930G – 931B as follows:
23.The inference to be drawn must be grounded on the primary facts proved. This was explained by Ribeiro PJ in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§185 – 187:
24.Where the evidence is incomplete and obscure in critical aspects, the silent party’s failure to give evidence may convert that evidence into proof on the matters which are within his knowledge. As stated by Lord Sumption JSC in Prest v Petrodel Resources Ltd and others [2013] 2 AC 415 at §44:
25.Mr Mak does not dispute the above principles. He cites Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 and Tjang Siu Thu v Profield Construction Engineering Ltd & anor [2015] 5 HKC 22 at §33 for statements of principles to the same effect. 26.Moreover, to the extent that Mr Lee has raised positive defences to the complaints raised in the Petition, he bears the evidential burden of proving such defences. The principle was stated in Phipson on Evidence, 18th ed, §6–06 thus:
27.Further, where the directors are sued for breach of fiduciary duties in conducting the affairs of the Company, the burden falls on each of them to demonstrate the propriety of their actions or decisions as the liability of the directors participating in breaches of fiduciary duties is joint and several. It is no excuse that a director blindly followed the lead of another director (Bishopsgate Investment Management Ltd [1993] BCC 120, at 140C–G, per Hoffmann LJ (as he then was) and at 143D–H per Ralph Gibson LJ). 28.Following the above principles, I will not treat the evidence of Mr Cheng as evidence in support of the defences advanced by Mr Lee unless such evidence is not in dispute or is corroborated by other credible evidence. Where I find that the primary facts are sufficient to raise a prima facie case of the matters complained of against Mr Lee and the matters were or likely to be within his knowledge, I will draw reasonable inferences against Mr Lee as to the facts which he has chosen to withhold from the court. B5. Importance of contemporaneous documents 29.Mr Mak submits that as most of the material events took place almost 10 years ago, it is not surprising that the witnesses from both sides have occasionally appeared to be confused about the sequence of events or failed to recall certain details. It seems to me that this observation only applies to the oral evidence of Mr Cheng but not the other witnesses whose testimony is, as discussed above, clear and largely consistent. 30.Mr Mak submits that where, as here, there was a long passage of time between the events and the trial, the court should place special importance to contemporaneous documentation, citing the judgment of Stock JA in Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439 at §135:
31.I agree that in assessing the evidence and making fact finding in these proceedings, the court should place special importance on contemporaneous documentation in particular those which were signed by the Shareholders. C. UNDISPUTED FACTS AND RELEVANT FINDINGS 32.I first set out the facts which I understand to be not in dispute based on the submissions of counsel, the documents disclosed by the parties, the evidence of the witnesses and the lines of cross-examination. Where there are matters in dispute, the respective contentions and my findings (if appropriate) will be stated. C1. Relationship between the parties 33.Mr Choi, Mr Cheng and Mr Lee are experienced businessmen engaging in farming business in Hong Kong. Until 1997 when there was an outbreak of bird flu in Hong Kong, Mr Choi ran a chicken farm in Kam Tin with about 100,000 square feet (“Farm”). He switched to pig farming and subsequently resumed chicken farming until 2005 when the bird flu broke out again. Mr Lee was a chicken farmer, and was known to Mr Choi for many years and the two had been in regular contact. Mr Cheng has since 1980 been engaging in pig farming business and is familiar with the business. Through his involvement in public services relating to agricultural sector, Mr Cheng came to know Mr Lee. 34.In 2005, chicken farming and pig farming business in Hong Kong were adversely affected by the bird flu and Japanese encephalitis respectively. This led to the Government offering financial incentives to the farmers to surrender their licences. At that time, Mr Lee introduced Mr Cheng to Mr Choi. The three of them came up with the idea of setting up an agricultural special zone (“ASZ”) in the Mainland which, if established, would allow the farmers to set up their farms there and importing their crop into Hong Kong. 35.To facilitate the negotiations with the relevant authorities, Mr Cheng, Mr Lee and Mr Choi established the Hong Kong Agriculture Special Zone Development Association (香港農業專區發展協會) (“Association”), which was registered as a society on 25 February 2006. The stated purposes of the Association included assisting the farmers to set up their farm in the ASZ and to promote the development and exchanges of farming business between Hong Kong and the Mainland. 36.As Mr Cheng had more experience in pig farming, it was agreed between them that Mr Cheng would be the Chairman of the Association, while Mr Choi and Mr Lee would be the Vice Chairmen. They then proceeded to recruit other members. An executive committee of the Association (“ExCo”) was formed, whose members included Mr Wong Yung Kan (黃容根), the then representative of the Agricultural and Fisheries Constituency of the Legislative Council, and 8 individuals including Kwan Wing Kai (關永啟), Lam Chi Lun (林子倫), Wong Buk Hung (黃北洪), Lum Choi Kam, Shea Yan Shing (佘恩成), Chan Chiu Yung (陳超勇), Lam Wing Yuen (林榮源) and Lam Po Sang David (collectively the “8 Individuals”). 37.The 8 Individuals later incorporated a company on 3 April 2008 in the name of Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司) (“Management Company”) for the specific purpose of acting as the manager of the Company. The Management Company only has nominal capital, and the 8 Individuals have been its only shareholders and directors. C2. Incorporation of the Company 38.By early 2006, Mr Cheng had already set up several vegetable farms and pig farms in Shaoguan (韶關) in Guangdong Province, while Mr Lee and Mr Choi also ran some chicken farms there. In anticipation of Shaoguan becoming an ASZ, Mr Cheng, Mr Choi and Mr Lee decided to set up a company to capture the business opportunities arising from the need to transport the crop from ASZ to Hong Kong. The other members of the Association were not interested in joining the company. 39.Upon the instructions of Mr Choi, Mr KY Mak incorporated the Company on 19 June 2006 with an authorised capital of $10,000 divided into 10,000 shares of $1 each. At the first meeting of the directors of the Company held on 27 June 2006 at which Mr Choi was the Chairman, it was resolved that:
40.Despite the issue of the 5,400 shares, none of them was paid up by the Shareholders. Although Mr Cheng asserts in his oral evidence that the shareholders have paid $5,400 for the shares issued, this seems to be incorrect as the audited financial statements of the Company for the year ended 31 March 2008 (“2008 A/C”), which were approved by him and Mr Lee on 10 November 2008, recorded that none of the shares issued by the Company had been paid up. 41.Amongst the Company’s documents, the certificate of incorporation, the documents relating to appointment of first directors and secretary and the minutes of directors’ meeting regarding bank account all dated 27 June 2006, the seal and chop of the Company had since 24 July 2007 been kept by Mr Choi at the Farm. The other statutory books and records of the Company including copies of its memorandum and articles of association (“M&A”) had been kept at Fairview’s Office until they were handed over to Mr Cheng on 5 April 2008, following his request. 42.The transport business did not materialise as it would take about 2 years to obtain the requisite approvals from the authorities in the Mainland to establish the ASZ and for the crop produced in such ASZ to be exported to Hong Kong. In the meantime, the Company was left dormant. C3. Securing the agency business 43.On 31 August 2007, the China Chamber of Commerce of Foodstuffs and Native Produce (中國食品土畜進出口商會) (“CCCFNP”) announced that it would appoint a Hong Kong company to be the third authorized agent, in addition to Ng Fung Hong (五豐行) and Guangnan Hong (廣南行), and invited companies with the relevant experience and financial capability to submit their applications before 10 September 2007. 44.There is some dispute on the willingness and enthusiasm on the part of Mr Cheng and Mr Lee in using the Company to pursue the application. Nevertheless, at the meeting on 3 September 2007 at Wai King Restaurant (偉景餐廳) (“Wai King”), which was then the place where Mr Cheng, Mr Choi and Mr Lee had lunch every day, Mr Choi said he would give it a try and put in an application in the name of the Company to CCCFNP. They signed the minutes of the extraordinary general meeting (“EGM”) held on 3 September 2007 to increase the authorized capital of the Company from $10,000 to $50 million. No new share was issued. 45.A few days later, at the meeting of the ExCo held on 6 September 2007 at which Mr Cheng, Mr Choi and Mr Lee were present, there were some discussions about submitting an application for the agency, but no agreement was reached. Mr Cheng stated that Mr Choi, Mr Lee and he would use the Company to make the application and if they succeed in the application, the benefit would belong to the Association. Mr Choi was surprised by what Mr Cheng had said but did not express any view at the meeting. 46.At that time, Mr Choi had already been using his own resources in preparing the application. These included enlisting the assistance of Mr KY Mak to prepare the requisite documentation, discussing and refining the proposed mode of operation with entities familiar with import, transportation and sale of live pigs from the Mainland including廣東溫氏食品集團有限公司 (“Wens”), a substantial company in the Mainland engaging in poultry and pig farming business and the largest supplier of chicken exported to Hong Kong, and lobbying and obtaining the support from 6 different associations involved in poultry farming and related business. 47.Mr Lee had no interest or investment in the process. Although Mr Cheng did not take an active role in the process, there is no dispute that some of the experience and connections in pig farming business stated in the Company’s application was a reference to Mr Cheng’s experience and connections, and Mr Cheng obtained support letters from 2 associations involving in the pig farming related business. 48.The application was submitted by Mr Choi on behalf of the Company to CCCFNP on 8 September 2007. Between 10 September and 9 October 2007, Mr Choi continued to liaise with CCCFNP on the application and provided further documents and supplementary information relating to the capital of the Company, the capacity of the proposed operation and the proposed methods to stabilise the supply of live pigs in Hong Kong. 49.On 22 October 2007, the Ministry of Commerce announced that after considering the 8 applications submitted, the CCCFNP decided to appoint the Company as the third authorised agent, which would be given the same right as Ng Fung Hong and Guangnan Hong in acting as the authorised agent in importing and selling live pigs from the Mainland in Hong Kong. C4. Establishing the agency business — 22 October to 28 November 2007 50.Mr Choi was keen to start the agency business as quickly as possible. He took a month to negotiate and establish the business model and secured the agreements of all the parties required to start the agency business. 51.At the same time, Mr Choi had to deal with regulatory issues including reporting to CCCFNP on the progress of the preparatory work undertaken by the Company. By letter dated 15 November 2007, Mr Choi informed CCCFNP that the Company would be able to start the import on 24 November 2007, initially at 120 pigs per day, to be increased to 320 pigs by the beginning of December 2007. This was equivalent to 8 lorry loads of pigs (with each lorry carrying 40 pigs). 52.By a notice dated 15 November 2007, the Ministry of Commerce requested the 3 authorised agents to meet in Beijing on 19 November 2007 to discuss the market condition in Hong Kong, the quota system in the Mainland and the ways to ensure stable supply of live pigs in Hong Kong. The meeting was attended by Mr Choi as the Chairman and general manager of the Company. 53.By letters dated 22 November 2007 to the Beijing and Guangzhou offices of the Ministry of Commerce signed by Mr Choi on behalf of the Company, the Company notified the Ministry of Commerce that as it had not applied for the daily quota in good time, it could only start importing live pigs after 24 November 2007. It also requested the Ministry of Commerce to allocate a daily quota of 600 pigs to the Company, rather than entrusting Ng Fung Hong to handle the allocation of daily quota amongst the 3 authorised agents. 54.At the same time, Mr Choi wrote to the Food and Environmental Hygiene Department (“FEHD”) to enlist its assistance in understanding the regulatory framework in the Mainland and increasing the number of spaces at the Slaughterhouse. 55.Between 22 October 2007 and 28 November 2007 (when the Company started to import live pigs from the Mainland), Mr Choi with the assistance of his family members managed to establish the entire network and business model required for the agency business. These included negotiating and securing the agreement of (1) the suppliers in the Mainland willing to appoint the Company as their agents in exporting and selling their live pigs in Hong Kong, (2) the transportation company to handle the logistics matters in the Mainland and in Hong Kong, and (3) the auction company to take charge of the sale of the pigs in Hong Kong and to account for the revenue generated from such sale. Since then, the Company has been carrying on its agency business using the same business model established by Mr Choi. C5. Modus operandi of agency business 56.The modus operandi of the agency business was (and still is) fairly simple and involved the following aspects. 57.First, the Company signed an agency agreement (供港活大豬代理協議) with the following suppliers in the Mainland (“1st Agency Agreement”):
58.The Suppliers came to the scene through the introduction of CCCFNP. They met with Mr Choi in Beijing, and after brief negotiation, agreed to enter into the 1st Agency Agreement, which was signed by Mr Choi on behalf of the Company on 12 November 2007. Under the 1st Agency Agreement, the parties agreed, inter alia, as follows:
59.After Mr Cheng and Mr Lee had taken control of the Company in mid-April 2008 (as described in section C13 below), the Company continued to sign similar agency agreements (described as “供港活大豬代理經銷合同”) with the Suppliers and another new supplier, 湖北良友畜禽有限公司, on an annual basis which set out the rate of commission, the minimum quantity of pigs entrusted to the Company for sale and the payment terms. 60.Secondly, the Company engaged Sam Ran to transport the pigs from the Shenzhen Warehouse to Sheung Shui Slaughterhouse (上水屠房) (“Slaughterhouse”). Sam Ran was responsible for handling the clearance with the customs departments in the Mainland and in Hong Kong. On 30 December 2007, the Company and Sam Ran entered into a 交通運輸業務委託協議 (“Transportation Agreement”) whereby the Company appointed Sam Ran to handle all transportation matters for the Company for 15 years. 61.Thirdly, the Company appointed Hop Kee as its sole agent in handling all matters relating to the sale of the pigs delivered to the Slaughterhouse including (1) counting the number of pigs delivered, (2) conducting the auction of the pigs, (3) collecting the cash payment from the buyers (買手) for the pigs bought during the auction, (4) handing over the pigs to the buyers, and (5) keeping the pigs which are not sold and making them available for sale in the next day. Hop Kee has 7 spaces (each described as “laan” “欄”) at the Slaughterhouse to carry on its operation. 62.The appointment was first made in the form of a handwritten undertaking dated 25 November 2007 and signed by Mr Choi on behalf of the Company. The terms of the appointment were subsequently set out in the letter dated 21 April 2008 addressed to Mr Cheng as general manager and signed by Mr Lee on behalf of the Company (“Auction Agreement”). The Auction Agreement provided, inter alia, that:
63.The auction and record process was further simplified in early 2008 when Hop Kee implemented an automated system to assist the process. The new system included an electronic device to measure the weight of each of the pigs sold, which would be recorded in the system. Once the unit prices and the number of pigs sold at such prices were determined at the auction and entered into the system, the actual amount payable by the buyers would be calculated. With this system in place, the staff of the Company would not need to copy the results of the auction from the handwritten records kept by Hop Kee or to monitor the weight of the pigs closely as such information would be automatically recorded in the system. 64.Hop Kee has been providing daily sales records on the auction to the Company (collectively “Daily Records”), which listed out in detail (1) the unit prices, the total weight and number of the pigs sold at the prices and the revenue generated, (2) the commission payable to the Company, (3) the commission and labour charge payable to Hop Kee, and (4) the amount payable to the suppliers. 65.As for the revenue generated by the sale of the pigs, it was handled by Hop Kee to the Company in the following manner:
66.Under the modus operandi established by Mr Choi, the Company only has limited role or involvement in the import and sale process as follows:
C6. Managing the business — 28 November to 31 December 2007 67.The first load of 400 live pigs were delivered to the Slaughterhouse on 28 November 2007. Despite the importance of this occasion, which marked the beginning of the agency business, only Mr Choi and his brother-in-law, Mr Chan Hak Keung (陳克強) attended the Slaughterhouse. Neither Mr Cheng nor Mr Lee appeared. Nor did they enquire with Mr Choi about how the business had been carried on. 68.During the period from 28 November 2007 to 31 December 2007 (“34 Days”), the Company was managed and operated by Mr Choi alone. He was assisted by his daughter, Ms Choi Man Kit (蔡敏潔), Mr Chan Hak Keung and Mrs Choi. Mr Cheng and Mr Lee had no involvement in the day-to-day operation of the Company or its business. 69.During this period, the Company had to face a number of challenges and obstacles posed by the others including the regulatory authorities and the competitors. These included seeking to increase the daily quota for export of live pigs from the Mainland, dealing with the competitors’ attempts to exclude those buyers who purchased any pigs from the Company and the attempt by the local transportation companies to block Sam Ran’s lorries from entering into the Slaughterhouse. Mr Choi was the only person who handled and resolved all these challenges, invariably in his capacity as the Chairman of the Company, which included seeking assistance from CCCFNP and the FEHD. 70.As for the internal affairs of the Company, they were primarily handled by Mrs Choi. These included the day-to-day liaison with the Suppliers and Sam Ran as well as the administrative and accounting matters. She carried out these tasks at the Farm. Mr Chan Hak Keung attended the Slaughterhouse on a daily basis to monitor the auction, copy the results of the auction and obtained the invoices from Hop Kee. 71.Pursuant to the 1st Agency Agreement, the Company was entitled to charge 12% of the amount generated from the sale of the pigs as its commission. After deducting its commission and charge, Hop Kee remitted the gross revenue to the bank account of Mrs Choi who, in turn, used the amount to pay the Suppliers, Sam Ran and other expenses incurred by the business. 72.The gross profits generated by the Company amounted to $2,778,678.66 (ie the 34 Days’ Profits). C7. Agreement with Wens / Eagle Luck 73.While the agency business was on-going, Mr Choi proposed to invite Wens to be a strategic investor of the Company with a view to raise capital to finance the existing and future business of the Company. This was necessary as the Company only had capital of $5,400, which was credited as paid-up. 74.The issues of introducing a strategic investor and injecting capital into the Company were discussed at the Board of Directors’ meeting held on 28 October 2007 attended by Mr Choi (as Chairman), Mr Cheng, Mr Lee and Mr KY Mak (as secretary). This was the first time Mr KY Mak met with Mr Cheng and Mr Lee. At the meeting, the directors considered the letter of intent of the same date from Eagle Luck Development Ltd (鵬福發展有限公司) (a subsidiary of Wens) (“Eagle Luck”) whereby Eagle Luck proposed to increase the capital of the Company to $100 million, to subscribe for 51% issued shares in the Company, and to use the capital raised to finance the business of the Company and to invest in a pig farm in the Mainland. It was unanimously resolved that Mr Choi be authorised to represent the Company to negotiate with Eagle Luck on the matters stated in the letter of intent and to sign the relevant documents. 75.Thereafter, at the meeting held on 1 November 2007 at Panglin Hotel in Shenzhen, which was attended by Mr Choi and Mr KY Mak on behalf of the Company and the representatives of Wens and Eagle Luck, the parties discussed the future mode of cooperation, the agency business then operated by the Company and the manner in which Eagle Luck would acquire the majority shareholding and how to deal with the remaining shareholdings. Reference was made to the involvement of the members of the Association. 76.There was another meeting held on 24 November 2007 in Guangzhou with representatives of Wens, which was attended by Mr Choi and Mr KY Mak on behalf of the Company. At the meeting, the parties finalised the terms of the proposed investment by Eagle Luck into the Company. The matters discussed at the meeting were set out in a document prepared by Mr KY Mak. 77.On 2 December 2007, Mr Choi, Mr Cheng and Mr Lee went to Guangzhou to meet with Mr Lai, a representative of Eagle Luck, and the parties entered into an agreement entitled “入股香港農業專區有限公司協議書” (“Eagle Luck Agreement”) signed by all parties on the same day. Under the Eagle Luck Agreement, the parties agreed, inter alia, that:
78.The Eagle Luck Agreement was never performed by the parties, and none of the parties ever sought to enforce it. There is a dispute on the reason for the non-performance of the Eagle Luck Agreement — Mr Choi says that Mr Cheng changed his mind for reason not clear to him, while Mr Cheng says that the Agreement was cancelled by Eagle Luck after Mr Lai had seen their dispute over the distribution of $5 million and the shareholdings between them. There is no document or evidence from Mr Lai or Eagle Luck regarding the allegation cancellation of the Eagle Luck Agreement. C8. 1st, 2nd and 3rd Proposals to invite subscription of shares 79.It is the unchallenged evidence of Mr KY Mak that he had a meeting with Mr Cheng and Mr Lee on 10 December 2007 at the Panda Hotel (悅來酒店) in Tsuen Wan. At the meeting, Mr Cheng gave various instructions on re-allocation of the shareholdings in the Company. Mr KY Mak says that he just jotted down what was said by Mr Cheng, as he was confused by the instructions and did not know what Mr Cheng wanted him to do. His handwritten notes show that Mr Cheng intended to give 3 months to the members of the Association to decide whether to subscribe for shares in the Company, and to issue 5% shares to each of the 7 associations which had supported the Company’s application to CCCFNP. 80.Pursuant to Mr Cheng’s instructions, Mr KY Mak prepared a letter dated 11 December 2007 in the name of the Association and to be signed by Mr Cheng as Chairman and by Mr Wong Yung Kan as President (“1st Proposal”). In the 1st Proposal, Mr Cheng proposed to change the capital and shareholding of the Company as follows:
81.Mr Choi was not aware of, and had not been consulted by, Mr Cheng before he instructed Mr KY Mak to prepare the 1st Proposal. In the end, the 1st Proposal was not issued by the Association. Mr Cheng says that this was because the members of the Association objected to the inclusion of Wens as a prospective shareholder, while Mr Choi saya that it was because Mr Wong Yung Kan considered that the 1st Proposal should be issued by the Company, rather than the Association. It seems to me that the reason given by Mr Choi to be more plausible, given that Mr Wong Yung Kan was named as one of the signatories of the 1st Proposal. 82.Thereafter, Mr Cheng instructed Mr KY Mak to prepare another document entitled “聯合股份募集及專案簡介” to be issued in the names of the Association and the Company (“2nd Proposal”). The 2nd Proposal stated, inter alia, as follows:
83.Again, Mr Choi was not consulted by Mr Cheng about the 2nd Proposal. Nor did Mr KY Mak send the 2nd Proposal to Mr Choi after it had been prepared. 84.On 18 December 2007, Mr Choi met with Mr Wong Yung Kan at which he was shown the 1st Proposal and was asked to issue the same in the name of the Company. Mr Choi says out of respect for Mr Wong Yung Kan and Mr Cheng, he agreed to issue the 1st Proposal in the name of the Company. At the meeting, Mr Wong Yung Kan suggested Mr Choi to let the other shareholders to re-participate in the business of the Company. 85.Mr Choi then instructed Mr KY Mak to prepare a letter based on the terms of the 1st Proposal to be issued in the name of the Company. The letter was dated 20 December 2007 and signed by Mr Choi as Chairman of the Company (“3rd Proposal”). The contents of the 3rd Proposal were almost identical to the 1st Proposal save that the proposed shareholding for Wens was increased from 5% to 10%, while the shareholding for Mr Choi and Mr Lee was increased from 6% to 7%. There is a dispute on whether the changes in the shareholdings had been discussed with Mr Cheng and Mr Lee before the 3rd Proposal was issued by the Company. I find that Mr Choi had obtained the agreement of Mr Cheng and Mr Lee on the changes, as neither of them has complained about the contents of the 3rd Proposal after it was issued. 86.Also on 18 December 2007, Mr Cheng and Mr Lee attended the Fairview Office for the first time. They requested Mr KY Mak to provide the company kit and the Eagle Luck Agreement to them. Mr KY Mak did not accede to the request as he considered that it was the responsibility of the Fairview to retain the documents of the Company and he wanted to understand what was going on before handing over the documents to them. As Mr Cheng insisted on taking the company kit, Mr KY Mak called the police for assistance. In the end, Mr KY Mak provided copies of the memorandum and articles of association, the business certificate, the minutes of the Board of Directors’ meeting on 28 October 2007 and the Eagle Luck Agreement after Mr Cheng and Mr Lee had signed a handwritten note to request for the same. 87.According to the record maintained by Mr Choi, the 3rd Proposal was only received by some of the entities between 27 and 31 December 2007. As will be seen in section C9 below, by that time, all the 50,000,000 shares in the Company were already issued to Mr Choi, Mr Cheng and Mr Lee. It is not clear how the Company could allocate the shares to the applicants, should they decide to accept the 3rd Proposal. 88.As it turned out, no one accepted the 3rd Proposal. C9. Agreements reached on 20 December 2007 89.In the meantime, there was a Board of Directors’ meeting of the Company held in the evening of 20 December 2007 at which Mr Choi, Mr Cheng, Mr Lee and Mr KY Mak were present. As stated in the handwritten minutes prepared by Mr Cheng (“Handwritten Minutes of 20/12/2007”), the first 3 resolutions were passed unanimously resolved while the last resolution was not passed:
90.A few days after the meeting, Mr KY Mak prepared the typed-up minutes of the Board of Directors meeting held on 20 December 2007, which was signed by all the directors (“Typed-up Minutes of 20/12/2007). The contents of these Minutes were largely similar to the Handwritten Minutes of 20/12/2007. As Mr Cheng and Mr Lee dispute what was agreed at the meeting and the meaning of the words used in the Type-up Minutes of 20/12/2007, I set out the relevant resolutions as they appeared in the Minutes:
91.There is no dispute that at the meeting on 20 December 2007, Mr Choi, Mr Cheng and Mr Lee also agreed to allot 49,994,600 shares to themselves at $1 each, with Mr Choi and Mr Cheng receiving one share more than Mr Lee. For this purpose, they signed the minutes of Board of Directors’ meeting and EGM stated to have been held on 20 December 2007, which recorded the unanimous resolutions approving the allotment. Each of them also signed application dated 20 December 2007 to apply for the shares allotted by the Company. I refer these documents signed by the parties for the purpose of issuing and allotting 49,994,600 new shares as “Allotment Documents”. All the Allotment Documents had been prepared by Mr KY Mak and brought to the meeting on 20 December 2007 for the Shareholders to sign, and they signed them at the meeting. 92.In addition, Mr Choi, Mr Cheng and Mr Lee also signed 股東權益協議書(agreement as to shareholders’ interest dated 20 December 2007 (“Shareholders’ Agreement”). 93.There is a dispute as to whether the Shareholders’ Agreement was signed on 20 December 2007 — Mr Choi and Mr KY Mak say that it was signed before the Shareholders proceeded to hold the Board meeting recorded in the Handwritten Minutes of 20/12/2007, while Mr Cheng says that it was signed 2 days later, at Wai King or Lung Wah restaurant, when he was having lunch with Mr Choi. The relevance of this dispute relates to Mr Cheng’s contention the Shareholders’ Agreement was subject to 2 conditions precedent, namely (1) the complete handover of all the work and duties undertaken by Mr Choi in the Company on 1 January 2008, and (2) the immediate opening of 2 bank accounts in the name of the Company (“Alleged Conditions Precedents”), both of which, he says, was agreed between the parties at the Board meeting on 20 December 2007. 94.I reject Mr Cheng’s evidence that he only signed the Shareholders’ Agreement 2 days after the meeting on 20 December 2007, as it is contradictory to all the evidence and his own pleaded case:
95.There is no dispute that the Shareholders also signed the minutes of the Board of Directors’ meeting held on 20 December 2007 at 8:35 pm (“Board Minutes of 20/12/2007”) which recorded that the Shareholders’ Agreement was approved by all the directors unanimously. 96.In all the minutes of the meetings held on 20 December 2007, Mr Choi was described as the Chairman and he signed them as Chairman of the meetings. 97.There is no dispute that on 21 December 2007, Mr Choi opened a bank account in the name of the Company at Bank of China and another account at Standard Chartered Bank, and Mr Choi, Mr Cheng and Mr Lee were named as joint signatories. As Mr Cheng and Mr Lee did not attend the banks to sign the documents required to open the bank accounts until early January 2018, the bank accounts were only opened on 6 or 7 January 2008. C10. Meeting on 30 December 2007 98.There was a meeting held on 30 December 2007 at a restaurant in Shek Kong (石崗金疊餐廳), which was attended by the Shareholders and Mr Wong. At the meeting, a transportation agreement was signed between the Company and Sam Ran whereby the Company agreed to engage Sam Ran to handle all the transportation matters from 1 January 2008 to 31 December 2022. Mr Choi signed the agreement on behalf of the Company and as Chairman of the Company, while Mr Cheng and Mr Lee signed it as directors. 99.There were two sets of minutes for the meeting on 30 December 2007, one handwritten by Mr Wong and one typed up minutes (together “Minutes of 30/12/2007”). As their contents are identical, I will refer to the typed up version. There is no dispute that:
100.§2 of the Minutes of 30/12/2007 stated as follows:
101.The Minutes of 30/12/2007 also stated as follows:
102.Mr Cheng does not accept that the matters set out in §§3 – 10 of the Minutes of 30/12/2007 were agreed upon by the Shareholders. In his oral evidence, Mr Cheng clarifies that the matters stated in §§3 – 10 of the Minutes of 30/12/2007 were mentioned by Mr Choi at the meeting, but he did not say whether he agreed or disagreed. Mr Cheng says that in his mind, it was not necessary to discuss any matters about the Company as Mr Choi had already agreed to hand over control the Company, whereupon he and Mr Lee could decide any matters on their own. As for Mr Choi, he says that all the matters set out in the Minutes of 30/10/2007 were discussed and agreed upon by Mr Cheng and Mr Lee at the meeting, although no formal resolutions were passed as it was not a Board meeting. 103.I find that the matters stated in §§3 – 10 of the Minutes of 30/10/2007 were agreed upon by the Shareholders, for the following reasons:
C11. Managing the agency business – 1 January to 15 April 2008 104.On 1 January 2008, the first day when Mr Cheng and Mr Lee were supposed to take up some of the duties previously undertaken by Mr Choi, neither of them attended the Farm, the Fairview Office or the Slaughterhouse, which were the only places at which the Company’s business and affairs were carried out. They did not make any enquiry with Mr Choi or Mr KY Mak about the affairs of the Company. Nor did they make any request to Mr Choi or Mr KY Mak to hand over any affairs of the Company. 105.Mr Choi continued to operate the agency business with the assistance of his family members. For this purpose, Mr Choi:
106.The gross profits generated by the agency business during the period from 1 January to 15 April 2008 was $9,198,108.45 (“4.5 Months’ Profits”). Pursuant to Mr Choi’s instructions, the entire amount was held by Hop Kee on account of the Company. C12. Removal of Mr Choi as director 107.While Mr Choi was still carrying on the agency business, without any prior notice or discussion, Mr Cheng instructed Fairview to issue a notice dated 10 January 2008 purportedly on behalf of the Board to convene an EGM on 12 January 2008 to consider resolutions to (1) remove Mr Choi as a director and appoint Mr Wong But Hung and Mr Lam Wing Yuen (2 of the 8 Individuals) as directors of the Company, (2) replace the company Secretary with a new company Secretary, and (3) arrange new authorised signatories (“Purported Notice of 10/1/2008”). 108.Mr Choi, through his solicitors, Messrs Gallant Y T Ho & Co (“GYTH”), complained on 11 January 2008 that the Purported Notice of 10/1/2008 was invalid. In the same letter, GYTH stated that at the Board meeting on 30 December 2007, it had been unanimously resolved that Mr Choi be appointed as Chairman of the Company for 2 years from 1 January 2008 and that each shareholder should provide $3.5 million as “temporary capital contribution” in the form of shareholder’s loan by 15 January 2008. A cashier order for $3.5 million payable to the Company was provided by Mr Choi to Fairview on 12 January 2008 as payment for 7% shares issued to him. Mr Cheng and Mr Lee did not pay any amount to the Company by 15 January 2008. 109.In response, Mr Cheng and Mr Lee instructed Messrs Chan, Evans, Chung & To (“CECT”) to issue a letter dated 25 January 2008 making a number of serious allegations against Mr Choi (“CECT’s Letter of 25/1/2008”). The allegations will be considered in section D1 below. 110.Pursuant to another notice dated 2 February 2008 issued by Mr Lee, a Board meeting was held on 13 February 2008 (“Board Meeting of 13/2/2008”) to consider resolutions to remove Mr Choi and Fairview as director and company secretary respectively and to convene an EGM. The Board Meeting of 13/2/2008 was attended by Mr Cheng, Mr Choi, Mr Lee and Mr Wong and a representative of the new company secretary. At the Meeting:
111.On the same day the resolutions were passed, a notice was issued to convene an EGM to be held on 8 March 2008 to consider a resolution to remove Mr Choi as director. 112.By letter dated 19 February 2008, GYTH gave notice on behalf of Mr Choi to appoint 2 persons as additional directors, and requested the Company, Mr Cheng and Mr Lee to consider at the coming EGM the way to resolve the Company’s shortage of capital, which was required to import the live pigs into Hong Kong and to set up the other facilities in Mainland. 113.At the EGM held on 8 March 2008 (“EGM of 8/3/2008”), there were arguments between Mr Choi and Mr Cheng as to (1) whether Mr Choi’s shareholding in the Company should be larger in light of the $3.5 million he paid to the Company, (2) whether Mr Choi or Mr Cheng should act as Chairman of the meeting, and (3) whether the Minutes of 30/12/2007 accurately reflected what had been agreed at the meeting. As to (3), Mr Cheng acknowledged at the meeting that some of the matters stated in the Minutes of 30/12/2007 had been agreed by him, although he did not identify which matters. After these intense arguments, Mr Choi left the meeting. 114.It appears that resolutions were passed by Mr Cheng and Mr Lee at the EGM of 8/3/2008 to remove Mr Choi as director of the Company, as notification of change of director was filed at the Companies Registry on 11 March 2008. No minutes of the EGM of 3/8/2008 have been disclosed and it is not clear whether there was any discussion on the reasons for removing Mr Choi as director. However, given that Mr Cheng and Mr Lee had already decided to remove Mr Choi as director on 10 January 2008, it is reasonable to infer that there would not be any discussion on the reasons for removing Mr Choi as director. C13. Taking control over the Company 115.Even before removing Mr Choi as a director of the Company, Mr Cheng and Mr Lee have already been taking steps to obtain control over the Company, its agency business and assets in the following manner. 116.First, at the Board meeting on 13 February 2008, Mr Cheng and Mr Lee caused resolutions to be passed to remove Fairview as company secretary and to change the registered office to a newly rented office at Sheung Shui Plaza (“SS Office”) with effect from 8 March 2008. 117.Secondly, on 14 February 2008, Mr Cheng requested Fairview to return the books and records of the Company. Upon receiving payment of its professional fees, Fairview returned all of them to the Company on 5 April 2008. 118.Thirdly, Mr Cheng and Mr Lee decided not to use the bank accounts already opened by the Company at Bank of China and Standard Chartered Bank. Instead, they opened a new bank account of the Company at Bank of Communications (“BOC”), with 2 of them being its only authorised signatories. 119.Fourthly, Mr Cheng and Mr Lee caused CECT to issue a demand letter to Hop Kee on 20 March 2008, requesting it to pay all the monies owed to the Company into its bank account at Standard Chartered, and stating that if Hop Kee continued to deal with Mr Choi (who had been removed as director), it did so at its own risk. In response, on 27 March 2008, Hop Kee through its solicitors pointed out that Mr Choi had been running the agency business all along and still held the import permits of the Company, and requested CECT to confirm whether Mr Choi still had authority to act on behalf of the Company. On 1 May 2008, Mr Lee on behalf of the Company instructed Hop Kee to pay the 4.5 Months’ Profits to the Company, whereupon Hop Kee paid the entire amount into the Company’s bank account at BOC on 16 May 2008. 120.Fifthly, Mr Cheng and Mr Lee continued to follow the modus operandi established by Mr Choi in carrying on the agency business, and entrusted the actual work relating to import, transportation and sale of the live pigs to Sam Ran and Hop Kee. They decided to replace all the family members of Mr Choi by new employees and employed a part time accountant, Ms Hung Yin Ling (“Ms Hung”), to handle the accounting and banking matters. They also replaced Mr Chan Hak Keung with 2 junior staff (whose monthly salary was less than $10,000) to attend the Slaughterhouse to copy the results of the auction. 121.Sixthly, Mr Cheng and Mr Lee appointed the Management Company, a newly formed shelf company, to manage the business of the Company. D. COMPLAINTS IN THE PETITION 122.Against the above facts, Mr Choi complains that the affairs of the Company have been mis-managed by Mr Cheng and Mr Lee in an unfair manner and that his interest as shareholder has been prejudiced. Based on his complaints pleaded in the Petition and the Amended Points of Claim (“APOC”), the defences pleaded in the Re-Amended Points of Defence filed on behalf of Mr Cheng and Mr Lee (“RAPOD”) and the Agreed List of Issues, the complaints fall into 10 categories and the issues raised by the parties may be summarised as follows:
123.The issues will be analysed in turn. D1. Exclusion from management 124.The applicable legal principles are not in dispute. The starting point is the seminal speech of Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 at 379B–G in the context of a “just and equitable” winding up petition:
125.The approach to the concept of unfairness in an unfair prejudice petition runs parallel to the concept of “just and equitable” as a ground for winding up as explained in In re Westbourne Galleries Ltd. The concept of fairness must be applied judicially and the content which it is to be given by the court must be based upon rational principles. The context and background are very important (O’Neill v Phillips [1999] 1 WLR 1092 at 1098D – 1099F, per Lord Hoffmann; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§43 – 45, per Ma CJ and Lord Millett NPJ). 126.In O’Neill v Phillips, at 1101D – 1102B, Lord Hoffmann explained what would give rise to an equitable constraint in this way:
127.As to what may constitute considerations of a personal character involving mutual confidence, “this may come in the form of mutual understandings between members of a company or what may have been ‘an accepted course of conduct between the parties whether or not cast into the mould of a contract.’” (Kam Leung Sui Kwan v Kam Kwan Lai at §46). 128.With the above principles in mind, I turn to the evidence. 129.It is Mr Choi’s evidence that at the time he formed the Company with Mr Cheng and Mr Lee, he did so on the basis of personal relationship and the trust each of them reposed on the other. It was the mutual understanding of the Shareholders that they would work as equal partners in establishing and running the business together. Mr Choi says that it was on these bases that he decided to use the Company to bid for the agency business and allowed Mr Cheng and Mr Lee to re-participate in the agency business despite the Oral Agreement and the fact that neither of them had made any contribution to the Company. Mr Choi accepts under cross-examination that although there was no agreement to the effect that the Shareholders could only act with their unanimous consent, it was the mutual understanding between the Shareholders that they would be equal partners of the Company, and would be entitled to run its business together. I accept Mr Choi’s evidence.
130.In their RAPOD, Mr Cheng and Mr Lee claim that it was Mr Cheng who decided to establish the Company and invited the members of the Association to be “strategic shareholders”, and Mr Choi was “invited as a strategic shareholder of the Company so that the Company could secure a source of business should the transport service materialize”. On this basis, they deny that there was any agreement between the Shareholders “which formed the basis of any mutual trust and understanding or any quasi-partnership arrangement”. I reject this assertion.
131.I find that the Company was formed on the basis of personal relationship involving trust reposed by the Shareholders on each other, and upon the mutual understanding that they would work as equal partners in running its business together. It follows that the Company is a quasi partnership and Mr Choi is entitled to participate in managing its business as an equal partner in the same way as Mr Cheng and Mr Lee. There is thus an equitable constraint on each Shareholders that he could not exercise his legal power in such a way as to exclude the others from participating in the management of the Company. 132.As stated in section C12 above, as early as 10 January 2008, Mr Cheng and Mr Lee already decided to remove Mr Choi as a director of the Company. At the Board Meeting of 13/2/2008 and the EGM of 8/3/2008, Mr Cheng and Mr Lee did not provide any reason for removing Mr Choi as a director. It is clear from the transcript of the Board Meeting of 13/2/2008 that Mr Cheng and Mr Lee merely proceeded on the basis that as the majority shareholders, they could exercise their legal power to remove Mr Choi as a director without any reason. In light of my finding on the bases upon which the Company was formed, I do not think that Mr Cheng and Mr Lee could fairly or equitably exercise their majority power in this way. 133.In their RAPOD, Mr Cheng and Mr Lee assert that it was “both lawful and proper and for the interest of the Company” to remove Mr Choi as a director as he had wrongfully seized control of the Company from late October 2007 to 30 April 2008 to exclusion of Mr Cheng and Mr Lee and had “mismanaged the Company in breach of his director’s duty and fiduciary duty towards the Company and to the detriment and prejudice of both the Company and the Respondents as shareholders”. No particulars have been provided on the alleged mismanagement or the detriment allegedly suffered by the Company. The allegation flies against the undisputed facts that:
134.In his oral evidence, Mr Cheng asserts that the reasons for removing Mr Choi as a director were those stated in correspondence although he does not identify which letter(s) he has in mind. As the only letter relevant to the alleged misconduct referred to by Mr Mak during his cross-examination is the CECT’s Letter of 25/1/2008, I will consider the allegations contained in this letter. The allegations made by Mr Cheng and Mr Lee included, inter alia:
135.In my view, the allegations made in CECT’s Letter of 25/1/2008 are wholly without merit and some of them are clearly false. 136.First, the allegation that the agency business was obtained and carried on by the Company “for and on behalf of the Association” and that Mr Choi was obliged to account to the Association (§134(1) – (2) above) is manifestly false. Upon the court’s enquiry, Mr Mak expressly disavows the allegation, and confirms that the Association has no right or interest in the Company or the agency business. 137.Secondly, the allegation that Mr Choi treated the Company’s money as his own (§134(3) above) flies against the contents of the Shareholders’ Agreement, the Board Minutes of 20/12/2007 and §2 of the Minutes of 30/12/2007, all of which recorded the fact that the Shareholders had agreed that Mr Choi was entitled to operate the agency business on his own during the 34 Days, and that the Company, Mr Cheng and Mr Lee “had nothing to do with the profits or liabilities” of the business during this period. The allegation that Mr Choi treated the Company’s money as his own is disingenuous, given that Mr Cheng and Mr Lee have expressly agreed to allow Mr Choi to retain the 34 Days’ Profits. 138.Thirdly, the allegations about assigning “valuable contracts to connected persons” and hiring close relatives as servants of the Company (§134(4) – (5) above) are wholly without merit. These matters were well known to Mr Cheng and Mr Lee and they never made any complaint about them at any of the meetings of the Company. Indeed, it is difficult to see how Mr Cheng and Mr Lee could honestly instruct CECT to make these allegations against Mr Choi, given that:
139.Fourthly, the allegations on appointing a “connected person” as director of the Company, purporting to arrange the distribution of share of the Company, and the attempt to lend $3.5 million to the Company (§134(6) – (8) above) are wholly without basis:
140.Fifthly, the allegation that Mr Choi had wrongfully represented to the others that he was the Chairman and that he alone could act on behalf of the Company (§134(9) above) is again disingenuous. Mr Cheng and Mr Lee were clearly aware of the fact that Mr Choi had been acting as the Chairman of the Company, both externally and internally, and they never complained about it:
141.Sixthly, the allegation that Mr Choi failed to allow inspection of the documents (§134(10) above) was made on a false premise. As discussed in section C8 above, the request for inspection of documents was made to Fairview, not Mr Choi. In any event, the documents requested by Mr Cheng and Mr Lee were duly provided by Fairview to them. 142.Seventhly, the alleged failure of Mr Choi in handing over “any properties” of the Company upon demand (§134(11) above) was extremely vague and in any event, wholly unjustified in light of the fact that:
143.Lastly, Mr Mak submits that if the court finds that the Shareholders did not reach the Oral Agreement, then “the position must be that [Mr Choi’s] removal from the Board could not have been unfairly prejudicial because it was brought about by [Mr Choi’s] own wrongful act”, citing Mears v R Mears and Co (Holdings) Ltd [2002] 2 BCLC 1 at §§27 – 35. The submissions must be rejected:
144.For the above reasons, I find that in removing Mr Choi as a director, Mr Cheng and Mr Lee were relying solely on their majority power qua shareholders of the Company, and they did not state or rely on any other ground or allegation in support of their act. Although Mr Cheng asserts that the grounds for removing Mr Choi were stated in correspondence, the allegations raised in CECT’s Letter of 25/1/2008 are wholly without merit and some of them are clearly false. It is clear from the steps taken by Mr Cheng and Mr Lee (discussed in section C13 above) that even before Mr Choi was formally removed as a director, they had already been taking steps to seize control over the Company’s business, affairs and assets to the exclusion of Mr Choi. 145.In exercising their majority power to remove Mr Choi as a director of the Company, Mr Cheng and Mr Lee acted in breach of the bases upon which the Company had been formed, and their conduct was unfair and prejudicial to the interests of Mr Choi as it deprived his right to run the Company and its business as an equal partner. 146.Further, the removal of Mr Choi as a director also prejudiced his interest in the Company as he lost his right to share in the profits through director’s remuneration. This was unfair to Mr Choi as the other 2 partners, Mr Cheng and Mr Lee, continued to receive director’s remuneration at $60,000 per month, in addition to the other allowance and benefits such as the use of Company’s cars and receiving reimbursement for their entertainment and travelling expenses, as further described in section D7 below. 147.In light of my conclusion on exclusion from management, it is unnecessary to decide the other issues identified in §122(1)(b) – (c) above. Nevertheless, for the sake of completeness, I find that at the meeting on 20 December 2007, the Shareholders agreed that from 1 January 2008 onwards, Mr Cheng and Mr Lee would share some of the work or duties previously undertaken by Mr Choi and that the transfer would be effected gradually. This finding is based on the clear wordings of the Handwritten Minutes of 20/12/2007 and the Typed-up Minutes of 20/12/2007 (discussed in section C9 above), and the evidence of Mr Choi and Mr KY Mak as to what happened at the meeting. 148.I reject the allegation made by Mr Cheng and Mr Lee that at the meeting on 20 December 2007, the Shareholders agreed to a complete handover of all the work and duties from Mr Choi to them, for the following reasons:
149.I turn to the meeting held on 30 December 2007. As discussed in section C10 above, I find that the Shareholders did agree upon the matters set out in §§3 – 10 of the Minutes of 30/12/2007, which included Mr Choi’s appointment as Chairman of the Board for 2 years at $60,000 per month. 150.Thus, even if I were wrong in finding that the Company was formed on the bases contended by Mr Choi, the act of Mr Cheng and Mr Lee in excluding Mr Choi from the management of the Company was contrary to the agreements reached by the Shareholders on 20 December 2007 and 30 December 2007 that Mr Choi could continue to manage the Company as Chairman and director of the Company. Such conduct was unfair and prejudicial to Mr Choi’s interest as he lost his right to receive his remuneration of $60,000/month from 1 April 2008 onwards. D2. 34 Days’ Profits 151.It is Mr Choi’s evidence that in late October 2007 at Wai King, the Shareholders reached the Oral Agreement that Mr Choi could operate the agency business on his own account. He says at that time, the Ministry of Commerce wanted the Company to commence its operation as soon as possible. Mr Cheng and Mr Lee were pessimistic about the business, as they were concerned that the Company would not be able to compete with Ng Fung Hong and Guangnan Hong, both of which were substantial companies and had been in the business for some time. 152.During cross-examination, it is suggested to Mr Choi that there was no urgency to start the operation, nor did the Ministry of Commerce ask the Company to start its operation as soon as possible. The suggestion appears to be based on Mr Cheng’s assertion that his intention was to start the operation sometime in 2008 when the pig farms were relocated to ASZ and the pigs could be re-imported into Hong Kong. 153.Mr Cheng’s assertion cannot be true.
154.Mr Choi’s evidence is corroborated by Mrs Choi who was present at the meeting at which the Oral Agreement was reached. Mrs Choi recalls that Mr Lee and Mr Cheng both appeared to be skeptical about the future of the business, and they mentioned about financial constraints or limits and discouraged Mr Choi from commencing the business. Mr Choi insisted that he would give it a try and, upon seeing that Mr Choi was keen to start the business, Mr Cheng and Mr Lee said that they would not participate, and Mr Choi should bear all the consequences in doing so. After the meeting, while Mrs Choi was waiting outside Wai King, Mr Lee came to her and asked her to persuade Mr Choi to give up the idea as there was no money to start the business, whereupon Mrs Choi responded that they should just let Mr Choi try. This evidence of Mrs Choi is not challenged during her cross-examination. 155.Mr Mak submits that Mr Choi’s account on the Oral Agreement “is mired with inherent improbabilities and inexplicable by any standard of commercial reasonableness”, on the bases that (1) Mr Cheng and Mr Lee would not suddenly become disinterested in the business, (2) Mr Cheng’s act in putting forward the 1st and 2nd Proposals was inconsistent with the Oral Agreement, (3) Mr Choi did not take steps to formally take over the Company or transfer all the shares to himself, and (4) the Shareholders still went to meet with Wens on 24 November 2007 to discuss its potential investment in the Company. It seems to me that the submissions are made on the erroneous basis that under the Oral Agreement, Mr Cheng and Mr Lee agreed to give up all their rights and interests in the Company, which is not the case advanced by Mr Choi. As Mr Choi says in his evidence, which I accept to be true, the intention of the Shareholders was that Mr Choi would run the operation on his own account as a try (“等我試試”) and no fixed period was agreed. As a matter of fact, it was only until the Shareholders’ Agreement that the Shareholders agreed that the period for which Mr Choi could operate the business on his own was from 28 November 2007 to 31 December 2007. 156.The evidence of Mr Choi and Mrs Choi that the Shareholders reached the Oral Agreement in late October 2007 is also corroborated by the fact that during the 34 Days, Mr Cheng and Mr Lee were not concerned with, and had no involvement in, the operation of the agency business at all. Their act in not spending any time or resources in establishing or operating the agency business is consistent with the fact that the Shareholders had entered into the Oral Agreement in late October 2007, such that the success or failure of the agency business had nothing to do with them. More importantly, it is supported by the express terms of the Shareholders’ Agreement, as discussed further below. I accept the evidence of Mr Choi and Mrs Choi and find that the Shareholders reached the Oral Agreement in late October 2007. 157.The Shareholders’ Agreement was in Chinese and its English translation is not in dispute. Given its importance, I set out the terms in full:
158.Despite the very clear terms of the Shareholders’ Agreement, Mr Cheng and Mr Lee contend (at §50 of RAPOD) that it was “not enforceable or binding” on them because they signed the Shareholders’ Agreement on the Alleged Conditions Precedent, which Mr Choi agreed but failed to fulfill. 159.The Alleged Conditions Precedent were not mentioned anywhere in the Shareholders’ Agreement. Nevertheless, Mr Cheng seeks to introduce extrinsic evidence to vary the express terms of the Shareholders’ Agreement. He does so by asserting, in §§30 and 32 of his witness statement, as follows:
160.The defence is wholly devoid of merit and must be rejected. 161.First, the Handwritten Minutes of 20/12/2007 prepared by Mr Cheng himself did not refer to the Shareholders’ Agreement at all. Mr Cheng has not been able to proffer any sensible explanation as to why he did not record the so-called agreement by the Shareholders to the effect that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent. 162.Secondly, it is Mr KY Mak’s clear evidence (which I accept) that the Shareholders never agreed at the meeting of 20 December 2007 that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent. Consistent with this, in the Typed-up Minutes of 20/12/2007 prepared by him, there was no reference to the Shareholders’ Agreement, let alone it being subject to the Alleged Conditions Precedent. Mr Cheng and Mr Lee signed the Typed-up Minutes of 20/12/2007 to signify their agreement to its contents. 163.Thirdly, in the Board Minutes of 20/12/2007, which was signed by Mr Choi, Mr Cheng and Mr Lee, it was recorded that the Shareholders’ Agreement was approved unanimously by all the directors, again without any reference to the Alleged Conditions Precedent:
164.It is well established that where, as here, a person of full age signed the documents, he is bound by the documents unless he establishes one of the recognized vitiating factors. The principle has been explained by Ribeiro PJ in Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at §§84 and 87:
165.As Mr Cheng and Mr Lee have not identified, let alone established any of the recognized vitiating factors, they are bound by their signatures to the Shareholders’ Agreement, the Handwritten Minutes of 20/12/2007, the Typed-up Minutes of 20/12/2007 and the Board Minutes of 20/12/2007. 166.Fourthly, the existence of the Alleged Conditions Precedent was also inconsistent with the conduct of Mr Cheng and Mr Lee. Had the Shareholders agreed on the Alleged Conditions Precedent:
167.As for Mr Lee, I infer that the reason why he did not attend the banks to open the bank accounts on 21 December 2007 or to attend any of the places of business of the Company on 1 January 2008 was because he knew that these 2 matters could be effected by them gradually, and the Shareholders never agreed that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent. 168.In any event, even if the Shareholders had agreed that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent, it is clear that the condition for opening bank accounts was fulfilled as Mr Choi did open the Company's bank accounts at Bank of China and Standard Chartered Bank on 21 December 2007. As regards the so-called complete handover of all the work and duties undertaken by Mr Choi in the Company on 1 January 2008, the condition was not fulfilled due to the failure on the part of Mr Cheng and Mr Lee in attending to the places of business of the Company to effect the handover. It is well settled that where the performance of a term of contract depends on the act or cooperation of the other party, that other party must refrain from doing anything that would obstruct the party’s performance (Chitty on Contracts, 31st ed, §§13-012 and 13-013). The act of Mr Cheng and Mr Lee in not attending any of the places of business of the Company had the effect of obstructing Mr Choi’s performance of completely handing over his duties and work. It is not open to Mr Cheng and Mr Lee to rely on their own default and contend that Mr Choi acted in breach of the Alleged Conditions Precedent. 169.In summary, all the evidence discussed above including the contemporaneous documents signed by the Shareholders point to the same fact that the Shareholders had reached the Oral Agreement in late October to the effect that Mr Choi was to be responsible for the profit and loss of the Company during the period when he operated the business alone. Subsequently, the Shareholders entered into the Shareholders’ Agreement to record their agreement that Mr Choi was to be responsible for the profit and loss of the Company during the 34 Days. I find that the Alleged Conditions Precedent was a pure fabrication created by Mr Cheng and Mr Lee for the ill purpose of seeking to defeat Mr Choi’s right to retain the 34 Days’ Profits. D3. Eagle Luck Agreement 170.As discussed in section C7 above, there is no dispute that the Eagle Luck Agreement was never performed by the parties. There is no suggestion that as a result of the non-performance of the Eagle Luck Agreement, the Company or Mr Choi has suffered any prejudice, whether financially or otherwise. It is for this reason that at the outset, the court enquires with Mr Yau as to why this complaint, even if established, can be said to be unfairly prejudicial to the interest of the Company or Mr Choi. As I understand it, Mr Yau submits that it is relevant to the background and generally, to show that Mr Cheng and Mr Lee are persons who have no respect for agreements and would act in accordance with their own wishes. 171.I do not accept that this is a proper basis for making a complaint for unfair prejudice. As section 724 (or its predecessor, section 168A) makes clear, only the affairs which are unfair and prejudicial to the interests of the Company or a shareholder may give rise to a relief under the section. It is not the purpose of the section for a petitioner to adopt a “kitchen sink” approach and raises every dispute between the shareholders in a petition under section 724 irrespective of whether such dispute has caused any prejudice to the Company or the shareholder. 172.Nevertheless, since the parties have given extensive evidence on the issue, I will set out my finding on this issue in case anything turns on it. 173.Mr Choi’s evidence that the reason for the non-performance of the Eagle Luck Agreement was because Mr Cheng changed his mind after signing the Agreement for reason which he was not clear. I accept Mr Choi’s evidence. The overwhelming impression I have after hearing the evidence given by the witnesses is that Mr Cheng thought that he could dictate the affairs of the Company in the way he wished, and had no hesitation in changing his mind or unilaterally deciding important matters of the Company without consulting Mr Choi. The examples included:
174.Mr Cheng gives 2 very different versions on the reasons for the termination of the Eagle Luck Agreement. In §26 of his witness statement, Mr Cheng says:
175.In his oral evidence, however, Mr Cheng asserts that Mr Lee and he agreed to the same proposed distribution of the $5 million made by Mr Choi. However, when the 3 of them went to Shenzhen to meet with representatives of Wens on 4 December 2007, Mr Choi mentioned for the first time that he wanted 48% shareholding in the Company, leaving Mr Lee and Mr Cheng with 0.5% each. The representatives of Wens said that this was not fair and began to argue with Mr Choi. In the end, the representatives of Wens said that as the Shareholders had not agreed on the future shareholding, the Eagle Luck Agreement should be cancelled and kicked them out of the meeting. 176.Mr Choi denies having made the proposed distribution of $5 million. He says that he only learnt about it from Mr KY Mak, who said that the proposal came from Mr Lee. Mr Choi did not discuss with Mr Cheng or Mr Lee about the proposed distribution as the Eagle Luck Agreement had not been completed. Mr Choi’s account on the proposed distribution of $5 million is corroborated by Mr KY Mak. It is reasonable to infer that the proposed distribution was made by Mr Lee to Mr KY Mak in the circumstances described by Mr KY Mak. 177.As for the meeting with Wens, Mr Choi says that after Mr KY Mak told him about the 1st Proposal, he realised that Mr Cheng and Mr Lee had decided to renege on the Eagle Luck Agreement. At the meeting between the Shareholders and Wens held after 10 December 2007, Mr Cheng and Mr Lee said that the members of the Association objected to the Eagle Luck Agreement and Mr Choi said that it was not right for Mr Cheng and Mr Lee to renege on the Eagle Luck Agreement whereupon the representatives of Wens told them to go back to consider how they wanted to proceed with the matter. 178.I reject Mr Cheng’s evidence on the meeting with Wens which is full of inconsistency and is inherently implausible. As discussed in section C7 above, far from saying that he solely owned the Company, Mr Choi had acted in an open and candid manner throughout his dealings with Wens and involved Mr Cheng and Mr Lee at every stage. More importantly, it was expressly stated in clause 1.1 of the Eagle Luck Agreement that Mr Cheng, Mr Lee and Mr Choi were the shareholders of the Company and that the 3 of them were directors of the Company. All these show that Mr Choi could not have asserted that he solely owned the Company. It is also inconceivable that the representatives of Wens would cancel the Eagle Luck Agreement on the basis that it was unfair to Mr Cheng and Mr Lee. On the other hand, the evidence of Mr Choi (which I accept) accords with the fact that Mr Cheng had unilaterally instructed Mr KY Mak to prepare the 1st Proposal having decided not to perform the Eagle Luck Agreement. D4. Capitalisation issue 179.As stated in section C9 above, the Shareholders unanimously agreed that the Company should issue 49,994,6000 shares to themselves at $1 each. I have no hesitation in rejecting the contention raised by Mr Cheng and Mr Lee that the Shareholders’ agreement to pay up the amount due on the shares issued was conditional upon the fulfilment of the Alleged Conditions Precedent for the following reasons:
180.Upon accepting the new shares issued to them, the Shareholders and each of them became liable to pay the amount payable on the shares. This is trite law. As stated in Gore-Browne on Companies, 45th ed, §22[11]:
181.In Hong Kong, section 23(2) of the former Companies Ordinance (Cap 32), which applied to the allotment of shares on 20 December 2007, provided that “All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company, and be of the nature of a specialty debt”. 182.Other than the Alleged Conditions Precedent, no other defence has been pleaded by Mr Cheng and Mr Lee as to why they did not cause the Company to demand the Shareholders to pay the amount admittedly due on the shares issued. 183.In §§70 – 71 of their RAPOD, it is pleaded that when Mr Cheng and Mr Lee took over the business in May 2008, the Company was required to raise $10 million to meet the Suppliers’ demand for letters of guarantee which, they claim, was a condition created solely by Mr Choi although they do not explain how. Mr Cheng and Mr Lee sought the assistance from the members of the Association to “pool their funds together to provide the guarantee” in support of the letter of guarantee. 184.In §§46 to 50 of his witness statement, however, Mr Cheng says that a supplier required a deposit of $10 million from the Company as Mr Choi had been in arrears of paying $7 million to it. Mr Cheng says that it was “undesirable that the amount be satisfied by shareholder’s equity” as he hoped that the Company would generate profits which could be used to satisfy the deposit. He and Mr Lee approached members of the Association who agreed to provide the fund to guarantee the issue of a letter of guarantee and requested some remuneration. Given this and the fact that Mr Choi did not hand over anything to them and they had to begin the operation on their own, they caused the Company to enter into the Management Agreement with the Management Company in return for 2⁄9th of the profits. However, in his supplemental witness statement, Mr Cheng contradicts himself in this way:
185.In his oral evidence, Mr Cheng contradicts himself again and asserts that the Company’s need for capital stemmed from the fact that in the beginning of May 2008, the suppliers reduced the credit period from 7 days to 2 days although he does not explain why. This cannot be right. As discussed in section C11 above, in the new agreements signed between the Company and the Suppliers for the period up to 31 December 2008, the credit period was reduced from 7 days to 5 days. 186.I do not accept Mr Cheng’s assertions that the Company was in need of fund in May 2008 or that the members of the Association had provided $10 million of their funds as security for the facility provided by the bank to the Company in light of the following facts and matters:
187.Nevertheless, at the Board meeting of the Company on 9 May 2008, Mr Cheng and Mr Lee stated that the bank had refused to issue any letter of guarantee for the Company in the absence of any security, whereupon the ExCo members agreed that the Company could provide security for the bank in the aggregate amount of $10 million at the interest rate of 58% per annum. 188.According to the minutes of the Board meeting held on 23 March 2009, it was stated that as Mr Choi had failed to return any of the profits made by the Company, the Company did not have sufficient assets to provide any collateral to the bank. The directors therefore decided to use high interest rate to attract friendly parties to help the Company to resolve its need for fund. In light of the substantial amount of interest incurred, Mr Cheng and Mr Lee agreed to repay all the interest expense to the Company by 31 March 2010. The matters stated in these minutes could not be true, given that the Company received the 4.5 Months’ Profits and could have used them to provide security for the Facility. 189.As it turned out, Mr Cheng and Mr Lee did not repay the interest expense to the Company and, instead, caused it to be recorded as amounts due from directors with no interest and repayable within one year. The amounts recorded in the audited accounts for the year ended 31 March 2009 (“2009 A/C”) as due from Mr Cheng and Mr Lee were $1,899,000 and $1,900,000 respectively. In the audited accounts for the year ended 31 March 2010 (“2010 A/C”), the entire amounts were shown to have been repaid. It is not clear when and how the amounts were repaid by Mr Cheng and Mr Lee. 190.On 26 June 2009, Mr Cheng convened an EGM to be held on 27 July 2009 to discuss matters concerning the provision of guarantee letters to the suppliers and the associated interest. In response, on 7 July 2009, Mr Choi requested the directors to provide documents evidencing the suppliers’ request for guarantee letters, the 2008 A/C, 2009 A/C and the updated accounts of the Company. By letter dated 8 July 2009, Mr Cheng appears to have provided some documents relating to the bank’s request for security in support of the issue of the guarantee letters[9] but refused to provide any accounts of the Company on the basis that Mr Choi had not properly explained the accounts for the period up to 8 March 2008. At the EGM held on 27 July 2009 at which Mr Choi was absent, it was resolved that as the Company did not have sufficient funds to provide any security for the guarantee letters, but Mr Cheng and Mr Lee were willing to provide guarantee for the Company at reasonable interest rate. There is no document to show that the personal guarantee was in fact provided. 191.At another EGM held on 9 March 2010 attended by Mr Cheng and Mr Lee with Mr Choi being absent, it was noted that Hunan New Wellful had requested for documents to clarify the relationship between the Management Company and the Association and a payment of $3 million in advance, which was met by $2 million lent by Mr Cheng and the $1 million from the Company’s fund. It was resolved that interest should be paid to Mr Cheng at 9% per annum. Again, no document has been disclosed by Mr Cheng and Mr Lee in relation to this $2 million loan said to have been advanced by Mr Cheng. 192.By another notice dated 6 July 2010 issued by Mr Cheng to convene an EGM to be held on 26 July 2010, it was stated that Mr Cheng and Mr Lee had used their personal funds as security for a guarantee letter issued by the bank to Guangxi Fungrich which had expired in June 2010, and the supplier requested for an increase in the amount guaranteed by $1.5 million. At the EGM held on 26 July 2010 which was attended by the Shareholders, Mr Choi requested to see the documents relating to the guarantee letter requested by Guangxi Fungrich and the repayment of the amounts owed by Mr Cheng and Mr Lee to the Company, both of which were rejected by Mr Cheng. No resolution was passed to pay interest on the amount said to have been guaranteed by Mr Lee and Mr Cheng. 193.In the absence of any primary documents disclosed by Mr Cheng and Mr Lee in support of the security allegedly provided by Mr Cheng or the members of the Association to the bank, I do not accept that any collateral was in fact provided. 194.Even if, contrary to my finding, the Company was in need of $10 million as security for the Facility in May 2008, Mr Cheng and Mr Lee were duty bound to cause the Company to demand the Shareholders to pay the amount due on the shares issued to them. In answer to the questions posed by the court, Mr Cheng accepts that it was the responsibility of the directors to raise finance in the most advantageous manner. He admits that the reason why he and Mr Lee did not cause the Company to demand the Shareholders to pay the amount due on the shares issued was because Mr Lee did not have the fund to meet such demand:
195.Therefore, even if (contrary to my finding) the Company required to raise $10 million in May 2008 to provide the security in support of the Facility, the decisions of Mr Cheng and Mr Lee not to cause the Company to demand the Shareholders to pay the amounts owed and, instead, resorted to borrowing from the members of the Association and Mr Cheng constituted a breach of their fiduciary duties as they had put the interests of Mr Lee ahead of the interests of the Company. It follows that any amounts paid by the Company as interest to Mr Cheng or the members of the Association are voidable and should be repaid by Mr Cheng and Mr Lee to the Company. D5. Agreement reached on 30 December 2007 196.As discussed in section C10 above, the matters stated in §§1 – 2 of the Minutes of 30/12/2007 are not in dispute. As for the matters stated in §§3 – 10 of the same Minutes, I find that the Shareholders did agree at the meeting on 30 December 2007 on those matters. D6. Engagement of Management Company 197.Shortly after Mr Cheng and Mr Lee had taken control over the Company, they caused the Company to enter into an agreement dated 1 May 2008 with the Management Company (“Management Agreement”) whereby the parties agreed as follows:
198.On the face of the Management Agreement, the Company engaged the Management Company to manage, in its absolute discretion, the entire agency business for so long as it remains an agent authorised by CCCFNP. In return, the Management Company was entitled to receive 2⁄9th of the commission earned by the Company. 199.According to the reconciliation tables prepared by the Company and the further submissions of Mr Yau and Mr Mak, except the amount of gross profits made by the Company for the period from 1 April 2010 to 15 September 2010, the following amounts are not in dispute:
200.As regards the gross profits for the period from 1 April 2010 to 15 September 2010, the parties only differ by $77,350. I accept Mr Yau’s submission that the amount $154,700 paid to Sam Ran for its service from 11 to 20 September 2010 should be apportioned by half, given that only 5 days out of the 10 days’ period are covered in the table. 201.There is no dispute that shortly after its appointment, Mr Cheng and Mr Lee instructed Hop Kee to pay the daily gross revenue generated by the sale of live pigs to the bank account of the Management Company. The Management Company then paid the Suppliers, Sam Ran and its remuneration and remitted the balance to the Company’s bank account. Mr Cheng says that in May 2009, he discovered that the Management Company had overcharged its remuneration by taking 2⁄9th of the gross revenue received from Hop Kee, rather than 2⁄9th of the net profits made by the Company as he intended to pay. Since then, Mr Cheng instructed Hop Kee to pay the gross revenue directly to the Company, so that the Company could pay the auppliers, Sam Ran and other expenses. 202.Despite the discovery of the overcharge, Mr Cheng did not take any step to recover the amount overpaid from the Management Company. Instead, he continued to retain the Management Company so that he could deduct the remuneration payable by the Company from the amount it had overcharged. 203.Mr Cheng subsequently decided to terminate the appointment of the Management Company on 15 September 2010. At that time, the amount owed by the Management Company was $1,912,938.80 (“Overcharged Balance”). No step had been taken by the Company to recover the Overcharged Balance for about 2 years until 27 September 2012 when an action was finally commenced against the Management Company to claim the same. After obtaining default judgment against the Management Company on 7 November 2012 for the Overcharged Balance together with interest and fixed cost at $11,045 (“Default Judgment”), no step was taken to enforce the Default Judgment. 204.Mr Choi makes the following complaints about the appointment of the Management Company:
205.In §§66 – 76A of the RAPOD, Mr Cheng and Mr Lee deny that the appointment was made for the purpose of diverting the profits made by the Company. They seek to justify the appointment and the remuneration paid on the following grounds:
206.Mr Mak submits that the appointment of the Management Company cannot form the basis of an unfair prejudice claim because (1) the appointment has already been terminated and, as such, cannot form the basis of a complaint under section 724, which is to put an end to any alleged mis-management rather than to redress past conduct, and (2) any loss resulted from the appointment is a loss suffered by the Company and, therefore, a reflective loss which cannot be claimed by Mr Choi. 207.The submissions are misconceived. As section 724(1) makes clear, the provision covers a situation where “the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the members)”. This is wide enough to cover past conduct. There is no issue of reflective loss as any amounts the directors are liable to compensate to the company would not be paid to the petitioner directly. Rather, the amounts would either be ordered to be paid to the company or be treated as adjustments to the value of the company, in the event that a buy out order is made. 208.It is well established that in considering whether the directors have abused their fiduciary powers for an improper purpose, the court would approach the matter in the way as expounded by Lord Wilberforce in Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 832F–H, 835F–H:
209.As stated in Howard Smith, at 834F–H, where self-interest of the directors is involved:
210.As regards the reasons for appointing the Management Company, Mr Cheng gives 2 different versions in his witness statements. 211.In §§46 – 50 of his witness statement that the appointment was a form of “return” for the security allegedly provided by certain members of the Association (see §184 above). This cannot be true.
212.In §§6 – 10 of his 2nd supplemental witness statement, Mr Cheng says that some (unidentified) members of the Association made some “noises” to the suppliers and CLA and made insinuation about the financial stability of the Company. Although the members refused to subscribe for the shares offered to them, they continued to approach Mr Cheng and asked for a plan to participate. When he and Mr Lee took control over the Company, the Company “was in a mess” and they needed to look for people to deal with the operation. The position was worsened by the default of Mr Choi in making payment, which led to the Suppliers requesting for “a big deposit”. Then Mr Cheng says this:
213.As Mr Lee has not come forth to prove his pleaded justifications, in the following discussion, the references to Mr Lee are based on the undisputed facts, my finding in other sections of this judgment or the inferences I make against Mr Lee. 214.The allegation that the Company was “in a mess” is wholly unfounded. As discussed in section C5 above, the Company continued to adopt the same modus operandi established by Mr Choi in carrying on its business. Had Mr Cheng and Mr Lee abided by the agreement reached between the Shareholders on 30 December 2007, the Company would have been able to benefit from the services provided by Mr Choi, Mrs Choi, Ms Choi and Mr Chan Hak Keung (see sections C10 and D5 above). I do not see how Mr Cheng and Mr Lee could honestly complain that the Company “was in a mess” when it was their own decisions to renege on the agreement reached on 30 December 2007 and replaced all the persons who had built up the agency business from the scratch. 215.As discussed in section D1 above, Mr Mak accepts on behalf of Mr Cheng and Mr Lee that the members of the Association have no interest or right in the Company. They are strangers to the Company. It is a misuse of their power to appoint the Management Company for the purposes of satisfying the requests of the members of the Association still less to benefit them. In exercising their power for the purposes of the members of the Association, Mr Cheng and Mr Lee have put the interest of the members of the Association (or, rather the 8 Individuals) ahead of the interests of the Company and, therefore, acted in breach of their fiduciary duties owed to the Company. 216.Moreover, it is clear that during the 28.5 months of its appointment, the Management Company has not done any substantive work for the Company:
217.Looking at the situation objectively, it is clear that Mr Cheng and Mr Lee have been treating the Management Company favourably and have put its interest ahead of the interest of the Company, evidenced by their following actions and decisions:
218.In putting the interest of the Management Company ahead of the interest of the Company in the above manner, Mr Cheng and Mr Choi acted in breach of their fiduciary duties owed to the Company. 219.As can be seen from the table at §199 above, the remuneration received by the Management Company accounted for 36.63% of the gross profits made by the Company. Even taking into account the contention of Mr Cheng and Mr Lee that of the $4,405,000.98 actually received by the Management Company, $2,285,536.42 represented the amount overcharged, the amount charged by the Management Agreement would be $2,119,464.56, equivalent to 17.62% of the gross profits made by the Company. As the Management Company did not carry out any substantive work for the Company, the amount of remuneration paid to it, whether in the amount of $4,405,000.98 or $2,119,464.56, viewed objectively, was excessive and wholly unjustified. 220.The failure on the part of Mr Cheng and Mr Lee to recover the amount overcharged by the Management Company and their decision to retain the Management Company after discovery of the overcharge constituted a further breach of their fiduciary duties as it was incumbent upon them to protect the interest of the Company by taking all possible steps to recover the amount overcharged. This is particularly so when the Management Company was owned by the 8 Individuals who were their fellow members of the ExCo and whose interest they had sought to advance by making the appointment. 221.As the appointment of the Management Company was made by Mr Cheng and Mr Lee in breach of their fiduciary duties, it is voidable and is set aside. It follows that Mr Cheng and Mr Lee are liable to compensate the Company for the $4,405,000.98 paid by the Company to the Management Company. D7. Director’s remuneration 222.The principles governing the propriety of the payment of directors’ remuneration are well-established and may be summarised as follows. 223.A director is an officer of the company and, in the absence of a service contract, is not regarded as an employee of the company. The nature of the remuneration of directors has been explained thus:
224.Directors are not entitled as of right to any remuneration, whether on quantum meruit basis or otherwise (Gore-Browne on Companies, 45th ed, §13[14]). Moreover, unlike other employees, a director is a fiduciary and, as such, is under a duty not to make a profit out of his trust or to put himself in a position where there is a conflict between his personal interests and his duty as a fiduciary. This rule, which is applicable to all trustees of which a director is one, depends “not on fraud or mala fides, but on the mere fact of a profit made.” (Guinness Plc v Saunders [1990] 2 AC 663, 689F – 692D, per Lord Templeman) 225.Mr Mak submits, and I agree, that the following principles are applicable to the present case:
226.There is no dispute that after Mr Cheng and Mr Lee had taken control over the Company, they caused the Company to pay $60,000 per month as their remuneration as directors of the Company retrospectively from 1 November 2007. According to the audited accounts of the Company prepared under the instructions of Mr Cheng and Mr Lee, they received an aggregate amount of $15,324,000 as their directors’ remuneration as follows:
227.So far as the remuneration received by Mr Cheng and Mr Lee for the 2 months from 1 November to 31 December 2007, it is void as there was no agreement or resolution reached or passed by the Shareholders which permit them to receive this remuneration. 228.In any event, given that Mr Cheng and Mr Lee had no involvement in managing the business or affairs of the Company during the period from 1 November to 31 December 2007, there was no basis for them to receive any remuneration from the Company. It follows that Mr Cheng and Mr Lee are liable to repay the $240,000 received by them as remuneration for the 2 months in 2007 to the Company. 229.As for the remuneration from 1 January 2008 onwards, in light of my finding that the Shareholders reached an agreement on 30 December 2007 to pay $30,000 per month to each of Mr Cheng and Mr Lee as their remuneration for 2 years (see section C10 above), they were entitled to receive $1,440,000 from 1 January 2008 to 31 December 2009, and should repay an aggregate amount of $1,440,000 overpaid to them. 230.As for the remuneration received by Mr Cheng and Mr Lee from 1 January 2010 onwards, it was not covered by any agreement reached by the Shareholders, but was approved by the resolutions passed by Mr Cheng and Mr Lee themselves qua majority shareholders. The question is whether the payment of such remuneration was unfair and prejudicial to the interest of Mr Choi. 231.Mr Mak submits that as Mr Choi has not adduced any evidence on the market level of a director working in the comparable field with comparable expertise or workload, the court may take the $60,000 per month, being the remuneration proposed by Mr Choi himself at the meeting of 30 December 2007, as the appropriate level of remuneration for Mr Cheng and Mr Lee. I disagree. The $60,000 per month was the remuneration agreed to be paid to Mr Choi in circumstances where he had been acting as the Chairman of the Company, was instrumental in securing and building up the agency business for the Company and in the expectation that he would continue to act as such Chairman. There is no basis to equate the position of Mr Choi with that of Mr Cheng and Mr Lee. 232.Mr Mak submits that given the work done by Mr Cheng in liaising with members of the Association, Mr Wong Yung Kan and the CLA; and the effort of Mr Cheng and Mr Lee in securing a new supplier in Shanghai, assisting the import of live pigs from the ASZ and making the business to become “more sustainable” with a cash reserve of over $10 million, the remuneration paid to them could not be said to be excessive. I am unable to agree. 233.So far as Mr Lee is concerned, there is no evidence to suggest that he has done any substantive work for the Company, other than participating in meetings and voting in the same way as Mr Cheng at all meetings of the Company. 234.As for Mr Cheng, I do not regard his act in liaising with the members of the Association may be regarded as the work done for the Company, given that the members of the Association have no right or interest in the Company. Nor do I accept the suggestion that Mr Cheng’s work in assisting the import of live pigs from the ASZ may be regarded as work for the Company, as there is no suggestion that the Company has extended its business to the live pigs imported from the ASZ. 235.Although Mr Cheng claims that he spent a lot of time to deal with the Company’s affairs including negotiating with the Suppliers and the additional supplier in Shanghai and dealing with the CLA to ensure that the agency business could be maintained, I do not accept that these work required him to spend a lot of time or effort. As discussed in section C5 above, the entire modus operandi of the business had been established by Mr Choi, and after Mr Cheng and Mr Lee took control of the Company, Mr Cheng simply followed the same mode in operating the business. There was very limited work required to be done by the Company, which was performed by 3 junior staff. There was no justification for their decision to pay $60,000 per month to themselves as director’s remuneration. 236.The only reasonable inference I can draw is that their decision in paying such a high level of remuneration to themselves was motivated by a desire to distribute a large part of the profits of the Company to themselves, leaving the balance to be distributed to the Shareholders by way of dividends. As a matter of fact, as at 31 March 2016, the retained profits of the Company only amounted to $14,127,564.46 (which included the 4.5 Months’ Profits), which was less than the $15,324,000 paid to Mr Cheng and Mr Lee by way of director’s remuneration. Such conduct of Mr Cheng and Mr Lee was both unfair and prejudicial as Mr Choi was the only shareholder who had been deprived of the right to receive distribution of the profits made by the Company in this way. 237.It follows that adjustment should be made in the valuation of the Company on the basis that the $13,884,000 (being $15,324,000 less $1,440,000 they were entitled to receive) received by Mr Cheng and Mr Lee should be treated as if it had not been paid. 238.In ordering the above adjustment, I have taken into account the fact that Mr Cheng and Mr Lee would in effect be acting as directors of the Company from 1 January 2010 without any remuneration. But this was the result of their act in excluding Mr Choi from the management of the Company and depriving him of the right to share in the distribution of the profits by way of director’s remuneration. Moreover, I consider that the other allowance and benefit enjoyed by Mr Cheng and Mr Lee qua directors (such as reimbursement of entertainment expenses and use of Company’s cars) were sufficient compensation for the limited work they had done for the Company. D8. Failure to declare dividend 239.Where the directors have refused to pay reasonable dividends which the company is in a position to pay, the court may order the company to be wound up on the basis that the proper and legitimate expectations of the members have been defeated (In re a Company (No 00370 of 1987), ex p Glossop [1988] 1 WLR 1068, at 1076c–f). 240.Moreover, non-payment of dividends, or payment of unreasonably low dividends, in circumstances where the company is able to pay substantial dividends or has substantial reserves, is capable of constituting unfair prejudice (Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, at 427d; Re Sam Weller & Sons Ltd (Re a Company No 823A of 1987) [1990] BCLC 80 at 88b–d). 241.Mr Mak submits that the decision whether to declare dividend is a commercial decision which the directors are entitled to make, having regard to the commercial needs of the company (Company Law in Hong Kong — Practice and Procedure 2015, §8.096 p 375). As a general principle I agree, but the burden is on the directors to justify their decision when it is being challenged. 242.There is no dispute that during the 9 years when the Company has been under the control of Mr Cheng and Mr Lee, no dividend has been declared or paid to the Shareholders. 243.According to the audited accounts for the year ended 31 March 2012, by the time the Petition was presented, the Company had retained profits of $7,878,749.28. The amount was increased to $14,127,564.46 for the year ended 31 March 2016. As the Company only engages in a single business which is well established and fairly stable, prima facie, the retained profits could have been paid to the Shareholders by way of dividends. 244.The first time Mr Cheng and Mr Lee indicated that the Company was in a position to declare dividend was in the letter of CECT dated 29 June 2016. No detail on the proposed dividend was provided, and Mr Choi was requested to contribute $1,800 to the Company as “initial share capital” as the auditor had not been able to verify the amount previously paid by the Shareholders. Mr Choi through his solicitors responded 9 months later, pointing out that his complaint for failure to declare dividend has been made in the Petition at the outset, and the suggested declaration of dividend came too late. 245.Mr Cheng advances 2 reasons to justify his decision in not declaring any dividend in the past 9 years. First, he says that he considered that dividends should only be declared when the Company has sufficient reserve to do so. Secondly, he says he relied on the “legal advice” given to him to the effect that the Company could not declare any dividends when its shares have not been paid up. 246.As regards the first reason, I do not think it is sufficient for Mr Cheng to rely on a general assertion that dividends should only be declared when the Company has sufficient reserve to do so. This is particularly so when the Company only carries on a single business which is well established and does not require any new investment. 247.As for the so-called “legal advice” received by the directors, under cross-examination, Mr Cheng clarifies that the advice he relied on was given by the auditor. However, as Mr Fok says in his oral evidence, whether the Company should declare dividend has nothing to do with the auditor, and the auditor has no right to say whether the Company should or should not declare dividend. He confirms that he did not give any advice to the directors to the effect that the Company could only declare dividend when the amount payable on the issued shares is actually paid up. I accept Mr Fok’s evidence and reject Mr Cheng’s assertion that the directors acted under the alleged advice given by the auditor. 248.In light of the Company’s substantial retained profits and the absence of any proper justification as to why they did not declare dividends, I consider that the failure on the part Mr Cheng and Mr Lee to cause the Company to declare any dividends to the Shareholders was both unfair and prejudicial to the interests of Mr Choi. D9. Administration expenses 249.In §22 of the APOC, Mr Choi complains that that the “unexplained administration expenses totalling $13,696,321” for the year ended 31 March 2010 was unreasonable as it exceeded the expenses for the previous year by more than $5 million even though the revenue for that year remained similar to the level the year before, which resulted in a net loss of $3,3556,355. 250.The complaint arose out of Mr Choi’s request made in his letter dated 7 December 2010 requiring the directors to explain, inter alia, the various items shown in the 2010 A/C including the various expenses which amounted to $13,696,321. 251.At the AGM held on 8 December 2010 (“AGM of 8/12/2010”), Mr Choi stated that he had a lot of queries on the 2010 A/C and requested the directors to explain and clarify. In response, Mr Cheng said that the queries raised by Mr Choi concerned the operating information, and the Company could not list out each and every information for the Shareholders. If Mr Choi wished to express any view, he could take legal action. He said that the Company would provide a written reply. 252.Mr Cheng’s response is to say the least unhelpful. It is clear from his response that he had no respect for Mr Choi’s right as a shareholder and failed to appreciate that it was the duty of the directors to answer the questions raised by the shareholders on the business and accounts of the Company. 253.The reply came in 3 month later in the form of a letter dated 28 February 2011 signed by Mr Cheng (“Reply”). In the Reply, Mr Cheng explained that the various expenses shown in the 2010 A/C was attributed to change in accounting treatment, director’s remuneration, account receivable of $609,689.24 held by the Management Company, the amount $2,597,034.11 owed by Mr Choi (the 34 Days’ Profits) and provision for bad debt in the amount of $3,206,723.35. The explanations made no sense as account receivable and the amount owed by Mr Choi, on their face, should be recorded as assets. As for the provision for bad debts, given the amount involved, it was incumbent upon the directors to explain how they came about and why they considered the debts to be irrecoverable. No such explanation was provided by the directors. 254.In §§83-95 of RAPOD, Mr Cheng and Mr Lee does not adopt the explanations set out in the Reply. Instead, they say that the reasons for the net loss of $3,3556,355 incurred by the Company for that year were due to (1) the reduction in the commission paid by the suppliers to the Company, and (2) the increase in the transportation costs and the bonus payable to the buyers at the Slaughterhouse. 255.In my view, neither of the reasons pleaded in the RAPOD explains the increase in administration expenses for over $5 million:
256.Mr Mak in his closing submissions relies heavily on the Reply and submits that in light of the explanations set out therein, the administration expenses for the year ended 31 December 2010 were reasonable. Mr Mak prepares an Annex 1 which purports to explain the nature of the expenses recorded as administration expenses. I do not think it is open to Mr Mak to rely on the Reply or Annex 1 given that these documents and their contents are neither pleaded in the RAPOD nor alluded to by Mr Cheng in his witness statements or oral evidence. 257.In my view, faced with a sudden increase in administration expenses to the extent of $5 million, Mr Choi was perfectly entitled to ask the directors to explain and account for the increase. As directors of the Company, it was incumbent upon Mr Cheng and Mr Lee to provide proper explanation on the questions raised by Mr Choi. The cavealier response at the AGM of 8/12/2010, the Reply and the RAPOD given by Mr Cheng and Mr Lee demonstrate that they completely disregarded the right of Mr Choi as a shareholder of the Company and failed to treat Mr Choi fairly and in good faith as one would expect from the directors of a company. D10. Denial of access to financial information 258.In §§25 – 26 of APOC, Mr Choi complains that Mr Cheng and Mr Lee repeatedly refused to answer questions raised by him or to provide information concerning the Company’s affairs. It was only until Mr Choi applied under s.152FA of the former Companies Ordinance that Mr Cheng and Mr Lee produced some documents of the Company to Mr Choi. 259.In §§101 – 102 of RAPOD, Mr Cheng and Mr Lee deny the complaint and contend that the questions raised by Mr Choi “were duly answered. The proceedings for inspection of documents were misconceived.” This defence is surprising, if not disingenuous, given that Mr Choi succeeded in persuading Mr Justice L Chan to grant an order against the Company, Mr Cheng and Mr Lee on 5 June 2012, requiring them to produce a whole array of documents relevant to the queries raised by Mr Choi which remained unanswered at the time of the order. 260.Mr Yau in his opening submissions draws my attention to the various passages in the Decision of Mr Justice L Chan relating to the queries raised by Mr Choi on the 2008 A/C, the 2009 A/C, the 2010 A/C and the 2011 A/C including the increase in administration expenses for the years ended 31 March 2010 and 31 March 2011, and his view that the questions raised were reasonable to which no satisfactory answers were provided by the directors. 261.It suffices to say that at trial, the position remains that no satisfactory answers have been provided by Mr Cheng and Mr Lee to most of the questions raised. 262.Mr Yau points out that except the audited accounts, the financial documents in the trial bundles had been made up to 2012 and were produced by Mr Cheng and Mr Lee pursuant to the order of Mr Justice L Chan. Mr Yau submits that this reinforces Mr Choi’s complaint that Mr Cheng and Mr Lee have continued to deny Mr Choi’s access to the financial information on the one hand and refusing to provide proper explanation to the questions raised by Mr Choi on the audited accounts of the Company. I agree. 263.The above conduct of Mr Cheng and Mr Lee is unfair to Mr Choi. It has the effect of depriving Mr Choi’s right to know the financial performance of the Company and the reasons behind the substantial increase in expenses and the corresponding reduction in its profits and, as such, is prejudicial to his interest qua shareholder. E. 3 ACTIONS 264.In my view, the 3 actions are wholly unnecessary and their commencement are against the underlying objectives of the CJR and only serve to waste costs. E1. 1st Company’s Action 265.In his opening submissions, Mr Co describes the “major misconducts” of Mr Choi pleaded in the statement of claim, all of which are alleged to have been made by Mr Choi in breach of his fiduciary duties and/or breach of trust. As this court points out to Mr Co, the matters pleaded in relation to the (1) the donation of $500,000 on 21 February 2008, (2) the application for a branch office for the Company on 13 March 2008 and (3) the failure to make proper declaration of the pigs imported do not give rise to reasonable causes of action for breach of fiduciary duties or breach of trust. 266.As for the claim for the 34 Days’ Profits, Mr Co is asked to explain why the directors decided to cause the Company to commence the action against Mr Choi, rather than waiting for the court’s determination on the same issue which had already been raised by the parties in the Petition. Mr Co is unable to provide any explanation other than asserting that the Company is entitled to make the claim against Mr Choi. 267.The court indicates to Mr Co that it is minded to order the directors to pay the costs of the action personally irrespective of the outcome of the issue on the 34 Days’ Profits as there was no reason why the directors should use the Company’s fund to litigate what is in effect a dispute between the Shareholders. The principle was fully explained in Re CG & L Investment Ltd v Wyatt Estates Ltd [1992] 1 HKC 78 (CA) at 82E – 83D which, in turn, referred to the well known passages in Re Crossmore Electrical and Civil Engineering Ltd (1989) 5 BCC 37 and Re A Company (No 004502 of 1998), ex p Johnson [1991] BCC 234; and Re Milgate Developments Ltd [1991] BCC 24. 268.At Day 4 of the trial, Mr Co informs the court that the Company abandons all the claims made against Mr Choi in the action except the claim in relation to the 34 Days’ Profits. 269.As discussed in section D2 above, I reject all the allegations advanced by Mr Cheng and Mr Lee in relation to Mr Choi’s right to retain the 34 Days’ Profits. In particular, I find that the Alleged Conditions Precedent was a pure fabrication created by Mr Cheng and Mr Lee for the ill purpose of seeking to defeat Mr Choi’s right to retain the 34 Days’ Profits. 270.It follows that the only remaining claim in the 1st Company’s Action must fail and I dismiss the Action. 271.As for costs, Mr Cheng and Mr Lee and those advising the Company should know that as a result of the Board Minutes of 20/12/2007, the validity of which has never been challenged by anyone, the Company was bound by the Shareholders’ Agreement and could not act inconsistently with it. Yet, they completely ignored the resolution passed by all the directors and caused the Company to commence the 1st Company’s Action against Mr Choi. There is no explanation from Mr Cheng and Mr Lee as to why they considered that it was proper for them to have acted in this way. 272.In the absence of any explanation, it is reasonable to infer that in causing the Company to commence the 1st Company’s Action, Mr Cheng and Mr Lee were seeking to use the Company’s fund to advance their own allegations against Mr Choi, and to create maximum pressure on Mr Choi. In so acting, Mr Cheng and Mr Lee have abused their power as directors and misused the Company’s money to pursue the 1st Company’s Action. They are liable to compensate the Company for its own costs incurred in pursuing the 1st Company’s Action including all the costs of solicitors and counsel appearing for the Company at the trial and the costs expended by the Company in correspondence. The Company’s own costs should form part of the adjustment in the valuation as I consider that it is a matter arising from Mr Choi’s complaint in the Petition. 273.As for the adverse costs incurred by Mr Choi in defending the 1st Company’s Action, to mark the disapproval of the court on Mr Cheng and Mr Lee’s conduct, I am minded to order all the costs of and occasioned by the 1st Company’s Action to be paid by Mr Cheng and Mr Lee personally and be taxed on an indemnity basis, with certificate for 2 counsel. 274.As Mr Cheng and Mr Lee are technically non-parties to the 1st Company’s Action, pursuant to O.62 r.6A(1), I order that they be joined as parties to the 1st Company’s Action for the purpose of costs only, and I direct Mr Cheng and Mr Lee to lodge their submissions in opposition to the costs order I am minded to make within 14 days of this Judgment and to issue a summons for a 30-minute hearing unless the parties agree to dispense with the need for the hearing. E2. The Derivative Action 275.As stated in section A above, the Derivative Action is commenced for the sole purpose of enforcing the Capitalisation Agreement which was an agreement reached between the Shareholders on 30 December 2007. It is in that sense a personal claim made by Mr Choi against Mr Cheng and Mr Lee. Such a claim has already been raised as a complaint in the Petition and the issues are joined. It seems to me that it is both unnecessary and pointless for Mr Choi to commence the Derivative Action to litigate the same complaint. 276.In response to the court’s enquiry as to why the Derivative Action was commenced, Mr Yau submits that the only reason for commencing the Derivative Action was because Mr Choi wished to seek an interlocutory injunction to compel Mr Cheng and Mr Lee to abide by their obligation in contributing to the capital of the Company. In my view, this is not a valid reason for commencing the Derivative Action at all as it was open to Mr Choi to make the same application for interlocutory injunction in the Petition. Indeed, such interim relief is pleaded in the APOC prayer (6). 277.As for Mr Yau’s submission that the Capitalisation Agreement is also pleaded as a derivative claim brought by Mr Choi on behalf of the Company, with respect, I do not see how the Capitalisation Agreement can form a claim in a derivative action. Apart from the fact that the essential requirements for the claim to come within the exceptions to the rule in Foss v Harbottle have not been pleaded in the statement of claim, it is clear that the refusal on the part of Mr Cheng and Mr Lee to abide by the Capitalisation Agreement is not and cannot constitute a “fraud on minority”. 278.I therefore dismiss the Derivative Action. I make an order nisi that the costs of and occasioned by the Derivative Action be paid by Mr Choi to the Company, Mr Cheng and Mr Lee, such costs to be taxed on a party and party basis. For the avoidance of doubt, the costs of the Company is only limited to the costs in providing discovery, if any. 279.As for the other costs incurred by the Company in the Derivative Action including the costs in filing a defence, they should be borne by Mr Cheng and Mr Lee as it is a misuse of the Company’s fund for the Company to take any substantive step in the Derivative Action, other than giving discovery. These costs should form part of the adjustment in the valuation. E3. 2nd Company’s Action 280.The only claim made by the Company against Mrs Choi is for repayment of the 34 Days’ Profits on the bases that Mr Choi acted in breach of her fiduciary duties as employee of the Company, dishonest assistance and knowing receipt. 281.During the cross-examination of Mrs Choi, Mr Co does not put any questions to Mrs Choi about her knowledge, let alone the allegation of dishonesty to her. This is not surprising given that in the witness statements filed behalf of the Company, no such allegation has been made against Mrs Choi. The claim based on dishonest assistance and knowing receipt is bound to fail. 282.For the reasons discussed in section E2 above, Mr Choi was entitled to retain the 34 Days’ Profits. I dismiss the Company’s claim against Mrs Choi. 283.When asked by the court as to why the directors considered it necessary to commence the 2nd Company’s Action against Mrs Choi, having already raised the same issues in the Petition and the 1st Company’s Action, Mr Co’s only response is that Mr Choi may not have sufficient asset to pay any judgment which may be awarded against it. I reject the suggestion. Apart from the fact that Mr Choi is an accomplished businessman, it is indisputable that the 33.33% shares he held in the Company are valuable assets which may be used to answer any judgment the Company may obtain against him. 284.In the absence of any proper explanation, the court is driven to infer that in causing the Company to commence the 2nd Company’s Action against Mrs Choi, Mr Cheng and Mr Lee were seeking to use the Company’s fund to advance their own allegations against Mr Choi, and to create maximum pressure on Mr Choi, which constitutes a misuse of the Company’s fund. 285.The Company’s own costs in pursuing the 2nd Company’s Action should form part of the adjustment in the valuation for the same reason that it arises from Mr Choi’s complaint in the Petition. 286.As for the adverse costs incurred by Mrs Choi in defending the 2nd Company’s Action, I am minded to order all the costs of and occasioned by the 2nd Company’s Action to be paid by Mr Cheng and Mr Lee personally and be taxed on an indemnity basis, with certificate for 2 counsel. 287.The same directions on joiner of Mr Cheng and Mr Lee for the purpose of costs only (at §274) apply to the 2nd Company’s Action. F. CONCLUSION AND REMEDIES 288.In light of my findings on unfair prejudice discussed in sections D1 to D10 above, it is inevitable that there should be a parting of way between the Shareholders as it would be unfair to require Mr Choi to remain as a shareholder alongside with Mr Cheng and Mr Lee who have in the past 9 years managed the Company in a manner which only benefitted themselves and the Management Company (and the 8 Individuals behind it) and in complete disregard of Mr Choi’s rights and interest in the Company and to his prejudice. The case cries out for an order so as to put an end to the matters complained of. 289.There are 5 main issues to consider:
F1. Share purchase order 290.A share purchase order is the most important and commonly granted remedy, as the order has the advantage of effecting a “clean break” (Robin Hollington QC, Shareholders’ Rights, 7th ed, §8-44). A share purchase order is appropriate in a case involving exclusion from management or where the respondent has shown a propensity for using the company’s assets for his personal benefit and the benefit of his family and friends, as it would be unfair to the petitioner to be “locked in” as minority in the company where there is no practicable way of regulating the conduct of the company’s affairs in future so that it is a case for a “clean break” (Re Elgindata Ltd [1991] BCLC 959 at 1005f–i). 291.In my view, it is appropriate to make a share purchase order so as to bring an end to the matters complained of by Mr Choi and to achieve a clean break between the Shareholders. 292.In the APOC and his witness statements, Mr Choi says that it is appropriate for him to buy out the shares held by Mr Cheng and Mr Lee given his contribution and dedication to the Company in securing and building up the agency business and operated it profitably. On the other hand, Mr Cheng and Mr Lee are “selfish, greedy and incompetent” and, therefore, not suitable to manage the Company, which is supposed to serve an important public function of stabling the supply and prices of imported live pigs in Hong Kong and creates competition in the market. Mr Choi believes that if the Company is placed under his control, it will be able to play a more active role in bringing more and better quality live pigs into Hong Kong. His evidence in this regard is not challenged. 293.Given that Mr Choi has single handedly obtained the agency business and established the modus operandi in less than 3 months, and managed to generate profits in excess of $11 million in the first 5.5 months, I consider that he is more suitable and, certainly more effective, in managing the business of the Company. 294.I agree that the Company has an important public function to play. In view of my findings on the conduct of Mr Cheng and Mr Lee, which falls far short of the standard one would expect from directors and fiduciaries, I do not consider that they should be entrusted with the responsibility of managing the Company. Indeed, in their RAPOD, Mr Cheng and Mr Lee have not pleaded that if unfair prejudice is made out, they should be ordered to buy out Mr Choi’s shares. Nor has Mr Cheng said in his witness statements or oral evidence why he and Mr Lee should be entitled to buy out Mr Choi’s shares. 295.This notwithstanding, Mr Mak submits that if the court finds that Mr Choi’s complaints are made out, his shares should be bought out by Mr Cheng and Mr Lee on the grounds that (1) the court rarely orders the majority be bought out, (2) it is not the object of section 724 “to put the petitioner in a better position by expropriating the majority shareholder”, and (3) it would be unusual to order the majority to be bought out where they are actively concerned in the management and are willing and able to buy out the minority at a fair price, citing Company law in Hong Kong — Practice and Procedure 2015, §8.117, pp 388 – 389. 296.I do not think it is open to Mr Mak to seek this relief in his closing submissions, when his clients have not done so in their pleadings and evidence. In any event, Mr Mak’s arguments must be rejected. 297.First, the number of shares held by each shareholder is the same. It is wrong to characterize Mr Cheng or Mr Lee as the majority. The fact that Mr Cheng and Mr Lee chose to exercise their power in the same way does not without more make either of them to become the majority shareholder. 298.Secondly, the usual order requiring a shareholder to sell his shares (or to buy out the other’s shares) is for the shares to be sold at a fair value. So long as a fair price is paid, there is no question of expropriating the shares. This is particularly so when the agency business of the Company was obtained and built up by Mr Choi at the outset, which Mr Cheng and Mr Lee have continued to follow to-date. 299.Thirdly, far from willing and able to buy out Mr Choi’s shares, the consistent stance of Mr Cheng and Mr Lee is to fight the Petition to the end. They have never made any open offer to buy out Mr Choi’s shares. F2. Date of valuation 300.The choice of the date of valuation is a matter for the court’s exercise of discretion. The overriding requirement is that the date of valuation should be fair on the facts of the particular case. In Profinance Trust SA v Gladstone [2002] 1 BCLC 141 §§60 – 62, Walker LJ (as he then was) held, after conducting an exhaustive review of the earlier authorities, that whist the valuation could be back-dated to provide for past oppression, the starting point was that the shares should be valued as nearly as possible to the actual date of sale:
301.Neither the Petition nor the RAPOD has pleaded what the parties claim should be the appropriate date of valuation. 302.Mr Yau submits that the date of the order after adjudication of the petition is the “norm date”, while Mr Mak contends that the date of the Petition should be the date of valuation as “any date later than that would be unfair” to Mr Cheng and Mr Lee who have built up the Company’s business after that date. I do not accept this. As is clear from my findings at sections D and E above, far from building up the business, Mr Cheng and Mr Lee have mis-managed the affairs, business and fund of the Company. 303.In my view, it is appropriate to fix the date of valuation as the actual date of sale. The Company is a going concern and has been making profits. There is no reason why the profits made by the Company should not be taken into account in the valuation. Indeed, if the valuation is made on the date of the Petition, it would mean that Mr Cheng and Mr Lee would be deprived of their share in the profits generated from the date of the Petition to the date of sale. I do not think it is right or fair in the circumstances of this case. F3. Basis of valuation 304.The parties have not taken any stance in pleadings on this issue. Nor has any submission been made by counsel. 305.The starting point for valuation of a shareholding in a private company is almost invariably the value of the company as a whole. Usually, but not invariably, the material value of the company as a whole is the value in the open market assuming a hypothetical willing (but not anxious or forced) seller and buyer (Hollington, Shareholders’ Rights, §8‑134). 306.The principle was explained by Lord Millet in CVC v Demarco [2002] 2 BCLC 108 (PC) at §§41 – 42 and 45 in this way:
307.Applying the principle in CVC v Demarco, I hold that the Company should be valued as a whole and on a going concern basis. F4. Discount or premium 308.In the Petition and the APOC, it is pleaded that there should be no discount for minority shareholding or premium for the majority shareholding. In the RAPOD, Mr Cheng and Mr Lee contends that there should be a minority discount in the event that a buy out order is made against them. 309.Both Mr Yau and Mr Mak relies on Re Bird Precision Bellows Ltd [1984] BCLC 195 but makes different spins out of the case. Mr Yau submits that in a case where it is established that the company is a quasi partnership and unfair prejudice is made out, there should not be any discount or premium. Mr Mak, on the other hand, submits that Mr Choi has acted in such a way as to deserve his exclusion from management, relying on the alleged wrongful seizing of control of the Company from November 2007 to 30 April 2008. 310.As stated above, it is not right to characterize Mr Cheng and Mr Lee as the majority shareholders. Given that the shareholding of the Shareholders is equal, there should be no discount or premium applicable to any of their shareholding. 311.Even if I were wrong in considering the shareholding of each of the Shareholders separately such that Mr Cheng and Mr Lee should be regarded as the majority, in light of my findings on the bases upon which the Company was formed and the unfairly prejudicial conduct of Mr Cheng and Mr Lee, I do not consider that there should be any premium for their shareholding. Equally, had I ordered Mr Cheng and Mr Lee to buy out the shares of Mr Choi, there should not be any discount for his minority shareholding (see CVC v Demarco, §41). F5. Adjustments to valuation 312.Mr Yau submits that where as here, unfair prejudice is made out, the court may order the valuation of the Company on the basis that the sums representing the prejudice to the Company would be reimbursed to the Company with interest (Tam Po Kei v Tam Bo Kin (No 1) [2011] 1 HKLRD 537 at §127, per Harris J). Mr Mak does not dispute this. 313.On the basis of my findings set out in sections D and E above, I order that the following adjustments be made to the valuation of the Company:
314.As the parties have not made any submissions on the question of interest, I shall leave it to the parties to address the court on the issue as part of the proceedings on valuation. F6. Costs of the Petition 315.As for costs of the Petition, I make a costs order nisi that:
F7. Disposition in 3 Actions 316.As stated in section E above, I dismiss the 1st Company’s Action, the Derivative Action and the 2nd Company’s Action and make the costs orders as stated in §§273 – 274, 278 and 286 – 287 above.
Mr Albert Yau, instructed by Lau, Chan & Ko, for the petitioner (in HCMP 729/2012) and the defendant (by original action) and the plaintiff (by counterclaim) (in HCA 1441/2012) and the plaintiff (in HCA 126/2013) and the defendant (in HCA 2147/2013) Mr Bernard Mak, instructed by Chan, Evans, Chung & To, for the 1st and 2nd respondents (in HCMP 729/2012) and the 2nd and 3rd defendants (by counterclaim) (in HCA 1441/2012) and the 2nd and 3rd defendants (in HCA 126/2013) Mr Dixon Co, instructed by Yung & Au Solicitors, for the 3rd respondent (in HCMP 729/2012) and the plaintiff (by original action) and the 1st defendant (in HCA 126/2013) and the plaintiff (in HCA 2147/2013) [1] Which has since January 2008 been changed to Hop Kee Sam Yick Laan Company Limited (合記三益生豬欄有限公司) [2] The abbreviated name of the “Liaison Office of the Central People’s Government in the Hong Kong Special Administrative Region” (中央人民政府駐香港特別行政區聯絡辦公室) [3] Which has been referred to as “the legal burden”, “the probative burden”, “the ultimate burden”, “the burden of proof on the pleadings” or “the risk of non-persuasion”: Phipson on Evidence, 18th ed, §6–02 [4] Per Robertsons’ letter dated 27 March 2008 [5] Ng Fung Slaughterhouse (Hong Kong) Company Ltd (五豐屠房(香港)有限公司) [6] Mr Cheng accepts in his oral evidence that he agrees with the contents of §2 [7] Per §3 of the Statement of Claim filed in the 2nd Company’s Action [8] Being Hunan New Wellful, Hubei Cereals Oils and Guangxi Fungrich [9] Not included in the bundles [10] The Company [11] The Management Company [12] Being the commission paid by the Suppliers, less the amounts paid to Hop Kee and Sam Ran [13] Being Hunan New Wellful, Hubei Cereals Oils and Guangxi Fungrich |
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