Lee Man Biu and Others v. Hung Wan Hoi Gilbert and Others
Read the full judgment text of HCCW 281/2014 on BabelCite. This High Court CFI judgment was delivered on 16 July 2018.
1. This case concerns a company called Global Eco Resource Limited (“ Company ”) which was set up for the business of food waste processing. The protagonists are its two camps of shareholders. On one side are Mr Lee Man Biu Billy (“ Billy Lee ”), his wife, and their daughter, holding 60% of the shareholding, though Billy Lee was by far the main player in the relevant events. On the other side are 5 individuals holding the other 40%. Although both sides have presented a petition for relief ag
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HCCW 281/2014 [2018] HKCFI 1658 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING‑UP) PROCEEDINGS NO 281 OF 2014 ____________
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____________ AND HCCW 372/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING UP) PROCEEDINGS NO 372 OF 2014 ____________
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____________ (Consolidated pursuant to the order of the Honourable Mr Justice Harris dated 2 March 2015)
_________________ J U D G M E N T _________________ A. Introduction 1.This case concerns a company called Global Eco Resource Limited (“Company”) which was set up for the business of food waste processing. The protagonists are its two camps of shareholders. On one side are Mr Lee Man Biu Billy (“Billy Lee”), his wife, and their daughter, holding 60% of the shareholding, though Billy Lee was by far the main player in the relevant events. On the other side are 5 individuals holding the other 40%. Although both sides have presented a petition for relief against unfairly prejudicial conduct and for a winding up order in the alternative, for convenience I shall refer to Billy Lee’s side as the “Petitioners” and the other side as the “Respondents”. B. The factual context 2.In this section I set out the main facts and events, and my findings on them where there is a dispute. 3.Billy Lee had been involved in the food waste management industry for many years, mainly in the USA where he lived between 1991 and 2009. He had been using the trade name “GER” — Global Eco Resource. In June 2010 he and his wife (Madam Yeung, the 2nd Petitioner), decided to return to Hong Kong and, having done so, they set up the Company here, with the two of them being the only directors and shareholders at that time, each holding 300,000 shares. A principal part of the business was the marketing and sale of a food waste processing machine (“Machine”), which could produce compost from food waste. Billy Lee held certain patents for certain related technology, but the Machine was manufactured by a third party called Koreanvironment in Korea. 4.To develop the business further, the Petitioners needed to attract capital from investors. Lee Che Fung (“CF Lee”), the 3rd Respondent, was a good friend of Billy Lee’s. Their family were close to each other. CF Lee was aware of the business that Billy Lee was seeking to start in Hong Kong and in 2010 he mentioned it to his friend, Chau Tak Cheong (“Chau”), the 2nd Respondent. Chau in turn mentioned it to his close friend, Hung Wan Choi Gilbert (“Hung”), the 1st Respondent. Chau and Hung were both businessmen, and became interested in the idea. 5.There were discussions in early 2011 during which Billy Lee explained his ideas and that he had developed the Machine which employed a thermal evaporation process and a unique grinding process. There was, not surprisingly, an element of “sales pitch” by Billy Lee about the GER brand and the Machines in these discussions. What was precisely said by Billy Lee is in dispute. However, this is not of central importance because the Respondents have not raised any legal claims based on misrepresentation although this might in part explain the later decline in the parties’ relationship. More likely than not, the Respondents were given to understand that the GER company was very successful in the USA and that Billy Lee had patent rights both in the USA and in Mainland China. This is evidenced by a document called minutes of new project for environmental support which I accept was produced by Hung’s assistants at around that time though not seen or approved by Billy Lee. 6.Eventually, it was agreed that Hung, Chau, CF Lee and his wife Stephine Cheng (the 4th Respondent) and her sister Rebecca Cheng (the 5th Respondent) would each invest and become a shareholder in the Company. It was no doubt a welcome development from the Petitioners’ point of view, not least because Hung was the Chairman of the Ideal Group, a group of companies with businesses in different sectors (including the manufacture of zipper — its original business) and with its own building in Kwun Tong called Ideal Centre. From the start he was seen as the leader of the Respondents so far as this investment was concerned. 7.On 8 February 2011, the following share allotments were made:
8.In other words, at that time the Petitioners had 15 million shares while the Respondents together had 5 million shares in the Company. At the same time, the Respondents and Ms Lee Ho Yin were all appointed as additional directors. 9.The investment was carried out in a fairly informal manner, there being no document drawn up to record any agreement, save for the minutes drawn up and written applications for shares. The parties differ as to the agreed basis of cooperation between them (“Basis of Cooperation”) but this became of lesser significance as they later executed a written shareholders’ agreement in relation to the Company. The shares of the Respondents were allotted to them at the par value of $1 per share and they paid up half of the share capital in cash (a total of $2,500,000). As for the shares allotted to the Petitioners, although the application stated $1 per share was “payable in cash”, they were in fact not paid for in cash. It appears the Respondents did not pay much attention to what exactly the Petitioners had put in for their part, and it was only in May 2012 a formal agreement was drawn up for the intellectual property rights held by Billy Lee to be treated as capital injected (see §18 below). 10.The Company moved into 3/F Ideal Centre in about mid 2011. A tenancy agreement between Billy Lee and the landlord was signed for a term until 31 July 2012 at a concessionary rent (at approximately 10% of market rate). After the Respondents’ investment into the Company, between February 2011 and March 2012, it continued to operate, with Billy Lee and Madam Yeung being responsible for the day‑to‑day affairs and the Respondents (none of whom had any experience with food waste processing) being involved on a less regular basis. There were a number of meetings held among them to discuss business directions and strategies. Included in the evidence are the notes of shareholders meetings on 8, 21, 25 February and 1 March 2011, and 22, 24 February 2012. There were also other occasions when the shareholders or some of them met and worked together for promotional and other activities. 11.There were 4 authorised signatories for the Company’s bank account with the Bank of China, namely, Billy Lee, Madam Yeung and Stephine and Rebecca Cheng; any two of them could jointly operate the account. However, up to the summer of 2012 it was the Petitioners who in practice operated the bank account. 12.The Company purchased 9 Machines from Koreanvironment for a total price of about $1.05 million. It managed to rent out one Machine to the Cheung Chau Island Women’s Association and another one to the management company of the residential estate, Pacific Palisades, in North Point. The remaining 7 Machines were displayed at the showroom in Ideal Centre. 13.On 15 February 2012, Hung wrote to Billy Lee, saying that after a year of collaboration, certain information was still outstanding, including documents to show GER USA was being held by the Company and the patents for the Machine. The patent documents were supplied by Billy Lee at the shareholders meeting on 24 February 2012. At that meeting Billy Lee agreed he could procure the transfer of the patents to the Company. 14.The accounts of the Company had not yet been audited. As will be seen below, the first audit was in respect of the accounts for the period from the date of incorporation of 4 June 2010 to 31 March 2012. 15.Between March and May 2012, there were further negotiations between the parties. The Petitioners asked the Respondents to inject the rest of the capital (the unpaid half on the shares allotted to them). Although there was a dispute whether there was a “capital call”, I think it is clear from Hung’s own email to his solicitor in March 2012 that the Petitioners did at about that time request the Respondents to inject the balance in the sum of $2,500,000. 16.Knowing that Hung was carrying on a large and successful business himself and had valuable connections, Billy Lee wanted Hung to contribute more time to the Company and suggested he take a larger stake in the Company. It is clear that the other Respondents also wanted Hung to take a larger part in the Company, and as a result Hung was beginning to pay more attention to this investment at this time and, perhaps as a result of this, he wanted to put things on a more formal basis. He instructed a solicitor, Mr Ngan of Lau & Ngan, to review the position. The Petitioners retained Ms Winnie Wong of Iu, Lai & Li. 17.At around that time, the shareholders also explored business opportunities overseas, for example, a potential sale of the Machines to the Thai government which failed apparently because the price of the Machines as sourced from Koreanvironment was relatively high. It was discovered that in fact Billy Lee did not hold any Mainland China patents. Billy Lee said that it was an honest mistake on his part, as he did believe he held patents for Mainland China. To address the problem, in May 2012, the Company appointed an agent for the purpose of applying for patents in the Mainland. 18.After further discussions, on 18 May 2012:
19.As a result of the purchase of shares by Hung from the 1st and 2nd Petitioners, the shareholding structure in the Company became as follows:
In other words, the Petitioners held 60% whereas the Respondents together held 40% of the shares in the Company. 20.Shortly after the Shareholders Agreement was executed, certain amendments were prepared by Mr Ngan, and sent to Billy Lee and Hung on 25 May 2012 for circulation to the other shareholders, which were eventually agreed and executed by all the shareholders. 21.In particular, one clause originally provided:
22.By the amendment, the following proviso was added between the 2 sentences:
23.In this respect I do not accept Billy Lee’s claim that he was “wholly unaware” of the effect of the amendments. Mr Ngan’s email to him and Hung expressly stated the amendment was proposed “in order to more speedily facilitate the solving of the dead‑lock situation arising when either one of u not turning up in the Directors’ meeting” (sic). 24.It is not to the point to investigate who initiated these amendments. They were agreed to by all. In any event I would accept Mr Ngan’s evidence, who had no reason to speak other than the truth, that as far as he was concerned the proposed amendment came from Billy Lee. That was why on 1 June 2012, he asked Billy Lee to obtain the 2nd to 5th Respondents’ signatures for the amendments. On the next few days, those 4 Respondents signed on the amendments. 25.Under the Shareholders Agreement (as amended):
26.On 30 May 2012, Hung and Billy Lee together went to Dongguan to visit a factory there which belonged to Hung’s own group of companies. The Petitioners allege that Hung made certain improper demands and proposals during the visit which they rely upon in their petition as wrongful conduct on the part of Hung. I reject the Petitioners’ version of events, as discussed in §§104-107 below. However, it seems that Hung’s concerns about the project grew after the Dongguan visit. 27.On 5 June 2012, because of his concerns about the project, Hung told Billy Lee to put on hold the proposed delivery of 2 Machines to Dongguan, until further notice, stating:
28.On 8 June 2012, Hung wrote an email to Billy Lee. Because it sheds light on the reasons for the deterioration of relationship, I set it out extensively here:
29.There were further emails between Hung and Billy Lee suggesting a meeting but it appears no meeting was held. Instead, on 13 June 2012, Billy Lee replied by email:
30.It is clear that by then, Billy Lee’s relationship with Hung had become tense, although Billy Lee was on better terms with the other Respondents including in particular CF Lee who had long been a friend. The Petitioners allege that the parties’ relationship broke down because Billy Lee turned down Hung’s wrongful proposals made during the Dongguan visit and that, thereafter, Hung tried to blackmail the Petitioners to buy back 3 million shares from him with the threat of strangling the Company. 31.For the reasons given in §104-107 below, I reject the so-called Dongguan Incident put forward by the Petitioners to explain the downturn in relationship. I accept Hung’s evidence there was no such blackmail or threat or plan to use the well-being of the Company as a bargaining chip. What I think led to the deterioration in relationship was that Hung became increasingly dissatisfied that the “sales pitch” by Billy Lee did not materialise. In particular, Hung felt that Billy Lee had misled the Respondents about the patent rights he held in relation to the Machines. It is true that the lack of US and Mainland China patents was already discovered in April 2012, prior to the Shareholders Agreement. But it only dawned on Hung during or shortly after the Dongguan trip that important patents were held by the Korean manufacturer and that without the relevant intellectual property rights, it would not be feasible for the Dongguan Factory (or, for that matter, another factory) to undertake the manufacture of the Machine. I accept Hung’s evidence that Billy Lee had not told them before that the intellectual property rights he held, priced at HK$15 million in return for shares in the Company, did not give the Company any right or ability to manufacture the Machines. Nor did Billy Lee clearly explain how those rights were “utilised in the manufacture of the Machines by Koreanvironment”[1] and, if so, why the Company never received any royalties. 32.I accept that at that time Hung also felt that Billy Lee had not been frank with the Respondents about the condition of GER in the US, which was far worse than they thought they had been told by Billy Lee. Hung was in addition concerned about Billy Lee’s continuing claims to third parties (in particular, Royal Garden Hotel) about the success of GER in the US. 33.The other 4 Respondents were also dissatisfied with Billy Lee, though less so than Hung. They knew that Hung and Billy Lee had traded harsh words and wished to mediate. On 8 July 2012, there was a dinner meeting attended by Billy Lee, Madam Yeung, Chau, CF Lee and Stephine Cheng for the purpose of exploring ways to iron things out. At this meeting, the Respondents asked that they be given access to and custody of the financial books and records of the Company, but Billy Lee did not comply. This attempt to resolve their differences failed. There were further attempts by the Respondents, particularly the 3rd and 4th Respondents as mutual friends, to ask the Petitioners to cooperate and specifically to hand over the Company’s books and records for the Respondents to exert closer supervision but the Petitioners were unresponsive. 34.On 10 July 2012, the landlord, a company within Hung’s group which owned the premises in 3/F Ideal Centre, served a notice on Billy Lee asking him to vacate the premises upon the expiration of the existing tenancy on 1 August 2012. While the Petitioners might have felt bitter about it, there is in my view nothing unfair in this, as Hung had no obligation to subsidise the Company through the further provision of premises at a concessionary rent. 35.Without notice to the Respondents, Billy Lee decided to move the 7 Machines held by the Company then to Kam Tsin Village in Sheung Shui. He also decided on his own to set up an office for the Company in Chai Wan. Without the knowledge of the Respondents until much later, he filed a notice of change of registered office of the Company (which used to be 9/F Ideal Centre, not the rented premises on 3/F) to the Chai Wan office on 13 September 2012. 36.Effectively, it would seem that from June 2012 up to this point, Billy Lee had ignored the Respondents and sought to carry on the Company without reference to them. In particular, the Respondents did not receive any books and records or financial information, not to mention the quarterly reports (eg for the quarter after the financial year end of 31 March 2012) mandated by clause 6.02 of the Shareholders Agreement. 37.On 14 September 2012, the Respondents (but not the Petitioners) signed a written resolution of the directors of the Company pursuant to Article 15 of the Articles of Association that no directors should be allowed or had any power or authority to incur any expenditure or make any commitment unless approved by the board. 38.On 19 September 2012, Billy Lee gave notice to the Respondents that his family would be on leave from 19 September to 5 October 2012, and that the Company would move to a new office in Chai Wan by end of October 2012. 39.Then, in late September and early October 2012, the 2nd to 5th Respondents each decided to exercise their right under the Shareholders Agreement to nominate a representative to act as a director of the Company in place of themselves. Thus, on 27 September 2012, Chau sent a notice to the board stating he resigned as director and appointed one Joyce Ku as his nominee director with immediate effect. This was approved by a written resolution signed by the Respondents of the same date. 40.On 28 September 2012, Billy Lee caused a notice to be sent in the name of the Company to the directors which (i) stated that the resolutions passed by the Respondents were invalid, (ii) proposed an EGM to be held on 5 November, and (iii) asked the Respondents to pay up the unpaid capital on their shares by 27 October. 41.Notwithstanding Billy Lee’s notice, on 3, 4 and 5 October, CF Lee, Stephine Cheng and Rebecca Cheng also resigned and appointed Law Sing Yui, Tang Kin Ming and James Arthur Elms as nominee directors respectively. Accordingly, by then the 2nd to 5th Respondents had appointed Ku, Law, Tang and Elms to be nominee directors of the Company for them. The four individuals were all employees within Hung’s group of companies. I shall refer to them as the “new directors”. 42.On 12 November 2012, the new directors tried to hold a board meeting, which was attended by the new directors, as well as by Billy Lee and Madam Yeung. Billy Lee left after voicing his objections to the validity of the meeting, on the ground that the new directors had not been properly appointed because the Respondents had not paid up their shares and were not proper shareholders. After he and Madam Yeung left, those who remained resolved, inter alia, that the authorised signatories of the Company’s bank account would be changed to Elms and Law. 43.On 16 November 2012, Elms and Ku wrote to Billy Lee and asked him to deliver to Elms for custody on behalf of the board (i) the financial statements of the Company including its profit and loss accounts and balance sheet made up to 31 October 2012; (ii) all books and accounts, bank statements and passbooks, cheque books and chops and seals of the Company; (iii) all other corporate items including the certificate of incorporation, business registration certificate and memorandum and articles of association. When Billy Lee did not comply with the direction, they wrote again on 10 December 2012 to ask for the documents. 44.On 15 December 2012, Billy Lee caused another notice to be issued in the name of the Company to the Respondents asking them to pay up the unpaid capital on their shares. 45.On 31 December 2012, the 5 Respondents wrote a letter to Billy Lee (in response to his letter dated 5 December which was not in evidence), stating that they had been misled by him about the performance of the GER company in the USA and about the utility of the patents he held. They also complained that after the sale of shares in May 2012, Billy Lee had not provided any financial and operation report to them or to the board and had failed to hand over the financial books of the Company. They asked him to repent and cooperate with the board of directors. 46.In his reply of 28 January 2013, Billy Lee denied the Respondents’ accusations. 47.Meanwhile Billy Lee refused to attend any directors’ meetings with the new directors. From April 2013 onwards, the parties instructed solicitors who corresponded with each other on their behalves. 48.In a letter dated 30 April 2013, the Respondents’ solicitors stated that it had all along been the understanding among the shareholders that the remainder of the share capital would only be required as and when funds were needed for the operation of the Company. In a letter dated 9 July 2013, the Respondents’ solicitors stated that the Respondents had put up the unpaid capital in the sum of $2,500,000 and placed it with the solicitors as an interim measure to meet any financial needs of the Company if the board decided to “re-activate or revamp the business”. 49.By a notice dated 4 June 2013 and a further notice dated 15 July 2013, the Petitioners called and requisitioned an EGM for the purpose, inter alia, of removing Ku, Law, Tang and Elms as directors. 50.In response, on or about 24 July 2013, Hung and Ku, Law, Tang and Elms signed resolutions, as a majority of the directors, to approve the resignation of Ku, Law, Tang and Elms as directors and the re‑appointment of the 2nd to 5th Respondents, Chau, CF Lee, Stephine Cheng and Rebecca Cheng as directors in their place. 51.One would have thought that this was a conciliatory move welcome to the Petitioners. But the Petitioners continued to purport to hold an EGM on 30 July 2013 and pass a members’ resolution to remove Ku, Law, Tang and Elms as directors. Furthermore, by their letter dated 2 August 2013, the Petitioners stated the purported reinstatement of the 2nd to 5th Respondents as directors was not effective. By doing that, the Petitioners effectively took the position that they now constituted the majority of the board. In that letter, the Petitioners also stated that unless the Respondents were prepared to buy them out, they intended to wind up the Company. 52.The Petitioners stated the Company was “basically dormant” and repeated their stance in a letter of 10 March 2014 that the Company should be wound up, if not voluntarily then by petition to the court. In response, by their solicitors’ letter of 19 March 2014, the Respondents stated they had been shut out from the information and operation of the Company and could not verify the Petitioners’ assertions. They asked again for production of the books and accounts of the Company. 53.Eventually, on 25 April 2014, Hung, in his own name and as a director of the Company, issued proceedings by way of originating summons (HCMP 1018/2014) against the Petitioners and the Company seeking access to the books and accounting records of the Company. The application came before Harris J on 20 August 2014 when the Petitioners told the court that Hung and the other 4 Respondents were in control of the board and the Company and that therefore no order was necessary. As a result, the court adjourned the hearing of the originating summons sine die with costs reserved. 54.On 9 October 2014 the Petitioners presented their petition (HCCW 281/2014) for an order under s 724 of the Companies Ordinance (Cap 622) (“Ordinance”) that the Respondents do purchase the Petitioners’ shares in the Company, alternatively for a winding up of the Company. 55.On 12 December 2014, the Respondents presented their own petition (HCCW 372/2014) for an order that the Petitioners do purchase their shares, alternatively that the Company be wound up. C. The relief sought 56.Although a buy-out order was claimed in the Petitioners’ petition, it was not pursued at trial. Their position is that the Company should be wound up because of a total breakdown of relationship caused by the Respondents, or loss of the Company’s substratum, or the suspension of the Company’s business for a year, and that the Respondents’ claim for a buy‑out order should be dismissed. 57.In contrast, the Respondents contend primarily for an order that the Petitioners purchase their shares, and only if that is refused do they ask for a winding up order. 58.Because both sides have included winding up among the relief sought, Mr Martin Ho, who appeared for the Petitioners, submitted at the outset that the sensible course would be for the parties to agree to have the Company wound up by consent, leaving any outstanding relevant allegations to be investigated by the liquidator. The fact of the matter, however, is that there is no such agreement either for winding up or on what would be the proper factual basis for a winding up. Further, the primary relief sought by the Respondents was an order for the purchase of their shares. Accordingly, the trial of the petitions proceeded. 59.What I propose to do below is to examine the parties’ respective allegations of unfairly prejudicial conduct or other misconduct, before turning to the question of the proper relief. D. The parties’ respective allegations 60.The Petitioners contend that the parties’ relationship broke down after and because of the Dongguan incident at the end of May 2012. The Petitioners’ complaint of unfairly prejudicial conduct of the affairs of the Company may be set out under 5 headings:
61.For their part, the Respondents’ complaints may be categorised as follows:
62.I have examined the allegations and evaluated the evidence as a whole but, as a matter of presentation, I shall deal below with the Respondents’ complaints before the Petitioners’, after setting out my observations on the witnesses and my findings on the Basis of Cooperation. E. The witnesses’ evidence 63.The Petitioners called only Billy Lee to give evidence, whereas each of the Respondents gave evidence, as well as the solicitor Mr Ngan, one of the new directors James Elms, a third party Mr Shum and three investigators from a private investigators firm. 64.I did not find Billy Lee’s evidence reliable. His answers during oral evidence appeared to me calculated rather than spontaneous. In particular, I found his evidence positively untruthful in the following areas:
As a result, I have exercised caution in relation to Billy Lee’s evidence generally, even in relation to letters he wrote at the time making various assertions which were at variance with the Respondents’ version. 65.In contrast, while there might be inaccuracies in memory given the lapse of time, I found the Respondents on the whole to be honest witnesses who tried to tell the truth from their recollection which was no doubt imperfect. As to their other witnesses, Mr Ngan gave his evidence in a straightforward manner and I accept his evidence. Mr Shum’s evidence was not challenged. Mr Elms also impressed me as an honest witness whose evidence was not shaken by cross‑examination. Where Billy Lee’s evidence is in conflict with the evidence of these witnesses and there is no other evidence to shed light on the dispute, I have generally preferred the latter’s. The private investigators’ evidence, however, was confusing and parts of their reports relied on unidentified hearsay. I have exercised caution in approaching their evidence. F. Basis of Cooperation 66.There is no dispute that the Company was a quasi‑partnership after the Respondents joined as shareholders in February 2011. The investment was made informally at first, without any written agreement. But by May 2012, Hung had become more guarded, and the cooperation was put on a more formal basis under the Shareholders Agreement and other agreements executed at around the same time. 67.The Petitioners allege that there was a mutual understanding and agreement that each would contribute to the Company in that (i) Hung, along with the 2nd to 5th Respondents, would provide funding, capital contribution and business opportunities and connections for the benefit of the Company; whereas (ii) the Petitioners would be responsible for managing the business and finances of the Company. It should be noted, however, that the Petitioners advanced no pleading of any breach by Hung of an expectation to introduce business to the Company. 68.The Respondents accept that the initial understanding was that the Petitioners would be primarily responsible for the day to day running of the Company’s business and managing its finances. There are three points raised by the Respondents that were made out. First, while the Petitioners would be responsible for the day to day operation, the Respondents would have the right to supervise and participate in the management of the Company. It is evident from the outset that the Respondents were not purely passive investors. They were each made a director of the Company and, indeed, as a bloc, formed a majority on the board. Secondly, while it was no doubt hoped that Hung could use his connections to help the Company, I do not think the understanding was that it was the sole responsibility of Hung or the Respondents to find business opportunities and establish connections for the Company, but that it was a joint venture and everyone was expected to help if he or she could. Thirdly, as far as the capital injection by the Respondents was concerned, I consider that the understanding was that as the Company should not have significant expenses to defray, it was unlikely the second tranche would be required in the near future: see further §§115-123 below. 69.Further, it seems to me that the Basis of Cooperation must, from the date of the Shareholders Agreement onwards, be taken together with that agreement as it represented the expressly agreed basis of further cooperation among the parties. In particular, the Shareholders Agreement made clear there was no intention for the Petitioners to have unsupervised powers of management of the business and finances. While Billy Lee was to be the Managing Director, the Respondents, acting together, would have majority control of the board. Further, in contrast to the ordinary position under s 740 of the Ordinance,[2] each shareholder would, unconditionally, be entitled to access to the books and records of the Company. The requirement of quarterly reports underlined the Respondents’ emphasis on supervision. As regards funding, clause 5.01 of the Shareholders Agreement provides that working capital was to be raised from banks or, if no bank financing could be obtained, (if approved by special resolution) by way of pro rata shareholders’ loans or issue of new shares. G. The Respondents’ complaints G1. Denial of access to information and exclusion from management 70.As is clear from the facts set out above, the relationship between Billy Lee and Hung significantly deteriorated in June 2012. The evidence shows that Hung and, to some extent, the other Respondents had by then become sceptical towards Billy Lee and wanted to exercise closer control and supervision over the finances of the Company than they had hitherto asserted. 71.As a director, each of the Respondents was entitled to access to all the books and records of the Company. Furthermore, clause 6.02 of the Shareholders Agreement provided:
72.The Petitioners argued that there was no request for financial records until November 2012. While the first demand in writing appears to have been made on 16 November 2012 (see §43 above), I do not think it had simply come out of the blue at that point in time. I accept the Respondents’ evidence that they had verbally asked Billy Lee, during the few months before (including at the dinner meeting on 8 July 2012), for the books of accounts and records, and also for the opportunity of more closely supervising the financial affairs of the Company. Given the personal relationships involved, it is not at all surprising that verbal requests would have been made prior to any formal written demand. Billy Lee’s own letter of 28 January 2013 shows that custody of the books and accounts was discussed at the dinner meeting on 8 July 2012 although Billy Lee claimed that he had agreed to hand over custody of the books only if the Respondents put forward a proposal for business development. 73.A constant refrain uttered by the Petitioners was that the draft audited accounts prepared by Jenny Chung & Co were provided to Mr Ngan, the solicitor, in late June 2012 with a request for the Respondents to sign them. But these were the annual financial statements, not the detailed financial information and books that were needed for closer supervision. The audit opinion was qualified, for the reason that there had been no verification of the stock held (although this might initially have been a lesser concern insofar as the stock consisted of the Machines, which up to July 2012 were still located in Ideal Centre). It seems to me that from July 2012 onwards, the Petitioners had failed to give the Respondents access to the underlying books and records of the Company as requested by them. 74.An aggravating factor was that the Petitioners did not cause the Company to change its auditors to Lak & Associates, CPA Ltd in accordance with the Shareholders Agreement. The auditors, Jenny Chung & Co, were a firm chosen by the Petitioners, and appointed at some point after 31 March 2012. While the identity of the auditors, of itself, might not have been a serious complaint, the Petitioners’ failure to take steps to ensure adherence to the Shareholders Agreement in this respect no doubt contributed to the Respondents’ distrust. 75.The Petitioners’ response that the Respondents never took steps to procure the appointment of Lak & Associates, CPA Ltd was not a satisfactory answer. Billy Lee was the one giving instructions to the auditors. Billy Lee’s explanation in oral evidence that he did not know how to contact Lak & Associates, CPA Ltd was in my view disingenuous. Appointment of auditors is a matter for the Company in general meeting (see s 396 of the Ordinance), and therefore the control lay with the Petitioners. Subsequently, when Jenny Chung & Co resigned in July 2013, the Petitioners caused a firm called H K Wan CPA & Co to be appointed auditors at the purported EGM on 30 July 2013. H K Wan CPA & Co later confirmed that they acted for the three Petitioners and obtained instructions from Billy Lee. 76.By September and early October 2012, it seems the 2nd to 5th Respondents had become tired of trying to approach Billy Lee themselves. They (other than Hung) decided to appoint representatives to act as directors of the Company on their behalves: see §§39 and 41 above. This was their right as provided in the Shareholders Agreement at clause 4.01:
77.The Respondents also sought to approve these appointments by a written resolution of the majority of the directors. Notice of these appointments was promptly given to the Company and to Billy Lee, but he refused to recognise them, as stated in his emails at the time. He also refused to recognise them in the directors’ meeting on 12 November 2012. He continued to refuse to recognise them or to attend any meetings with them up to the summer of 2013. 78.Although there was eventually a total breakdown of relationship, I do not think it had fully occurred by the second half of June 2012 as the Petitioners submitted. It was a deteriorating situation, with increasing animosity, but as at September 2012 I accept the Respondents’ evidence that they were by these steps still hoping that Billy Lee would be brought back to work things out together with them. 79.It was argued for the Petitioners that the appointments were invalid and unfair because no notice of the written resolution was given to them, in breach of Article 15 of the Articles of Association, and because they were contrary to the Basis of Cooperation, served no commercial purpose of the Company and were not in the interests of developing the business of the Company. 80.Article 15 of the Articles of Association of the Company provided that a resolution of the directors in writing signed by the majority of the directors shall be valid and binding as a resolution of the directors provided notice has been given to all the directors capable of being communicated with conveniently according to the last notification of address. I agree that the Respondents could not avail themselves of Article 15 without even trying to give notice to the Petitioners of the written resolutions. As a matter of contract, however, the Petitioners were bound by clause 4.01 of the Shareholders Agreement to accept the right of the Respondents to appoint directors on behalf of themselves. The Company was also a party to the Shareholders Agreement and therefore cannot claim that it was unaffected by it. It was expressly agreed in the Shareholders Agreement that it was to prevail over the Articles of Association to the extent of any inconsistencies. Even if the Articles are not to be treated as having been amended accordingly, as a matter of personal obligations between the Petitioners and the Respondents, it would in my view be a breach of contract for the Petitioners to deny the Respondents the right under clause 4.01. 81.In making the appointments the Respondents were exercising an express and unfettered right under the Shareholders Agreement. I do not think the appointments could be said to have infringed any understanding or expectations or to be unfair for lacking commercial purpose. There is no suggestion that the new directors were determined to act contrary to the interests of the Company. 82.In refusing to recognise the Respondents’ right under clause 4.01 of the Shareholders Agreement and in excluding their appointed representatives from playing any part, it seems to me that the Petitioners had repudiated the agreed basis for cooperation and conducted the affairs of the Company in an unfair and wrongful manner: Re a Company [1986] BCLC 391, 396b‑c; In re A & BC Chewing Gum Ltd [1975] 1 WLR 579, 591‑592. 83.At the meeting on 12 November 2012, Billy Lee not only refused to acknowledge the appointment of the new directors, he even refused to acknowledge that the Respondents had any right as shareholders on the ground that their shares had not been fully paid up. No books and records of the Company were provided by him to the Respondents following the meeting. 84.The matter did not stop there. When the 2nd to 5th Respondents, in order to avoid dispute, caused the new directors to resign and sought to have themselves reinstated as directors on 25‑27 July 2013, the Petitioners equally refused to recognise them as directors. Instead, the Petitioners sought to remove the new directors on 30 July 2013. As stated in their solicitors’ letters of 2 August 2013, the Petitioners adopted the position that neither the new directors nor the 2nd to 5th Respondents were directors, and that the directors of the Company were the Petitioners and Hung only, on the ground that the written resolution of directors only came to their attention on 27 July 2013, after the new directors had resigned. The Petitioners even caused lengthy letters to be written to the Companies Registry in November 2013 and February 2014 to dispute the status of the 2nd to 5th Respondents as directors, stating that the four of them were not properly appointed, and that their names should be removed as directors from the public records. This was in my view a further repudiation of the Respondents’ entitlement under clause 4.01 of the Shareholders Agreement and their entitlement to take part in the management of the Company. 85.While disputing the status of the new directors and subsequently the status of the 2nd to 5th Respondents, the Petitioners failed to give them access to the books and accounts even as shareholders of the Company under the Shareholders Agreement. When Hung finally issued legal proceedings for access to the books and records, however, Billy Lee — in a remarkable volte face — made an affirmation dated 1 August 2014 on behalf of the Petitioners in which he referred to each shareholder’s entitlement to appoint a director under clause 4.01 of the Shareholders Agreement and said (at §16) that Hung’s camp “with 5 directors all together, were and remain in control of the Board”. 86.As Billy Lee admitted in oral evidence, his affirmation in the inspection proceedings was the first time he informed the Respondents that the books and records of the Company were being kept by the auditors. 87.At the hearing before Harris J on 20 August 2014, counsel for the Petitioners opposed Hung’s application on the ground that the Respondents constituted the “majority of the directors” and could therefore pass any lawful resolution they liked. The line taken was that it was superfluous for Hung to have made an application to the court. The hearing was adjourned on that basis. 88.The Respondents’ solicitors duly wrote to the Petitioners on 22 September 2014 and demanded on behalf of the board of directors that the Petitioners deliver up all books and records of the Company. Surprisingly, the reply of the Petitioners’ solicitors on the next day stated that the directors of the Company were the Petitioners and Hung only, and that the other 4 Respondents had not been validly re‑appointed directors. I find it very surprising, to say the least, that the same firm of solicitors found themselves able to (i) write one of the letters to the Companies Registry dated 25 November 2013 (referred to in §84 above), (ii) file the affirmation of Billy Lee dated 1 August 2014, (iii) give instructions for counsel’s submissions at the hearing on 20 August 2014, and (iv) write to the Respondents on 23 September 2014, in plainly mutually contradictory terms. This prevarication was reflected in Billy Lee’s own evidence. 89.As of April 2015, in the draft accounts prepared by H K Wan CPA & Co, it was stated that the Petitioners objected to the validity of the appointments of the 2nd to 5th Respondents as directors of the Company. 90.In the lengthy course of steps taken for the inspection of documents, the Petitioners seem to me to have been saying things that they considered to suit their purpose at any one time, and giving the Respondents the runaround on the question of access to and delivery of the books and records. Even when he was giving evidence, Billy Lee still equivocated when asked whether the 2nd to 5th Respondents were directors of the Company. 91.The course of events leading to the petitions was one in which the Petitioners demonstrably sought to obstruct the Respondents from enjoying their rights of access under the Shareholders Agreement to the books, records and documents of the Company. As a result of the hurdles set up by the Petitioners, the Respondents did not get access except a one‑off supervised inspection obtained by Hung by virtue of his separate application to the court. No meaningful explanation and breakdown of the Company’s expenditure was supplied to the Respondents by the Petitioners until after the commencement of the present proceedings, depriving them of the right to supervise the management and finances of the Company and leading to the breakdown of trust and confidence. Such denial of and obstruction to access was, in my view, unfair and prejudicial conduct: see Re Power Hong Kong Ltd (unrep, HCCW 377/2011, 22 December 2014), at §61, per Ng J. 92.During the same period, the Petitioners had physical possession and control of the Machines. They were in contact with the hirers of the two Machines that had been rented out. The Petitioners received cheques for the rental payments but did not notify the Respondents until the cheques were about to expire. The Petitioners were also the contact persons for Government tender notices. Between mid‑2012 and 2014 there were dozens of tender notices received by the Company, such as for procuring composters with technical specifications that the Company was able to comply with, and Billy Lee went to many of the presentation meetings for these tenders. But none of the tender notices was forwarded or notified to the Respondents; nor did the Petitioners call any meeting with the Respondents to discuss these opportunities or indeed notify the Respondents of any other business opportunities, including those referred to below. The tender notices might have been published on the Internet at the same time, but the Respondents could not fairly be expected to follow them up by themselves as none of them was skilled in this business. Effectively, the Petitioners had purported to handle the business without the participation of the Respondents notwithstanding the Company’s bank accounts were frozen. G2. Diversion of corporate opportunities 93.On the Petitioners’ case the Company has essentially ceased business since 2012, with only 2 Machines on outstanding rental arrangements. The evidence shows that from late 2012 onwards, Billy Lee had taken part in an entity called Green Technology Consortium Ltd (“Green Technology”). This entity had its base in Kam Tsin Village, Fanling. For example, in October 2013, Billy Lee took part at the counter of Green Technology in an environmental exhibition, and invited those who came to the counter to visit its premises in Kam Tsin Village. In December 2013, he was in Kam Tsin Village representing Green Technology in dealing with persons interested in food waste processing machines. 94.Billy Lee’s explanation is that after the termination of the lease at Ideal Centre, the 7 Machines then in the Company’s possession had to be relocated. He decided to move them to Kam Tsin Village. He explained that Green Technology was a non‑profit making entity and its premises at Kam Tsin Village were in part an education centre aimed at raising public awareness of green industry and technologies. Various companies in the industry showcased their products at the education centre. By displaying the 7 Machines of the Company there, the Company could benefit from the promotional effect and save on storage cost. I accept that Green Technology was non‑profit making but, as subsequent events suggest, I am sceptical as to whether Billy Lee’s activities there were intended to be beneficial to the Company. 95.There is some evidence that Billy Lee was also close to another company called Hong Kong Organic Waste Recycling Centre Ltd (“HKOWRC”). Billy Lee’s statement said this company was itself a member of Green Technology and a tenant of another part of the site at Kam Tsin Village which operated separately from Green Technology and its education centre. He said that he had never acted as a representative of HKOWRC, though he was a friend of Mr Henry Ngai of HKOWRC. In his oral evidence (but not before), Billy Lee said he had entered into an arrangement with Mr Ngai whereby the Company would lease or sell its Machines to third parties through HKOWRC which would be entitled to a 5%‑10% commission. He admitted, however, that he had never told the Respondents there was such an arrangement. 96.As admitted by Billy Lee, during 2012 to 2014, there were potential customers interested in hiring or buying the Machines and he received enquiries from them, but he never notified the Respondents of these matters. Billy Lee claimed that no business was concluded, but I am not prepared to take his assertion at face value, even though there is no positive evidence of actual deals. 97.In April 2014, an investigator engaged by the Respondents, called Paul Wong, visited the premises at Kam Tsin Village and was received by Billy Lee. They discussed a potential engagement for food waste processing. Exchanges by email followed:
98.Billy Lee’s email of 10 June 2014 attaching the quotation from Green Waste is significant “incriminating” evidence. The position taken by Billy Lee about it in these proceedings is in my view quite incredible. In his second witness statement (dated July 2016) and third witness statement (dated October 2016), he did not deal with the quotation at all even though it had been referred to by Hung in his first witness statement (dated May 2016)[3] as one of the “blatant examples” of Billy Lee’s diversion of the Company’s business. There Hung said “Billy replied by email … and attached a quotation on behalf of Green Waste addressed to Paul Wong of Allied Way” and went on to describe the quotation, which was unmistakably the one issued by Green Waste dated 10 June 2014 referred to in §97(4) above. Billy Lee was unable to give any credible explanation why he did not respond to that matter in his own subsequent witness statements. Counsel’s complaint that Billy Lee was “ambushed” was but an opportunistic attempt to capitalise on the deficiencies in the private investigators’ evidence and deflect attention from Billy Lee’s untenable position. 99.In oral evidence Billy Lee claimed that he simply ignored LC So’s reminder for him to send a quotation to Paul Wong. His claim that he must have deleted that email from his account was never mentioned in his statements and is highly suspicious. His suggestion that the attachment to his email of 10 June 2014 was the Heng Fa Chuen materials seemed to me to be a desperate fabrication that did not make sense. It was clear he was not telling the truth to this court. 100.The email was clear evidence that Billy Lee gave a quotation for the Machines on behalf of Green Waste to a potential customer. LC So’s reply of 20 May would suggest that any question of purchase or hiring of food processing machines was within Billy Lee’s scope and would be referred to him. The Respondents have not alleged that Billy Lee owned Green Waste whether wholly or in part and I make no findings in that respect. But its quotation used photographs of the Company’s Machines taken at Ideal Centre and Pacific Palisades, with a “GER” logo on them. Its website contained materials identical to those on the Company’s website, including a slogan. The plain inference was that Billy Lee was connected with Green Waste and was in a position to deal with customers on its behalf. I do not believe his claim that he had “never had any affiliation with Green Waste”. 101.This incident was a clear example of Billy Lee failing to act in the interests of the Company and diverting potential business away to its competitors. It also constituted a breach of clause 9.03 of the Shareholders Agreement (the validity of which has not been called into question), which provides:
102.The conduct in question fell below acceptable standards of probity and good faith and indicated that Billy Lee effectively ignored the continued existence of the Company while using its Machines as a means of attracting business for another entity. G3. Mismanagement in relation to debts to two creditors 103.There was an allegation by the Respondents that the Petitioners mismanaged the Company’s affairs which resulted in two statutory demands for $23,020 and $17,866 respectively being issued against the Company. The Respondents settled the debts using the money they had deposited with their solicitors as further capital. I need not deal with this allegation as the Petitioners had explained that the sums were proper expenses and this explanation was not challenged in cross‑examination. H. The Petitioners’ complaints H1. Dongguan incident 104.I now turn to the Petitioners’ complaints. The first complaint is that Hung was guilty of unfairly prejudicial conduct during a trip to Dongguan in May 2012. 105.It is common ground that on 30 May 2012, Hung and Billy Lee visited a factory in Dongguan belonging to Hung’s businesses (“Dongguan Factory”). The Petitioners allege that while in Dongguan, Hung “demanded, attempted to persuade and pressured” Billy Lee to provide Hung with the designs, know‑how and technology in relation to the Machines to enable the Dongguan Factory to produce the same or similar food waste processing machines, indicating that the Dongguan Factory could then sell or lease such machines to clients directly, bypassing the Company. The Respondents deny these allegations. 106.My findings are as follows:
107.This Petitioners’ allegation is simply Billy Lee’s invention. I reject it. H2. Ousting the Petitioners from management 108.The Petitioners’ complaint under this head is that, from mid‑September 2012 onwards, the Respondents unilaterally took steps which were contrary to the Basis of Cooperation, deprived the Petitioners’ right to jointly manage the Company, and usurped complete control over the Company. In particular, the Petitioners complain about:
109.As to the resolution on 14 September 2012 restricting expenditure or commitment, it has to be looked at in the context of the prevailing circumstances. On my findings, this was a measure devised by the Respondents to assert their right to supervise the management of the Company, in circumstances where the Petitioners had failed to give them access to the books and records and refused to be subjected to closer financial control by the Respondents but were asking the Respondents to pay up the remaining share capital. 110.The resolution did not have the effect of preventing further business, but of requiring the directors to sit down and manage the affairs of the Company together. It did not deprive the Petitioners of any “right to jointly manage” the Company. On the contrary, it seems to me to have been intended for the purpose of insisting upon joint management and preventing Billy Lee from running the Company as if it were his own. The resolution did not have the effect of ousting the Petitioners from management, though it did purport to revoke and limit any previous authority they might have had for incurring expenditure and committing the Company to binding obligations. It was in my view something that was within the power of the board to impose. 111.Nor was the resolution in breach of any Basis of Cooperation. It was not part of the understanding of the parties that no restriction could be placed on Billy Lee’s powers of management as Managing Director, especially in circumstances where, as I have found, he had failed to respond positively to the Respondents’ requests for the financial books and records of the Company. 112.It is common ground that no prior notice of this resolution was given to the Petitioners. I think it was wrong not to have given notice. But the absence of notice caused little prejudice to the Petitioners because even if notice was given, the Respondents had sufficient majority on the board to pass the resolution. The real issue is the substance of the resolution. 113.As explained by Hung, if the Petitioners had any legitimate expenses to incur, they simply had to inform the other directors and the board could then decide on the matter. General authority could also be conferred again to the extent appropriate. The fact of the matter is that the Petitioners never thereafter presented any proposal to the board or provided any information about any proposed expenditure or business. 114.As to the complaint about the appointment of the 4 nominee directors and their subsequent replacement, the re‑appointment of the 2nd to 5th Respondents as directors and the Petitioners’ requisitions for EGM, I refer to the discussion in §§70-92 above. The Petitioners’ complaint is in essence the obverse of the Respondents’. For the reasons already given, I do not consider that the Respondents’ conduct in this regard constituted unfairly prejudicial conduct towards the Petitioners. H3. Failure to pay up outstanding share capital 115.The Petitioners allege that there was an agreement that the capital in respect of the shares taken up by the Respondents would be paid in two tranches: the first $2.5 million in January 2011 and the other $2.5 million by January 2012. The Petitioners complain that despite repeated demands, the Respondents failed and refused to pay up the outstanding share capital. 116.I find that there was an understanding that the raising of capital would be divided into two phases, as evidenced in the notes of meeting of 8 February 2011. It was mentioned in the discussions then that the Company would initially need about $2 million. The question of when the second half would be payable is less clear. It was obviously agreed in February 2011 that it would not be immediately payable. I accept the Respondents’ evidence that they were given to understand then that it would only need to be paid if and when necessary, and that it would probably not be necessary because – in the rosy portrayal by Billy Lee – the Company would be successful, the business would expand and there would be venture capital or corporate investors brought in. 117.It is common ground that in about March 2012, the Petitioners asked the Respondents for the outstanding share capital to be paid up but I do not think there was any strong, urgent demand or any agreement to pay it immediately. The Shareholders Agreement did not deal with the question, and simply (and erroneously) recorded the capital as fully paid up (see clause 3.01). The Petitioners’ reliance on that clause seems to me to be opportunistic. If there had been an express agreement at that time as to a precise date on which the outstanding share capital should be paid, it would be surprising that it was not reflected in the written agreement or any contemporaneous record in around May or June 2012. The likelihood was that this was not a matter on which advice was sought from the lawyers at all. Further, the 1st and 2nd Petitioners had themselves received $3 million from Hung for the shares transferred to him in May 2012 and so it was credible that they did not insist upon payment of the remaining capital at that time. 118.It seems to me given the lack of return after over a year, the absence of satisfactory progress from their point of view, and the Petitioners’ request for them to pay the other half of the subscription monies for the shares, the Respondents (certainly on the part of Hung) decided to look more closely at the structure of the Company. 119.According to the draft audited financial statements prepared by the then auditors, Jenny Chung & Co, there were cash at bank (over $841,000) and prepaid expenses ($9,000) totalling over $850,000. The Respondents demanded an explanation from the Petitioners as to the need for them to pay up the outstanding share capital, but the Petitioners never explained for what concrete purposes the Company needed further capital at that point in time. Even in evidence, Billy Lee was unable to give any details and simply said if there was capital, he might have new proposals to make. 120.I reject the Petitioners’ allegation that the 2nd to 5th Respondents appointed the new directors in order to avoid the pressure of the capital call. If they were liable to pay at that point, appointing the new directors would not absolve them from that liability. In fact, they sought to reinstate themselves as directors in July 2013 and it was the Petitioners who objected to the validity of their re‑appointment. 121.On about 9 July 2013, perhaps to demonstrate that they had not failed to pay due to lack of funds, the Respondents paid the sum of $2.5 million to the solicitors firm of Lau & Ngan as stakeholders. The sum was later, in August 2014, transferred to the Respondents’ solicitors in these proceedings, Messrs Tang & So, and was used to pay off certain small creditors of the Company. 122.There is no allegation or evidence that the Company was prejudiced as a result of the non‑payment of capital either between June 2012 and July 2013 or thereafter. 123.In conclusion, I find that the Respondents did not breach any agreement or understanding and were not guilty of any unfairly prejudicial conduct in not paying the remaining share capital in the circumstances described. H4. Freezing the Company’s bank account 124.At the board meeting of 12 November 2012, the new directors passed a resolution to remove Billy Lee and Madam Yeung as authorised signatories of the Company’s bank accounts. On 19 November 2012, a notice was sent to Bank of China to appoint Law and Elms as authorised signatories to replace Billy Lee and Madam Yeung. Further, on 26 November 2012, Stephine and Rebecca Cheng, as authorised signatories, sent a notice to the bank with instructions to freeze the accounts. In May 2013, the bank authorised the depositing of funds into the accounts although withdrawal could still not be made. 125.When in May 2013 the Respondents proposed opening a new bank account for the Company, the Petitioners stated they would only agree if the Respondents paid up all their shares and insisted that the authorised signatories of the new account should be limited to directors who owned 10% or more of the shares of the Company (ie only Hung and the Petitioners). 126.The Petitioners complained that there was unfairly prejudicial conduct on the part of the Respondents. I think this contention also fails. The measure was plainly taken for the purpose of preventing Billy Lee and Madam Yeung, who had been authorised signatories of the Company’s bank accounts, from making unmonitored use of the funds in the Company’s bank accounts. It applied across the board to all directors. It reinforced the earlier resolution that no director be allowed to incur expenditure for the Company without board approval. As Hung explained, it was open to Billy Lee to revert to the Respondents and take a transparent approach as regards finances, but he simply did not raise with them any further business needs of the Company. H5. Refusal to sign and file audited accounts with IRD 127.It is common ground that Jenny Chung & Co prepared draft audited accounts which were sent to Messrs Lau & Ngan on about 28 June 2012 and that the Respondents did not sign them. However, as I have explained above, by then the relationship between Hung and Billy Lee was strained and the Respondents no longer had complete faith in Billy Lee. I consider that the failure by the Respondents to sign the audited accounts was not unfairly prejudicial conduct because:
128.The Petitioners complained that without audited accounts, the Company was disabled from tendering for Government projects. However, it was accepted that the Petitioners never forwarded any government tender letters to the Respondents. I accept the Respondents’ evidence that they did not refuse to sign the accounts in order to prevent the Company from engaging in Government tenders; that would not make sense anyway given their real investment and stake in the Company. I. Substratum of the Company 129.It was submitted on behalf of the Petitioners that the Company should be wound up for loss of substratum. The Respondents deny that the Company’s substratum has been destroyed. 130.It is common ground that the mere suspension of trading does not of itself show a loss of substratum. As stated by the Lord Justice Clerk (Moncrieff) in Galbraith v Metro Shipping Co, 1947 SC 446 at 456, in a passage adopted by Rogers J (as he then was) in Re Mediavision Ltd [1993] 2 HKC 629, 633E:
131.A little further on p 456, the Lord Justice Clerk (Moncrieff) stated:
132.After referring to the first quoted passage above from Galbraith v Metro Shipping Co, Rogers J continued to state in Re Mediavision Ltd at p 633F:
133.On these principles, it seems to me whether or not on the evidence available a company’s substratum has gone must be a question of fact in each particular case. 134.In the present case, while there might in fact have been a suspension of business, I do not think the substratum of the Company has disappeared.
135.As to the ground in s 177(1)(b) that the Company has suspended its business for a year, as Le Pichon J (as she then was) stated in Re Power Point Engineering Ltd (unrep, HCCW 555/1999, 10 July 2000) at p 20, one has to inquire into the reasons why a company has had to cease business. In this case, it is not clear that the Company had suspended its business of leasing any Machine for a year prior to the presentation of the Petitioners’ petition. In any event, had the Petitioners referred the potential opportunities to the Company and the Respondents, it would appear that the Company could have been activated and carried on business. 136.While it was discussed in the early days (February 2011) that the Machines would be primarily targeted for hotels, there was no such limitation on the scope of the Company’s business. In fact, because of the odours emitted by the Machines there was a potential impediment in pursuing the hotel business. Various other sources of business such as environmental groups and property management companies also came to be considered by the Company. I reject the Petitioners’ suggestion that the Company had no potential for further business merely because Hung did not introduce more hotel business. 137.The Petitioners sought to put the blame on the Respondents for freezing the bank accounts and failing to sign the audited accounts, to explain why the Company had no further business. It is said that the Company needed its audited accounts in order to bid in Government tenders. I have already dealt with the Petitioners’ complaints about the bank accounts and the audited accounts, which in my view stemmed from the Petitioners’ refusal to provide access to the detailed financial information and to be subjected to closer supervision by the Respondents. The Petitioners did not inform the Respondents that the audited accounts were needed for Government tenders. In the Petitioners’ letter to the Respondents dated 28 January 2013 it was only stated that the freezing of the bank accounts meant that the Company could not tender for Government contracts. The bank accounts could have been put back into normal operation if the Petitioners had recognised and accepted the Respondents’ ability to exert control at the level of the board of directors. Since it was the Respondents who injected cash into the Company, there was no reason for them to prevent the Company from carrying on business provided its finances were satisfactorily supervised. J. Conclusion and relief 138.There had been a deterioration in the relationship of the parties since mid‑2012 but no irretrievable breakdown that of itself justified a winding up of the Company prior to 2013. The Petitioners’ complaints of misconduct or unfairly prejudicial conduct are not made out. Nor have they made out a case that it was the respondents’ conduct which was the substantial cause of the destruction of the mutual trust and confidence between the parties: c.f. Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, 290c. The Petitioners’ petition will therefore be dismissed. 139.As for the Respondents’ petition, for the foregoing reasons I find that the affairs of the Company had been conducted by the Petitioners in a manner unfairly prejudicial to the Respondents as members of the Company. Mr Ho submitted on behalf of the Petitioners that it would be wrong to make a buy‑out order against the Petitioners based on their unfairly prejudicial acts if those acts only occurred after a breakdown of relationship that was not shown to have been caused by the Petitioners’ misconduct. If it was intended to be a general proposition of law, I am with respect unable to discern from the authorities such a principle. 140.While the overall touchstone remains the question whether it is just and equitable to do so, to obtain a winding-up order based on a breakdown of trust and confidence it is generally necessary for the petitioner to show that the lack of confidence is “grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s business”: Loch v John Blackwood Ltd [1924] A.C. 783, 788, or at least “that it is the respondent’s conduct which has been the substantial cause of the destruction of the mutual confidence involved in the personal relationship”: Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, 290c; Jesner v Jarrad Properties Ltd [1993] BCLC 1032, 1043. Conversely, a petitioner cannot obtain a winding up order on the basis of a breakdown in confidence if it was caused by his own misconduct: Re Westbourne Galleries Ltd [1973] A.C. 360, 387F; see also Ng Yat Chi v Max Share Ltd [2001] 1 HKLRD 561, 572 (CA); Harbour Front Ltd v Leung Yuet Keung [2018] HKCFI 358, §§42‑44. 141.In Vujnovich & Anor v Vujnovich (1989) 5 B.C.C 740, the parties’ mutual confidence had completely and irretrievably gone by about 1981. It was found during the trial that the respondent had in 1986 wrongfully diverted business of the company to a company controlled by members of his family. The trial judge ordered a winding up and refused to make a buy‑out order against the respondent. In the Privy Council, the appellant argued that no winding‑up order should be made because the respondent had been guilty of misconduct. Lord Oliver, delivering the opinion of the Board, said (at p 744H):
142.Vujnovich shows that where the basis for winding up had already long arisen, subsequent misconduct on the part of the petitioner which was only discovered at trial is not necessarily a bar to the grant of winding‑up relief. It does not support Mr Ho’s proposition. The facts of Vujnovich, moreover, are far removed from those in this case. Here, the wrongful conduct of the Petitioners was squarely relied upon by the Respondents for relief, and not only incidentally discovered during the trial. While the parties’ relationship had started to deteriorate in the summer of 2012, the Petitioners’ conduct contributed and led to the subsequent complete and irretrievable breakdown of trust and confidence. There was no accrued basis as at mid-2012 for winding up the Company at the instance of the Petitioners. 143.In all the circumstances, I consider that an order that Billy Lee purchase the shares of the Respondents at a fair value is an appropriate remedy in this case. It would achieve a clean break between the parties. I would not make that order against the 2nd and 3rd Petitioners because although when dealing with the Respondents Billy Lee had generally purported to act on behalf of all the Petitioners, there is some doubt in my mind as to the 2nd and 3rd Petitioners’ precise involvement in and responsibility for the acts in question. 144.As for the date of valuation, the overriding principle is that it should yield a fair value. Fairness may require that the valuation date be earlier, sometimes much earlier, than the date of the order or the sale: see eg Re Golden Bright Ltd (unrep, HCMP 6472/2001, 27 February 2004), §§66‑67. In the present case, it would in my judgment not be fair to the Respondents to value the shares as of now because of the prejudicial conduct committed by Billy Lee as well as the suspension of business after the breakdown of relationship. Fairness means that the reference date for valuation should be 30 June 2012, approximately a date before the occurrence of any of the prejudicial conduct complained of. 145.The Respondents’ shares should be valued without any minority discount. 146.The unpaid capital on the Respondents’ shares should be notionally treated as paid up and as part of the Company’s assets in the valuation, with adjustments to be made to the sums payable at the end on account of the fact that such capital had not been paid. 147.There should be interest on the purchase price at 1% per annum above the HSBC prime rate from the date of the Respondents’ petition (12 December 2014) to the date of this judgment: Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384; Re Goldsfine Development Ltd [2013] 5 HKLRD 318. 148.There will be liberty to apply with regard to any other matter concerning the valuation of shares and payment of any sums found payable. 149.There will be an order nisi that the Petitioners do pay the Respondents the costs of both sets of proceedings.
Mr Martin Ho, instructed by Chan, Wong & Lam, for the 1st to 3rd Petitioners in HCCW 281/2014 and the 1st to 3rd Respondents in HCCW 372/2014 Mr Derek J Y Chan, instructed by Tang & So, for the 1st to 5th Respondents in HCCW 281/2014 and the 1st to 5th Petitioners in HCCW 372/2014 Global Eco Resource Limited, the 6th Respondent in HCCW 281/2014 and the 4th Respondent in HCCW 372/2014, was not represented and did not appear The Official Receiver was excused from attendance [1] Billy Lee’s witness statement §7. [2] Under that section, shareholders have to satisfy certain criteria in order to obtain a court order for the inspection of the company’s documents: see Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241, Re LehmanBrown Ltd [2011] 5 HKLRD 668 and Veron International Ltd v RCG Holdings Ltd [2013] 3 HKLRD 657. [3] at §92. [4] §45. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCCW 281/2014