Poon Ka Man Jason v. Cheng Wai Tao and Others

HCA 304/2011

[2019] HKCFI 1141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 304 OF 2011

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J U D G M E N T

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INTRODUCTION

1.The Summons now before the Court (“Sanctioned Payment Summons”) was issued on 18 September 2017.  As it is now over 18 months later, and despite the volume of materials and some complexity of argument, I will give my decision at once.

2.As the title identifies, this is a common law derivative action.  The claim was brought by the plaintiff (“Jason”) on behalf of himself and all other shareholders in the 2^nd defendant (“the Company”) except the 1^st defendant (“Ricky”), with respect to Ricky’s conduct in relation to the 3^rd to 31^st defendants (“D3-D31”).

3.Jason is a 10% shareholder of the Company, with 1,000 shares.  Until 3 August 2017, Ricky was the registered owner of 38% of the shares in the Company, with 3,800 shares.  The circumstances in which he transferred away all but one of his shares frame the issues to be decided.  Ricky has at all material times been and remains the sole director of the Company.

4.As at the commencement of the derivative action, the remaining 52% of the shareholding of the Company was held as follows: 10% by Kong Yiu Wai (“Kong”), 8% by Mak Kin Shing (“Mak”), 4% by Sato Akira (“Sato”), 4% by Teraguchi Tadayoshi (“Teraguchi”), 2% by Wong Yui To (“Wong”), and 24% by Daisy Poon (“Daisy”).  Daisy is Jason’s sister.

5.The Company operated a sushi restaurant under the name “Itamae”.  D3 to D10 inclusive each operated a sushi restaurant or connected business under the same name “Itamae”.  D11 to D31 each operated a sushi restaurant or connected business under the name “Itacho”.

6.After the trial of the action, in her Judgment dated 24 May 2013, Mimmie Chan J held that Ricky had breached his fiduciary duties as a director of the Company by operating the Itacho restaurants.  She awarded damages to the Company up to 2010, when the Company ceased to operate its sushi restaurant.  But she dismissed an identical claim with respect to the Itamae restaurants.

7.Subsequently, by its Judgment dated 21 January 2015, the Court of Appeal allowed Jason’s appeal and held that Ricky’s operation of both the Itamae and Itacho restaurants constituted breaches of Ricky’s fiduciary duties to the Company.  The Court of Appeal also held that Jason was entitled to elect between an account of profits and damages.  That decision was upheld by the majority decision of the Court of Final Appeal in its Judgment dated 1 April 2016.  

8.The Order of the Court of Appeal specifically entered judgment in favour of the Company, brought on its behalf by Jason, and that his entitlement to the election between an account and damages was on behalf of the Company.

9.Jason has elected an account of profits, so directions have been given by Order dated 16 May 2017 for that purpose, including: the appointment of an assessor with expertise in forensic accounting to review and assess the items in dispute as identified in Jason’s Notice of Objections to the Schedules of income/expenses/net profit provided as an exhibit to Ricky’s 3^rd affirmation; the requirement for various disclosure; and the obtaining of expert evidence.  That process has been in train, albeit interrupted to an extent by subsequent events, including by an Order for a stay (on terms) until after disposal of the current application.  

10.Those events flowed from the Notice of Sanctioned Payment filed on 25 April 2017 by Ricky and D3-D31, giving notice to Jason that they had paid HK$40 million into court in settlement of the whole of his claim.  As Ricky until shortly beforehand had been sole director of D3-D31 (though he had added his wife as co-director in the circumstances of his illness), the Notice of Sanctioned Payment must have been directed by him. Indeed, he acknowledges that it was.

11.On 20 June 2017, Jason gave notice to the Board of Directors of the Company requesting an Extraordinary General Meeting (“EGM”) of the Company to be called for the purpose of considering and, if thought fit, passing certain resolutions being:

“1. To consider and accept/reject the Sanctioned Payment made by the 1^st and 3^rd to 31^st Defendants in HCA 304/2011 as set out in the Notice of Sanctioned Payment filed therein on 25 April 2017.

2. To authorise Poon Ka Man Jason (“Jason”) to indemnify himself out of the assets of the Company, or alternatively to make an application to the Court authorising him to indemnify himself out of the assets of the Company for:

(a) the shortfall of all the costs of and incurred by him in pursuing HCA 304/2011 and the subsequent appeals in CACV 135/2013, FAMV 22/2015 and FACV 17/2015 to the extent that the same cannot be recovered by Jason from the 1^st and 3^rd to 31^st Defendants; and

(b) all the costs of and incurred by Jason in pursuing the account of profits ordered by the Court of Appeal on 21 January 2015 and affirmed by the Court of Final Appeal on 1 April 2016.”

12.An EGM was called for 8 August 2017, and the Notice dated 11 July 2017 calling it was signed “By the Order of the Board” by Mass Secretarial Services Ltd (“Mass”), as Company Secretary.  The authorised representative of Mass is Fung Chi Keung (“Fung”).  Fung is also the proprietor of Fung Chi Keung & Company, the auditor of the Company and D3-D31.

13.However, the first proposed resolution (“Resolution 1”) was slightly reworded in the Notice so that it read:

“That to accept the Sanctioned Payment made by the 1^st and 3^rd to 31^st Defendants in HCA 304/2011 as set out in the Notice of Sanctioned Payment filed therein on 25 April 2017.”

14.There was also a proposed third resolution (“Resolution 3”) as follows:

“That this Company shall indemnify Mr Poon Ka Man Jason the difference between (1) the amount of the cost and disbursements in respect of HCA 304 of 2011 and any appeal therefrom paid by the said Poon Ka Man Jason to be taxed on common fund basis and (2) the amount recovered by the said Poon Ka Man Jason from the 1^st and 3^rd to 31^st Defendants in respect of the aforesaid action: Provided that nothing herein shall require the Company to pay the said Poon Ka Man Jason any amount which the said Poon Ka Man Jason is ordered by the Court to pay to the 1^st and 3^rd to 31 (sic) Defendants or any of them in HCA 304 of 2011 or to the Company as a result of the said Poon Ka Man Jason’s failure to accept any sanctioned offer made by the 1^st and 3^rd to 31^st Defendants or as a result of the said Poon Ka Man Jason’s voting in Resolution #1 herein in such a way that in consequence of which this Company will have resolved not to accept the sanctioned offer made by the 1^st and 3^rd to 31^st Defendants.”

15.It is said that Resolution 3 was proposed by Mak, but against the chronology of certain documents Jason asserts that it must have been directed by Ricky.  Mak says he proposed it on the advice of and with the assistance of Fung, and not at the direction of Ricky.

16.Immediately before the EGM began, Fung (representing the Company’s company secretary, Mass) announced that on 3 August 2017 Ricky had transferred 3,799 of his 3,800 shares in the Company (“the Shares Transfer”) to Mak (1,999 shares) and Wong (1,800 shares), retaining only one share.

17.Ricky would have been ineligible to have voted on Resolution 1 relating to whether or not to accept the sanctioned payment.  Had he not transferred his shares, a majority of the shareholders eligible to vote would have voted not to accept the sanctioned payment.  Indeed, Jason and Daisy (who think the sanctioned payment should be rejected) together owned more than half of the remaining shares.  However, Mak and Wong voted to accept the sanctioned payment, the result being that it is said on behalf of the Company that a majority of shareholders have validly voted to pass Resolution 1 and so to accept the sanctioned payment.

18.Jason argues that the Court should draw the inference that the Shares Transfer from Ricky to Mak and Wong was carried out, and Ricky approved the transfer as a director, for the sole purpose of pretending that the shares had been properly transferred and so that Mak and Wong could exercise the voting rights as directed by Ricky, but which voting rights Ricky himself could not have exercised, or that they were sold at a discount in return for voting according to Ricky’s direction.

19.The second resolution (“Resolution 2”) was defeated and Resolution 3 was passed, each by the same voting pattern.

20.It should also be mentioned that, at the same time as the Shares Transfer took place, the 400 shares previously owned by Sato were transferred to Mak and Shigemitsu Katsuaki (“Shigemitsu”), 200 shares each.  Before the business of the Company began, Shigemitsu had operated a chain of Ajisen Ramen restaurants in Hong Kong with Ricky, Jason and Daisy.  Shigemitsu had previously been a shareholder of the Company, indeed was one of the original shareholders, but had transferred his shareholding to Ricky on 12 March 2007.

21.The transfer of all shares to Mak, Wong and Shigemitsu were approved by Ricky as sole director of the Company.

22.On the back of the resolutions passed at the EGM, the Sanctioned Payment Summons was issued on 18 September 2017, by solicitors purporting to act for the Company.  As Ricky was the sole director of the Company, the application made by that summons must have been directed by him.

23.The Sanctioned Payment Summons seeks an order that:

“1. Leave be granted to the 2^nd Defendant to accept the sanctioned payment made by the 1^st, 3^rd to 31^st Defendants on 25 April 2017 in the sum of HK$40,000,000.00 in full and final settlement of the Plaintiff’s claim;

2. Alternatively, leave be granted to the Plaintiff to accept the sanctioned payment made by the 1^st, 3^rd to 31^st Defendants on 25 April 2017 in the sum of HK$40,000,000.00 in full and final settlement of the Plaintiff’s claim;

3. Leave be granted for the said sum of HK$40,000,000.00 be paid out to the 2^nd Defendant in full and final settlement of the Plaintiff’s claims”

24.The application was led by the affirmation of Fung, also dated 18 September 2017.  When he says he is duly authorised by the Company to make the affirmation, that must mean authorised by Ricky.  Essentially, that affirmation relies on the fact that Resolution 1 was passed by a majority of the members’ votes at the EGM.  But as the time for accepting the sanctioned payment had lapsed, and there was no agreement on the liability for costs, the Company issued the Sanctioned Payment Summons.

25.The application was immediately opposed by Jason, first through the affirmation of his solicitor Shiu Ka Yip Arthur (“Shiu”) dated 26 October 2017.  In summary, the opposition was premised on three main grounds being:

(1)   In approving the Shares Transfer, Ricky exercised his power qua director for an improper purpose and failed to act in the best interest of the Company.  Thus the Shares Transfer is invalid and not binding upon the Company.

(2)   Even if (which is not accepted) the Shares Transfer were valid, Mak and Wong could not exercise the voting rights on those shares by voting for Resolution 1, as it was not in the interests of the Company’s shareholders (other than Ricky) to accept the sanctioned payment, in light of the magnitude of the profits for which Ricky and his companies are liable to account to the Company.

(3)   Further, even if (which is not accepted) Resolution 1 were valid, the Company would not have any right to decide whether to accept the sanctioned payment.  Since Mak and Wong are Ricky’s nominees and voted in favour of Resolution 1 for the purpose of advancing the interest of Ricky, and given that Ricky remains the sole director of the Company, the Company is clearly under the wrongdoer’s control.  Accordingly, the decision whether to continue with this action is a matter for Jason (not the Company).

26.This obviously created issues involving Mak and Wong.  On their application, and by Order dated 8 February 2018, Mak and Wong were joined respectively as D32 and D33 solely for the purpose of supporting the Sanctioned Payment Summons, and directions were given for the further exchange of affidavits/affirmation evidence.

27.By Order dated 26 February 2019, and contrary to an earlier judicial indication otherwise, it was directed by Queenie Au Yeung J that the Company should not be permitted to participate in the Sanctioned Payment Summons.  From her ruling it can be seen that, essentially, she considered that there is nothing additional which only the Company could address which is not already bound to be addressed by the other parties, and it would be unjust for the Company to incur costs in an unnecessary attendance.

28.At this hearing, Jason was represented by Linda Chan SC and Thomas Wong; Ricky and D3-D31 were represented by Edward Chan SC, Lee Tung-ming and Chan Chun-sang; and Mak and Wong were represented by CY Li SC and Lawrence Cheung.  Each team had provided thorough written opening submissions of 31, 97 and 80 pages respectively (not including schedules and authorities).  After conclusion of the evidence, each team has made concise oral closing submissions with the benefit of written submissions or speaking notes running to 11, 35 and 53 pages respectively.  I have had the opportunity to read and reflect on those written submissions and notes, although it is also fair to point out that they understandably rehearse some of the matters already canvassed in the opening submissions.

The Issues

29.The parties have been unable to agree a single list of issues, but the area of disagreement between them is probably just as to the appropriate granularity or level of detail.  The battle lines drawn are clear and, in any event, I think I can usefully approach the resolution of this application by looking at the following matters: (1) a jurisdiction point; (2) whether Mak and Wong and others were Ricky’s nominees and/or close associates; (3) whether the Shares Transfer was a sham; (4) the adequacy or sufficiency of the sanctioned payment; (5) whether the nature of the private agreement between Ricky and Mac and Wong meant that Mac and Wong could not bind the other shareholders; (6) whether the votes of the majority who passed Resolution 1 were invalid through those voters lack of bona fides; and (7) whether Ricky’s “approval” of the Shares Transfer was valid.

Whether Jurisdiction to make Orders Sought

30.The first point which arises for consideration is a matter of law or procedure.  It is probably not fact sensitive and so does not require consideration of the evidence filed.  Depending on the way in which the point is decided it is capable of being dispositive of the application.

31.Before dealing with this point directly, I will touch on another point made by Mr Chan in his submissions.  He says that the Sanctioned Payment Summons is an application made by the Company, and so ought to be pursued by the Company.  However, since the Court has (on the application of Jason) made an order that the Company should not be permitted to participate in this hearing, Ricky and D3-D31 “will endeavour to assist the Court by offering their submissions”.  It seems to me that the implied criticism of the order denying the Company participation in this hearing is misplaced for two reasons.  First, as stated above, the main rationale for excluding the Company from participation was to prevent unnecessary expenditure of costs in relation to an argument the full ambit of which was already going to be canvassed by Ricky, D1-D31, and Mak and Wong (none of whom were offering to step aside).  Secondly, the criticism ignores the fact that Ricky is the sole director of the Company, is clearly the person giving instructions on behalf of the Company, and that he has been found to be in breach of fiduciary duties owed to the Company which has justified the commencement and pursuit of this derivative claim.

32.As to the jurisdiction point, on behalf of Jason, Ms Chan submits that the current application is misconceived.  She first says that the order sought by §2 of the Sanctioned Payment Summons – seeking leave for the plaintiff to accept the sanctioned payment – makes no sense, given that Jason has no intention of accepting the sanctioned payment so that it is meaningless to allow him to do so.

33.As to the order sought by §1 of the Sanctioned Payment Summons – seeking leave to be granted to the Company to accept the sanctioned payment – Ms Chan submits that the rules simply do not allow a defendant to accept a sanctioned payment, as Order 22 rule 15 refers only to acceptance of sanctioned payment by “a plaintiff”.

34.Ms Chan further submits that it is plain under the Order 22 regime that it is up to the plaintiff to decide whether or not to accept a sanctioned payment, and there is no basis for a defendant to accept one, or to force the plaintiff to accept one.  She says §3 of the Sanctioned Payment Summons – that leave be granted for the payment out to the Company in full and final satisfaction of its claims – is in substance identical to the primary order sought and objectionable for the same reasons.

35.Mr Chan and Mr Li submit otherwise, Mr Li mainly echoing or relying on Mr Chan’s submissions.  First they say (and this is not controversial) that Order 22 and Order 22A ought to be read together.  Mr Chan then identifies that the sanctioned payment was made pursuant to Order 22 rule 8(2), that Order 22 rule 15 provides for the time for acceptance, and that Order 22 rule 17 contains provision relating to payment out of the sum in Court on acceptance of sanctioned payment, but that it is subject to the provisions in Order 22A rule 2.

36.To understand the argument and my conclusions on it, it would help to set out the provisions of those and some other rules, and the Forms in Appendix A to which they make reference, as follows:

(1)   Order 22 rule 8(1) provides: “A sanctioned payment may relate to the whole claim or to part of it or to an issue arising from it.”

(2)   Order 22 rule 8(2) provides: “A defendant who makes a sanctioned payment shall file with the Court a notice in Form No. 23 in Appendix A …”

(3)   Form No. 23 is a notice directed “To the plaintiff (‘s solicitor) and to the Director of Legal Aid (if applicable)” and the form is to be signed in a box above the words “Defendant (‘s solicitor)”.  At the bottom of the Form is a “Note: To the plaintiff [.]  If you wish to accept the payment made into court and the Court’s leave for acceptance is not required, you should complete Form No. 24, send it to the defendant and file a copy in the Registry of the High Court.”

(4)   This tallies with Order 22 rule 9, which provides that: “A defendant who makes a sanctioned payment shall – (a) serve the sanctioned payment notice – (i) on the plaintiff; and (ii) where the plaintiff is an aided person, on the Director of Legal Aid; and (b) file with the Court a certificate of service of the notice.”

(5)   Order 22 rule 12(2) provides that: “A sanctioned payment is made when a sanctioned payment notice is served on the offeree.”

(6)   Order 22 rule 15 relates to the time for acceptance of a defendant’s sanctioned offer or sanctioned payment and rule 15(2) provides that: “If … the plaintiff does not accept [the sanctioned offer or sanctioned payment] within the period specified … then the plaintiff may - (i) if the parties agree on the liability for costs, accept the offer or payment without the leave of the Court; and (ii) if the parties do not agree on the liability for costs, only accept the offer or payment with the leave of the Court.”

(7)   Order 22 rule 15(4) provides that: “A notice of acceptance of a sanctioned payment must be in Form No. 24 in Appendix A.”

(8)   Form No. 24 is to be addressed “To the defendant (‘s solicitor) and to the Director of Legal Aid (if applicable)” and is to be signed in the box above the words “Plaintiff (‘s solicitor)”.

(9)   Order 22 rule 17 provides that: “Subject to … Order 22A rule 2, where a sanctioned payment is accepted, the plaintiff may obtain payment out of the sum in court by making a request for payment in Form No. 25 in Appendix A.”

(10)   Form No. 25 is to be signed in the box under the words “Plaintiff or solicitor’s full name/Director of Legal Aid”.

(11)   Order 22A rule 1 provides that: “Subject to Order 22 rule 17, any money paid into court in an action (whether or not in accordance with Order 22) may not be paid out except in pursuance of an order of the Court which may be made at any time before, at or after the trial or hearing of the action.”

(12)   Order 22A rule 2(1) provides that: “Where the party entitled to money in court is a person in respect of whom a certificate is or has been in force entitling him to legal aid under the Legal Aid Ordinance (Cap. 91), payment shall be made only to the Director of Legal Aid without the need for any authority from the party.”

(13)   Order 22A rule 2(2) provides that: “Subject to paragraph (1), payment shall be made to the party entitled or to his solicitor.”

(14)   Order 22 rule 23 provides for the costs consequences where the plaintiff fails to do better than the sanctioned offer or sanctioned payment.  The consequences are to be suffered by “the plaintiff”.

37.Mr Chan says that where Order 22 rule 17 says “the plaintiff may obtain payment out”, that is in permissive terms and it does not say that only the “plaintiff” could obtain the payment out.  Anyway, he says, the opening phrase “Subject to … Order 22A rule 2” shows that the permission for the “plaintiff” to obtain the payment out is made expressly subject to that rule, and that rule identifies the overriding guiding principle that the payment out “shall be made to the party entitled”, which is in mandatory language.  Hence, he says, whilst the “plaintiff” under Order 22 rule 17 “may” obtain payment out of a sanctioned payment, that is subject to the governing rule that payment “shall be made to the party entitled”, from which he argues that it would be wrong to assert that only the plaintiff in an action may accept the sanctioned payment.

38.Thus, he says, the pertinent question is: who is the “party entitled”?  In a derivative action, Mr Chan says the plain answer is the Company, not Jason.  This is because of the settled principles that in the context of a common law derivative action the claim is brought by the plaintiff on behalf of the company, and the cause of action is really that of the company. This is in effect to assert, as Mr Chan and Mr Li do, that the Company is the “real plaintiff”.

39.As to the first part of that argument, I disagree.  The reference in Order 22A rule 2(2) to the “party entitled” is in distinction to the reference which follows it being “or to his solicitor”, that also being specifically subject to the provision in rule 2(1) that a party entitled to money if legally aided shall receive that money by payment only via the Director of Legal Aid.

40.I do not think the words “party entitled” change what is the fundamentally clear sense of the regime in Order 22, namely that a notice of sanctioned payment is given by a defendant (the offeror) to a plaintiff (the offeree), and that notice of acceptance is given, if at all, by that plaintiff to that defendant.  Order 22A applies to circumstances including but wider than just those relating to sanctioned payments.  However, read with Order 22, Order 22A rule 2(2) simply provides that payment is payable to the plaintiff or his solicitor, as the plaintiff is the “party entitled” under Order 22.

41.I do not think the provision in Order 22A rule 1 assists the argument one way or another.  That rule simply provides for an unfettered discretion, which it might be said must be exercised judicially and so as to achieve justice between the parties in the individual circumstances of any particular case.  But I do not think that helps to answer the jurisdictional question which has been posed.

42.I also do not think that the rationale underpinning sanctioned payments under Order 22, being to encourage parties to take positive settlement seriously and to avoid unproductive and expensive prolongation of litigation, can itself change the identity of the parties and the respective roles they play within that regime as provided for under the terms of the rules.

43.There may be more force in the argument that the Company is the “real plaintiff” and that references in Order 22 to the “plaintiff” should be read as including reference to the “real plaintiff”.  It cannot be controversial that the cause of action in a common law derivative claim is a cause of action belonging to the company on whose behalf it is brought by the plaintiff, and that damages ultimately recovered are payable to the Company.  It is thus trite that, in a derivative action, the company is joined as a defendant in order to receive any damages that might be awarded.

44.Mr Chan relies on a passage from the judgment of To J in Grasberg Capital Asia Limited v Huchun Joseph Yung (HCMP 727/2014, 6 May 2015) where at §14 he observed that:

“It is therefore well settled law by the highest authority of our land that a shareholder suing in a derivative action is suing on behalf of the company which is the real plaintiff in the action”.

45.He also refers to a passage in the decision of Anderson Chow J in Waddington Limited v Chan Chun Hoo Thomas [2019] 1 HKLRD 271 at §15, which dealt with money sitting in court

“… which it cannot be disputed was paid into court for the benefit of the 5^th defendant [the subject company in a multiple derivative action]. It is also indisputable that the money in court belongs to the 5^th defendant, being the fruits of this multiple derivative action brought by the plaintiff on behalf of and for the benefit of the 5^th defendant. That being the position, the 5^th defendant is, prima facie, entitled to be paid the money now in court.”

46.Mr Chan also reminds me that the Order made by the Court of Appeal specifically gave judgment in favour of the Company.  Hence, he says that the Company is the party entitled to enforce and obtain the fruit of the judgment.  In this context, Mr Chan says, the fruit of the judgment is the sanctioned payment, and he refers to a passage in Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204, at 220B-E which reads:

“In the result [the judge] found that Newman was entitled as against Mr Bartlett and Mr Laughton [the fraudster directors] to damages for conspiracy and breach of fiduciary duty, and he directed an enquiry as to damages subject to a stay in case of an appeal. Thereafter, Newman had three choices, subject to the operation of the stay. First, it might do nothing. In this case the plaintiffs would be entitled, if they so desired, to issue a summons to proceed with the enquiry. Secondly, Newman might decide for some proper reason, assuming that a proper reason might exist, and duly resolve at a proper board or general meeting, to proceed no further with the claim against Mr Bartlett and Mr Laughton. In this event, assuming that the resolution of the board or of the company in general meeting was in all respects proper, the plaintiffs would be unable to proceed with the enquiry because a valid release could be pleaded by Mr Bartlett and Mr Laughton. Thirdly, Newman might adopt the order which the plaintiffs had obtained on its behalf and pursue the enquiry accordingly. This would occasion no procedural problem nor even any special procedural step. Any party, plaintiff or defendant, can issue a summons to proceed upon an order. It would not be necessary for Newman to apply to be made a plaintiff, or to start a fresh action and rely upon the principle of res judicata, as was suggested at one time in the course of the argument. The order has been made. Newman is a party to the action. Newman can enforce the order. If this course were adopted, the rule in Foss v Harbottle is irrelevant. The rule has no room to operate with the company itself is proceeding with an action, or to enforce a judgment, pursuant to a valid board or company resolution.”

47.Thus, Mr Chan submits, it is clear that after a judgment in a derivative action, the company could take over control of the proceedings and even to decide to take no further action on the judgment.  Certainly, he says, it would also be open to the company to apply to proceed with acceptance of the sanctioned payment to put an end to the proceedings.

48.In response, Ms Chan makes the short submission that to regard the Company as the “plaintiff” of the action would be wrong.  Like all derivative actions, the Company is named and can only be a defendant. It cannot be the plaintiff, because it was and remains under the wrongdoer’s control.  Ms Chan submits that the case of Waddington can be distinguished, because it concerned an application for payment out of the fruits of a derivative action which had been finally determined, and had nothing to do with a sanctioned payment.  In that case, unlike the present case, the company was no longer under the wrongdoer’s control as the wrongdoer had already left the company.

49.For myself, I do not think the monies paid into court under a sanctioned payment can really be equated to the fruits of a judgment.  I accept that one might view the monies in court as the product of bringing the claim, perhaps a “forced” response to the claim, but one very purpose of making a sanctioned payment is to seek to avoid the necessity for the parties to get to a judgment.

50.In the present context, I also accept that one might view the monies in court as the product of the judgment already obtained that Ricky has breached his fiduciary duties owed to the Company, but I do not think that makes those monies the fruits of the relevant judgment in the context of an ongoing ordered account of profits.  If, ultimately, the account of profits were to lead to an order that a particular sum of money should be accounted for, I agree that it would be the Company to which that money should properly be paid.  I also agree that, if not paid, the Company might enforce the order that it should be paid.  But that does not seem to me to deal quite with the current question as to whether or not the Company is to be treated as the “plaintiff” for the purposes of the operation of the sanctioned payment regime under Order 22.

51.I agree with Ms Chan that if the plaintiff refuses to settle and fails to obtain a judgment better than the sanctioned payment, he alone will face the cost sanctions under Order 22 rule 23.  I do not think the passage in Wallersteiner v Moir (No. 2) [1975] QB 373 at 392B-D, to which Mr Chan makes reference, says otherwise.  That passage provides:

“But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action – that it was a reasonable and prudent course to take in the interests of the company – he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well-known maxim of the law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it fails. Qui sentit commodum sentire debet et onus. This indemnity should extend to his own costs taxed on common fund basis.”

52.In the context of arguments about costs following a sanctioned payment, it seems to me that if the sanctioned payment is not bettered by the amount obtained on the account of profits, it is likely that that fact will show that continuing to pursue the account after the sanctioned payment was made was not the reasonable and prudent course to take in the interests of the Company.  Although without needing to bind herself at this stage, Ms Chan accepted this statement of general principle and its likely effect.

53.I can also refer to Wallersteiner at 399B-D and F, where under the heading “Costs” it was stated:

“A plaintiff in a minority shareholder’s action is personally liable to his own solicitor for costs and is exposed to the risk of being ordered to pay the taxed costs of any defendant. His position in this respect is precisely the same as that of any other litigant, notwithstanding that the plaintiff in a minority shareholder’s action normally has no cause of action of his own but is suing on a cause of action vested in a defendant company. … The minority shareholder, although he may be fully justified in instituting the action, is under no duty to do so; and he has no right or power to recoup his costs out of the company’s assets without the assistance of an order of the court. The fruits of the judgement recovered in suction action along to the company, but the expenses of recovering them, except so far as they may be recovered from some other party, fall not upon the company but upon the plaintiff. If the action fails the plaintiff is at risk of being ordered to pay the defendant’s costs as well as his own.”

54.As Ms Chan submits, Jason has been bearing the expenses of the litigation, there is no order permitting him to recoup any costs out of the Company’s assets, and no such order has been sought.  It also seems to me implicit in the making of the sanctioned payment that the intention of Ricky was to put Jason himself (and, contrary to Mr Chan’s submission, not the Company) at the risk of the cost and interest consequences that might flow if the sanctioned payment is not accepted but is not later bettered.

55.As for the points made on the back of the Prudential case, of the 3 “choices” available to the Company, technically we are in the first situation as the Company has done nothing and Jason has been entitled to elect, has elected, and has indeed pursued the account of profits.  Mr Chan is, of course, asserting that we are in the second situation, so that the focus is to examine whether the Company has decided for some proper reason, assuming that a proper reason might exist, and has duly resolved at a proper general meeting, to accept the sanctioned payment and thus proceed no further with the claim to an account.

56.But Ms Chan points out that no step has been taken for the Company to take over the action and to pursue the account of profits.  For example, no summons has been issued by the Company to proceed upon the order holding Ricky and D3-D31 to account.  Indeed, that fact might simply be the corollary of the fact that we are in the first Prudential “choice” situation.  So, she says, the position is simply that Jason remains the plaintiff and thus it is up to him to decide whether or not to accept the sanctioned payment, which decision he makes at his own risk as to costs.

57.I agree with Ms Chan that if the Company cannot bring itself within the provisions of Order 22 (as read with Order 22A), and because there is a statutory scheme delineating the jurisdiction of the court, there can be no recourse to the “inherent jurisdiction” which is also referenced in the margin note on the Sanctioned Payment Summons.

58.I explored with counsel during submissions whether this jurisdiction question might in any way be fact sensitive.  On reflection, I do not think that it is fact sensitive.  Either the Company can demonstrate that it is the party under and within the meaning of the provisions in Order 22 which can accept the sanctioned payment of which notice was given to Jason as plaintiff, or it cannot.

59.My conclusion is that it cannot.  In the circumstances, this point would be determinative and lead to a dismissal of the application.

60.But, in case I am wrong, and because significant resources have been deployed in respect of the other issues, I will of course go on to deal with them.

The Evidence

61.The other arguments are not limited to matters of law or procedure, but are factually sensitive.

62.Voluminous evidence has been filed by affidavit/affirmation.  Unfortunately, there is significant duplication even in the body of the affidavits/affirmations, as well as in the exhibits.  I have also had the benefit of oral evidence, and have seen and heard the respective witnesses.  I do not need to traverse all of the evidence for the purposes of this decision, though I have it all freshly in mind.  Insofar as I need to make factual findings, I shall do so taking some account of demeanour, but moreso by looking at what arises from the contemporaneous documents and what seem to me to be the inherent likelihoods and probabilities.

63.As to the objections made on behalf of Jason to some of the evidential material, my ruling is as follows.  The objection to the admission of the 1^st affirmation of Mak, which was filed in support of Mak and Wong’s summons to intervene in the action seems to me to be moot, as Mak’s 2^nd affirmation essentially repeated the contents of the 1^st affirmation verbatim and largely exhibited the same materials.  As to the other affidavit material, an order has already been made that the affirmations (in the case of Teraguchi, his unsworn statement) are not admissible unless their makers are tendered for cross-examination. 

64.Further, Ricky’s various affirmations are relevant to this application and its context, and he was tendered for cross-examination on them.  I think it is artificial to exclude any of them on the basis that they were not strictly filed for the purposes of this application, or that they were filed not for Ricky himself but as a witness for Mak and Wong.

65.As to the documents produced by Mak and Wong to show more recent borrowing in October 2018, they merely update the position, and would likely have come out through the answers to questions put to them, so advance notice of that material has been preferable.

66.Jason has not been called to give evidence or been cross-examined, but it does not seem to be in dispute that I can refer to his evidence and that filed for him.  Of course, the main points are made by reference to, cross-examination of, and comment and submission on, the Defendants’ evidence.

67.In passing, I would point out that I have not lost sight of the fact that it might be said that Jason did not exactly come out of the earlier trial “smelling of roses”.  The trial of this derivative claim was heard together with another action brought by Jason and Daisy through their corporate vehicle Fine Elite Limited.  That claim was dismissed by Mimmie Chan J, and there was no appeal from the dismissal.  In her review of the relevant evidence, the judge described some of Jason’s evidence as “disingenuous” and “unbelievable”.

68.Mak’s evidence in his affirmations is simply confirmed by Wong in his affirmations, at least as to the reasons why they decided to vote at the EGM to accept the sanctioned payment.  Hence, unless the context otherwise makes clear, when I refer to Mak’s evidence I am also referring to the evidence of Wong.

69.The application was originally led by the evidence of Fung, but he has not given evidence orally, so I will limit my observations on his evidence.  Fung is perhaps in the awkward position as adviser on all accounting matters for the companies in Ricky’s group of companies.  From what has been described by the witnesses as to what Fung has told them from time to time, the impartiality of his views is perhaps open to question.  But it is clear, for example, that one relied on what he was told by Fung in deciding his own approach to the consideration of Resolution one, albeit with the benefit of his inside knowledge of the operation and management of

70.I have, of course, also had the benefit of very recent oral evidence, where I have seen and heard the witnesses speak to the matters dealt with in their affidavits or affirmations, and subjected to cross-examination.

Nominees and/or close associates

71.In Shiu’s affirmation, he asserts that (at least) Mak, Wong and Teraguchi are Ricky’s associates and nominees.  In Jason’s 2^nd affirmation, he possibly extends the list to include Shigemitsu and Kong.  Reliance is placed on the statement of claim and Jason’s witness statement filed in these proceedings as well as §118 of the CFA judgment, which states:

“Jason also said at para 76 of his witness statement that “most of the current shareholders of [the Company] are either nominees or business associates of Ricky Cheng”. Ricky generally confirmed this in his evidence at trial (see Part B Tab 11).”

72.Reference is also made to the similarity between a letter dated 4 July 2017, by which Ricky on behalf of the Company asks Jason to withdraw Resolution 2, and the terms of Resolution 3 proposed by Mak.  It is argued that given that the 4 July 2017 letter was sent to Jason alone, it was impossible for Mak to propose a resolution that was identical to the view expressed by Ricky in that letter unless Ricky asked Mak to do so.  I agree that the chronology reflects some likely liaison, if not collusion, between Mak and Ricky, albeit that that does not necessarily make Mak the nominee of Ricky.

73.Indeed, there is to my mind a degree of imprecision in the way the description of “nominee or close associate” has been used.  I suppose somebody might be a nominee and a close associate, but the phrases tend to be used to identify alternates.  If someone is the nominee of another, it is irrelevant as to whether they are closely associated in other respects.  But the fact that two persons might be closely associated does not of itself render one the nominee of the other.

74.The point also seems to me to be linked to the suggestion that the Shares Transfer was a sham.  Whilst I shall deal with that topic separately, it might be thought that if the Shares Transfer was indeed a sham, any idea as to Mak and Wong being the nominee of Ricky is irrelevant.

75.In his first affirmation, Mak says that “not very soon after the Company ceased business” Ricky told him that the Company had a bank balance of about HK$22 million against the liability of around HK$2 million.  In other words, there was substantial surplus assets which could be distributed to its shareholders.  In light of the litigation between Ricky and Jason, Ricky asked Mak and Wong to be patient and wait, and that he would keep them posted about developments.

76.This is to be contrasted with what Ricky said in oral evidence.  It was put to him that he chose not to distribute the HK$20 million to the shareholders as a way of maintaining leverage against shareholders.  Ricky denied this suggestion, and said he would have distributed the HK$20 million to the shareholders if anyone had asked for it.  Ms Chan was able to take him to a part of the transcript of the earlier trial when he was asked if he had any plan to deal with that cash, and he said he had in fact wanted to distribute the dividends but was not sure who the shareholders were.  Whilst I acknowledge that there was some issue as to whether the true owner of the shares held by Jason and Daisy might be someone else (Andrew Lee), Ricky himself had refused to register the transfer of shares from Jason and Daisy to their corporate vehicle Fine Elite Limited.  Further, as sole director of the Company, Ricky was the person who could have recommended and effected the distribution of the retained cash to the shareholders, and he did not require any of the shareholders to requisition a general meeting to pass resolution for that purpose.  In sum, I do not consider Ricky’s evidence in this regard to be convincing.

77.I might also note that there is no suggestion that when (on their cases) Ricky was approached by Mak and Wong in June 2017 complaining about the delay in the receipt of their share of assets that Ricky said that he was happy to distribute those in any event.  Although this was not explored in evidence, had the HK$20 million been distributed to the shareholders in or before 2017, it might be that they would been content to await the outcome of the account to see if they could take the benefit of any further recovery for the Company.  I specifically have in mind Mak’s own reference to the amount of the sanctioned payment being a “windfall”.

78.However, in any event, Mak’s evidence was that he considered they were “caught in the crossfire”, so that they could not obtain their respective shares of the assets of the Company, even though there was no reason to maintain the Company.  Mak says that had Jason approached him to seek his consent to commence these proceedings on his behalf (as one of the shareholders, other than Ricky), he would not have given consent as the effect of the proceedings has been to preclude him from obtaining his share of assets which he should have received in 2010.  Against Ricky’s oral evidence, that is not correct.  But anyway, this is a slightly odd statement to have made with the benefit of the hindsight that by virtue of these proceedings, and the amount of the sanctioned payment which it has generated and which they want to accept, Mak and Wong stand to recover a significant multiple of the amount that they might have received by distribution in 2010 (even ignoring, for this purpose, the additional shares purchased in 2017).

79.As to the amount of the sanctioned payment, Mak and Wong say that it was explained to them by Ricky.  Ricky told them that Jason had essentially challenged almost every expense of the relevant companies, even though the account provided by Ricky was based on the audited accounts from which he made certain deductions (“the 5 Deductions”) not recorded in those accounts.  Mak says that Ricky explained the 5 Deductions, and that he thought that at least some of them were legitimate expenses which should be deducted from the net profit of the group.  Mak says he and Wong were satisfied about the deduction for trademark or image rights usage fees, the cash bonus to staff (which they knew about because they were also recipients) and the theft loss (which they also claim to have known about).  Having made deductions for those expenses, and adding back an interest element, that explained the settlement sum of HK$40 million.

80.Having decided that that was a reasonable figure, and that it would be added to the net HK$20 million already held by the Company, Mak and Wong determined that they would seek to persuade other shareholders to accept that offered sum.  However, Fung confirmed to them the “hard fact” (which Ricky had himself earlier told them) that Ricky could not vote on the resolution for accepting the sanctioned payment because of conflict of interest.  It is that which led to Mak and Wong approaching Ricky (and, they say, not the other way round) about the purchase of his shares.  This was important to them because of their anxiety that Jason and Daisy would use their 34% shareholding to veto the sanctioned payment, meaning that the Company would continue to be embroiled in litigation with no end in sight as to when the Company’s assets might be distributed.

81.Mak and Wong were also concerned about the terms of Resolution 2 which might mean that Jason and Daisy would have “carte blanche” to continue these proceedings without fear on legal costs because the Company would effectively underwrite the costs they incurred.  The dragging on of the proceedings, and the risk that substantial assets would be eaten up by costs, was “totally unacceptable” to Mak and Wong.

82.In approaching Ricky in early July 2017, Mak and Wong expressly told him that the purpose behind the proposal to buy his shares was to obtain sufficient shares in the Company to pass the resolution approving the sanctioned payment.  They also contacted the other minority shareholders to seek to secure their support.

83.Mak contacted Shigemitsu to try to contact Sato and Teraguchi.  Shigemitsu told him that Sato was in deep financial trouble and wanted to liquidate his shareholding, which is why Shigemistu and Mak later bought it.  Teraguchi would support accepting the sanctioned payment.

84.The price agreed with Ricky came about as follows.  Adding the HK$20 million held by the Company to the HK$40 million of the sanctioned payment, that would mean the Company would have a net asset value of HK$60 million, giving a price per share of HK$6,000.  On the basis that the shares were being purchased to vote for acceptance of the sanctioned payment, Mak asked Ricky to give them a 25% discount to HK$4,500.  On that basis, if the sanctioned payment were approved and assets distributed, Mak and Wong stood to gain a total of HK$5.7 million from the purchase within a short time.

85.Mak says that although the deal was “straightforward and lucrative”, neither he nor Wong had the surplus money to buy those shares.  Hence they came up with the idea of asking for payment by instalments over a period of time, and needed to look for a source of short term finance.

86.Eventually in late July 2017, Ricky informed Mak that he had final stage pancreatic cancer, and (as well as other matters) was determined to sell his shares in the Company, as he hoped the litigation would end which had been taking a toll on his health.  Hence, Ricky agreed the price of HK$4,500 and proposed payment by 3 instalments, 40% within 2 months, 30% a year thereafter, and the last 30% a further year after that.

87.The Shares Transfer and other relevant documents were all signed on 3August 2017, when Mak and Wong and Kong visited Ricky at the hospital.  The relevant documentation had all been prepared by Fung.  Mak and Wong say they signed 2 promissory notes in Chinese, stating that they owed Ricky the respective total purchase prices, against the instalment proposal.  They also signed the instrument of transfer and bought and sold notes for the Shares Transfer.  Mak also signed documents relating to the purchase of 200 shares from Sato, who had already signed the documents (as had Shigemitsu for his part).  The documents all show that they were duly stamped on 4 August 2017.

88.As to actual payment for the shares, there are 2 loan agreements dated 30 September 2017, under which Mak and Wong borrowed term loans in the amounts of HK$5 million and HK$4.5 million respectively.  Repayment was due after 12 months, with interest of 10% to be paid at the same time.  All of Mak’s and Wong’s shares in the Company (that is, the original shareholding and those recently transferred to them) were pledged as security by way of share mortgages also dated 30 September 2017 in favour of the lender.  Cheque and payment advices were produced to show the first instalment payments made by Mak and Wong to Ricky, but although the cheques are dated 3 October 2017, which was the day the loans were drawn down by Mak and Wong, they were not in fact paid into Ricky’s account until 9 October 2017.

89.Ms Chan says these matters identify that the loans and the payments made with the benefit of the loans, as late as 9 October 2017, were simply the response to the allegation made in a letter dated 9 August 2017 from Jason’s solicitors, which alleged that the Shares Transfer was a sham and which demanded all documents surrounding the transfer, including the bought and sold notes and instruments of transfer.  As it happens, the only documents ultimately provided in correspondence were only provided on 3 October 2017, and were limited to the bought and sold notes and instruments of transfer. No loan documentation was provided; no promissory note was provided; no proof of payment to Ricky was provided.  These only came with Mak’s affirmation to intervene.

90.As to the 2^nd and 3^rd instalments due on 3 October 2018 and 3 October 2019, it was Mak’s and Wong’s “plan and optimistic belief” that with the acceptance of the sanctioned payment, the litigation would end, the assets of the Company would be distributed, and they would be more than sufficient to repay the loans together with the interest, as well as to pay off the remaining instalments.

91.As to the 200 shares transferred from Sato to Mak, the purchase price appears to have been paid by Shigemitsu, but Mak says he has paid HK$90,000 (10% of the price) to Shigemitsu, who is happy for the remaining HK$810,000 to be paid at any future convenient time for Mak, without interest.  Shigemitsu confirmed this in his evidence.

92.With the acquisition of Ricky’s shares and the proxies given to Mak by Kong and Shigemitsu, he and Wong had already secured a total voting power of 61.99% of the total shareholding of the Company, thus securing the passing of Resolutions 1 and 3 and rejecting Resolution 2 at the EGM. 

93.Mak and Wong say that they were happy to take no part in the previous elements of these proceedings, as whatever the outcome of the disputes their interest in the Company would not be affected and indeed “they might get a windfall (suchlike what happened now as a result of the account exercise)” if Jason won his claims.  But now, they see no reason why the Company should not accept the sanctioned payment, they are entitled to exercise their shareholders rights in what they perceive to be their best interest, the objections taken by Jason to the account rendered by Ricky are “groundless” and it is “entirely speculative that the Company would get more than HK$40 million after the account exercise is completed”.  Further they say that even if the Company could get more, the trade-off of time and costs would render the exercise worthless.

94.From his point of view Ricky has explained the Shares Transfer as follows.  He has done so as a witness on his own behalf, as well as being a witness for Mak and Wong.  First, he emphasises that though Mak and Wong have been his long-time acquaintances and that they have worked closely together in business, they were not and are not his nominees.  He says the original shareholding allotted to Mak and Wong in the Company was held by them in their own right as the actual and true owner of those shares.  I accept that is correct.  The evidence is that they were allotted their relatively small shareholdings in the Company because of what they, like some others allotted shares, brought to or were expected to bring to the Company.

95.So I accept that the 8% and 2% of allotments of shares in the Company originally made to Mak and Wong were allotted to them for them to hold and own beneficially, not on trust for Ricky or as his nominees.  At least to that extent they were, therefore, genuine minor shareholders of the Company.  The fact that they were close associates of Ricky, and owed him some loyalty, might make it likely that they would tend to support Ricky including in voting their shares in accordance with Ricky’s own voting or his wishes.  But I do not think there is anything necessarily nefarious in that, when they were long term associates and trusted working colleagues.

96.Ms Chan has submitted that by virtue of the previous court decisions, not least that part of the CFA’s judgment which I have made reference, and estoppel arises to prevent the argument to suggest that at least Mac and Wong are not nominees of Ricky.  I reject that submission. First, it seems to me that the only implicit finding which was necessary to establish Jason’s locus to bring the derivative claim on behalf of the Company was that Ricky controlled the board.  In reality, that could not have been an issue, as he has always been the sole director.  Secondly, Mak and Wong were not parties to the earlier episodes in these proceedings, and the CFA itself recognised that there was no real need for them to have joined in, as they could sit back and await the result and any benefit which might flow from it.  It might also be noted that that expressed recognition is itself contrary to an assertion that the CFA found that Mac and Wong were merely nominees.

97.Whilst there can be no doubt that Ricky was and is in “control” of the Company as its sole director, I do not think that it can properly be said that the “control” extends to the shareholders in general meeting, simply because of the relationships between Ricky and other shareholders.

98.I have also had in mind that the argument advanced on behalf of Jason that there was a private bargain made between Ricky and Mak and Wong (which is said to vitiate their ability to vote the shares transferred) presupposes that the bargain was genuine, which is at least inconsistent with the suggestion that they were nominees, and probably inconsistent with the argument that the whole bargain was a sham.

99.My conclusion is that none of the other shareholders, including Mak and Wong, are to be regarded as nominees of Ricky.

The reason for the Shares Transfer and whether it was a sham

100.The principles for determining what in law is a sham are settled.  The classic definition is to be found in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, as frequently restated in Hong Kong, for example in Alexina Investments Ltd v Keysberg Ltd (HCA 6359/1992, 8 January 2004, Waung J).  The essential ingredients to establish that a document is a sham are (1) the common intention of (2) both parties (3) that the document was not to create legal rights (4) but to give to 3^rd parties the appearance of the document creating legal rights between them (5) different from the actual legal rights between the parties.

101.I bear in mind that the court should have proper regard to the fact that there is a strong presumption that parties intend to be bound by the provisions of the agreements into which they enter, and intend those agreements to take effect.  I also accept Mr Li’s submission that the burden of proof of the sham is carried by Jason, and that cogent evidence would be needed to establish a sham.

102.I have of course dealt with some of the relevant material facts for this issue in dealing with the above issue.  I do not propose to repeat those matters, but have them in mind.

103.As to the Shares Transfer, Jason (first through Shiu) has asserted that there was no apparent reason, and none had been provided (which was correct at least at the time the Shiu affirmation was made), for Ricky to dispose of all but one of his shares to his nominees/associates just days before the EGM, and that the irresistible inference is that the Shares Transfer was carried out, and the approval of the transfer was made by Ricky as director, for the sole purpose of pretending that the shares had been transferred to Mak and Wong so that they could exercise the voting rights which otherwise Ricky could not have exercised, to accept the sanctioned payment.

104.It is specifically asserted that neither Mak nor Wong could have afforded to purchase the shares at the agreed price of HK$4,500 per share, totalling for Mak and Wong respectively HK$8,995,500 and HK$8,100,000.  This is not really in issue, even on Mak’s and Wong’s own evidence (see below).

105.Complaint is also made by Jason as to the terms of the Fact Sheet purportedly sent by the Company to its shareholders on 1 August 2017, which was “heavily slanted” in favour of accepting the sanctioned payment.  The Fact Sheet only mentioned the account rendered by Ricky showed a net loss of HK$10 million during the period of account, but failed to mention that according to D3-D31’s own audited accounts, they had generated net profits of over HK$167 million.  Further, it is alleged that Ricky caused the fact sheet to be sent to Jason by registered post, even though the Company have been corresponding with Jason’s solicitors on the EGM for some time.  This was to ensure that Jason and Daisy did not see the Fact Sheet before the EGM, as indeed they received it only on the day following the EGM.

106.It is also fair to note that Jason and Daisy might have learned of the content of the Fact Sheet had they chosen to attend the EGM in person, but they did not, sending their solicitors as their proxy.  Also, in the 4 July 2017 letter sent by Fung, they had been invited to provide information/material to the Company for it to circulate to the shareholders for their consideration before or at the EGM.  Jason was also told he might circulate materials to the shareholders at his own cost.  Jason and Daisy did not take up either offer or opportunity, when that might have re-balanced any alleged unfairness from the content of the Fact Sheet.

107.Both Mak and Wong came across in evidence as well able to exercise their own will on the basis of opinions formed by themselves. (Incidentally, the same is correct for Shigemitsu and Teraguchi.)

108.As noted, Ricky also says that the initiative in making an offer to purchase Ricky’s shares in July 2017 came from Mak and Wong. They had become fed up with the protracted litigation between Jason and Daisy and Ricky, which had prevented the distribution of some HK$20 million to the shareholders since the cessation of business in 2010.  They also expressed to Ricky a concern that Jason and Daisy would prevent accepting the sanctioned payment and would unreasonably continue to litigate with Ricky on the account of profits exercise at the expense of the Company by procuring an indemnity from the Company for Jason’s costs.

109.Originally, Ricky had not been tempted to sell.  But that changed after he discovered in late July 2017 that he had a life-threatening illness of final stage pancreatic cancer.  Ricky thought that since he had known Mak and Wong for a long time and their services to his business had been good, their offer to purchase shares added 25% discount on the price might allow them to make a profit which could be his final gift to them as a token of appreciation for the long time services to his business.  Ricky says he also thought that if Mak and Wong could have the proceedings brought to an end, that would not be a bad thing for him, because even if the illness were to end with his death, the proceedings would not left behind by his wife.  Having agreed the price, he proposed the payment by instalments which was subsequently agreed.

110.The relevant documents were all signed on 3 August 2017 in the hospital.  Amongst the documents were Ricky’s approval as director of the Shares Transfer as well as the transfer of shares from Sato to Shigemitsu and Mak.

111.Ricky emphasises that the Shares Transfer was a genuine sale and purchase transaction with proper consideration.  He said in oral evidence that if it were not genuine he could have simply transferred the shares to either one of Mak and Wong and not both.

112.In his responsive affirmation, Jason reiterates that the minority shareholders, including Mak and Wong were and are Ricky’s nominees/associates.  Amongst points previously raised, reliance is placed on the fact that they seem to have knowledge of the financial position of the Company in 2010, when Jason did not, not least because Ricky had refused to disclose the accounts of the Company at that time (albeit that he undertook to preserve the accounting and financial statements and supporting documents of the Companies and other companies operating the restaurants).  Thus, Jason says the allegation that the litigation had prevented the distribution of the Company’s assets to his shareholders has no merit.  Indeed, it must have been Ricky’s own decision as sole director not to make distribution or interim dividends of any kind.

113.Jason also relies on the point that Ricky’s explanation for the calculation of the amount of the sanctioned payment – apparently given ex post facto, as it was never offered prior to or at the EGM – is said to have been told to and understood by the other shareholders before the EGM, which would confirm that they are nominees or close associates of Ricky.

114.Jason also says that there is a conflict between the interests of Mak and Wong with those of the Company and other shareholders (particularly himself and Daisy) in part because Mak and Wong were senior management staff assisting Ricky with the business whose profits are to be accounted for, and that they would be remunerated according to the operating results of those companies, and because the private biking for the Shares Transfer was at a substantial discount with unusually attractive payment terms.

115.Criticisms are also made by Jason as to the conduct of Ricky in the account taking exercise, which Jason says Ricky has attempted to delay and derail.  I do not think I can or need to decide this aspect.

116.Ms Chan emphasises that the ongoing litigation between Jason and Ricky and his companies does not stop Ricky, as sole director, from paying dividends and thus distributing the HK$20 million cash at bank to the shareholders.  She submits that Ricky’s claim that no distribution could be made because the Company may need to indemnify Jason’s costs in this action is but a belated excuse which ought not to be accepted when no proposal was ever made to distribute any part of the funds.

117.Ultimately, where the purchase price is specifically calculated with the intention to achieve a quick profit of $5.7 million – a sum vastly in excess of the money which either Mak or Wong could ever hope to earn through their ordinary employment in Ricky’s group of restaurants – and where Ricky himself has in effect described that some as a gift to them, it is not difficult to find that that money is precisely the incentive to vote in accordance with Ricky’s wishes.

118.The payment terms are also instructive.  According to the audited accounts alone (that is, ignoring for the moment the 5 Deductions), the Company ought to receive funds to add to the funds already held so that it might have over HK$145 million (ignoring any interest which might attract).  If it did, each share would be worth over HK$14,500.  The purchase price of HK$4,500 was obviously a significant discount to that figure. But even on Mak and Wong’s own case, it was a discount of 25% offered for the “particular purpose” of approving the sanctioned payment.

119.The instalment terms also permitted the Shares Transfer without any payment being made at all, and none being required until some 2 months later.  But that was only 40% and the remaining 60% would be paid into equal tranches a further one year and 2 years after that, with no interest payable.

120.The price which Mak and Wong agreed to pay was apparently in excess of what they could have afforded, in circumstances where at the time they had not actually raised finance even for the delayed first instalment, and did not do so until very shortly before the delayed first instalment due date.  Mak did say in evidence that he might have had other funds which he could have deployed, but did not want to use them because he envisaged only a short-term borrowing and the terms of the loan including the 10% rate of annual interest were acceptable.  But he also accepted that he had just taken out a mortgage on a property, apparently to purchase another property, albeit he says that he knew he might borrow to buy the shares against the pledge of the shares bought.  Anyway, the fact is that no monies changed hands at the time of the Shares Transfer, necessitating the promissory note.

121.I also accept that the transaction appears to have been carried out in haste, as indeed it needed to have been if Ricky’s shares were to have been voted by Mak and Wong at the EGM.  Clearly the timing was intended, and indeed it is openly admitted that it was intended, for Mak and Wong to be able to vote the shares at the EGM just days later to approve the resolution accepting the sanctioned payment.  There is no sale and purchase agreement to record its terms (and the payment by instalments) other than the one-page note signed by Mak and Wong but not Ricky.  I think there must be at least significant doubt that that document even existed at the date of the Shares Transfer, as it is difficult to understand why it would not have been signed by Ricky at the time that the other transfer documents were signed by the parties at the hospital so as to signify his agreement to its terms. 

122.Ricky said in his oral evidence that perhaps if Jason had come to him, he might have sold the shares to Jason too.  I suppose this somewhat flippant addition to the written evidence may be correct, but the price would likely not have been the same as the sale price to Mak and Wong, and Ricky would unlikely have thought that selling his shares to Jason would have brought an end to Jason’s seeking for Ricky to make a full account of profits to the Company.

123.Ricky agreed that a fair summary of his evidence was that whilst Mak and Wong had told him that they wanted to purchase his shares so as to vote at the EGM in favour of accepting the sanctioned payment, that he hoped that they would vote in that way, but that he was not sure that after purchasing the shares they would ultimately in fact vote that way.  I do not find this evidence convincing, when the whole purpose of buying the shares was explained as avoiding the problem caused by Ricky’s being unable to vote them, and where Mak and Wong had to promise to pay millions of dollars that they did not have and had not yet arranged to borrow.

124.As it happens, it is Mak’s and Wong’s evidence that they thought they would only need to borrow enough to pay the first instalment of the purchase price, as they would be able to bring about acceptance of the sanctioned payment and distribution of the Company’s assets before they needed to repay the loan taken for that purpose or the due dates of the 2^nd and 3^rd instalments.  Though expressed as an optimistic hope, the level of confidence demonstrated Mak’s and Wong’s likely belief that they would bring about their intention.

125.Ms Chan also relies on the extension which Ricky gave on 3 August 2017 (the date of the Shares Transfer) for the time within which the sanctioned payment might be accepted.  She says, and I agree, that this is some evidence of some confidence on the part of Ricky that the majority of shareholders would vote in favour of accepting the sanctioned payment.

126.Indeed, there is another connection, in that LK Finance is apparently a company owned and controlled by a person who is a friend of Ricky, and who co-invested with Ricky in property in July 2012, which was later sold in September 2018.  That property was apparently used by one of the Itacho restaurants.  But Ricky denied in his oral evidence that he had asked his friend to loan the money to Mak and Wong, either at the time of the original loan in late September 2017 or the subsequent renewal and extension of the loan in October 2018.  Mr Wong, who is the one of the two who approached LK Finance, also denied that Ricky had directed him to that company; Mr Wong said that he had been recommended to it by a friend of his called Chan.

127.I think the coincidence is, however, too stark to ignore.  I doubt it was anticipated that Jason and/or his legal team would make such enquiries as would identify the close relationship between Ricky and the lender to Mak and Wong on what objectively look like favourable terms (no ongoing interest payments required, no other collateral than the pledge of the shares themselves, in effect a rollover of the substantial principle of the first loan at the time of extending the loan to permit the 2^nd instalment payment on similar terms).  I also take account of the fact that there is little evidence to show how, and on what materials, LK Finance might have commercially sensibly agreed to lend such large sums of money against only the pledge of shares in a private company, the value of which would be difficult to establish.  Wong did say in evidence that he gave Fung’s telephone number to LK Finance, but he does not know whether or not anyone spoke to Fung.  I note that the security pledged did not change even when the amounts loaned against that security was increased by around 55%.

128.Further, though the loans are secured by formal share mortgage documents to which blank instruments of transfer and bought/sold notes signed by Mak and Wong respectively are attached, the value of that security must be affected by the discretionary power given to the Board of the Company to refuse to register any transfer of shares if it thinks fit.  This would be an odd risk to run, unless the connection with Ricky as the current sole member of the Board was such as to give sufficient confidence to the lender.

129.In oral evidence, Ricky described the Company, which had been the first Itamae restaurant, as his “baby”.  He said this explained his reluctance ever to sell his shares.  But he did so in the circumstances of his serious illness and a strong desire to bring these proceedings to a close.  I am prepared to accept this evidence, but I do not think it greatly assists Ricky’s or Mak’s and Wong’s position in the context of this application. Indeed, I think it only emphasises that Ricky not only wanted, but intended, and thought he had achieved bringing about the end of the proceedings.

130.Ricky also said in oral evidence that part of his motivation to sell his shares to Mak and Wong was because he wanted the other minority shareholders to get what they deserved.  First, I would note that this presupposes confidence that the resolution to accept the sanctioned payment would be passed.  Secondly, this is a statement somewhat difficult to reconcile with the fact that Ricky was forced to account for the profit, and that the purpose of the sanctioned payment was to avoid the need for the accounting exercise to be completed.

131.In this context, Ricky also said that Teraguchi had approached him in around 2016 asking why he could not receive his share of the assets retained by the Company.  In response, Ricky told him that was because the Company was embroiled in litigation.  But that evidence is inconsistent with other parts of Ricky’s evidence in which he stated that had he been approached by any shareholder asking the distribution he would have given.  I was not impressed by the attempt to get around this inconsistency by saying that no EGM had been requisitioned.  Again, I can point to the fact that, as sole director, Ricky could quite readily have arranged a dividend payment, if necessary with the assistance of Fung to deal with the technical company secretarial matters.

132.In cross-examination of Ricky, Ms Chan suggested that the two matters dealt with in the above 2 paragraphs do not appear anywhere in Ricky’s various affirmations filed for the purposes of this application.  Therefore, she suggested, the evidence was made up.  In re-examination, Mr Chan drew Ricky’s and my attention to the fact that in his 6^th affirmation at §25 Ricky had made reference to the interests of the Company having been taken into account by him.  However, it seems to me that that paragraph was focused on an explanation as to why Ricky says it was appropriate for him not to have refused to register the transfer of the shares transferred under the Shares Transfer; I do not think that the paragraph fairly read extends to an explanation as to why Ricky says he decided to sell those shares.  Indeed, it might be odd had he actually said so, for that would have been a clear statement that he was intending by the sale to effect something which he knew he could not personally effect unless he sold the shares.

133.Both Mak and Wong simply agreed with Ricky as to the reasonableness of the 5 Deductions, without asking any questions about it or asking to see any documents.  But, to be fair to them, both had some relevant knowledge from their own management activities of D3-D31 to be able to form some view as to the reasonableness of those deductions.

134.I have considered whether the sale and purchase of Sato’s shares is in any way instructive.  It might be asked why Mak would bother to purchase just a further 2% of the shares in the Company (or 4% if he was confident, as it must have been, that Shigemitsu would vote in the same way) if he and Wong could purchase all but one share of Ricky’s 38%.  That the purchase was made of Sato’s shares might indicate the contemporaneous view that Sato was not safely to be taken to be in Ricky’s or Mak’s and Wong’s ‘camp’.  If it was a genuine purchase, that might also make it more likely that the purchase of Ricky’s shares was also genuine.

135.Ultimately, it seems to me that the essence of the Shares Transfer was that the shares were to be genuinely transferred from Ricky to Mak and Wong, albeit in the circumstances and for the reasons I have identified and on which I have made the above findings.

136.My conclusion is that the Shares Transfer was not sham transaction.

137.Both Mr Chan and Mr Li have suggested that that would be the end of the analysis.  I disagree.  It seems to me that the following analysis must also be performed.

Adequacy of the sanctioned payment

138.Permeating a number of the arguments is the question as to the adequacy or otherwise of the sanctioned payment in the amount of HK$40 million.  Therefore, I might deal with this issue next.

139.Jason argues that the sanctioned payment is grossly inadequate.  This is said to be because the audited financial statements of D3-D31 show a generated total profit before tax of almost HK$208 million during the relevant period, and net profit after tax of over HK$167 million.  Yet Ricky has tried to suggest an overall net loss of something over HK$10 million.  This arises from (a) ending the period of account on 30 May 2010, rather than 31 December 2010, when Jason says there is no contemporaneous evidence to support that date, and (b) the making of five “conjured up” charges or expenses of over HK$135 million, that is the 5 Deductions, even though they do not appear in the audited financial statements.

140.I do not think it falls to me in the context of this application to decide the issue as to whether the sanctioned payment is sufficient or not.  That issue can only properly be decided in the context of the taking of the account.  For that purpose, a suitably qualified forensic accountant has been appointed to review and assess most of the items in dispute identified in the Notice of Objections.  The Order appointing that assessor provides a detailed process by which the assessment shall be performed, and the assessor’s determination made.  It also provides that the assessor plays an evidential role in the accounting process, such that his determination on the questions identified for him are final and binding upon the parties.  As to the questions arising relating to the 5 Deductions, I specifically note that questions as to whether or not Ricky is entitled as a matter of law and fact to charge, and if so entitled, the quantum which he is entitled to charge as expenses from the 5 Deductions are questions specifically ordered to be determined by the Court at the hearing of the account: see §12 of the Order dated 16 May 2017.

141.Mak says the Company ceased business operation on 30 May 2010, when the lease for the restaurant premises expired and the parties were unable to reach an agreement as to the future rentals which were significantly raised by the landlord.  The Company has not resumed any business operation since then.  Other than as to the date, it is agreed that the Company has not had business operation as such since it ceased operating the restaurant.

142.Mr Chan has suggested that the idea that there is no contemporaneous evidence to support 30 May 2010 as the end of the period of account is “daft”.  Though I do not need to decide this point now, I tend to agree.  At this hearing at least, Ms Chan understandably did not appear to press the point.  The audited financial statements of the Company to year end 31 December 2010, and the materials provided to the Revenue, all state that the Company ceased its restaurant business on 30 May 2010.  It did so because its restaurant business was conducted at premises for which the lease expired, without renewal, on that date.  I have seen no evidence to suggest that the lease did not expire on that date, or to suggest any way in which the Company’s business could have or would have continued beyond that date.  The closure of the restaurant would have been visible to everyone.

143.Hence, it seems the starting point is that the audited accounts of D3-D31 showed a profit of around HK$125 million over the period of account.

144.As to the amount of the sanctioned payment, Jason says that even if one takes 30 May 2010 as the date when the Company ceased business, there would still be a total net profit after tax of over HK$131 million prima facie accountable to the Company.  Adding compound interest at the rate of 6% per annum with quarterly rests even up to March 2018 would give total accountable profits in excess of HK$222 million.  Therefore it makes no sense for shareholders to accept sanctioned payment representing less than 20% of the prima facie accountable profits.  Even that takes no account of expenses amounting to almost HK$890 million for which it is said Ricky has not so far identified or produced to the Assessor any supporting documents.

145.Jason also says that reliance upon the auditors as having confirmed the financial statements is misplaced when the auditors’ fees were extremely modest, such that it would be absurd to think that they had reviewed the audited accounts by reference to supporting documents at the level appropriate to the account taking exercise.

146.As to the 5 Deductions, they comprise: (1) trademark/image rights usage fee (adjusted to cut-off and without factory/other business), calculated at 6% of turnover, in the amount of HK$66,641,921; (2) Ricky’s management remuneration of HK$14,416,112; (3) Ricky’s services on setting up of the restaurants of HK$12,326,332; (4) year-end bonus paid to staff of HK$8,150,994; (5) theft loss of HK$34,100,543; together totalling HK$135,635,902.

147.Jason says that the 5 Deductions have been created by Ricky for the purposes of avoiding the liability to account for profits to the Company, and had they been genuine expenses they would have been recorded in the audited financial statements.  Alternatively, at the very least, the veracity of the 5 Deductions is said to be highly dubious and that no reasonable shareholder would accept them at face value.

148.The 5 Deductions aside, Jason also questions numerous other items of expense recorded by Ricky in his account of profits.  There is a Notice of Objections dated 29 November 2016, which on his own count objects to 311 out of 893 items claimed in the account of profits.  One particular complaint relates to approximately HK$202 million of “management fees” paid to 4 companies, being Speedy Winner (Asia) Ltd (“Speedy Winner”), Dragon Target Ltd (“Dragon Target”), Well Keen International Ltd (D6), and Joyful Gain Ltd (D3).

149.Taking all these matters into account, Jason says that it is clear that the sanctioned payment of HK$40 million was a gross undervalue of the amount of profit for which the defendants are liable to account to the Company.

150.Jason is criticized as being overly complaining and unnecessarily seeking vast documentary evidence for expenses the vast bulk of which have been audited.  Mr Chan identifies that all of the income shown in the account has been taken from the audited accounts of the companies and no basis for challenging the audited expense figures has been advanced.  Of the ‘expense’ figures, Mr Chan says 91.65% are extracted or derived from the audited accounts, and the 5 Deductions only account for 8.35% of the total ‘expenses’ of the relevant company defendants.  But even these percentages give rise to potentially wide differences in dollar figures.  I also take into account that the Notice of Objections has been drafted with the assistance of a forensic accountant.

151.I accept that Jason might be more suspicious than is ultimately warranted.  But it seems to me that where Ricky has been found to have acted in breach of fiduciary duties owed to the Company, and has been forced only by Court Order to account for profit, it is perhaps unsurprising that he wishes to see real evidence to back what Ricky asserts in giving that account.  Also, at this stage I think the Court is entitled to bring some healthy skepticism to bear on the account explanations offered.  The incentive to reduce the amount to be accounted for is plain; whatever monies generated by the company defendants are not accounted for as profit and paid over to the Company (for its ultimate distribution to its shareholders) will increase Ricky’s funds as he will not have to share those funds with the other shareholders of the Company.

152.Ricky has explained how figure of HK$40 million was calculated and why he says it is reasonable and an amount which could be accepted in the best interests of the Company.  The explanation of the calculation is said to be a later invention, but clearly there must have been some contemporaneous basis for reaching that figure and deciding to pay that figure in with the notice of sanctioned payment.  

153.He says there were 2 approaches for calculating the HK$40 million figure.  One was to take the HK$125 million total net profits and deduct the Deductions for trademark/image rights usage fee, year-end bonus paid to staff and theft loss, leaving about HK$17 million to which would be added interest at 6% compounded annually in the sum of around HK$23 million.  The second is to take the same starting figure and make the same deductions except at a lower (5%) rate for the trademark/image rights usage fee, leaving about HK$28 million, and adding interest calculated after earlier losses have been offset from the profits made on a simple basis at 6%, of around HK$11 million.

154.Ricky points to the account of profits of the defendant companies, and the 5 Deductions, which would leave a net loss of slightly over HK$10 million.  He argues against Jason’s points relating not just to the 5 Deductions back to the other challenges to expense items, including in particular the management fees.

155.He points to the fact that the CFA specifically contemplated that there might be a deduction in the account of profits to make allowance for the use of the trademark owned by Ricky.  He says that the year-end bonuses paid to staff were genuine expenses, examined by the IRD demanded tax from the recipients, and that the theft loss was originally absorbed by himself but fairness required to be taken into account.

156.As to the challenge to the management fees, Ricky identifies by reference to certain audited financial statements of the respective defendant companies that the relevant management fees were provided by companies acting as central staffing and administration points within the group, that those companies did not make a profit, and that they simply provided fees that would otherwise have been paid for by the individual companies direct.  He points to the fact that these management fees are reflected in the audited accounts which were passed to the IRD, so that the fees are proper expenses accepted by the auditors and the Revenue.

157.As stated, I am in no position to decide this within the context of the current application.  I can only take into account what broadly seem to me to be points to be made on the evidence as it stands.

158.The starting point is the profit figure taken from the audited accounts, of around HK$125 million.  I accept that is prima facie the figure for which Ricky and D3-D31 need to account to the Company.  But just as Jason suggests that the audited figures may not be the correct figure (and indeed he challenges those figures), it seems to me that Ricky can also make a similar point.  Ricky does so by reference to the 5 Deductions.  Of course, it might be noted that deductions are only potentially relevant if they relate to expenses incurred as part of the generation of profit.

159.As to the first of the 5 Deductions, relating to image use fees, there is a joint expert report which provides some assistance.  The experts agree that a fee for such use or rights might typically be charged at 5% to 6% of turnover, which is the basis put forward by Ricky.  Where they disagree is as to whether or not some or all of such fees would ordinarily be expected have been included within the significant “management fees” paid between the various corporate defendants.  I note that the explanation for the “management” fees of approximately HK$202 million was not offered by Ricky when he purported to give the account, but only came in the context of the evidence filed for the current application.  But now looking at that material, the companies which acted as central administrator or central staffing point appeared to have operated on a break-even basis, and it is not apparent to me at the moment how image use fees might have been somehow wrapped up in the services provided.  Therefore, on current materials, there seems to me to be some reasonable prospect that a significant deduction might be made from the audited account profits in this regard.

160.As to the other 4 of the 5 Deductions, I take into account that they do not appear in the audited accounts and were raised only for the first time in August 2016.  The significant figure for “theft loss” exceeding HK$34 million does seem somewhat dubious in the absence of any report of theft to the police or an insurance company or any other institution, including the auditors.  In his oral evidence, Mak said that the figures relating to the amounts claimed for the “theft loss” had been checked by the accounting staff, some time after the theft had been discovered.  But, if these matters were known to the accounting staff, it is not clear to me why they were not taken into the companies’ financial statements and also drawn to the attention of the auditors.  I have not overlooked that Mr Chan has drawn attention to a list of documents, giving certain disclosure, which includes for example reference to copies of cheques said to have been made out to fraudulent payees evidencing the theft.

161.There is also some real doubt about the proposed deduction of over HK$8 million relating to year-end bonus for staff, when staff bonuses are already reflected in the audited accounts.  Mak’s oral evidence on this point was at times apparently internally inconsistent, which at this stage does not provide wholly convincing support for the proposed deduction.  Indeed, Mak signed at least some of the employer’s returns provided to the Revenue which asserted the level of remuneration of the employees (including himself and Wong) which did not include the bonuses now suggested.  As it is Mak’s evidence which is part of the evidence to support Ricky’s deduction in this respect, the knock-on effect is that it may call into question the reliability of Mak’s support for other of the proposed deductions.

162.As to the proposed management fees and restaurant set up one-off fees for Ricky, that they were not charged on an ongoing basis and so were not reflected in the accounts also raises a serious question as to whether they are proper deductions to be made against an account of profit.  Mak did receive director’s fees and accommodation, and so there is a real question as to whether he should be entitled to make the deduction based upon a “salary” of HK$25,000 per month for each company.  There is also a legitimate question as to whether such fees might properly now be regarded as expenses to be set off against generation of profit, when the accounts do not record such fees as any such expense.  Similarly, little confidence can be placed in the propriety of the one-off HK$500,000 fee for the Ricky’s setting up charge for each restaurant when that fee has been charged by Well Keen which Ricky himself says never in fact set up or operated any restaurant in the period of account.

163.Whilst I have considerable sympathy with the suggestion that there ought not to be a complete re-auditing of D3-D31’s accounts, and there seems to be some force in the criticism of at least some of Jason’s objections in the Notice of Objections, this particular process for determining the profits for which a defendant is liable to account has been ordered in line with previous authority.  I agree that the relatively modest fees charged by the auditors of D3-D31 may suggest that there was not enormous scrutiny of the individual companies’ expenses reflected in the accounts.  Also, Ricky’s refusal to disclose the scope and basis of the alleged tax audit makes it difficult for the Court at this stage to place any great reliance on the underlying figures as having somehow been “audited” by the Revenue.

164.So there is room to think that the Court may not ultimately accept Ricky’s case on the account, and may give a higher figure than that argued for by him.  That higher figure may be, but only may be, considerably so.

Whether the nature of the private agreement between Ricky and Mak and Wong meant that they could not bind the other shareholders

165.Again, I have already set out the relevant facts relating to the agreement made between Ricky and Mak and Wong.

166.Ms Chan also relies on the fact that Mak and Wong were at all material times senior management employees of Ricky and assisted him to manage the restaurants which constituted the breach of his fiduciary duties to the Company.

167.I do not think the nature of the private agreement was such that, as a result of the terms of that agreement, they could not bind the other shareholders.

168.I acknowledge that they bought shares at a discount which was apparently not offered to the other shareholders.  But that does not seem to me to address the real question on this issue.

Whether the votes of the majority passing Resolution 1 were invalid through their lack of bona fides

169.In light of my finding that those shareholders who formed the majority which voted in favour of accepting the sanctioned payment under Resolution 1 were not nominees of Ricky, the question of bona fides seems to turn upon their own motives for voting as they did.

170.I have dealt above with what Mak and Wong say were their motives.

171.Shigemitsu confirms in his evidence the veracity of the matters covered by Mak, especially as concern himself.  He also adds that he believes that the Company should accept the sanctioned payment because it is a “fair amount” for settling Ricky’s liability to the Company.  But, in any event, whilst he understood the calculation of the HK$40 million figure has been based on the audited accounts with some further items of expense raised by Ricky which were quite legitimate, Shigemitsu states that his decision was based not so much on obtaining a return from the distribution of assets of the Company but rather that as a friend and long-time business partner of both Ricky and Jason/Daisy, he considers that the protracted disputes between them should come to an end as soon as possible, particularly considering the serious medical condition Ricky is suffering.  He also agrees that the shareholders should be able to obtain the return without further undue delay.  He strongly refutes any suggestion that he is a nominee of Ricky in deciding to accept the sanctioned payment.

172.Of course, it was Mak’s evidence that Shigemitsu arranged to purchase the 4% shares from Sato on the specific request of Mak so as to outvote Jason and Daisy.

173.Kong has given evidence to similar effect, indeed in an affirmation which in parts is word-for-word the same as Shigemitsu’s.  Kong says he thinks that the amount of the sanctioned payment is a fair amount for settling Ricky’s liability to the Company as, he says, “objectively it was calculated based on the audited accounts of the Group and some further expense items raised by Ricky which I consider to be legitimate and acceptable”.  Nevertheless, he immediately goes on to say that he does not really care about how the calculation came about as his primary concern was to obtain and make good use of the share of assets of the Company as soon as possible, and he was tired of waiting for the conclusion of the protracted litigation between Ricky and Jason and Daisy.

174.Indeed, in his oral evidence, he first confirmed as correct and complete Mak’s description of what (he) Kong had told him (Mak), and that he had decided to accept the sanctioned payment and told Mak that fact, before he gave Mak the proxy on 3 August 2017.  He said at that time, though Mak had offered some explanation for the HK$40 million figure which he did not doubt, he did not pay much attention to whether D3-D31 were making a profit or not.  Yet he says he did take into account whether acceptance of the sum was in the best interests of the Company, though those interests (as he described them) were really to end the litigation soon to allow him to get his share of the assets.

175.In the unsworn statement made by Teraguchi, which he adopted in oral evidence on affirmation, he explains that the main reason for him to vote to accept the sanctioned payment was that he believes the HK$40 million is adequate, and he can receive a fair return from his shareholding without further delay, especially because of his age and bad health condition.  He made reference to having been shown (perhaps sent by fax) some information on the matters relating to the sanctioned payment, parts of which he said had been translated into Japanese.  From his description of it, I think it might have been the Fact Sheet and the various attachments to it. Despite his age and health condition, he physically travelled to Hong Kong to vote in person at the EGM.  He stressed that he is not, and never has been, a nominee or puppet of Ricky.  He voted at his own free will and in his own interest.  I fully accept that.

176.The first point made by Mr Li is that it is trite that shareholders do not owe any fiduciary duty to the Company.  Hence, they could not be in a position of conflict of interest.  Shareholders are free to vote according to their personal interests, because (subject to exception in specific circumstances, the voting rights of a shareholder is a proprietary right which he can exercise regardless of whether it is in the interests of the other shareholders all the company in question.

177.All Council have referred me to the case of Hiew Fook Siong v Fung Tak Keung [2006] 3 HKLRD 762 in which To J identified the relevant to exceptions as being (a) shareholders’ decision to alter the articles of the company and (b) the majority practising a fraud on the minority. 

178.I have also been referred to Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653 in which Harris J restated the general principle that a shareholder does not owe fiduciary duties to a company, and that the right to vote shares is a proprietary right which in most circumstances can be voted as the shareholder wishes, without regard to the interests of other shareholders.  In that case, which involved an application made by the provisional liquidator of a listed company and its minority shareholder for an interlocutory injunction to restrain the majority shareholders from voting against a resolution on the restructuring of the listed company, Harris J accepted that there was an exception applicable to the general rule because the decision of the majority was irrational, so much so that they could be said not to be acting in good faith.  The irrationality was because if the resolution for restructuring did not take place, then it was certain that the company would be delisted, effectively destroying the economic value of the other shareholders.

179.In Kim Lung Transport Co (a firm) v Ip Man Fai (HCA 271/2012 and HCMP 1002-1003/2012, 6 June 2012, DHCJ Pow SC) at §27, the Deputy Judge considered that the Sunlink case was an example which might be grouped under the umbrella of “fraud or oppression on the minorities”.  A similar observation was made by G Lam J in China Investment Fund Co Ltd v Guang Sheng Investment Development Group Ltd (HCA 411/2016, 27 May 2016) at §32.

180.Here, Mr Chan and Mr Li both submit that it could not properly be said that the decision to vote for the sanctioned payment falls within the fraud on minority exception.  My attention was drawn to the facts that all shareholders, except Ricky and Jason and Daisy, voted in favour of acceptance; clear reasons have been given by Mac and Wong as to why they voted as they did, including wishing to take the return from their shareholdings, to take the additional reward, and to do so without waiting indefinitely for the conclusion of litigation which was in any event inherently uncertain; clear reasons had been given by Kong and Teraguchi that they also wish to obtain their return without further delay, and they considered the amount they (and the Company) would receive to be fair; Shigemitsu had explained that he was less concerned with obtaining his return on the acquired 200 shares, but rather wanted to bring the litigation to an end for the benefit of Ricky in his medical condition, and that even thought that it was good to bring the disputes between Ricky and Jason and Daisy to an end generally, as well as his view that the amount of the sanctioned payment was fair.

181.For her part, Ms Chan submits that the principle that generally a shareholder is entitled to exercise his voting right as propounded in earlier cases was considered by the Privy Council in British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369, and she referred me in particular to the holding at 372-373.  Putting it into its necessary context the passage reads as follows:

“To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice the business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority by a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under the general title which confers the vote as a right of property attaching to a share.”

182.While Ms Chan has pointed out that the British America Nickel case was apparently not cited to To J, Harris J, G Lam J and DHCJ Pow SC in the cases I have canvassed above, I do not think that renders any of those decisions inaccurate.  As I read it, the restriction which may be imposed upon the private property rights attaching to a share are limited.  The specific limitation identified in the passage from British America Nickel quoted above does not seem to me to create some general requirement to be imposed on shareholders voting in every circumstance.  Rather the restriction of such powers as the shareholder might generally exercise is in – see the reference to “such powers” – the exercise of powers to alter the articles of association or something analogous.  I think this also fits with the statement made by the Court of Appeal at §144 of Re PCCW Ltd (CACV 85/2009, 11 May 2009, Court of Appeal), where the focus is on the authorities which established that “in a class meeting, a shareholder must exercise his voting power in the interests of the class as a whole and this is a restraint on his freedom to vote”.

183.Hence, it seems to me that the relevant question is whether in considering Resolution 1, the shareholders were acting as a “class” in a situation which might be regarded as analogous.

184.I think I am entitled to take into account the fact that the Company is no longer trading, indeed has had no business operation since 2010 when its only restaurant closed.  Its only purpose is to receive whatever might be due to it on the taking of the account of profits.  This might make it all the more justifiable that the shareholders vote entirely in their own self-interest as they see it, including by bringing the continued existence of the Company to an end by accepting the sanctioned payment and dissolving the Company for ultimate distribution of assets to the shareholders themselves, sooner rather than potentially much later.  It is wholly understandable that shareholders might prefer a ‘bird in the hand over two in the bush’.

185.On the other hand, where the shareholders are avowedly voting in their own self-interest, and though they might also assert that they see those interests as aligned with those of the Company itself, this might be a rare example of the kind of circumstance in which the Court will intervene.  Indeed, where there is no other business except collecting in the profit from the account and distributing it amongst the shareholders this might be thought to be a situation more akin to other circumstances when shareholders vote as a class.

186.The plaintiff has brought the action for the benefit of the Company, which must mean the intention is to conduct the action in the Company’s best interests.  The bringing and pursuit of the action have been fully justified by the subsequent findings of breach of fiduciary duty, and the requirement for Ricky to account for the profit.  I note that it is Mak and Wong’s own assertion that had they been asked to consent to the bringing of the action, they would have refused to give consent.  In other words, had they been able to outvote a resolution proposing to bring the action in the first place, they would have done so.  That necessarily means that the Company would have been deprived of whatever is ultimately the fruit of the account of profits.  I have already referred to the incongruity between the assertion that the action should not have been commenced, with the desire to take the benefit of its having been pursued, through taking a share of the increased assets flowing from the finding of breach of fiduciary duties.

187.Ms Chan also made the submission that I should take into account the fact that ordinarily a decision facing a company as to whether or not to accept a sanctioned payment would fall to be made by the Board of Directors of that company.  As she identified, in this case, clearly the Board could not make the decision as it was comprised solely by the wrongdoer.  Hence, she said that the decision felt to be made by the shareholders in general meeting instead.  While she acknowledged that that would not of itself create fiduciary duties for the shareholders which would otherwise have been born by the directors, she did suggest that might give rise to a restriction on the otherwise general powers to vote as they saw fit in their own interest.

188.In this context, Mr Chan also reminded me of what was said by Barma J in the PCCW case at §§202-203, where he said by reference, albeit by reference to the particular circumstances of that case:

“The consequence of this [the continued trading in the PCCW shares] is that shareholders voting at the meeting might take very different views of the commercial merits of the proposition that was put before them. A shareholder who had acquired shares in the company some considerable time earlier, when the share price was much higher than that offered under the scheme, and who felt that the company had prospects going forward that made it more desirable to remain a member of the company, might well think that the scheme was not commercially attractive enough to garner his support. On the other hand, it would be open to other individuals to purchase shares on the open market at less than the buyout price proposed under the scheme, in the hope that the scheme would be approved, so that they would be able to realise their investment in the company for a reasonably attractive short-term gain. Shareholders in such a position are, it seems to me, just as much shareholders in the company as those in the former situation, but they could quite rationally and sensibly vote in favour of the scheme.

In these circumstances, if (contrary to the views which this Court has come to) the court were satisfied that the result of the class meeting was fairly representative of the class, I do not think that the court should substitute its view of the commercial merits of the proposal for that of a truly representative majority of members of the class concerned, simply because, in the view of the court, the scheme was not one which the Court considered attractive.  Whether or not such flaws or drawbacks as they might be in the scheme were such as to justify its rejection is, in my view, ultimately a matter for the members of the class to determine, save in excess wholly exceptional cases – which I do not think is the case here.”

189.This passage seems to me to identify that even in circumstances of what is generally regarded as a “class meeting”, shareholders within that class are perfectly entitled to vote as they see fit and to come to rationally reached, albeit varying, decisions as to whether or not to vote in favour of the proposal.

190.I take account of the fact that in so far as the majority relied upon the fairness of the amount of the sanctioned payment, they did so simply by reliance on Ricky’s explanation, which was hardly tested and not checked against documentation.  I also take account of the fact that, rightly or wrongly, they appear to have taken the view that they were not otherwise entitled to share in the profits of D3-D31 via the Company, so that they were content to receive any significant additional distribution from the Company as was created by the HK$40 million.  This is, in effect, the “windfall” point.

191.I reject Ms Chan’s submission that the voting not rational because those voting to accept the sanctioned payment had not looked at the relevant materials in the account, but had merely relied upon what Ricky told them, or ignored the question altogether.  I also reject the idea that there was “no downside” in rejecting the sanctioned payment.  Whilst there might not be downside relating to the cost of continuing the action for the account, clearly there is no guarantee that the amount of the sanctioned payment is the bottom line of recovery.  As at least Mak and Teraguchi said in evidence, and as must in any event be obvious, it is at least possible that the dollar figure for which Ricky and D3-D31 might be required to account after a trial of the account would end up lower than HK$40 million.

192.Having accepted that none of them are nominees of Ricky, I accept their individual explanations for voting as they did.  None of the explanations are in my view irrational.  I do not see them as a fraud on the minority, but rather as perfectly comprehensible individual differences in points of view.  Differences in commercial view are as applicable to the interests of the Company as to the perceived self-interest of individuals.  Insofar as it is necessary for me to say so, I would reject the idea that voting in accordance with the rationale explained could properly be described as vitiating the decision-making process as being directed to an improper purpose.

193.My conclusion is that the votes are not to be impugned for lack of bona fides.

Whether Ricky’s “approval” of the Shares Transfer was valid

194.Ricky emphasises in his evidence that he did not see, and still does not see, any reason or possible justification for him as a director to exercise the discretion to refuse to register the transfer of the shares.  Ricky said that even if he had thought that Mak and Wong would vote in favour of accepting the sanctioned payment, that would be in the interest of the Company.  This was because, first with the deteriorated relationship between him and Jason/Daisy, there was no chance for the shareholders to resume pursuing any real business with the Company; secondly, because the Company had been dormant, but holding on to assets which had not been distributed because of the protracted litigation; and thirdly the sanctioned payment figure is a reasonable figure.

195.Indeed, as noted above, it was Mak’s own evidence that he and Wong approached Ricky and expressly told him that the purpose behind the proposal to purchase sufficient shares in the Company was so that they could pass the resolution approving the sanctioned payment, and that as the proposed share purchase was for that particular purpose, Ricky should consider giving some discount over the price.  In other words, the discount was asked for and it was agreed in consideration for the ability to effect approval of the sanctioned payment.

196.It may be, therefore, that it does not matter that the transaction was not itself a sham.  The transaction was clearly intended to provide the circumstances in which shares which otherwise could not have been used to vote for the sanctioned payment were put into the hands of persons who clearly would have exercised a vote in that way.

197.Put another way, the price to Ricky (HK$5.7 million) of ensuring that shares which otherwise he could not vote were voted to accept the sanctioned payment was potentially hugely less than the benefit to him as sole or main shareholder of D3-D31 if a full account required payment of many millions more.

198.Ricky himself admits that the Shares Transfer was at least in part motivated by a desire to procure acceptance of the sanctioned payment and to end these proceedings.  Indeed, he apparently told Mak that his determination to sell the shares in the Company was because of the hope that the litigation would end.  Undoubtedly, Ricky knew that Mak and Wong would vote the shares in favour of accepting the sanctioned payment if he was to effect the Shares Transfer.  I reject the suggestion that against everything discussed between them that Ricky might seriously have thought that they might ultimately not vote to accept the sanctioned payment and to bring the proceedings to an end.

199.As sole director of the Company, Ricky continued to owe fiduciary duties to it.  Irrespective of what he thought was the correct figure for the account, Ricky must have understood that there was at least a significant risk (including just the litigation risk) that he would be required to account for a figure rather in excess of HK$40 million.  Indeed, there must be a real risk that the figure is inadequate, perhaps significantly so.

200.Hence, in approving the Shares Transfer knowing that the shares would be voted in favour of accepting the sanctioned payment, it can be said that Ricky failed to act in the best interest of the Company.

201.The argument deployed by Ricky in response is that no “approval” was required; the relevant article of the Company’s constitution merely provided the director a discretion to refuse to register shares after transfer.

202.I do not think this argument helps Ricky, if his fiduciary duty was to act in the best interests of the Company, that would require him to exercise his discretion for that purpose.  The director cannot do nothing; he must either refuse to register the transfer or choose not to exercise a refusal.  If it was in the best interests of the Company to refuse to register the shares, the discretion should have been exercised by giving that refusal.  Further, as a matter of fact, the Board resolution signed by Ricky recorded that the Board had “approved” the Shares Transfer, as well as the transfer of shares from Sato, so it is difficult for Ricky to say he did not actually approve the transfer.  For this factual reason, it is not open to Ricky to suggest that any default position might have been reached on an assumption that he might have not exercised his discretion to refuse to register the transfer.

203.Of course, the other factual problem which arose is that Ricky was the sole director, so he constituted the entire Board, and it was in precisely that capacity that he has already been found to be in breach of his duties and to have put himself in a position of conflict.  That is the context, and I accept Ms Chan’s submission that the rule to avoid conflict of interest is strict and inflexible.  Even if a director is acting in good faith intending to act in the best interests of the company, that is irrelevant to the question of whether there has been a breach of fiduciary duty.

204.Therefore, the question of the fairness or unfairness of the transaction is immaterial: see, for example Pleasure International Ltd v Kao Wai Ho Francis (HCA 1753/2008, 25 June 2009) at §§45-51.

205.This is perhaps a short answer to the arguments about whether or not HK$40 million is a fair and appropriate amount for the Company to accept from Ricky and D3-D31 as an account of profits payable by them as a result of his breach of fiduciary duty owed to the Company.

206.Mr Chan has himself placed emphasis on the point that in the present case Resolution 1 was no a resolution to absolve Ricky from his wrongdoing, as the CFA has already confirmed that Ricky is liable to account.  Instead, Mr Chan says, it is a question of whether the court could refuse to recognise a decision by the Company to enter into a contract with Ricky to settle the amount of the liability and put an end to the litigation.

207.This point seems to me to emphasise the existence of the conflict.  So, whilst there may be (as Mr Chan also submits) nothing unattractive or wrong on the part of other innocent minority shareholders who thought that the litigation should end to acquire as many shares as possible so as to achieve what they considered to be for the benefit of the company to end the litigation with the early distribution of assets, that does not get around the fundamental problem that they could only have done so if the purchase of the shares was made the subject of a transfer effective to permit them to vote.  As Ricky acknowledged in oral evidence, no transfer would have been effective but for his approval of the transfer, or the exercise of his discretion not to refuse the registration.

208.I consider that Ricky’s desire to bring this litigation to an end was a perfectly natural desire in the context of his serious illness.  It is wholly understandable that Ricky would wish not to leave any litigation in which his wife might have to become embroiled.  But, it seems to me that point only tends to amplify the fact of the conflict in which Ricky was placed.

209.I therefore hold that the shares were not validly transferred under the Shares Transfer.  Necessarily, this means that so many of the shares held by Mak and Wong were held by them as a result of the Shares Transfer ought not to have been counted in the voting on Resolution 1 (and indeed the other Resolutions 2 and 3).

Conclusion

210.This ruling is perhaps longer than it might have been, had the decision been reserved, giving a longer time to write a shorter ruling.  But, ultimately, it will be noted that I would dismiss the application made by the Sanctioned Payment Summons for two primary reasons.  The first is that I consider that the application, made by the Company at the current stage of these proceedings, is not properly jurisdictionally founded.  The second is that the Shares Transfer was invalid to have permitted Mak and Wong to have voted the 3,799 shares at the EGM because the exercise by Ricky of his discretion whether or not to refuse to register, and his factual decision and resolution to “approve” registration, was an abuse of his power.

211.Having dismissed the application, I will hear the parties on costs and any subsequent or consequential orders or directions.

Ms Linda Chan, SC leading Mr Thomas Wong, instructed byT H Koo & Associates, for the plaintiff

Mr Edward Chan, SC, Mr T M Lee and Chan Chun Sang, instructed by T K Tsui & Co, for the 1^st, 3^rd to 31^st defendants

Mr C Y Li, SC and Lawrence Cheung, instructed by Lau, Chan & Co, for the 32^nd and 33^rd defendants

The 2^nd defendant excused from court attendance