Leung King Lun Danny and Others v. Ng Louie Kwok Kuen and Others

HCMP 2126/2021

[2025] HKCFI 1583

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2126 OF 2021 (TRANSFERRED FROM COMPANIES WINDING UP PROCEEDINGS NO. 5 OF 2021)

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BETWEEN

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DECISION

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1.This is the application of the 1^st to 4^th Respondents (collectively, the “Respondents”) by summons dated 9 July 2024 (the “Summons”) to strike out the relief sought by the Petitioners in their re-amended petition (the “Petition”). The relief the Petitioners now seek against the Respondents is a buyout order of their shares in Prosperous Pacific Limited (“PPL”). At the conclusion of the hearing, the Decision was reserved which I now give.

Relevant background

2.PPL was a Hong Kong company incorporated on 8 March 2017. It later established subsidiaries (collectively, the “PPL group”) to acquire a mine in Australia (the “Mine”) and to operate a business of manufacturing and selling products produced from the mine, including PURE (a collagen booster).

3.PPL indirectly owns 2 Hong Kong subsidiaries, namely, Global Nature Limited (Hong Kong) and GN Marketing Ltd (Hong Kong) (“GN Marketing HK”) (collectively, “the HK Office”) which were under the Petitioners’ control whilst 2 Australian subsidiaries namely, Global Nature (Aus) Pty Ltd (“Global Nature (Aus)”) and GN Marketing (Aus) Pty Ltd (“GN Marketing (Aus)) (collectively, “the Sydney Office”) were under the Respondents’ control.

4.The Sydney Office (operated by R1, R2 & R4) was in charge of the production and bottling of PURE. GN Marketing (Aus) sold PURE to customers within Australia.

5.The Sydney Office exported PURE to the Hong Kong Office for GN Marketing (HK) to sell to customers outside of Australia.

6.The PPL board comprised 3 directors, namely, R1 (“Louie”), R4 (“Laura”) and P1 (“Danny”). R2 (“Lily”) is Louie’s wife and was involved in the operations of the Sydney Office. R3 (“LLMSD) is a corporate shareholder owned by Louie and Lily who are its directors and shareholders.

7.The Petitioners together held 25.4% shares PPL. Through LLMSD, Louie and Lily owned 23.35% of PPL.

8.The shareholders of PPL entered into a Shareholders’ Agreement dated 31 July 2018 which, inter alia, provided that PPL must not enter into unusual commercial transactions or to incur loans of AUD 5m plus without 75% shareholder consent. That provision effectively gave the Petitioners a veto over such transactions.

9.The PPL group acquired the Mine when, on 7 August 2019, Global Nature (Aus) entered into sale and purchase agreements with the vendor (“Vendor”) for the Mine at the purchase price of A$ [1]16.5m. At the time of the acquisition, the PPL group only had sufficient funds to pay A$ 11m. The balance was financed by a loan of A$ 5.5m advanced by the Vendor to Global Nature (Aus) (“Vendor Loan”) which was to fall due on 31 October 2018. The Vendor Loan was secured by a Specific Security Deed (“SSD”) granting the Vendor security interests over the Mine.

10.The main events[2] that occurred after the acquisition of the Mine may be summarised as follows:

(i) When PPL could not meet the repayment date of 31 October 2018, it obtained an extension for repayment to 31 January 2019.

(ii) The HK Office began marketing PURE in December 2018.

(iii) Negotiations with the Vendor ensued. When the January 2019 deadline also could not be met, the Vendor required Global Nature (Aus) to enter into a Forbearance Deed dated 17 June 2019 which released the Vendor from non-compete restraints imposed by the sale and purchase agreements for the Mine.

(iv) The Forbearance Deed specified a final repayment deadline of 16 December 2019. Danny was made aware of its execution on 2 July 2019[3].

(v) In July 2019, the Sydney Office discontinued the supply of PURE to the HK Office (“1^st Refusal of Supply”).

(vi) PPL failed to meet the payment deadline of 16 December 2019.

(vii) By letter of 19 December 2019, the Vendor’s solicitors noted that an event of default had occurred and demanded repayment by 20 December 2019 failing which the Vendor would enforce its securities rights over the Mine without further notice.

(viii) On the same day (19 December 2019), a Deed of Assignment and Novation of the Debt and Securities (the “Assignment”) was entered into between the Vendor, MS Australia Finance Pty Ltd (“MS Australia”) and Global Nature (Aus) under which the Vendor’s interests under the Vendor Loan and the SSD were assigned to MS Australia on a dollar for dollar basis.

(ix) The Assignment was signed by Louie and Laura on behalf of Global Nature (Aus) and Lily on behalf of MS Australia. Company search records show that Lily was the sole director and shareholder of MS Australia. The Assignment was concealed from Danny who was unaware of this occurrence until May 2020.

(x) In February 2020, the Sydney Office resumed the supply of PURE to the HK Office.

(xi) Sometime in February 2020, lawyers for Samuel Chan (“Samuel”) (one of the lenders of funds to PPL) sent PPL a letter of demand in relation to debts that had fallen due in October 2019.

(xii) On 30 March 2020, Samuel’s solicitors served a statutory demand on PPL.

(xiii) In April 2020, Robin (P3) and Danny devised a business plan (the “Business Plan”) for the HK Office to sell 23,000 bottles of PURE to generate revenue of HK $2.5m.

(xiv) In May 2020, the Sydney Office terminated the supply of PURE to the HK Office (“2^nd Refusal of Supply”).

(xv) On 18 May 2020, by a majority (with Danny opposing) the Board resolved that PPL proceeds to put the recapitalisation plan to its shareholders to raise to A$ 750,000 (the entitlement offer was set at $500,000 and the loan offer at $250,000), with a deadline of 22 May 2020.

(xvi) Meanwhile, on 21 May 2020, Samuel filed a petition to wind up PPL.

(xvii) The re-capitalisation plan could not proceed as the Petitioners (who held over 25% of the shares) would not consent to the equity component of A$ 500,000.

(xviii) PPL held a board meeting on 4 June 2020 in Danny’s absence[4] at which, inter alia, after noting (a) MS Australia’s refusal to grant an extension for the loan repayment[5], (b) the “very low level of sales out of Hong Kong” and (c) the apparent ability of the Sydney Office to take over the operations of the HK Office, it was resolved to close down the operations of the HK Office and move all commercial and financial functions of the PPL group to the Sydney Office (the “June 2020 resolution”).

(xix) Samuel withdrew his 1^st petition in August 2020 but issued a fresh statutory demand to PPL and, on 14 September 2020, issued a 2^nd winding up petition.

(xx) PPL was wound up on 20 January 2021.

(xxi) The Sydney Office continues to market PURE under the name Global Nature in Hong Kong and elsewhere.

11.The Petitioners allege that the Respondents began conducting PPL’s affairs in an unfairly prejudicial manner from about mid-2019, with the intention of enabling themselves to take over the Mine and its related business to the exclusion of the Petitioners.

12.The evidence filed by the parties comprise Louie’s affirmation dated 9 July 2024 (“Louie 1^st”) filed by the Respondents in support of the Summons, Danny’s sixth affirmation dated 21 October 2024 (“Danny 6^th”) filed by the Petitioners in opposition and Louie’s 2^nd affirmation dated 21 January 2025 (“Louie 2^nd”) filed in reply.

13.The Petitioners’ case of unfair prejudice is based on 2 matters. They are considered below under the headings (1) and (2) together with the Respondents’ submissions as to why the Petition should be struck out.

(1) The Assignment

14.The first head of complaint arises out of the acquisition by MS Australia of the Vendor’s interests under the Vendor Loan and the SSD by the Assignment of 19 December 2019 and the subsequent deployment of the security interest so acquired to further the Respondents’ objective of taking over the Mine and its related business to the exclusion of the Petitioners.

15.Mr Eugene Kwan, counsel for the Petitioners, contends that the execution of the Assignment placed Louie in a position of conflict: by virtue of Lily’s ownership and control of MS Australia, Louie had an interest in enforcing the security and taking possession of or selling the Mine while PPL had an interest in maintaining the possession of the Mine and ensuring that the security over the Mine would not be enforced.

16.Louie deliberately concealed his conflict from the Petitioners and in 7 board meetings subsequent to the date of the Assignment, he declared that he had no material personal interest, direct or indirect which he was required to disclose. Danny only obtained a copy of the Assignment after a board meeting held on 18 May 2020.

17.It is further alleged that in furtherance of the Respondents’ scheme to take over the Mine to the exclusion of the Petitioners, Lily later procured MS Australia to threaten to enforce the security over the Mine to pressure the Petitioners to agree to a share issue and when that failed, used that as a reason for closing down the HK operations.

18.The Respondents’ submissions in outline are that: (a) there can be no unfair prejudice without financial loss; (b) Samuel’s statutory demand rather than commercial pressure from MS Australia caused the share issue; (c) in any event, it is not a breach of duty; (d) buyout relief is not available because the PPL shares would definitely have been worthless; and (e) the Petitioners’ complaints concern breaches of duty which relate to misconduct and the proper forum should be claims by PPL brought by its liquidators.

(a) Whether financial loss is a necessary ingredient to found unfair prejudice

19.Mr Kevin Lau, counsel for the Respondents, submits that the Assignment was a commercial necessity. For the purposes of the present application, the Respondents are not disputing conflict of interest. The Respondents contend that whatever happened could not have been prejudicial to the Petitioners because if the Respondents had not taken any action, the Vendor would have exercised its security rights to take over the Mine which would have been fatal to the PPL group’s continued operations.

20.In mid-December 2019, PPL’s financial situation was bad. As a group, it was simply unable to raise the funds to repay. The Respondents’ stance is that (a) all available draft financial statements (“FS”) for both the Hong Kong and Australian subsidiaries were in the red; (b) from inception, PPL has relied on debt financing[6]; (c) PPL was unable to make repayment of short-term loans that had fallen due; and (d) after December 2018, PPL was unable to raise any equity capital despite further fundraising attempts. Australian investors were reluctant to lend to a Hong Kong based company structure.

21.PPL’s management account shows that its assets are all loans due from its subsidiaries. If they do not repay, PPL has no cash on hand.

22.The Respondents rely on Re a company (No 001761 of 1986) [1987 ] BCLC 141 where the respondent (shareholder and director) paid off the company’s bank loan and took an assignment of the bank security over the company’s assets without informing the board or other shareholders. Harman J struck out the unfair prejudice petition, inter alia, on the basis that there could be no prejudice. He took the view that the respondent’s actions had deprived the company of nothing.

23.Rock Nominees Ltd v RCO (Holdings) plc (in liq) [2004] 1 BCLC 439 was cited in further support of the Respondents’ stance that a conflict of interest is not a breach of fiduciary duty and, in any event, not “prejudice” where no harm is suffered by the company. That case concerned the sale of the operating subsidiary by the respondent directors to a company of which they were also directors. The English Court of Appeal upheld the dismissal of the petition and overturned the finding of breach of fiduciary duty as no harm was in fact done and no damage or prejudice caused[7] because the sale price was not at undervalue.

24.In short, the Respondents consider that “prejudice” in financial terms is an indispensable ingredient for any conflict of interest claim. As the Assignment was made on a dollar for dollar basis, on the authority cited, there was no breach of fiduciary duty.

25.Mr Eugene Kwan, counsel for the Petitioners, disagrees. He submits that the court takes a very wide view on prejudice which need not be predicated upon financial loss. The Petitioners can make out a sufficient case on prejudice relying just on the initial acquisition of the security by MS Australia, citing the following passage from Hollington on Shareholders’ Rights (10^th Edn) at 268:

“In Re Elgindata (No.I) [1991] B.C.L.C. 959, Warner J held that the misapplication of the company's assets for the benefit of the directors and their associates was inherently unfairly prejudicial to the minority shareholders, despite the fact that there was no serious diminution in the value of their shares. Justifiable loss of confidence in the probity of the company's management is prejudice in itself. See Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), where it was held that a breach of fiduciary duty by the directors, such as not to place themselves in a position of conflict of personal interest and duty, or a biased investigation, could amount to unfair prejudice because it was "corrosive of good administration and trust between shareholders and directors": at [339], [493], [606], [620].

26.In that case the matters about which the petitioners complained concerned breaches of fiduciary duty by the 1^st respondent (JS), a shareholder and director, in relation to corporate opportunities to invest in companies called “W” and “E”, such that he remained as a director in a position of conflict of interest and duty. JS deliberately gave a misleading impression of what the true state of affairs was[8]. JS contended that even if he had acted in breach of fiduciary duty, as those breaches caused no loss to the company, that misconduct was not prejudicial.

27.Fancourt J held (at §§339 and 493) as follows:

“339. The breaches of duty as regards [W] and [E] by their very nature caused all the shareholders prejudice, in that JS was wrongly putting himself in a position where his duty to the shareholders of the Company conflicted with his own interests and then preferring his own interests. That kind of conflict is corrosive of good administration and trust between shareholders and directors. Further, the prejudice was by its nature unfair. The members did not know of JS’s personal interest: they were unaware of the undisclosed conflict that the CEO of the Company continued to have. They were deprived of the right to give or refuse consent to JS taking the opportunity for his personal benefit.

...

493. In my judgment, the misleading and inadequate terms in which the shareholders were informed of the findings of the Company was prejudicial to all the shareholders, as being contrary to the good administration of the Company and the interests of the shareholders ... in having matters of complaint about a director of the Company fairly and fully investigated and reported on. There can be no doubt in the circumstances that the prejudice was unfair prejudice. It was unfair because neither the board nor the shareholders had the benefit of that to which they were entitled, namely a fair and full investigation into JS's conduct as regards [W] and [E]. As a result, the shareholders did not have the opportunity to consider, on a properly informed basis, whether to hold JS to account for the consequences of his breaches of duty.”

28.There are thus similarities between Louie’s conduct in the present case in executing the Assignment without informing the Petitioners and without deliberation and concealing it for a period of 5 months and JS’s predicament in Edwardian.

29.Mr Lau disagrees with Mr Kwan’s reading of the extracts from Edwardian and submits that despite the observations about being “corrosive of good administration”, the judge’s main point was money (i.e. financial loss)[9] in that without financial loss, the conduct may not be unfair or prejudicial. The secondary point was concealment of the wrongdoing for 17 years and, in that regard, suggested that nothing of the sort arises on the facts of the present case.

30.Pausing there, in so far as the suggestion is that there was no concealment in the present case, it is not borne out by the facts. Danny was only given a copy of the Assignment after his request for the same at the board meeting held on 18 May 2020, 5 months after the event. Louie made no declaration of interest at any of the several board meetings held between the date of the Assignment and the date Danny was provided with a copy.

31.Further, it is difficult to believe that the fact that the notice of default issued by McMahon Clarke Lawyers to Louie (demanding repayment to the Vendor of (in round terms) A$ 4.3 million) and the Assignment both happen to be dated and executed on 19 December 2019[10] is nothing more than sheer happenstance. The agreement for the Assignment is highly likely to have been reached before that date as the Assignment (which exceeds 80 pages) had to be prepared. All this was deliberately concealed from the Petitioners.

32.What was done was without board deliberation, thus depriving the Petitioners of the opportunity of considering alternatives to resolve the matter such as approaching other lenders to obtain a loan on the strength of a 2^nd charge over the Mine as clearly there was still substantial residual value which could have been leveraged upon to secure alternative financing.

33.Another possibility would be to raise funds from the shareholders directly. Although attempts to raise funds in May/early June 2020 were unsuccessful, by then the Petitioners had discovered the Assignment. As a result of the Respondents’ conduct, Danny lost confidence and trust in the probity of decisions made and actions taken in the management of PPL and, in part, accounted for his reluctance to inject further funds to support the continuing operation of PPL.

34.Mr Kwan submits that on the pleaded facts, it is clearly open for a judge to find that had the Assignment not occurred and had the deliberate concealment of Danny’s conflict not occurred, there could have been other ways of resolving the issue of repayment of the Vendor Loan. The Respondents’ submission that the Assignment was the only way to save the Mine cannot be correct.

35.Turning to the proper reading of the various extracts from Edwardian on which the Petitioners and the Respondents rely, I agree with the Petitioners that the judge’s finding of prejudice is based on the very nature of the conduct involved rather than being predicated upon financial loss.

36.The statement (at §340) that

“if it is clearly established that no financial loss was suffered by a company as a result of a breach of duty, there may be no unfair prejudice capable of being identified by a shareholder in a section 994[11] petition”

is taken from David Richards J’s judgment in Re Coroin (No 2) [2012] EWHC 2343 at §631 where the judge considered Rock Nominees as an illustration of the principle stated. Nevertheless, in so holding, David Richards J made it clear (at §630) that:

“prejudice need not be financial in character. A disregard of the rights of a member as such, without financial consequences, may amount to prejudice falling within the section.”

37.In Re a Company on which the Respondents rely, is factually very different because in that case the director never sought to use the threat of enforcement of the security as leverage to influence the affairs of the company.

38.What the cases show is that whether or not there has been unfair prejudice is highly fact sensitive. I do not accept the proposition that there can be no unfair prejudice or conflict of interest without financial loss. It is not a valid basis for striking out the Petition. In my view, financial loss is not necessarily an indispensable ingredient in founding unfair prejudice.

(b) The reason for capital raising

39.In so far as the Petitioners allege that MS Australia used the security over the Mine to leverage commercial pressure on the Petitioners to agree to a share issue, the Respondents contend that it is not supported by the documents and, in any event, it is not a breach of duty.

40.The Respondents contend that the re-capitalisation plan came about as a result of Samuel’s statutory demand served on PPL on 30 March 2020 seeking repayment of his loan (in round terms) of approximately A$ 370,000.

41.The chronology leading up to the re-capitalisation plan is as follows:

(i) Following receipt of the statutory demand, a board meeting was held on 7 April 2022 where it was agreed that Danny should take the lead in seeking to agree a compromise with Samuel involving staged repayments.

(ii) Board minutes of 23 April 2020 noted that (a) PPL’s debt position was made up of, inter alia, unsecured lenders then overdue of A$ 3.2[12] million and A$ 4.2 million for refinancing the Vendor Loan; (b) John Merity (JM)[13] a financial adviser advised that PPL urgently needed new equity so as to meet current debt obligations and to provide working capital; (c) Danny raised the need to convince shareholders to further support the recapitalisation plan; and (d) JM was directed to prepare draft shareholder documentation without the board setting the amount of capital to be raised.

(iii) Board minutes of 18 May 2020 show that by that date the draft capital raising documentation had been circulated to the directors who, by a majority (with Danny voting against), inter alia, resolved to proceed with the recapitalisation plan, setting the size of the capital raising at $750,000 (with the entitlement offer set at $500,000 and the loan offer at $250,000), and that PPL proceeds to put the recapitalisation plan to shareholders.

(iv) At the meeting on 18 May 2020, Danny requested a copy of the Assignment and upon conducting a company search of MS Australia after receiving the Assignment, Danny discovered that its sole director, sole shareholder and company secretary was Lily.

(v) The draft capital raising documentation sent to the shareholders of PPL on 19 May 2020 includes a consent letter[14] that gives prominence to the statutory demand. The deadline was 22 May 2020.

42.As noted in §10 (xvii) above, the Petitioners did not give their consent when the deadline expired on 22 May 2020. Meanwhile, on the previous day, 21 May 2020, Samuel filed his 1^st winding up petition.

43.While Samuel’s statutory demand necessarily featured in the board minutes, the amount due to him is dwarfed by the A$ 4.2 million due in refinancing the Vendor Loan, the latter constituting a significant portion of PPL’s overall indebtedness.

44.Also, the Respondents did not mention the fact that the final date for repayment under the Assignment was 23 March 2020 which actually predated Samuel’s statutory demand by a week. That only came to light in Andrew’s email which was attached to Louie’s email to Danny of 29 May 2020.

45.At §10 (xviii) above, I touched upon the urgent board meeting[15] (initially convened for 1 June 2020) eventually held on 4 June 2020. Its urgency was apparently brought about by MS Australia’s refusal to grant further extensions for repayment as advised in Andrew’s email of 28 May 2020 (attached to Louie’s email of 29 May 2020) seeking to convene an urgent board meeting.

46.Andrew’s email merits further consideration. In pertinent part, it read:

“You have informed us that the proposed capital raising to be undertaken by your parent company [PPL] will not proceed. It is not clear to us how the Borrower will be able to meet its obligations under the [Assignment]. Under these circumstances, we will not grant further extensions to the date for repayment of the Outstanding Debt.

…

the Outstanding Debt … now stands at[approximately A$4.5 million] in principal and accrued but unpaid interest …

Regards

Andrew Lim Tran

Director”

47.Andrew’s email is problematic for the following reasons:

(i) Although Andrew held himself out to be a director of MS Australia that is at odds with a company search carried out on 15 October 2020 which shows Lily to be the sole director. No explanation has been given for that state of affairs.

(ii) In the earlier part of his email[16] Andrew refers to the Assignment to MS Australia taking place on 6 January 2020. It is unclear how it is to be reconciled with exhibit LKLD 88[17].

(iii) It also refers to ‘multiple’ extensions given on 6 January 2020[18], 7 February 2020 and 9 March 2020 when the final date for repayment was extended to 23 March 2020. However, there is no evidence as to what occurred when repayment was not made on the due date and whether MS Australia and Global Nature (Aus) reached any arrangement during the hiatus between 23 March 2020 and the date of Andrew’s email.

48.The Respondents submit that the entire fundraising exercise was first brought up to deal with Samuel (whose statutory demand was served on 30 March 2020[19]) and when that failed, there was the prospect of PPL being wound up causing concern about MS Australia’s security rights.

49.On the facts set out in §§39-47 above, I do not consider the statement that Samuel was the reason for capital raising is accurate or to be taken at face value. It overlooks the fact that the final repayment date to MS Australia (to whom A$ 4.2 million[20] was said to be owing) was 23 March 2020[21].

50.As the amount of capital raising was a mere A$ 750,000 when the amount owing to MS Australia and Samuel was over 6 times that amount, it is not understood how the capital raising exercise could have achieved the objectives referred to in the board minutes of 23 April 2020[22].

51.In any event, the cause of the share issue exercise is of little consequence. The gravamen of the Petitioners’ complaint is set out in §54 below.

(2) Whether leveraging commercial pressure for a share issue is a breach of duty

52.The Respondents submit that there is no relevant breach of duty by Louie even assuming (for present purposes) that Lily is behind MS Australia.

53.Lily was perfectly entitled to leverage commercial pressure for a share issue, citing Re Cardiff City Football Club (Holdings) Limited [2022] EWHC 2023. In that case T a majority shareholder and major creditor of the company used his position to put pressure on the board to accede to his demands and it was held (at §86) that he was entitled, as shareholder and creditor, to seek to exercise such commercial pressure as was at his disposal in his own interests and was under no equitable or legal constraints in such exercise.

54.But the Petitioners’ allegation is not directed at MS Australia for enforcing the security against PPL as a creditor. Rather, the complaint is that Louie, as a director of PPL, was in breach of fiduciary duties by facilitating Lily to use the threat of enforcement of the security to influence the affairs of PPL. Unlike T in Cardiff who was only a shareholder and a creditor who owed no duties to PPL, Louis was constrained by his directors’ duties. The complaints are directed at Louie’s reaction to the threat of enforcement and how he breached the constraints and duties imposed on him by law.

55.The Respondents submit that if a particular exercise of a power is challenged, the court needs to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not: see per Lord Wilberforce in Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 835. Even if the fundraising exercise was driven by MS Australia’s pressure (which would have been an improper purpose), it was a dual purpose situation, there being the legitimate or proper purpose to raise funds for PPL to meet its immediately due debts: see Cardiff City at §§118 and 127.

56.In my view, Cardiff City is distinguishable on the facts. In that case, there was a director who was untainted by the improper purpose. In the present case, the majority who supported the June 2020 resolution are the Respondents themselves. Moreover, as earlier noted, the capital raising was but a fraction of the amount required simply to settle overdue debts, leaving nothing for working capital which was one of the purposes for recapitalisation.

57.Mr Lau emphasises that where a conflict of interest arises, unfair prejudice is not an ipso facto conclusion. Whether or not there is unfair prejudice would entirely depend on the facts of the particular case, citing Rock Nominees and Edwardian as examples.

58.But for a strike out, unless the Respondents can demonstrate that the claim is obviously unsustainable and bound to fail, it is not a ground for striking out the Petitioners’ unfair prejudice allegations. That threshold has not been met. For present purposes, whether the Petitioners will succeed at the end of the day is irrelevant.

(2) The Refusals to Supply

59.The Petitioners’ complaint is that the Sydney Office, inexplicably, twice discontinued its supply of PURE to the HK Office. The 1^st Refusal commenced sometime in July 2019 and lasted until February 2020. The 2^nd Refusal commenced sometime in May 2020 followed shortly thereafter by the resolution to close down the HK Office on 4 June 2020 (collectively, “the 1^st and 2^nd Refusals”).

60.Sometime in July 2019, approximately 6-7 months after the HK Office began marketing PURE in Hong Kong, the Sydney Office stopped its supply to the HK Office.

61.The Respondents submit that the 1^st Refusal is amply justified by commercial reasons:

(i) the HK Office was loss-making: for the financial year ending 30 June 2019 the draft audited accounts of GN Marketing show a loss of $1.3 million;

(ii) their records were hopeless making it commercially unviable to maintain operations such an entity;

(iii) in July 2019, the HK Office was not in need of further PURE: of the 6000 bottles that had been shipped, by late August 2019, it still had a stock of at least 1460 bottles; and

(iv) the HK Office had failed to pay intra-invoices.

62.The Respondents cited Holman v Adams Securities Limited [2010] EWHC 2421 (at §41) for the proposition that in order to establish unfair prejudice, the petitioner has to show that the decision of the directors was taken mala fides (that is in breach of their fiduciary duties).

63.In Holman the respondents only sought to strike out allegations concerning the board’s decision to put the company into run-off and liquidate assets where possible. The only evidence the petitioner could give of mala fides was what the petitioner described as the inexplicable decision to go into run-off which he maintained was a decision no reasonable person could have reached and therefore mala fides is to be inferred.

64.The judge rejected the submission because the respondents offered an explanation for the decision by giving reasons how it was a commercial decision taken by the board. Although the petitioner disputed that explanation, the court considered that there could be a “credible basis for the board’s strategy” and it could not be said that no reasonable person could ever have reached a similar decision directors. On that basis the judge opined that had those allegations been “freestanding[23]”, he would have no hesitation in striking them out: see Holman at §§44, 46 and 47.

65.The Respondents submit that the Refusals to Supply allegations are “freestanding”, such that the Court should apply the Holman principle and strike out those allegations.

66.Mr Kwan does not agree with the approach stated in Holman. Instead, he cites Cyberworks Audio Video Technology Ltd (In Compulsory Liquidation) v Mei Ah (HK) Co Ltd [2020] HKCFI 398 at §§69-70 which sets out a two-stage test:

“The HLC Environmental case at §§91-92 also reminds that the duty imposed on directors to act bona fide in the interests of the company is a subjective one. The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the best interests of the company. Still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether a director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. But, where it is clear that the act or omission under challenge resulted in substantial detriment to the company (or, where relevant, to its creditors), the director will have a more difficult task in persuading the court that he honestly believed it to be in the company’s (or creditors’) interests.”

67.The pleadings show that at the time of the 1^st and 2^nd Refusals many distributorships and supply agreements had been lined up and signed. The Petitioners have also particularised various marketing and expansion opportunities in Macau and the Greater Bay Area, online sales plans with multiple sales platforms and marketing development work in various Asian Pacific regions. They were not taken up at the time as a result of the 1^st and/or the 2^nd Refusals because the Petitioners could not be sure that they would have the stock to fulfil any orders made under the framework agreements. It is the Petitioners’ pleaded case that the acts complained of have caused substantial detriment to PPL.

68.The Petitioners highlight the fact that the reasons the Respondents now rely on did not feature in any of the contemporary documents and some of them were also not pleaded in the points of defence.

69.As regards the allegation in §61 (iii) above, the only contemporary documents are the emails exchanged between Lily and Danny on the subject of “Delivery of PURE to the HK office - URGENT” on 22, 26, 27 and 30 August 2019. They show that the Sydney Office initially refused to accede to the HK Office’s request made at the end of July 2019 for replenishment of stock because of a dispute over non-settlement of intra-Group transactions.

70.Then, on 26 August 2019, Lily advanced a different reason, namely, that the Sydney Office’s numerous requests for the sale status report had not been complied with. Later the same day, Danny replied (attaching a copy of “GN Marketing’s Stock Movement from 1 July 2018 to 26 August 2019” (the “Stock Movement statement”)), reminding Lily that she (amongst other personnel in the Sydney Office) could get into the books of GN Marketing HK to see the stock level and sales on a daily basis. Danny’s explanation elicited Lily’s acknowledgement of “Noted with thanks”.

71.This shows that at the time of the relevant events, the Respondents never took issue with the Petitioners’ record-keeping. Had there been deficiencies, one would have expected requests for clarifications but there were none.

72.Lily’s email of 30 August 2019 then changed to another topic by asking for sales forecast for the next 3 months and intimated that until the stock in hand of 1400+ bottles had been sold, she would not be replenishing supplies, notwithstanding Danny’s explanation given in note 3 of the Stock Movement statement.

73.As to the reasons now advanced (see §61 above), (ii) and (iii) are not pleaded. More to the point, they also do not appear to be supported by contemporaneous documents. Further, the reason given in §61 (i) is far from convincing when the Australian subsidiaries themselves were also loss-making for FY 2019[24].

74.As regards the 2^nd Refusal, the Respondents highlight the fact that there was no challenge to the validity of the June 2020 resolution[25] to close down the HK Office which justified the 2^nd Refusal.

75.The Petitioners submit that the June 2020 resolution was the culmination of a series of unfairly prejudicial conduct on the part of the Respondents aimed at taking over the Mine and its related business to the exclusion of the Petitioners. It is concerned with the conduct of the affairs of the company generally, whether there are breaches of common understanding between the shareholders as to how the company is run and whether the breaches are prejudicial. The pleaded case is that the 2020 resolution forms part of the scheme of the unfairly prejudicial conduct perpetrated by the Respondents. Thus the resolution itself cannot be a reason for the discontinuance of the supply of PURE.

76.The June 2020 resolution is noteworthy because it testifies to the potential and viability of the HK business as otherwise the HK operations would have been shut down and discontinued altogether. What it proposed is the transfer of the operations from Hong Kong to Sydney and the justification for the transfer was the low sales out of the HK Office.

77.The Petitioners submit that the low sales were caused by the Respondents’ conduct in unilaterally terminating supply between July 2019 and February 2020 (i.e. the 1^st Refusal period) and then from 11 May 2020 until the closure of the HK Office. Effectively, it meant that the HK Office was in operation for no more than 10 months in total before it was shut down.

78.The 1^st and 2^nd Refusals affected the HK Office’s ability to take up framework agreements and distributorships that had been in place, caused it to advise its Macau distributor to suspend expansion plans in Macau and the Greater Bay Area, suspend online sales plans with established retail outlets, forego sales opportunities offered by an existing customer with numerous clinics in Hong Kong and to suspend marketing development work in countries in the Asia-Pacific area.

79.The Petitioners submit that on the facts as pleaded, it is open to a judge to find at trial that the Respondents terminated the supply of PURE to the HK Office knowing that it would not be in the best interests of PPL. I agree.

(4) Buyout relief

80.It is common ground that the proper test is that stated in Re Tobian Properties Ltd [2013] Bus LR 753 at §11. The question is not whether the PPL shares currently have any value but whether the shares would have had value but for the Respondents’ wrongful conduct. To strike out the buyout relief, the Respondents must demonstrate at this early stage and without discovery that the shares in PPL would definitely have been worthless even without the Respondents’ unfairly prejudicial conduct.

81.In the Business Plan, the Petitioners project a sales forecast of just under 30,000 bottles. Extrapolating from the 2019’s Sales Report, the Respondents calculate the average sale price to be around HK $100 per bottle and submit that even if fully successful it would yield no more than A$ 2.5 million when the losses are double that.

82.Danny’s evidence[26] is that by the time he left PPL or ceased to be involved in business, the selling price was HK $299 per bottle[27]. On that basis, there is a realistic prospect that (but for the 1^st and 2^nd Refusals), the Petitioners could have developed a profitable business. The Business Plan if successfully executed would have generated enough revenue to cover all the operating losses of the PPL group. The fact that the Australian subsidiaries to this day continue to market PURE in Hong Kong and abroad speaks to the commercial viability of the business in selling the product.

83.The value the PPL shares would have had but for what is said to be the Respondents’ unfairly prejudicial conduct cannot be determined in the abstract and is dependent on the evidence available at the trial including any expert valuation evidence.

84.In the circumstances, at this stage, I do not consider that there is a valid basis for concluding that the PPL shares are shown to be worthless.

(5) Misconduct and mismanagement

85.The Respondents submit that since the Petitioners’ complaints boil down to breaches of duty, they relate to misconduct and not mismanagement. The proper forum for relief should be claims by PPL (brought by its liquidators) and not an unfair prejudice petition. In other words, the principle of reflective loss applies and prevents a petitioner claiming loss in respect of which there is a cause of action available to the company.

86.In In re Plankton Limited, HCCW 291/2011 at §12[28], Harris J considered the established limitation on the extent to which a petitioner can rely on misconduct, as opposed to mismanagement, by officers of a company as constituting unfair prejudice in a petition issued under section 168A and concluded as follows:

“The following principles emerge from a consideration of the authorities:

(1) If the essence of the complaint being made is of director’s misconduct, rather than of director’s mismanagement, the proper vehicle for seeking and obtaining relief would usually be a derivative action, rather than a section 168A petition.

(2) The very same facts may provide the foundation for both a derivative action and a section 168A petition. Indeed, directors’ acts of misconduct may well provide the requisite evidence to establish a charge of unfairly prejudicial management.

(3) Therefore, in order to ascertain whether a complaint is one of misconduct or mismanagement, it is not enough simply to look at the acts complained. Instead, it is necessary to look at the nature of the complaint and the relief sought.”

87.The misconduct/mismanagement issue arose in Re Gen2 Partners Inc [2012] 4 HKLRD 511. In that case, the petitioner applied for leave to bring a derivative action on behalf of the company and presented an unfair prejudice petition in parallel based on substantially the same complaints. The bulk of the reliefs sought in the unfair prejudice petition are to be made in favour of the Company although it also included a buyout relief.

88.The Respondents submit that Barma J held that the inclusion of a prayer for a buy-out order in the petition of itself is not good enough to resist a strikeout, citing §76 of Gen 2 Partners.

89.The Petitioners’ approach is that §§76-77 need to be read together. They show that since the Court decided to grant leave for the petitioner to bring a derivative action, it held that the reliefs claimed in favour of the company in the unfair prejudice petition should be pursued in the derivative action. However, in respect of the buyout relief which is only available in an unfair prejudice petition, the Court granted leave for the petitioner to put forward an amended petition, limiting the allegations in the amended petition to those relied on in support of the buy-out relief.

90.In my view, the Petitioners’ reading of Gen2 Partners is correct. In that case, Barma J recognised that persistent misconduct and breach of duty on the part of management towards a company might properly be regarded as also amounting to mismanagement of the affairs of the company that would support a claim for relief such as a buyout order. The primary relief sought in the present case is for an order that the Respondents buyout the Petitioners’ shares in PPL as opposed to any redress in favour of PPL.

91.I do not consider that the present Petition should be struck out on the basis that it contravenes the reflective loss principle.

Conclusion

92.For the reasons set out above, I find that the grounds on which the Respondents rely for striking out the Petition have not been made out. Accordingly, the Summons is dismissed.

93.There is to be an order nisi of costs of the Summons, with certificate for counsel, in favour of the Petitioners such costs to be summarily assessed and payable forthwith.

94.Directions for such assessment will be given on the order being made absolute.

Mr. KWAN Eugene, instructed by Cedric & Co., for the 1^st to 4^th Petitioners

Mr. LAU Kevin, instructed by Stephenson Harwood, for the 1^st to 4^th Respondents

The 5^th Respondent, in person, absent