Re Ching Hing Construction Co. Ltd.
Read the full judgment text of HCCW 889/1999 on BabelCite. This High Court CFI judgment was delivered on 23 November 2001.
1. This is a petition for a buy-out order under section 168A of the Companies Ordinance, Cap.32 or alternatively for an order to wind up on the just and equitable ground. The Company concerned is Ching Hing Construction Company Limited ("the Company").
Cited by 1 case
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HCCW000889/1999 HCCW889/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP PROCEEDINGS NO.889 OF 1999 -------------------
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------------------- Coram : Deputy High Court Judge Poon in Court Dates of Hearing : 9 - 11, 14 - 18, 21 - 24 and 28 - 30 May 2001 Date of Judgment : 23 November 2001 ----------------------- J U D G M E N T ----------------------- 1.This is a petition for a buy-out order under section 168A of the Companies Ordinance, Cap.32 or alternatively for an order to wind up on the just and equitable ground. The Company concerned is Ching Hing Construction Company Limited ("the Company"). 2.This judgment is divided into the following sections :
SECTION A - THE COMPANY (1) A brief history 3.The Company was formed in 1954 by Mr Ip and Madam Wong. It was until the early 1980s one of the major contractors in Hong Kong, engaging in many private and government projects. Its construction business began to scale down after the death of Madam Wong on 2 May 1981 and of Mr Ip on 12 April 1983 and had by the late 1980s virtually stopped. Since then, the Company has been deriving its principal recurring income from leasing of properties. Its current property portfolio consists of 8 properties and 42 car park spaces with an estimated value of about $200 million. (2) The parties 4.Mr Ip and Madam Wong had two sons, Henry and Sammy and five daughters, Loretta, Roseanna, Maimie, Marion and Henrietta. 5.Henry married Madam Cecilia Chan Kit Lai ("Cecilia") in May 1959. They were divorced in March 1980. Henry died in August 1988. Henry and Cecilia had two sons, Arnold and Desmond and one daughter, Chyvette. This petition is presented by Cecilia and Arnold. Though named as the 9th respondent, Desmond now lives in England and dose not take part in these proceedings. Chyvette is not a party. 6.Sammy died in November 1997. His widow, Mrs Regina Ip Lau Suk Yee ("Regina") is joined as the 3rd respondent solely in her capacity as the administratrix of Sammy's estate so that it will be bound any judgment the court may make in these proceedings. The petitioners do not allege any wrongdoings or seek any relief against her personally. Regina's position is that she will abide by such orders as the court may make but will support a winding up order as a preferred form of relief should the court finds the allegations against the other respondents proven in order to facilitate the distribution of the Company's assets, thereby assisting the discharge of her duties as the administratrix of Sammy's estate. 7.Loretta, Roseanna, Maimie, Marion and Henrietta are the 4th, 8th, 5th, 6th and 7th respondents respectively. Henrietta is well known in the community. Once a legislative councillor from 1982 to 1991, she now holds various positions in different charitable organizations. She is a paediatrician by profession. But she gave up her lucrative practice in 1995 and has since been working full time for the Company as an executive director. 8.Marion, Roseanna and Henrietta are further joined as the 1st respondent in their capacity as the executrices of Mr Ip's estate. Roseanna in her capacity as the administratrix of the estate of Mr Ip Man Kwong, a nephew of Mr Ip, is joined as the 2nd respondent. 9.The 10th respondent is the Company, which is a necessary party to these proceedings. Its position is neutral. It will abide by any orders that the court may make. However, it has reserved its position on the question of costs and would like to be heard in that regard in due course. 10.As will be seen below, the protagonists to these proceedings are on the one hand Cecilia and Arnold and on the other, the five sisters of the Ip family, in particular, Henrietta. In the rest of this judgment, as and when necessary, I will refer to Loretta, Roseanna, Maimie, Marion and Henrietta collectively as "the five sisters". And unless otherwise stated, the term "the respondents" shall mean the five sisters. (3) Distribution of shares 11.The Company is a family company. Since the 1950s, shares had been allotted to the children and grandchildren of Mr Ip and Madam Wong. Initially, the Company had a nominal capital of $5 million divided into 500 $10,000 shares. The share capital was increased gradually over the years until it reached $10 million. It was divided into 1,000 $10,000 shares, out of which a total of 770 had been allotted among the family members as detailed below. The figures in bracket represent the percentage of the issued capital held by the members. 12.The petitioners hold 110 shares jointly (14.3%). These shares were originally held in the joint name of Henry and Cecilia but were transferred to them on 8 March 1984. On 10 March 1984, Arnold transferred the 11 shares (1.43%) held in his name to Henry. Henry subsequently on 8 March 1987 transferred the shares back to Arnold, who has since been holding them. After the transfer, Henry ceased to be a shareholder. The estates of Mr Ip, Sammy and Mr Ip Man Kwong hold 148 shares (19.2%), 77 shares (10%) and 1 share (0.13%) respectively. The five sisters hold 2 shares (0.26%) jointly. These shares were devolved on them upon Madam Wong's death. Each of them holds a further 82 shares (10.65%) in their own name, 39 of which were also devolved on them individually upon Madam Wong's death. Desmond holds the remaining 11 shares (1.43%). (4) Directorship 13.All directors came from the Ip family. As founders, Mr Ip and Madam Wong were the only two permanent directors until their deaths. The other directors were elected at the Company's general meetings. 14.Henry and Sammy first became a director on 21 June 1959 and 5 June 1967 respectively. Both of them resigned on 21 June 1981. Since then Henry had never been elected again. Sammy was, however, re-elected at an extraordinary meeting on 27 October 1984 ("the 1984 extraordinary general meeting"). Eventually, he resigned again on 11 August 1990 and never returned to the board. 15.Both Loretta and Maimie were first elected to the board on 27 April 1983 and remained there until the 1999 annual general meeting held on 20 November 1999 when they did not offer themselves for re-election. Roseanna was first elected on 23 May 1981 and had become one of the executive directors since April 1982. At the 1999 annual general meeting, she was elected as a non-executive director and has since remained so. Marion was first elected on 27 July 1981. She had been an executive director since 1982 until 1 September 1990. She had since remained on the board as a non-executive director until the 2000 annual general meeting. Henrietta was first elected on 23 May 1981. She has been an executive director since 1982. She is now the only executive director. 16.Arnold was first elected together with Sammy at the 1984 extraordinary general meeting. He remained on the board until the 1996 annual general meeting held on 29 July 1996 ("the 1996 annual general meeting") when he failed to be re-elected. Desmond was a director between 4 May 1989 and 29 December 1998 when he resigned. Cecilia is never a director. It is the petitioners' case that her interest was represented by either Henry or Arnold sitting on the board. 17.Mr David Kwan, the ex-husband of Roseanna, sat on the board from 1 August 1974 to 16 February 1978. These proceedings do not concern him. 18.Thus, as at present, only Roseanna and Henrietta remain on the board and Henrietta is the only executive director. (5) Distribution of dividends 19.Before Madam Wong passed away in May 1981, the Company had never declared any dividends. After her death and up to 1991, dividends were declared and paid on 17 occasions. In particular, in the years of 1987, 1988 and 1991, three properties were sold for $10.55 million, $81 million and $4 million respectively. The sale proceeds or substantial part thereof were distributed to members as dividends. In 1994, another property, namely, Office B, 3/F, Duke Wellington House, 12-24 Wellington Street, Central, Hong Kong was sold at $14,828,000. But no dividend was declared to distribute the sale proceeds. (6) Property portfolio 20.The eight properties held by the Company and in the name of its subsidiary, Lederle Limited ("Lederle"), can be conveniently grouped as follows :
21.The property portfolio is managed by the board of directors. In recent years, the responsibility mainly rests with Henrietta. The Company has three part-time employees. They were originally Mr Ip's nurse, chauffeur and clerk. They have been working for the Company over 20 years. According to Henrietta, they are loyal and familiar with the affairs of the Company. The Company continues to employ them as part-time staff after their retirement. The directors of the Company also take care of the management of Lederle. (The Company is its corporate director.) The only employee Lederle has is a junior secretary who was recruited less than two years ago. 22.With these background facts, I now turn to the petitioners' complaints. SECTION B - THE PETITIONERS' COMPLAINTS AND AGREED ISSUES 23.The petitioners' central complaints as set out in their re-amended petition can be summarised as follows. 24.There was a common understanding and/or implied agreement amongst all shareholders or alternatively a legitimate expectation that each of the shareholders, if they so desire, would be : (1) appointed and be allowed to remain as a director so as to take part in the management of the Company's affairs including the ways in which the Company's assets are invested or handled and the manner in which its profits are distributed; and (2) entitled to share the profits of the Company in proportion to their respective shareholding in the Company ("the Common Understanding"). Profits in this context include the Company's underlying assets and recurring rental income. In short, the first limb of the Common Understanding concerns the right to participate in management; the second limb, the right to share profits. 25.In breach of the Common Understanding, the respondents had wrongfully expelled Arnold from the board in the 1996 annual general meeting, thereby depriving the petitioners' right to manage the Company's affairs and to share its profits. It is the petitioners' case that Arnold was not re-elected because the 4th to 8th respondents, the controlling majority, agitated by his commencing the 1995 action, joined force and acted in concert to expel him from the board as revenge. Concerning the deprivation of the petitioners' entitlement to share profits, the petition went on to allege the following. The Company has not declared any dividends since 1992. Distribution of profits has since then taken the form of directors' emoluments which were roughly in proportion to the members' respective shareholding in the Company. The situation was acceptable to the petitioners while Arnold remained as a director. However, ever since Arnold's exclusion from the board, neither of the petitioners have received any share of the profits from the Company in the form of dividends, directors' emoluments or otherwise while the other directors continue to enjoy wholly excessive emoluments. As will be seen later, it is Arnold's evidence that it was in fact part and parcel of the Common Understanding that the Company's profits and assets were to be distributed by way of directors' emoluments in proportion to shareholding. The petitioners are not particularly complained about the dollars and cents of payments to directors. It is the way, the set-up or structure under which these payments have been made and distributed such that the petitioners have been wrongly excluded. 26.The petition also alleged that the respondents had caused wholly excessive emoluments to be paid to the directors even though the Company was in substance trading at a loss since 1991, thereby depleting the Company's reserves and the shareholders' funds or equity to the prejudice of the petitioners. In this context, the petitioners allege that the emoluments paid to directors are highly disproportionate to the work done by them, which is in essence to manage the Company's property portfolio. 27.There are other complaints about the other shareholders' intention to sell the Company's assets so as to enable it to continue to pay directors substantial emoluments; the board's failure to address the petitioners' concerns in respect of the matters complained of; and lack of probity in conducting the Company's affairs. 28.At the end of the hearing, the petitioners applied to further amend the re-amended petition by adding an alternative ground (paragraph 39A), which in substance amounts to this. Irrespective of the Common Understanding, the petitioners are unfairly prejudiced because the wrongful expulsion of Arnold from the board had deprived the petitioners of their right to participate in the Company's distribution of profits and assets, which had since around 1986 taken the form of director's emoluments and allowances. The proposed amendment is interwoven with some of the central issues that I need to determine. I therefore reserved my ruling at the hearing. I will come back to deal with this application later in Section G. 29.Although the petitioners do ask for a buy out order, the parties agree that I need not at this stage hear evidence pertaining to valuation of the shares, on the footing that that would be necessary only if I did order a purchase. 30.Pursuant to the order of Le Pichon J (as she then was) dated 6 September 2000, the parties had agreed on nine issues to be determined by the court. They are :
SECTION C - THE LAW 31.Before setting out the evidence, I will first state the law in this jurisdiction. 32.The grounds for an order under section 168A are that "the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including the petitioner)". If these grounds are made out, the court has a discretion to make such order as it thinks fit for giving relief in respect of the matters complained of, including in particular an order that other members or the company itself buy the petitioner's shares : see subsection (2)(c). 33.Mr Kotewall, SC, who appeared for the petitioners had taken me through a chronological survey of the authorities ranging from Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042 to O'Neill v. Phillips [1999] 1 WLR 1092. Mr Bunting, SC, who appeared for the respondents also cited various cases including Re Guidezone Ltd [2000] 2 BCLC 321 and some Hong Kong authorities. I am indebted to counsel for their efforts. The research is thorough. And reading the authorities is most educational. However, for present purposes, I do not consider it necessary to deal with all the cases in depth. For as observed by Lord Hoffmann in O'Neill v. Phillips, at p.1099H, the way in which the equitable principles operate in this jurisdiction is "tolerably well settled". Hereinbelow I will endeavour to summarize the relevant propositions derived from the authorities. I will only go into greater detail of the cases only when it is necessary to do so. For clarity, I will set out the propositions under various headings. (1) Legislative intent 34.Section 168A closely followed section 459 of the English Companies Act 1985. In O'Neill v. Phillips, Lord Hoffmann said at p.1098D :
This is no doubt also the legislative intent behind the enactment of section 168A in Hong Kong. (2) Conduct must be both unfair and prejudicial 35.The conduct complained of must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest of the petitioner) and also unfairly so. Conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests : Re a Company, ex p Schwarcz [1989] BCLC 427, per Peter Gibson J at p.437, In re Saul D Harrison & Sons plc, per Neill LJ at p.31c. (3) Concept of unfairness to be applied judicially 36.The words "unfairly prejudicial" are general words and they should be applied flexibly to meet the circumstances of the particular case : In re Saul D Harrison & Sons plc, per Neill LJ at p.30f. However, the concept of "unfairness" for the purposes of section 168A is not to be judged by reference to subjective notions of fairness, but rather by testing whether, applying established equitable principles, the majority had acted, or was proposing to act, in a manner which equity would regard as contrary to good faith : per Lord Hoffmann in O'Neill v. Phillips, at pp.1098E and 1099H, Re Guidezone Ltd, per Jonathan Parker J at p.355i. (4) Proper approach 37.Lord Hoffmann expounded the proper approach to the concept of unfairness in the section 459 of the English Companies Act in O'Neill v. Phillips, at pp.1098G-1099B :
38.Lord Hoffmann went on to say that this approach to the concept of unfairness in section 459 runs parallel to that which the House of Lords in In re Westbourne Galleries Ltd [1973] AC 360 adopted in giving content to the concept of "just and equitable" as a ground for winding up. He had in mind this particular passage of Lord Wilberforce at p.379 :
The same reasoning is, according to Lord Hoffmann, applicable to the concept of unfairness in section 459. (5) Starting point of the enquiry : articles of association 39.Following the above approach, an enquiry in section 168A cases always starts with the articles of association. Lord Hoffmann explained in In re Saul D Harrison & Sons plc, at p.17i-18a thus :
40.Although one begins with the articles, a finding that conduct was not in accordance with the articles does not necessarily mean that it was unfair, still less that the court will exercise its discretion to grant relief. Trivial or technical infringements of the articles were not intended to give rise to petition under section 168A : see In re Saul D Harrison & Sons plc, per Lord Hoffmann at p.18g-i. (6) Enquiry beyond the articles of association 41.The proper approach to the concept of unfairness entails an enquiry beyond the scope of the articles. This normally arises when the letter of articles does not fully reflect the promises made or understandings reached by the parties at the time when the company was formed. Thus, the personally relationship between a shareholder and those who control the company may entitle him to say that it would be in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting : In re Saul D Harrison & Sons plc, per Lord Hoffmann at p.19f-g, see also Clemens v. Clemens Bros. [1976] 2 All ER 268, Re Astec (BSR) plc [1988] 2 BCLC 556. In the case of quasi-partnership company, exclusion of the minority from participation in the management of the company contrary to the agreement or understanding on the basis of which the company also provides a clear example of unfairly prejudicial conduct : see Re Guidezone Ltd, per Jonathan Parker J at pp.356i-357a. Similarly where there was an understanding between the shareholders when the company was formed that each of them who had ventured his capital would also participate in the management of the company and receive the return of his investment in the form of salary rather than dividend : see In re Saul D Harrison & Sons plc, per Lord Hoffmann at p.19g-h. 42.Unfairness may also arise from agreements or promises made or understandings reached during the life of the company which it would be unfair to allow the majority to ignore even if they were not enforceable at law : O'Neill v. Phillips, per Lord Hoffmann at p.1101G. Applying traditional equitable principles, equity will not as a general rule hold that the majority had acted contrary to good faith unless and until it had allowed the minority to act in reliance on such an agreement, promise or understanding : see Re Guidezone Ltd, per Jonathan Parker J at p.356c-d. 43.Exercising rights in breach of some agreement, promise or understanding is not the only form of conduct which will be regarded as unfair for the purposes of section 168A. There may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree : O'Neill v. Phillips, per Lord Hoffmann at pp.1101H-1102A. In Re Guidezone Ltd, per Jonathan Parker J pointed out at p.356e-f that applying traditional principles, the unfairness arises from the conduct of the majority in insisting upon the continuance of the association in the changed circumstances, not in the changed circumstances themselves. Were that not so, the notion of "no-fault divorce" would be recognised : see paragraph 48 below. (7) Directors' remuneration excessive 44.A shareholder who does not receive an income from the company except by way of dividend is not always entitled to complain whenever the company is controlled by persons who do derive an income from the company and when profits are not fully distributed by way of dividend. The court will view with great caution allegations of unfair prejudice on this ground : In re Sam Weller Ltd [1990] 1 Ch 683, per Peter Gibson J at p.693F. On the other hand, the payment of excessive remuneration to directors, to the detriment of those members who are not directors, is one of the recognised forms of unfairly prejudicial conduct : see for example, Re Jermyn Street Turkish Baths Ltd, per Buckley LJ at pp.1059D-1060C; Re Cumana Ltd [1986] BCLC 430, per Lawton LJ at p.435d-e. Thus, if the controlling directors pay themselves remuneration not by reference to a standard of proper reward for services rendered but as a means to distribute profits of the company, such conduct would be unfairly prejudicial to the interests of non-director members : Menier v. Hooper's Telegraph Works (1874) 9 Ch App 350, per James LJ at p.353 and per Mellish LJ at p.354; Millers (Invercargill) Ltd v. Maddams [1938] NZLR 490, per Myers CJ at 494-495; Sanford v Sanford Courier Services Pty Ltd (1986) 10 ACLR 549, per Waddell CJ at pp.555-560. 45.In Re Elgindata Ltd [1991] BCLC 959, the misapplication of the company's assets for the benefit of the directors and their associates was held to be inherently unfairly prejudicial to the minority, despite that fact that there was no serious diminution in the value of their shares : per Warner J at p.1004f-h. Payment of excessive directors' emoluments may amount to one form of misapplication of company's assets. 46.In considering the quantum of emoluments, the court applies an objective test : Re a Company, ex parte Burr [1992] BCLC 724, per Vinelott J at p.735f-g. "If the remuneration and dividend levels cannot be justified by objective commercial criteria it is easy to conclude the companies have been managed in a way unfairly prejudicial to the non-director shareholders" : Re a Company (No.00415 of 1996) [1997] 1 BCLC 479, per Sir Richard Scott VC at p.494b. (8) Paying directors remuneration even when the company making losses 47.If the directors of a company continue to trade when the company is making losses and when it should have been apparent that there was no real prospect that the company would return to profitability, the court may draw the inference that the directors' decision was improperly influenced by their desire to continue in office and in control of the company and to draw remuneration and other benefits for themselves and others connected with them. So also if the company is trading at a profit which yields a return which does not reflect the value of the assets employed and which would be available for distribution in a winding up, and if there is no real prospect that the profits will ever represent a reasonable return on the capital employed. If that inference is drawn, the court may conclude that the affairs of the company are being conducted in a way which is unfairly prejudicial to the members or to members other than the directors and those who obtain such benefit. But it is not sufficient simply to allege that a company is making a loss or insufficient profits and that there is no real prospect that it will make a profit or sufficient profit in the future. There must be some evidence which, if substantiated at the trial, could found the inference that the directors' decision to continue to trade was influenced by self-interest or at least that no reasonable board of directors mindful of their duty to the company and its members could have decided that it was in the interests of the company and its members that it should continue to trade : Re a Company, ex parte Burr, above, per Vinelott J at p.731d-h. (9) "No-fault divorce" not permissible 48.In the absence of unfair prejudice, a mere breakdown of trust and confidence between the parties is not sufficient. There is no support in the authorities for such a stark right of unilateral withdrawal. Section 168A simply does not provide a right to exit at will : O'Neill v. Phillips, per Lord Hoffmann at pp.1104C-1105BA. (10) Legitimate expectation 49.The phrase "legitimate expectation" was first borrowed by Lord Hoffmann from public law in In re Saul D Harrison & Sons plc, to describe the "correlative right" to which a relationship between members may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member. However, in O'Neill v. Phillips, at p.1102e-f, he warned :
(11) Relationship between section 168A and winding up on the just and equitable ground 50.The parallel drawn by Lord Hoffmann in jurisdiction O'Neill v. Phillips between the notion of "just and equitable" as explained by Lord Wilberforce in In re Westbourne Galleries Ltd and the notion of fairness in section 459 does not mean that conduct will not be unfair unless it would have justified an order to wind up the company : see pp.1099H-1100C. However, it does not mean that the "just and equitable" jurisdiction is wider than the jurisdiction in section 459. Jonathan Parker J explained in Re Guidezone Ltd at p.357f-i :
SECTION D - CHRONOLOGY OF THE MAIN EVENTS 51.With the above legal propositions in mind, I now turn to the evidence and consider if the petitioners' complaints are made out. On the petitioners' side, Arnold was the only witness. He had made a number of affirmations. For present purposes, only the 1st affirmation dated 8 October 1999 in support of the petition and the 8th affirmation dated 9 August 2000 in reply need to be considered in detail. Cecilia did not give any affidavit or oral evidence. She relied on her son's evidence. For the respondents, Henrietta was the principal witness. She had made one affidavit in opposition. Marion also gave affidavit and oral evidence on some factual disputes but her evidence was much shorter than Henrietta's. Both sides had adduced expert's evidence to deal with reasonableness or otherwise of the emoluments paid to directors for carrying out their duties, in particular, managing the Company's property portfolio. 52.I first examine the evidence relating to the Common Understanding, which forms the basis for most of the petitioners' complaints. (1) How and when the Common Understanding arose 53.In his 1st affirmation, Arnold referred to the fact that the Company has along been a family company; that Mr Ip, as well as Madam Wong according to his oral evidence, had made gifts to the family members out of their wealth over the years; and that members of the family were allotted shares in the Company as well as made directors at different stages. Arnold said their intention of allotting to members of the family was clear and perfectly understandable. Like many traditional Chinese, both of them wanted their children and grandchildren to be in a position to share the fruits of the Company which are part of the family fortune. Shares were allotted to them so as to ensure that they would enjoy whatever distribution of profits the Company would make. 54.Arnold then went on to describe how the Common Understanding arose in paragraph 14 of his 1st affirmation thus :
55.It is not clear from Arnold's affirmation evidence when precisely the Common Understanding arose. 56.In his oral evidence, Arnold repeatedly sought to put the Common Understanding in a wider context : the affairs of the Company must be conducted fairly and openly. Appointment of shareholders to the board of directors and distributions of the Company's profits by way of directors' emoluments and allowances were ways to implement this board understanding of fairness and openness. He further said that the Common Understanding arose after the death of his grandparents and around the time when he was appointed as a director in October 1984. And it came about in stages. Under cross-examination, he had this to say :
57.Arnold was referring to the discussions he alluded to in paragraph 13 of his 8th affirmation, which read :
While admitting that neither the petition nor his 1st affirmation referred to the above discussions, Arnold denied that paragraph 13 was a new allegation. "It is a new description of what happened which was not made in the [1st affirmation]", he said. Paragraph 13 was made in reply to paragraph 7.5 of Henrietta's affidavit. There, she said the Company did not declare any further dividend because it had to save money. Arnold denied the suggestion that paragraph 7.5 jotted his memory. He said the he had all along known about the discussions alluded to in paragraph 13. He just made it in reply to Henrietta's paragraph 7.5 probably because he thought it was relevant to present the whole picture. 58.Arnold readily accepted that the understanding that any shareholder could sit on the board as of right was not mentioned in paragraph 13 of his 8th affirmation. But he insisted that one of the results of those discussions was that he was appointed as a director. When further pressed, Arnold conceded that his appointment alone did not establish or imply that there was a common understanding that any shareholder had a right to be appointed to the board. However, he insisted that his appointment reflected that there was such an understanding. 59.Arnold was further cross-examined on paragraph 14 of his 1st affirmation as to the circumstances giving rise to the Common Understanding. The relevant part of his evidence read :
60.In the rest of this judgment, the term "Common Understanding" will include not only the definition in the petition as set out in paragraph 24 above but also the meaning and effect Arnold had given to it in the course of his oral testimony as summarised above. 61.On paragraph 13 of Arnold's 1st affirmation, Henrietta made a number of points. First, there was no discussion between the petitioners and the directors as alleged. All discussions were made at either general meetings or board meetings and were properly minuted. Secondly, although there were social occasions where she met Arnold, they were very rare in 1984. In any event, they did not have the discussions as alleged. Thirdly, there was no agreement that a significant portion of the Company's recurring rental income would be distributed to shareholders in the form of directors' emoluments. Lastly, she agreed that executive directors were entitled to slightly higher emoluments than non-executive directors. But that had been the practice before the deaths of Mr Ip and Madam Wong. The trend just continued thereafter. 62.Given Arnold's assertion that the Common Understanding came about in stages around the time when he was elected to the board at the 1984 extraordinary general meeting, I propose to set out chronologically the evidence on the main events leading up to his appointment and the parties' conduct thereafter. I will then consider the parties' submissions and examine the evidence closely to see if the petitioners' case on the Common Understanding is made out. (2) Before the 1984 EGM 63.Prior to the formation of the Common Understanding, shareholders did not have the right to sit on the board even if they so desired. This is clearly borne out by the minutes of the board meetings and annual general meetings held before the 1984 extraordinary general meeting. 64.At the annual general meetings for 1979 and 1980, both Henry and Sammy were re-elected. As noted, Madam Wong died on 2 May 1981. A board meeting was held on 23 May 1981 to discuss, among other things, the proposed resolutions to appoint Roseanna as a director to fill the casual vacancy occasioned by Madam Wong's death and to appoint Henrietta as an additional director. Henry opposed both proposed resolutions and Sammy abstained from voting. Mr Ip then exercised his casting vote in favour of the proposed resolutions. At the 1981 annual general meeting held on 23 December 1981, while the other directors were re-elected, Sammy, though nominated by Henry, was not. The 1982 annual general meeting was uneventful. 65.The 1983 annual general meeting was held on 23 December 1983. Arnold was present in person and Henry by his proxy, Mr John Liu. Henrietta was the chairman of the meeting. Mr Liu made enquiry if the board had any intention of appointing directors with experience in the construction field after the death of Mr Ip. Henrietta replied that unless otherwise provided by the articles of the association, it was for the Company in the general meeting and not the board to appoint directors. She further drew Mr Liu's attention to the share qualification requirement to become a shareholder. (Presumably, Henrietta was referring to article 10 of the articles of association : see paragraph 119 below.) Mr Liu then asked if the board and the shareholders would appoint Henry as a director. Henrietta proposed to consider this question under the item concerning election of directors. Later at the meeting, existing directors were elected en bloc. But the question of appointing Henry was not raised again, whether by Mr Liu himself or otherwise. 66.At the 1983 annual general meeting, Mr Liu, referring to the difference in quantum of dividends paid in 1982 and 1983, asked if the directors had any long term policy regarding declaration of dividend. (In 1982, the dividend paid was $1,540,000 whereas in 1983, dividends were paid twice totalling $5,544,000.) Henrietta replied that one of the reasons why the 1983 dividend appeared to be out of line with previous declaration was the 1997 issue and devaluation of the Hong Kong dollar. Arnold was also interested in the distribution of the Company's profits. He asked if the Company finally decided not to continue construction work, whether more of the unappropriated profits (nearly $3 million) would be distributed. Henrietta expressed her personal view that if the Company were to cease construction business, there would be two ways to deal with the money : to invest or to distribute dividends. She said given the importance of this question, the board would seriously consider any opinion of the shareholders. She then invited shareholders to give their view in writing to the board. (3) The 1984 annual general meeting 67.On 21 August 1984, the Company held its annual general meeting for that year. It was again chaired by Henrietta. Arnold and Regina as Sammy's proxy were present. Regina asked if it was possible to appoint members who were qualified in the construction business to be appointed as directors. She noted that none of the five directors at that time (that is, the five sisters) were qualified in the construction field. She queried the basis for appointment of directors and fixing of their remuneration. She then asked if it was possible to consider appointing Sammy (who was an engineer by profession) and Arnold who had a sizeable shareholding whereupon, Arnold indicated that he would be away working in England for three years in connection with his professional work and would not consider that he would have quite the time to work as a director. Henrietta then replied that directors were elected by members and that the articles of association needed to be amended to increase the maximum number of directors from five to accommodate the appointment of any additional directors. She then referred to the procedural requirement for passing of a special resolution to amend the articles. As the proposal to increase the number of directors was not on the agenda and it was impossible to pass a special resolution there and then, it was decided that the matter be adjourned until it should be raised by members again. 68.At the meeting, Regina also raised concerns about the benefits enjoyed by the directors in addition to their remuneration. After some discussion, Regina remarked that she was only interested in trying to reduce the Company's overhead if feasible. 69.Under cross-examination, it was put to Arnold that the alleged right to sit on the board was flatly contradicted by what happened at the 1984 annual general meeting. Arnold said :
70.It is not clear if Arnold was maintaining that the Common Understanding had already come into existence at or before the 1984 annual general meeting. (4) Follow up by Sammy and Arnold 71.Sammy and Arnold followed up the idea of appointing them to the board. By a letter dated 12 September 1984, they required the board to convene an extraordinary general meeting to consider and pass resolutions to increase the maximum number of directors from five to seven and to appoint them as additional directors. The requisition was discussed by the board at its meeting on 18 September 1984. Solicitors' advice was sought on the requisition. According to the minutes of the board meeting and the subsequent advice letter from the solicitors dated 22 September 1984, the board had no objection in principle to appoint Sammy and Arnold as additional directors. Further, as the requisition did not mention emolument, the board decided to write to them seeking their view in that regard. Henrietta in her oral evidence confirmed that a letter dated 25 September 1984 had subsequently been sent to Sammy and Arnold c/o a firm of solicitors by hand. By that letter, Sammy and Arnold were told that before the board would proceed to convene the extraordinary general meeting, it would like to know if they would wish to actively participate in the management of the Company and to have their remuneration fixed at the extraordinary general meeting and (if so) the amount of the proposed remuneration. 72.Sammy wrote back on 27 September 1984 on his behalf and purportedly on Arnold's behalf. His letter, produced as Exh.D4, read :
73.At another board meeting on 29 September 1984, the requisition was formally tabled. The directors then resolved that an extraordinary general meeting be held on 27 October 1984. 74.Because Sammy's letter of 27 September 1984 was only disclosed at a very late stage, it was not put to Arnold while he was giving evidence. Should the respondents seek to rely on it, the petitioners' case, in Mr Kotewall's submissions, is as follows. Arnold did not recall receiving the letter of the Company of 25 September 1984. He was then living in the United Kingdom. Sammy's letter was not signed by Arnold. It was signed by Sammy purportedly on his behalf. There is no evidence that Arnold approved the contents of that letter or authorised Sammy to sign or send it on his behalf. This letter stated both Sammy and Arnold wished to contribute mainly in the area of construction/development business of the Company. Arnold was an accountant and did not have experience in construction business. It is thus unlikely that he would have agreed to make the contribution as alleged. Further, at the 1984 annual general meeting, Arnold expressly stated that he would be working for three years in the United Kingdom and would not be able to contribute much to the Company's business. So even Sammy's letter stated that, Arnold would not assume any active participation in the management of the Company. (5) The 1984 EGM 75.The 1984 extraordinary general meeting was attended by Henrietta, Roseanna, Marion, Sammy and Arnold in person and Loretta by proxy. Regina was also present. The proposed resolutions to increase the maximum number of directors and to appoint Sammy and Arnold as additional directors were all passed unanimously. 76.On the question of how directors' emoluments were fixed, Henrietta first sought to clarify and put in perspective the duties expected of directors. She pointed out that the Company used to have two permanent directors who were executive directors. The Company then appointed Henry and Sammy as directors but during their tenure, they were basically non-executive directors and did not perform day-to-day functions. Thus the Company in practice had two types of directors, namely, executive and non-executive directors. After the deaths of the permanent directors, five directors were appointed. (They were the five sisters.) Two of them served as non-executive directors as they resided overseas. However, whenever they were in Hong Kong, they were welcome to join the board meetings which were at that time held weekly or bi-weekly. Henrietta went on to point out that there was no fixed chairman for the board, the appointment being by rotation among the executive directors depending on who had prepared for the particular meeting. Board meetings were usually held during office hours and lasted from one to four hours. 77.Henrietta then reported that she had earlier discussed with Arnold on the matter who had indicated that he would like to be appointed as a non-executive director. Arnold confirmed that at the meeting. Sammy also indicated that he would like to be appointed as a non-executive director. It was then unanimously resolved that both Sammy and Arnold be paid in line with the remuneration payable to other non-executive directors, that is $3,000 per month with double pay at the Chinese New Year. (6) Introducing housing allowance in 1985 78.In 1985, housing allowance was for the first time introduced as part of directors' emoluments. At a director meeting of 12 March 1985, Roseanna, Marion and Henrietta discussed the matters concerning directors' housing benefits. Sammy was then occupying Flat C of the Fei Ngo Shan Property. The estimated monthly rental was $24,000. They considered that in fairness, other directors should also enjoy the same housing benefit. Thus they decided that each director (other than Sammy) should have housing allowance of $12,000 per month in addition to the common use of some other flats of the Fei Ngo Shan Property. At a subsequent board meeting on 11 April 1985, it was recorded in the minutes that Regina representing Sammy agreed that each director other than Sammy might receive $8,000 per month as directors' housing benefit; and that this matter should be agreed by all executive directors before putting it to an extraordinary general meeting for discussion and approval. At the subsequent extraordinary general meeting held on 5 June 1985 attended only by the five sisters either in person or by proxy, the proposal was passed unanimously. 79.Henrietta confirmed in her oral evidence that housing allowance was introduced to put all directors on equal terms for housing benefits. The figure of $12,000 was arrived at by working out the rough market value of Sammy's residence and then making adjustments to reflect the directors' entitlement to use the other flats in the Fei Ngo Shan Property if they so wished. Regina was consulted and she came back with $8,000, which was accepted. 80.At the 1985 annual general meeting held on 10 August 1985, the shareholders present, that is, the five sisters, Sammy and Cecilia, agreed unanimously that as from 1 April 1985, (other than Sammy) the executive directors should receive housing allowance of $13,500 per month for 12 months whereas non-executive directors should receive $8,000 per month for 12 months. All directors received the same amount of emoluments of $3,000 per month for 13 months. All retiring directors were re-elected en bloc. 81.Arnold under cross-examination agreed that the housing allowance was introduced to put all the directors on an equal footing as far as housing benefits were concerned; that it was introduced without reference to the percentage shareholding of the shareholders who were directors; and that it did not reflect the amount of work the directors put in. But he maintained that the directors' remuneration package as a whole was by and large in proportion to their respective shareholding and that what he had deposed in paragraph 13 of his 8th affirmation concerning the agreement on directors' emoluments was true. 82.It would appear that the respondents accepted that when the figures alone were considered, remuneration was roughly in proportion to respective shareholding. But they denied that it was because of any supposed agreement or understanding. It was purely because there was not much difference among the shareholdings and housing allowance was introduced to address the inequality among shareholders on housing benefits. It can be seen from the following part of Arnold's cross examination :
(7) The AGMs for 1986 to 1988 83.The 1986 annual general meeting was held on 12 August 1986. Cecilia and Arnold were present. Regina as Sammy's proxy was also there. All the seven retiring directors were re-elected en bloc with their emolument remaining the same as for the previous year. At the end of the meeting, Henrietta set out the general trend of development of the Company desired by the shareholders present after discussion. Among other things, the Company would diversify its activities by selling some of the capital assets, including the Fei Ngo Shan Property. The Company would try to settle the 1985 action with Henry. Upon the sale of the Fei Ngo Shan Property, Sammy would no longer be using it. His emolument would be adjusted accordingly. 84.At the 1987 annual general meeting held on 24 October 1987, all the seven retiring directors were again re-elected en bloc. Their remunerations remained the same as in the previous year. 85.At the 1988 annual general meeting held on 13 December 1988, Cecilia was present but Arnold was not. While directors were again re-elected en bloc, fixing the directors' emolument was discussed separately. Henrietta explained that after the sale of one of its properties, directors' workload should be lessened. It was therefore recommended that their emolument and transport subsidy should be lowered accordingly. The housing allowance for directors (other than Sammy), however, should be increased because of inflation. Regina representing Sammy objected and sought to put on record that Sammy occupied the Fei Ngo Shan Property because he was Mr Ip's son. It had nothing to do with his relationship with the Company. The proposal was unfair to him as one of its director. Henrietta then referred to a valuation report obtained from a surveyor in respect of Sammy's occupancy which was assessed at $32,000 per month. Eventually, the resolution to increase the housing allowance payable to executive directors and non-executive directors to $19,000 and $13,000 per month was passed by a majority vote. Regina was the only dissenting voice. 86.During the 1988 annual general meeting, Henrietta informed members that Desmond had written to the Company asking to be appointed as a director. Members present indicated that they had no objection to that if the Company's constitution were to be amended to increase the maximum number of directors. It was their consensus to hold an extraordinary general meeting in this regard later. This brings me to Desmond's appointment to the board. (8) Desmond's appointment to the board 87.It is common ground that Desmond was then a student living in England. Marion explained in her evidence how he wrote the letter to the Company indicating his wish to be appointed as a director thus. When Henry and Cecilia divorced in 1980, Desmond stayed with Cecilia but when he turned 18, he left her and stayed with Henry. After Henry's death in 1988, his second wife sold the flat in London where Desmond was then staying. Desmond suddenly found himself homeless and, because of the pending probate matters in connection with Henry's estate, penniless. The aunts took pity on him and took him under their wings. They bought him a flat in London so that he could stay there and finish his studies. Roseanna was like a second mother to Desmond. She wanted Desmond to come back to Hong Kong and work in the Company. She therefore asked him to write the letter to test the water, to see if Cecilia and Arnold were willing to let him come back. 88.By a notice dated 14 March 1989, an extraordinary general meeting was proposed to be convened to increase the maximum number of directors from seven to eight, the Directors having considered it advisable and appropriate to pass the proposed resolution "so as to enable the Company to carry on its business more efficiently." The resolution was subsequently passed at the meeting on 25 April 1989. In the event, Desmond was appointed to the board on 4 May 1989. (9) AGMs for 1989 to 1995 89.At the 1989 annual general meeting, all the eight retiring directors were re-elected en bloc. Other than Desmond, the non-executive directors were entitled to emolument of $13,000 per annum and housing allowance of $29,000 per month. In Desmond's case, emolument was $12,000 from May 1989 to March 1990 and housing allowance, $1,700 per month for the same period. 90.Directors' remuneration was further adjusted at the 1990 annual general meeting held on 31 August 1990. Henrietta, Roseanna and Arnold attended in person, Loretta and Marion by proxy. By that time, Sammy had already retired from the board. Henrietta reported that Marion was to resign as an executive director on 1 September 1990. She then invited suggestions. Members had informal discussions and reached a common consensus that the two remaining executive directors, i.e., Roseanna and Henrietta, would share the remuneration package originally shared by the three executive directors as the two of them would have to share the original burden for three. Members took into this common consensus, the loss of the Company in the previous year and inflation on rental value in determining the housing allowance and then adjusted the remuneration package accordingly. 91.At the 1991 annual general meeting, directors' emoluments were increased by 12% across the board. The reason was not apparent from the minutes. Directors were again re-elected en bloc. 92.Directors' remuneration remained unchanged for the years of 1992 and 1993. Then at the 1994 annual general meeting, it was increased by 10% in line with inflation. There was a further increase of 10% increase in line with inflation at the 1995 annual general meeting. For the years 1992 up to 1995, retiring directors were all re-elected en bloc at the annual general meetings. (10) The 1996 AGM 93.Then came the 1996 annual general meeting, which was held on 29 July 1996. Arnold and a Ms Chan (presumably a lawyer of Johnson Stokes and Masters ("JSM")) as his proxy attended. Roseanna and Henrietta attended in person while the rest of the five sisters by proxy. All directors retired pursuant to the articles of association. Election of directors was then dealt with on an individual basis. The five sisters and Desmond were all re-elected unanimously. Arnold offered himself for re-election but failed to be re-elected. Both Roseanna and Henrietta voted against him while the other sisters (by proxy) abstained. The meeting then proceeded to fix directors' emoluments. Arnold voted against the resolution. He said he objected to the directors' remuneration because he would no longer be a director and in past years no dividend had been distributed. Henrietta said in her oral evidence that her understanding of what Arnold said at that time was this. He was no longer a director, so all directors should not receive any remuneration. Henrietta found that unreasonable as directors worked and in particular had to defend the two High Court actions concerning the Fei Ngo Shan Property. 94.Under cross-examination, Arnold agreed that during the meeting, despite the existence of the Common Understanding, neither did he object to his non-election nor protest that he was entitled to sit on the board. He said his then primary objection was that if he were excluded, the distribution under the structure whereby the other directors were to continue sharing the recurring income of the Company through emoluments would become unfair to him. He explained that directorship and remuneration were related and tied together and he did object to the remuneration. He further said that he was caught by surprise when he was not re-elected. It was therefore not possible for him to state clearly everything which he objected to. (11) Why Arnold was not re-elected 95.In her affidavit, Henrietta stated her reasons of voting against Arnold's re-election thus :
96.In her oral evidence, Henrietta pointed out further that it was initially hoped that Arnold might be interested in actively participating in the Company's affairs but he had hardly any time to do so because of his own career and lack of interest. Throughout the years, Arnold attended only 11 board meetings. All of them, except an emergency meeting, were either coincidentally with the same time as annual or extraordinary general meetings or matters relating to dividends or sale of properties were discussed. Arnold was not really interested in the management of the Company. His only interest was in dividends. She found that disappointing. Further, Arnold was allowed not to participate in the Company's affairs because of his budding career as a chartered accountant at that time. Referring to the 1995 action, she said that it was administratively inconvenient for the Company to have a person suing it to sit on the board. But that is not the main reason. Her main personal reason remained financial. The two High Court actions were draining the resources. And the Company had to cut its overheads. Further, the sale of properties and reduction in rental income had led to streaming the staff, reducing the actual income paid to directors and reducing the actual number of directors to those who participated in the running of the Company. Henrietta denied that Arnold was not re-elected because the five sisters acted in concert to take revenge on him because of the 1995 action. Referring to the articles of association, she said that shareholders had the right and power to vote in election of directors. They acted in accordance with the articles of association at the 1996 annual general meeting : Roseanna and she voted against Arnold's re-election while the other sisters by proxy abstained. She referred to the 1995 annual general meeting where Arnold was re-elected despite the possible conflict of interest arising from the 1985 action. The potential conflict was avoided by the agreement that Arnold would not attend all board meeting in which the 1985 action was to be discussed and that notice and minutes of such meetings would not be circulated to him. Henrietta said she was actually opposing Arnold's re-election in 1995 but was persuaded by the other sisters to let him stay on the board. 97.According to Marion, Arnold was not re-elected because by that time the Company had already sold many of its properties and sale proceeds had been declared as dividends. Workload and income were reduced. So fewer directors were required. Marion also said that before the 1996 annual general meeting the five sisters had discussed whether Arnold should be re-elected but they had different opinions. In fact, before the discussion, Marion had for a long time felt that Arnold should not be re-elected but other sisters took the view that it did not matter if he was re-elected. On this occasion, Marion personally preferred not to re-elect him. She thus instructed her proxy to do nothing at the meeting when it came to electing Arnold. (12) Arnold's letters after the 1996 AGM 98.After the 1996 annual general meeting, JSM wrote to the Company on behalf of Arnold on 27 August 1996. The letter first referred to Arnold's non-election and then continued :
In a subsequent letter dated 29 August 1996, JSM corrected a typographical error : the words "was formed" should read "is to be run". 99.Several points arose from Arnold's evidence under cross-examination on these two letters. First, he accepted that in the first letter, there is no explanation or elaboration of what the "original understanding" was. But he contended that everyone should be aware of the understanding that the Company should be run properly and fairly. Secondly, he could not recall if he told the solicitors that there was the Common Understanding among the members. Thirdly, he accepted that what the first letter did not state was that the Common Understanding existed among the members but he said its existence was clear to all. And it was made clear in the second letter. But he agreed that all the second letter did was to move the start date of the original understanding from 1954 to a subsequent date which was then not identified. He agreed that that was not a typographical error. 100.Henrietta's evidence on the two letters in short is this. She was on a trip overseas when they were faxed to her for consideration. According to her interpretation, the understanding referred to therein meant the memorandum and articles of association. The Company was formed and run in accordance with them. She did not consider the shareholders had done anything wrong as they were entitled to act in accordance with the articles of association. When she returned to Hong Kong, these letters were superseded by subsequent letters from Arnold's solicitors requesting for minutes of general meetings and board meetings. Upon advice, these correspondence though available were not produced. (13) THE 1997 AGM 101.The 1997 annual general meeting was held on 21 November 1997. Again, Arnold and Ms Chan of JSM attended. The main business of this meeting was to receive reports of the directors and the auditors and the audited accounts for the fiscal year of 1997, to elect directors, to fix their remuneration and to re-appoint auditor for the Company. 102.When the resolution concerning reports was put to vote, Arnold and Ms Chan demanded a poll. Arnold said that he intended to abstain from voting and proposed that an "abstain vote" be added in the polling paper. Henrietta asked him why he intended to abstain from voting. He said he preferred not to make any comment. Then for every resolution put to vote, Arnold and Ms Chan demanded a poll. On the resolution concerning reports, they abstained from voting. On election of directors, Henrietta proposed to re-elect all retiring directors en bloc. They voted against the motion. On remuneration, Henrietta proposed to increase directors' emolument, housing allowance and transport subsidy by 6% in line with inflation as opposed to 10% in the previous year. Arnold asked if there was any other reason apart from inflation, to which Henrietta said none. She then asked if there was any other proposal concerning directors' remuneration. No other proposal was put forward. Arnold and Ms Chan voted against the motion. On the re-appointment of auditors, they voted for the motion. 103.Under cross-examination, Arnold explained that demanding a poll was his way of objecting the whole structure and the whole set up whereby he was excluded and the other directors continued to receive distributions from the Company. When asked why he did not put the objection in reasonably clear terms and not simply asking for a poll, Arnold said it was already quite clear. "In every single vote, we opposed", he said. Arnold went on to say that when Henrietta asked him to explain why he intended to abstain but he chose not to make any comment because there was no need for him to explain. Everyone knew or were fully aware of what was happening, and to him it was quite obvious to everyone concerned the reason why he was opposing. In respect of remuneration, he agreed that he did not make any proposal. He agreed that it was yet another concealed protest but he said that there was little point protesting what the majority wanted to do or to oppose whatever they were proposing. His position all along was made very clear to them. Everyone knew what was happening, he repeated. 104.Henrietta said in her oral testimony she did not understand why Arnold behaved in such a way at the meeting. (14) THE 1998 AGM 105.At the 1998 annual general meeting held on 29 December 1998, Arnold voted against the election of directors. On remuneration, Henrietta proposed to reduce the housing allowance by 30% in keeping with the depressed economy and drop in the property market whereas emolument and transport subsidy could be kept at the same level. Arnold voted against the remuneration. At the end of the meeting, Arnold questioned how the Company, which was then making a loss, could fund its expenditure in the future. After some exchange, Henrietta said that given it was a shareholder meeting, it was more appropriate for shareholders to indicate what they wanted and suggest how directors could go about it. Arnold did not come up with any suggestion. 106.Henrietta elaborated in her oral evidence on what happened at the 1998 annual general meeting. She said as she did not understand what Arnold' true intention was, she tried to find out what he really wanted by proposing to elect each director individually and to deal with the remuneration package on an item by item basis. Arnold voted against all directors and all items. Henrietta could not understand why Arnold so behaved. After the meeting, she and Roseanna asked him to stay behind to discuss matters in the absence of lawyers. Arnold refused, saying that his mind was blank. (15) Correspondence after the 1998 AGM 107.After the 1998 annual general meeting, Arnold wrote to the board on 8 February 1999. After referring to his query raised in the meeting how the Company could fund its expenditure, he said in paragraph 3 :
Henrietta said before this letter, neither Cecilia nor Arnold had made any complaint that directors' emoluments were excessive. 108.This letter was discussed by the board at its meeting on 27 April 1999. It was decided that Henrietta would write to Arnold on behalf of the board, which she subsequently did on 7 May 1999. The relevant parts read :
Arnold was then asked if he had any proposal to make. Henrietta said he had not come back with any proposal. She disagreed with the suggestion that making any proposal would be a waste of time as her mind was already closed. 109.Under cross-examination, Arnold agreed that he did not protest that he had been deprived of his right to sit on the board. Again, he reiterated that everyone was aware that he had not been properly treated. He said the protest was really aimed at highlighting that Cecilia and he as shareholders were not properly treated and the emoluments and allowances the directors were getting were not distributed to them because they were excluded from the board. However, he agreed that in the papers there was no specific mention about his protest or the set up of distributions by way of directors' emoluments. Once again, he resorted to the reason that everyone knew what was happening and it was clear enough to everyone. (16) Presenting the petition 110.The petition was presented on 7 October 1999. Before that, according to Henrietta, neither Cecilia nor Arnold had complained that Arnold's non-re-election at the 1996 annual general meeting was contrary to a common understanding that any shareholder had a right to sit on the board. 111.The respondents complained that there was inordinate delay in commencing proceedings. It was more than three years after the 1996 annual general meeting. Arnold was asked to explain. He said there were a number of reasons. In 1996 and 1997, he was occupied with setting up his own and his work. He was aware of that the Company was running out of cash from reading the accounts. Possibly in retrospect, he was hoping that once the cash had been distributed, there might be changes in the structure of the distribution. He was also concerned about the costs of litigation. "It was in general a progressive kind of development," he said. (17) The 1999 AGM and thereafter 112.The 1999 annual general meeting was held on 20 November 1999, one month after the petition was presented. Like previous general meetings, Arnold demanded a poll on motions and voted against the election of directors and their remuneration. 113.By a letter dated 30 November 2000, Arnold offered himself for election to the board at the 2000 annual general meeting. The relevant part of his letter read :
Under cross-examination, Arnold denied that his real complaint was not really that he was not re-elected despite the Common Understanding but the way the Company's profits were distributed. When further pressed, he repeated his assertion that the Common Understanding was that the Company was to run on a fair basis and directorship was a way to implementing that. "It all boils down to fair play, and it took the form of directorship and distributions", he said. SECTION E - FAMILY RELATIONSHIP 114.This concludes the chronology on the main events. To complete the evidence relating to the Common Understanding, I find it necessary to deal with the matters concerning the relationship among the family members, although I must confess it is not pleasant to do so at all. 115.In paragraph 5 of his 8th affirmation, Arnold complained that after his wrongful exclusion from the board as a result of the concerted effort of his aunts, the relationship involving mutual trust, understanding and confidence between his aunts on the one hand and his mother and himself on the other no longer existed. He therefore decided not to offer himself for any re-election. Under cross-examination, Arnold had this to say :
The inference that I draw from this part of Arnold's evidence is that the alleged harmonious relationship between his aunts on the one hand and his mother and him on the other existed before the Common Understanding arose. It is, however, not clear if the petitioners seek to rely on this alleged relationship to support their case on the Common Understanding. For neither the petition nor Arnold's 1st affidavit placed any reliance on this. Further, as noted, Arnold made the point in his 8th affidavit to justify his decision of not offering himself for re-election. 116.If the petitioners do rely on the existence of mutual trust, understanding and confidence among the family members, then the following incidents prior to the 1984 extraordinary general meeting need to be considered :
117.According to Henrietta, the relationship the Ip family had with Cecilia was strained even before she married Henry. Henrietta was the one who kept contact with Cecilia and Arnold. But apart from the Company's meetings, she had about five to six contacts with Cecilia and three with Arnold in the last 20 years. Other sisters had much less contacts. The relationship did not involve any as mutual trust, understanding or confidence. In particular, she referred to the letter of Cecilia's solicitors on 23 May 1980. Henrietta said that a series of things happened after Cecilia's divorce with Henry. She requested money from her parents in laws, demanded general meetings be convened and sent lawyers along to the general meetings. At the 1980 annual general meeting held on 27 February 1981, she sent two lawyers representing Arnold and Desmond. There was discussion at the meeting about whether legal representatives should attend the meeting. According to Henrietta, Madam Wong was very anxious when lawyers attended meetings. SECTION F - THE COMMON UNDERSTANDING 118.This concludes the main evidence concerning the Common Understanding. I will now proceed to determine, with the benefit of the parties' submissions, firstly if the Common Understanding did exist and secondly if any of the related complaints is established. To recap, the Common Understanding, based on fairness and openness, encapsulated two agreements concerning respectively : (1) the right to sit on the board and (2) distribution of the Company's profits by way of directors' emoluments in proportion to shareholding. 119.A right to sit on the board if a member so desires is, prima facie, inconsistent with the Company's articles of association pertaining to appointment of directors. Not every shareholder is qualified for appointment as a director. Only those who hold at least 10 fully paid shares are (Article 10). The number of directors whether elected at the ordinary meeting under Article 8 or appointed by the directors as an additional director under Article 15 is limited (Article 6). The Company may remove any director other than the permanent directors (Article 16), which may well be contrary to the wish of any individual director. All directors other than the permanent directors shall retire from office at the ordinary general meeting although they are eligible for re-election (Article 9). Apparently, there is a risk that they might not be re-elected. Arnold readily acknowledged that the Company's affairs could be conducted fairly and openly without giving all shareholders a right to sit on the board. In other words, fairness and openness did not necessarily entail a right to sit on the board. 120.Further, nothing in the articles of association and indeed in any of the Company's documents produced in these proceedings contains or refers to the Common Understanding or the agreement on either the right to directorship or profits distributions, despite the significant impact they might have on the conduct of the Company's affairs and members' rights. 121.Against this backdrop, the petitioners have to satisfy me that the Common Understanding did exist as alleged. The burden rests squarely and firmly on them. 122.Mr Kotewall submitted that there are four main reasons why I should find in favour of the petitioners :
123.The first reason, as a legal proposition, is well supported by authorities : see Section C - The law at paragraphs 37 and 38 above. However, whether the memorandum and articles of association of a limited company contain all the rights and expectations of its members depends on the particular circumstances of the case. In most companies and in most contexts, as Lord Wilberforce observed in In re Westbourne Galleries Ltd at p.379, the structure of a company as defined by the statute and its articles of association is sufficient and exhaustive, equally so whether the company is large or small. On the other hand, there are cases where their rights and expectations are contained in some form of understanding or agreement other than the articles. Cases involving quasi-partnerships are classic examples. Although the Company is not a quasi-partnership, this is not necessarily fatal to the petitioners' case. The question is : after all the circumstances of the present case have been considered, can any equitable restraints on the strength of the Common Understanding be superimposed on the memorandum and articles of association such that it would be unfair and prejudicial to the petitioners if the respondents acted contrary to the Common Understanding? 124.Similarly, the fourth reason, as a matter of legal principle, cannot be flawed. But the petitioners' complaint in this regard is legitimate only if they can successfully prove that the parties had agreed that distribution of the Company's profits and assets, as part and parcel of the Common Understanding, should take the form of directors' emoluments and allowances in proportion of the respective shareholding. 125.The second reason essentially concerns how the Common Understanding arose. The third reason specifically dealt with the alleged agreement on distribution of profits. To a large extent, the evidence and submissions advanced under these two reasons overlap. I will therefore deal with them together. And I will examine the salient points under various headings. (1) How and when the Common Understanding arose 126.Mr Kotewall's referred to O'Neill v. Phillips and In re Astec (BSR) plc and contended that any common understanding does not have to be formed at the time when the company is incorporated. Events subsequent to incorporation may also give rise to such understanding. For example, "there may be later promises, by words or by conduct, which it would be unfair to allow a member to ignore" : per Lord Hoffmann in O'Neill v. Phillip, above, at p.1101G. His submission is no doubt correct. But is the petitioners' case on how and when the Common Understanding arose borne out by evidence? In this regard, the relevant part of Arnold's evidence as set out in paragraphs 53 to 61 above merits closer scrutiny. I will not repeat his evidence here. Instead, I will demonstrate below how the form of the Common Understanding changed as his evidence unfolded. 127.On a fair reading of the re-amended petition and Arnold's 1st affirmation, the Common Understanding took the initial form of an understanding or agreement implied by or alternatively a legitimate expectation arising from conduct and circumstances. It is worth noting :
128.Then in paragraph 13 of his 8th affirmation, Arnold for the first time said that at around October 1984, he had discussions with the directors and it was agreed during those discussions that, inter alia, a significant proportion of the Company's recurring rental income would be distributed to shareholders in the form of directors' emoluments which should be in proportion to shareholding. Though not mentioned in paragraph 13, the right to sit on the board, Arnold stressed in his oral testimony, was also agreed. Thus :
129.Finally, in his oral testimony, Arnold sought repeatedly to put a gloss on the Common Understanding : fairness and openness. What the parties had actually agreed was to conduct the Company's affairs fairly and openly. Directorship and distributions were only ways to implement fairness and openness. The Common Understanding seemed to have led a life of its own and had its scope expanded considerably to embrace the notions of fairness and openness while going down the path of litigation. 130.How the Common Understanding evolved and settled in its final form speaks volume of Arnold's credibility or more precisely, the lack of it. He did attempt to explain the discrepancies. But his explanation is hardly convincing. First, Arnold said paragraph 13 of his 8th affirmation is not a new allegation. This I reject. Given the importance of the alleged discussions, I see no reason why they were not referred to in the petition and his 1st affirmation in the first place. Secondly, Arnold said one of the results of the discussions was that any shareholder had the right to be appointed to the board. If that was the case, Arnold should have expressly stated so in paragraph 13. After all, it was his intention to "present the whole picture". 131.As Arnold acknowledged, fairness itself does not entail a right to sit on the board. Even without it, the affairs of the Company could be conducted fairly and openly. Indeed, there was no suggestion that before the deaths of the grandparents in the early 1980s and in the absence of the Common Understanding, the affairs of the Company had not been conducted fairly or openly since its inception in 1954. Then why would their deaths bring about such a fundamental change in the conduct of the Company's affairs? 132.Mr Kotewall submitted thus. Before their deaths, Mr Ip and Madam Wong were in control over the Company's affairs. After their deaths, only the second and subsequent generations remained as shareholders of the Company. In the absence of a family member assuming the role of the family head, all shareholders were on an equal footing save as to the number of shares held by them. Given their personal/family relationship and the fact that the Company is a family investment holding company, it is understandable and only fair that all shareholders should have and had a say (in proportion to their shareholdings) in the management of the assets of the Company. 133.Two points arise out of the above. The "say" that a shareholder had in the management of the assets is said to be proportional to his shareholdings. But once appointed, all directors, irrespective of their shareholdings, had an equal say in the management of the Company's affairs. Nothing before me suggests otherwise. Thus, if members did have the right to sit and did sit on the board accordingly, they had an equal say in the management of the Company's assets irrespective of any difference in shareholding. Secondly, any reliance on personal relationships among the family members is bound to fail. I agree with Mr Bunting's submission that the Company being a family company is itself clearly not an adequate basis for the allegation of an implied agreement or understanding. Further, I do not find the personal relationships among the members were such that equitable restraints would be imposed on the exercise of their rights under the articles of association : cf. In re Astec (BSR) Plc, per Parker J at p.588. While the five sisters no doubt enjoy harmonious relationships among themselves, that sadly does not extend to other members. Throughout the years, rents ran through the family as demonstrated by the incidents set out in Section E above. I also accept Henrietta's evidence on the relationship the five sisters had with Cecilia and Arnold. Any suggestion that the relationships among the family members (with the exception of the five sisters as a camp) involved a mutual trust, understanding and confidence is perverse. Desmond may have a better relationship with his aunts. But that is not sufficient to ground the Common Understanding. (2) Sammy's re-entry and Arnold's appointment to the board in 1984 134.Mr Kotewall cited Sammy re-entry to the board in 1984 as an illustration of the change brought about by the deaths of Arnold's grandparents in the early 1980s which gave rise to the Common Understanding. Sammy was not re-elected in the 1981 annual general meeting, counsel suggested, probably due to the difference of opinion he had with Mr Ip. After his death in April 1983, and after the Common Understanding arose at around the same time, Sammy was again elected to the board in 1984 without any resistance. 135.Sammy and Arnold were elected at the same time, namely, at the 1984 extraordinary general meeting. The circumstances leading to that meeting can be found at paragraphs 67 to 77 above. Mr Kotewall submitted that once Regina raised the question of appointing Sammy and Arnold as directors, it was then accepted and implemented with the minimal of fuss. It is therefore wrong to suggest, as the respondents did, that Regina acted on the footing that their appointment was purely a matter for the shareholders. All the other events putting through their appointments are far more meaningful in showing Arnold's right and expectation. With resepct, I disagree. 136.From what transpired at the 1984 annual general meeting, it was clear that the Common Understanding had not arisen yet. Otherwise, Regina, Arnold and Henrietta should have behaved differently. First, Regina would not have queried the basis for appointing directors and fixing of their remuneration. If the Common Understanding was already in existence but for some reasons, Regina did not know about it, Arnold or Henrietta should have advised her there and then when she raised those queries. Secondly, Arnold appeared to be rather hesitant about Regina's suggestion to have him appointed to the board. He should have agreed to the appointment without hesitation. It would enable him to immediately share the Company's profits, which appeared from these proceedings to be his primary concern. In this respect, whether he would be able to contribute to the Company's affairs was on his own case immaterial. Thirdly, Henrietta adopted a "go by the book" attitude in answering Regina's queries, which was rather odd because compliance of the articles of association would be a mere formality. 137.It is the petitioners' case that by the time of the 1984 extraordinary general meeting, as part of the Common Understanding, the parties had already agreed to distribute the Company's profits by way of directors' emoluments roughly in proportion to their respective shareholding. But that did not fit well with the events leading up to that meeting and what happened there. The board did not need to ask Sammy and Arnold by its letter dated 25 September 1984 if they wished to have their remuneration fixed at the meeting and, if so, the amount of the proposed remuneration. Pursuant to the Common Understanding, they would be fixed in proportion to their respective shareholding any way. Sammy would not have responded in his letter dated 27 September 1984 by saying that "we are very open minded in connection with the respective amounts payable to each of us." I am aware of Mr Kotewall's submissions on Arnold' stance over this letter : see paragraph 74 above. But it does not explain why Sammy conducted himself in apparent contradiction of the Common Understanding. One may suggest that the Common Understanding arose only after the exchange of these correspondences. But then, why would members present at the 1984 extraordinary general meeting need to discuss how emolument was to be fixed? Why did Henrietta need to particularise the executive directors' duties for the purposes of discussing how to fix the remuneration? She was obviously relating directors' emoluments to the duties they were expected to discharge, contrary to the agreement under which emoluments basically had nothing to do with contribution by any individual director but were to be fixed roughly in proportion to shareholdings. And if indeed that was the basis, why were the emoluments for Sammy and Arnold fixed without any mention of or reference to their shareholding or the shareholding of other non-executive directors? 138.Arnold himself was present at the 1984 extraordinary meeting. His case on the correspondences as set out in paragraph 74 above is not an answer to what happened at the meeting. (3) Directorship as an agreed means to allow participation in the Company's distributions? 139.The petitioners' case is that appointment of directors was not based on participation in or contribution to the management of the Company's affairs. It was a means agreed by the parties to allow participation in the Company's distributions by way of directors' emoluments and allowances. In this connection, Mr Kotewall relied on the appointment of Desmond to the board. He argued that it is clear from Marion's evidence that Desmond was appointed so that he could receive his share of the family fortune in the form of director's emoluments when he faced financial difficulty as a result of Henry's death. Counsel submitted that the suggestion that the reason given in the notice of the 1989 extraordinary general meeting dated 14 March 1989 indicated that Desmond's appointment was regarded as a matter for the shareholders was against the weight of evidence. Mr Kotewall also pointed out that Loretta and Maimie were at all material times residing overseas and yet both of them remained as directors until 1999. Under cross-examination, Henrietta suggested that although they lived abroad, the Company still tapped their service and free advice from Loretta's husband and Maimie's first husband, who were both architects. Counsel submitted that such suggestion is far-fetched and difficult to accept. 140.It should be borne in mind that it is the petitioners' primary case that appointment to the board as a means to share the Company's distributions was in fact part and parcel of the Common Understanding. (Their alternative case as set out in paragraph 28 above, which does not hinge upon the existence of the Common Understanding, will be deal with in Section G below.) I have already explained why I find Arnold's evidence on how the Common Understanding arose unsatisfactory. The same observations apply here equally. 141.There is little doubt that Desmond was elected to the board so that he could derive financial support when he needed it most. But when all the circumstances are considered, I do not consider Desmond's appointment alone is indicative of an agreement whereby the Company's profits were to be distributed by way of directors' emoluments. In my view, the other family members just gave him an exceptional, generous treatment. 142.As to the position of Loretta and Maimie, their contribution to the daily operation of the Company's affairs must be minimal while living aboard. But I accept that they did contribute to the preparation of the 1985 and 1995 actions. (I will cover this point in greater detail in Section G.) The mere fact that they remained on the board until 1999, when considered together with all the circumstances, does not necessarily demonstrate the existence of an agreement whereby the Company's profits were to be distributed by way of directors' emoluments. 143.Further, the contention that remuneration did not relate to contribution or workload is contradicted by the 1988 and 1990 annual general meetings. At the 1988 annual general meeting, emoluments were lowered exactly because of reduction in workload : see paragraph 85 above. At the 1990 annual general meeting, when Roseanna and Henrietta had to take up the extra workload after Marion's resignation as an executive director, their remuneration was increased : see paragraph 90 above. (4) Agreement to distribute profits by directors' emoluments in proportion to shareholding? 144.The respondents accepted that when the figures alone are considered, remuneration was roughly in proportion to respective shareholding. But they deny that it was because of any supposed agreement or understanding. It was purely because there was not much difference among the shareholdings and housing allowance was introduced to address the inequality among shareholders on housing benefits. 145.A major component of directors' remuneration is indeed the housing allowance. This was first introduced in 1985 and revised in subsequent years along inflation because of the inequality on housing benefit created by Sammy's occupancy of the Fei Ngo Shan Property. It bore no reference to or connection with shareholding at all, whether at the time of introduction or subsequent adjustments. Arnold maintained that it was introduced as part of the distribution structure to implement fairness. It is certainly fair to introduce housing allowances to address the inequality on housing benefit. But it does not necessarily follow that members had agreed that remuneration, of which housing allowance took up a significant portion, was to be fixed in proportion of the respective shareholding. I respectfully agreed with Mr Bunting's observation that Arnold had indeed overworked his notion of fairness. 146.Further, in my view, the fact that emoluments and allowances were in rough proportion of shareholding is one thing. It is entirely consistent with the fact that there was no much difference in shareholding. An agreement among the shareholders that distributions should be by way of emoluments and allowances in rough proportion to shareholding is quite another. It requires proof by cogent evidence, which in my view is lacking. (5) Articles of association as mere formality? 147.The articles of association on appointment of directors are inconsistent with the Common Understanding : see paragraph 119 above. Mr Bunting submitted that the burden of proving that every member had the right to sit on the board is particularly onerous in light of these articles. Mr Kotewall submitted that the presence of any inconsistency between the Common Understanding and the articles does not prevent the former from arising. He cited, as an illustration of the existence of the Common Understanding, the fact that each of Sammy, Arnold and Desmond, who wanted to be, was unanimously appointed as a director and that in each case, the shareholders readily amended the articles of association to accommodate their appointments. The articles of association are mere formality and any conflict between the articles and the Common Understanding was, as and when necessary, removed. 148.I have already dealt with the appointments of Sammy, Arnold and Desmond as directors. The mere fact that amendments to the articles were readily made, in my view, does not necessarily assist the petitioners. The relevant articles restricting the number of directors need to be amended irrespective of the existence of the Common Understanding if additional directors were to be elected. Further, if members thought fit to amend the articles restricting the number of directors in order to implement the Common Understanding, I see no reason why they did not amend articles 8 and 9 (on who has the right to sit on the board) and article 10 (on qualification) as well. 149.Mr Kotewall referred to the practice of electing directors en bloc in annual general meetings between 1985 and 1995 as an illustration that articles were treated as formality. In my view, when considered together with all the circumstances, conducting re-elections en bloc is more consistent with the inference that it was done purely for administrative convenience than the existence of the Common Understanding. (6) How Arnold complained 150.I now examine how Arnold complained to the majority after his exclusion from the board. To recap, Arnold registered his complaints before presenting the petition mainly by :
His conduct casts considerable doubt on his case on the Common Understanding. I will explain why below. 151.First, I have considerable difficulty in accepting Arnold's explanation why no express reference was made to the Common Understanding in the two JSM letters. It was the first formal complaint made through his solicitors immediately after he was wronged by the majority. If indeed the respondents were fully aware of the Common Understanding and yet deliberately acted in breach of it, then the first thing any formal complaint (as the two letters purported to be) should do is to spell out in an unequivocal manner the terms of the Common Understanding and how they had acted in breach thereof. 152.Secondly, Arnold's way of making protests at the annual general meetings did not make sense at all. The simplest way to make known to the respondents his grievance is obviously by referring to the Common Understanding and pointing out how they had acted in breach of it and had the protests properly minuted. 153.Thirdly, in his letter of 2 February 1999, Arnold was making a point that the Company was paying substantial emoluments to directors although it was making a loss. What he was not complaining was that he had been deprived of his right to share the profits, contrary to the Common Understanding. Why he did not do so is difficult to understand. Further, by the letter dated 7 May 1999, Henrietta on behalf of the board responded to his letter. She referred to the directors' emoluments constituting a significant portion of the Company's expenditure as a long standing pattern maintained by the shareholders since 1985 for some good reasons. This must provide Arnold a good opportunity to state his case on the Common Understanding by reminding Henrietta the discussions back in 1984 and the reasons for such understanding. But he did not do so. 154.Arnold had his own excuses why he behaved as he did. He said that the majority knew what was going on and how he and his mother had been unfairly treated, and that it was a waste of time since the majority had a closed mind. I find those excuses singularly unconvincing. I see no reason at all why he did not set out the Common Understanding and the flagrant breach by the respondents in clear and simple terms either at the annual general meetings or correspondence. 155.In summary, I find Arnold's way of making his complaints inconsistent with his case on the Common Understanding. 156.After presenting this petition, Arnold wrote to the board offering for election at the 2000 annual general meeting : see paragraph 109. I note that this letter was written more than a year after the petition was presented. The petitioners' case including the Common Understanding and the breach thereof had all been set out in the petition already. However, strangely enough, Arnold made no reference to his right to sit on the board in this letter when offering himself for election. It is true that he was there mainly complaining about being deprived of profits distribution. But it is his case on the Common Understanding that profits distribution was linked to and indeed dependant upon directorship. It made it more important to refer to his right to sit on the board. (7) No Common Understanding 157.For the above reasons, I am not satisfied that the petitioners have proved on a balance of probabilities that the Common Understanding existed as alleged. Accordingly, any complaint that based on the existence of the Common Understanding, in particular, the alleged deprivation of the petitioners' right to manage the Company's affairs and their entitlement to share profits by way of directors' emoluments and allowances in breach of the Common Understanding, must fail. SECTION G - ANY UNFAIR AND PREJUDICIAL CONDUCT 158.Mr Kotewall submitted that the absence of a common understanding or legitimate expectation is not fatal to a claim for unfair prejudice. Irrespective of the Common Understanding, the respondents' act as a concerted effort of not re-electing Arnold was an improper exercise of their voting rights as shareholders which, by reasons of the set-up of the Company concerning the distribution of the Company's profits and assets, constitutes unfair prejudice against the petitioners. He went on to submit that as the Company's distributions have since 1992 been made in the form of directors' emoluments in rough proportion to shareholding (as opposed to dividends), the non-re-election of Arnold as a director at the 1996 annual general meeting had the effect of excluding the petitioners from partaking in all the Company's distributions. The excessive amount of the directors' emoluments bespeaks the point that they are in substance distribution of the Company's profits and assets as opposed to rewards for the directors' contribution to the Company. These, counsel submitted, coupled with the fact the Company has been operating at a loss (without taking into account extraordinary gains by way of sales of properties) since 1991 aggravates the unfair prejudice to the petitioners. 159.The complaint that the petitioners had been deprived of their entitlement to partake the Company's distributions by way of directors' remuneration, as pleaded in the petition, seemed to have been based on the Common Understanding. Now that the petitioners seek to advance a case in this respect without reference to and independent of the Common Understanding, the petition has to be amended so as to overcome the technical objection that a point which is not pleaded cannot be relied on : Re Technion Investments Ltd [1985] BCLC 434, Re Tourmaline Ltd [2000] HKC 348. As I understand them, the parties have canvassed this part of the case quite independently of the matters concerning the Common Understanding. The evidence is already before the court and the respondents are unlikely to suffer any real prejudice. Justice requires all issues arising from directors' remuneration to be fully ventilated and resolved in these proceedings. I therefore allow the application. 160.As the petition now stands, and with any reliance on the Common Understanding discounted, the unfair and prejudicial conduct complained of may be put under various heads :
I will deal with them in turn. (1) Wrongful exclusion of Arnold from the board 161.The first complaint gives rise to the following questions : (a) whether there was any valid reason for not re-electing Arnold; (b) whether the respondents acted in concert in not re-electing him; (c) whether the respondents exercised their voting rights improperly in not re-electing him; (d) whether Arnold's non-re-election had the effect of excluding him from the profits distributions. This in turn give rises to a further question : (e) whether the profits distribution did take the form of directors' emoluments and allowances. These questions are addressed below. (a) Any valid reason in not re-electing Arnold 162.The reasons given by Henrietta for not re-electing Arnold are, firstly, Arnold's lack of interest in the Company's affairs; secondly, the 1995 action was draining away the Company's resources and the Company had to cut its overheads consequently; thirdly, the sale of properties and reduction in rental income leading to streaming of staff, reducing the actual income paid to directors and reducing the number of directors to those who participate in the running of the Company; and fourthly, the administrative inconvenience to have someone suing the Company sitting on the board. The reason given by Marion mainly concerned with the reduction in work after sale of properties and reduction in rental income. Mr Kotewall submitted none of the above is valid. His submissions on the each of the reasons are summarised below. 163.Lack of interest on the part of Arnold in the Company's affairs was not a valid reason because prior to his appointment, Arnold had already made it clear that he would be working abroad and yet, he was elected and allowed to remain on the board. If contribution and participation had been relevant, he would have been removed many years ago. In any event, Arnold was allowed not to participate in the Company's affairs because of his "budding career". 164.It is not correct that the 1995 action was draining the resources of the Company. The action was commenced about eight months before Arnold's removal from the board. The amount of legal costs incurred could not have been substantial. Henrietta in this connection relied on a bill from Messrs Lo & Lo dated 10 July 1996 for about $860,000 covering work done for both the 1985 and 1995 actions for the period from 1 November 1990 up to 3 July 1996. Clearly, the bill covered the work done for the 1985 action. Hence, if legal action was draining the Company's resources, it was the 1985 action commenced by Henry and not the 1995 action commenced by Arnold. 165.Sale of properties and reduction in rental income as an explanation cannot withstand scrutiny. According to the undisputed figures from the accounts, the net rental income increased continuously from the financial year ended 31 March 1993 at $783,533 to that ended 31 March 1996 at $1,276,276. There was however no reduction in directors' emoluments during the same period. The amount actually increased from $2,842,160 for 1993 to $4,171,486 for 1996. Thus the explanation for reducing the number of directors is simply not worthy. Henrietta in her oral evidence prayed in aid figures before 1990. But she is unable to explain (1) why Arnold was only excluded in 1996 when, according to her, the rental income dropped since 1990; (2) why the respondents saw fit to reduce the number of directors by not re-electing Arnold in 1996 when at the same time they somehow saw fit to increase emoluments package, as opposed to reducing it so as to deal with the perceived reduction of rental income; and (3) why Arnold' exclusion from the board came at the first available annual general meeting after his commencement of the 1995 action. 166.Henrietta's view that it was administratively inconvenient to have Arnold (who is suing the Company) to sit on the board was not stated as a reason for not re-electing in her affidavit. This is perplexing. Even if (which is denied) the 1985 and 1995 action could be a proper reason for not re-electing Arnold, the fact remained that he was singled out and discriminated against by the respondents. Desmond, who likewise was not able to and did not assist in the actions, was allowed to remain as a director until the 1998 annual general meeting. Henrietta said Desmond was allowed to stay as a director because the board needed an independent director to make decisions on behalf of the Company at arm's length. This need is highly questionable. The question of conflict of interest can be dealt with easily by seeking consent from the shareholders. Besides, one independent director on his own cannot form the necessary quorum for a board meeting. In any event, Desmond was also not re-elected in 1998 showed that the need to retain an independent director was no more than a convenient excuse to justify the respondents' wrongful act of singling out Arnold in 1996. Henrietta suggested that Loretta and Maimie were not re-elected as directors in 1999 for reasons similar to the non-re-election of Arnold in 1996. But they both sent letters before the 1999 annual general meeting indicating that they would not offer themselves for re-election. Thus, their non-re-election was clearly a result of their own choice. 167.Having considered the evidence and submissions in this regard carefully, I am of the view that the only real reason why the respondents did not re-elect Arnold in 1996 was that it was administratively inconvenient to have a person suing the Company to sit on the board. It is true that this reason was not stated in Henrietta's affidavit. However, I do not consider it fatal. Allowing Arnold who had obvious and serious conflicts of interest with the Company to remain as a director must be a real concern to the respondents at the time. Such concern is legitimate and understandable. The respondents might well have opted to deal with the conflicts by some other means, for example, by asking Arnold not to attend any board meeting that touched upon the actions. But refusing to re-elect him to the board is in itself not objectionable. If it had the effect of excluding Arnold from profits distribution, the position may well be different. (I will come to this in a moment.) Subject to this qualification, I do not consider Arnold had been singled out and discriminated against by the respondents either. Henrietta's explanation that the board needed Desmond as an independent director might sound hollow. But comparing Arnold with Desmond and indeed other directors is simply not apt. For they, unlike Arnold, did not have any conflict of interest arising from the 1985 and 1995 actions. I reject the petitioners' contention that the respondents' not re-electing Arnold was revenge against him for commencing the 1995 action. (b) The five sisters acting in concert 168.Turning to the second question whether the respondents acted in concert in not re-electing Arnold, Mr Kotewall submitted that the respondents clearly so acted. Henrietta admitted that she discussed the matter with her sisters and they felt that they would not approve of Arnold being re-elected. The five sisters, according to Henrietta, always worked as a team and they would convince each other if they had disagreements. According to Marion, while she did not want to re-elect Arnold, the sisters had different opinions and some of them had said that it did not matter. In the circumstances, although only Henrietta and Roseanna voted against Arnold's re-election and the other sisters abstained, those who abstained knew that Arnold would then be excluded from the board. Thus, clearly the respondents all joined forces and acted in concert in expelling Arnold from the board. I am satisfied that the five sisters had discussed Arnold's re-election before the 1996 annual general meeting; that Henrietta and Roseanna had decided to vote against his re-election while the other three sisters would abstain; and that those who would abstain knew that Arnold would not be re-elected. I therefore accept that the five sisters had thus joined forces and acted in concert in not re-electing Arnold. It matters not whether some would vote against his re-election and some abstained. The net result of their discussions and the ensuing action in the 1996 annual general meeting was that Arnold was expelled. But as I have ruled in paragraph 167 above, subject to the question whether Arnold had been excluded from profits distribution, there was nothing objectionable in not re-electing him. Subject to the same caveat, it is not wrongful for the five sisters to act in concert in not re-electing Arnold either. (c) Improper exercise of voting powers 169.Mr Kotewall submitted that a shareholder is not entitled to exercise his vote in whatever way he pleases. His exercise of the vote is subject to the general principles of law and equity. In this conncetion, he relies on the observations of Peter Gibsion J in Re Ringtower Holdings plc (1989) 5 BCC 82 at p.101:
170.Counsel submitted that Arnold was discriminated against by the respondents which resulted in the petitioners being excluded from participating in the Company's distributions of profits and assets. Thus, this question whether the respondents had improperly used their voting powers hinges on the fourth question whether Arnold's non-re-election had the effect of excluding him from profits distribution which, on the petitioners' case, took the form of directors' emoluments and allowances. This brings me to the foremost question in this part of the case. (d) Distributions by way of directors' emoluments and allowances 171.There is no doubt that the pivot of the petitioners' case on the wrongful exclusion of Arnold from the board is the assertion that the distributions of the Company did take the form of directors' emoluments and allowances. If that platform is removed, the contention that the petitioners had been deprived of the distributions as a result of Arnold's exclusion from the board in 1996 will fall. The essential question is thus whether the emoluments and allowances were a proper remuneration for the directors or a mere disguise of distributions. It is common ground that in this connection remuneration of the board as a whole and not the remuneration of each individual director should be considered. 172.The burden rests on the petitioners to satisfy me that the Company did distribute its profits and assets by way of directors' remuneration as alleged. The new paragraph 39A of the petition alleged that the profits distribution took such form since 1986 : see paragraph 28 above. But this allegation did not sit well with the fact that declarations of dividends had been made in the period before July 1991. I see no reason why before July 1991, the Company's distributions would take the form of declaration of dividends and directors' remuneration simultaneously. Indeed, it is Arnold's own evidence that the main crux of the complaint is in the whole set-up and the structure of the Company whereby the parties since 1992 have partaken in its distributions by way of directors' emoluments and allowances. As I understand Mr Kotewall's submissions, he did not seek to contend otherwise. In the circumstances, I do not accept that the Company's distributions of profits and assets were by way of directors' emoluments and allowances since 1986 as alleged. What is the position since the last declaration of dividends in July 1991? 173.To support their contentions, the petitioners sought to rely on a number of matters. As I understand them, they are not direct proof as such but are matters that the petitioners rely on to ask the court to draw an inference in their favour. First, after the last distribution of dividends in July 1991 and until Arnold's exclusion from the board in 1996, directors' emoluments and allowances were in rough proportion to shareholding (with the only exception of Sammy who, instead of receiving monetary payments, was allowed to reside with family in the Fei Ngo Shan Property). Mr Kotewall submitted that in this regard, Desmond's case provided the best example. As noted above in paragraph 12 above, Desmond holds 11 shares in the Company. This represents 1.43% of the entire issued capital of the Company. The total directors' emoluments and allowances paid to Desmond, while he remained as a director, were consistently in the region of 1.4% of the overall amount paid by the Company for directors' emoluments and allowances. On the matters relating to housing allowance, Mr Kotewall submitted the shareholders who were then directors (with the exception of Sammy who held slightly fewer shares) hold roughly the same shareholding in the Company and they, being family members, were not particularly concerned with minor differences. 174.It is important to note that it is Arnold's own evidence that the remuneration package had always been fixed with regard to the shareholding percentage. As noted above, housing allowance constituted a significant portion of the directors' remuneration. When it was first introduced and subsequently revised along with inflation, it bore no relationship with shareholding at all. After the introduction of housing allowance, there was not much difference in the amount of remuneration received by the directors simply because there was not much difference in the percentage shareholding. Arnold's evidence above is therefore simply untrue. In my view, he was putting the cart before the horse. Desmond's position is unique. He was allowed to derive financial benefits from the Company when he needed it most. Over the years, he enjoyed similar emoluments as other non-executive directors did. His housing allowance was however considerably smaller than theirs. The reason why his remuneration package was designed in such a way is not apparent. But there is nothing in the evidence to show that his package was expressly fixed by reference to his shareholding. More importantly, did the payments made to Desmond's as a director necessarily raise an inference that directors' remuneration package was the way to distribute profits? I will come back to this question later. 175.Secondly, Mr Kotewall submitted that as directors' emoluments and allowances are paid roughly in proportion to their respective shareholding in the Company, there is no question that such payments were linked to contribution to the Company's management (save that executive directors were paid slightly more.) Hence, directors' emoluments and allowances were but the mechanics whereby the Company distributed its profits and assets to its shareholders. I have already expressed my view why directors' remuneration was in rough proportion of shareholding and explained why it did not support the petitioners' case. I have also demonstrated why the submission that remuneration package is not linked with contribution is not entirely correct in light of Henrietta's remarks at the 1984 annual general meeting and the adjustments of emoluments at the 1988 and 1990 annual general meetings : see paragraphs 137 and 143 above. I note that these incidents were all pre-1992. However, there is nothing in the evidence to show that after 1992 when fixing the remuneration package for executive directors, their skill and contributions were to be disregarded. 176.Thirdly, Mr Kotewall submitted that the directors' emoluments and allowances were excessive. It bespeaks the point that they are in substance distribution of the Company's profits and assets as opposed to rewards for the directors' contribution to the Company. However, if the directors' emoluments and allowances were not excessive, it leaves no room to import the inference that they were distributions of the Company's profits : see paragraph 44 above. They must be proper reward for their contributions. So, was the directors' remuneration excessive? To the evidence on this crucial question I now turn. 177.The petitioners' case in short is that the Company' business since 1990 has been confined to leasing of properties for rental incomes. Given the size of the property portfolio and the work involved, a full-time employee who is not particularly qualified would suffice. The remuneration paid to the directors was wholly excessive and could not be justified by the work they did. In the course of his oral evidence, Arnold conceded that the actual amount of remuneration for the years 1999 and 2000 in the respective sum of $751,952 and $712,952 was not excessive. He also conceded that the 1999 level of remuneration was reasonable for the years 1996 to 1998. In those years, the actual amount of remuneration was respectively $3,980,766, $4,219,608, and $3,012,716. The alleged excess was therefore $3,228,814, $3,467,656 and $2,260,764. Arnold agreed that he had not asked his aunts about their workload but he said he was well aware of the Company's business at the time. Finally, he disagreed with the suggestion that the total amount of directors' remuneration was not unreasonable, albeit slightly on the high side. I note that since June 1998, housing allowance has not been paid although such allowance has been approved. Thus the Company owes the directors a total of $2,296,988 in 1999 and $3,647,737 in 2000. 178.Henrietta gave a detail account on directors' workload. She said that all the five sisters had been involved in the management of the Company's property portfolio. Basically they took turn. Between 1959 and 1967, Loretta took part in the management although she was not a director. She helped as "a daughter-cum-member of staff" with a few thousand dollars per month. In the 1960s, Maimie for a few years took over the management when her parents travelled abroad. Maimie was then a quite renowned ballerina. She set up the first modern ballet school in Hong Kong but gave that up to look after the Company's property. Then it was Roseanna's turn between 1967 and 1979. Marion also made contribution in the 1970s up to early 1980s. In the early 1980s, Loretta and Maimie lived abroad and Henrietta had her own medical practice. They therefore did not take part in the management as much as the other two sisters did. Then Henrietta came into the picture in 1985. Subsequently in 1995, she gave up her medical practice and worked full time for the Company. Henrietta said she learnt her trade from her elder sisters who in turn learnt theirs from their mother. The five sisters worked as a team throughout the years. 179.Henrietta had caused about 100 files brought to court, 60 of which related directly to the property portfolio. She said in the Company' office, there were over 1,000 files, 660 of which were in relation to construction and the rest, either property or the legal actions confronting the Company. In respect of the 1985 and 1995 High Court Actions, there were another 105 files of documents and 42 files of correspondence with the handling solicitors. 180.Apart from the daily management of the Company's office, the directors were responsible for taking care of the property portfolio and the 1985 and 1995 High Court Actions. Henrietta denied the suggestion that a not particular qualified employee can handle all the different aspects of the directors' work. 181.According to her list (exhibit "IMHH-11"), directors' duties and responsibilities in connection with the property side are : (1) policy making and (2) administrative, executive and management works. She also listed out the problems of the properties when dealing with the portfolio (exhibit "IMHM-12"). They ranged from mundane and petty items to major and significant work which required personal and intensive involvement by Henrietta. 182.There are five properties in the portfolio. Henrietta described briefly her work in connection with each one of them separately. 183.Fei Ngo Shan Property was old and rather dilapidated. There were problems in connection with the swimming pool, burst of water pipes, broken windows, water leakage, etc. In 1997, a fire broke out in the electric meter room. As a result, the whole building was rewired. Henrietta was involved with the work, including finding an appropriate contractor to carry out the work, obtaining approval from the government to approve the contract, and checking if the work was carried in accordance with the contract. The entire problem lasted about 6 months. 184.The ground floor of Duke Wellington House had problems like water seepage damaging tenants' decoration in 1997 and 1999 and blockage of toilet in 1997. The Fire Service Department required that for the whole of the building, automatic sprinkler, emergence lighting system, manual fire alarm system be installed and standby fixed fire pump and additional hose reel points be provided. Henrietta personally dealt with the problem. In the course of doing so, she contacted and negotiated with architects, fire contractors, the incorporated owners, the owners of the units in the building and tenants. In particular, there were problems in finding a suitable location for the water tank. Further negotiations with the owner who owns the relevant part of the roof are necessary. There was also another problem involving piping. A hole needs to be dug in the wall on the ground floor. There is another set of on-going negotiations with the owner of that unit. At the time of the hearing, the work required by the Fire Service Department was only partially completed for the ground floor. The entire building was still under works. 185.The properties situated at Tai Kok Tsui were very old and dilapidated. Problems like water leakage and pipe blockage were frequent. Repair work had been carried out. There were illegal subtenants to be expelled. All these problems were compounded by the fact that there was no Incorporated Owners. 186.The second floor of Man Kee Mansion was served with government orders after the old tenant moved out in 1997. In order to comply with the orders, architects and contractors were engaged. Negotiations with owners were made. Renovations that took six months were carried out. Henrietta was personally involved in all of these. After the old tenant moved out, new tenants had to be targeted. Contractors, who had engaged in renovating elderly homes, suggested to the directors that that might be a possibility. Henrietta made enquiry with the Social Welfare Department and obtained useful information. She was in touch of the community and knew its needs. The directors then concluded that renting the premises to elderly home operators was a very favourable idea. So elderly home operators were targeted. Considerable efforts were made to look for a suitable tenant. Intensive negotiations were carried out with the potential tenant who eventually took up the tenancy. In the end, the Company was able to procure favourable terms in the tenancy agreement, including substantial renovation to be carried out by the tenant totalling $10 million, complex guarantees which in short secured a handsome increase in rent when the tenant exercised the option to renew. And because of this tenancy, the Company's recurring rental income had increased tremendously from $1 million in 1995 to $4.2 million in 2000 despite the downturn of economy. Henrietta said the credit should go to the directors who had since 1997 vigorously marketed the second floor of Man Kee Mansion. 187.Henrietta did not think a professional property agent, as suggested by the petitioners, could achieve what had been done in relation to the Man Kee Mansion tenancy, including the terms of lease made with the elderly home operator. 188.The directors also spent time in upgrading the Company's office, including installing tele-eye technology to monitor from the office the car parking spaces in Man Kee Mansion and Fei Ngo Shan Property. 189.Turning to the two actions, Henrietta had this to say. The peak of the work in connection with the actions was in 1996 and 1997 although it started mounting in 1995. In 1996, she and Roseanna spent about 2,400 hours, Marion, about 1,200 hours and Loretta and Maimie, about 800 hours. Using the time spent in 1996 as a reference, the time spent in 1995 was about half whereas that in 1997 was less than a half. In 1998, it was about a quarter. At the material times, Loretta and Maimie were abroad but they rendered necessary and useful assistance. In Loretta's case, she knew historically all the information about Fei Ngo Shan Property which was important to some of the important issues in the actions. In Maimie's case, she lived there for the longest period. She was aware of matters about the property that Henrietta was not. 190.Henrietta then described how she and Roseanna prepared for the two cases, including reading documents and witness statements, having conference with counsel, retrieving relevant documents from the Company, preparing witness statements, considering counsel's advice, having telephone conferences with the two sisters abroad, etc. They devoted much time and effort on the actions because the Fei Ngo Shan Property (worth about $100 million at the moment and more than $200 million after lease modification) is the most valuable property of the Company. 191.She disagreed that the directors had been drawing excessive emoluments as alleged for the work they did in the years 1995 up to 1999. She said, "We deserve all that was paid to us, because of the time that was spent on the legal work, and because we had spent time on the property portfolio." 192.I now turn to the experts' evidence. For the petitioners, the expert is Mr Simon Lai, the chief executive of Knight Frank Hong Kong. The respondents' expert is Ms Carrie Lam, a director of the property management division of Jones Lang LaSalle. Their expertise is not in dispute. I will deal with Mr Lai's evidence first. 193.Mr Lai has 21 years of experience in the property field. During this period, he has been involved in property valuation, property consultancy such as advising on resumption, taxation cases, property agency and property management. Knight Frank Hong Kong was established in 1983 and is part of the Knight Frank Group, which have 135 offices worldwide and of approximately 2,500 employees. It provides a full range of professional services including residential, office, retail and industrial agency, property valuation and property management. 194.The terms of reference given by Mr Lai is to estimate the likely fee which an independent property management company will charge for the handling of all such matters which may arise as a result of holding the property portfolio for rental returns; and to compare such estimated fee above with the actual remuneration paid/payable to the directors (especially executive directors) of the Company covering the period since the year ended 31 March 1996. 195.It is his opinion that the scope of work involved in management by the owner of the Company's property portfolio above would normally and principally be collecting rents and initiating associated actions if the rents are in arrears; appointing leasing agents in the case of vacancies; receiving complaints from the tenants and taking appropriate actions where necessary; finding contractors for repairs and maintenance works where the liability is assumed by the landlord under the terms of the lease; co-ordinating work between the tenants and the property management bodies; negotiating new rents in cases of lease renewals; and periodic physical inspection of the properties. With reference to the list of problems relating to the properties as set out in Henietta's list ("IMHH-12"), they would normally fall under the broad category of issues required to be dealt with by owners of properties of such nature and age. It is common for owners to appoint a professional property manager to take over the management obligation when holding property as investment. In Hong Kong, such managers are either companies solely established for property management; or the property management divisions of surveyor firms or banks. Under normal trade practice, the fee for such services is generally fixed as a percentage of the rent received; which will normally range from 3% to 6% approximately of rent received. The exact percentage will depend on the nature of the property and the likely complexity of the work. 196.Mr Lai then concludes that should a property manager be appointed to be responsible to the Company for the overall management of its property portfolio, a reasonable level of fees that may be charged for the work will be 5% of the rent collected from the portfolio, or a minimum lump sum charge of approximately $20,000 per month, which is significantly less than the remuneration paid/payable to the executive directors of the Company since the year ended 31 March 1996. It is his view that having regard to the total actual rental income received by the Company, the fee for the property manager for the period would not have exceeded $20,000 per month. 197.Miss Lam has over 12 years of experience in the field of property management. She is in charge of the management of a mixed portfolio of properties. She is also responsible for overseeing her division's cost/management service and has extensive experience in the provision of advice on management related issues to clients. Jones Lang LaSalle was founded in March 1999 with the completion of the merger between Jones Lang Wootton and LaSalle Partners. It is an independent and specialized firm in property and real estate management. With over 6,000 employees worldwide, operating 100 markets in nearly 35 countries on 5 continents, Jones Lang LaSalle provides global real estate and investment management services. The Hong Kong branch manages over 50 million square feet of quality commercial, residential and industrial accommodation, employing over 190 professional and 2,800 operational staff who are specialised in provision of quality property/facility management services to clients. 198.Miss Lam had been asked to assess the level of professional fees for managing the Company's property portfolio; to compare the scope of work between a property management agent and the directors of the Company; to assess the work of the directors and staff employed by the Company; and to estimate the costs of setting up an independent management team to manage the Company's portfolio. 199.Her views can be summarised thus. The scope of services that a property management agent will generally provide for managing an investment portfolio such as that held by the Company includes : collecting rents and initiate associated actions if the rents are in arrears; appointing leasing agents for vacant premises; dealing with complaints from the tenants and take appropriate actions where necessary; appointing contractors for repairs and maintenance works where the landlord under the lease terms assumes the liability; co-ordinating the work between tenants and the property management company/incorporated owners of the building; negotiating new rents for lease renewals on behalf of the landlord; conducting physical inspection of the properties periodically; handing over premises to tenants upon lease commencement and taking over the premises from the tenant upon lease expiry; administering the lease and serve notice to quit to tenants on behalf of the landlord; preparing an annual income and expenditure budget for managing those properties for approval by landlord; handling the licensing of carpark spaces and issue relevant tickets/permits to the licensees and to co-ordinate with management companies of involved buildings; liaising with agents, government departments, incorporated owners and professional; attending meetings (usually after office hours) with the incorporated owners and/or management companies; and issuing letters on behalf of the landlord. Some but not all of the above items are referred to by Mr Lai as well in his report. Generally, the directors of the Company were responsible for policy making, administration, executive and management works of the Company. Ms Lam in substance referred to Henrietta's list ("IMHH-11") and, inter alias, the extra work listed in connection with the two High Court Actions. She then set out the major differences between the work of the directors and that of a property management agent. 200.Miss Lam finally concluded that having compared with the scope of work between the directors of the Company and a property management agent, the directors have assumed additional duties that an ordinary property management agent will not undertake. The charge of HK$20,000 per month stated in Mr Lai's expert report is insufficient to cover the scope of work of managing the Company's property portfolio. A property management company would charge about HK$25,000 per month for the management of such a portfolio (excluding additional security and hourly charges for specific work). Furthermore, such charge does not reflect the level of charge for the part of work outside the scope of property management e.g. litigation relating to the Fei Ngo Shan property or outsourcing of corporate secretarial work. If a new in-house management team were to be set up which includes assigning work to an outsourced company secretarial firm, the total monthly costs would be around HK$152,500.00 excluding other outgoings (and additional security). The estimate is based on the assumption that there is no substantial and complicated matters in managing the properties and it does not take into account of the possible additional complications of the Company being involved in substantial litigation disputes. If the director is to involve in such complicated litigation matters, additional remuneration shall be paid to reflect extra workload. 201.Mr Kotewall submitted that it is clear from the experts' evidence that the costs of engaging a property manager to look after the Company's property portfolio will be in the region of $20,000 to $25,000 per month. This is far less than the directors' emoluments and allowances paid or resolved to be payable by the Company since Arnold's exclusion from the board. He went on to submit that while the directors might have to make decisions which a property manager would not be in a position to, this extra requirement would not justify the level of directors' emoluments and allowances paid after Arnold's departure. Further, in view of the Company's property portfolio, the suggestion of Ms Lam to set up an independent property management team, Mr Kotewall submitted, is clearly out of line and out of question. Nor could the costs of setting up such a team be reflective of likely costs to replace the existing directors. Lastly, he submitted that Henrietta's evidence on the workload was clearly exaggerated. 202.Mr Bunting naturally took a different view. He submitted that although the workload and responsibilities of the board for the relevant period were important, they were by no means the only factors. The Company is not the kind of commercial organisations where management is expected to justify its remuneration on a continuing basis, and where directors are liable to be eased out for shortcomings or inefficiency. It is a family company, where all shareholders and directors are members of the same family which has been in business for nearly 50 years, and where the five sisters have been running it for the past 20 years. The sister are now in their 50s and 60s and Henrietta made a considerable financial sacrifice to cease her medical practice in order to work full time for the Company. Mr Bunting contended that in the circumstances the yardstick of reasonableness for the Company is more flexibility than in the case of a modern commercial organisation. 203.Although the main business of the Company has since 1990 been leasing of properties for rental income, Mr Bunting submitted, this gave a misleading picture of the board's responsibilities and workload. There was a great deal of renovation work to be done which enhanced the capital value of the property portfolio. The directors were also charged with consideration of the capital value of the properties in terms of sales and possible redevelopment. Henrietta's evidence had clearly demonstrated the considerable quantity and difficulty of the directors' workload in respect of the property portfolio between 1996 and 1999, and the very considerable benefits to the Company as a result of their work both in the form of increased rental income and also in the form of capital appreciation. Mr Bunting went on to submit that an outside professional manager would not be a substitute for the executive directors. Even Mr Lai recognised that when he accepted that the property manager would not be primarily concerned with renovation or redevelopment. Further, both experts recognised in monetary terms the very considerably increased workload between 1996 and 1999. 204.Mr Bunting pointed out that the directors were also charged with protection of the Company's principal asset, the Fei Ngo Shan Property, by defending the 1985 and 1995 actions. The huge workload on the litigation is documented in the bills from Messrs Lo & Lo which covered work exclusively done for the Company. Henrietta also explained in her evidence the involvement of the five sisters, the quantity and difficulty of the work involved. 205.I have carefully considered the evidence and the submissions. I am of the view that given the workload and responsibilities undertaken by the directors between 1996 and 1999, the Company's property portfolio could not be handled by an employee with no particular qualification (as suggested by Arnold) or by a property management agent (as suggested by Mr Lai). On the other hand, it would be unrealistic to set up an independent management team to replace the directors (as suggested by Ms Lam). But the directors, in particular, Henrietta had contributed considerably in the management of the portfolio which brought about significant benefits to the Company both in terms of increase in rental income and capital appreciation. In this regard, the best example is Man Kee Mansion. I do not find Henrietta's evidence in this regard exaggerated. The directors had to prepare the 1985 and 1995 actions as well. Henrietta may have exaggerated on the time the five sisters had spent in preparing the actions. But I have no doubt that the workload as reflected by the bills was onerous. And they must have spent considerable effort and time in defending the actions. After all, as rightly put by Henrietta, the Fei Ngo Shan Property is the most valuable in the Company's property portfolio. I accept Mr Bunting's submissions on the special features in paragraph 202 above and agree that a more flexible yardstick should be applied when determining the reasonableness of the directors' remuneration. Having regard to all the circumstances, I find that the directors' annual remuneration package between 1996 to 1999 as a whole (including housing allowance payable) was not unreasonable or excessive. It represented a proper reward for their skills and contributions in those years. 206.There is no evidence before me on the excessiveness or otherwise of the directors' remuneration between July 1991 and before Arnold's exclusion from the board in 1996. It would appear that this question from the petitioners' point of view does not arise. For Mr Kotewall submitted that if all the shareholders partook in the Company's contributions in the form of directors' emoluments and allowances, there is no question of whether the amounts were or were not excessive insofar as the distributions were made in proportion to their respective shareholdings. Nor would the petitioners have complained even if executive directors were paid a little bit more for the time they spent on the Company's affairs. That being the case and the burden being squarely on the petitioners, I am not satisfied that they had proved that the directors' remuneration was excessive for that period. 207.For the above reasons, the petitioners have failed to prove that the Company had distributed its profits and assets by way of directors' emoluments and allowances since its last declaration of dividends in July 1991. I do not accept the petitioners' allegation that the directors had been drawing excessive remuneration with a view to depleting the company's assets or at all. The remuneration properly and reasonably reflects the workload they discharged and contributions they made in those years. 208.I now come back to the nature of the payments made to Arnold and Desmond as directors. In my view, when all the circumstances are considered, the payments to them were not distribution of the Company's profits and assets. If that were the case, some directors, that is, the contributing directors, would be drawing emoluments and allowances as a proper reward for their work. Some, like Arnold and Desmond, were partaking distribution of profits and assets as an entitlement qua shareholders. Such a differential treatment is not only untenable conceptually but also unsupported by the evidence before me. The Company is a family company. Arnold and Desmond are the third generation. According to Henrietta's evidence, which I accept, the five sisters were hoping that they might in their own way contribute to the Company after their appointments. In the circumstances, it is not unreasonable to draw, and I so draw, the inference that they were allowed to derive some form of financial benefits from the Company without making much contribution. In the absence of any wrongdoing on the part of the respondents, the petitioners cannot complain that Arnold had not been able to receive such benefits since 1996 : see the remarks of Peter Gibson J in In re Sam Weller Ltd at paragraph 44 above. 209.Accordingly, I am not satisfied that the respondents had used their voting powers improperly when not re-electing Arnold at the 1996 annual general meeting and that the petitioners had thereby been wrongfully excluded from partaking the Company's distributions of profits and assets. 210.I next deal with the second complaint about paying directors excessive emoluments while the Company is making loss. (2) Paying directors excessive emoluments while the Company making loss 211.The petitioners contended under this head that since 1991 the Company had been trading at a loss without taking into account extraordinary gains from property disposal. But the respondents continued to pay themselves directors' emoluments which were wholly excessive in the circumstances. Mr Kotewall referred to the figures on the rental incomes and directors' remuneration for the period between 1991 and 2000, which do not appear to be in dispute and clearly showed that directors' emoluments were paid while at the same time the Company was in substance operating at a loss. He submitted that if that were allowed to continue, it had the effect of depleting the Company's reserve. Then at some stage there would be nothing left and the petitioners' shares would become worthless. 212.In my view, it is not objectionable to pay directors remuneration representing a proper reward for their skills and contributions, even though at the same time the Company was making a loss. In order to succeed, the petitioners must first prove that the directors' remuneration was excessive such that it cannot possibly be a proper reward for their work. This, as I have ruled above, they fail to do. The petitioners must also prove that the directors were improperly influenced by their self interest and desire to continue in office and in control of the Company and to draw remuneration and other benefits for themselves and others connected with them : see paragraph 47 above. Not only did they fail to adduce any evidence to that effect, but there is also ample evidence to show that the executive directors, especially Henrietta, had contributed considerably to the Company's affairs and through their efforts, the Company's financial position improved over the years. This complaint therefore fails. (3) Directors' emoluments were excessive 213.The petitioners said that the emoluments after Arnold's exclusion in 1996 were excessive. In light of my findings above, this complaint must fail. (4) Intention to sell assets 214.The petitioners complained that the respondents intended to sell one of the properties so as to enable the Company to pay substantial directors' remuneration. By a letter dated 4 December 1997 issued on behalf of Madam Wong's estate to Chyvette, it was said that the Company was decisive of selling Office B, 8/F, Duke Wellington House and that the estate offered to buy it at $7.5 million. In the event, the transaction did not go through. Henrietta said the letter was just an attempt to test the market. 215.In my view, this complaint bites only if the directors were in fact paid excessive remuneration. In light of my findings to the contrary, I reject it. (5) Failure to address the petitioners' concern 216.The petitioners' complaints did not have any substance. They cannot possibly blame the respondent for failing to address their concerns in respect of the matters complained of. (6) Lack of probity 217.Since there is no merit in the matters complained of, the respondents were not guilty of any lack of probity as alleged. The petitioners, for their own reasons, may well have no trust or confidence in the respondents. But that alone does not entitle them to withdraw unilaterally : see paragraph 48 above. 218.In conclusion, I find that the respondents are not guilty of any unfair and prejudicial conduct as alleged. That being the case, it is not necessary to address counsel's submissions on other miscellaneous matters, for example, delay in commencing proceedings. SECTION H - CONCLUSION 219.For the foregoing reasons, my answer to the first issue of the agreed issues listed in paragraph 30 above is "no". The second and third issues, couched in their terms, do not arise. In any event, irrespective of the Common Understanding, the non-re-election of Arnold in 1996 did not have the alleged effect of wrongfully depriving the petitioners of their right to contribute to or participate in the management of the Company's affairs or their entitlement as shareholders to partake the distributions of the Company's profits and assets. I will also answer the fourth to ninth issues all in the negative. 220.Consequently, none of the grounds relied on by the petitioners are made out. The petition fails in its entirety and I dismiss it accordingly with costs with a certificate for two counsel. 221.As to the Company's costs, I will leave it to the parties for the time being. If they cannot come to an agreement, they are at liberty to apply. 222.Finally, I would like to express my gratitude to both senior and junior counsel for their tremendous efforts and able assistance, which have rendered the writing of this judgment far less onerous than it otherwise would have been.
Representation: Mr Robert Kotewall, SC and Mr Rimsky Yuen, instructed by Messrs Richards Butler, for the 1st and 2nd Petitioners Mr Michael Bunting, SC and Mr Anthony Ismail, instructed by Messrs Andrew W.Y. Ng & Co., for the 1st, 4th, 5th, 6th, 7th and 8th Respondents Mr Jeremy Bartlett, instructed by Messrs Wilkinson & Grist, for the 3rd Respondent (appearing on 23rd May and 28th May 2001 only) Messrs Lo & Lo for the 10th Respondent (excused from attendance) |
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