Re World Win Management Ltd.

HCCW000829A/2000

HCCW 828/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 828 OF 2000

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HCCW 829/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 828 OF 2000

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(Heard Together)

Coram: Hon Yuen J in Chambers

Date of Hearing: 9 October 2001

Date of Decision: 11 February 2002

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DECISION

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1.These are summonses for specific discovery . The background to the applications is set out below.

Background

2.Shun On Company Limited ("Shun On") is a private company incorporated in Hong Kong and World Win Management Limited ("World Win") is a private company incorporated in the British Virgin Islands.

3.Shun On was set up in 1937 by Un Sam who distributed the shares amongst himself, his wife, concubines and children. Un Sam died in 1941. The shareholders of Shun On are still descendants or the spouses of descendants of Un Sam.

4.World Win was incorporated in 1996 to hold the family home in Hong Kong.

Petitions

5.Petitions have been presented in relation to both companies for the winding-up of the companies, alternatively for orders under s.168A Companies Ordinance. The individual respondents are the same in both petitions, but with the addition of Paul Fong and Mary Li as petitioners and Ellen Yuen as a respondent in the Shun On petition.

6.The Petitioners in the Shun On petition control 44.76% of that company. The Petitioners in the World Win petition control 50% of the shares of that company.

Payment of "salaries"

7.Amongst the allegations made by the Petitioners in the Shun On petition is an allegation that the directors of Shun On who are also among the majority shareholders in that company have caused "salaries" to be paid to selected shareholders whilst others, including the majority of the Petitioners, had received none. It is alleged that the payments of such "salaries" bore little relation to work undertaken for Shun On, and no relation to shareholdings, and that such discriminatory payments of "salaries" have been excessive and have substantially reduced the amount of profits available for distribution as dividends.

SOUS

8.There is also an allegation that Shun On's funds have been depleted by the directors' decision to make equity investments in and unsecured loans to a company called Shun On (USA) Inc. ("SOUS"). Shun On has a minority 18% interest in SOUS. Yuen Cho Nang (the 3rd Respondent in both petitions) controls a substantial portion of the shares in SOUS and is its president.

9.The movement of Shun On's funds to SOUS related to 5 real estate projects undertaken by SOUS, all in Vancouver, Washington State, USA.

MC Investment, Cana Realty and Cana Corp

10.The properties were however not acquired directly, but were acquired through a company called MC Investment Inc. ("MCI") and managed by a company called Cana Realty Inc. Further, one of the buildings acquired by SOUS, the Arts Building, was co-owned with a company called Cana Corporation.

Yuen Cho Nang's involvement

11.Yuen Cho Nang is a 50% shareholder and director of MCI and Cana Realty. Yuen Cho Nang also has an interest, albeit a minority interest, in Cana Corporation.

Petitioners' allegations

12.The Petitioners have alleged that MCI and Cana Realty have benefited from their services to SOUS. Cana Realty has received some US$1m in management fees from SOUS. It has further been alleged in the affirmation of Colleen Yuen (the 3rd Petitioner) that SOUS' board had not been consulted before investments were made, and that Yuen Cho Nang had not disclosed his interest in Cana Corporation.

13.The Petitioners have alleged that no reasonable businessmen would have made those commercial decisions committing Shun On's funds to the transactions set out above, that they were made to allow Yuen Cho Nang to finance ventures which he wished to pursue for his own interest and that they benefited Yuen Cho Nang personally at the expense of the Petitioners.

14.Shun On (of which the 1st to 4th Respondents are directors) has written off part of the investment in SOUS. As for the loans, SOUS had issued promissory notes in favour of Shun On which were originally due for payment in 1998 but the payment date has since had to be extended.

Respondents' answers

15.In answer to the above allegations, the Respondents' case is that Shun On had been run in accordance with Un Sam's intentions for the maintenance of the family. The Respondents say that Un Sam's wishes were that the directors of Shun On and the executors of his Will were to run the company and his estate as "family affairs", the predominant purpose of which was to provide for the maintenance of family members and the upbringing of the younger generation. The Respondents say that in the early 1950's, the directors of Shun On, who were also trustees and beneficiaries of the estate, had established "a system of salary positions", with persons holding such positions being provided with regular income for their livelihood, with equal treatment for the various "f'ongs". It is the Respondents' case that the payments of "salaries" were made pursuant to this system and therefore were not proportional to the shareholdings in Shun On.

16.As for the allegation concerning MCI and Cana, the Respondents' case is that these were "more efficient" ways of investing in property transactions in the U.S.A. and that Yuen Cho Nang "chose to hold some shareholding interest in the said companies in order to ensure that good services are provided". The Respondents' case is contained in the 1st Affirmation of Yuen Yau Hon who has said that Yuen Cho Nang had received no benefits from his association with those companies. Yuen Cho Nang has however not sworn any affidavits himself.

Summonses for specific discovery

17.The Petitioners have issued summonses for specific discovery in both petitions. Since the issue of the summonses, some further discovery has been made by the Respondents. However there remained a number of differences between the parties.

Relevant principles

18.Before I deal with the resisted items, I should first set out the relevant principles applicable to the Court's determination of applications for specific discovery of documents.

19.It is well-established that on an application for specific discovery of documents, the applicant (in this case, the Petitioners) must first establish that the documents exist, secondly, that they are in the possession custody or power of the respondents, and thirdly, that they relate to a matter in issue in the proceedings.

20.When these three prerequisites are established, the Court then has a discretion whether or not to order disclosure. The Court would have to weigh up the value of the documents against the burden of producing them. If the burden is greater than the value, an order may be refused on the ground that it would be unduly oppressive to the respondents.

Shun On summons - Class 1 documents

21.The Petitioners have in the Shun On summons sought from the individual respondents specific discovery of all documents relating to the payment of salaries and dividends by Shun On since 1 January 1980, including but not limited to "Shun On's cashbooks, journals, ledgers, bank statements, mandates, instructions to Shun On's bankers, receipts for salary or dividend payments made by Shun On, Shun On's tax returns recording salary or dividend payments, accounts and financial statements recording salary or dividend payments, and employment and/or service contracts of Shun On' s directors".

22.On the face of it, the particularised documents are documents which in the normal course would be kept by the company, not by the individual respondents. The Petitioners have not shown why it is thought that these documents were in the possession, custody or power of the individual respondents, other than that in the affidavit of David Kidd, the Petitioners' solicitor, in support of the summons, he has asserted that "in the nature of matters such as distribution of dividends by a limited company, and in the light of the affirmation evidence given by the 2nd Respondent in this matter, it is highly unlikely that all of the 1st to 6th Respondents have never had, or no longer have, such documents in their possession, custody or power".

23.In the event, it became apparent from the submission of the Petitioners' counsel that all that they wanted was a breakdown of the "salaries" received by each of the 1st to 6th Respondents, the total amount received by them being already known. The disclosure of this information would show whether the payment of "salaries" was really pursuant to the "system" alleged by the Respondents.

24.Given that limited extent of the request, Counsel for the Respondents was prepared to provide a schedule of the "salaries" received by each of the 1st to 5th Respondents, the 6th Respondent not having received any, and to disclose the source documents used for the compilation of the schedule. On that basis, counsel for the Petitioners did not pursue the application relating to "salaries".

25.As for dividends, the Petitioners were unable, in my view, to establish the relevance of the application. There is no allegation in the Amended Petition that dividends (in contradistinction with "salaries") have been paid inconsistently as between the shareholders. Indeed, it is accepted in paragraph 21 that Shun On "has paid dividends to shareholders in accordance with their shareholding". That being the case, the receipt of dividends by the individual respondents is not in issue, and so the application does not satisfy the third prerequisite referred to in paragraph 16 above.

26.In light of the matters set out in paragraphs 21 - 25 above, I would dismiss the Petitioners' application for the documents in Class 1 of the Schedule to the Shun On summons.

Shun On summons - Class 6 documents

27.The Petitioners sought specific discovery of all documents relating to the payments or other benefits received by MCI, Cana Realty and Cana Corporation from their dealings with SOUS, the current financial position of such companies and the extent of the interest of Yuen Cho Nang (or other Respondents) in such companies, including but not limited to SOUS cashbooks, journals, ledgers, bank statements, mandates, instructions to SOUS' bankers, receipts for payments made by SOUS and/or other benefits provided to MCI, Cana Realty and Cana Corporation, SOUS' tax returns recording payments made by SOUS and/or other benefits provided to MCI, Cana Realty and Cana Corporation, and accounts and financial statements recording payments made by SOUS and/or other benefits provided to MCI, Cana Realty and Cana Corporation, share registers, accounts and other documents indicating the extent of Yuen Cho Nang's interest in MCI, Cana Realty and Cana Corporation and the value of such companies.

28.Although the summons was directed at all the individual respondents, counsel for the Petitioners indicated at the hearing that it was being pursued only against Yuen Cho Nang, the president of SOUS, a director of MCI and Cana Realty and a shareholder of all three companies.

29.I shall consider the three prerequisites for an application for specific discovery in turn. First, the applicants must show that the documents exist. The extent of documents sought is widely-drafted, but at least some of the documents sought are the usual documents that would be kept in the course of business where a company's (SOUS') properties are held in the name of another (MCI) or are being managed by another (Cana Realty), or are co-owned with another (Cana Corporation), such as ledgers showing its accounts with them. Further, it is common business sense that MCI, Cana Realty and Cana Corporation would have periodical financial statements (such as balance sheets and profit and loss accounts) to inform their shareholders of the respective companies' assets and liabilities, from which the net asset value of these companies (and hence the value of Yuen Cho Nang's shares) can be ascertained. The first prerequisite for specific discovery has therefore been satisfied in respect of at least these documents.

30.As for the second prerequisite, counsel for the Respondents submitted that there is no evidence that Yuen Cho Nang had possession custody or control of such documents.

31.As far as SOUS is concerned, it is well-established law that an order for discovery can be made against a person for a company's business documents if it is shown that he has control or power over the company. Yuen Cho Nang is the president and the largest shareholder of SOUS. It is not alleged that there are any outsiders in this company. I take the view that it can be inferred from these circumstances that he has sufficient control or power over SOUS for the purposes of an application for specific discovery for that company's documents. There is no evidence to the contrary.

32.As for MCI and Cana Realty, Yuen Cho Nang is a director but only a 50% shareholder. The other shareholder is a person by the name of Steve Madison. There is no evidence that Madison holds his shares otherwise than for his personal benefit. As for Cana Corporation, Yuen Cho Nang is only a minority shareholder, and I have not been directed to any evidence to show that he is a director. Given that Yuen Cho Nang cannot be said in those circumstances to have any overriding control or power over these companies, and in the absence of any actual evidence of his power or control over these companies, I see no grounds for an order that he disclose any documents other than documents to which he would be entitled purely as a shareholder, i.e. the periodical financial statements issued by the companies to their shareholders.

33.As for the third prerequisite, I take the view that Shun On's decision to invest in and to give unsecured loans to SOUS for investments from which Yuen Cho Nang acquired personal benefits through his shareholdings in MCI and Cana Realty, are relevant to the allegations of unfair prejudice in the Shun On petition. The Respondents say that the application is speculative. I do not agree, in view of the fact that service fees of US$1m. had in fact been received by Cana Realty and in the absence of any substantive evidence of commercial benefits received by SOUS from the arrangements for the properties to be held in the name of MCI and to be managed by Cana Realty. As for the co-ownership of the Arts Building by Cana Corporation, there has been no substantive evidence so far to show that Yuen Cho Nang had disclosed his interests in Cana Corporation to the board of SOUS or the board of Shun On.

34.The Respondents have also alleged that it would be oppressive to have to disclose all the documents particularised. I take the view that disclosure of all the documents referred to in Class 6 would be oppressive, and I consider that the applicants' purpose would be served (at least in the first instance) by disclosure of first, the ledger kept by SOUS containing its accounts with MCI, Cana Realty and Cana Corporation respectively (I say in the first instance, as it may be that information contained in the ledger may have to be followed up by inspection of some of the other documents listed in Class 6); and secondly, the periodical financial statements received by Yuen Cho Nang as a shareholder of MCI, Cana Realty and Cana Corporation.

Both summonses - documents referred to in Items No. 315, 338 and 345

35.The Petitioners have also sought discovery of the specific documents referred to in items No. 315, 338 and 345 of the list of documents filed by the 1st - 6th Respondents. Item No. 315 refers to "Report submitted by [SOUS]". Item No. 338 refers to "Arts Building Contract" and Item No. 345 refers to "Fiscal Year 2000 Financial statements and tax returns".

36.The "Report submitted by SOUS" apparently refers to its report to the tax authorities. The "Arts Building Contract" refers to the sale of the Arts Building co-owned by SOUS and Cana Corporation. The Petitioners have alleged that it was sold at a value which was lower than a valuation done 3 months before the sale, and on deferred payment terms. The 2000 financial statements and tax returns are those of SOUS .

37.In relation to the Arts Building Contract, the Petitioners have not suggested that the purchaser was connected to any of the Respondents and there is no evidence that the terms were not arms-length terms. I do not see the relevance of this document to the issues in the petition.

38.As for the Report to the tax authorities and SOUS' tax returns, the Petitioners say that they would show SOUS' financial position and this is a relevant factor when the Court has to assess the decision of the board of directors of Shun On to extend the promissory notes. However in my view it would be adequate for this purpose to order discovery of SOUS' financial statements and I so order.

Order

39.In conclusion, on the undertaking by the Respondents through their counsel that they would provide a schedule of "salaries" received by each of the 1st to 5th Respondents together with the source documents used for the compilation of the schedule, I would order specific discovery to be made by the 3rd Respondent Yuen Cho Nang of (in the first instance) all ledger(s) kept by SOUS containing its accounts with MCI, Cana Realty and Cana Corporation respectively and all periodical financial statements received by him as a shareholder of MCI, Cana Realty and Cana Corporation. I would also order that the 1st - 5th Respondents disclose the financial statements of SOUS for the fiscal year 2000 referred to in item No. 345 of their previous list.

40.Finally, as to costs, as the Respondents have not offered the documents ordered to be disclosed above, the application would have been necessary in any event even though the original application was couched in wider terms. I would make an order nisi that the costs follow the event, i.e. that the Respondents bear the costs of the application.

Representation:

Mr Jonathan Harris instructed by CMS Cameron McKenna for the Petitioners

Mr Patrick Fung SC and Mr William MF Wong instructed by Liu Choi & Chan for the 1st - 6th Respondents in CW828/00 and for the 1st - 7th Respondents in CW 829/00