Re Astrotech International Holdings Ltd.
Read the full judgment text of HCCW 816/2002 on BabelCite. This High Court CFI judgment was delivered on 21 February 2003.
1. This is an application for the appointment of provisional liquidators under section 193(1) of the Companies Ordinance for Astrotech International Holdings Limited ("AIH").
Cited by 2 cases · Cites 2 cases
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HCCW000816/2002 HCCW816/2002 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP PROCEEDINGS NO.816 OF 2002 ---------------------
---------------------- Coram: Deputy High Court Judge Poon in Chambers Dates of Hearing: 8, 14, 25 and 30 November 2002 Date of Judgment: 21 February 2003 ----------------------- J U D G M E N T ----------------------- 1.This is an application for the appointment of provisional liquidators under section 193(1) of the Companies Ordinance for Astrotech International Holdings Limited ("AIH"). 2.For easy reference, this judgment is divided into the following sections :
INTRODUCTION 3.AIH is the holding company of the Astrotech Group of companies ("the Group"). The Group owed its origin to Astrotech Inc., a company established by Mr George Lee in Illinois, USA, in April 1984. Throughout the years, various companies were formed as the business grew and expanded. Eventually, the Group became a sizable business. In 1999, it had more than 2,000 employees. Its turnover in 2000 was in the region of US$50 million. As at 21 November 2001, the Group consisted of some 28 companies incorporated in various places including the USA, the BVI, the Mainland and Hong Kong. A diagrammatic representation of the companies within the Group as at that date is set out in the Appendix to this judgment. 4.AIH was incorporated in the British Virgins Island on 4 September 2000 to replace the then holding company, Astrotech Holding Limited ("Astrotech Holdings"), which was formed on 13 December 1994 as part of the restructuring exercise undertaken at the time. Palmont Investment Limited ("Palmont") and Leading Star Holdings Limited ("Leading Star") are two of AIH's corporate shareholders. Beneficially owned and controlled by Mr George Lee and his family, they collectively hold 34.3% of AIH's shares. The individual shareholders are Mr Kwan Chee Yan ("Mr Paul Kwan"), Mr Kwan Tak Shun ("Mr Dick Kwan"), Mr Liu Kam Cheong ("Mr KC Liu"), Mr Leung Kin Sun ("Mr KS Leung"), Mr Cheng Ming Hin ("Mr MH Cheng") and Mr Tam Siu Wing ("Mr SW Tam"). They collectively hold 61.5% of AIH's shares. The balance of the 4.2% shares is held by Rauland-Borg, an USA company that does not take part in these proceedings. 5.Since its incorporation, AIH's directors had always included Mr George Lee, his eldest son Mr Keith Lee (as the authorised representative of Palmont and Leading Star respectively) and the individual shareholders. The Lees were, however, not re-elected as directors at the 2001 annual general meeting held on 21 February 2001 ("the 2001 AGM"). Thereafter, they were removed from the boards and management of the companies within the Group. The complete exclusion of the Lees from management eventually triggered the winding-up proceedings now before the court when on 25 July 2002, Palmont and Leading Star filed a petition, supported by the first affidavit of Mr George Lee of the same date, seeking to wind up AIH on the just and equitable ground. 6.The petition first asserted that AIH and the Group were held closely among the parties who reposed mutual trust and confidence in each other because of the personal relationships developed throughout the years. It then raised four principal complaints. First, Mr George Lee and Mr Keith Lee had been wrongfully excluded from the board and management of AIH when they were not re-elected as directors at the 2001AGM, contrary to an agreement or understanding reached by the parties at a meeting called "The First General Shareholders' Meeting of the [Group]" held on 14 and 17 September 1994 ("The 1994 Agreement" and "The First Meeting" respectively). Second, the respondents had misconducted themselves by selling AIH's most profitable business, namely, the original equipment manufacturing ("OEM") business, to a consortium formed by them and Rauland-Borg at HK$219,000,000 in December 2001 without proper valuation and prior notice to the petitioners. Third, since the exclusion of the Lees, the respondents had wrongfully refused to provide the petitioners with the necessary information concerning the affairs of AIH, especially those relating to the sale of the OEM business, despite repeated requests. Fourth, the respondents had failed to consider the rights of members to have profits distributed so far as commercially possible by declaring dividends of HK$0.04 per share in May 2002, which were minimal when compared with dividends declared in the past. (In the rest of this judgment, I will refer to these complaints as "the Wrongful Exclusion Complaint", "the Conflict of Interests Complaint", "the Information Complaint" and "the Dividends Complaint" respectively.) The petition pleaded that by reason of the matters complained of, the petitioners had thoroughly lost any faith and trust in the respondents and that there had been a complete breakdown of mutual trust and confidence upon the basis of which the Group and AIH were formed and operated. They therefore sought to invoke the just and equitable provision to wind up AIH. 7.The petition is strenuously opposed by the respondents. Their stance can be gleaned from the first affirmation of Mr Paul Kwan filed on 9 October 2001. In brief, they said that no mutual trust and confidence as alleged existed, that the 1994 Agreement did not exist, that the Lees were excluded because of their misconduct and that the sale of the OEM business, and that the non-provision of information and the declaration of dividends in May 2002 were all justified by various reasons. 8.Almost three months after the presentation of the petition, by a summons dated 17 October 2002, the petitioners took out the present application. To support the petition, Mr George Lee made three further affidavits dated 10 October, 6 and 13 November 2002. The application was likewise opposed by the respondents. Evidence on their behalf was adduced by Mr Paul Kwan in three affirmations dated 5, 6 and 11 November 2002. Mr SW Tam filed his affirmation dated 5 November 2002 on behalf of AIH. Its position is said to be neutral but Mr Tam raised certain matters which, according to him, made the appointment of provisional liquidators undesirable. 9.The hearing of the application was originally set down for one day. Eventually, it took more than three days to conclude. Given the submissions advanced on behalf of the parties, it is necessary to visit all the major issues arising from the petition. In the following section, I will summarize the evidence and, for clarity, put it under different headings. I will begin with the corporate history of the Group, which is not seriously in dispute, and then come to the parties' assertions, which are, as expected, highly contentious. THE CORPORATE HISTORY (1) The initial years 10.At all material times, Mr George Lee was domiciled in the USA. In the 1970s and early 1980s, he was the director of the Far East Operations of Spartus Corporation, an U.S. company that carried on, inter alia, the OEM business. On 1 April 1984, he formed Astrotech Inc. when he commenced his own business in the OEM field. The company introduced electronics products of the Far East to customers in the USA and arranged for the manufacturing of products on their behalf, thereby earning a commission. He and his wife, Dorothy, were then the only shareholders. 11.Between 1984 and 1992, a string of companies were formed at different times in different places with common shareholding of Mr George Lee and some of the respondents as the business of the Group expanded. They were :
These companies are discussed in greater details below. 12.Astrotech International was formerly a company established by Mr George Lee and his brother-in-law, Mr WK Fung in 1978 but had been left dormant since 1979. It was revived in about July 1984 with its name changed to AI International Limited in order to establish a Hong Kong side of the business. Mr SW Tam, a former colleague of Mr George Lee in Spartus Corporation, joined the company when he was offered 10% of its shares. The balance was held by Mr George Lee (80%) and Mr KW Fung (10%). The three of them also became directors with different duties : Mr SW Tam to take care of the operations, procurement and quality control, Mr WK Fung to deal with the accounting and financial functions and Mr George Lee to be responsible for the sales in the USA. The company did not manufacture products but acted as an introduction agent between customers identified by Astrotech Inc. and manufacturers. Its name was changed to Astrotech International in April 1993. 13.In 1985, Mr George Lee, Mr SW Tam and Mr WK Fung with a view to expanding and developing business, decided that Astrotech International should set up its own manufacturing operation to service the orders received from customers. Two of Astrotech International's major customers in the USA, Rauland-Borg and Tri-Lite Electronic Inc., agreed to participate in this new company. ATRML was thus acquired in about July 1985 as the corporate vehicle for the manufacturing side of the business to produce high quality and reliable electronic assemblies. The shares in ATRML were held by AI Enterprise, Rauland-Borg and Tri-Lite Electronics Inc. in the ratio of 60%, 24% and 16%. 14.Shortly before the acquisition of ATRML, AI Enterprise was acquired in about June 1985 as the corporate vehicle to hold the interests for Mr George Lee and the other Hong Kong participants in ATRML, namely, Mr SW Tam, Mr KC Liu, another former colleague of Mr George Lee in Spartus Corporation, and Mr Peter Fan, an owner of a plastic factory and tolling facilities which supplied to Astrotech International from time to time. The shares of AI Enterprise after an allotment in February 1986 were held by Mr George Lee (45%), Mr WK Fung (5%), Mr SW Tam (10%), Mr KC Liu (30%) and Mr Fan (10%). In about 1986, Mr Fan withdrew from AI Enterprise and his shares were distributed among the remaining shareholders. In September 1986, Tri-Lite Electronics Inc. sold its shares in ATRML to Astrotech International and Rauland-Borg. Astrotech International's shares were in December 1988 transferred to AI Enterprise. Consequently until the restructuring in July 1996, ATRML was held by AI Enterprise (70%) and Rauland-Borg (30%). 15.In June 1987, Mr KC Liu became a shareholder of Astrotech International after a transfer of a 5% shareholding from Mr George Lee. Mr WK Fung died in November 1987. As a result of the re-distribution of Mr Fung's shares and subsequent restructurings in the 1990s, Astrotech International was held by Mr George Lee (81.33%), Mr SW Tam (13.33%) and Mr KC Liu (5.33%) until July 1996. 16.By 1988, the manufacturing capacity of ATRML's factory in Hong Kong had become inadequate and the factory was sub-contracting manufacturing of many kinds of electronic products to a factory owned by Mr KS Leung. In about 1990, upon the invitation of the board of directors of ATRML, Mr KS Leung assumed management responsibility for ATRML's new factory in Chang-An in the Mainland. 17.Mr Dick Kwan, a close friend of Mr SW Tam and Mr KC Liu, joined the Group in December 1990. He had been working in the electronic industry for many years. For the purpose of marketing health and body fitness electronic products to customers in the USA and Europe, AI Multitech was set up in 1990. Thereafter it carried on business by purchasing products manufactured by ATRML and selling them to customers in the USA. Until the restructuring in December 1994, the issued share capital of AI Multitech was held by Mr George Lee, Mr SW Tam, Mr KC Liu and Mr Dick Kwan equally. Further, Mr Dick Kwan was made a shareholder of AI Enterprise when Mr George Lee transferred 1,000 shares to him on 2 January 1992. AI Enterprise was then held by Mr George Lee (40%), Mr SW Tam (20%), Mr KC Liu (35%) and Mr Dick Kwan (5%). 18.Astrolite was formed in 1988 to market Astrotech brand products, initially with each of Mr George Lee and Mr SW Tam holding 10,000 shares respectively. In 1991, Mr Paul Kwan, a friend of Mr Dick Kwan, was appointed and employed as the financial controller of Astrolite. In 1991 and 1992, as a result of a number of share allotments and transfers, Mr Paul Kwan, Mr Dick Kwan and Mr KC Liu became one of five equal shareholders in Astrolite with Mr George Lee and Mr SW Tam. Since his appointment as financial controller, Mr Paul Kwan had been responsible for the accounting affairs for the Group. 19.Accura Moulding owned a factory in Kowloon and was principally involved in tooling and plastic injection. The initial shareholding was distributed as follows : AI Enterprise (50%), Mr George Lee (8.33%), Mr SW Tam (8.33%), Mr KC Liu (8.33%), and three other individuals each holding 8.33%. There were subsequent changes to the shareholding structure. In particular, on 1 April 1994, Mr MH Cheng, a supplier of tolling to ATRML, was allotted 100,000 shares in Accura Moulding Limited which resulted in the shareholding structure as follows : AI Enterprise (75%), Mr KS Leung (7.5%), Mr Dick Kwan (7.5%) and Mr MH Cheng (10%). This shareholding structure remained unchanged until the restructuring of the Group in 1996. 20.In 1995, ATRML built its second factory in Tang Xia in the Mainland. At about the same time, Mr MH Cheng, became a director of AI Enterprise. Thereafter, Mr MH Cheng assumed responsibility for managing the factory in Tang Xia. 21.ATRM China held the investment in the manufacturing plants in Dongguan, China. The shareholding was initially distributed as follows : AI Multitech (48%), Mr KS Leung (40%) and Mr Paul Kwan (12%). Pursuant to changes in the shareholding structure in early 1994, by March 1994 the shareholding was held among : Mr KS Leung (40%), Mr Paul Kwan (12%), Mr George Lee (12%), Mr SW Tam (12%), Mr KC Liu (12%) and Mr Dick Kwan (12%) and remained so held until the restructuring in 1996. 22.AIM China owned land and the factory in Tang Xia. The shareholding was initially held by AI Multitech (80%) and Mr KS Leung (20%). On 30 March 1994, AI Multitech's 80% shareholding was transferred in equal proportions to Mr George Lee, Mr SW Tam, Mr KC Liu and Mr Dick Kwan thus changing the shareholding to : Mr KS Leung (20%), Mr George Lee (20%), Mr SW Tam (20%), Mr KC Liu (20%) and Mr Dick Kwan (20%), which remained unchanged until the restructuring in 1996. 23.Oscars Services and Superpower Assets were formed as part of the tax planning exercise for the Group. They provided management services to the Group for a fee. 24.These companies charted the growth of the Group between 1984 and the early 1990s. In short, it had over the years developed its own manufacturing operations, acquired two factories in the Mainland and established operations for the USA and other territories. The companies within the Group collectively operated a vertically integrated electronics products manufacturing and supply business. (2) The restructuring in the 1990s and thereafter 25.It is common ground that the Group went through a restructuring between 1994 and 1996. The more pertinent features of the restructuring are set out below. 26.First, Astrotech Inc. (then owned by Mr and Mrs George Lee) became a wholly owned subsidiary of Astrotech International in January 1994. 27.Secondly, Mr and Mrs George Lee and the respondents held the First Meeting. According to the minutes of the First Meeting, consolidation of the companies within the Group was imminent. It was unanimously resolved at the meeting that "any shareholder of the Group be elected as the directors of the board automatically and the Board of Directors be re-elected annually". The meeting also appointed Mr George Lee as the Managing Director, Mr SW Tam, Mr KC Liu, Mr Paul Kwan and Mr Dick Kwan as executive directors. The parties further resolved that the Operation Committee of the Group ("the Operation Committee") be constituted by the Managing Director and four Executive Directors and that the Chairman and Managing Director to be the spokesman. 28.Thirdly, Astrotech Holdings was incorporated in December 1994 as the holding company of all the companies within the Group. As a consequence and immediately after the restructuring exercise, other than Astrotech Inc. and ATRML, all the companies then within the Group became directly wholly owned subsidiaries of Astrotech Holdings. ATRML became an indirectly wholly owned subsidiary of Astrotech Holdings, being held as to 30% by Astrotech Holdings and as to 70% by AI Enterprise. 29.Mr Keith Lee had been handling the sales operation of Astrotech Inc. in Chicago as vice president since 1995. On 2 August 1996, Palmont transferred 30,000 shares in Astrotech Holdings to Leading Star, a company incorporated in the BVI and acquired by Mr Keith Lee for the purpose of holding such shares. Consequently, as from 2 August 1996, the shareholding in Astrotech Holdings was distributed among the shareholders thus :
30.Mr George Lee, the respondents and Mr Norman Kidder, a representative of Rauland-Borg, were elected directors of Astrotech Holdings at its inception. Mr Keith Lee was appointed as a director in August 1996 responsible for managing the Group's operation in Chicago when Leading Star became a shareholder. Mr Kidder resigned from the board of Astrotech Holdings with effect from 5 January 2000 and Rauland-Borg had not since nominated any other representative to any of the boards of the companies within the Group. (3) The bill validator business 31.In about July 1997, the Group expanded into the business of distribution of bill validators when it took over Diversified System Inc., a customer of ATRML in the United States. For that purpose, Astrosys was set up as a company in the BVI on 25 July 1997 and as a wholly owned subsidiary of Astrotech Holdings and was used to acquire and hold 88% of the shareholding of Diversified System Inc., with the remaining 12% allocated to three individuals who were previous owners of Diversified System Inc. At about the same time, Diversified System International Limited was set up in the United Kingdom as a wholly owned subsidiary of Astrosys to take over Diversified System Inc.'s sales operations of bill validators in the United Kingdom. The operation of Diversified System International Limited was subsequently taken over by Astrosystems Limited, another subsidiary of Astrosys incorporated in the United Kingdom. Another company called Astrosystems Inc. was also established in Nevada, United States, to take over the United States sales business of Diversified System Inc. 32.Astrosys's business in bill validators expanded. In 1999, in order to complement that business, Astrosys Holdings Pty Limited was set up as a wholly owned subsidiary of Astrosys to acquire and hold Microsystem Control Pty Limited, an Australian company which carried on business as a designer of coin validator. Astrosystems (Far East) Limited was set up in Hong Kong in the same year to market bill validators in China and the Far East. 33.As the scope of business of the Group expanded, the Astrotech Group grew from less than 1,000 personnel in 1990 to over 2,000 in 1999 with a turnover of US$50 million in 2000. (4) The restructuring in 2000 34.Towards the latter part of 2000, the shareholders of Astrotech Holdings decided that a new investment company should be set up, into which funds for investment of the Group should be injected and by which the Group's investments could be separately held, and that Astrotech Holdings would continue to hold the operation business of the Group. AIH was consequently incorporated on 14 September 2000 to be the holding company of Astrotech Holdings and the new investment company and hence the ultimate holding company of the Group. The shareholders of Astrotech Holdings exchanged their shares in Astrotech Holdings with shares in AIH on a one to one basis. Their individual shareholding in AIH is thus just the same as in Astrotech Holdings : see paragraph 29 above. Astrotech Holdings in turn became a wholly owned subsidiary of AIH. 35.Against this backdrop, I will now highlight the parties' assertions which form their case on the removal of the Lees from the directorship of AIH and management of the Group. REMOVAL OF THE LEES (1) The parties' relationships & Mr George Lee's role 36.The petitioners alleged that since the inception, all the companies within the Group had been closely held by, directly and indirectly, among Mr George Lee and the respondents. Rauland-Borg and Tri-Lite were basically customers of Astrotech International and had played the role of passive investors. Equity participation in the companies within the Group had been restricted to the Mr George Lee (and later Mr Keith Lee) and the respondents who were connected by their personal relationships resulting in mutual trust and confidence. In particular, they alleged that :
37.The petitioners further alleged that Mr George Lee was directly or indirectly one of the largest single shareholders in most of the companies within the Group and had always been, until his exclusion from the board of the 2001 AGM, an executive director and chairman of the board of those companies. He was acknowledged by the respondents as the founder of the Group and the leader in its core management. (The petition gave an impression that Mr George Lee offered shares to the respondents when they joined the Group.) He in turn entrusted the respondents with different aspects of management and operations and together the team worked very well for many years for the benefit of the Group. While the business of the companies within the Group was operated by a number of disparate companies with different immediate shareholders, Mr George Lee provided leadership and guidance for these companies, as one of his roles was to oversee the overall operation of these companies and the Group as a whole. It was he who brought in most of the business for Astrotech Inc. and Astrotech International in the initial years. 38.The respondents' views on the parties' relationships and Mr George Lee's role are significantly different. According to them, the Group is a conglomeration of various different businesses and companies which had common shareholders including Mr George Lee and the respondents. The other businesses and companies in the Group were established over the years by a number of participants which included Mr George Lee, the respondents and corporate investors such as Rauland-Borg and Tri-Lite Electronics. The respondents did not consider Mr George Lee to be the founder of all the businesses and companies which were eventually integrated to form the Group. 39.They also disagreed that the respondents all received their shares in the business from Mr George Lee. In particular :
Further, ATRML and its holding company AI Enterprise, the two entities making up the OEM manufacturing operation were set up in 1985 with substantial capital contributions from Rauland-Borg and Tri-Lite Electronics, who were allotted nearly 50% of ATRML's shares. 40.According to the respondents, the relationship between the respondents and Mr George Lee was that they were equal participants in the various businesses which were eventually grouped together into the Group. As with any business venture, they trusted each other in the sense that we expected that each of them would act in the best interests of the business. Mr George Lee was not the main guiding force in the management of the Group as alleged. The central management of the Group had since 1994 been served by the Operation Committee. Within the context of the Operation Committee, the members were all equal and they all participated in reviewing, discussing and approving business decisions and matters of company policy and strategy. Mr George Lee's titles of "Chairman" and "Managing Director" did not confer upon him any powers or authority over and above that of the other directors. 41.The respondents further asserted that it was substantially due to the contributions and effort of the respondents that the Group grew into a sizeable electronics business which combined OEM manufacturing together with marketing operations overseas. ATRML's OEM business grew rapidly after Mr Dick Kwan was brought in in April 1990. When he joined the Astrotech Group, Mr Dick Kwan had around 20 years experience working in the U.S. market. After Mr Dick Kwan joined, the turnover of ATRML, which manufactured all the OEM products the Group sold to the U.S., increased by over 100% from around HK$38,000,000 in 1991 to over HK$80,000,000 in 1992. 42.The Group's strategy was to have an integrated business, i.e. to have marketing arms in overseas markets, primarily the U.S. at the time, to sell the products manufactured by ATRML. Mr George Lee's contribution to the Group was also in marketing ATRML products in the U.S., however Astrotech Inc., the U.S. marketing company which he had set up, did not generate significant sales due to its small customer base which was substantially limited to the Illinois area. Astrotech Inc.'s sales consistently declined after its integration into the Group in 1994, dropping from around US$6.5 million to less than US$1.5 million in 2000. Mr George Lee, in addition to his role in marketing the Group's OEM products in the U.S., was also put in charge of Astrosys in 1999. Prior to that, Mr Paul Kwan was the one from the Group's board of directors who had been involved in the day-to-day management and operations of Astrosys from 1997 to 1999 and during that period Astrosys made a profit of over US$1,200,000 for the year ended March 1999. Given that Mr George Lee was based in the U.S., it appeared to the directors that he was better placed to supervise Astrosys' operations which were all outside of Hong Kong and was given responsibility for Astrosys in 1999. However, Astrosys became a loss-making operation under Mr George Lee's management and suffered an operating loss of around US$865,000 for the year ended March 2000. 43.Mr George Lee's involvement in and contribution to the Group declined in the years prior to the cessation of his directorship. He had little involvement in the manufacturing operations and his contribution to the U.S. marketing and sales of the Astrotech Group decreased (Astrotech Inc.'s sales accounted for just over 2% of the Group's turnover in 2001). In 2001, over 70% of the sales made by the Astrotech Group were attributable to U.S. sales to Mr Dick Kwan's customer, ICON Health & Fitness. The respondents considered that Mr George Lee's management of those parts of the Group he had responsibility for had been poor, and this was reflected in the disappointing performances of Astrotech Inc. and Astrosys during his management. (2) The 1994 Agreement 44.The petitioners relied heavily on the 1994 Agreement to support the Wrongful Exclusion Complaint. Their assertions are summarized in paragraphs 45 to 51 below. 45.It was Mr George Lee who proposed to restructure the companies within the Group by, inter alia, forming a holding company, back in 1992. Other respondents agreed. In about 1993 Mr George Lee proposed that the operation of Astrotech Inc. in the USA and the operation of Astrotech International in Hong Kong should be merged so that the shareholders of Astrotech International could also have an interest in Astrotech Inc. The respondents again agreed. That resulted in Astrotech Inc. becoming a wholly-owned subsidiary of Astrotech International after a share swapping exercise. 46.At the First Meeting, the 1994 Agreement was reached by the shareholders in these terms :
47.The petitioners alleged that it was on the basis of the trust and confidence that Mr George Lee reposed in the respondents and as increased and strengthened over the years in the course of the working and personal relationships between them and on the basis of the 1994 Agreement that he agreed to and implemented the restructuring exercise resulting in Astrotech Holdings being created as the holding company for the Group in December 1994 and its shareholding structure. 48.After the restructuring exercise, the Group operated in accordance with the 1994 Agreement and on the following basis :
49.The Operation Committee was formed to monitor the overall operations of the companies in the Group and to be responsible for strategic planning and long term business development. In July 1996, it took charge of the entire management of the Group. While each director performed his specific role as referred to above, the Operation Committee held regular telephone conferences (usually between the four Executive Directors in Hong Kong and Mr George Lee in the United States) to discuss and make decisions on all major issues. In addition, Mr George Lee returned to Hong Kong three to four times a year. During such visits, board meetings of the companies within the Group and Operation Committee meetings would be held and attended by Mr George Lee. 50.In about August 1996, when Mr Keith Lee joined the Group, it was understood and agreed as between the shareholders of Astrotech Holdings and Mr Keith Lee that he or his nominee would become a shareholder on the same basis as per the 1994 Agreement. In particular, it was agreed and understood that, for so long as Mr Keith Lee or his nominee remained a shareholder of Astrotech Holdings, he would be entitled to remain a director thereof. 51.In 2000, the shareholders agreed to the restructuring resulting in the formation of AIH on the basis that the 1994 Agreement continued to apply to it in same manner as previously applied to Astrotech Holdings. The 2000 restructuring was a corporate restructuring at the level of the holding companies which had little effect on the business and operation of the Group. The Operation Committee continued to consist of Mr George Lee as the Managing Director and the four Executive Director. And the manner in which the business of the Group was managed as described above remained unchanged. 52.The respondents denied that the Agreement existed as alleged. They contended that Mr George Lee's own words and conduct were inconsistent with the existence of the Agreement :
53.Although Mr Keith Lee was appointed as a director, the respondents did not consent to his appointment on the basis of his interest as a shareholder, nor would the respondents consider there is any right for Mr Keith Lee to remain as a director as long as he was a shareholder. (3) The Exclusion of the Lees 54.It is common ground that since 1999, the relationship between Mr George Lee and the respondents had started to deteriorate, and many disputes in modes of operation arose between them. (The petition referred to a complaint about certain amendments to AIH's articles in the latter part of 2000. But it would appear that at least for present purposes, little, if any, reliance is placed on it. Accordingly, I will not go into this particular area.) In early 2001, Mr George Lee and the respondents discussed the possibility of Mr George Lee and Mr Keith Lee purchasing a controlling interest in Astrosys from the Group and the respondents purchasing the petitioners' shareholding in AIH. Mr George Lee and Mr Keith Lee would then cease to be directors and to take part in the management of the companies in the Group other than Astrosys and its subsidiaries. They would in short sever their ties with the rest of the Group. But in the event, no agreement was reached. The respondents were unwilling for Mr George Lee and Mr Keith Lee to acquire a controlling interest in Astrosys. 55.At the 2001 AGM, resolutions were proposed to re-elect each of the shareholders or their representatives (except Rauland-Borg) as directors of the AIH. The resolutions for the re-election of the respondents as directors were passed unanimously, with the petitioners voting in favour of each such appointment. However, the resolutions for the re-election of Mr George Lee and Mr Keith Lee, which came last, were not passed, as each of the respondents voted against those resolutions. Mr Paul Kwan thereafter asked them to leave the meeting notwithstanding that it was a shareholders' meeting. After the 2001 AGM, Mr George Lee and Mr Keith Lee were removed as directors of the other companies within the Group. 56.The petitioners complained that it was an ambush by surprise. Mr George Lee and Mr Keith Lee were removed without any justification and in breach of the 1994 Agreement. At the 2001 AGM, no reason was advanced when the Lees were not re-elected. However, the respondents, now through Mr Paul Kwan in his first affirmation, put forward a number of grounds for removing them from AIH's board and the management of its subsidiaries. In brief, it had nothing to do with the unsuccessful discussions referred to in paragraph 54 above. The parties' evidence on the purported reasons for excluding Mr George Lee is discussed in paragraphs 57 to 66 below. (4) Not re-electing Mr George Lee
57.The respondents complained that Mr George Lee had caused Astrotech Inc. to declare unauthorized additional salary of US$410,000 to him for the financial year ending in March 1997 in respect of which certain statutory withholdings had to be paid. (His salary was only US$135,000 at the time.) Mr George Lee then caused Astrotech Inc. to pay about US$235,000 to the authority. The respondents were not aware of this incident until the latter part of 1999. Enquiry was made with Astrotech Inc.'s accountant, Mr John Kornacker who told Mr Paul Kwan that it had been done for the ostensible purpose of tax structuring for the Group. However, as this scheme involved Astrotech Inc. declaring a greater amount of remuneration than was actually paid to Mr George Lee, Astrotech Inc. had to pay unnecessary withholding taxes to the government. In the course of enquiry, Mr Paul Kwan also discovered that Mr Kornacker had been Mr George Lee's personal accountant and tax adviser before becoming Astrotech Inc.'s accountant. Further enquiries were made with Mr Kornacker but he was evasive. In the event, the enquiries continued through 2000 and 2001 when the respondents found out that the whole scheme had been structured for Mr George Lee's own tax benefit. Mr Paul Kwan referred to an e-mail from Mr Korncaker to Mr George Lee dated 4 November 2000 in which he recited the purpose of the arrangement. In November 2001, proceedings were commenced in the United States District Court for the Northern District of Illinois (Civil Action No.01 C 08883) against Mr George Lee to recover the loss he had caused to Astrotech Inc. through his scheme. In that action, it was alleged that the purpose of causing Astrotech Inc. to declare additional salaries to Mr George Lee and pay withholding taxes was to allow him to offset the withholding taxes paid against his personal tax liability for his private purposes; that although Astrotech Inc. had overpaid on taxes Mr George Lee did not disclose this matter to the Group's management and concealed its existence by ensuring that Astrotech Inc. did not file tax returns in 1996 to 1999; and that he did not take steps to recover the overpayment. The action was eventually settled in July 2002 when Mr George Lee paid the entire sum claimed, that is, US$235,461.50. 58.In response, Mr George Lee first said that the additional salary and the withholding tax were the result of incorrect advice given by Mr Kornacker. He was not aware of it at the time and when he did, he wrote an e-mail to Mr SW Tam, Mr Lee's agent for his account in Hong Kong and the USA on 9 December 2000 to reimburse Astrotech Inc. But Mr SW Tam did not carry out his instructions. Secondly, Mr George Lee maintained that the respondents were aware of the tax incident as early as February 1997 and not late 1999 as alleged. In this connection, he relied on a copy fax exhibited as part of "GPL-17" to his first affidavit from Mr Kornacker to Mr Paul Kwan in which Mr Kornacker told Mr Paul Kwan about the arrangement. Mr Paul Kwan was at all material times the financial controller of the Group. He kept regular communications with Mr Kornacker. He further denied that he caused Astrotech Inc. not to file the tax returns for the years 1996 to 1999. It was the current company secretary and attorney of Astrotech Inc. who decided that those tax returns. Finally, Mr George Lee complained that the aforesaid action was brought to cause oppression against him. He had not received the alleged additional salary. The respondents were aware of the mistaken advice given by Mr Kornacker in February 1997. No steps had been taken to seek a refund of the overpayment from the relevant authority. Mr Lee had earlier made an offer to repay Astrotech Inc. the sum of US$134,404 calculated by Mr Kornacker as the excess amount paid by Astrotech Inc. But the respondents had refused to accept it. The action was eventually settled by him by paying the sum of US$235,461.50 without interest.
59.Mr George Lee formed a small business called EZ Industries. Mr SW Tam and Mr KC Liu also participated but Mr George Lee had an 80% interest. EZ Industries rented warehouse premises from Astrotech Inc. for the monthly rental of about US$5,000. The respondents complained that EZ Industries owed rent to Astrotech Inc. and was only able to settle about 25% of the outstanding which caused a loss of about US$40,000 to Astrotech Inc. EZ Industries eventually ceased business in August 1997. 60.Mr George Lee said that he was not involved in the operations of EZ Industries. It was managed by Mr Lee Von Gunten. EZ Industries did owe Astrotech Inc. rental in the region of US$40,000 but Mr George Lee took it upon himself to discuss settlement with Astrotech Inc. In the end, he paid 25% of the outstanding by his own money out of good will to the respondents without asking any contribution from Mr SW Tam or Mr KC Liu. He was surprised why this matter was, after all these years, raised again in these proceedings.
61.Under the Group's policy, Mr George Lee had an allowance to purchase a company's car for his use up to a value of HK$500,000. However, in January 2001, he used US$75,892 of Astrotech Inc.'s funds to purchase a Mercedes Benz S430 without the approval of his fellow directors and registered the ownership in his own name rather than in the name of Astrotech Inc. 62.Mr George Lee said that it was the Group's practice that all vehicles were registered in the personal name of the shareholders who used that particular company car. Mr Paul Kwan, Mr KC Liu, Mr SW Tam and Mr Dick Kwan were all driving luxury cars which were registered in their own names. The respondents were aware of his buying the Mercedes and had never complained about it. They believed that his using such a company car was good for the Company's prestige and image. 63.In reply, the respondents denied Mr George Lee's assertion that company cars were registered in the name of the shareholders. In this connection, they relied on the vehicle registration documents which showed that the company cars used by Mr Paul Kwan, Mr KC Liu and Mr Dick Kwan were all registered in the name of ATRML. The company car used by Mr SW Tam was registered in his name. But ATRML held a blank-dated transfer form signed by Mr SW Tam. The arrangement arose of the fact that Mr SW Tam wished to buy a car in the excess of his allowance of HK$600,000. At a meeting dated 1 November 1997, minutes of which had been exhibited to Mr Paul Kwan's fourth affirmation, the directors including Mr George Lee approved Mr SW Tam's purchase of the car subject to his paying the excess by his own money and an option to require AIH to re-purchase the car at HK$600,000. In contrast, Mr George Lee had never sought similar approval.
64.Astrotech Inc. had accounts payable due to its parent company, Astrotech International arising out of the purchase of OEM products from the Group which had not been paid for. Because of the losses incurred by Astrotech Inc. over the years and its poor financial situation, Astrotech International had to write off about HK$9,000,000 worth or receivables due from Astrotech Inc. in the year ended March 2000. The respondents alleged that the whereabouts of those OEM products, which had not resulted in any sales or receivables from customers being recorded by Astrotech Inc. could be accounted for by Mr George Lee. 65.Mr George Lee was surprised by the respondents' allegations. He said the writing-off was caused by failures to make payments by certain customers and/or their bankruptcy. He did not misappropriate the OEM products as alleged. Indeed, Astrotech Inc.'s books and accounts were kept by Ms Barbara Jarmoc, who is still an employee of Astrotech Inc. in Chicago. It was impossible for Mr George Lee to misappropriate the OEM products without her knowledge. 66.In reply, the respondents said that they did not know how much time was given by Astrotech Inc. to those defaulting customers to pay or what attempts had been made by Astrotech Inc. to recover the outstanding payments. For Mr George Lee had not provided detailed information of Astrotech Inc.'s activities to the respondents. In any event, the writing off showed that Mr George Lee did not properly manage Astrotech Inc.'s business. (5) Not re-electing Mr Keith Lee 67.I now turn to the reasons for excluding Mr Keith Lee. The respondents alleged that Mr Keith Lee's performance as a director was unsatisfactory. He was given a salary increase at the 2000 annual general meeting upon Mr George Lee's suggestion but on the condition that his performance would have to be improved to satisfy the respondents. However, he failed to do so. He was removed from AIH's board because of his incompetence. Further, in early April 2001, Mr Dick Kwan, upon his visit to Astrotech Inc.'s office in Chicago, discovered that Mr Keith Lee had sent away one of the employees to a new company established by the Lees, ADR Technologies Inc. ("ADR"), which was a competing business. He also misinformed two other employees that the Chicago office would close down due to serious financial problems. Mr Keith Lee himself had ceased working for Astrotech Inc. As a result, the Chicago office was left empty and Astrotech Inc. became inoperative until a week later, Mr Kidder of Rauland-Borg persuaded the two employees to return to work. Mr Keith Lee's attempt to sabotage Astrotech Inc. led to his removal as director from other companies within the Group. 68.Mr George Lee denied that ADR is a competing business or that he or Mr Keith Lee had poached any of the employees as alleged. (As will be seen, the allegations concerning ADR are also of significance in relation to the other complaints. And I will deal with them in greater details in a moment.) This completes the summary of the evidence on the removal of the Lees. I now turn to the evidence on the major events after the 2001 AGM. REFUSING TO PROVIDE INFORMATION AFTER THE 2001 AGM 69.The petitioners complained that up to date, the respondents have failed to provide the minutes of the 2001 AGM. They further complained that subsequent to the 2001 AGM, AIH ceased to provide to the them detailed monthly financial reports of the Astrotech Group which had previously been distributed to all the shareholders of Astrotech Holdings and, subsequently, of AIH every month. Despite the petitioners' repeated requests by themselves and through their legal representatives for inspection of various corporate documents and financial statements of AIH made after the 2001 AGM, wrongfully and in breach of the 1994 Agreement and in violation of the right of the petitioners as AIH's shareholders, no or no adequate documentation or information was supplied. In particular, by a letter of their solicitors dated 6 November 2001 to AIH, the petitioners pointed out that certain documents were still outstanding and sought inspection of the books, records, minutes and consents kept by AIH. However, at a board meeting held apparently on 19 November 2001, AIH's directors exercised the discretion under section 67(4) of the International Business Company Act of the BVI to reject the petitioners' request for inspection, purportedly on the grounds that Mr George Lee and Mr Keith Lee were setting up ADR, a competing business to the AIH and its subsidiaries and that allowing inspection might be detrimental to the AIH. ADR 70.According to the respondents, the three main business areas of the Group in 2001 were investment holding business (Astrotech International Investment Limited); currency validator product business (Astrosys and its subsidiaries); and OEM business (ATRML, ATRM China and AIM (China)). It is their case that ADR is and was at all material times competing with the Group in the currency validator product business. 71.In paragraph 92 of his first affidavit, Mr George Lee dealt with ADR in rather brief terms. He admitted that he did incorporate ADR in Illinois, the USA on 28 March 2001 with the hope that the discussions with the respondents for the acquisition of the petitioners' interests in AIH might materialize. ADR did not carry out any business operation until late April or early May 2001, after the 2001 AGM. ADR has been carrying on the business of representing manufacturers of electronic and mechanical components in the USA. It did not perform any manufacturing functions there or elsewhere. Its business was different and it did not compete with the Group as alleged. 72.In his first affirmation, Mr Paul Kwan dealt with ADR in much greater details. In summary, his complaints are : (1) Mr George Lee was at all material time in charge of Astrosys, responsible for its operations, sales and product development. Astrosys's key employees included Jeff Marsh, sales manager, Donald Liu, project engineer, Terry Hughes and Robert LaPlante, mechanical engineers. In or about April 2001, Lawrence Peters, then a customers service manager of the Group discussed with Mr George Lee the setting up of ADR. (The relevant e-mails can be found at exhibit "KCY-9".) The e-mails showed that they intended to poach the aforesaid key employees of Astrosys and use the Group's confidential customer contact and pricing information and offer the same products to those customers at price which undercut the Group's price. In particular, they discussed how ADR would be able to secure an order of the value of about US$3 million from SAFCO Crop of Illinois, a customer of the Group. (2) Mr George Lee also used technology misappropriated from Astrosys for the benefit of ADR. The similarity of the names ATR and ADR was intended to mislead customers into thinking that they were dealing with the Group. In July 2002, Mr Paul Kwan was told by Ron Spinabella, a sales representative of ATR in Chicago, that all files relating to the Group's US customers had been missing from the Group's Illinois offices since the departure of the Lees. These files contained product information, confidential pricing information and quotations given to customers and contact details of the customers. (3) Astrosys invested substantially in the development of the global validator, including hardware and software. It is used in vending machines to verify the legitimacy of paper currency. There are a number of different product models available including the earlier GBA-I model and the newer models GBII-A and VBA. Astrosys had registered and owned the copyright in the GBA-I software and had registered patents in the GBA-I hardware. The GBA-I product accounted for sales of over US$10 million from 1996 to 1998, over 75% of Astrosys's revenues. Hughes, Liu and LaPlante had all been involved in the development of the global bill validator. They were practically the entire team working on developing updated and improved models of VBA and GBA-II. They all resigned in March 2001 and joined ADR. They had access to the software and source code hardware plans, specifications prototypes for the new product. Enquiries were subsequently made with Ronald Bates, a former generally manager of Astrosystems Inc. In his letter dated 11 June 2001 (exhibit "KCY-10"), he said that in March 2001, Mr George Lee and Bill Birnie, who worked for Mr George Lee, clearly stated their intention to remove all the completed GBA-II software and related source code from Astrosys and thereafter to represent to third parties that GBA-II software was created by ADR; and that he was convinced the departing employees had deliberately not saved their most recent work on Astrosys's computer. (4) Mr Paul Kwan referred to an e-mail exchange dated 9 April 2001 between Mr George Lee and Edmond Tang, a former sales manager of AstrosySystems (Far East) Limited, mistakenly sent to AIH's e mail address as an example of how Mr Lee poached AIH's staff, his intention and action to damage AIH's business. The part relied on by the respondents (as referred to by their counsel in the course of hearing) is written by Mr George Lee which read : "Just think, if Mr Peter Lee is still in there, no one would dare to be the top man. This is what Mr Paul Kwan wants. Unfortunately, even my closest associate, Mr SW Tam has joined him. This, to now, I do not quite understand." (5) After the departure of the above employees, the development of Astrosys's new products VBA and GBA-II fell significantly behind schedule and Astrosys had to re-organize its engineering development team. Due to the delay in launching these new products, Astrosys's sales turnover for the year ended March 2002 dropped dramatically to around US$6 million, which was substantially below the budget of US$11 million. (6) In about May 2001, the respondents learnt from Mr Kidder of Rauland-Borg that Mr George Lee and Mr Keith Lee approached three of the Group's clients in the USA, namely, Rauland-Borg, TPI Inc. and Vendapin, to discuss potential OEM business for ADR. Further, according to the copy material downloaded from ADR's website (exhibit "KCY-13"), the products listed and shown there are very similar to ATR's OEM products. (7) Referring to e-mails passing between Astrosys and Vendapin in May 2002 (exhibit "KCY-14"), Mr Paul Kwan said that Mr SW Tam was informed that Mr George Lee/ADR was developing a currency validator product in direct competition with Astrosys which would be ready in a few months. Exhibit "KCY-13" also described and displayed a currency validator product which has similar design, features and technology as Astrosys's. 73.Mr Paul Kwan went on to say that he believed that after the breakdown of discussions in early 2001 for the Lees to acquire Astrosys, they set out to forcibly achieve the same result by the conducts complained of above. He also explained that the discussions fell through because the value the Lees had ascribed to Astrosys did not reflect the actual investment that had been made by the Group. Astrosys's currency validator business had been nurtured by the Group for a number of years and the directors expected that with its growth potential it would gradually eclipse the OEM business. He referred to the board minutes of Astrotech Holdings between 1998 and 2000 and concluded that the Group had significant cash reserves which it was not re-investing into the OEM business but was waiting to re-invest in suitable business opportunities. On 30 October 2002, a complaint was filed against ADR and Mr George Lee in the Illinois District Court. AIH intended to prosecute the claim vigorously. Referring to this action, Mr Kwan said in his second affirmation that it would be contrary to AIH's interests and of Astrosys if the action were held in abeyance as a result of the appointment of provisional liquidators. 74.In his third affidavit, Mr George Lee denied that he or Mr Keith Lee had poached any employees or customers of Astrosys, misappropriated its technology or software or hardware, used any of its confidential information or removed any of its files. He re-iterated that ADR had not engaged in any competing business as alleged. He said that ADR did not acquire any office premises nor recruit any staff until May 2001 and that it did not start any operation until after May 2002. Referring to the various employees mentioned by Mr Paul Kwan, Mr George Lee pointed out that after he resigned from Astrosys, he wrote to all the staff on 25 March 2001, informing them about his departure. Laplante, Liu and Hughes were involved in the development of VBA only and not GBA-II. Birnie and Tang were not involved in the design and development of VBA and GBA-II. Laplante, Liu and Hughes voluntarily left prior to 31 March 2001 and subsequently joined ADR. Peters did not join ADR until 25 April 2001. Tang was dismissed in May 2001 and thereafter he applied to join ADR on his own accord. Birnie never joined ADR. Mr George Lee also denied that he or Mr Keith Lee had poached Rauland-Borg, TPI Inc. or Vendapin as alleged. Mr Keith Lee, in his capacity as a representative of Global Component Manufacturing Inc., a company he established in Illinois on 31 December 2001 to engage in the business of manufacturing and distributing mechanical components, did approach Rauland-Borg regarding metal products and he gave a quotation on metal and plastic assemblies sold by this company. But it was not competing with the Group as the latter did not have any business in that kind of product. 75.Mr Paul Kwan in his fourth affirmation made a further comment : it would not be possible to develop a bill validator from scratch without undertaking a period of several years of research and development but ADR has been able to develop and market a bill validator product since commencing business in May 2001. 76.In his fourth affidavit, Mr George Lee explained that although ADR's business was similar to that of the Group, it was in fact very different for several reasons. First, ADR started to develop its bill validator in May 2001 and until November 2002, the validator was still being developed. ADR therefore had not manufactured or sold any bill validator. The respondents had not referred to any prices, availability or quantities for such sales as they had not taken place. Second, the validator developed by ADR used new technology which the Group did not have. The features mentioned by Mr Kwan in his first affirmation were in fact common to other validators available in the market. Different validators often looked similar to a lay person. Had it misappropriated the proprietary information of the Group, ADR would not have had to wait for over one and half year before it even started to manufacture and/or sell its validators, which it had yet to do so. Third, ADR represented Global Component Manufacturing, who manufactured and sold OEM mechanical components of metal and rubber. The Group did not have the capacity to produce OEM metal components. THE 2002 AGM 77.The annual general meeting of AIH for 2002 (the "2002 AGM") was convened to be held on a public holiday in Hong Kong (5 April 2002). The petitioners complained that it was conducted in an oppressive manner against Mr George Lee and Mr Keith Lee, their representatives present at the meeting. In particular :
SALE OF THE OEM BUSINESS 78.Under the agenda item of "Group Structure", Mr Timothy Cheung reported that the OEM business of the Astrotech Group had been sold for HK$219,000,000. No prior notice of such sale had been given to the petitioners. No other information on the sale was volunteered at the meeting. In answer to the question raised by Mr George Lee and Mr Keith Lee, Mr Timothy Cheung confirmed that the purchasers included the respondents. All other questions raised by Mr George Lee and Mr Keith Lee on the justification for the sale of the OEM business, the exact identity of the purchaser, the terms of sale, the manner of payment of the purchase price, the proper valuation of the OEM business and whether other offers for purchase had been sought or obtained, were unanswered. Mr Timothy Cheung simply said that such questions would be referred to the management. 79.Mr Paul Kwan said in paragraph 50 of his first affirmation that the commercial rationale of selling the OEM business had been explained at the 2002 AGM. (However, according to the transcript of the meeting produced by Mr George Lee as "GPL-19" in his first affidavit, that is apparent not the case.) The commercial rationale and AIH's strategy is summarized by Mr Paul Kwan in these terms :
80.Mr Paul Kwan explained that AIH had earlier tried to list the OEM business in Hong Kong but was unsuccessful. In December 2001, it was extremely difficult to find a third party buyer. At the same time, the respondents considered that with Mr George Lee seeking to compete in the OEM business through ADR, that divesting itself of the OEM business was in the best interests of AIH. The respondents therefore undertook to form a consortium with Rauland-Borg, that is, Modern Filed Holdings Inc. to acquire the OEM business at fair market value, which was determined by reference to the NAV of the business shown in the last audited accounts. The respondents considered the disposal and acquisition to be more in the nature of a custodian arrangement - the market conditions for the OEM business had continued through 2002 to be difficult and the respondents would be seeking to exit from the OEM business in the next few years. The sale and purchase agreement dated 10 December 2001 ("the OEM Agreement") was exhibited as "KCY-17" to Mr Paul Kwan's first affirmation. 81.Under the OEM Agreement, World Era Limited was the vendor. Mr Paul Kwan explained in paragraph 12 of his second affirmation that AIH acquired World Era as a new immediate BVI holding company to which it transferred its indirect interests in the subsidiaries to be disposed of at a nominal consideration and then World Era entered the OEM Agreement as vendor. Pursuant to clause 3(c) thereof, the purchase price of HK$219,295,414 was to be received by World Era by way of instalments ending on 30 September 2003. All instalments carried compound interest. Mr Paul Kwan confirmed that AIH had received instalments up to 30 April 2002, that is 50% of the price. The proceeds were kept by AIH in its bank account as World Era did not have a bank account until recently. A portion of the sale proceeds received had been applied towards settlement of long outstanding trade receivables owed by AIH to its former subsidiaries. Mr Kwan did not give further particulars in this respect. Those particulars were found in paragraph 4 of his third affirmation. And I digress from his second affirmation and summarize what he said there. In essence, he said that those receivables arose thus. Astrosys had sold currency validator business manufactured by other subsidiaries of AIH. Money was due to those subsidiaries but the debts were allowed to build up over a number of years due to their intra-group nature. After selling the currency validator products, Astrosys was allowed to invest a significant part of those proceeds into the development of its currency validator products. He referred to what Mr SW Tam said in paragraph 5 of his affirmation. There Mr Tam said that in the course of the last six years, more than US$10 million had been invested in research and development of the currency validator products. Mr Paul Kwan confirmed that was true. He further said in paragraph 8 of his fourth affirmation that there was no basis to suggest that the funds represented by the shortfalls had been applied for any purpose other than the business of AIH. At this juncture, I would note that neither Mr Paul Kwan on behalf of the respondents nor Mr SW Tam on behalf of AIH had adduced any documentary evidence on these allegations. 82.I now return to Mr Paul Kwan's evidence in his second affirmation. He went on to say that AIH had of HK$50 million cash in its bank account with HSBC. AIH had also invested the sums of US$200,000 and US$1.1 million in two HSBC equity funds. These funds were guaranteed such that AIH was not exposed to any risk on the principal sums invested. The respondents considered these funds to be a sensible and conservative way to generate returns from its cash. 83.In his third affidavit, Mr George Lee emphasized that there was no independent or any valuation disclosed for the disposal of the OEM business to the respondents and Rauland-Borg and that the price was to be paid by five instalments, the last of which would not be made until 30 September 2003. He had considerable reservations about the price and the terms for the sale. The OEM business included a substantial retained profit which alone, according to the relevant Combined Profit and Loss Account was HK$200,990,000 for the period ended 1 March 1999. And according to the draft accounts of AIH for the period dated 31 March 2001 (exhibit "KCY-16"), the retained profits of the Group as at that date was HK$218,398,000. The price was almost the same as the retained profit, not to mention other assets of the business. Mr George Lee therefore contended that it was necessary for an independent and proper valuation to be conducted as soon as possible of the value of the OEM business as at the date of the sale in December 2001. He also recalled that up to the date of his removal, the OEM business made up virtually 100% of AIH's profits since the bill validator business always operated at a loss. The respondents had substantially reduced the Group's value and seriously prejudiced the petitioners' interests by selling the OEM business at less than the best price reasonably obtainable. 84.In paragraph 5 of his fourth affirmation, Mr Paul Kwan queried why Mr George Lee made the reference to the "retained profits" of the Group. It would appear to him that Mr Lee was suggesting that the "retained profits" indicated that the Group had case assets of this amount awaiting distribution. He said that suggestion was, as a matter of accounting and of common sense, misconceived and potentially misleading. The "retained profits" was an accounting figure and merely indicated the way in which the Group's assets had been funded - in the Group's case, it reflected that the Group was started with a very small amount of capital and funded its expansion through the reinvestment of its profits. 85.Mr Paul Kwan went on to deal with AIH's cash position by referring to the draft audited accounts for the year ended 31 March 2001. Note 14 of the accounts showed that cash and balances and time deposits accounted for around HK$70 million. Note 15 showed that the Group had bank overdrafts and loans of about HK$31 million secured against properties and fixed term deposits of about HK$60 million. The net cash position of the Group, assuming repaying of the bank borrowings, was about HK$100 million. Of this HK$33 million was paid out by AIH on 3 July and 1 November 2001 as dividends. A large portion of the remaining cash balance was accounted for by ATRML, which was amongst the companies disposed of. That was not surprising because ATRML was the then major manufacturing subsidiary of AIH and it was required to have cash available to pay out substantial overheads and trade debts every month. 86.Mr Paul Kwan further pointed out that the consideration of HK$219,295,414, was determined by reference to the net asset value of the companies disposed of. In this respect, a firm of certified public accounts was instructed to prepare a report on the value of those companies as at 31 March 2001 (exhibit "KCY-21"). That report was actually entitled "The Financial Statements and Accountants of [Astrotech Holdings]" dated 8 October 2001. Apparently, it was not specifically prepared for the purposes of the disposal of the OEM business in December 2001. Mr Paul Kwan said that according to this report, an initial valuation of HK$225,395,414 was arrived at. This figure was later adjusted as the disposal did not include the deferred non-voting share capital of the various companies. 87.The round of evidence on the sale of the OEM business and AIH's cash position is concluded by Mr George Lee in his fourth affidavit where he had this to say :
DECLARATION OF DIVIDENDS 88.The petitioners alleged that after taking into account prospective investments of the Group, dividends would be declared and paid. Typically, an interim dividend would be declared in the first quarter of the year prior to completion of audit of the accounts and a final dividend would be declared after completion of the audited account. At least since about 1997, substantial interim and final dividends in the range of HK$4.5 to HK$20 per share were declared every year by Astrotech Holdings (up to 1 January 2001) and by AIH (after 1 January 2001) until the drastically reduced interim dividend of HK$0.04 per share in respect of the half year to 30 September 2001. Particulars of dividends declared are set out below :
89.At the 2002 AGM, Mr Timothy Cheung informed the meeting that the directors of AIH had resolved to recommend that an interim dividend of HK$0.04 per share be declared and paid by AIH by the end of April 2002 and that a final dividend would be determined at a later stage after the audited accounts of the Group are completed. The petitioners complained that the objection of Mr George Lee and Mr Keith Lee against the dramatic reduction in the amount of interim dividend from the past range of HK$4.5 to HK$20 per share was ignored and no explanation was given as to how the amount of interim dividend was arrived at. Later, by a letter dated 2 May 2002, Tims Corporate Services Limited sent to Palmont a bank draft for the sum of US$1,596.93 representing Palmont's share of the Company's interim dividend of HK$0.04 per share. 90.Mr Paul Kwan explained the reduction in dividends on two grounds in his first affirmation. First, it was due to the need to retain cash in the Group and to invest in the development of Astrosys's currency validator products. The directors' emoluments and salaries were also reduced drastically. The combined remuneration for the respondents was less than HK$200,000 for the year. Further, the Group experienced an operating loss for the year ended 31 March 2002. Although it did not affect the cash position of AIH, the cash had not been distributed by way of dividends. Mr Paul Kwan further contended that the petitioners had already received nearly HK$60 million as dividends since 1994. That was over and above what Mr George Lee was entitled to. In this connection, he made a complaint about how the restructuring in 1994 was unfairly conducted. I do not propose to go into detail in this respect as it obviously did not amount to an explanation of the reduction of dividends in 2002. 91.Mr George Lee contradicted Mr Kwan's allegations in paragraphs 47 of his third affidavit. He first complained that after the respondents had wrongfully excluded them from all management participation and directorship and then taken away any effective right to dividends and refused to provide necessary and relevant financial information, the petitioners were left at their mercy. Such steps were designed to oppress them such that they would be forced to sell their shares to the respondents at a low price dictated by the latter. Secondly, it was difficult to see how the respondents could sensibly maintain that there were insufficient profits for distribution when (1) the draft 2001 audited accounts (exhibit "KCY-16") showed that the Group had a net profit of HK$71,924,000 for the year ended 31 March 2001 and (2) AIH had already sold the OEM business in December 2001 for HK$219,295,414. Mr George Lee said he was not in a position to comment if AIH was making an operating loss as he was not provided with the relevant financial information. Lastly, he denied that he had received dividends greater than what he was entitled to. No complaints had ever been raised in the past and he had never been asked to make any refund. REFUSING FURTHER TO PROVIDE INFORMATION 92.After the 2002 AGM, by a letter dated 18 April 2002, the petitioners' solicitors wrote to AIH's solicitors and its board of directors, raising objections to and questions concerning, inter alia, the matters referred to paragraphs to above. Further, they sought, inter alia, the following documentation :
93.By letter dated 22 April 2002, AIH's solicitors stated, inter alia, that neither the management nor the chairman of the 2002 AGM is required by law or the articles of association of AIH to address all questions posed by any shareholder at the meeting and that such questions raised had been addressed and answered to the degree the chairman considered appropriate. A copy of a resolution of the board of directors of AIH on 22 April 2002 was enclosed with this letter. According to the resolution, the board resolved again that in exercising the discretion under section 67(4) of the International Business Company Act, it rejected the request for copies of books, records and minutes and information by the petitioners on the grounds that "the board has reasons to believe that Mr George Lee and Mr Keith Lee are setting up a competing business to the Company and its subsidiaries and allowing inspection or providing additional information may be detrimental to the Company and would not be for the best interest of the shareholders of the Company". 94.Mr Paul Kwan took a similar stance in paragraphs 46 to 48 of his first affirmation. He further said that the annual accounts of AIH for the year ended 31 March 2001 had not been finalized at the 2002 AGM and were therefore not available to be tabled prior to or at the meeting. While the audit for the 2001 accounts had been completed, the directors were awaiting the return of Mr George Lee's declaration of remuneration prior to the approving of the 2001 accounts. His remunerations were substantial being in the order of several millions Hong Kong dollars. The draft audited accounts (Exhibit "KCY-16") could be approved and signed off once the directors received the declaration from Mr George Lee. He did not know why Mr Lee did not furnish that simple document. 95.Mr George Lee took exceptions to Mr Kwan's allegations. He first said in paragraph 41 of his third affidavit that he was astonished by the allegation that the 2001 audited accounts had still not been completed by October 2002. He was told by Mr Timothy Cheung at the 2002 AGM that the board expected to complete the audited accounts within two months and that the delay was due to unclear and suspicious books and records of a subsidiary. The return of the remuneration by him was not mentioned at the 2002 AGM at all. The transcript of the meeting (exhibit "GPL-19") apparently confirmed what Mr George Lee had said. He further observed that the respondents were not frank as clause 1(A) of the OEM Agreement specifically referred to the audited accounts of the Group as at 31 March 2001. It appeared that the respondents' statement that the 2001 audited accounts of AIH were not available at the 2002 AGM was not true. Mr Paul Kwan in paragraph 28 of his fourth affirmation said that the reference in clause 1(A) did not mean that the audited accounts had been finalized at the time of the executing of the OEM Agreement. It was referred to in the agreement for the purposes of a price adjustment clause which would only take effect in March 2003 if the turnover of the companies disposed of had decreased significantly in comparison with the 2001 audited accounts. THE RESPONDENTS' OFFER 96.According to Mr Paul Kwan in his first affirmation, after the disposal of the OEM business, the main operation business held by AIH was Astrosys, which engaged in the marketing of currency validator products. The respondents considered that Astrosys's business required continued capital investment but also had potential. The respondents also wished to protect Astrosys's some 40 employees. Thus, the respondents were willing to buy out the petitioners' shares at a fair and reasonable price, notwithstanding their misconducts. The audited accounts for the year ended 31 March 2002 could form a basis for the valuation. In his second and third affirmations, Mr Paul Kwan took the matter further. For the purposes of making a fair and reasonable offer to buy out the petitioners, the respondents were willing to give access to AIH's financial books and records to independent valuers to carry out the valuation and to the professional advisers parties acting for the petitioners provided that the petitoners' advisers undertook not to disclose the information to the petitioners. The independent valuer could be specifically instructed to look into the transaction disposing the OEM business to determine if the consideration was fair. 97.Mr George Lee dealt with the offer in his fourth affidavit. He first said that he had not received any offer from the respondents. Further, he said that the petitioners were willing to consider any reasonable offer put forward by the respondents. But unless and until the sale of the OEM business and the very substantial cash deficiency were fully and independently investigated, it was difficult to imagine how the parties could possibly reach an agreement. He also believed that provisional liquidators would have more power and ability to conduct such investigations than a valuer. The valuer might find the respondents slow in providing necessary information in particular where they had a conflict of interests or it would not be in their best interest to reveal the true position. There was a real risk that if a valuer were appointed, it would entail more unnecessary delay and costs. It is thus not a practical option. AIH'S POSITION 98.This completes the evidence adduced by the protagonists in these proceedings. I now turn to AIH's position which can be gleaned from Mr SW Tam's affirmation. 99.As noted, AIH is said to remain neutral in these proceedings and the present application. However, Mr SW Tam in his affirmation first raised the point that if an order appointing provisional liquidators were to be made, it would likely damage the business and interest of AIH. He explained that one of the principal businesses of AIH was the sale and marketing of currency handling devices. Such products were generally used in the amusement, vending and gaming industries, and were not ordinary consumer products. To manage a business developing and marketing such products required technical expertise and highly specialized knowledge and experience of the product and the market. It was extremely unlikely that the proposed provisional liquidators would have the requisite knowledge to properly manage the business. 100.Mr SW Tam then referred to the investment of over US$10 million by AIH in establishing a research and development department to conduct in connection with the design and development of the products, resulting in the development of the Global Bill Validator and the Vending Bill Acceptor. Given the competition by ADR, Mr George Lee's misconducts in that regard and the pending litigation in the USA, if provisional liquidators were appointed, there was a danger that the disruption of AIH's business would unfairly benefit ADR and Mr George Lee to the obvious detriment of AIH and its subsidiaries. Appointing provisional liquidators who were not familiar with the business would cause serious delay and loss of opportunity in the fast changing markets. It could be fatal to AIH's continued operation and would also place in jeopardy the significant investment that had been made in AIH thus far. THE LAW 101.I now come to the law pertinent to applications for appointment of provisional liquidators. Section 193(1) of the Companies Ordinance provides :
There is a wealth of authorities on how this section operates. Recently, in Re Hang Tak Buddhist Hall Association Ltd [2002] 2 HKLRD 863, Kwan J summarised the general position in paragraph 22 of the judgment thus :
102.As the authorities demonstrate, whether to invoke the statutory power involves a two-stage enquiry. The petitioner must first establish that there is a good prima facie case for a winding-up order : Securities and Futures Commission v. Mandarin Resources Corp. Ltd [1997] HKLRD 405, per Godfrey JA at pp.408I-409A. Conflicts of evidence can only be resolved on the hearing of the petition. At this stage, if the petitioner can show, by believable evidence, facts which if eventually proved at the hearing of the petition will entitle it to a winding-up order and if the contrary is not proved at the present time, then the applicant will have established a prima facie case : Re Five Lakes Investment Co. Ltd and Multiford Co. Ltd, above, per Clough J (as he then was) at pp.284D-E. To decide this point, the court looks at not merely the petitioner's evidence but also the evidence put forward by those opposing the application. The court must then form a provisional view and decide, as the matter then stands, if there is a reasonable prospect that the petition might succeed. Unless the evidence put in by the opposing party is so "obviously cogent", any conflict of evidence should be left to be resolved at the hearing of the petition. Any views expressed by the court on the merits of the petition at this stage are provisional only, as the views are formed on the basis of affidavit evidence untested by cross-examination : Re Boldwin Construction Ltd, HCCW340/2002, 31 October 2002, unreported, Kwan J. 103.Having surmounted this hurdle, the petitioner must then show that in all the circumstances and in particular having regard to the commercial realities, the degree of urgency and need established by him, the balance of convenience according to the particular circumstances, it is just and convenient to appoint the provisional liquidators. The circumstances inevitably vary, as Bright J observed in Club Mediterranean Pty Ltd, above, at pp.38-39 :
104.Three further points are of significance in the particular circumstances of the present case. First, in cases where the petition arose out of disputes between two warring camps of shareholders and directors, a provisional liquidator may be appointed to hold the position or, as it is commonly put, to maintain the status quo, until the disputes are resolved. The purpose of appointing a third party to intervene in the affairs of the company is to ensure that those affairs will be managed by an independent party whose duty will be to safe-guard the interests and assets of the company : Re Five Lakes Investment Co. Ltd and Multiford Co. Ltd, above, per Clough J at p.387F-H; Re Club Mediterranean Pty. Ltd, above, per Bright J at p.36; Zemplian v. JN Taylor [1990] 3 ACSR 518, per King CJ at p.522. Second, where there is questionable conduct on the part of the directors in control, which gives rise to justifiable concern that the company's assets cannot properly be allowed to remain under their control for longer than necessary, a provisional liquidator may be appointed : Re Brackland Magazines Ltd [1994] 1 BCLC 190, per Chadwick J at p.195g-h. Third, where there is an actual or potential conflict of interest between a director and the company, an independent assessment of the situation may be necessary to determine the adequacy of consideration for any transactions that directors have concluded while under a conflict of interest. That may justify the appointment of a provisional liquidator : Zempilas v. JN Raylor, above, per Kings CJ at p.521. 105.With these principles in mind, I turn to examine the first question whether there is a good prima facie case for winding-up. WHETHER A GOOD PRIMA FACIE CASE FOR WINDING-UP 106.It is pleaded in the petition that AIH and indeed the Group were held on the basis of mutual trust and confidence amongst the protagonists and that the matters complained of caused a complete breakdown thereof. Mr Chua, counsel for the petitioners, submitted that on each or all of the four complaints, AIH should be wound up under the just and equitable ground. I first start with the Wrongful Exclusion Complaint. (1) Wrongful Exclusion Complaint 107.The articles in AIH's articles of association pertaining to appointment and removal of directors are :
Mr Beresford, counsel for the respondents, submitted that under these articles, the respondents were perfectly entitled not to re-elect the Lees at the 2001 AGM. In the absence of any allegation that the respondents had conducted the affairs of AIH in breach of its articles or the applicable BVI law, they were entitled to do so. Mr Chua however submitted that the exclusion of the Lees from the directorship and management of AIH, a closely held company built on mutual trust, was in flagrant breach of the 1994 Agreement. It was wrongful and the just and equitable provision applied. 108.In my view, the fundamental question is whether the respondents' exercise of the right not to re-elect the Lees as directors at the 2001 AGM under the relevant articles, is subject to equitable considerations which may make it unjust, or inequitable, on their part to insist on such legal right or to exercise it in the way as they did. If the answer is in the affirmative, the just and equitable provision will bite. See In re Westbourne Galleries [1973] AC 360 where Lord Wilberforce said at p.380B-F :
109.Here, the petitioners prayed in aid both the mutual trust and confidence built on the personal relationships amongst the parties and the 1994 Agreement. But it would appear that in the particular circumstances of the present case, the mere existence of mutual trust and confidence, in the absence of the 1994 Agreement, is not sufficient to ground the Wrongful Exclusion Complaint. It is neither the petitioners' case nor Mr George Lee's evidence, as I understand it, that mutual trust and confidence alone gave rise to the right of directorship in AIH. It is the 1994 Agreement. And the parties' personal relationships set the background leading to and explained why the parties entered into that agreement at the time. In short, the petitioners must prove the 1994 Agreement in order to prove the Wrongful Exclusion Complaint. 110.To recap, the petitioners' case in this respect is that the 1994 Agreement was reached in the First Meeting. At that meeting, parties expressly agreed that for so long as any of them remained a shareholder in the holding company, he would be entitled to be elected as a director of such holding company, and to participate in its management and the management of its subsidiaries from time to time : see paragraph 46 above. Mr Chua sought to place heavy reliance on the minutes of the meeting, which stated that it was resolved unanimously resolved by all the shareholders that any shareholder of the Group be elected as the directors of the board automatically and the Board of Directors be re-elected annually : see paragraph 27 above. 111.It can be readily seen from the minutes that there was no reference to the alleged right to participate in management of the subsidiaries as alleged. More importantly, the resolution, in the terms as recorded, did not confer on any of the shareholder the right to be elected as directors annually. This point became obvious when one looks at the Chinese version of the relevant part, which reads :
"重新" literally means "afresh". Thus, according to the Chinese version, the board had to be elected afresh annually. This is inconsistent with any unfettered right to sit on the board. 112.When considered in context, the effect of the resolution, in my view, amounts to this. Formation of a holding company was at the time of the First Meeting imminent. The shareholders might well have agreed that at the time of its formation, all would become directors to constitute the first board. But in the years ahead, the board had to be re-elected annually. Mr George Lee seemed to have held a similar view. At the 1998 AGM of Astrotech Holdings held on 21 February 1998, Mr George Lee was recorded to have stated that at the formation of the company, all shareholders of the Group were appointed as directors but directors should be appointed annually by shareholders at the subsequent AGMs : see paragraph 16 of the minutes of the meeting and paragraph 52(a) above. He did not refer to any right or entitlement to be elected as director. Mr Chua contended that what Mr George Lee said did not allow a director to be removed against his wish. With respect, I disagree. If election is required, a director can and may be removed by the shareholders against his wish. I further note that the 1994 Agreement allegedly came into existence before the formation of the then holding company, Astrotech Holdings. I have not been referred to its articles of association. But it would appear from what Mr George Lee said at the 1998 AGM that the articles did not give the shareholder any right to sit on the board so long as he remained a director. It is odd. The right to directorships and management was on the petitioners' case an important element in the management structure and operation of the Group. It also to a significant extent defined the shareholders' rights. I fail to see why the parties did not include it in the articles of Astrotech Holdings to be formed. The same can be said of the articles of AIH. No particular difficulty arose if the articles of association were to be tailor-made to incorporate the 1994 Agreement. 113.Mr Chua contended that on the respondents' own case, all shareholders were entitled to "equal participation". And there was equal participation on the Operation Committee. He was referring to paragraphs 14 and 15 of Mr Paul Kwan's first affirmation. When those paragraphs are understood in context, they did not support Mr Chua's contention that the respondents agreed that all shareholders were entitled to as a matter of right to be elected as director. In my view, the concept of "equal participation" does not sit happily with the existence of the Operations Committee. Not every shareholder sat on the committee. What is the purpose of having the committee if every shareholder had equal participation in the management of the holding company or the Group? Further, consent of the committee was required for all major changes affecting the manufacturing business of the Group, implying that not all shareholders were "equal" insofar as management of the manufacturing side of the Group's business was concerned. 114.For the above reasons, the petitioners have for present purposes failed to establish to my satisfaction the part of the 1994 Agreement relating to the right to be elected to as director of AIH and the right to participate in its management and management of its subsidiaries. Counsel had made submissions on some other minor points in this regard. In order not to over-burden this judgment, I do not propose to deal with them in detail. Suffice it to say that I have already considered all the points before I come to the above conclusion. The petitioners cannot invoke the just and equitable considerations to impeach the respondents' right not to elect the Lees at the 2001 AGM. Accordingly, they cannot rely on the Wrongful Exclusion Complaint to support a good prima facie case for winding-up. 115.In light of my conclusion above, it is not necessary for me to deal with the petitioners' case on the parties' personal relationships and mutual trust and confidence in the context of the Wrongful Exclusion Complaint. Nor is it necessary to deal with the reasons for not electing the Lees at the 2001 AGM for present purposes. I now turn to the Conflict of Interests Complaint. (2) The Conflict of Interests Complaint 116.The sale of the OEM business in December 2001 to the consortium formed by the respondents and Rauland-Borg obviously involved a conflict of interest between AIH and the respondents. Contrary to the respondents' allegation, the commercial reasons were not given at the 2002 AGM. The reasons stated in Mr Paul Kwan's first affirmation are set out in paragraphs 79 and 80 above. In essence, the respondents alleged that the market condition had rendered the OEM business, then a profitable venture, very risky. To maintain the long term returns to shareholders, it was in the interest of the Group to realize its investment in the OEM business and to apply to proceeds towards new investment opportunities as well as support the currency validator business. Divesting itself of the OEM business was also in the best interest of AIH because Mr George Lee was seeking to compete with AIH in the OEM business through ADR. 117.Mr Beresford relied on two articles in AIH's articles of association to justify the sale. He first referred to article 93 of AIH's articles of association which empowered the directors to manage the business and affairs of the company and submitted that the disposal of the OEM business was within the respondents' fiduciary powers under this article. He next referred to article 119, which provided :
Counsel submitted that the sale of the OEM business was obviously known by all the respondents, the sale was therefore proper and valid under this article despite the apparent conflict of interest. 118.The commercial reasons advanced by the respondents to justify the sale are in my view not convincing for a number of reasons. First, the OEM business was then the major and most profitable venture of AIH. The sale was said to benefit not only AIH but also the shareholders in the long run. Why was then no prior notice given to the petitioners, who were after all the biggest single shareholders? They were only made aware of it at the 2002 AGM, some four months after the signing of the agreement. And even then they were not given any reasons to justify the sale although they had raised concerns at the meeting. The respondents have not explained why it was necessary to keep the petitioners in the dark. It has not even been suggested or argued that since Mr George Lee was seeking to compete in the OEM business through ADR, they decided not to give any prior notice to the petitioners. Secondly, it was suggested that the respondents sold the business to themselves because Mr George Lee was seeking to compete in the same business. But the best evidence Mr Paul Kwan could come up with was the hearsay evidence from Rauland-Borg that Mr George Lee approached them for discussing potential OEM business and the undated materials downloaded from ADR's website (exhibit "KCY-13"), which clearly emphasized its vending machines but also contained two photographs of products that were, according to Mr Paul Kwan, similar to AIH's. There is simply no concrete evidence that prior to or at the time of the sale, ADR did engage in competition in the OEM business. Thirdly, it was said that the OEM business might suffer as a result of potential competition and possible change in market condition. But Mr Paul Kwan had failed to bolster the vague suggestion with evidence, which renders the serious threats hollow. Fourthly, the OEM business had, according to the respondents, become too risky. But why would the respondents themselves absorb the risks by acquiring the business through the consortium? What benefits would they derive? Fifthly, if the sale was in the best interest of AIH, why was there no independent valuation of the business to ensure that it would fetch the best market price? Sixthly, cash arising from the proceeds of sale of the OEM business would have to be retained and be applied to other business opportunities including in particular the validator business. But it was the respondents' case that ADR was then seriously competing in the validator business. What were the commercial benefits of divesting AIH of the most profitable business at the time and then applying proceeds to a business which was or would be facing fierce competition? 119.I am satisfied that for present purposes the petitioners have proved a good prima facie case that the respondents were in breach of their fiduciary duty as directors by selling the OEM business to their consortium. The respondents asserted that the sale was bona fide in the best interest of AIH. Mr Chua submitted that it is not open to the respondents who are in conflict of interest to rely on the incantation of the phrase. He first relied on firstly the Privy Council decision of Howard Smith v. Ampol Ltd [1974] AC 821 where Lord Wilberforce said at pp.834G and 835D-F :
Mr Chua next referred to In re a Company [1988] 1 WLR 1068 where Smith v. Ampol Ltd was followed. Harman J said at p.1076G-1077A :
I agree. 120.As noted, the respondents prayed in aid of article 119 of AIH's articles of association. Mr Chua submitted that the article did not entitle the directors to act in breach of their fiduciary duty to AIH. The respondents had siphoned off the most profitable business of the company to themselves. They could not possibly invoke the article. I also agree. 121.Related to the sale of the OEM business is the important question whether AIH's assets are in jeopardy. As at 31 March 2001, the cash position of the Group was in the region of HK$100,000,000. On 3 July and 1 November 2001, total dividends of HK$33,000,000 were declared. The balance is about HK$64,000,000. By May 2002, AIH had received HK$109,000,000 as proceeds from the sale of the OEM business, adding the cash balance up to about HK$170,000,000. But according to Mr Paul Kwan's second affirmation, the then cash position (May 2002) was over HK$50,000,000. The apparent deficiency is about HK$120,000,000. Mr Paul Kwan however said there was no deficiency. His explanations can be found in different part of his affirmations. He first said in paragraph 13 of his second affirmation that a portion of the sale proceeds had been applied towards settlement of long outstanding trade receivables owed by AIH to its former OEM subsidiaries. No particulars were offered on the amounts of the receivables or the identity of the subsidiaries involved. In paragraph 4 of his third affirmation, Mr Paul Kwan said that as a result of the disposal of the OEM business, AIH was required to settle large inter-large company trade receivables owed to its former subsidiaries. He made brief reference to Astrosys but again refrained from giving further details. In paragraph 8 of his fourth affirmation, he said that the shortfall represented the amount that AIH had invested into Astrosys over the past five to six years. And the amounts after the disposal of the OEM business Astrosys had historically been permitted to owe to other companies disposed of had to be repaid. Again no particulars had been given. According to the Financial Statements and Accountants' Report of Astrotech Holdings as at 31 March 2001 (exhibit "KCY-21" of Mr Paul Kwan's fourth affirmation), the amount due by Astrotech Holdings, which was prior to the sale of the OEM business, 100% owned by AIH and was the holding company for such business, was only HK$381,692. This is significantly less than what Mr Paul Kwan had suggested. Mr Beresford, in the course of his submissions, prepared an aide memoire on the figures to support his contention that there was in fact no significant cash deficiency. He referred to the amounts due from fellow subsidiaries to Astrotech Holdings recorded in the same report, which was HK$83,180,517. He seemed to have submitted in effect that that sum represented the amounts of trade receivables AIH had to settle after the disposal of the OEM business. But as noted, Mr Paul Kwan himself did not give any particulars on the receivables. In fact, he had not even referred to this particular entry in his evidence to support his allegation. Mr Paul Kwan had been unable to make use of the accounting reports he adduced to make good his bare assertion. I am therefore unable to accept counsel's submission. In my view, the petitioners have made out a good prima facie case that the respondents had dissipated AIH's assets. 122.For the above reasons, I am satisfied that for present purposes, the Conflict of Interest Complaint is established. (3) The Information Complaint 123.I next come to the Information Complaint. In my view, this complaint must be considered together with the Conflict of Interests Complaint. The main reason for not providing the information requested by the petitioners is that the Lees were competing through ADR. Even assuming that the respondents' allegations were true, I see no reason why the information not relating to the currency validator business was not provided upon request. Most of the requests indeed related to AIH's financial position, its management, the disposal of the OEM business and the respondents' conflict of interests in that regard. They did not relate to the currency validator business. The excuse of competition is simply untenable. Mr Chua complained that there was no justification for the blanket refusal to provide information and the "drip-feed" approach in the provision of information only as a result of these proceedings. I agree. In my view, the respondents' conduct in this regard is an attempt to unjustifiably deny the petitioners access to important information concerning AIH' affairs and their conduct in connection with the disposal of the OEM business and the cash deficiency. I rule that this complaint is also established for present purposes. (4) The Dividends Complaint 124.Mr Chua finally submitted that the drastic reduction in dividends in May 2002 demonstrating that the respondents had acted in breach of their duty to consider the rights of members to have profits distributed so far as commercially possible : In re a Company [1988] 1 WLR 1068. Mr Beresford submitted that the decision not to pay a substantial dividend was within the respondents power as directors and it was a legitimate commercial decision to retain the capital for investment in the currency validators business. The reduction in dividends, when considered in isolation, appeared to be legitimate. But as I have earlier ruled, there is a good prima facie case that at about the same time (May 2002), the respondents had dissipated or in the course of dissipating AIH's cash assets. In the circumstances, I have grave doubt if the reasons advanced are genuine. In my view, the reduction in dividends, coupled with the dissipation of cash assets, is a wrongful denial of the petitioners' rights to have profits distributed to them so far as commercially possible. This complaint succeeds for present purposes. 125.I have not dealt with the parties' case on personal relationships, mutual trust and confidence, Mr George Lee's role and the protagonists' contributions. In my view, it is not necessary to do so. Reliance had been placed on the following passage of Lord Wilberforce's judgment in In re Westbourne Galleries [1973] AC 360 at p.379B-G :
As I understand it, the circumstances in which the just and equitable jurisdiction may be invoked vary and cannot be exhaustively defined. Cases involving mutual trust and confidence are only one of the very many instances and indeed a classic example where the just and equitable provision is applied. It is however not the pre-requisite. Here, the petitioners need not establish the above matters including mutual trust and confidence in order to prove the Conflict of Interests Complaint, the Information Complaint or the Dividends Complaint. The matters complained of are quite independent of those matters including mutual trust and confidence. If established, as I have ruled that it is the case for present purposes, they alone are sufficient to enable the petitioners to invoke the just and equitable jurisdiction. (5) Whether to wind-up 126.Mr Beresford submitted that even if a complaint is made out, the petitioners are nevertheless not entitled to a winding-up order. He essentially took three points and I will deal with them separately. 127.He first submitted that the breakdown in trust and confidence between the respondents and the Lees is due to the latter's misconduct. He was referring to the reasons for their removal from AIH's board and subsidiaries : see paragraphs 54 to 68 above. Thus the petitioners are not entitled to the equitable relief of winding-up. However, the breakdown in trust and confidence presupposes that the petitioners needs to prove mutual trust and confidence. That, as noted, is simply not required. Further, although a shareholder may have been partly responsible for the breakdown in relationship, his conduct must be causative of the breakdown, if it was to operate as a bar to winding-up : see Vujnovich v. Vujnovich [1990] BCLC 227 at 231i-232a. Here the matters giving rise to the Wrongful Exclusion Complaint, the Information Complaint and the Dividends Complaint arose after the removal of the Lees at the 2001 AGM on the purported ground of their misconduct or incompetence as the case may be. 128.Mr Beresford next submitted that the petition was brought for a collateral purpose, namely, to compel the distribution of the proceeds of the OEM business and to stifle AIH's activity which competes with ADR by depriving it of that capital. The petition ought not to be allowed to be used as an instrument of oppressing in this way and a winding-up order will not be made in such circumstances. There is no evidence before me to show that the petition was brought with this ulterior motive. Further, I have already ruled that the respondents had misconducted themselves by selling the OEM business and that they had been unable to explain the significant deficiency in the cash position thereafter. It is legitimate for the petitioners to bring the petition and to obtain a winding-up order so that, inter alia, the respondents' misconduct may be successfully investigated : see Halsbury's Laws of Hong Kong, Vol.6 (1997 edn), para.95.0980 at p.733. A winding-up order will bring an end to AIH's business activity. That is the inevitable consequence of the winding-up order. But it does not necessarily follow that the petition was brought with the collateral purpose in the first place. 129.Mr Beresford finally submitted that the respondents are willing and have indeed offered to have AIH and the OEM business valued by an independent expert and to buy out the petitioners' shares. The petitioners having unreasonably refused this alternative remedy, are not entitled to a winding-up order. It is common ground that the relief under section 168A does not apply to AIH. The only remedy under the statue is a winding-up order. But a winding-up order is a remedy of last resort. For my part and for present purposes, I am prepared to accept that if there is an alternative remedy, though not available under the statute, which is reasonable in the circumstances but unjustifiably rejected by the petitioners, they are not entitled to a winding-up order. 130.In O'Neill v. Phillips [1999] 1 WLR 1092, Lord Hoffmann stated that a reasonable offer should have the following features :
The respondents' offer is set out in paragraph 96 above. I do not consider it reasonable in the circumstances. It does not provide the same right to access to information to the petitioners. For the petitioners' advisers are not permitted to disclose the information to the petitioners. I just wonder how the petitioners can meaningfully instruct their advisers, evaluate the expert's opinion and to make submissions to him. More importantly, any valuation will not fully address all the matters relating to the respondents' misconduct. This is particularly so when the respondents, who have a clear conflict of interest, are in control of the information to be divulged. It is unlikely that the expert in the circumstances will come up with a fair valuation. In my view, the petitioners have not acted unreasonably in refusing to accept the offer. 131.For the above reasons, I rule that the petitioners have established a good prima facie case for winding-up. WHETHER JUST AND CONVENIENT TO APPOINT PROVISIONAL LIQUIDATORS 132.I next consider whether it is just and convenient in the circumstances to appoint provisional liquidators. 133.Mr Chua submitted that the petitioners' interests have been seriously prejudiced : there has been complete lack of transparency, and the respondents have been in plain breach of fiduciary duty. There had been very little (and extremely late) information provided on the sale of the OEM business. The company's assets are at risk. Mr Beresford disagreed. He submitted that AIH's assets are not at jeopardy. The respondents are prepared to make disclosure of information to an independent valuer and offered an undertaking to preserve the cash proceeds identified in its bank accounts pending the disposal of the petition. They are also willing to disclose relevant information to the petitioners' advisers subject to safeguard. In my view, given the significant cash deficiency unsatisfactorily accounted for by the respondents and their reluctance to disclose the relevant information in the past, there is a strong indication that AIH's assets are in jeopardy. The matters need to be investigated forthwith. The offer and undertaking by the respondents, which were made only in these proceedings, is not an answer. Their questionable conduct gives rise to justifiable concern that AIH's assets cannot properly be allowed to remain under their control for longer than necessary. A provisional liquidator should be appointed : see Re Brackland Magazines Ltd [1994] 1 BCLC 190 at p.195g-h. 134.An appointment of provisional liquidators is also necessary here to maintain the status quo until the disputes between the two warring camps of shareholders are resolved. The purpose of making the appointment is to ensure that AIH's affairs will be managed by an independent party whose duty will be to safe-guard the interests and assets of the company : Re Five Lakes Investment Co. Ltd and Multiford Co. Ltd [1985] HKLR 273 at 287F-H. Further, as I have ruled that the Conflict of Interests Complaint is established, an independent assessment of the situation by provisional liquidators is necessary to determine the adequacy of consideration of the OEM transaction which the respondents had concluded under a conflict of interests : see Zempilas v. JN Raylor [1990] 3 ACSR 518 at p.521. 135.Mr Beresford complained that there was delay on the part of the petitioners in bringing this application. The matters relied on in support of the application were all known to the petitioners at the time of the petition in July 2002. No reason is advanced why they did not take out the present application until October 2002. I do not think there was any undue delay. I agree with Mr Chua's submission that the relevant period is the time between the last request by the petitioners' solicitors for information on 27 September 2002 and the summons on 17 October 2002. In any event, having considered the evidence in the round and having regard to the necessity, commercial reality and the balance of convenience, any alleged delay complained of is not a bar to appointment of provisional liquidators. 136.Mr Beresford further submitted that allowing the application is tantamount to disposing of the petition summarily. With respect, I disagree. As noted, the views that I have expressed on the merits of the petition are necessarily provisional, pending a proper determination at trial when all the factual disputes are to be resolved. I agree that appointment of provisional liquidators should never be made lightly. That is why the court in exercising the jurisdiction requires the petitioner to satisfy the two-stage test. But once the test is satisfied, there is no reason to deny the petitioner the relief even though the consequences are usually drastic. 137.Mr Beresford then submitted that there is a possibility that the provisional liquidators appointed by the Hong Kong court will not be recognized in other jurisdictions where the subsidiaries of the Group were incorporated. He doubted if the appointment would serve any useful purpose. Again, I am unable to accept this submission. Whether the provisional liquidators need to take any step outside Hong Kong in the course of discharging their duties remains to be seen. And if such steps are to be taken, it is mere speculation at this stage that the same will be challenged by any of the subsidiaries or indeed any party in any jurisdiction outside Hong Kong. 138.Finally, Mr Beresford submitted that the provisional liquidators do not have the expertise to run the validator business. That would adversely affect AIH's operations. Provisional liquidators are entitled to retain or engage suitable personnel to help manage AIH's affairs including the validator business, if necessary. I see no merits in this submission. 139.For these reasons, I rule that it is just and convenient in all the circumstances to appoint provisional liquidators. CONCLUSION 140.I will allow the petitioners' application for appointing provisional liquidators and make an order in terms of the summons dated 17 October 2002 save and except that in paragraph 2(9) thereof, the premises known as 2/F and 8/F, 28 Hung To Road, Kwun Tong, Kowloon should be deleted as the same had already been disposed of by AIH in 2001 : see paragraph 29 of Mr Paul Kwan's fourth affirmation. 141.I will also make an order nisi that the costs of the application be in the cause. This is the costs order requested in the petitioners' summons.
Representation: Mr Chua Guan-Hock, instructed by Messrs Dibb Lupton Alsop, for the Petitioners Messrs Wilkinson & Grist for Astrotech International Holdings Limited (excused from attendance) Official Receiver (excused from attendance) Mr Roger Beresford, instructed by Messrs Richards Butler, for Opposing Contributories (Kwan Chee Yan Paul, Kwan Tak Shun Dick, Liu Kam Cheong, Leung Kin Sun, Cheng Ming Hin and Tam Siu Wing) Rauland-Borg, Shareholder, absent. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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