She Wai Hung v. Juliano Lim and Others

HCMP006472/2001

HCMP 6472/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6472 OF 2001

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Coram: Hon Kwan J in Court

Dates of Hearing: 16-20 February 2004

Date of Handing Down of Judgment: 27 February 2004

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J U D G M E N T

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Introduction

1.This is a petition under section 168A of the Companies Ordinance, Cap. 32. The petitioner, She Wai Hung, seeks an order that Juliano Lim and Johnathan Lim, the 1st and 2nd respondents herein, may be ordered to purchase the 40% shareholding of the petitioner in Golden Bright Limited ("the Company"), the 3rd respondent herein, at a price to be determined by the court. The 1st respondent is the father of the 2nd respondent. The Company has not taken part in these proceedings as this is a dispute among shareholders. The reference to the respondents in this judgment shall be taken as referring to the 1st and 2nd respondents only.

2.In summary, the petitioner alleged that since about May 1997, the affairs of the Company have been conducted by the 1st and 2nd respondents in a manner that is unfairly prejudicial to his interest. His complaints may be grouped under two main heads. Firstly, he was wrongfully excluded from the management of the Company notwithstanding that the sale of his shareholding in the Company to the 1st respondent in May 1997 had fallen through. Secondly, since May 1997, the respondents have wrongfully diverted the business of the Company in the electroplating of spectacles frames with a processing factory in the Mainland to a company known as Gold Loop Electroplating & Metal Finishing Company Limited ("Gold Loop"). This factory in the Mainland has much importance in these proceedings. It is situated at the Longgang District in Shenzhen, and is known as the Kwai Chung Gold Loop Spectacles Processing Factory ("the Factory").

3.The respondents' case in answer to the first main complaint may be stated as follows. The petitioner had resigned from his positions in the Company voluntarily and his resignation was not conditional upon the completion of the sale of his shares in the Company to the 1st respondent. Hence, the respondents had no duty to restore the petitioner to his former positions when the sale fell through. Further, they were justified in excluding the petitioner from the management owing to the misconduct of the petitioner in these respects: the petitioner had misappropriated the assets of the Company and the Factory; he had sold the processed products of the Factory in the Mainland, which he was not permitted to do; and he had forged the minutes of a directors' meeting of Gold Loop dated 20 June 1993 and purportedly signed a letter to the relevant Mainland authority dated 10 January 1996 on behalf of Gold Loop and the Company without authority.

4.In answer to the second main complaint of diversion of business to Gold Loop, the respondents alleged that the Company was merely authorised by Gold Loop to manage the production process in the Factory. It is not in dispute that since May 1997, Gold Loop has taken over the control of the Factory from the Company and continued its operation. There was however no diversion of business as the business and the interest in the Factory have belonged to Gold Loop at all material times and Gold Loop had revoked the authority of the Company to manage the Factory in May 1997.

5.Only the petitioner and the 1st respondent have filed substantive affirmations, which stood as their evidence in chief. They were cross-examined on their various affirmations. Essentially, these proceedings turn on my assessment of the credibility of these only two witnesses.

6.There are quite a number of factual disputes on both sides, with allegations of forgery and other unlawful or wrongful acts. I have given the gist of the case advanced on each side at the outset, as I think it important not to lose sight of the main issues in contention. It is quite unnecessary, and I do not intend to make findings in respect of each and every factual dispute.

The events from 1990 to 1993

7.I will first give the background matters relating to the setting up of Gold Loop, the Factory and the Company in chronological order. Unless stated otherwise, these matters are largely uncontroversial.

8.Some time in 1990, the 1st respondent, who was and is ordinarily resident in the Philippines, decided to set up a business of electroplating in Hong Kong with five Hong Kong residents, being the petitioner, Wong Sin Tat, Ko Chi Lok, Chow Kam Wah and Lam Chi Wai Joseph. It was decided to use Gold Loop as the corporate vehicle for this business. The five Hong Kong residents had established a company in January 1990 known as Consensus Industrial Company Limited ("Consensus") to hold their interest in Gold Loop.

9.Gold Loop was incorporated in Hong Kong on 24 April 1990 under the name of Styling Plaza Limited. On 22 May 1990, its name was changed to its present name and the 2nd respondent and Consensus were appointed the first directors. On 4 June 1990, the two subscriber shares were transferred to the 2nd respondent and Consensus. In January 1991, the 2nd respondent resigned as a director and the 1st respondent and two other family members were appointed as directors in his place. In March 1991, the authorised share capital was increased to HK$3 million and additional shares were allotted so that the 1st respondent and his family members held 90% of the shares and Consensus held the remaining 10%.

10.In December 1991, the petitioner increased his shareholding in Consensus to 60%. Thus, his interest in Gold Loop through his shareholding in Consensus was increased to 6%.

11.Some time in 1992, it was decided to set up a factory in the Mainland for Gold Loop to carry out the processing work for the electroplating of spectacles frames. At a directors' meeting of Gold Loop held on 6 October 1992, the petitioner and Ko Chi Lok were authorised to handle all matters relating to the establishment of a factory in Shenzhen. Gold Loop then signed an agreement dated 10 November 1992 ("the November 92 Agreement") with a local party in the Mainland to set up the Factory. In that agreement, Gold Loop was "party B". Somewhat confusingly, "party A" was stated to be "Kwai Chung Gold Loop Spectacles Processing Factory", which is the name of the Factory to be set up under that agreement. Another entity, being the Shenzhen Baoan External Trading Company, also signed that agreement. It was described as the "commercial unit" in the agreement, and it was not explained to me what role or obligations this third entity had assumed under that agreement.

12.The November 92 Agreement was approved and registered by the Shenzhen Longgang Economic Development Bureau ("the Bureau") on 16 November 1992, upon which the agreement took effect. It provided for co-operation between Gold Loop and the local party for processing the materials supplied by Gold Loop in the electroplating of spectacles frames. In essence, Gold Loop was given the right to operate the Factory to be built on land provided by the local party for a period of five years (this was extended for ten years to 10 November 2007 by the Bureau on 29 March 1996). Gold Loop was also to provide the machinery and equipment and pay the wages of the workers supplied by the local party. The local party was to be paid an annual processing fee when production commenced.

13.From late 1992 to mid 1993, preparation work was carried out for the setting up of the Factory. Ko Chi Lok was appointed the legal representative of the Factory. He resigned from this position in May 1993. The Factory did not start production until some time in early 1994, which was after the petitioner had given up his indirect interest in Gold Loop in the circumstances that I am about to come to.

14.It is the petitioner's case that in about July 1993, he made an oral agreement with the 1st respondent to dispose of his indirect interest in Gold Loop held through his shares in Consensus. The value of such interest was agreed at HK$1.5 million. In return, Gold Loop agreed to sell to the petitioner its interest in the Factory at an agreed valuation of HK$1.8 million. Thus, the petitioner was to pay the difference of HK$300,000.00 to Gold Loop to acquire the latter's interest in the Factory. Payment was made by the petitioner's wife, the petitioner produced as evidence the photocopy of a deposit slip of HK$300,000.00 into the bank account of Gold Loop on 10 July 1993.

15.The petitioner further alleged that soon after he had acquired Gold Loop's interest in the Factory and in about July 1993, the 1st respondent had a change of mind. He did not want to give up the Factory. He made a proposal to the petitioner to enter into business together in operating the Factory. For that purpose, the 1st respondent would provide further finance in setting up the Factory and the petitioner, who had the technical skills in electroplating, would be responsible for running the Factory. They decided to use a company as the vehicle for their new business co-operation and the petitioner was to inject his recently acquired interest in the Factory as part of his capital contribution to the new company. Hence, the Company was acquired, on the understanding that the petitioner was to hold 40% of the shares and the 1st respondent 60%.

16.The respondents accepted that the petitioner had given up his indirect interest in Gold Loop. Indeed, this is borne out by the documents registered with the Companies Registry as on 31 August 1993, Consensus resigned as a director of Gold Loop and Wong Sin Tat was appointed as director in its place; on 27 September 1993, Consensus transferred all its 300,000 shares in Gold Loop to Wong Sin Tat. However, the respondents alleged that at no time did the petitioner acquire or purchase from Gold Loop the latter's interest in the Factory and that Gold Loop has retained its interest therein throughout. This is one of the key issues I need to resolve, as the rival contentions of the parties regarding the complaint of wrongful diversion of the Company's business to Gold Loop would stand or fall with how I rule on this issue.

The events from late 1993 to 1997

17.The Company was incorporated on 8 July 1993 with a nominal share capital of HK$10,000.00 divided into 10,000 shares of HK$1.00 each. However, according to the documents registered with the Companies Registry, the two subscriber shares of the Company were only transferred to the 1st and 2nd respondents on 11 April 1994. It was only on 13 April 1994 that the necessary documents appointing the respondents as the first directors were lodged with the Companies Registry, stating that their appointments were to take effect from 8 July 1993. On 31 March 1995, the petitioner was appointed as an additional director. On 4 December 1995, the 2nd respondent transferred his one share to the petitioner. There was an allotment of all the unissued shares on 5 December 1995, 5,999 shares were allotted to the 1st respondent and 3,999 shares were allotted to the petitioner. As a result, the 1st respondent held 6,000 shares in the Company and the petitioner held the remaining 4,000 shares. It was only on 28 July 1997 (which was after the formal agreement for the sale and purchase of all the petitioner's shares in the Company was signed) that the 1st respondent transferred one of his shares to the 2nd respondent. The present position is that the 1st respondent holds 5,999 shares, the 2nd respondent holds one share, and the petitioner holds 4,000 shares and that the 1st and 2nd respondents are the only directors.

18.The petitioner claimed that from the start he had participated in the business of the Company in operating the Factory on the basis he was to own 40% of the shares in the Company, notwithstanding that he did not become a shareholder until December 1995 and that the delay in allotting the shares to him was due to the 2nd respondent's delay in attending to the documentation. The respondents disputed the above, saying that there was no delay in preparing the documentation for registration. They claimed that in the beginning the petitioner was merely a technical staff of the Company employed to manage the Factory and although he had expressed interest to acquire some shares in the Company, the respondents did not agree to this until December 1995 when they considered that the petitioner had proved his worth. This factual dispute would need to be resolved.

19.Another matter which gave rise to complications and disputes was that for a long time there was no change in the name of the legal representative for the Factory (Ko Chi Lok was still the representative on record notwithstanding he had left in May 1993) and that the Hong Kong entity authorised by the Chinese authorities to operate the Factory was Gold Loop (which was the contracting party in the November 92 Agreement). The change of name did not come about until approval was given by the Bureau on 25 November 1996, in circumstances that I will later go into. From then onwards until some time in 1997, the Company was recognised by the Bureau as the authorised party to operate the Factory under the November 92 Agreement and the petitioner was the legal representative for the Factory.

20.It is not in dispute that from late 1993 to May 1997, it was the Company, not Gold Loop, which had been operating the Factory. As mentioned earlier, the respondents' case is that in October 1993 Gold Loop had authorised the Company to manage the production process of the Factory for and on behalf of Gold Loop, until such authority was revoked by Gold Loop in May 1997. The respondents relied on the board minutes of Gold Loop dated 18 October 1993, the board minutes of the Company dated 20 October 1993 and the resolution signed by all the directors of Gold Loop in May 1997. The petitioner contended that these are all self-serving documents created by the respondents for the purpose of these proceedings.

21.It is common ground that in about May 1997, there were negotiations between the petitioner and the 1st respondent regarding the sale of the 1st respondent's shares in the Company to the petitioner and in the alternative the sale of the petitioner's shares to the 1st respondent. The respondents alleged these negotiations came about as a result of the 1st respondent discovering wrongdoings committed by the petitioner in the management of the Factory and that the petitioner did not give any explanation when confronted by the 1st respondent. The petitioner denied this. The outcome of the negotiations was that the 1st respondent agreed to buy out the petitioner and to pay HK$4 million for the petitioner's shares in the Company in two instalments. The parties signed a provisional agreement for sale and purchase in Chinese on 29 May 1997. On 4 July 1997, they signed a formal agreement for sale and purchase in Chinese ("the Share Sale Agreement"). It was expressly provided that upon the completion of the sale, the petitioner must have resigned from his positions as director and manager of the Company and as the legal representative of the Factory.

22.The petitioner received payment of the first instalment being HK$1 million. He was not paid the balance being HK$3 million by 31 August 1997, as provided in the Share Sale Agreement. The sale of the petitioner's shares fell through, and both parties treated the Share Sale Agreement as having been terminated. The 1st respondent claimed that the petitioner was not paid the balance of the purchase price because in contravention of the Share Sale Agreement the petitioner had failed to deliver up to the 1st respondent, before the completion date, all the accounting records, legal documents, seals, agreements, all relevant documents in respect of the Company and the Factory, and all the assets owned by the Company and the Factory. The petitioner denied this allegation. He forfeited the HK$1 million paid by the 1st respondent, claiming that it was the 1st respondent who had breached the Share Sale Agreement when he was not paid the balance of the purchase price. On 13 April 1999, the petitioner brought proceedings against the 1st respondent in High Court Action No. 5969 of 1999, claiming damages and a declaration that his resignation as a director of the Company was void. The 1st respondent counterclaimed for repayment of the amount forfeited and another HK$2 million as liquidated damages. Neither has sought specific performance of the Share Sale Agreement. That action became dormant after an order was made on the summons for directions in September 1999.

23.The petitioner signed an undated letter of resignation stating that he resigned as a director of the Company as from 19 May 1997 and an application addressed to the board of directors to give up his shares in the Company "on personal grounds" dated 15 May 1997. The respondents acted quickly on these documents signed by the petitioner. Minutes were drawn up of a board meeting of the Company held on 19 May 1997 resolving to accept the petitioner's resignation as a director with immediate effect, and of another board meeting held on 20 May 1997 resolving that the petitioner ceased to be the corporate representative of the Company in China and the 1st respondent be authorised in his place. The notice of change of director was filed with the Companies Registry on 31 May 1997. Notification was given to the Bureau on 25 June 1997 and on the same day the Bureau gave approval that the 1st respondent was to be the legal representative of the Company in place of the petitioner.

24.Despite the termination of the Share Sale Agreement, the petitioner was not restored to his former positions in the Company. He had asked to be reinstated in the annual general meetings but was out-voted by the respondents. As mentioned earlier, the respondents asserted that the sale of the petitioner's shares and his resignation were wholly unrelated matters.

25.The business of operating the Factory was the only substantial business of the Company. According to the audited accounts, the business turnover, which was derived wholly from the operations of the Factory, was as follows for these financial years (which ended on 31 March for each year): HK$17,592,026.05 for 1996, HK$9,324,196.42 for 1997 (a different figure of HK$10,665,400.12 was given in the financial statements for the following year and I have no explanation about this), HK$2,471,921.70 for 1998, and nil for 1999. Also, according to the report of the directors in the financial statements for the year ended March 1998, during that financial year, the principal activities of the Company were the trading of spectacles frames until May 1997, which was the time when the petitioner made an agreement to sell his shares to the 1st respondent. In the directors' report for the financial year ended March 1999, it was stated that 31 March 1999 was the date of cessation of business and the Company had not traded during that financial year.

26.One other matter I should mention is that on 23 May 1997, the petitioner and his wife acquired a company known as Fortune Grand Industrial Limited ("Fortune Grand"). They have used Fortune Grand to carry on the business of making spectacles frames and set up a factory in the Mainland 130 km from the Factory. The respondents alleged that this is a competing business and that this should disentitle the petitioner from relief under section 168A. The petitioner has denied this.

The witnesses

27.The petitioner gave evidence in Cantonese. He has no knowledge of English. The 1st respondent gave evidence in Putonghua. He does not speak Cantonese but has a reasonable command of English. I have had ample opportunity to assess their credibility when they testified in court.

28.The 1st respondent does not strike me as a credible witness. He is a seasoned businessman with other business interests and a sophisticated person. Not infrequently, in the course of cross-examination, he took refuge too readily in saying that he was not personally responsible for certain matters and that the questions should be referred to someone else, or that he has no recollection, notwithstanding that he had produced certain documents or was the author of certain documents or had deposed to those matters in his affirmations. He also evaded questions and tried to resile from earlier answers when he realised his admitted involvement in certain matters might work to his disadvantage. I agree with the helpful analysis in the closing submissions of Mr Paul Lam, who appeared for the petitioner, that large parts of the 1st respondent's evidence does not stand up to scrutiny as being inconsistent, incoherent, contradicted by contemporaneous documents, or lacking in commercial sense. I have little difficulty in rejecting most of the material evidence given by the 1st respondent.

29.The petitioner was subjected to a long, rambling and at times aimless cross-examination by Mr Yeung Yeuk Chuen, who appeared for the 1st respondent. The petitioner's patience was taxed by the cross-examination and he had unceremoniously called the 1st respondent names in his testimony. It does not appear to me that he had resorted to tricks in his responses to persistent questioning. He did try to answer questions in a straightforward manner. I accept most of his evidence, except that in relation to certain documents submitted to the Mainland authorities to be dealt with in the latter part of this judgment.

30.I turn to the specific factual disputes which I need to resolve.

If the Company was merely authorised to manage the Factory

31.To support their contention that the Company was merely authorised by Gold Loop to manage the Factory from October 1993 to May 1997, the respondents produced the respective board minutes of Gold Loop and the Company in October 1993 and the board resolution signed by all the directors of Gold Loop in May 1997. Are these documents merely self-serving documents produced for the purpose of these proceedings? I find that they are and I reject the 1st respondent's evidence here for the following reasons.

32.Firstly, none of the three documents relied on by the respondents mentioned any terms on which Gold Loop authorised the Company to manage the production of the Factory. The 1st respondent was asked in cross-examination to clarify if there were any such terms. Initially he said it was too long ago and he had forgotten. Then he said basically no terms were fixed. He was simply unable to explain why the Company, which was a company with a paid up capital of HK$2.00 in October 1993, was authorised by Gold Loop to manage the Factory, which was a substantial undertaking. He said no management fee was payable under this authorisation. I find his answers wholly incredible.

33.Secondly, if the Company was merely authorised to manage the production process in the Factory for Gold Loop, it must follow that such business was the business of Gold Loop and not of the Company, so that the machineries and equipment should belong to Gold Loop, the business turnover in the operation should be attributable to Gold Loop, and the profit derived therefrom should go to Gold Loop. However, as I have pointed out earlier, that was not the position as regards the turnover in the audited accounts of the Company, as substantial turnover derived from the operations of the Factory was recorded until May 1997, when Gold Loop took over the operations from the Company. Further, the principal activities of the Company in the directors' report for the financial year ended March 1997 were described as "machinery rental and trading of spectacles", there was no mention that the Company was merely authorised to manage the production process of a factory. The fixed assets of the Company had included the machinery in the Factory, according to the audited accounts for the year ended March 1997. Faced with the financial statements, the 1st respondent had to qualify his evidence. Under cross-examination, he could not maintain that the Company was merely authorised to manage the Factory as he had done in his affirmations. He had to accept that capital was injected into the setting up of the Factory by the Company, that the Company had bought equipment and raw materials, paid the workers and outgoings of the Factory, and that the profit derived from the operations should go to the party that had invested in the operations.

34.Thirdly, it simply defies commercial sense that having invested millions of dollars into the operations of the Factory, the Company would have accepted an arrangement with Gold Loop that its authorization to manage the Factory could be terminated at any time by Gold Loop without any conditions.

35.Fourthly, in May 1997 the 1st respondent was willing to pay HK$4 million to purchase the petitioner's shares in the Company, on the basis that the Company was worth HK$10 million, as evidenced by a note in Chinese dated 15 May 1997 written by the 1st respondent in the course of negotiation. The value put on the Company could hardly be justified if the Company was merely authorized to manage the Factory for Gold Loop and the substantial turnover derived from such operations would cease any time on the revocation by Gold Loop of the authority. I should also point out that the 1st respondent's evidence, when he was cross-examined on the note dated 15 May 1997, is evasive and lacking in credence.

36.Fifthly, as pointed out by Mr Lam, the resolution signed by all the directors of Gold Loop in May 1997 to revoke the authority of the Company was not mentioned anywhere in the three affirmations made by the 1st respondent, let alone exhibited to his affirmations. This document, which is most important to the respondents' case, was only produced subsequently. The 1st respondent claimed he had no idea why this document was produced late. In this regard, it is pertinent to note that in the first affirmation of the 1st respondent, he gave a different reason for the cessation of the business of the Company. He had deposed that the Company recorded a loss for the financial year ended March 1997 and "accordingly" it was resolved to cease operation. There was no mention in that affirmation that the Company ceased to manage the Factory because its authority was revoked by Gold Loop in May 1997. He confirmed that there was no resolution in writing and no minutes of board meeting stating that the Company decided to cease business because of the loss suffered.

If Gold Loop had sold its interest in the Factory in July 1993

37.I agree with Mr Lam that the payment of HK$300,000.00 goes a long way to support the petitioner's case that Gold Loop had sold its interest in the Factory to him in July 1993. The 1st respondent claimed he did not know what this amount represented when he was asked about the deposit slip showing that the money was paid into the bank account of Gold Loop on 10 July 1993. I do not accept his evidence that he had no knowledge about this, particularly when this is considered with his evidence regarding a note in Chinese dated 5 April 1994 which was written by him.

38.The note dated 5 April 1994 contained a reference to cash of HK$300,000.00. The 1st respondent accepted that this amount was part of the petitioner's investment in the Company but claimed that he could not recall if this represented cash to be paid by the petitioner or cash already paid. The note was dated and it purported to set out the investment of HK$6.8 million by the 1st respondent and the petitioner in the Company in the proportions of 60% and 40%. The figures are very detailed, particularly as regards item 5, which related to capital contribution. The figures for capital contribution were divided into two columns, those on the left related to capital contribution of the 1st respondent, and the ones on the right related to capital contribution of the petitioner. With such detailed figures all of which were written by him and the date on the note to jog his memory, I do not think the 1st respondent was genuinely unable to recall if the amount of HK$300,000.00 represented capital yet to be contributed by the petitioner or capital that had already been contributed. Further, I note that for the capital contribution of the 1st respondent as written on the note, an amount of HK$150,000.00 was written against the date of "April 6, 94", which was the day after the note was written. This would seem to indicate that such amount of capital contribution was as yet unpaid by the 1st respondent at the time of the note but would be paid the following day. If the amount of HK$300,000.00 were not yet paid by the petitioner as his capital contribution, this would have been indicated in the note in a similar way.

39.The petitioner was cross-examined at some length about the note dated 5 April 1994. I find his explanation coherent and credible. I accept that the capital contribution as written there represented the contribution he had already made to the Company by that date, which was when the Factory had just commenced production, and that the note was for the purpose of working out how much had already been paid by the parties. The petitioner's contribution, being 40% of the total investment, should have been HK$2,720,000.00. As 10% of the total investment being HK$680,000.00 was provided by the 1st respondent on the petitioner's behalf, to be repaid by him to the 1st respondent when the Company made a profit, the petitioner's net contribution would have been HK$2,040,000.00. He did not repay HK$680,000.00 to the 1st respondent, as no profit was ever distributed by the Company. Ultimately, the petitioner contributed a sum of approximately HK$2.23 million as capital contribution.

40.I find that the petitioner's interest in the Factory was injected by him as part of his capital contribution to the Company and the value as estimated by Gold Loop was HK$1.8 million odd as recorded in the note. When the petitioner acquired Gold Loop's interest in the Factory in July 1993, this was paid for with the cash of HK$300,000.00 and the proceeds of sale of his indirect interest in Gold Loop held through Consensus, which was agreed at HK$1.5 million. He explained how the figure of HK$1.5 million was arrived at, and that this was made up of the par value of the shares of Gold Loop held by Consensus to the extent of the petitioner's interest in Consensus, his 6% share in the profits of Gold Loop and his 12% share in the bonus of Gold Loop. These three items which made up the value of his interest in Gold Loop had featured in the note dated 5 April 1994, although the petitioner did not agree with the percentage of his bonus in Gold Loop as stated in the note which was 5%. He further explained that even when the percentage of his bonus was increased to 12%, the three items added up were still HK$144,000.00 short of HK$1.5 million and that the figure of HK$1.5 million was agreed between him and the 1st respondent after much bargaining and negotiation, it was not calculated on the basis of precise figures for individual items. I accept his evidence on the above matters.

41.I further find that there was an oral agreement between the petitioner and the 1st respondent in or about July 1993 that a company was to be acquired by them for the purpose of operating the Factory and in which shares were to be held as to 60% by the 1st respondent and 40% by the petitioner. The petitioner was not merely a technical staff in the beginning as alleged by the respondents. The fact that he did not become a director until March 1995 and a shareholder until December 1995 was just due to the delay of the respondents in attending to the documentation and formalities of registration. There is no credence in the 1st respondent's evidence that the petitioner was merely a "nominal managing director" without the usual powers of a director. The evidence is all to the contrary. The petitioner signed a tenancy agreement dated 15 September 1993 to rent premises for the office of the Company in Hong Kong. There is no suggestion that he was not authorised to do so. The petitioner and the 1st respondent held a bank account in joint names in August and September 1993 for the purpose of the Company's business. The 1st respondent had no explanation why this was done if the petitioner were merely a technical staff. Besides, it is clear from the documents filed with the Companies Registry that there was much delay in preparing the documentation. The subscribers' shares were only transferred to the 1st and 2nd respondents on 11 April 1994 and their appointment as first directors with effect from the date of incorporation on 8 July 1993 was only received by the Companies Registry on 13 April 1994.

42.Further, the respondents' claim that the interest in the Factory has always been retained by Gold Loop is contradicted by some of the documents made by the 1st respondent. One notable example is a letter in Chinese dated 4 July 1997 written by the 1st respondent to Francis SL Yan & Co. (a firm of certified public accountants appointed as the auditors of the Company and also acted as the stakeholder in the Share Sale Agreement), in which the 1st respondent referred to the Factory as the "wholly owned subsidiary factory" of the Company.

43.In support of his case, the petitioner also produced various documents that had been submitted to the authorities in the Mainland for the purpose of effecting a change in the name of the Hong Kong party authorised to operate the Factory under the November 92 Agreement and for changing the legal representative of the Factory. He gave evidence why the application for such changes was made only in 1996, and that was because the legal representative of the Factory on record was Ko Chi Lok, who could not be found. He also said the change was made at the request of the 1st respondent after an incident of leakage of chemicals at that time resulted in a fine imposed on Gold Loop and the shareholders of Gold Loop was not happy for the Company to continue using the name of Gold Loop to import chemicals from Hong Kong to the Mainland for the operations of the Factory. Hence, the petitioner had several meetings with the Mainland authorities and was advised to publish a notice in a newspaper in Guangzhou to the effect that Ko Chi Lok had left the Factory in 1993, before the Company and Gold Loop were to submit their application to effect the relevant changes. I see no reason to doubt this part of the petitioner's evidence, which has a ring of truth about it, notwithstanding that it was denied by the 1st respondent.

44.The problem about the aforesaid documents submitted by the petitioner to the Mainland authorities is that they do not on their face appear to have been signed by a properly authorised person for and on behalf of Gold Loop, as the petitioner had ceased to hold any interest or position in Gold Loop in 1996. Indeed, in the case of Gold Loop's minutes dated 20 June 1993, the name of the 1st respondent was even signed by the petitioner, as admitted by the latter. The respondents claimed that these documents, including an agreement dated 1 October 1993, a letter to the Mainland authority from Gold Loop and the Company dated 10 January 1996, and the board minutes of Gold Loop dated 20 June 1993 were all forgeries in that the petitioner was not authorised to use the company chops of Gold Loop and the Company or to sign on behalf of these entities. The petitioner claimed that he used the company chops and signed on behalf of these entities with the consent of the 1st respondent.

45.I do not find it inherently improbable that the 1st respondent would have permitted the petitioner to use the company chop of Gold Loop for the purpose of the operations of the Factory until the application for the relevant changes was approved. After all, Gold Loop had for some time allowed the Company to import chemicals and raw materials to the Factory under the name of Gold Loop. However, this is not to say that the petitioner would have blanket authority to apply the company chop of Gold Loop or sign for Gold Loop on any document as the petitioner saw fit.

46.I do not think it necessary for the petitioner to rely on any of the three documents I have mentioned to support his case. I have grave reservations as to some of the explanations given by the petitioner as to how he came to execute these documents for and on behalf of Gold Loop, particularly in respect of the board minutes of Gold Loop dated 20 June 1993. The respondents have relied on the judgment of the Shenzhen City Intermediate People's Court made on 20 November 2003, being an appeal brought by the petitioner against a judgment of the Shenzhen City Longgang District People's Court. The lower court gave judgment in favour of Gold Loop and the Company against the petitioner for signing the 1st respondent's name on the board minutes of Gold Loop on 20 June 1993 without the 1st respondent's authority and in using such board minutes had infringed the rights in the names of Gold Loop and the Company. The judgment of the lower court was upheld by the Intermediate People's Court. Mr Lam submitted that the judgment could not give rise to an issue estoppel here, one of the reasons being that the judgment was not final and conclusive under Chinese law, as the petitioner has lodged a protest to the Procuratorate for a retrial under the special procedure in the Mainland (Chiyu Banking Corporation Limited v Chan Tin Kwun [1996] 2 HKLR 395 at 398G to 400C).

47.I do not think it necessary to rule on the question if issue estoppel should apply here. If it were necessary to do so, I would probably have come to the same finding made by the Mainland Courts that the petitioner was not authorised by the 1st respondent to sign the latter's name on the board minutes of Gold Loop dated 20 June 1993, having considered his evidence in this aspect, which is somewhat unsatisfactory and difficult to accept, unlike most of his evidence on other matters.

48.In the end, I think the evidence of the petitioner ought to be considered as a whole. Even if his evidence on the board minutes were rejected, it does not seem to me that his credibility in relation to other evidence should likewise be affected. The petitioner admitted under cross-examination that he had no authority to sign for Gold Loop if things were done by the book, but maintained he had a prior discussion with the 1st respondent and he had to submit the documents to the Mainland authorities so as not to affect the normal operation of the Factory. It may well be that he had resorted to expediency and improper measures to achieve his objective. I do not think his conduct here was so dishonest as to cast doubt on other evidence given by him.

The complaint of diversion of business

49.In view of the findings I have reached on the factual disputes set out above, I find that the petitioner has established his first broad complaint of unfairly prejudicial conduct, namely, that there was wrongful diversion of the Company's business in the operation of the Factory to Gold Loop since May 1997.

If the petitioner's resignation was conditional on the sale of his shares

50.There was some suggestion raised on behalf of the respondents that the petitioner has no legitimate expectation to be a director or to be concerned in the management of the Company. I reject this without hesitation. In my judgment, this is a classic situation of quasi-partnership in which a company was acquired on the basis of substantial investment on the part of the two shareholders, with the expectation that they, or at least the petitioner, who had been concerned in the preparation work for setting up the Factory, should be actively involved in operating the Factory which was the Company's only substantial business.

51.I have little difficulty in preferring the petitioner's evidence that his resignation from his positions of the Company in May 1997 was conditional on the successful completion of the sale of his shares to the 1st respondent, and not unconditional and voluntary as alleged by the respondents. It is quite simply unrealistic to suggest that the petitioner would have resigned voluntarily without any regard to what should happen to his shares in the Company. The 1st respondent's evidence that the petitioner tendered his resignation after he was confronted with wrongdoings in management does not stand up to scrutiny. It was not alleged by the respondents that the petitioner had made any admission of wrongdoing when he was confronted. It seems inherently unlikely that the petitioner would have resigned in that situation, as that would have given the impression that he was responsible or culpable in some way. Besides, the 1st respondent accepted that the sale of the petitioner's shares to him and the petitioner's resignation were discussed together. I cannot see in these circumstances how he could maintain that the two matters bore no relation to each other. Indeed, a specific term was inserted in the Share Sale Agreement to the effect that the petitioner should have resigned from all his positions upon the completion of the sale.

Are the respondents justified in excluding the petitioner from management

52.It was the respondents' contention that even if the petitioner's resignation were not conditional upon the successful completion of the sale of his shares, he is not entitled to be reinstated to his former positions because of his "unlawful and unauthorized acts". I have set out at the beginning of this judgment the three types of wrongful acts relied upon by the respondents.

53.Regarding the allegation of misappropriation of the assets of the Company and the Factory, I find that this is not established on the evidence. The respondents are not even able to provide an approximate value of the assets allegedly misappropriated. They have sought to rely on the report dated 19 December 1996 furnished by an accountant in the Mainland to the 1st respondent. The report did not give any support to an allegation that the petitioner had misappropriated assets and it made no mention that the accountant was engaged to investigate any wrongdoings of the petitioner. The 1st respondent also alleged that the accountant had reported to him verbally that the accounts of the Company were "irregular", "the assets of the Factory were misappropriated", and that she did not mention these findings in her written report "in order not to alert any person". I find there is no truth in these allegations. I see no cogent reason why the accountant could not have reported such findings, which must be important findings, in a separate confidential report, if the report dated 19 December 1996 was provided to others. Furthermore, the 1st respondent made a curious concession under cross-examination that what the accountant told him verbally was "without basis or evidence".

54.The only other piece of evidence relied on by the respondents to support the allegation of misappropriation is clause 5 of the Share Sale Agreement, which provided that on verifying the accounts of the Company and the Factory, if the petitioner had without authority appropriated company funds and property for personal use, the amount concerned would be deducted from the balance of the purchase price of the shares, the petitioner should be fully liable at law and that the rights of 1st respondent or the Company to bring proceedings for recovery would be reserved. I cannot see how this would advance the respondents' case.

55.I should also mention that since 1998, the parties have commenced a number of proceedings in the Mainland and in Hong Kong seeking various kinds of relief arising out of their dispute. To date, no proceedings have been brought against the petitioner in respect of any misappropriation of assets of the Company or the Factory.

56.The next allegation is that the petitioner had sold the processed products of the Factory in the Mainland in contravention of the regulations there. The 1st respondent alleged that in or about March 1996, he was "advised" that "the Factory was operated by the petitioner in contravention of the terms and conditions in the [November 92 Agreement]" and "in particular, the petitioner sold the processed products in the PRC". The source of his information was not given in his affirmation. He further alleged that the accountant mentioned earlier was engaged to look into this and other matters and that in about April 1997, with the aid of the report dated 19 December 1996, he had "evidence" verifying that the petitioner had sold the processed products in the Mainland. He produced two invoices issued by the Factory in July 1995 to such clients and three delivery notes issued by the Factory in April 1997 by which the processed products were delivered by the petitioner to his own clients.

57.Contrary to the 1st respondent's evidence, the report of the accountant made no mention that processed products of the Factory were sold in the Mainland in contravention of the regulations. As for the two invoices produced by the 1st respondent, the petitioner explained that they were issued by the Factory at the request of the customers to secure tax advantages from the Mainland authorities and that no money was in fact paid pursuant to such invoices. In cross-examination, the 1st respondent retracted his assertion in his affirmation that it was a criminal act in the Mainland for the Factory to issue invoices to customers to secure tax advantages in the manner as described by the petitioner.

58.Regarding the two customers in the three delivery notes, the petitioner denied they were his own clients and stated that he did not know either of them. He pointed out there was a curious feature about the delivery notes in that they were all signed by one surnamed Yip and to his knowledge this was a receptionist of the Factory and she should not have signed on the delivery notes. The respondents did not seek to deal with this feature in the delivery notes in their affirmations or in the oral evidence of the 1st respondent. The petitioner was not cross-examined on this either.

59.I am inclined to accept the petitioner's evidence and I find that the allegation that he had sold the processed products of the Factory in the Mainland is not established.

60.The last allegation of misconduct is that the petitioner had forged the minutes of Gold Loop dated 20 June 1993 and the letter to the Mainland authority dated 10 January 1996. This allegation was not raised in any of the affirmations filed by the respondents. The respondents produced the board minutes of the Company dated 15 July 1998 in which it was noted inter alia that the petitioner had forged these documents and that it was resolved by the board that the Company should proceed against him for all loss and damage resulting therefrom.

61.I have accepted the petitioner's evidence regarding the circumstances leading to the application to the Mainland authorities in 1996 for the relevant changes to be made. Even if the petitioner had exceeded his authority in purporting to sign for the 1st respondent and for Gold Loop on the two documents concerned, he had merely resorted to improper measures to bring about the necessary changes without further delay so as not to affect the normal operation of the Factory. I do not think that should warrant his exclusion from the management.

The complaint of wrongful exclusion from management

62.In view of the findings I make on the relevant factual disputes, I find that the second broad ground of complaint of unfairly prejudicial conduct is established on the evidence.

If the petitioner has established a competing business

63.The allegation that Fortune Grand is a competing business set up by the petitioner may be disposed of shortly. This is simply not made out on the evidence. As explained by the petitioner, the nature of the business of Fortune Grand is clearly different from the nature of the business of the Factory. The work carried out in the Factory is the electroplating of spectacles frames. The work carried out in the factory of Fortune Grand is the manufacture of spectacles and the entire manufacturing process would involve some 25 steps, of which electroplating is but one step. There is no competing business. Besides, the petitioner had only set up the business of Fortune Grand after he was excluded from the management of the Company. There is no reason he should be disentitled to relief under section 168A.

The relief sought

64.Having come to the conclusion that the petitioner has established his case of unfairly prejudicial conduct, I turn to consider the relief that should be granted on the petition.

65.In the petition, the petitioner seeks an order that the 1st and 2nd respondents should purchase his shares to be valued at a suitable date and at a price to be determined by the court. I think it would be appropriate to order the 1st respondent alone to purchase the petitioner's shares. The 2nd respondent's involvement was minimal. Although he held one subscriber share in the beginning, this was transferred to the petitioner in December 1995 and the 2nd respondent only became a shareholder again when the 1st respondent transferred one of his shares to him in July 1997. He had made no or no substantial contribution to the capital.

66.As regards the appropriate date of valuation of the petitioner's shares, I was referred by Mr Lam to In re London School of Electronics Ltd. [1986] 1 Ch 211 at 224A to F and Re Sparkle Consultants (HK) Ltd. [2002] 4 HKC 107 at 115D to 116C. The overriding requirement is that the valuation of shares should be fair on the facts of the particular case. Here, I am not concerned with the shares of a going concern. As I have found, the only substantial business of the Company has been diverted to Gold Loop since May 1997. The Company has formally ceased business since 31 March 1999. In this situation, it would clearly be inappropriate to order that the date of valuation should be the date of presentation of the petition on 12 December 2001, as submitted by Mr Yeung, since by that time the value of the petitioner's shares had been affected by the altered status of the Company (cf. Re O C (Transport) Services Ltd. [1984] BCLC 251 at 258d to g). In this case, fairness would require that the valuation of the shares should relate back to a date prior to the presentation of the petition, and before the occurrence of unfairly prejudicial acts. I would fix the date as at 18 May 1997, which was the day before the petitioner's resignation from his positions in the Company took effect and just before Gold Loop could be regarded as effectively taking over the control of the Factory.

67.Next, I consider if any discount to the valuation should be made on the ground that the petitioner's 40% shareholding is a minority interest. I am inclined to think that no discount should be made and that the price of the shares should be fixed pro rata according to the value of the shares as a whole. As I have found, the Company was acquired and operated as a quasi-partnership between the petitioner and the 1st respondent, so the petitioner is not an ordinary minority shareholder. The sale of the petitioner's shares to the 1st respondent in July 1997 had fallen through, and it is unnecessary in these proceedings to decide which party was at fault for the abortive sale. The fact remains that the petitioner has found it intolerable to continue his association with the respondents due to the unfairly prejudicial acts, and his only practical way out, short of winding up the Company, is to seek a buy out order under section 168A. The general rule where a purchase order is made in the case of a quasi-partner who has suffered unfair prejudice at the hands of the majority is that there should be no discount for the fact that the petitioner's shares constitute a minority, unless the petitioner has acted in such a way as to deserve his exclusion from the company (Re Bird Precision Bellows Ltd. [1984] Ch 419 and [1986] Ch 658). Here, as I have found, the petitioner has not acted in any way as to deserve his exclusion from the Company.

68.The last matter I need to deal with on the question of valuation of the shares is the shortfall in capital contribution by the petitioner. The nominal share capital of the Company is HK$10,000.00 which has been fully paid up. I have found that the petitioner had agreed with the 1st respondent that they were to make a capital contribution of HK$6.8 million to the Company, in the ratio of their shareholdings, as evidenced by the note dated 5 April 1994 written by the 1st respondent. The amount of HK$6.8 million should be regarded as loan capital and adjustment should be made to the purchase price of the petitioner's shares to take into account the shortfall in the capital contribution by the petitioner.

69.On the agreed figure of total capital contribution, the petitioner should have contributed HK$2,720,000.00. I find that he actually contributed HK$2,223,328.75, not HK$2,227,328.75 as he has claimed. The former figure is taken from an accountant's report prepared by Francis SL Yan & Co. on 8 May 1997 for the period from 1 April 1996 to 28 February 1997, although it was in draft and had not been signed by the accountant. Nevertheless, a detailed breakdown was given for the figure of HK$2,223,328.75, and this figure was adopted by the 1st respondent in his note dated 15 May 1997 when the parties negotiated for the sale of the petitioner's shares. Furthermore, the total amount of the advances made by the shareholders as loan capital, being HK$6,586,797.75, as stated in the report dated 8 May 1997, was also in the audited accounts of the Company for the year ended March 1997. As for the latter figure of HK$2,227,328.75, this was given to the petitioner by his accountant. He did not give details as to who that accountant was or produce any documents in support of it.

70.Thus, the amount of the shortfall of the petitioner's capital contribution is HK$496,671.25 and this should be deducted from the valuation of the petitioner's shares. I note also that according to the petitioner's evidence, he had initially agreed to deduct the shortfall in his capital contribution from the purchase price of his shares, as contained in the provisional agreement for sale and purchase dated 29 May 1997, although when the Share Sale Agreement was made on 4 July 1997, the parties had agreed to proceed on a new basis of not taking into account the shortfall in capital contribution.

Orders

71.I make the following orders to give relief under section 168A:

(1)	the 1st respondent do purchase the 4,000 ordinary shares of HK$1.00 each in the capital of the Company presently registered in the name of the petitioner at a price to be fixed by such valuer ("the valuer") being a certified public accountant, as may within 14 days hereof be agreed upon by the petitioner and the 1st respondent, or failing such agreement as may be appointed by the president for the time being of the Hong Kong Society of Accountants upon the application of either party with or without the consent of the other;
(2)	the valuer is hereby directed to value the petitioner's shares by reference to the assets, profitability and future prospects of the Company as at 18 May 1997 and without discount for the fact that the petitioner's shareholding is a minority holding and on the footing that adjustment is to be made to the purchase price to take into account the shortfall in the petitioner's contribution to the loan capital being HK$496,671.25; and
(3)	there be liberty to all parties to apply for directions as to the payment of the purchase price and generally.

72.As the petitioner has succeeded on his petition, I make an order nisi that the respondents should pay the petitioner's costs of these proceedings, on a party and party basis, save for the costs of and occasioned by the adjournment of the petition on the first day of the hearing on 28 July 2003 before Deputy Judge To. I have heard submissions in respect of the costs of and occasioned by the adjournment, which were reserved. I rule that such costs should be to the respondents in any event, as it was due to the late production of documents on the first day of the hearing that an adjournment was necessitated. I have had no explanation from the petitioner why such documents were not supplied to the respondents in sufficient time to allow the latter to make proper enquiries from the bank concerned.

73.Lastly, I wish to point out that quite a number of documents produced in these proceedings are in Chinese and no English translation was prepared. The parties had sought and obtained a direction that the case was to be heard by a bilingual judge, no doubt on the basis that they did not intend to translate any of the Chinese documents. The petition and the affirmations filed by them are all in English, the parties appeared by counsel, and it was apparently envisaged from the start that the proceedings would be conducted entirely in English with an interpreter. In the course of the hearing, objection was taken every now and then to the translation of certain documents rendered by counsel and it was left to the court interpreter to resolve the differences. This seems to me an undesirable way of conducting proceedings. There is no good reason why material documents in Chinese expected to be referred to in the proceedings should not have been translated and certified.

Representation:

Mr Paul Lam, instructed by Messrs C L Chow & Macksion Chan, for the Petitioner

Mr Yeung Yeuk Chuen, instructed by Messrs Yu, Chan & Yeung, for the 1st and 2nd Respondents

The 3rd Respondent, absent and unrepresented