Lam Sum Po v. Kam Fai Electroplating Factory Ltd and Others
Read the full judgment text of HCCW 534/2000 on BabelCite. This High Court CFI judgment was delivered on 8 December 2003.
1. This is a petition brought under section 168A of the Companies Ordinance, Cap.32. The petitioner sought an order that his shares in Kam Fai Electroplating Factory Limited ("the Company") be purchased by the 2nd to 5th respondents; or alternatively an order to wind up the Company on the just and equitable ground.
Cited by 3 cases
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HCCW000534A/2000 HCCW534/2000 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) PROCEEDINGS NO.534 OF 2000 ----------------------------------
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---------------------- Coram: Deputy High Court Judge Poon in Court Dates of Hearing: 3, 4 and 8-10 April, 3-7 and 10-12 November and 8 December 2003 Date of Judgment: 8 December 2003 Date of Reasons for Judgment: 12 May 2004 ------------------------------------------------------- REASONS FOR JUDGMENT -------------------------------------------------------- INTRODUCTION 1.This is a petition brought under section 168A of the Companies Ordinance, Cap.32. The petitioner sought an order that his shares in Kam Fai Electroplating Factory Limited ("the Company") be purchased by the 2nd to 5th respondents; or alternatively an order to wind up the Company on the just and equitable ground. 2.On 9 April 2003, upon the application by the respondents, which was unopposed by the petitioner, I struck out the winding up relief. On 8 December 2003, at the conclusion of the trial, I dismissed the balance of the claim with costs. I have indicated that I would give my reasons in writing, which I now do. THE PARTIES 3.The Company is and was at all material times a family company of the Lam family. The father is the 2nd respondent. The petitioner, the 3rd respondent and the 4th respondent are respectively his eldest son, younger son and wife. The 5th respondent, a solicitor by profession, is a friend of the family. THE COMPANY 4.The Company was incorporated on 15 January 1988. As its name suggested, it engaged in the electroplating industry at all material times. (1) Shareholding 5.At the time of its inception, the Company had a share capital of HK$100,000 divided into 100,000 shares. The 2nd and 3rd respondents each held 1 share as subscribers. On 28 December 1991, 99,998 shares were allotted to the 2nd respondent, the petitioner and the 3rd respondent. As a result of the allotment, each of them held 51,000 shares, 48,999 shares and 1 share respectively. On 9 May 1995, 18,999 shares then held by the 2nd respondent were transferred to the 3rd respondent. 6.By resolution passed at the extraordinary general meeting held on 16 December 1996, the Company increased the share capital by HK$30,000 divided into 30,000 shares. The new shares were all allotted to the 4th respondent. On 12 May 2000, the 4th respondent transferred to the 5th respondent 20,000 shares. 7.Thus as at the date of the petition (19 June 2000), the Company was held by the shareholders as follows :
That has since remained the position up to now. (2) Directorship 8.The 2nd and 3rd respondents were the Company's first directors. On 1 December 1991, the 3rd respondent resigned from the board. On 1 May 1995, he was re-appointed. The 4th respondent was appointed as director on 1 June 1997. On 2 May 2000, the 5th respondent was appointed as director. Since their appointment or re-appointment, as the case may be, the respondents have remained on the board to date. 9.The petitioner was first appointed as director on 1 December 1991 when at the same time the 3rd respondent resigned. At the extraordinary general meeting held on 19 June 2000, he was removed from the Company's board. THE PETITIONER'S CASE 10.In the amended petition, the petitioner first described the history of the Company thus. The predecessor of the Company was a partnership business known as Kam Fai Electroplating Factory ("KFEF"). KFEF was initially a sole-proprietorship set up by a Mr Ng Kam Wo ("KW Ng") in 1980. In 1981, the petitioner and a Mr Ng Wan Yu ("WY Ng") took over the business from KW Ng and continued to run it as a partnership business at a factory in Shatin. In July 1982, WY Ng retired from the partnership. The 2nd respondent was admitted as a partner in his place. 11.As KFEF's business grew, the petitioner and the 2nd respondent rented an office in Tsimshatsui. The 2nd respondent moved to work at the Tsimshatsui office while the petitioner remained in the factory in Shatin. In early 1986, the factory in Shatin expanded. In 1987, the tenancy of the factory premises in Shatin was about to expire. The petitioner and the 2nd respondent decided to move the factory to the Mainland. As a result, a factory of about 10,000 square feet was set up in the Xiao Bian Village at the Chang An County, Dongguan City, Guangdong Province ("the Xiao Bian Factory"). At all material times, the petitioner stationed in the Xiao Bian Factory, responsible for its daily operation and management. 12.The petitioner then alleged that the Company was incorporated to take over the business of KFEF. It was an express agreement or alternatively the common understanding of the petitioner, the 2nd and 3rd respondents ("the Common Understanding") that :
13.The petitioner further alleged that he placed his entire trust and confidence on the 2nd and 3rd respondents that they would faithfully perform their duties as directors and carry out the Common Understanding. The petitioner complained that they had acted in breach of their duties as directors and the Common Understanding by :
14.The petitioner also complained that he had been wrongfully denied of information relating to the Company's affairs. He further complained that the 2nd respondent had caused substantial increase of annual director remuneration paid to himself for 1999/2000 and 2000/2001 when he received HK$1.2 million and HK$1.3 million, as opposed to that in the region of about HK$100,000 in previous years. 15.Because of their wrongful conduct, the petitioner had completely lost confidence in the probity and good faith on the part of the respondents. WHETHER THE PETITIONER A MERE NOMINEE 16.Opposing the petition, the respondents raised a preliminary issue. They contended that the petitioner is but a mere nominee of the 2nd respondent, holding the shares registered in his name as a trustee of his father. If this preliminary issue is decided in their favour, the petition shall be dismissed without determining the substantive merits. For a petition under section 168A will fall in limine if it is established that the petitioner does not in fact beneficially own any share in the company, despite there being shares registered under his name: In re Chor Lau Heung Restaurant Company Limited, HCCW63/1999, Le Pichon J (as she then was), unreported, 31 March 2000. 17.As pointed out by Li Pichon J in the Chor Lau Heung case, whether shares registered under the name of a petitioner are held by him beneficially or merely on trust for another person is essentially a matter of fact. Given the nature of the issue, the first question that the court will normally have to consider is whether or not the petitioner has in fact provided consideration for the shares, e.g., whether he had ventured any of his capital to the company when the shares were issued to him. In cases where a family company is involved, such the present one, the presumption of advancement may arise that gives the petitioner beneficial interest in the shares, even if he has not paid for them. But, the presumption can be rebutted by evidence of the actual intention of the donor or the transferor. Where there is no express declaration of trust, the court will considers all the circumstances of the case so as to arrive at the donor's real intention; it is only where there is no evidence to contradict it that the presumption of advancement will prevail. Further, the fact that a petitioner was prepared to part with shares under his name for no consideration is also a factor that the court should take into account when considering whether those shares were beneficially owned by him in the first place. 18.With the above principles in mind, I turn to examine the preliminary issue now before me. In this connection, a number of major factual disputes are involved. (1) The petitioner's status in KFEF 19.The first major dispute relates to the petitioner's status in KFEF, which arises in this way. It is common ground that according to the business registration records, KFEF was registered as a sole proprietorship in the name of KW Ng in December 1980 as sole proprietor. WY Ng became a partner subsequently on 28 January 1981. In April 1981, KW Ng retired from the partnership and on 15 April 1981, the petitioner registered as a partner. The petitioner's case is that since he had been one of the partners of KFEF whose business was taken over by the Company in 1995, he should have a beneficial interest in the Company's shares to the extent of one half. The respondents' case is that it was the 2nd respondent and WY Ng who set up KFEF as partners. KW Ng, an engineering staff, was a nominee for both of them. When KW Ng retired, the petitioner was registered as a partner in name only. He was in fact the 2nd respondent's nominee. In light of the parties' respective case, it is essential to first look at the petitioner's status in KFEF. (a) Other factories set up by Ng and the 2nd respondent 20.It is common ground that when the Lam family emigrated from the Mainland to Hong Kong in November 1978, they met WY Ng, a painter-artist, while crossing the border. In 1979, WY Ng and the 2nd respondent started an electroplating business in Tai Kok Tsui, Kowloon, namely, Hong Kong Electroplating Factory. Shortly thereafter, the two of them set up another factory known as Modern Electroplating Factory. 21.The petitioner admitted that he had no interest in either Hong Kong Electroplating Factory or Modern Electroplating Factory. It is hardly surprising. For when he first emigrated to Hong Kong, he had not even reached the age of 18. He had just finished secondary school in the Mainland. After Hong Kong Electroplating Factory was established, he helped the 2nd respondent at the factory for a short while. But the petitioner alleged that he had given HK$2,700 to his father for investment in this business, which the 2nd respondent denied. I have no difficulty in rejecting the petitioner's allegation for two reasons. He has never raised it in any of the affirmations filed. Further and more importantly, it is the 2nd respondent's evidence, hardly disputed by the petitioner, that at that time, the petitioner was living at home, with meals and lodging provided. It would be fanciful to suggest that the petitioner would need to pay the 2nd respondent HK$2,700 for his investments or the 2nd respondent would need his assistance at all. (b) How KFEF was set up 22.The 2nd respondent described in details not only in his affirmations but also in his oral testimony how he and WY Ng set up Hong Kong Electroplating Factory, Modern Electroplating Factory and KFEF. His evidence may be summarized thus. He had spent over 20 years in the electroplating industry in the Mainland before migrating to Hong Kong in 1978. His experience included "aluminum electroplating" as well as the use of "bronze" materials for electroplating. He impressed Evergo, a manufacturer of electrical appliances, with his credentials, convinced them to use bronze as "imitation gold" instead of real gold in electroplating fan components, and managed to woo their business. In partnership with WY Ng, he bought a factory in Tai Kok Tsui to fulfil Evergo orders, and renamed it Hong Kong Electroplating Factory. Evergo turned out to be a very key and profitable customer of this electroplating business. The volume of orders from them were so large that WY Ng and the 2nd respondent soon ran out of production capacity and had to look for additional factory space. They chose KFEF's premises in Shatin for their expansion plan. Extensive engineering works were then carried out to modify the existing factory premises into one that suited their needs. In that connection, about HK$700,000 to HK$800,000 were spent. The money came from profits generated in Hong Kong Electroplating Factory and Modern Electroplating Factory. 23.The 2nd respondent went on to say that KW Ng was an engineering staff of Hong Kong Electroplating Factory. He was named as the sole-proprietor of KFEF because at the time, the owner of a factory named in the business registration needed to be stationed at the factory in case government authorities came to inspect. Neither WY Ng nor the 2nd respondent could spend time in Shatin seeing to the modification works there, which lasted some five months. KW Ng was tasked to oversee the modification. Hence the need to name him as the sole proprietor of the business. He was all along a nominee for WY Ng and the 2nd respondent. 24.The 2nd respondent also explained the naming of the new factory. The word "金" came from the middle name of KW Ng; the word "暉" came from the name of the petitioner's little sister. The factory was named right at the outset, and not when WY Ng took over from KW Ng as alleged by the petitioner. 25.The 2nd respondent denied that WY Ng invited the petitioner to be a partner as alleged. The petitioner had worked briefly in Hong Kong Electroplating Factory between 1979 and November 1980 as a delivery assistant, but he was asked to leave after a heated argument with Ng in November 1980. Since then, the petitioner had either lounged around at home or job-hopped for a while with different employers. The petitioner was registered as a partner only because the 2nd respondent had wished that by putting his name as a partner, he might become more interested in electroplating. The petitioner did not start working at KFEF until some time in 1983, as evidenced by the petitioner's own C.V. 26.The petitioner alleged that in March or April 1981, WY Ng invited him to become a partner of KFEF. Although he had never asked WY Ng, he knew why WY Ng extended the invitation to him for three reasons. First, he had worked with WY Ng in the past. Second, he was young and had learnt skills from companies outside of Hong Kong Electroplating Factory. Third, he would shoulder liability jointly with WY Ng in borrowing HK$100,000 from the latter's elder sister, a sum which KFEE needed at the time. 27.None of the reasons advanced by the petitioner is, in my view, credible. I shall explain why below. 28.First, the first two reasons were never given during his evidence-in-chief at the hearing in April 2003, despite Mr Lau, his counsel (he was then legally represented), having on no less than four occasions tried to elicit evidence from him on this important matter. 29.Secondly, the petitioner admitted under cross-examination that by April 1981, WY Ng and his father had made considerable profit in Hong Kong Electroplating Factory and Modern Electroplating Factory. It is most unlikely that WY Ng would team up with the petitioner, who had no or practically no financial resources and not the 2nd respondent, who had the resources and proven ability to run a profitable electroplating business. 30.Thirdly, as noted above, the petitioner was at that time a young man who had just left secondary school in 1978. He had very limited work experience or relevant experience. The petitioner admitted under cross-examination that he had spent a short while working at PPL, an integrated circuit "leadframe" manufacturer" in 1980 and he was still working there in March 1981. The electroplating done at PPL was a type of "functional", high precision electroplating. The products manufactured by the two factories of WY Ng and his father were different. They were mostly decorative fans or components of these fans. The petitioner's experience gained at PPL could hardly be relevant. In the circumstances, there is simply no reason why WY Ng would invite the petitioner to become a partner of KFEF. 31.Fourthly, on the allegation of shouldering liability of borrowing money from WY Ng's elder sister, the petitioner changed his evidence in cross-examination. He confessed that when WY Ng invited him to become a partner in March or April 1981, the issue of borrowing money from his sister had not yet arisen. WY Ng had not mentioned it at all. And WY Ng only asked him to shoulder the liability of the loan in June or July 1981. Eventually, he admitted that the shouldering of liability of the loan did not form a reason for WY Ng's partnership invitation to him. (c) Did the petitioner invest any of his money in KFEF? 32.The petitioner alleged that he had initially invested about HK$10,000 in KFEF. Under cross-examination, he elaborated on what his initial contribution towards the business entailed. He put up HK$500 for registering his name as a partner of KFEF and for buying office stationery; HK$500 to open a bank account in Fotan's Yien Yieh Bank together with Ng (who is said to have also put up HK$500); around HK$5,000 to HK$6,000 to pay for second-hand equipment purchased in San Po Kong and raw materials and about HK$1,000 to HK$2,000 for the rent and other miscellaneous items. 33.However, the petitioner admitted under cross-examination that although this investment was his "first ever" venture in a factory business, he did not make any written note of how much he had invested. He said he just gave the money to WY Ng and left it to him to keep the accounting records. He has failed to produce any documentary evidence in support of his investment. Although he mentioned that his own bank passbooks should record the relevant withdrawals, he was unable to refer to any passbook entries that showed such withdrawals. The most he could recall was the said four items referred to above. However, he was unsure about the exact amount put up. The figure of "HK$10,000" was only an approximation of the sum he invested. This was in sharp contrast with the HK$2,700 which the petitioner said he had given to his father on 20 August 1979 to invest in Hong Kong Electroplating, a company to which he made no ownership claim. 34.I find the petitioner's evidence on this issue wholly unreliable. It was raised for the first time in his 7th affirmation filed on 17 February 2003. I see no reason why, given its importance, it was not raised previously. Further, even though he claimed to be the partner of this business which was his first ever investment, he could hardly recall any detail of his investment. His case is simply not supported by any documentary evidence at all. I reject his evidence. (d) Disparity in respective of financial contribution towards KFEF 35.The petitioner's case is further contradicted by the disparity in respective of the financial contributions he and WY Ng had purportedly made to KFEF. 36.The petitioner's case is that KFEF was owned equally by him and WY Ng from April 1981 until July 1982, the time when WY Ng retired. But their respective financial contributions towards the business were far from being on "equal footing", even on the petitioner's own evidence. 37.According to the petitioner, KFEF had about HK$30,000 to HK$40,000 worth of assets at the time the petitioner joined. WY Ng had paid for these assets prior to the petitioner's joining. WY Ng later invested additional HK$50,000 to HK$60,000 on modifying the factory equipment. Accordingly, according to the petitioner, WY Ng had in total invested HK$80,000 to HK$100,000 in the business. WY Ng had asked the petitioner to hand over "as much money as he could". The petitioner was able to raise just HK$10,000 or so. 38.The petitioner's "best" answer for why his HK$10,000 investment would entitle him to a 50% share in this business was that he had, at the request of WY Ng, contributed "as much as he could", and he was prepared to be personally liable jointly with WY Ng in borrowing HK$100,000 from his elder sister. However, as noted above, no documentary evidence for the loan has been adduced, despite the petitioner's allegation that a loan memorandum had been signed by both WY Ng and the petitioner. (e) Initial bank account of KFEF 39.This is another area where the petitioner's case is wholly unreliable. 40.The petitioner's evidence was that he and WY Ng opened a current account at Fotan's Yien Yieh Bank at the end of May 1981, with account number 014688 00016639. He and WY Ng each placed HK$500 into this account when it was first opened. The petitioner even produced as Exhibit P-1, an account card for this "16639" account which he confirmed unreservedly to be the account which he and WY Ng opened back in 1981 for KFEF. But under cross-examination, he attempted to change his evidence and said he could not remember the account number of this first account at Yien Yieh Bank. 41.The 2nd respondent's evidence was that the first bank account of KFEF was opened only after WY Ng retired from that business, i.e. after 29 July 1982. That first account's number began with "5". The "16639" account was opened much later, in August 1986. The "16639" needed to be opened because a cheque-book for the "5XXX" account had been lost. His evidence is corroborated by a letter from Yien Yieh Commercial Bank which stated that the "16639" account was only opened on 22 August 1986. 42.When shown this letter, the petitioner said he would now need to check to see if this "16639" account was indeed the first account which he and WY Ng opened. Further, the petitioner has been unable to adduce any evidence to show that the first account had HK$1,000 as initial deposit in 1981, let alone HK$500 was contributed by him. 43.The petitioner's case is not supported by Exhibit P-1 either. A closer study of the exhibit reveals that, on its face, it is an account card issued by Yien Yieh Commercial Bank Ltd. The account name is "Kam Fai Electroplating Factory". The account is a current account, with the number 00016639. The card is stated to be a "cheque deposit account number card" (支票活期存款賬號咭). By its very name, the card's function must be to facilitate depositing cheques into that account, and no more. The fact that the petitioner had one such card in hand could only prove that he could deposit cheques into the correct account of KFEF. 44.In any event, the petitioner admitted under cross-examination that WY Ng was in charge of accounts and that role was taken up by the 2nd respondent upon WY Ng's retirement. The petitioner entrusted account matters to WY Ng and the father. Because of this, the petitioner does not even know if KFEF had more than one bank account, despite his claim to be one of the partners of the business. 45.Evidently, the petitioner had very little knowledge of the financial affairs of KFEF. He did not know how many bank accounts it had. He was unsure about its first account's number. He did not know why the "5XXX" account had to be closed and the "16639" account had to be opened instead. He cannot remember whether KFEF had a different bank account number in Tsimshatsui's Yien Yieh Bank. He could only give a vague estimate of the monthly sales turnover of the business. His reason was that he was "learning skills outside" at the time (July 1981 onwards) and cannot give an accurate figure. 46.His lack of knowledge of these matters contradicts his case that he was a partner of KFEF. (f) Authorised signatories of KFEF's account 47.The petitioner's evidence on the signing arrangements for the company's bank account was evasive. Eventually, after having been shown some cheques signed singly by the 2nd respondent, he said that between 1981 and 1987, KFEF only had one bank account and that account required two signatures to operate. One signature would not do. After 24 November 1987, that signing arrangement was changed. Since then, one signature would be sufficient. That change was made because the petitioner had to travel to China from November 1987 onwards. 48.The 2nd respondent's evidence was that the first account was opened after Ng left KFEF, and throughout the account's currency, he was the only person authorised to operate the account. The petitioner was not an authorised signatory of that account. Further, KFEF had a bank overdraft line which was secured by a property owned by the 2nd respondent. 49.Again I found the 2nd respondent's evidence far more satisfactory than the petitioner's. (g) Departure of WY Ng 50.The petitioner gave evidence that the business of KFEF was good between July 1981 and June 1982, with profit margins of about 50%, but suddenly deteriorated in July 1982 when Evergo, its sole customer, gave it substantially fewer orders. By then, KFEF had accumulated assets of about HK$600,000. WY Ng then decided to quit the business and take his 50% share from the business, namely, HK$300,000, which he did by instalments of HK$100,000 each, starting from as early as May 1982, when the business of the factory was still making a ludicrous profit. 51.However, the petitioner admitted that in May 1982, WY Ng had not yet formed the intention to quit. He found out from WY Ng that he was quitting the business only in July 1982. But he did not question WY Ng's withdrawing of HK$100,000 each month starting from May 1982, because he trusted WY Ng and he did not ask him about it. In addition, according to the petitioner, HK$11,000 was withdrawn from the company to repay the loan advanced by WY Ng's elder sister (at 10% interest p.a.). 52.On the petitioner's evidence, the company's funds were therefore depleted very severely (HK$410,000) upon WY Ng's departure. Even though the petitioner was one of the partners in the business, he did not pay attention to the mass withdrawal of company funds in mid-1982. His explanation was that he and WY Ng had worked well together and WY Ng did not take all the money from the company, so the petitioner considered that that was acceptable. Further, the petitioner was unsure how much his father put into the business when the latter became registered as a partner in July 1982. He said he had left all accounting matters to his father. 53.The 2nd respondent's evidence is that WY Ng left in July 1982 because he wanted to return to his painting career and have his investments in the electroplating business liquidated; it had been agreed between WY Ng and the 2nd respondent that WY Ng would take half of the bank account balance of KFEF (i.e. half of HK$230,000), and the 2nd respondent would pay him HK$100,000 for WY Ng's share in the equipment. WY Ng took his share and left the business. 54.The petitioner was evidently oblivious to what was happening in the business, including important matters such as finances, how much WY Ng had been withdrawing and how much the petitioner's father had injected into the business. His purported explanations were all but lame excuses. The true reason, in my view, is that the petitioner was, in truth, no more than a nominee. He had no stakes in the business whatsoever. Not having put up any of his capital into the venture, the petitioner had no interest in what was happening in the business. (h) What was the petitioner really doing in 1982? 55.The petitioner confirmed in cross-examination that between 10 May and 19 December 1982, he was an employee of HK Stationery Manufacturing Co. Ltd. He was then receiving a salary of about HK$1,600 per month. 56.Evidently, the petitioner could not have spent much time at KFEF in 1982. Not only was he employed elsewhere, he was also enrolled in a number of training courses during this time :
57.According to the 2nd respondent's evidence, which I accept, the petitioner only started to work in KFEF in January 1983, after WY Ng had left. He made deliveries (跟車) and performed miscellaneous factory tasks. He initially received a monthly salary of HK$3,000 in cash, which gradually increased in later years. He was certainly not a proprietor or partner of the business. (i) Setting up Xiao Bian Factory 58.It is common ground that in November 1987, a subcontracting agreement between KFEF and the Xiao Bian side was signed ― the "San Lai Yi Bao" (三來一補) Agreement. By the express terms of that agreement, KFEF was responsible for providing electroplating equipment, raw materials, technical guidance and quality control, and the Chinese side was responsible for providing labour and factory premises. 59.It is the 2nd respondent's evidence that it was his idea to move the production base of KFEF to China. He chose Xiao Bian because he could get many concessions through his political connections on the Mainland. He set up the factory with the assistance of an able team of professional and experienced managers whom he gathered from KFEF, Evergo, Oriental Watch, and Xerox, including Tang Chi Hung (20-30 years of electroplating experience) from Oriental Watch and Liu Chi Tat from Evergo. 60.He further designed the auto line for the Xiao Bian Factory. The petitioner was seconded to Xiao Bian merely as the "son of the boss" of the HK-side; he had very limited experience in automated electroplating since the exposure he had gained in Fotan was principally "manual" electroplating. He only moved up to Xiao Bian and became stationed there in August 1988 when the Shatin premises had to be surrendered back to the landlord. 61.In respect of the setting up of the Xiao Bian Factory, the petitioner's evidence-in-chief was glaringly lacking in detail. In essence, he simply claimed his role to be the "boss" or the "leader" (領班). Under cross-examination, he agreed that all the preparation of the Xiao Bian Factory was done by a team of skilled professionals, but he added they did so under his "leadership". But not even one document for the Xiao Bian Factory was signed by the petitioner. Further, he admitted in cross-examination he never put in any money into the Xiao Bian set-up using his own money. All his money was tied up in the business, he said. 62.I do not accept the petitioner's evidence, which is but bare assertions wholly lacking in particulars. On the other hand, I find the 2nd respondent's evidence, which I accept, to be far more superior. (j) Conclusion 63.For the above reasons, I find the petitioner a poor and unreliable witness. His evidence is self contradictory, unsupported or contradicted by documentary evidence and defied common sense. It amounts to no more than bare assertions. On some of the important issues, he even changed tact under cross-examination. I have no hesitation in rejecting his case that he was a partner of KFEF as alleged. I find the 2nd respondent a truthful and reliable witness. His evidence is consistent, full of vivid details and supported by documentary evidence. He remained unshaken under cross-examination. 64.I therefore find that the petitioner was only a nominee of the 2nd respondent in respect of KFEF. He had no beneficial interest whatsoever in that business at all. 65.I now turn to the other major factual disputes which concern the Company. (2) Disputes relating to the Company (a) Change of the shareholding 66.It is not in dispute that the Company was incorporated on 15 January 1988. The petitioner was not a subscriber, the 2nd and 3rd respondents were. Nearly four years later, on 28 December 1991, 99,998 new shares in the Company was issued : 50,999 shares to the 2nd respondent and 48,999 shares to the petitioner. On record, the shareholders of the Company on 28 December 1991 thus became :
It is not in dispute that the Company was dormant when this change in shareholding took place in December 1991 and that the Company continued to be dormant up until the middle of 1995. 67.According to the petitioner, the reason for the increase in issued share capital from HK$2 to HK$100,000 in December 1991 was that he and his father wanted to turn the partnership business of KFEF into a limited liability business. They had felt the need to do so because Chit Tat Cigarette Lighter Factory, a customer of the Xiao Bian Factory, had owed it subcontracting charges of about HK$100,000 and that dispute had to be resolved in the court. The petitioner was also worried that there were increasingly more workers at the Xiao Bian Factory and things could go wrong with deliveries. 68.However, the Company did not take on the business of the partnership until mid-1995. The petitioner's explanation for this was that he trusted and respected his father. He had told his father to carry out the transfer of business and he expected him to do it. The petitioner was paying all his attention to his work at the factory. He left all other matters about the business to his father. 69.Under cross-examination, the petitioner admitted he did not know the real reason behind the increase in share capital from HK$2 to HK$100,000. The petitioner further said that this allotment was paid for using KFEF's funds. He later "clarified" in cross-examination that it was only his "logical deduction" that partnership's funds were used for the allotment. He also confessed it was only his "guess" that the allotment was done in the manner which he described during cross-examination, namely, money was transferred out of the Company as soon as the allotment was "complete". 70.After the allotment, the petitioner had registered under his name 48.999% shares of the Company, and his father's 51%. The petitioner's explanation for his father having a "controlling interest" in the Company as a result of the allotment (despite the petitioner's claim to 50% interest in the partnership business) was that the petitioner "had respects for" his father and he would let his father make decisions in board meetings. 71.The petitioner's evidence is clearly unbelievable. (b) Transfer of shares to the 3rd respondent 72.According to company records, which are again not in dispute, on 9 May 1995, the petitioner transferred 18,999 shares in the Company held under his name to the 3rd respondent; the Company's registered shareholders thus became :
73.The petitioner received no consideration for his transfer of 18,999 shares to the 3rd respondent in May 1995. His case is these shares were transferred to his brother, the 3rd respondent, on trust only. Under cross-examination, the petitioner even said that his mother was very "concerned" about his holding large number of shares in a dormant company. Hence the transfer of shares to the 3rd respondent to ease her mind. He is obviously making it up as he goes along. 74.The 2nd respondent's evidence was that he directed the petitioner to effect this transfer, and the petitioner just followed suit. 75.The petitioner admitted that the Company was still a dormant shell at the time of the transfer, i.e. on 1 May 1995. The Company had not even considered taking over the business of the partnership at that time. Effectively, the petitioner had transferred 18,999 shares of a company that was no more than an empty shell. The explanations given by the petitioner for the transfer are simply unbelievable. They are mere self-serving fiction. The transfers were in fact outright and unconditional. Both he and his brother, I find, were holding those shares as nominees for the 2nd respondent only. (c) Taking over of KFEF's business 76.The petitioner was unable to give a satisfactory answer to why the Company was activated in mid-1995 and took over the partnership's business at the time that it did. Neither the "Chit Tat" law-suit in 1991 nor the "Tung Shing" (通成) law-suit in late August 1995 could explain the timing of this transfer of business. 77.The real reason was, in my view, given by the 2nd respondent. In April 1995, he was served, as the proprietor of KFEF, with several summonses to answer allegations of mishandling of cyanamid. He became very concerned that he could be held personally liable for such problems and be prosecuted. On the suggestion of one of the Customs officers, he swiftly decided to transfer the partnership's business to the Company in mid-1995. The decision to transfer was made by him and him alone. This the petitioner did not dispute. The petitioner merely said he had been informed by his father about the cyanamid problem. (d) Financial affairs 78.Further evidence to suggest the petitioner has no beneficial interest in the Company at all can be found in the bank account signing arrangement for the Company. The petitioner was never an authorized signatory of the Company's bank account, despite he was registered as a director of the Company. He admitted that to be the case under cross-examination. Only his parents were the authorized signatories of the account. In other words, the petitioner could not operate that account. 79.Further, under cross-examination, the petitioner said he did not even know whether the Company had an overdraft facility; he did not know the Company had banking facilities that required his father to personally guarantee and to charge his property to the bank as security. But in fact, his father was the guarantor for the Company's banking facilities; and his property had been mortgaged as security. In other words, the 2nd respondent had taken on personal liability for the Company. The petitioner has not. (3) A nominee 80.Having carefully considered all the evidence, I have no doubt in my mind that the petitioner was a mere nominee partner in KFEF and a nominee shareholder in the Company. He does not own any share in the Company beneficially. He has no interest which section 168A can protect. He has no locus to bring this petition, which must fail in limine. For this reason alone, his petition is dismissed. UNFAIR PREJUDICE 81.For completeness, I proceed to consider whether, assuming that I were wrong on the preliminary issue, the petitioner has suffered any unfair prejudice as alleged. (1) The law 82.It is useful to set out the relevant legal principles. In Re Ching Hing Construction Company Ltd, HCCW889/1990, 23 November 2001, unreported, I endeavored to summarize the legal principles after reviewing the authorities. It is sufficient for present purposes to refer to what I had set out in that case as follows :
With these principles in mind. I now turn to consider the petitioner's case on unfair prejudice. (1) No Common Understanding 83.The petitioner's case on unfair prejudice is predicated on the Common Understanding. The petitioner was, however, unable to recall how it was reached. The best recollection he could give was that he and his father often talked on the phone, and that he and his brother often talked to each other in the Mainland. The petitioner could not recall what was said in relation to this "express agreement" or "common understanding". When questioned how such "common understanding" had arisen, his response was "This is simply too professional!". He could not remember. The petitioner later supplemented his answer by saying that : all along it was the same concept - just himself, his father and his brother participating in the business; that they had worked hard together and were doing so well; and that there was no reason for there to be outsiders in the business. 84.The petitioner's case is contradicted by the fact that WY Ng was very much part of the business at the outset. He was not a member of the Lam family. Further, the petitioner conceded that should the Company become a large corporation in days to come and have prospects of being listed on the stock exchange, outsiders could become members. The petitioner's final answer for the basis of this understanding (of there being no outsiders in the business) was that "they had been working together for a long period". I agree with Mr Ho, SC, counsel for the respondents, there could be no basis for the Common Understanding as alleged. In any case, the exceptions of (i) WY Ng and (ii) public offering of shares are sufficient to rebut such a contention of understanding. 85.On the issue of the petitioner's entitlement to participate in the management of the Xiao Bain Factory and the Company, the only "basis" he could name was that he was a shareholder of the Company and its boss; and that he was the top man in the factory and was responsible for its operation. 86.Mr Ho submitted and I agree that this could not be a basis for such understanding. In particular, it could not be a basis for his entitlement to the management of the Company, which is a separate entity from the Xiao Bian Factory altogether. Further, the petitioner admitted that he had taken no meaningful part in the affairs of the Company : he had not signed any cheques for the Company; he had not arranged for banking facilities for the Company; he had not pledged any of his assets to secure banking facilities for the Company; all daily expenses of the Company were handled by his father, and not him. Therefore, there is really no basis for him to contend that he should be entitled to take part in the management of the Company. 87.In my view, the petitioner has failed to establish the Common Understanding as alleged. 88.In any event, there is no substance in any of his complaints against the respondents for the wrongful conduct as alleged in his petition, see paragraphs 13 and 14 above. I will deal with those complaints in turn. (3) The petitioner's complaints (a) Allotment of 30,000 shares to the 4th respondent and appointing her as director 89.It is the petitioner's case that in breach of the Common Understanding, his father and brother made an unauthorized allotment of shares to his mother on 16 December 1996 and appointed her as a director of the Company on 1 June 1997. But it is indisputable that she is a family member. 90.The petitioner confirmed in cross-examination that he only found out about the allotment to his mother on about 22 May 2000 or 23 May 2000 when he realised from company search records that his mother had become a member and director of the Company. This piece of evidence promptly fell apart when he was asked to explain why in 1997 he signed his name close to his mother's on an accounting document where all shareholders of the Company had to sign. Evidently, he was the last person to sign on that document. 91.It is the 2nd respondent's case that he had informed the petitioner about the intended allotment to the petitioner's mother. Although the petitioner denied that his father had so informed him, his final answer to this series of questions is most telling :
92.His last answer is, as rightly pointed out by Mr Ho, an admission that such discussion was held in Hong Kong, but it is only the exact timing that the petitioner takes issue on. In other words, the petitioner had been informed about the intended allotment of 1996. He certainly was aware of this change and at no time did he complain about it (or at least there is no evidence to suggest so) until the petition was presented in June 2000. To say the least, he had acquiesced to this allotment. The complaint relating to the 4th respondent must fail. (b) Decision to expel the petitioner from Xiao Bian Factory 93.The petitioner complained that he had been wrongfully expelled from the management of the Xiao Bian Factory on 14 May 2000. 94.It is not disputed that the petitioner was expelled from the Xiao Bian Factory on 14 May 2000. What is in dispute is whether it was the 2nd respondent who made the decision to expel him from the factory, or it was the management of the Xiao Bian Company who decided to expel him. The petitioner attributed his expulsion to his father having authorised Xiao Bian Company to do so. The 2nd respondent said it was the Xiao Bian Company which made the decision to expel. He took no part in making that decision. Out of respect, Xiao Bian Company had informed him of the situation and sought his view. 95.The Head of Factory (廠長), Choi Hok Leung (蔡學良), made an affirmation addressing, amongst other matters, the expulsion of the petitioner from Xiao Bian Factory. In paragraph 14 of his affirmation, he confirmed that : it was the Xiao Bian Village Committee and the Xiao Bian Company who decided not to allow the petitioner to gain entry into the factory. It was not up to the petitioner's father to make such a decision, since the father was only the managing director of the Hong Kong side. The decision to expel was made in light of the petitioner's disruptive conduct at the factory. Further, the Xiao Bian local authority and the Xiao Bian Company jointly issued a "situation report" (情況通布) on the day after the petitioner's expulsion, setting out various misconduct of the petitioner, including his withholding of payment of wages to factory workers, and his attempt to take the factory's official seal(公章). (I will come to the petitioner's misdeeds in a moment.) 96.Choi Hok Leung gave viva voce evidence and confirmed the correctness of his affirmation, including the matters set out in the "situation report". His evidence was unchallenged by the petitioner. The 2nd respondent also gave evidence to confirm that the decision to expel was not made by him. His evidence also went unchallenged during cross-examination by the petitioner. 97.I agree with Mr Ho that there cannot be any issue on this point. The decision to expel the petitioner from the Xiao Bian Factory was not made by the 2nd respondent. Such expulsion could not be conduct attributable to the respondents, whether unfairly prejudicial to the petitioner's interest or not. 98.In any event, the evidence clearly shows that the expulsion of the petitioner from the Xiao Bian Factory was amply justified because of his misdeeds, which are dealt with below. (i) Withholding of payment of wages to workers 99.This relates to the financial situation of the factory in the weeks in the run-up to 14 May 2000, and the reasons given by the petitioner of being unable to pay wages to the workers on time. It is the petitioner's case that the Company had not remitted sufficient funds to the factory to cover wages for the month of March 2000. 100.It is the 2nd respondent's case that sufficient funds had been remitted and that after the Xiao Bian Company had taken over the factory on 14 May 2000, it was discovered that the petitioner had failed to return about RMB539,000 cash which the factory should have in the petitioner's custody or control at the time of his expulsion. 101.The petitioner disputed that there was surplus RMB at the factory at the material time. He then made corrections to the table at Trial Bundle C at page 416 to show that not only was there no surplus RMB, there was in fact a deficit of RMB187,427. The "corrected" table was exhibited as "Exhibit P-2". The petitioner then spent time to list out how this figure was reached. His workings/calculations were listed out and exhibited as "Exhibit P-3". The petitioner relied on Income Ledgers and Expense Ledgers of the factory found in Bundle N of the hearing bundles to support his calculations. In fact, he annotated his working in "Exhibit P-3" with page references in the hearing bundles. 102.Under cross-examination, the petitioner was unable to explain how he reached the total figure for expenses for the month of April 2000 (RMB1.07 million), despite time given to him to re-work his sums. The April Expense Ledgers, to which "Exhibit P-3" made reference, were littered with duplicate accounting entries - amounting to some RMB177,066 in total. Many of the entries' serial numbers were out of sequence, an anomaly from previous months'. Some of the entries were shown to be "payable" items only. Some were not clearly shown to be "payable" or "paid" items. Based on these April ledgers, the petitioner had over-stated cash outflow for April 2000 by at least RMB137,737 even on the most benevolent interpretation of the entries (all items not stated to be "payable" being assumed to have been paid). 103.The petitioner also could not explain why he had taken the sum for electricity expense for April 2000 as RMB337,950, when he was presented with the actual electricity bill receipts which only totalled to RMB235,273. In other words, the petitioner had overstated April expense by another RMB102,676. 104.Not only were there problems with the Expense Ledgers, there was also anomalies with the Income Ledgers, i.e. for the month of March, April and May 2000. First of all, there is no May Income Ledger at all. For the months of January and February 2000, the 3rd respondent countersigned against each entry in the Income Ledger. "Subcontracting income" and "remittances from Hong Kong" were the principal sources of income. But starting from March 2000, the petitioner took over the countersigning of Income Ledgers from the 3rd respondent. This was when the Income Ledgers started not to tally with remittances from Hong Kong. Entries in the April Income Ledger were not in sequence, were out of chronological order, and some entries were not countersigned. Of even greater significance was that there was no income from "subcontracting" recorded at all for the whole month, and only a small remittance sum of HK$60,000 was recorded in this ledger. 105.Clearly, the petitioner had taken control of these ledgers and failed to record fully the income received by the factory in April and May. He admitted under cross-examination that some data were missing from the Income Ledgers. His initial reason for the missing entries for April was that he was "busy in April". When pressed further for a proper answer, he said "I do not have an answer at the moment". This is hardly satisfactory. 106.I have no doubt that the petitioner had tried to inflate expenses and suppress income during April and May 2000 so as to justify his contention that there was insufficient funds to pay wages to the workers in late April/early May. In so doing, he had gone "overboard" and ended up with a deficit, which would not make any commonsense. His contention of there being insufficient funds for workers' wages is wholly unfounded. 107.On the other hand, evidence was given by the 2nd respondent and Choi Hok Leung that more funds were remitted to the factory around 9 May 2000, but the workers could still not receive their wages until the petitioner surrendered their payroll. HK$350,000 was remitted to Xiao Bian on 9 May 2000 and handed over, in RMB equivalent, to Choi Hok Leung. Choi Hok Leung had, on 9 May 2000 upon instructions from Mr Choi Mou Sum of the Xiao Bian Company, carried the cash to the factory in readiness for paying the workers' wages for the month of March 2000. Choi Hok Leung was unable to distribute the wages money to the workers because he could not get hold of the payroll, and without the payroll, he would not be in a position to know how much each worker should be paid. The payroll was then kept by the petitioner, who refused to give it to Choi Hok Leung. 108.Rather than giving the payroll to Choi Hok Leung to distribute the wages, the petitioner on 10 May 2000 demanded Choi Hok Leung to give him the money to distribute. Choi Hok Leung did not accede to his demands because Choi had express instructions from Xiao Bian Company not to pass that money to anyone. Seeing that he was unable to distribute the money to the workers, Choi Hok Leung eventually took the money back to the Xiao Bian Company and gave it to its cashier, Ms Choi Fung Sheung. Eventually, the petitioner was forced to surrender the payroll and the Xiao Bian cashier paid the workers all their March wages in the evening of 10 May 2000. The petitioner gave evidence in cross-examination that he was so unhappy about having been forced to surrender the payroll that he decided to move out of the factory quarters and move into Lotus Villa Club on 11 May 2000. 109.The petitioner's withholding of workers' wages had evidently caused considerable concern to the Xiao Bian Company, which had the ultimate responsibility for paying the factory's workers. It had issued a warning note to the Company on 4 May 2000 saying that should there be any further delay in paying wages (for March), it would take over the management of the factory. The petitioner nevertheless continued to hold on to the payroll until late 10 May 2000, thereby preventing the distribution of wages to the workers. 110.Takeover of the factory eventually took place on 14 May 2000. The "situation report" of 15 May 2000 described this delay in paying wages as one of the misdeeds of the petitioner. The last part of the last paragraph clearly states that under the 三來一補rules, the relevant unit should take over the management of the factory as soon as wages failed to be paid on time. And for this reason, the Xiao Bian authority and the Xiao Bian Company decided to order the expulsion of the petitioner from the factory so as to protect the interest of the factory. That is not only reasonable but also appears to be the only option then opened to the Xiao Bian authority and Xiao Bian Company (ii) Factory's official seal 111.Besides the complaint about late wage payments, the "situation report" also set out a complaint against the petitioner in relation to his demand for the factory's official seal on 18 April 2000. Choi Hok Leung confirmed the correctness of this report. He also confirmed that the factory seal belonged to the PRC party and should be kept by the Xiao Bian Company (1) and its representative seconded to the Xiao Bian Factory, namely, the Customs Personnel (1). The seal is said to be the "life-blood" of the factory. 112.Further evidence of this incident was given by the 2nd respondent. He said that Xiao Bian Factory made a complaint by phone to him saying that the petitioner had tried to force the holder of the factory seal to surrender the seal to him. He then wrote a letter to Choi Hok Leung in Xiao Bian, copied to Secretary Choi of Xiao Bian Factory and the petitioner, to suggest that the factory seal should best be kept in the custody of the Head of the Factory and any use of the seal should be recorded. He said when Secretary Choi paid him a visit in Hong Kong on 20 April 2000, he was questioned by Choi why the Hong Kong-side attempted to take control of the factory seal. Choi wanted to find out from the 2nd respondent whether or not he was colluding with the petitioner in this. He could not understand why the petitioner would want to take the seal from the Xiao Bian side. He totally disagreed that the petitioner should ask for the factory seal. He confirmed to Secretary Choi on 20 April 2000 that he had absolutely no intention to take the factory seal. Nevertheless, Choi asked the 2nd respondent to consider signing a new contract to clarify their respective responsibilities in the running of the factory. The 2nd respondent had it signed on 30 April 2000 when Choi Mou Sum came to collect it. 113.The petitioner admitted under cross-examination that the factory seal kept by the Customs Personnel was used when the special bank account was opened. That account is the account which contained the RMB2 million judgment sum received from "Tung Shing". Although the petitioner denied that he wanted to take the factory seal in order to deal with the RMB2 million in the bank account, it is submitted that his denial should not be believed. His suggestion that "to operate that account, one would require a factory seal which the petitioner had given to his father as soon as the account had been opened" is just too far fetched and moonshine. The money in the account belonged to the factory, and not to the Company or his father. There could be no sensible reason for the father to keep the factory's seal at all. In any case, the 2nd respondent denied he ever took the factory seal. In a further attempt to distant himself from having anything to do with the bank account, the petitioner later "clarified" his evidence and said he gave the factory seal to the 3rd respondent to give to the 2nd respondent. The 3rd respondent denied he ever took the factory seal from the petitioner. 114.There is no doubt that with the factory's seal in hand, the petitioner would be able to access the RMB2 million in the bank account. The petitioner had tried to take the factory seal in April 2000 in order to take the money out of the bank account. In these circumstances, the Xiao Bian authority and Xiao Bian Factory would be justified in removing the petitioner from the factory in light of these problems. (iii) Means to cover own tracks 115.In paragraph 12 of his affirmation, Choi Hok Leung deposed to the fact that the petitioner had sacked Wong Lai Wah, the accountant of the factory, in January 2000 because Wong Lai Wah was unwilling to yield to the petitioner's demands for bending accounting practices. The petitioner did not allow Wong Lai Wah to handover her tasks to anyone, and as a result, the financial and accounting department of the factory underwent some chaos. The part of his evidence was unchallenged. It was also undisputed that the petitioner hired Kiu Mei Chun around 1 April 2000 to take on the position of the factory's accountant. 116.It was also in this period (February to April 2000) when financial reporting from the factory to the 2nd respondent in Hong Kong suddenly became almost non-existent. Expense Ledgers for January to March were not received by the father. The 2nd respondent then decided to fax a notice to the petitioner and Kiu Mei Chun urging them to promptly prepare the reports for him. The reason for this fax was that he could not tell how much money the factory needed without those ledgers and could not tell how much he could remit to the factory for its expenses. Without these ledgers, he would be in the dark and could only keep remitting more and more money to the factory. He could tell that the discrepancy between remittances into the factory and the factory's expenses were getting large. 117.The inference that I draw from the above is that the petitioner had intentionally changed accountants and accounting practice, and withheld accounting information from his father with a view to covering his own tracks in misappropriating the factory's cash. The petitioner's intention was to "milk" the factory and indirectly, his father. (iv) Petitioner's other misdeeds in Xiao Bian 118.Evidence was given by the petitioner, his father and Choi Hok Leung about the petitioner's other misdeeds in Xiao Bian, including spending-sprees in Lotus Villas Club which the Company had to pay for. Many of these costs were incurred at the Loctus Villas Club in April and May 2000, and, judging by the timing of the contemporaneous events (e.g. the factory seal incident on 18 April 2000, late wages in early May, expulsion on 14 May 2000, and Tong Tit Yim making blackmail threats to the petitioner's father on 15 May 2000), many could not have been related to the Company's business. 119.The "situation report" prepared by the Xiao Bian authorities list out a number of the petitioner's other misdeeds. The contents of this report were not challenged by the petitioner in his cross-examination of Choi Hok Leung or the father. Nor has he adduced any evidence to contradict them. It is not necessary to set them out in detail. Suffice it to say that they reinforced the decision to expel the petitioner from Xiao Bian. (v) Attempts to regain control of factory 120.Obviously, after the petitioner was expelled from the factory on 14 May 2000, he could no longer lay hands on the factory's finances. 121.Although during his evidence, the petitioner tried to suggest that he never "touched money" or had contact with the factory's money, this was contradicted by Choi Hok Leung's evidence and the 3rd respondent's evidence. The petitioner's suggestion is also at odds with the Income Ledgers of March and April 2000 where he countersigned income entries in his capacity as the "receiver". His suggestion cannot be believed at all if one also considers his evidence about the workers' March payroll which he refused to hand over to the Xiao Bian side until he was forced to do so on 10 May 2000. The evidence is quite clear that he was trying to hold the Xiao Bian side to ransom : unless Choi Hok Leung handed over the $350,000 remittance (in RMB equivalent) to the petitioner, the petitioner would not surrender the payroll and the workers would not get paid. When the petitioner was forced to surrender the payroll, he became so upset he decided to move out of the factory quarters and into Lotus Villas Club. Therefore, clearly, prior to his expulsion, the petitioner had access to the factory's cash. 122.It is therefore hardly surprising that after the expulsion on 14 May 2000, the petitioner tried to regain entry into the factory. Choi Hok Leung described the situation in his affirmation and confirmed likewise in his testimony. On 15 May 2000, the petitioner went to the factory with Tong Tit Yim and another person (claimed to be a lawyer). The lawyer told Choi Hok Leung that the factory belonged to the petitioner and his expulsion was unlawful. On 17 May 2000, the petitioner tried to gain entry forcibly into the factory; this time, the petitioner came in a military vehicle with a couple of other persons. Neither of these two incidents was disputed by the petitioner. In fact, he confirmed that he did return to his office at the factory on 15 May 2000 to pick up "stuff" including account ledgers. 123.The petitioner also confirmed in cross-examination that Mr Li Chi (alias Li Sau Chi), the Colonel named in the PLA Top Secret Memo dated 16 May 2000 was present on 17 May 2000. He was said to have been "surrounded" or "ganged up against" outside the factory. 124.In his 7th affirmation, the 2nd respondent described how he received a phone call from Xiao Bian on or about the day the factory was taken over by Xiao Bian Company, with Tong Tit Yim blackmailing him for $1 million and demanding him to give the factory back to the petitioner. He confirmed this in his oral testimony. Although the petitioner in cross-examination denied that this happened, the evidence of the 2nd respondent is to be preferred, since he (and not the petitioner) was the person who was on the phone, and the petitioner did not cross-examine his father on this issue at all. Further, the 2nd respondent's evidence was that he was so scared he even reported the incident to the Hong Kong police. It is supported by contemporaneous evidence that he exhibited in his 7th affirmation, namely, a Police Report Slip. His evidence was that Tong Tit Yim blackmailed him on the instruction of the petitioner. 125.The petitioner's attempt to regain control of the factory did not end there. On 22 May 2000, the petitioner paid a visit to his father's office in Hong Kong together with Li Sau Chi. The petitioner confirmed in cross-examination that this meeting indeed took place, but the date was 18 May 2000 instead. According to the 2nd respondent, at that meeting, Li threatened him with execution if he would not give the control of the factory back to the petitioner. The petitioner's evidence was that Li was a friend of his who was "kind-hearted" enough to want to talk to the petitioner's father about the risks of handing the factory's control over to the Xiao Bian people. The petitioner admitted that he was standing some distance from where Li and his father were holding that conversation, and could hear bits of what they were discussing. 126.I accept the 2nd respondent's evidence. It is illogical that the petitioner should want Li Sau Chi to discuss factory matters with his father whilst Li had no involvement in the factory or the business whatsoever. The only reason the petitioner gave for involving Li in this meeting was that Li was one of the people who had been "surrounded" outside the factory on 17 May 2000. The petitioner admitted that he was not even engaged in the discussion between Li and the petitioner's father. He left it to Li to "reason" with his father. He was standing some distance away. According to two allegedly Top Secret memos Li Sau Chi was said to be a Colonel of the PLA visiting the region in mid-May 2000, and the PLA wanted the factory's control surrendered back to the PLA for covert operations. Clearly, Li took part in forcing the 2nd respondent to pass control of the factory to the petitioner. Seeing that even the PLA had intervened in the matter, the 2nd respondent sought help from the Liaison Office of the Central People's Government in Hong Kong. 127.From the evidence, it is quite clear that the petitioner had tried very hard using all kinds of means to put pressure on his father to let him regain control over the factory, even to the extent of involving the PLA. His conduct is most disgusting. I now return to the petitioner's complaints. (c) Transferring shares to the 5th respondent 128.The 5th respondent gave evidence on two affirmations and in court. He explained in cross-examination how he was invited by the 4th respondent to join the board : the two of them are good friends who became they were both devoted Buddhists. On affirmation, which was not challenged in cross-examination, he explained the shares transferred to his name were transferred to him as a trustee only. He also explained why the father believed it would be good idea to have him on the board so that there would be no need to pay for legal advice given by him. 129.As the petitioner has failed to establish the Common Understanding, the transfer of shares to the 5th respondent and his appointment as a director should not be a valid complaint as unfair prejudice. Furthermore, there is unchallenged evidence that those shares under Peter Lo's name are held on trust for the Lam's. Therefore, this complaint must fail. (d) Removing the petitioner from the Company's board 130.The 2nd respondent was justifiably very concerned with the factory and the Company's business for which he had everything at stake. In light of all the above incidents of the petitioner's misdeeds, threats, blackmail and reports from the Xiao Bian side (which, in the circumstances, he had no reason to disbelieve), and in the interest of the Company, his own reputation, and the interest of whole family, it can only be said that his decision to call a meeting to remove the petitioner from the Company's board in June 2000 was amply justified. He hoped that by ridding the petitioner of his status as a director of the Company, the petitioner would no longer create trouble in Xiao Bian, and things would get back on track. Removing the petitioner from the Company's Board would be the best solution. I accept his evidence and rule that this complaint fails. (e) Denial of information 131.The 5th respondent's evidence is that he tried to be a "go-between"/mediator for the Lam family when the dispute arose between the petitioner and the rest of his family in May 2000. To this end, he met the petitioner a number of times in May 2000. He did not withhold any information from the petitioner as alleged. He simply left the box of documents belonging to the Company to the petitioner to photocopy at will. There was no denial of information. At no time did he prevent the petitioner from photocopying any paper in the box. 132.I am satisfied that the petitioner has failed to establish that there was any denial of information to him. He was allowed to take copies of all the documents. (f) The 2nd respondent's remuneration 133.By paragraph 69A of the draft Amended Petition, the petitioner added a new allegation of unfairly prejudicial conduct in that the 2nd respondent had, unknown to the petitioner, caused and received substantial increase in annual director's remuneration paid to himself by the Company; in particular, he received :
134.In his 9th affirmation, the petitioner said, historically the remuneration of his father and himself did not differ so widely; he only found out about his father's elevated remunerations after he had had sight of the 13 account ledgers. 135.In reply to the petitioner's allegations, the 2nd respondent filed his 11th affirmation. In essence, what he said is that he had been receiving a nominal pay of around $10,000 per month from the Company when the Company was in its early days, but in 1999, he decided that a pay of $100,000 per month would more properly reflect his experience and contributions to the Company. He then gave his reasons for justifying such a pay in paragraphs 7 to 16 of that affirmation. In his oral testimony, he confirmed these reasons. In short, he was the founder, chief executive and chairman of the Company; despite the sizeable business turnover of the Company, there were only five members of staff in Hong Kong, including himself and his wife. In essence, he performed nearly all of the key functions of the Company such as business development, material sourcing, production coordination, finance and administrative matters. He had, through having spent nearly 50 years in the electroplating industry and his status as a Committee Member of the Central Political Committee as well as the Permanent Honourary Chairman of the Clansman Association in Xiao Bian County, established valuable connections and networks for customers and suppliers, and with government authorities on the mainland. Special concessions had been obtained for the benefit of the Company (e.g. rental concessions in Xiao Bian). 136.The Company at the relevant time was a profitable business :
These figures were arrived at after deducting all expenses including remunerations to directors. 137.Accordingly, there is no issue of the Company making losses whilst a director took a large remuneration. There is also no suggestion that the Company was trading at a profit which yielded a return which did not reflect the value of the assets employed. In fact, the Company had been making more profit every year, despite larger directors' remunerations. Therefore, there is no issue that the directors (or some of them) have been improperly influenced by their self-interest or desire to continue in office and in control of the Company when they decided to draw a larger remuneration package in 1999. 138.The petitioner has failed to adduce any evidence that the 2nd respondent was paid more than the Company would have had to pay to secure suitable replacements, or that the level of remuneration is out of line with that paid to executive directors of other companies of comparable size and turnover. In fact, the father has adduced unchallenged evidence that his remuneration was reasonable given his experience, contributions and dedication. 139.As I see it, the real complaint of the petitioner is that his father had, suddenly and without his knowledge, drawn a larger salary from the Company than he himself had. This, the petitioner found "unreasonable". The petitioner's complaint is not that his father had drawn an "excessive" remuneration per se. The "unreasonableness" lies in the "inequality" of drawings from the Company. 140.Mr Ho submitted that to run this argument successfully, the petitioner needs to have a firm basis for his expectation that the salaries of his and his father should be equal. There is simply no such basis. The petitioner has not asserted in his petition (or stated in his List of Issues) that there was an express agreement or common understanding that he and his father would draw the same amount of salaries from the Company. Nor has the petitioner adduced any evidence to support his contention. His only basis is that : according to his case, he and his father had an equal share in KFEF and since the Company was "capitalised" by the partnership company, he should have an equal share in the Company. If the petitioner fails to establish that he in fact had an equal share in the partnership company, or fails to establish that he in fact holds an equal share in the Company, his argument for receiving the same salary as his father in the Company must fail. I agree with Mr Ho entirely. 141.The petitioner further complained that his father had been receiving "double benefits" in that his father was also receiving $45,000 as rental benefit for his residence at Carmen Garden each month. 142.It is not in dispute that the Carmen Garden property is also the home for the Lam family. Even the petitioner admitted that his father had told him a room had been reserved for him. The father's undisputed evidence was that the property was acquired as a home for the whole family under his name with the assistance of a personal mortgage loan of over $10,000,000. At the material time, his remuneration was just $10,000 per month, whereas the mortgage repayment was $60,000 per month; he took $45,000 per month as rental benefit from the Company. His accountant later suggested that he should take a reasonable remuneration instead of a nominal one of $10,000. He eventually increased his remuneration to $100,000 per month after March 1999. 143.The Company's account ledgers for 1998/1999 and 1999/2000 reveal that the father stopped receiving any rental benefits from the Company as soon as his remuneration increased to $100,000. In other words, there was no "double benefits" as alleged. The 2nd respondent was either receiving rental benefits or receiving a higher pay; the increase in remuneration "package" as a whole was much less than what it might at first seem. 144.By passing, I note that it is the 2nd respondent's unchallenged testimony that the petitioner had four properties (in Beijing, Guangzhou, Dongguan and Hong Kong) paid for by the 2nd respondent at all material times. 145.The petitioner's complaint relating to the 2nd respondent's remuneration fails. (4) Settlement Note 146.For completeness, I wish to deal with a settlement note signed by the petitioner and the 2nd respondent on 9 March 2001. A copy can be found at Trial Bundle J at page J3278. On the 1st day of trial, Mr Lau, the petitioner's counsel, stated the petitioner's stance on this settlement note report by the parties thus :
I therefore ruled that there was no need to rule on the effect of the memo as a compromise as there was no live issue to prevent the court from hearing the petition. 147.The 2nd respondent gave oral evidence in respect of this note. It was prepared and signed outside the court just prior to a hearing on 9 March 2001. The Company's bank accounts had been frozen, and the petitioner had only allowed the Company to withdraw $1.5 million each month in the previous validation order hearing, whereas the Company needed at least $2 million each month. He feared that the Company would be completely stifled within six months if the petitioner continued to allow only $1.5 million withdrawals each month. The Company would close down, and the whole family would be seriously affected. His reputation would also be ruined. He had made every effort to save the business, including mediations. It was his understanding that all that the petitioner wanted was money. The petitioner said so to him outside the court-room before they drafted that note. He did not consider that the petitioner had any actual interest in the Company's shares. Since the petitioner only wanted money and the Company's cashflow had ended up in "dire straits" because of the petition, the 2nd respondent considered using money to solve the predicament which he and the business were facing. As a result, the note was drafted to include not just the Company, but also Kam Fai Industrial Company Limited and Fogo International ("Sun Fai"). Therefore, the offer of $3.5 million covered three companies. Further, the note also dealt with the redemption of the Wai Wah Centre property in Shatin, and the exchange of the Guangzhou property with six houses and a shop in Dongguan. The 2nd respondent's wish at the time was simply to distribute his wealth/"estate" to the petitioner right there and then. He wanted a speedy end to the business' and the family's predicament. The deal was by no means recognition of the petitioner's interest in the Company. 148.The petitioner did not challenge his father's evidence. Accordingly, I accept the 2nd respondent's evidence and find that the signing of the note by him is not evidence of any admission of liability or admission that the petitioner in fact had beneficial interest in Company. (5) Conclusion 149.For the above reasons, the petitioner's case of unfair prejudice fails in its entirety. DISMISSING THE PETITION 150.The petition is wholly unmeritorious. I have no hesitation in dismissing it with costs. And I so order. 151.Lastly, I would like to record my thanks to Mr Ho and his learned junior. Their assistance has rendered the writing of this judgment far less onerous than it otherwise would have been.
Representation: Mr Eric Lau and Mr W.S. Tang, instructed by Messrs Lau, Pau & Co., for the Petitioner (3-4 and 8-10 April 2003) Lam Sum Po, Petitioner, in person (3-7, 10-12 November and 8 December 2003) Mr Ambrose Ho, SC and Mr Paul Leung, instructed by Messrs Rowdget W. Young & Co., for the Respondents Official Receiver : excused from attendance |
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