Tam Shuk Yin, Anny v. Choi Kwok Chan and Others

HCMP 2399/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2399 OF 2004

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BETWEEN

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Before:  Hon Kwan J in Court

Dates of Hearing:  22 to 24, 27 to 30 November 2006, 1, 4 and 8 December 2006

Date of Handing Down of Judgment:  14 June 2007

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J U D G M E N T

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1.This is a petition under section 168A of the Companies Ordinance, Cap. 32.  Four companies are the subject of this petition – Active Team International Limited (“Active Team”), Advance Wise Development Limited (“Advance Wise”), Wise Apex Enterprises Limited (“Wise Apex”) and Richmond Properties and Trading Company Limited (“Richmond”).  For the reasons given in my decision on 11 November 2005 (Re Active Team International Ltd. & Ors. [2005] 4 HKLRD 375), I have allowed one petition to be presented notwithstanding reliefs are sought in respect of four companies, instead of requiring a separate petition to be presented for each.  In this judgment, I bear in mind that for relief to be granted under section 168A for a particular company, unfairly prejudicial conduct in respect of the affairs of that company would need to be established.

2.The only business of Active Team, Advance Wise and Wise Apex is to operate various kindergartens and schools.  The only business of Richmond is to hold and manage the properties at Nos. 49 and 57 Cumberland Road, Kowloon Tong, where two of the schools are located.

3.The petitioner, Tam Shuk Yin Anny, is married to Fung Lai Sing (“Mr. Fung”).  Mr. Fung is the elder brother of Fung Lai Mei Betty, the 2^nd respondent, who is married to Choi Kwok Chan, the 1^st respondent.  Mr. Fung, the petitioner and the 1^st respondent were at college together.  Since 1975, Mr. Fung and the 1^st respondent were business partners.

4.The petitioner and the 1^st respondent are equal shareholders and the only directors of Active Team, Advance Wise and Wise Apex at all times.  In respect of Richmond, half of the issued shares are held by the petitioner and the other half by the 1^st and 2^nd respondents combined.  Mr. Fung and the 1^st respondent are the only directors of Richmond at all times.

5.Since around the latter part of 1997, there had been very little direct communication between the two sides and since around 2001, there had been no direct communication between them other than by correspondence.  The parties have long lost faith in each other and mutual trust and confidence have been replaced by suspicion and hostility.  Protracted buy-out negotiations between 1998 and 2003 to resolve the deadlock and to split their interests in the companies were not successful.  Hence, the petitioner presented this petition in September 2004, on the premise that the 1^st respondent’s conduct in the affairs of each of the companies was unfairly prejudicial to her interest as a shareholder. 

6.The 1^st respondent has denied the allegations of unfairly prejudicial conduct against him.  He accepted that there is a deadlock and as the parties no longer have trust and confidence in each other, they cannot continue to manage the schools as before and should go their separate ways.  He has alleged that it was due to the petitioner’s conduct in the affairs of each of the companies that unfair prejudice was occasioned to him as a shareholder.  He seeks relief under section 168A in the event that his allegations of unfair prejudice were established in respect of each of the companies.

7.In the event that relief is granted under section 168A, whether on the complaints of the petitioner or of the 1^st respondent, there is no dispute as to who should buy out whom in respect of each of the companies.

8.I will first relate the history of the schools operated by the parties.

The schools under the partnership

9.In 1979, Mr. Fung set up a kindergarten at No. 150 Nga Tsin Wai Road, Kowloon City known as “York English and Chinese Kindergarten”.  The name “York” was conceived by the petitioner.  The 1^st respondent was invited to join as a partner.  This school was closed in the 1980s and does not feature in the present dispute. 

10.As from 1980, Mr. Fung and the 1^st respondent as equal partners set up a number of schools in the Kowloon Tong area (collectively “the Kowloon Tong Schools”), which were successful ventures.  In 1980, they set up “York English and Chinese Kindergarten” at No. 14 York Road (“No. 14”).  In 1981, a sister school known as “York English Primary School and Kindergarten” (“YPK”) was established at No. 8 York Road (“No. 8”).  The primary section of YPK was set up at No. 49 Cumberland Road (“No. 49”) in 1983.  YPK further expanded when the neighbouring premises at No. 10 York Road (“No. 10”) were taken up in 1985.  The walls between No. 8 and No.10 were demolished and the two premises operated as one, they constituted the kindergarten section of YPK.  In 1987, “St. Nicholas English Primary School” was set up at No.57 Cumberland Road (“No. 57”).

11.At all material times, the three schools at Nos. 8, 10 and 14 were managed by the petitioner and Mr. Fung, these are all kindergartens.  The 1^st and 2^nd respondents managed the two schools at Nos. 49 and 57, which are primary schools.

12.On 13 April 1982, Mr. Fung and the 1^st respondent entered into an agreement in writing (“the Bonus Agreement”) by which the petitioner and the 2^nd respondent were each paid bonuses out of the net profits of No. 14 and No. 8 for their services in running these schools.  The petitioner was the headmistress and the 2^nd respondent was the head teacher.  In respect of No. 14, the petitioner was entitled to be paid 10% and the 2^nd respondent 3% of the net profits before tax of the whole year.  As for No. 8, the petitioner was entitled to be paid 5% and the 2^nd respondent 2% of the net profits before tax of the whole year.

13.The partnership of Mr. Fung and the 1^st respondent also set up schools in the Kwai Chung area (collectively “the Kwai Chung Schools”).  A high school known as “St. Lucas College” was set up at No. 1 Wo Yi Hop Road in 1987.  In 1989, they set up a kindergarten and primary school under the name of “York English Primary School and Kindergarten” (“YPK (Kwai Chung)”), also at No. 1 Wo Yi Hop Road.  At all material times, the Kwai Chung Schools were managed by the 1^st respondent until they were closed in 1998. 

14.During 1988 to 1993, the petitioner resided in Canada and Mr. Fung operated the schools with the 1^st respondent.  She returned to Hong Kong in 1993.  In August 1994, with the agreement of the 1^st respondent, Mr. Fung transferred to the petitioner his entire interest in the partnership with the 1^st respondent in the Kowloon Tong Schools and the Kwai Chung Schools.  The reason why he did so is not material to these proceedings.

15.When the schools were run under the partnership, it was the practice that profits generated by the schools would be distributed to the partners whenever there was surplus cash.  Profits from the partnership were distributed up to the financial year of 1995/96.

Incorporation of the partnership business

16.In 1997, the petitioner and the 1^st respondent agreed to use three companies to hold and own the Kowloon Tong Schools, in place of the partnership.  It is immaterial who initiated the idea of incorporation and why this was done.  Active Team, incorporated on 10 January 1997, took over No. 14.  Wise Apex, incorporated on 27 January 1997, took over No. 57. Advance Wise, incorporated on 21 March 1997, took over YPK, at Nos. 8, 10 and 49.  The assets and liabilities of the partnership in relation to the schools concerned were injected into each of these companies.

17.The Kowloon Tong Schools continued to be under the same management as before, after the three companies took over.  Thus, the petitioner managed Nos. 8 and 10 (held by Advance Wise) and No. 14 (held by Active Team), and the 1^st respondent managed No. 49 (held by Advance Wise) and No. 57 (held by Wise Apex).

18.In respect of the accounts of each of the companies, the petitioner and the 1^st respondent would prepare accounts for the schools under their respective management for each other’s inspection.  In the case of Advance Wise, which held three schools under different management, the petitioner and the 1^st respondent would each prepare accounts for the schools under their respective management and the separate accounts would be consolidated by the auditors of Advance Wise.  Separate school accounts (comprising current accounts and time deposits) were opened with banks for (i) Nos. 8 and 10 (Advance Wise), (ii) No. 14 (Active Team), (iii) No. 49 (Advance Wise), and (iv) No. 57 (Wise Apex).  All bank accounts have to be operated jointly by the petitioner and the 1^st respondent.

19.Nos. 49 and 57 operated from premises owned by Richmond, as mentioned earlier.  Richmond was incorporated on 27 November 1981.  Nos. 8 and 10 operated from premises owned by third party landlords.  No. 14 operated from premises owned by Ever Jump Company Limited, of which the 1^st and 2^nd respondents and the petitioner are shareholders and directors; this company does not feature in these proceedings.

The Management Agreement

20.On 24 September 1997, a management agreement in writing (“the Management Agreement”) was entered into between the petitioner and the 2^nd respondent.  The objectives were to have better control over the income and expenditure of the Kowloon Tong Schools under each party’s management and to enhance accountability through periodic review.  Detailed provisions were made regarding the income and expenditure of the schools.

21.On the income side, all income received by the schools should first be paid into a bank account of the school operated jointly by the petitioner and the 1^st respondent, before sums were paid out to the respective management companies set up by the petitioner and the 1^st respondent for disbursing the expenditure of the schools under their separate management.  The petitioner’s management company is Prime Concord International Limited (“Prime Concord”); the 1^st respondent’s management company is South Harvest Management Limited (“South Harvest”).

22.To ascertain the minimum school fee income for budget purpose (“the budgeted school fee income”), there would be headcounts of the number of students enrolled at each school twice a year.  If the audited school fee income should exceed the budgeted school fee income, this would be treated as a credit in favour of the party who managed the school; whereas if the audited school fee income should fall below the budgeted school fee income, the difference would be treated as a debit against that party and he would have to pay the amount to the school. 

23.For the miscellaneous fee income received at the beginning of the school semester, 40% would be treated as profit to be divided equally between the shareholders and the remaining 60% would be deemed to be the cost borne by the party who managed the school.  I find as a matter of construction that no specific provision was made for the receipt of miscellaneous fee during the school semester. 

24.On the expenditure side, various items of expenses would be capped.  This was to be achieved by the parties agreeing on an annual budget of the expenditure (“the budgeted expenses”).  If the actual expenditure should exceed the budgeted expenses, the party who managed the school would have to pay the difference to the school from his own pocket.  If the actual expenditure should fall below the budgeted expenses, the difference would be treated as a credit in favour of the party who managed the school.

25.A fixed sum based on the budgeted expenses would be paid to Prime Concord and South Harvest in twelve equal monthly instalments (“monthly management fees”), to allow them to disburse the expenditure of the schools under their management.  Other items of expenditure not provided for in the budgeted expenses would be disbursed out of the relevant school bank account based on the actual expenses incurred. 

26.Notwithstanding various items of expenditure of the schools were agreed to be capped under the Management Agreement, when preparing accounts of each school for audit and tax purposes, the actual expenditure incurred by each party’s management company in running the school would be charged to the relevant company which holds the school.  Thus, the Management Agreement really existed for the purpose of calculating the profits and losses to which each party may, at the end of each financial year, be entitled for managing the schools.  As each party managing the schools might run the risk of making a profit or incurring a loss based on the budgeted school fee income and expenses, the parties had referred to the Management Agreement as an ‘underwriting’ agreement.  Any excess of the profits of the companies, after making provisions in accordance with the Management Agreement, would be shared equally between the parties.

27.It was also agreed in the Management Agreement that the method of calculating the income and expenditure of the schools would be reviewed and revised, in the event of significant changes in student numbers enrolled at the schools, namely, by an increase or decrease of more than 10%.

28.For each of the two financial years in 1996/97 and 1997/98, the budgeted expenses of the schools under the management of the petitioner were agreed at HK$15,495,600.00 and of the schools under the 1^st respondent’s management at HK$13,160,164.00.  The monthly management fees payable to Prime Concord were agreed at HK$1.2 million and the fees payable to South Harvest were agreed at HK$1 million.

29.For the subsequent financial years, no budget was prepared.  The parties simply paid the same amount of monthly management fees to their management companies until 26 July 2003, when the petitioner terminated the Management Agreement.  She did so because there was a significant drop in student numbers at the two schools managed by the 1^st respondent, being Nos. 49 and 57, and the parties had failed to agree on the revised terms under the Management Agreement.

30.Further, despite the express provision in the Management Agreement, the miscellaneous fee income and part of the school fee income were sometimes paid to the management companies directly instead of to the relevant school bank account.

31.Since the Kowloon Tong Schools were taken over by the companies in 1997, no dividends have ever been distributed by Active Team, Advance Wise and Wise Apex, owing to unresolved differences over the accounts.  The audited accounts showed that these companies were highly profitable.  The total accumulated profits of these companies up to the financial year of 2002/03 came up to HK$137 million odd.

The broad issues

32.These are the broad issues raised in these proceedings:

(1)     whether there was unfairly prejudicial conduct on the part of the 1^st respondent in the affairs of each of the four companies;

(2)     whether the petitioner and the 2^nd respondent were entitled to bonuses under the Bonus Agreement after Active Team and Advance Wise had taken over those of the Kowloon Tong Schools for which bonuses had been paid under the partnership;

(3)     what should be the correct accounting treatment for the payment of pre-incorporation bonuses to the petitioner and the 2^nd respondent pursuant to the Bonus Agreement;

(4)     whether there was unfairly prejudicial conduct on the part of the petitioner in the affairs of each of the four companies;

(5)     what would be the amount of accumulated net profits in each of the four companies available for distribution to the petitioner and the 1^st respondent on an equal basis, after taking into account what the parties and their respective management companies owed to each of the companies; and

(6)     if the allegations of unfairly prejudicial conduct advanced by either party in respect of each of the four companies are established, what are the appropriate reliefs.

33.Other matters of contention are raised.  I will confine myself to material issues in this judgment.  Nothing is to be gained by raking over old quarrels and grievances.  A prime example is the fires at the Kwai Chung Schools on 8 June 1996 and at No. 57 on 30 September 2002.  Much evidence was given on the extent of the damage caused and what documents were or were not destroyed in these fires.  I decline to be drawn into such disputes or draw any adverse inference on the credibility of any witness merely because his or her evidence on peripheral issues is not entirely satisfactory or forthcoming. 

The witnesses

34.The petitioner, Mr. Fung and the 1^st respondent had filed affirmations in these proceedings and they were cross-examined.

35.The 2^nd respondent had filed affirmations adopting the affirmations of the 1^st respondent.  But as she had declined to be cross-examined, the respondents could not rely on her evidence. 

36.The affirmations of two other deponents were admitted into evidence by consent.  These deponents were Fung Chun Bong (the petitioner’s son) and Wu Chi Hang Jason (an employee of Fung Chun Bong). 

37.There were expert witnesses on accounting and on document examination.  The accounting expert for the petitioner was Kenneth Morrison (“Mr. Morrison”) of Moores Rowland Mazars and the experts for the 1^st and 2^nd respondents were Cheng Chung Ching Raymond (“Mr. Cheng”) of Hodgson Impey Cheng and Ho Man Kit Horace (“Mr. Ho”) of Horace Ho & Company.  The document examination experts were Professor Jia Yuwen (“Professor Jia”) for the petitioner and Dr. Wong In-jea Daniel (“Dr. Wong”) for the respondents.  With the exception of Mr. Cheng, all the experts attended court and were cross-examined.  Mr. Ho had concurred with the views and findings of Mr. Cheng and leave was given to call him as the respondents’ accounting expert at the trial in place of Mr. Cheng.

38.A person who had some involvement in the affairs of the companies did not make any affirmation and was not called as a witness.  This was Wong Tam Fat (“Mr. Wong”), a family friend of the Fungs.  He would appear to be a close confidant of the petitioner.  He had also met with the 1^st respondent during 1997 to 2003.  He had been helping the petitioner with the accounts, as she has no expertise in understanding and handling accounts.  He was in court most of the time during the trial.  Mr. Dennis Law, for the 1^st and 2^nd respondents, sought to cast doubt on the explanation given by the petitioner why she did not call Mr. Wong to make an affirmation and to testify.  I do not quite understand the reluctance of the petitioner of not asking him to be her witness in that she was concerned for his safety.  I do not think the court has been given the full picture.  But, in the end, I decline to draw any adverse inference against the petitioner on account of this.  With the exception of the conflicting evidence regarding an alleged meeting in March 1997 and what had happened at a meeting on 23 August 1997, both concerning bonus payments, the resolution of material issues in this petition would not depend primarily on the oral evidence given by witnesses, as there were ample contemporaneous documents.  Mr. Wong was not present in the alleged meeting in March 1997, and played little part in the meeting in August 1997.  I do not think additional evidence from him would have made a significant difference to the resolution of material issues in these proceedings. 

The petitioner’s allegations of unfairly prejudicial conduct

39.The allegations made by the petitioner of unfairly prejudicial conduct may be grouped under these broad headings:

(1)     complaints relating to the accounts and the failure to distribute dividends for Active Team, Advance Wise and Wise Apex;

(2)     the Bonus Agreement and bonus payments;

(3)     the miscellaneous fee;

(4)     the failure to pay rent to Richmond;

(5)     the diversion of the funds of Richmond;

(6)     the refusal to revise the Management Agreement;

(7)     the refusal to renew the lease of No. 10;

(8)     the failure to distribute dividends for Richmond;

(9)     the occupation of No. 49 by the 1^st respondent; and

(10)   other unfairly prejudicial conduct.

40.I will consider them in the order set out above.  The test for unfairly prejudicial conduct is objective, not subjective.  Thus, whether the 1^st respondent had knowledge that his conduct was unfairly prejudicial or was acting in bad faith is not relevant.  The test is whether a reasonable bystander observing the consequences of the 1^st respondent’s conduct would regard it as having unfairly prejudiced the petitioner’s interest in each of the companies (Re Bovey Ventures Hotel Ltd., Ch. D, 31 July 1981, Slade J).

Complaints relating to the accounts and failure to distribute dividends for Active Team, Advance Wise and Wise Apex

41.These made up a large part of the allegations.  The disputes over the accounts caused the parties’ relationship to turn sour.  In essence, the complaints were that the 1^st respondent had failed to respond to the petitioner’s queries; he failed to provide accounts, supporting documents and information; he failed to discuss or meet with the petitioner to resolve her queries on the accounts.  These are closely associated with the petitioner’s complaint of the failure to declare dividends, in accordance with the practice of distributing profits under the partnership and the understanding under the Management Agreement.  As the accounts could not be finalised due to the disputes of the parties, no dividends have been declared.

42.The complaints relating to the accounts may be divided into the period before the Management Agreement and the period after that agreement.

43.Since about 1996, the petitioner had been raising queries over the accounts prepared by the 1^st respondent for the schools under his management including the number of students enrolled, the school fee income, the miscellaneous fee income, and the expenditure.  The 1^st respondent requested for time to comply with the petitioner’s requests for supporting documents.  Eventually, she engaged solicitors in June 1997 to pursue her requests.  

44.On 12 August 1997, the 1^st respondent provided the petitioner his proposal for allocating various expenses to the schools under the parties’ respective management.  It was suggested among other things to book expenditure on electricity, water, gas, repairs and maintenance based on the number of students enrolled at each school.  The petitioner did not agree with the proposal, taking the view that expenses should be booked according to the actual expenditure incurred. 

45.It was against this background that the Management Agreement was made on 24 September 1997, with the objectives mentioned earlier. 

46.As no profits of the Kowloon Tong Schools were distributed since they were taken over by the companies, on 19 July 1999 the petitioner proposed to the 1^st respondent to engage her own auditors to prepare statements of the partners’ and the shareholders’ current accounts for the period from 1 August 1996 to 31 July 1998.  These statements could then be cross-checked by the 1^st respondent’s auditors, and the parties would come to an agreement on the distribution of profits.  Letters were sent by the petitioner’s solicitors to the 1^st respondent on 11 and 16 October 1999 requesting a meeting to discuss her proposal.

47.No response was received from the 1^st respondent to this proposal until 22 October 1999, when he requested the petitioner to forward all relevant documents of the schools managed by her to his representative, an accountant named Johnny Chan of Johnny Chan & Co., and stated that upon reaching agreement in the finalisation of the accounts, he would let the petitioner know the time and place for a meeting to discuss the distribution of profits.  Johnny Chan and subsequently Johnny Chan & Co. Ltd. had been the auditors of Advance Wise and Wise Apex.

48.On 28 October 1999, the petitioner informed the 1^st respondent she had appointed her own accountant, Lau Kwok On of Messrs. Lau & Cho (“Lau & Cho”), to liaise with Johnny Chan to finalise the accounts.  However, essential documents remained long outstanding from the 1^st respondent’s accountant, making it impossible to finalise the accounts for the schools under the 1^st respondent’s management and to work out the profits available for distribution.  In 2000 and 2001, the petitioner’s side (by herself, Lau & Cho and her solicitors) made many requests to Johnny Chan, Johnny Chan & Co. Ltd., the 1^st respondent and his solicitors for accounting information and documents.  Outstanding documents included income statements and the basis of calculation, supporting documents in respect of expenses incurred, and ledgers of directors’ current account.

49.By a letter dated 27 April 2001 to the petitioner, Johnny Chan & Co. Ltd. refused to provide the outstanding documents, alleging that the accounts of the companies for the financial years of 1996/97 and 1997/98 were not audited by them but by Johnny Chan & Co., which had ceased business on 1 January 2000.

50.The petitioner had earlier demanded the 1^st respondent to supply the outstanding accounting documents and information in relation to the Kwai Chung Schools to finalise the accounts for the financial year of 1996/97.  In March 1998, she discovered anomalies in the draft accounts of YPK (Kwai Chung) for 1996/97 received from the auditors Johnny Chan & Co. and raised detailed queries with the 1^st respondent.  In particular, the student number would appear to have been grossly understated.

51.In his replies in March and April 1998, the 1^st respondent disagreed there was any anomaly in the draft accounts.  He asserted that the allegation of non-conformity in student number was without basis and he would tender the figures to the auditors for a re-audit.  In the subsequent reply by his solicitors in April 1998, it was claimed that some of the accounting records and documents requested by the petitioner were destroyed in a fire in March 1996 (the fire was in June 1996, not March as stated).  The solicitors provided revised draft accounts of YPK (Kwai Chung) to the petitioner for her approval and signature, in which the school fee income was increased by HK$31,460.00, miscellaneous fee income of HK$338,965.00 was added and printing and stationery charges were reduced by HK$62,497.00.

52.The petitioner remained unconvinced that the revised draft accounts were accurate, as they did not fully address the anomalies raised by her.  Further, Johnny Chan informed the petitioner in April 1998 that about 60% of the supporting documents were not made available for his inspection or verification.  She declined to approve the draft accounts of the Kwai Chung Schools and requested Johnny Chan to conduct a special audit. 

53.It was recorded in the minutes of a meeting between the petitioner and the 1^st respondent on 8 May 1998 that the 1^st respondent would reimburse YPK (Kwai Chung) HK$365,575.00 as the shortfall in the school fees for 1996/97 and the petitioner would accept the amount of HK$338,965.00 as the miscellaneous fee income of YPK (Kwai Chung) for 1996/97.  It was agreed that upon completion of an audit by Johnny Chan, these two sums should be paid into the relevant school bank account.  It was further agreed that accounting records and documents would be provided to Johnny Chan to conduct a special audit on the accounts of the Kwai Chung Schools. 

54.Notwithstanding the agreement, the special audit of the Kwai Chung Schools was not conducted.  Johnny Chan informed the petitioner subsequently he was unable to do so for lack of supporting documents.  Moreover, the 1^st respondent had not reimbursed YPK (Kwai Chung) the sums aforesaid, even though the amount of HK$338,965.00 was entered as an income of the school in the accounts submitted to the Commissioner for Inland Revenue.

55.The 1^st respondent maintained through his solicitors in September 2000 that the accounts of the Kwai Chung Schools had been agreed and finalised and there was nothing outstanding in relation thereto.

56.In July 2001, the 1^st respondent demanded that unless the petitioner should confirm that the accounts of the Kwai Chung Schools had been accepted by her and treated as finalised, the distribution of profits of the Kowloon Tong Schools would be put on hold until the matter concerning the accounts of the Kwai Chung Schools had been resolved.  The petitioners refused to accede to his demand, as the accounts of the Kwai Chung Schools related to the affairs of a separate entity and were independent of Active Team, Advance Wise and Wise Apex.  Besides, the Kwai Chung Schools were not subject to the Management Agreement.

57.As a result, there was an impasse and no progress was made for dividends to be distributed for the Kowloon Tong Schools notwithstanding the profits accumulated over the years.  The accumulated net profits as shown in the audited accounts of each of the three companies for the financial year of 2002/03 were substantial, they were HK$10,008,501.00 for Active Team, HK$85,143,772.00 for Advance Wise, and HK$42,085,969.00 for Wise Apex.  The 1^st respondent refused to attend the meetings convened by the petitioner in September 2001, October 2001 and October 2003, to discuss finalising the accounts and distributing the profits of the Kowloon Tong Schools. 

58.It is not necessary to go into the 1^st respondent’s allegations that the petitioner was intemperate and unduly suspicious and that there used to be a “broad brush” approach adopted by him and Mr. Fung on the accounts (that they would only be concerned with major income and expenses and would raise no query on “relatively minor matters”) before the petitioner became his partner.  In my view, the letters from 1997 to 2003 are the best evidence.  The 1^st respondent has not put forward any positive case regarding the petitioner’s complaints on his persistent failure to supply her with accounting documents as requested.  He admitted in cross-examination that approximately 60% of the supporting documents were not made available to the petitioner for her inspection and verification, as pointed out in the letter of her solicitors dated 30 April 1998.

59.Furthermore, the 1^st respondent had delayed in approving the accounts of No. 14 and in preparing the accounts of No. 49 for the tax assessment year of 1997/98, resulting in penalties of HK$90,000.00 imposed on Active Team (for No. 14) and HK$240,000.00 on Advance Wise (for No. 49) for late filing of tax returns.  He was even late in paying tax for Richmond for the tax assessment year of 1997/98, and a penalty of HK$37,489.00 was imposed.  He had often delayed in preparing the accounts of the schools under his management and the accounts of Richmond, leaving the petitioner, Mr. Fung and their accountants little time (ranging from four days to one day) to verify and finalise the draft accounts before signing off the accounts to meet the deadline for filing the tax returns.

60.Due to the 1^st respondent’s failure to keep proper accounting records, journal adjustments had to be made at the end of the year to correct errors and omissions in his accounts.  The petitioner found it difficult to confirm the accuracy of the accounts of the schools under his management and to ascertain how much was owed by him at any one time until the year-end journal adjustments were made.

61.As dividends were not distributed for over six financial years, a lot of money was accumulated in the time deposit accounts maintained by Nos. 14, 49 and 57 at a bank.  Nos. 8 and 10 did not maintain any substantial time deposit accounts because Active Team was authorised to collect school fee and other miscellaneous fee on behalf of Nos. 8 and 10.  Despite the repeated requests of the petitioner in March, April and June 2002, the 1^st respondent refused to authorise the transfer of money from the time deposit accounts into the current accounts of Advance Wise.  As a result, on occasions Advance Wise had to make use of overdraft facilities in its current accounts to meet operational expenses when it should have a good liquidity ratio.  Considerably higher interest rates were paid for using the overdraft facilities of Advance Wise, whilst lower interest rates were received on the time deposits.

62.On the matters set out above, there was clearly unfairly prejudicial conduct of the 1^st respondent in respect of Active Team, Advance Wise, Wise Apex and Richmond.  As a shareholder of these companies, the petitioner had a right to be given accurate accounting information.  The unreasonable demand of the 1^st respondent that the petitioner must accept the accounts of the Kwai Chung Schools led to the impasse, which resulted in the failure to declare dividends for Active Team, Advance Wise and Wise Apex, to the prejudice of the shareholders of these companies. 

The issues on Bonus Agreement and bonus payments

63.The Bonus Agreement was made between Mr. Fung and the 1^st respondent in 1982 when they were partners in running Nos. 14 and 8.  At that time, the 2^nd respondent was not yet married to the 1^st respondent.  The petitioner and the 2^nd respondent were merely employees of the schools.  Bonuses pursuant to the Bonus Agreement were later extended to other schools run by the partnership, namely, Nos. 10 and 49.

64.When the petitioner took over the interest of Mr. Fung and became the 1^st respondent’s partner in the Kowloon Tong Schools in 1994, there was no evidence to suggest that in becoming a partner, the petitioner would give up her entitlement to bonus under the Bonus Agreement.

65.Bonuses in accordance with the Bonus Agreement were paid up to the school year of 1996/97.  The school year and the tax assessment year were not coterminous.  Since the bonuses were determined with reference to the tax-assessed profits of the schools, payment of the bonuses was delayed pending receipt of the final tax assessment.  For the school years of 1994/95, 1995/96 and 1996/97, the bonuses were paid in one go in February 1999.  The petitioner and the 2^nd respondent have not been paid their bonuses as from the school year of 1997/98, after Active Team and Advance Wise took over Nos. 14, 8, 10 and 49 from the partnership.

66.On 6 March 1997, a meeting was held between the petitioner, Mr. Fung and the 1^st respondent to discuss, among other things, dissolution of the partnership and the future operation of the Kowloon Tong Schools under the companies.  As recorded in the minutes, the question of bonus payment under the Bonus Agreement was raised, but was postponed for discussion.  The reference to 9% profit sharing of the petitioner in that part of the minutes written by Mr. Fung was an error.  He had meant to refer to the total percentage that the petitioner was entitled to receive under the Bonus Agreement, but could not remember the correct figure, which was 15%.

67.On 7 July 1997, the petitioner’s solicitors wrote to the 1^st respondent stating the petitioner’s views that the Bonus Agreement should continue to be performed and observed.  The 1^st respondent made no comment to this in the reply of his solicitors dated 23 July 1997.

68.A meeting was held on 23 August 1997.  It was recorded in the last paragraph of the minutes that the petitioner and the 2^nd respondent would continue to be paid their bonuses pursuant to the Bonus Agreement.  The 1^st respondent alleged that this paragraph, which was written by Mr. Fung, was not in the minutes when the parties signed on the document, and was inserted subsequently without his knowledge and consent.  He claimed that he would not have signed the minutes if the last paragraph were there.  His position was that upon taking over the partnership business by the three companies in 1997, and by the payment of the bonuses in February 1999, the Bonus Agreement would have no further legal effect. 

69.There were also problems with the bonuses paid in 1999 out of the funds of the companies for the school years of 1994/95, 1995/96 and 1996/97, prior to the incorporation of the companies.  The bonuses payable to the petitioner and the 2^nd respondent by Advance Wise for these financial years were HK$2,548,907.35 and HK$1,019,562.94 respectively.  The bonuses payable to the petitioner and the 2^nd respondent by Active Team for these financial years were HK$2,172,967.70 and HK$651,890.31 respectively.  It was contended by the petitioner there were fundamental mistakes as to how these payments were treated in the accounts of Advance Wise and Active Team. 

70.The obligation for the bonus payments was met by the shareholders, who were the former equal partners of the former partnership business.  The sums payable as bonuses were firstly debited to the respective current accounts of the petitioner and the 1^st respondent.  Thus, in the case of Advance Wise, the petitioner was debited with HK$2,548,907.35 and the 1^st respondent debited with HK$1,019,562.94.  Then the total amounts paid as bonuses (HK$3,568,470.29 in respect of Advance Wise; HK$2,824,858.01 in respect of Active Team) were divided by two and each half was credited to the respective current accounts of the petitioner and the 1^st respondent as payments of “dividends”.

71.The petitioner contended that this accounting treatment of the payment of bonuses was wrong for these reasons: 

(1)     There was no reason why the petitioner should have to shoulder a greater sum than the 1^st respondent in respect of the sums debited to their respective current accounts in Advance Wise and Active Team, instead of an equal sum for each.  In other words, the liability of the partners to meet the payment of the bonuses should have been equal, even though the payments to the petitioner and the 2^nd respondent, as principal and head teacher respectively, were unequal under the Bonus Agreement.  Insofar as it was the intention of the parties to settle the liabilities arising under the Bonus Agreement by Advance Wise and Active Team rather than by the partners personally, this should have been done by debiting the directors’ current account equally. 

(2)     The petitioner was underpaid in that she was credited with half of the total amounts to her current accounts in Advance Wise and Active Team, whereas the 1^st respondent was overpaid.  She should have been paid HK$2,548,907.35 out of the distributable profits of Advance Wise and HK$2,172,967.70 out of the distributable profits of Active Team.  She had been underpaid HK$1,525,210.90 and the 1^st respondent had been overpaid the said sum.

(3)     The bonuses paid should have been treated normally like any other expense and should not have been dealt with by the current accounts of the petitioner and the 1^st respondent with Advance Wise and Active Team.

72.Although there was disagreement between the petitioner’s accounting expert, Mr. Morrison, and the accounting experts of the 1^st and 2^nd respondents, Mr. Cheng and Mr. Ho, on the accounting treatment given to the paid bonuses for the school years of 1994/95, 1995/96 and 1996/97, they agreed on the calculation and assessment of the bonuses for those years as determined in 1999, and they also agreed on the calculation and assessment of the bonuses for the subsequent school years from 1997/98 to 2002/03.  The total amount of bonus payable to the petitioner for the subsequent years would be HK$6,614,883.70, whereas the total payable to the 2^nd respondent would be HK$2,515,152.51.  The difference of opinion of the accounting experts was in how the bonuses should be recorded in the accounts of Active Team and Advance Wise.

73.There is no argument on the point that notwithstanding the bonuses were payable to the 2^nd respondent, the settlement of the payments was to be made in the 1^st respondent’s account. 

74.There are two questions for the determination of the court: (1) whether the petitioner and the 2^nd respondent were entitled to be paid bonuses under the Bonus Agreement after the companies took over the schools from the partnership; and (2) what should be the correct accounting treatment of the payment of pre-incorporation bonuses out of the funds of the companies. 

75.Before I go to the expert evidence on whether the minutes of the meeting on 23 August 1997 was forged, I should first examine the factual evidence relating to that meeting.

The factual evidence relating to the meeting on 23 August 1997

76.The 1^st respondent wrote the minutes, save for the last paragraph concerning the entitlement to bonus in accordance with the Bonus Agreement.  It is not in dispute that the entire last paragraph, with the exception of the character “fei” inserted in the penultimate line (費, meaning “fee”), was in Mr. Fung’s handwriting.  According to Mr. Fung and the petitioner, the 1^st respondent wrote the inserted character “fei”.  The 1^st respondent denied he had written it. 

77.The minutes were signed by the petitioner, the 1^st respondent and Mr. Fung, and by a brother of Mr. Fung and the 2^nd respondent, Fung Lai Yin Frederick, who is a solicitor, as a witness.  Frederick Fung was not called by either side to give evidence.  Mr. Wong was also present but he did not sign on the minutes.

78.Mr. Fung made two affirmations on the circumstances in which the minutes were written and signed.  There was some confusion in the sequence of events as recounted by him initially and he made a correction in his subsequent affirmation.  During the meeting on 23 August 1997, the 1^st respondent acted as the secretary and wrote down points in the minutes as they came up for discussion.  According to Mr. Fung, as the discussions came to an end, he realised that the issue of bonus payments had not been canvassed.  So he raised the matter and after it was dealt with at the meeting, he added a paragraph to the end of the minutes.  The unsigned document was then photocopied and given over to the 1^st respondent to read.  The 1^st respondent noticed an omission and wrote an inverted “v” sign at the appropriate place and inserted the character “fei” into the penultimate line of what Mr. Fung had written, on the original document as well as the photocopy.  After the 1^st respondent had inserted that character on both documents, the parties signed on the original and on the photocopy of the minutes in the presence of one another. 

79.The 1^st respondent was given the signed original of the minutes whilst the petitioner took the signed photocopy.  They also made a photocopy of the signed original and the signed photocopy for their records.  So each party left with a signed copy of the minutes and a photocopy of the other side’s signed copy.

80.In the petitioner’s affirmation filed in February 2005, she alleged that the last paragraph in Mr. Fung’s handwriting appeared on both her copy of the minutes and on the 1^st respondent’s copy.  Further, the penultimate line in the last paragraph contained an amendment made by the 1^st respondent personally. 

81.In May 2005, the petitioner’s solicitors wrote to the solicitors for the 1^st and 2^nd respondents seeking discovery of the signed original of the minutes.  As no reply was received, they applied for specific discovery in July 2005 and an order was made.  The 1^st respondent then made an affirmation in July 2005 pursuant to the order, stating that the signed original of the minutes was once in his possession but he was not able to locate it at the time of his affirmation. 

82.The petitioner had of course no idea if the 1^st respondent would still have in his possession the signed original of the minutes when she produced her two sets of the signed minutes (one with original signatures, one with photocopied signatures) with the disputed last paragraph.  If the petitioner or Mr. Fung had forged the minutes, they would have taken two extraordinary calculated risks, first to produce a forged document knowing that the other side had taken away the original and a photocopy of their signed copy, and then to seek specific discovery of the signed original from the other side.  Even if the 1^st respondent could not find the document in July 2005 as asserted in his affirmation, they would not know if the 1^st respondent would be able to locate the document subsequently, up to the time of the trial.  If the signed original minutes without the disputed paragraph should be found, this would destroy the credibility of the petitioner and Mr. Fung completely.  As it transpired, the 1^st respondent’s counsel informed the court at the trial that the 1^st respondent could not locate any of the two sets of minutes kept by him after the meeting. 

83.It was in his 5^th affirmation made in August 2006 that the 1^st respondent mentioned for the first time after the meeting on 6 March 1997 (between him, the petitioner and Mr. Fung, and there was a record of this meeting), he and Mr. Fung had come to an oral understanding at the end of March 1997 that the Bonus Agreement would no longer be carried out, as both the petitioner and the 2^nd respondent would become shareholders after the incorporation of the various companies and no longer merely employees as they were during the partnership era.  At the next meeting between the petitioner, Mr. Fung and the 1^st respondent on 15 April 1997 (there was also a record of this meeting), the issue of bonus was not raised.  At the meeting on 23 August 1997 (the last paragraph of the record of this meeting is in dispute), the issue of bonus was not raised, as there was already an agreement at the end of March.  He pointed to the record of that meeting that the issue of miscellaneous fee was raised but not resolved.  On 3 September 1997, he had a meeting with Mr. Fung (a record was kept of this meeting) in the absence of the petitioner and they worked out a solution on the miscellaneous fee, just like what they did for the bonus issue in late March 1997.  Mr. Fung told him he would report the progress in their meeting to the petitioner and did inform him within a few days that the petitioner had agreed to what was discussed in her absence.  On 11 September 1997, Mr. Fung told him that an agreement was drafted and typed out for him and the petitioner to sign, which they did on 24 September 1997 and this was the Management Agreement.

84.The 1^st respondent contended that if the bonus issue had not been resolved earlier in March 1997, the petitioner would not have signed the Management Agreement, which did not address that issue.  I do not think this would assist his case, as this could just be explained on the basis that at the meeting on 23 August 1997, agreement was reached on the bonus issue and hence it was not dealt with or mentioned in the Management Agreement made subsequently.

85.The bonus issue was mentioned in a draft buy-out agreement forwarded by the 1^st respondent’s solicitors to the petitioner’s solicitors in June 1999.  It was next mentioned in the letter of the petitioner dated 13 August 2003, in which she made a proposal on the division of the business of the schools and the profit distribution.  She proposed that the bonus for the academic years of 1998/99 to 2002/03 should be paid in accordance with the Bonus Agreement.  Then on 9 June 2004, the petitioner wrote to the 1^st respondent’s solicitors referring to the Bonus Agreement and the meeting on 23 August 1997 and seeking payment of the bonus for the years of 1998/99 to 2001/02 with her calculation and a cheque for the 1^st respondent’s signature.  The 1^st respondent replied by his solicitors on 17 June 2004, he refused to sign the cheque and asserted that the Bonus Agreement had ceased to have effect with the dissolution of the partnership.

86.Mr. Fung denied he had any meeting with the 1^st respondent at the end of March 1997 or that he had agreed to suspend operation of the Bonus Agreement.  He asserted that on such an important matter, there was no reason why he would not have discussed it with the petitioner. 

87.Quite apart from the lateness of this allegation, considering its importance to the 1^st respondent’s case, he provided no particulars of the alleged meeting at the end of March 1997 in his affirmation.  Unlike the other five meetings in March, April, August and September 1997, no record was made of this meeting and there was no explanation for this omission.  Nor was it ever mentioned in any contemporaneous document or in the extensive correspondence exchanged.  The oral evidence given by the 1^st respondent on this was contradictory and was an embellishment of his late affirmation.  He claimed to be “greatly shocked” when he first saw the minutes of the meeting on 23 August 1997 produced by the petitioner and sought to explain he did not mention his meeting with Mr. Fung in March 1997 until his 5^th affirmation because he was focusing his attention on looking for the original of the minutes kept by him of the August meeting.  This is wholly incredible.  I reject the 1^st respondent’s evidence that he had come to an understanding with Mr. Fung in March 1997 as alleged.  I prefer Mr. Fung’s evidence.

88.The petitioner gave evidence that the meeting on 23 August 1997 went smoothly and when Mr. Fung raised the continuation of the Bonus Agreement at the end, the 1^st respondent agreed to this without raising any objection.  Mr. Fung then recorded the agreement in the last four lines of the minutes.  The meeting took place in the coffee shop of the Kowloon Tong Club and they had to borrow the photocopier in the club office to make copies.  The petitioner said as the office was about to close, they felt uncomfortable about causing inconvenience to others so the photocopying was done in a hurry.  It was after the copying was done that they had time to read the documents and the 1^st respondent noticed that the character “fei” was missing in the last paragraph written by Mr. Fung, so the 1^st respondent added that character to the original minutes and the photocopy, before the documents were signed.  After that, copies of the signed documents were made. 

89.Mr. Fung gave evidence of the discussion on the bonus issue at the end of the meeting.  The 1^st respondent had made some comments, which Mr. Fung could not recall.  He did recall there was not much argument on the issue and the 1^st respondent did not bargain for a lower percentage of the bonus to be given to the petitioner.

90.I do not find anything peculiar about Mr. Fung adding a paragraph to the minutes in his own hand when it was the 1^st respondent who had been recording the minutes for this meeting.  It could be seen in the minutes of other meetings that occasionally both the 1^st respondent and Mr. Fung had written interchangeably in the minutes of a meeting in an informal way, as points were discussed and dealt with.  Indeed, there was one other part of the minutes of the meeting on 23 August 1997 that Mr. Fung had added some characters in his own handwriting, before the unsigned minutes were taken away for photocopying.  That was item (1) on the first page, to which Mr. Fung added characters to the effect that clearing was to be made based on the bank statement as of the 3^rd day of each month.  Mr. Fung also gave evidence explaining why he chose to write the last paragraph instead of leaving it to the 1^st respondent.  Bonus payment was a matter affecting the interest of the petitioner, so he did not want the 1^st respondent to put down what was agreed in vague terms in the minutes. 

91.There is a ring of truth about the petitioner’s evidence on this incident.  I am also inclined to accept Mr. Fung’s evidence.

92.On the factual evidence, I find there was no agreement or understanding between the 1^st respondent and Mr. Fung in late March 1997 as alleged, but the parties did reach an agreement at the meeting on 23 August 1997 that the Bonus Agreement would continue.  I turn to the expert evidence to see whether any doubt should be cast on the finding that agreement was reached on 23 August 1997 in that the minutes were forged. 

Whether the minutes of the meeting on 23 August 1997 were forged

93.As mentioned earlier, the 1^st respondent was unable to disclose any of the two sets of minutes he took away after the meeting.  So only the copies produced by the petitioner were made available for examination by the experts.  The document with original signatures and the original inserted character “fei” was marked “A” in Professor Jia’s report.  There was no dispute that Document A was the signed photocopy of the minutes taken away by the petitioner after the meeting.  Both Professor Jia and Dr. Wong had examined Document A.

94.The other copy produced by the petitioner was marked “B” in Professor Jia’s report.  The signatures and the inserted character “fei” on this document were photocopied.  Document B was not photocopied from Document A.  Professor Jia examined Document B; Dr. Wong did not do so, taking the view that the clarity of the photocopy was insufficient for him to decipher the writing attributes of the character “fei” on that document.

95.Mr. Law had sought belatedly to explore the question with Professor Jia that Document B was not the first generation photocopy, namely, the very document copied from the signed original to be kept by the 1^st respondent and taken away by the petitioner after the meeting.  It was a thoroughly meaningless exercise.  I only mentioned this because counsel dwelt on the matter again in his closing submission.  He had failed to lay proper groundwork for this line of inquiry, which leads nowhere.  This line of inquiry which Mr. Law had sought to explore was to form the basis of his submission that Document B was not the first generation photocopy and that the petitioner had deliberately chosen not to disclose the first generation photocopy because this document might have shown that the disputed four lines were not there and thereby prove the 1^st respondent’s case that the disputed lines were incorporated into the minutes by cut and paste and re-photocopying.

96.For one thing, Document B was disclosed by the petitioner from the start, that the 1^st respondent’s legal advisers had only realised this document might be a subsequent generation photocopy only on the 8^th day of the trial was quite beside the point.  If it were alleged that Document B was a subsequent generation photocopy and not the photocopy taken away by the petitioner at the meeting, the 1^st respondent’s legal advisers should have made an application for specific discovery.  This was not done.  The petitioner was not even asked in cross-examination if Document B was the very document she had taken with her after the meeting, and if not, the whereabouts of the first generation photocopy.  It was entirely a matter of surmise that the first generation photocopy did not have the disputed four lines.  The 1^st respondent has had in his possession the original signed minutes and the first generation photocopy of Document A, and could have easily proved his point by producing either document.  Besides, the document expert of the 1^st respondent did not examine Document B at all.  Professor Jia declined to be drawn into the question if Document B was a subsequent generation photocopy, when he was asked for the first time about this in cross-examination, as he did not think there was sufficient basis for him to form a view. 

97.If forgery had been committed, as alleged by the 1^st respondent, the forger would have carried out a two-stage process: first, by inserting the last paragraph in Mr. Fung’s handwriting in Documents A and B; and second, by writing the character “fei” into the penultimate line of Mr. Fung’s handwriting that had been inserted in Documents A and B and making that character resemble the 1^st respondent’s handwriting in each instance.  One wonders why the forgery was carried out in such a cumbersome manner. 

98.But that is not all.  When Professor Jia was instructed by Mr. Fung to examine the minutes, the only question he was asked to give an expert opinion on was whether lines 6 to 9 on page 3 were added subsequently by insertion after the parties had signed the minutes.  He was not even asked to determine who wrote the character “fei” in those lines.  It was only in the course of his examination when Professor Jia discovered that character that he requested to be supplied with writing samples, as he felt he ought to decide on the authorship of the character.  It would be very odd for Mr. Fung not to ask his expert for an opinion of the authorship of the character, if so much trouble had been taken in the forgery in the manner as described above and Mr. Fung had a part in it.

99.Dr. Wong gave his expert opinion that the character “fei” in Document A was not written by the 1^st respondent, and that he was unable to ascertain whether lines 6 to 9 on page 3 were present when the parties signed the minutes.  Professor Jia was of the opinion that the two added “fei” characters in Documents A and B were written by the 1^st respondent, and this was a material factor that led him to the conclusion that lines 6 to 9 were not added by insertion subsequently after the parties had signed.

100.The divergence of opinion of the experts on the authorship of the “fei” character stemmed from their differences on dissimilarities and natural variations, with Dr. Wong emphasising dissimilarities and Professor Jia explaining them and attributing them to natural variations.

101.Dr. Wong pointed out the following principal dissimilarities, which he regarded as significant:

(1)     a relatively deep retraced stroke with a concave curvature was observed at the end of the initial downward slanting stroke for the lower radical of the “fei” character (貝; which was written in simplified form so that it resembled欠);

(2)     the upper-most horizontal stroke of the upper radical of the “fei” character (弗) displayed a minor trough-like configuration;

(3)     there was a blind ending that resembled a blob of ink at the end of the curvature and concave configuration of the initial stroke of the lower radical (which was written to resemble 欠);

(4)     the tip of the second horizontal stroke in the upper radical (弗) would seem not to be connected to the tip of the third horizontal stroke;

(5)     heavy pen pressure was evident in some of the strokes in the “fei” character, whereas relatively lighter pen pressure was observed in the known control handwriting of the 1^st respondent;

(6)     the writing movement of the third horizontal stroke in the upper radical would appear to be in a much lower position when compared with sample characters in the known control handwriting of the 1^st respondent.  This could be demonstrated by drawing two lines on each side of the upper radical and projecting the lines upwards until they meet, the triangular space formed for the “fei” character was much taller than those of the sample characters; and

(7)     the ratio between the distance of the upper-most and lowest horizontal strokes of the upper radical on either side was 0.53 for the “fei” character in Document A, whereas the ratio for the “fei” characters in the sample characters was in the range of 0.59 to 1.36.

102.Dr. Wong quoted Suspect Documents by Wilson R. Harrison, page 343, for what the author described as the “fundamental rule which admits of no exception when handwritings are being compared” – “whatever features two specimens of handwriting may have in common, they cannot be considered to be of common authorship if they display but a single consistent dissimilarity in any feature which is fundamental to the structure of the handwriting, and whose presence is not capable of reasonable explanation.” See also Scientific Examination of Questioned Documents by Ordway Hilton, revised ed., pages 153 to 154.

103.For ease of reference, I adopt the same numbering as I have done in the earlier paragraph.  Professsor Jia dealt with the dissimilarities relied on by Dr. Wong in this way:

(1)     the retraced stroke with concave curvature was observed at the end of the initial downward slanting stroke for the lower radical which resembled欠 in the “fei” characters and other characters which also have the same lower radical in the known control handwriting of the 1^st respondent, as well as in the “fei” character in Document B;

(2)     the main cause for the minor trough-like configuration in the upper-most horizontal stroke of the upper radical was due to the cautious writing of that first stroke with a ballpoint pen, at a speed similar to the speed one would adopt in writing the regular script (楷書).  When the stroke began, it went a little downwards towards the right and for the remaining part of the stroke, it did not show an obvious curve.  This appearance could be observed in a comparable horizontal stroke in another character in the known control handwriting of the 1^st respondent;

(3)     the blob of ink at the end of the curvature and concave configuration of the initial stroke of the lower radical was not a blind ending, a very small space inside it could be observed with a magnifying glass.  Further, the movement characteristic of this horizontal stroke with a turn and hook was the same for the “fei” character in Documents A and B, although the size of the turn was different for the two characters.  This movement characteristic, connecting the turn and hook with the left falling stroke, could be observed in the known control handwriting of the 1^st respondent;

(4)     the writing movement from the tip of the second horizontal stroke in the upper radical to the tip of the third horizontal stroke of the “fei” character in Document A was a “non-solid form of connection” (虛連) in Chinese calligraphy.  There was solid connection in respect of these strokes in the “fei” character in Document B;

(5)     the disputed “fei” characters in Documents A and B were written in constrained conditions, both were inserted into lines already written, resulting not only in reduction in size of these characters but also affecting the speed, the ease of making the strokes and the associated connecting strokes.  Hence, the heavier pressure of certain strokes in the “fei” character observed in Document A was reasonable;

(6) and (7)  Professor Jia conducted similar proportion exercises for other “fei” characters in the control handwriting of the 1^st respondent.  The triangular space above the characters was high up in respect of two characters.  And the ratios calculated for other characters in the control handwriting were 0.31 and 0.32, which were outside the range of 0.59 to 1.36 calculated from other sample characters by Dr. Wong.  Professor Jia did not consider this way of comparison a reliable method because when one writes, there are natural variations, and a significant number of samples were required for this method.

104.In summary, Professor Jia did not think there existed any important, inexplicable dissimilarity between the “fei” character in Document A with the known control handwriting of the 1^st respondent.

105.I do not think there is anything substantial in the criticism of Mr. Law of Professor Jia’s method that the professor was not comparing like with like. 

106.As for the dissimilarity in (1), which Dr. Wong regarded as having greater significance than other dissimilarities, he only referred to the first of the three pages of sample control handwriting annexed to Professor Jia’s 2^nd report, to make his point that he did not observe the retraced stroke with curvature in any of the sample characters.  That was self-evident as one could readily observe from the red arrows placed by Professor Jia that the nine sample characters on that page did not have the characteristic of retraced stroke with curvature.  Dr. Wong did not comment at all on the second page of sample handwriting in his evidence in chief, which, as one would note from Professor Jia’s red arrows, contained sample characters in which that characteristic could be observed.  This selective commenting is unsatisfactory, particularly as the dissimilarity in (1) is the most significant according to his opinion.  It was only when the petitioner’s counsel, Mr. Jeevan Hingorani, took him to some of the sample characters on the second page that Dr. Wong agreed they did contain a retraced stroke.  I note also Dr. Wong did accept that he could see the retraced stroke with curvature in the “fei” character in Document B, which he did not analyse.

107.In my view, Dr. Wong had not paid sufficient regard to the different formative conditions of the writing of the “fei” character in Documents A and B in his comparison and analysis of these disputed characters with the control handwriting.  I find the opinion of Professor Jia in this respect more cogent and convincing.  As pointed out by Professor Jia, there may be variations to the initial stroke of a character or radical, such as the first horizontal stroke of the upper radical (弗), the initial downward slanting stroke of the lower radical that resembled欠, due to one or more of a number of factors – the change in chirography or speed of writing, the different influence from the penmanship of the word preceding or the radical preceding.

108.Dr. Wong agreed in cross-examination that the “fei” character in Document A was written fluently.  He also accepted that the lower radical of the “fei” character in Document B was different from that in Document A.  But unlike Professor Jia, he did not analyse the “fei” character in Document B.  Whereas Professor Jia had considered the two “fei” characters in Documents A and B as having natural variations (自然變化) but not possessing characteristics of simulation or mechanical similarities (機械雷同), when compared to the known control handwriting of the 1^st respondent, Dr. Wong focused only on the “fei” character in Document A in his analysis and comparison of handwriting characteristics. I find this to be a serious drawback.

109.Mr. Hingorani referred me to these extracts in Questioned Documents by Albert S. Osborn, 2^nd ed., at pages 368 and 369 on natural variations:

“Another indication of genuineness in a holographic document or a considerable amount of writing, or in two or more disputed signatures, are certain natural variations in the details of the writing.  It is difficult for the inexperienced or unthinking examiner to understand that a certain extent of variation in a group of several signatures and variation in repeated words and letters in a continuous holographic document can be evidence of genuineness.  The forger does not understand this necessity for natural variation and, as nearly as he can, makes words and letters just alike.”

“It necessarily follows, therefore, that if the several lines of a disputed document, or several signatures under investigation, show these natural variations of writing of the same word or letter, all of course within the scope of variation of the genuine writing, this variation itself, surprising and paradoxical as it may appear, is as strong evidence of genuineness as the opposite condition is evidence of forgery.”

110.Natural variations, subtle and inconspicuous, were observed by Professor Jia in the two “fei” characters in Documents A and B that are within the scope of variation of the control handwriting, as set out in his first report and elaborated in his evidence.

111.I am inclined to agree with Professor Jia on his conclusion that the two inserted “fei” characters in Documents A and B were written by the 1^st respondent.  I reject Dr. Wong’s evidence in this respect.

112.Having arrived at that conclusion, I do not propose to subject the other aspect of the expert evidence (whether the last paragraph in the minutes was incorporated to the document after the parties had signed) to detailed analysis.  In contrast to his firm opinion on the authorship of the disputed character, and but for his opinion that the disputed “fei” characters were written by the 1^st respondent, Professor Jia opined that he could not rule out the possibility the last paragraph was inserted by photocopying, although he was inclined to think it more probable than not that the last paragraph was not inserted by photocopying.  Dr. Wong’s conclusion on this, as mentioned earlier, was that the evidence was insufficient to support an opinion whether the last paragraph was original or whether it was added by insertion.  In these circumstances, I do not think it would be a fruitful exercise to analyse the doubts cast by each side on the other’s opinion that had been expressed in somewhat guarded terms. 

If there was entitlement to bonus after the companies were incorporated

113.The record of the meeting on 23 August 1997 was not the only evidence relied on by the petitioner that the parties had agreed the Bonus Agreement was to continue after the incorporation of the companies.  There was also the evidence of the petitioner and Mr. Fung, which I accept, as to what had happened at that meeting.  I find on the totality of the evidence that an agreement was reached on 23 August 1997 that the Bonus Agreement was to continue after the relevant schools were taken over by the companies. 

114.In the circumstances, the 1^st respondent had wrongfully refused to perform the Bonus Agreement after the incorporation of the companies.  The petitioner was not paid bonuses for the subsequent school years from 1997/98 to 2002/03 in the total sum of HK$6,614,883.70.  I find unfairly prejudicial conduct in this respect in the affairs of Active Team and Advance Wise.

The correct accounting treatment for the payment of pre-incorporation bonuses

115.The respondents’ expert, Mr. Cheng, was of the opinion that the payment of bonuses was in the nature of directors’ drawings, as no salaries tax had been reported to the Commissioner of Inland Revenue for the payments received.  The fact that the amounts drawn were based on the calculation in the Bonus Agreement was irrelevant.  If the payments were treated as bonuses, they should have been recorded as expenses in the income statement of the companies concerned, but they were not, and salaries tax were not payable by the petitioner and the 2^nd respondent as a result.  Instead, the payments were recorded as dividends declared to the shareholders, and were duly approved by the petitioner and the 1^st respondent in the audit adjustments for the year ended 31 July 1999.  As the petitioner and the 1^st respondent are equal shareholders, the dividends paid should be shared equally.  He opined that the accounting entries were proper accounting treatment for the dividends declared and that Mr. Morrison would appear to have mixed up the nature and accounting entries of bonuses, drawings and dividends.

116.Mr. Ho agreed with Mr. Cheng.  The partnership and the companies are different entities, and the latter could not record the transactions of the partnership, which had ceased to exist.  The companies could not be treated as continuation of the partnership when the accounting entries came to be made.  Recording a partnership equity transaction in the books of other entities does not satisfy the criteria for recording such transactions under the current accounting practices and standards.  As the partnership had ceased to exist in 1999 when the pre-incorporation bonus payments were made, such payments were reduction of liabilities of the directors in the books of the companies.  The bonus payments should have been recorded either as expenses of the companies or as drawings of directors after the cessation of the partnership.  In either case, the payments should have been recorded in the actual amounts of the drawings, not on a 50/50 basis.

117.In essence, it was contended for the respondents that the bonuses were personal liabilities owed by the petitioner and the 1^st respondent to the petitioner and the 2^nd respondent and that the accounting treatment in the books of Advance Wise and Active team was proper. 

118.Payments under the Bonus Agreement were calculated on the tax-assessed profits.  Mr. Morrison reasoned that given the partners shared profits equally, it was reasonable that they should also share the payments under the Bonus Agreement equally, especially when the agreement made no reference to the partners sharing the payments disproportionately.  Further, payments under the Bonus Agreement were not expenses of the partnership but part of the partners’ drawings, made out of profits available to the partners.  By not having been paid the bonuses when the assets and liabilities of the partnership were injected at their net book values into the companies, the balances in total on the partners’ accounts, which became the shareholders/directors’ accounts, were greater than they should have been by the amount of the total unpaid bonuses. 

119.Dividends of a company represent an appropriation of profit rather than an expense charged against the profits of the company.  Mr. Morrison opined that just as it would be appropriate for the bonus payments to the petitioner and the 2^nd respondent when made under the partnership to be charged to the partners’ current accounts, since they were payments out of the tax-assessed profits and therefore partners’ drawings, so too the total amount paid out as pre-incorporation bonuses was similarly charged to the shareholders/directors’ accounts as drawings, since such payments were not an expense of the companies.  However, despite the substance of the arrangements between the parties had remained unchanged when the school businesses were taken over by the companies from the partnership, the drawings of the total bonus payments to the petitioner and the 2^nd respondent were not charged equally to the current accounts of the petitioner and the 1^st respondent.  Instead, the portion of the bonus payable to the petitioner (HK$2,548,907.35 for Advance Wise and HK$2,172,967.70 for Active Team) was charged to her shareholder/director’s account and the portion of the bonus payable to the 2^nd respondent (HK$1,019,562.94 for Advance Wise and HK$651,890.31 for Active Team) was charged to the 1^st respondent’s shareholder/director’s account.

120.As these amounts represented the unpaid entitlements of the petitioner and the 2^nd respondent under the Bonus Agreements while the schools operated under the partnership, it was appropriate that they were not treated as expenses of the company but charged as shareholders/directors’ drawings.  There was no need to declare a dividend out of the companies’ profits to pay the pre-incorporation bonuses, as the shareholders/directors’ accounts were overstated by the amount of unpaid bonuses.  It would have been possible to pay the unpaid bonuses by simply charging the amounts to the shareholders/directors’ accounts.  The dividends declared were in the exact amounts owing jointly to the petitioner and the 2^nd respondent for the pre-incorporation bonuses.  This constituted strong evidence that the unsettled liabilities under the Bonus Agreement were to be settled.  The mechanism of charging the shareholders/directors with disproportionate amounts of the total bonus payments was inconsistent with their 50:50 equity and profit-sharing relationship.  Mr. Morrison was of the opinion that it would be appropriate for the equity holders to bear such amounts equally, in view of the equal holding of the partnership and the Company and in the absence of any reference in the Bonus Agreement to disproportionate sharing by the equity holders.

121.In respect of bonus payments after the incorporation of the companies, dividends in the total amounts of the bonuses would have to be declared to the shareholders to discharge the obligations to pay bonuses to the petitioner and the 2^nd respondent under the Bonus Agreement.  Dividends declared would be settled by charging the shareholders/directors’ accounts on an equal basis and bonuses would be paid out of the dividends to the petitioner and the 2^nd respondent in the amounts they were entitled to receive as calculated under the Bonus Agreement.  By this arrangement, the bonus payments would be borne by the petitioner and the 1^st respondent equally.

122.I am inclined to agree with Mr. Morrison’s opinion, which was well reasoned and consistent with the arrangements under the partnership where profits were shared equally.  Notwithstanding that the partnership and the companies are separate legal entities, the intention of the parties, as determined by the agreement between them, should be appropriately reflected in the accounts of the companies concerned.

123.I find unfairly prejudicial conduct was made out in that the 1^st respondent had wrongfully refused to rectify errors in the accounts of Active Team and Advance Wise regarding the bonuses paid in 1999.  The petitioner had been underpaid HK$1,525,210.90 whereas the 1^st respondent had been overpaid that amount.

Miscellaneous fee

124.Under the Management Agreement, the miscellaneous fee income received at the beginning of the school semester would be regulated by a 60/40 treatment, with 40% treated as profit and 60% was deemed to be the cost borne by the party responsible for the management of the particular school.  I find as a matter of construction that no provision was made in the agreement for miscellaneous fee income received during the school semester.  According to the petitioner’s understanding, miscellaneous fee income comprised fees collected from students which were not tuition fees or disbursements, and would include income from the sale of books and uniforms, expenses for parties, registration fees and refreshment fees.  Her evidence here was not disputed by the 1^st respondent.

125.Two questions arose out of the miscellaneous fee income.

126.Firstly, how should the income received during the school semester be treated? The 1^st respondent contended that such income should be apportioned in the same way in accordance with the Management Agreement.  The petitioner’s position was that the party responsible for the management of the particular school should retain such income in its entirety.  She did not therefore make any apportionment of the income received after the commencement of the semester.  She did, however, agree in her evidence that in principle, the treatment of 60% cost and 40% profit should apply not just to the miscellaneous fee income collected at the beginning of the school semester but also to such income collected during or at the end of the semester, provided that both sides should adhere to this if this were the correct practice.  She alleged that the 1^st respondent did not adhere to this practice despite his avowed position and he had only reported the fee income received at the beginning of the semester, which leads to the second question – did he in fact apportion all the miscellaneous fee income received or only the income received at the beginning of the semester. 

127.The 1^st respondent’s expert, Mr. Cheng, opined in his report that according to the schedules provided by the petitioner, the 1^st respondent had not retained any miscellaneous fee income received and that he had reported all such income of the whole school years. 

128.The petitioner’s expert Mr. Morrison pointed out that this could not be correct from his examination of the statutory accounts of Wise Apex and gave one example relating to extra-curricular courses entitled “English Phonics Fun”.  Three further examples were given in his subsequent report showing other items of miscellaneous fee paid to South Harvest and not included in the audited accounts of Wise Apex for 2002. 

129.The expert engaged subsequently by the 1^st respondent, Mr. Ho, agreed that based on Mr. Morrison’s examples, the 1^st respondent had not declared all miscellaneous fee income and stated that all miscellaneous fee income received by South Harvest should be disclosed.

130.I am satisfied that the examples given by Mr. Morrison showed a practice on the part of the 1^st respondent of not reporting all miscellaneous fee income, contrary to his assertion.

131.Mr. Ho confirmed that he had not been provided with all the accounting records of South Harvest.  Some of the relevant accounting records would appear to have been destroyed in the fire at No. 57 in 2002, according to the letters of the 1^st respondent’s solicitors dated 23 October 2002 and of Johnny Chan & Co. Ltd. dated 25 April 2003.  It would not now be possible to investigate the total amount of miscellaneous fee income received by South Harvest, as part of the supporting documents had been destroyed by fire.  The petitioner had disclosed the amount of miscellaneous fee income received by Prime Concord during the school semester, which had not been apportioned earlier.  There was no suggestion that her accounting records in this respect were incomplete or inaccurate.

132.The petitioner has not sought relief for reimbursement of any miscellaneous fee income that the 1^st respondent had failed to report, on the premise that she should be allowed to keep the 40% profit of the miscellaneous fee income received by her management company during the school semester in the sum of HK$3,282,069.48.  I think that is a sensible approach.  So each side would keep the entirety of the miscellaneous fee income received by their respective management companies during the semester.

133.I find unfairly prejudicial conduct established against the 1^st respondent in respect of Advance Wise and Wise Apex in that it was unreasonable of him to require both parties to adhere to a practice of reporting all miscellaneous fee income received during the semester when he had failed or was not in a position to do so. 

Failure to pay rent to Richmond

134.Richmond was formed to hold and manage the premises leased to the schools at Nos. 49 and 57, which are under the management of the 1^st and 2^nd respondents, and to collect rent from these schools.

135.Up to August 2002, the monthly rent payable by Advance Wise (for No. 49) and Wise Apex (for No. 57) to Richmond was HK$180,000.00 and HK$150,000.00 respectively.  From August 2002, the monthly rent for both Nos. 49 and 57 was reduced to HK$120,000.00.

136.Rent had not been paid for No. 49 from October 2001 to February 2002.  For No. 57, rent had not been paid since March 2000.

137.The petitioner made repeated requests to the 1^st respondent to pay rent of these schools in April 2001, November 2001, May 2002 and June 2002.  Her requests were ignored. 

138.The 1^st respondent did not dispute the obligation to pay rent.  The reports and financial statements of Richmond filed with the Commissioner of Inland Revenue for the year ended 28 February 2003 showed under “accounts receivable” a sum of HK$7,290,000.00, which represented the outstanding rent due from Advance Wise for No. 49 (HK$2,100,000.00) and Wise Apex for No. 57 (HK$5,190,000.00).

139.Due to the persistent failure of the 1^st respondent to pay rent to Richmond, Richmond was unable to pay an instalment loan of HK$154,889.70 to Sin Hua Bank Limited on 15 May 2001.  The 1^st respondent’s solicitors wrote to the petitioner’s solicitors on 23 May 2001 to ask the petitioner how to deal with the matter.  The petitioner’s solicitors suggested in reply that the 1^st respondent should realise the debts owed to Richmond from the accounts receivable and from the amount due from director.  Nothing further was heard from the 1^st respondent.

140.Further, Mr. Fung discovered anomalies in the draft accounts prepared by the 1^st respondent for Richmond for the year ended February 2003.  The first draft accounts faxed to the petitioner on 3 November 2003 showed a rental income for the year of HK$2,770,000.00 in that the monthly rental of the schools was reduced to HK$80,000.00 from August 2002.  In the second draft accounts dated 10 November 2003, the rental income became HK$1,650,000.00 in that no rentals were charged to the schools from August 2002.  These mistakes and omissions were only rectified and the rental adjusted to HK$3,330,000.00 after Mr. Fung confronted the 1^st respondent about them in a letter dated 11 November 2003.

141.The failure to pay rent to Richmond was unfairly prejudicial conduct on the part of the 1^st respondent.

Diversion of funds of Richmond

142.From the accounts of Wise Apex and Richmond, the 1^st respondent would appear to have assumed liability to pay rent for No. 57 as he had credited the amount of rent payable by Wise Apex to Richmond to his current account with Wise Apex from November 1997 until February 2000.  Notwithstanding this, the 1^st respondent did not pay rent to Richmond and the amount of rent due was simply treated in the accounts of Richmond as an amount due from the 1^st respondent.  Thus, in effect, the 1^st respondent had diverted the rent payable by Wise Apex to Richmond.  He had not provided a proper explanation for this. 

143.The total amount of rent due from the 1^st respondent to Richmond from November 1997 to February 2000 was HK$4,110,000.00.

144.According to Richmond’s audited accounts as at 28 February 1998, there existed a sum of HK$1,726,072.00 in the joint directors’ account recorded as an “amount due to a director”.  In the audited accounts as at 28 February 1999, the “amount due to a director” had become nil.  When the petitioner asked the 1^st respondent to explain, he provided a note from Johnny Chan stating that the sum of HK$1,726,072.00 was set off against rental of HK$1,800,000.00 payable by the 1^st respondent to Richmond during the financial year of 1998/99.  This practice was wrong as the amount of HK$1,726,072.00 in the joint directors’ account was payable to both directors and the 1^st respondent was not entitled to dispose of it freely.  Besides, by setting off the said sum against the rental, the 1^st respondent was in effect getting Mr. Fung as the other director of Richmond to shoulder half of what he owed Richmond for rental.

145.It was only after the petitioner’s protests that a journal adjustment was made to the accounts of Richmond for the financial year of 1999/2000.  This recorded a sum of HK$2,310,000.00 which represented the rental due from the 1^st respondent from November 1997 to February 1999.  However, instead of booking the entire sum as due from the 1^st respondent, the amount was halved and booked as a sum due to each of the 1^st respondent and Mr. Fung.  Mr. Fung did not agree with this accounting treatment and repeatedly requested the 1^st respondent to reverse it but to no avail.  Hence, Mr. Fung refused to sign and approve the accounts for Richmond for the financial year ended 28 February 2003.

146.In respect of the rent payable by No. 57 for the financial years of 2000/01 and 2001/02 of HK$1,800,000.00 per annum, this was no longer booked as an “amount due by a director” but simply as “account receivable” in the audited accounts of Richmond.

147.In the draft accounts of Richmond for the year ended 28 February 2003 prepared by the 1^st respondent, the sum of HK$2,955,487.00 was described as a loan due from the 1^st respondent with no fixed term of repayment, security and interest.  There was no general meeting of Richmond to approve such loan to the 1^st respondent.  The difference of HK$4,110,000.00 and HK$2,955,486.85 being HK$1,154,513.15 had been credited to the director’s account of Mr. Fung in Richmond, as appeared in the schedule of distributable profits prepared by the petitioner in appendix 8 to the 1^st report of Mr. Morrison.

148.The total amount of rent due to Richmond up to the financial year of 2002/03 was HK$10,245,486.85.  Notwithstanding this large amount of outstanding rent due from Advance Wise, Wise Apex and/or the 1^st respondent, Richmond had not taken any steps to recover the outstanding sums, as it was in a state of deadlock.

149.This was unfairly prejudicial conduct in the affairs of Richmond.

Refusal to revise the Management Agreement

150.Under the Management Agreement, it was provided that the method for calculating income and expenditure of the schools under each party’s management should be reviewed and revised if there was an increase or decrease of more than 10% in the number of students enrolled.

151.On 14 June 2003, the petitioner proposed to the 1^st respondent that a meeting be held before 23 June 2003 to discuss revising the Management Agreement because the student numbers at Nos. 49 and 57 had dropped by more than 70% and 35% respectively for the school years from 1999/2000 to 2002/03, and there was no reason why the same amount of monthly management fee should continue to be paid to South Harvest.  As the 1^st respondent replied he was unable to meet with the petitioner in June or early July 2003, she proposed a meeting before the end of July 2003.

152.By the letter of his solicitors dated 25 July 2003, the 1^st respondent asked for a draft proposal from the petitioner for his approval before any proposed meeting, citing past experience in that a meeting without “pre-agreed agenda” would result in disagreement and quarrel.  He stated further that the Management Agreement should continue to apply until the parties had replaced this with a revised agreement.  Thus, in effect, the same amount of monthly management fee would continue to be paid to his management company.

153.In view of the 1^st respondent’s stance, the petitioner gave notice to him on 26 July 2003 to terminate the Management Agreement with effect from 16 August 2003, and that they should revert to the mode of operation before the agreement, namely, that all cheques for expenses should be signed by two persons and each party should account to the other for the actual expenses incurred.  The petitioner took the view that the 1^st respondent had made no genuine efforts to negotiate a revised agreement and was merely stalling for time in asking her to come up with a draft first. 

154.On 17 September 2003, the 1^st respondent proposed through his solicitors that the monthly management fee of No. 49 be reduced from HK$500,000.00 to HK$200,000.00 “for the time being until the final calculation is made at the end of the academic year”, but the management fee for No. 57 should remain at HK$500,000.00 a month.

155.Subsequent correspondence was exchanged from October 2003 to April 2004. The 1^st respondent remained adamant that the Management Agreement should continue on the same terms until they have agreed on a revised agreement. 

156.I agree with the petitioner that it was not reasonable for the 1^st respondent to insist on his management company being paid a fee of HK$500,000.00 per school despite the significant drop in student numbers over a number of years.  The budgeted expenses agreed pursuant to the Management Agreement were out of date and should not have continued to apply.  There was clear provision in the Management Agreement that the method of calculating the income and expenditure should be revised in this situation.  The 1^st respondent was stalling for time.  His insistence on the continuation of the Management Agreement and that Advance Wise and Wise Apex should continue to pay the same amount of monthly management fee to his management company was unfairly prejudicial conduct in the affairs of these companies. 

Refusal to renew the lease of No. 10

157.There was disagreement between the petitioner and the 1^st respondent regarding the renewal of the lease of No. 10 upon its expiry.  This arose after the petitioner had raised the need to revise the Management Agreement in June 2003. 

158.No. 8 and No. 10 have been connected structurally for more than ten years and are occupied by the kindergarten section of YPK.  The lease for No. 8 was due to expire on 31 August 2003, the lease for No. 10 was due to expire on 5 September 2003.

159.By a letter dated 17 May 2002, the petitioner had raised with the 1^st respondent the issue concerning the renewal of the leases for Nos. 8 and 10 on their expiry, and suggested it should be left to the decision of the party responsible for managing these schools.  From December 2002, the petitioner and the 1^st respondent exchanged correspondence on the renewal of the leases.

160.By 7 April 2003, the 1^st respondent did not object to renew the lease of No. 8 at a monthly rent of HK$130,000.00 for four years, with the landlord bearing renovation expenses of HK$250,000.00.  On 19 June 2003, the petitioner wrote to the 1^st respondent to inform him of the terms for the renewal of the lease for No. 10 for three years, also at a monthly rent of HK$130,000.00 and with the landlord bearing part of the renovation expenses.  On 25 June 2003, the 1^st respondent objected to the renewal of the lease for No. 10, claiming that the asking rent of HK$130,000.00 was “outrageous”, even though it was the same amount as the rent for No. 8, which he had accepted, and notwithstanding both premises are about the same in area.  He also asked the petitioner to seriously consider giving up the premises at No. 10 and using instead the premises at No. 49, which was under-utilised for the past two years.

161.The petitioner gave a detailed reply to the 1^st respondent on the same day, giving reasons why the lease of No. 10 should be renewed.  There were four connected classrooms in No. 10 that could be used as a hall when the partitions were removed; there was no hall in No. 8 or No. 14.  There was an area in No. 10 which was used as an open music room, a large covered playground and an even bigger open playground.  The facilities of YPK at No. 8 and No. 10 were important selling points in attracting students.  The scale and atmosphere of YPK would be greatly diminished if only No. 8 was to remain.  Further, the classrooms were full, and there was a limit on the number of students allowed under the accommodation permit for No. 8 and No. 14.  It was not possible to inform parents at such a late stage that students would be moved to other premises.  She also asked the 1^st respondent to inform her as soon as possible the under-utilised situation of the classrooms at No. 49 and No. 57.

162.On 30 June 2003, the 1^st respondent proposed to make available the entire morning session of No. 49 to solve the problem of classroom shortage.  The petitioner considered his proposal unworkable and informed him why.  It was necessary to alter the facilities of No. 49, which was a primary school, to make them suitable for a kindergarten.  It would be necessary to obtain approval for the conversion from the Education and Manpower Bureau (“the Bureau”) and other relevant government authorities.  It was not feasible to use the premises at No. 49 to accommodate a kindergarten in the morning session and a primary school in the afternoon session.  There would be administrative problems, and it would be too late to inform parents that some of the students would be moved to other premises. 

163.The 1^st respondent maintained through his solicitors on 25 July 2003 there was no restriction in the registration of No. 49 for the use of the premises as a kindergarten or primary school.  He asserted that there was no requirement for government approval provided there was no structural alteration.  Furthermore, in view of the dwindling number of students at No. 49, he was considering to discontinue the primary school after the coming school year.

164.The petitioner made enquiries with the Bureau on the said letter of the 1^st respondent’s solicitors and was told of the need to tender a proposal and other relevant information to the Bureau for the use of No. 49 as a kindergarten and that prior approval must be obtained.  On 1 August 2003, the petitioner invited the 1^st respondent to obtain the necessary approvals from the relevant departments before she would notify parents about the arrangement to move some of the students to No. 49.  She requested to renew the lease of No. 10 for another year to give the parties time to discuss the necessary arrangements for the conversion of No.49 into a kindergarten.

165.The 1^st respondent however maintained his objection to any renewal of the lease for No. 10.  On 6 August 2003, which was less than a month before the start of the new school year, he replied through his solicitors that both parties should formulate a proposal to seek approval from the Bureau.  He threatened to take legal action against the petitioner for signing a lease for No. 10.

166.The 1^st respondent raised an additional point why the lease for No. 10 should not be renewed, as only the ground floor was registered for use as a school.  I do not think there is substance in this.  As pointed out by Mr. Hingorani, what matters more is the permitted number of students to be accommodated in the school, and there is only a difference of 17 students between No. 8 (permitted accommodation of 216) and No. 10 (permitted accommodation of 199).

167.It was clearly not feasible to move the students to No. 49 for the school year that was due to start in September 2003, in view of the tight time frame.  The petitioner renewed the lease of No. 10 at a monthly rent of HK$125,000.00 for a fixed term of one year from 6 September 2003, to allow more time for deliberation.  It was not reasonable or in the interest of Advance Wise for the 1^st respondent to object to the renewal of the lease for No. 10.  His unreasonable refusal to renew the lease at No. 10 was unfairly prejudicial conduct in the affairs of Advance Wise.

Failure of Richmond to distribute dividends

168.The profits of Richmond were distributed up to 1998 only.  Since then, no dividends have been declared despite the accumulated net profits as shown in the audited accounts for the financial year of 2002/03 had amounted to HK$32,994,535.00.

169.On 16 October 2002, the petitioner gave notice to the 1^st respondent to convene a meeting on 6 November 2002 to discuss the distribution of profits for Richmond, but he did not attend.

170.The 1^st respondent’s refusal to distribute dividends for Richmond was unreasonable in the circumstances, and was unfairly prejudicial to the other shareholders of the company including the petitioner.

Occupation of No. 49 by the 1^st respondent

171.On 25 May 2004, the 1^st respondent gave notice to the Bureau that the primary school of YPK at No. 49 would cease operation on completion of the school term in July 2004.  He did so without the prior consent of the petitioner.  On 17 August 2004, the Bureau deleted YPK from the primary school lists for primary one admission in 2005.

172.The 1^st respondent had spent most of his time in running his own school in Zhongshan, China, and was frequently not in Hong Kong.  As mentioned earlier, student numbers at No. 49 had dropped by more than 70% for the school years from 1999/2000 to 2002/03.

173.From 14 September 2004 to December 2005, the petitioner had tried to re-open negotiations with the 1^st respondent to convert No. 49 for the use of a kindergarten or let the premises to third parties or use the premises for storage to alleviate the shortage of storage space for the schools at No. 8 and No. 10.  The 1^st respondent made no reply until his solicitors wrote on 16 December 2005, in which the petitioner was asked to confirm whether she proposed to use No. 49 to accommodate students of Nos. 8 and 10 or No. 14 and to provide an estimate of the costs for the intended removal and conversion.  On 17 December 2005, the petitioner asked for time to come up with a concrete proposal for his consideration and requested to use three to four rooms at No. 49 immediately as storage for Nos. 8 and 10.  On 31 December 2005, she wrote again to the 1^st respondent as no response was received and requested access to the premises for planning the conversion.  She also requested a meeting to discuss conversion and renovation of the premises.

174.The 1^st respondent ignored the petitioner’s attempts to discuss the use of the premises at No. 49.  He did not come up with any proposal as to how the premises should best be used.  He just went on to occupy the premises.  According to the photographs the petitioner caused to be taken between June 2005 and April 2006, No. 49 was used solely for parking the 1^st respondent’s car and the car of his employee.  The petitioner could not gain access to the premises.  She was left with no choice but to renew the tenancy of No. 10 on its expiry.

175.The 1^st respondent’s conduct was unfairly prejudicial in the affairs of Advance Wise and Richmond, in failing to put the premises to proper commercial use for the benefit of both companies.

Other complaints of unfairly prejudicial conduct

176.The petitioner made other complaints of unfairly prejudicial conduct against the 1^st respondent including the following: failing to submit details to the Bureau; insisting on a more expensive insurance policy with inadequate coverage; failing or refusing to meet with the petitioner.  In essence, the petitioner complained of the 1^st respondent’s apathy and indifference to school affairs after he had started to operate his own school in Zhongshan in 1994 and spent much of his time away from Hong Kong. 

177.For the school years of 2001 and 2002, the 1^st respondent failed to submit the details of No. 49 to the Education Department (before it was constituted as the Bureau) for the “Primary School Guide” despite having been reminded to do so by the petitioner’s staff.  The submission of details to the Education Department is a simple process and no fee would be charged.  The Guide is the only official guide published by the government annually and is an important source of information for parents in selecting primary schools for their children.  As mentioned earlier, the number of students enrolled at No. 49 dropped considerably since 1999/2000 and there was an all time low of only nine students enrolled for primary one in the school year of 2002/03.  In comparison, the schools managed by the petitioner still made substantial profits for these years despite the fall in birth rates and the changes in government education policy.

178.In mid 2002, the petitioner made repeated requests to the 1^st respondent to sign cheques to pay the insurance premium for Nos. 8, 10 and 14 and the 1^st respondent neglected to do so.  The outcome was that these schools were left uninsured for three weeks from 1 to 21 August 2002.

179.Further, in 2002 he insisted on subscribing to a more expensive insurance policy for Nos. 49 and 57 and refused to change to a policy with another insurer despite the petitioner pointing out to him that the existing policy was not a public liability insurance but only covered personal accidents of students up to HK$100,000.00 per claim, which was clearly inadequate and cost more than a public liability policy with a coverage of up to HK$5 million per claim.  The 1^st respondent declined to switch to another insurer as he took the view he had good relationship with the existing insurer and it was more important to maintain that relationship to facilitate the prompt settlement of claims. 

180.On many occasions, the petitioner had tried to discuss with the 1^st respondent other affairs of the companies and the schools apart from finalising accounts and distributing dividends.  He refused to meet with the petitioner or return her telephone calls.  On 19 October 2001, the 1^st respondent’s solicitors wrote to the petitioner’s solicitors stating that the 1^st respondent did not think any meeting with the petitioner could result in fruitful conclusion, and asked the petitioner to put any proposal she had in writing.  As a result, the petitioner had to resort to communicate with the 1^st respondent by correspondence.  This was highly unsatisfactory as decisions were often stalled over important matters which called for urgent or immediate attention (such as the changing government policy on primary one education, the significant drop in student numbers at No. 49, the impact of the SARS epidemic on the operation and revenue of the schools, the fire which broke out at No. 57 on 30 September 2002), or matters which required the consideration and agreement of the directors (such as Johnny Chan’s claims for outstanding fees in 2000 and 2001 against Active Team, Advance Wise and Wise Apex, the repair and maintenance of the premises at Nos. 8, 10 and 14, the late payment of tax by Advance Wise, the school fee increases at No. 57).

181.There were other residual matters of complaint.  The 1^st respondent refused to authorise the opening of an autopay account at a bank for the receipt of school fees despite reaching an agreement with the petitioner on this on 12 December 1997.  He withheld his consent in 2002 and 2003 to closing a long dormant bank account of YPK, thereby allowing monthly maintenance fees to accumulate.  He withheld his consent in May 2000 for Active Team to apply to a bank for a lower interest rate for the mortgage of its premises.  He refused to pay contractors for mandatory inspection works required by the government for the premises at Nos. 8, 10 and 14.  He insisted on engaging Johnny Chan & Co. as auditors for the companies, despite the petitioner’s dissatisfaction and complaints about the quality of their work.

182.I find that unfairly prejudicial conduct of the 1^st respondent was made out in respect of the above matters in the affairs of Active Team, Advance Wise and Wise Apex.

Conclusion on the petitioner’s complaints of unfairly prejudicial conduct

183.In summary, I find that the petitioner has established a case of unfairly prejudicial conduct against the 1^st respondent in respect of the affairs of Active Team, Advance Wise, Wise Apex and Richmond.

The 1^st respondent’s allegations of unfairly prejudicial conduct

184.The 1^st respondent’s allegations of unfairly prejudicial conduct on the part of the petitioner may be grouped under these heads:

(1)     bad faith and conflict of interest;

(2)     hidden classes; and

(3)     wrongful drawing of monies.

185.I will consider them in the order set out above.  I decline to go into other trivial complaints of the 1^st respondent.

Bad faith and conflict of interest

186.It was alleged that since 1994 or 1995, the petitioner had spent a lot of time in establishing a number of kindergartens by the name of “St. Lorraine English Kindergarten” in Yuen Long, Palm Springs in Wo Shang Wai, South Horizons in Ap Lei Chau and in four places in the Mainland including Shenzhen and Panyu.  Without prior consultation or consent of the 1^st respondent, the petitioner used the operation scheme and teaching technique of the York kindergartens in the St. Lorraine kindergartens.  She also represented the new kindergartens as part of the York kindergartens.  The 1^st respondent did not take any action, “for the sake of maintaining harmony and relationship”.

187.In about March 1998, without prior consultation or consent of the 1^st respondent, the petitioner planned to open a St. Lorraine kindergarten at No. 14 Stafford Road, Kowloon Tong, in close proximity to the York kindergartens at Nos. 8, 10 and 14 York Road.  The property at No. 14 Stafford Road was owned by the petitioner and Mr. Fung.  She made representations to parents that this new St. Lorraine kindergarten was a sister school of the York kindergartens, and made use of the staff and resources of the York kindergartens to promote her new school.

188.On four occasions in March and April 1998, the 1^st respondent’s investigators posing as parents were told by the staff of the York kindergartens that there was no vacancy at their kindergartens, but they could apply for admission to St. Lorraine at No. 14 Stafford Road and their applications could be processed through the York kindergartens.  Armed with this information, the 1^st respondent brought a derivative action against the petitioner, Active Team, Advance Wise and Wise Apex on 27 May 1998 in High Court Action No. 8625 of 1998.  He claimed an injunction to restrain the petitioner from passing off St. Lorraine as a sister school or otherwise connected with the York kindergartens and St. Nicholas School, and an inquiry as to damages. He also applied for an interlocutory injunction.

189.The petitioner asserted in defence that places at the York kindergartens had become grossly over-subscribed in about mid 1997.  There was a pressing need to find other schools to accommodate the serious overflow of students.  Her decision to let her property at No. 14 Stafford Road as a kindergarten was meant to provide a quick and reliable solution to the overflow problem.  She pointed to the fact that the 1^st respondent had first set up a school on his own in Zhongshan in 1994 and alleged that the first of the St. Lorraine kindergartens was set up only two years later, and that she had been operating these kindergartens with the knowledge and consent of the 1^st respondent.  She claimed she had not as yet come to any arrangement whether she should own any share in the kindergarten proposed to be set up at Stafford Road.  At the first hearing of the interim injunction application in June 1998, she gave an undertaking to the court not to inform any inquirer of the kindergarten at Stafford Road or to represent the latter as a sister school of the York kindergartens and St. Nicholas School.  She also cancelled the arrangement to let her property as a kindergarten and instructed estate agents to look for another tenant.

190.The proposed St. Lorraine kindergarten changed its name to Stafford English Kindergarten on 1 September 1998 and was registered with the Education Department on 11 September 1998.

191.On 25 November 1998, an order was made by consent that the High Court Action be discontinued against all defendants upon the term that the petitioner was to pay the 1^st respondent’s costs.  Later, in February 1999, the 1^st respondent agreed with the petitioner to waive the costs order in his favour and that each party was to bear his own costs.

192.The 1^st respondent has now brought up the incidents in 1998 and alleged that the petitioner’s conduct at the time was wrongful and had prejudiced his interest as a shareholder in Active Team, Advance Wise and Wise Apex.

193.The dispute concerning the petitioner’s activities at No. 14 Stafford Road had long been compromised.  Besides, it was completely stale.  It is not necessary to go into the petitioner’s evidence on this and the counter-allegations she made against the 1^st respondent of similarly representing his school in Zhongshan as a sister school of No. 49 and St. Nicholas, of using the teaching method of St. Nicholas School in his school without her knowledge or consent, and instructing staff of the Kowloon Tong Schools to work in his school.  I note further that when the over-enrolment problem of the York kindergartens was publicised by the press in early 1999 as mentioned below, the 1^st respondent agreed to rent places from Stafford English Kindergarten to house the excess students and on 23 February 1999, a document was signed by the 1^st respondent and Mr. Fung on behalf of the petitioner to record their agreement that each would have no objection to the other to operate their own schools.

194.I decline to find unfairly prejudicial conduct on the part of the petitioner on the above allegations.

Hidden classes

195.The 1^st respondent pointed to a headline newspaper report in February 1999 which stated that the York kindergartens at Nos. 14, 8 and 10 had secretly over-enrolled 13 classes with 300 students.  These schools were under the management of the petitioner, although the 1^st respondent was the supervisor of Nos. 8 and 10 at the time.  It was reported that seven unregistered classrooms were used to house the excess students and during inspection by the Education Department, the students were required to move at short notice to adjoining school premises or to hide in vacant music and computer rooms, putting at risk their safety and wellbeing.  The newspaper report would appear to have seriously damaged the reputation of the York kindergartens.

196.The 1^st respondent further alleged that the number of students reported by the petitioner to the insurance company would not have included the hidden classes.  Nor would they be included in the headcount of the student numbers twice a year in the calculation of the school fee income and the miscellaneous fee income under the Management Agreement, and this had caused prejudice to him.  He claimed that the petitioner had never accounted for the school fee and miscellaneous fee income of these hidden classes.

197.The 1^st respondent was prosecuted as the supervisor of two of the schools for the contravention of various provisions under the Education Ordinance, Cap. 279.  He claimed that although all schools in Kowloon Tong had over-enrolled students, he would not have been prosecuted and would have been dealt with by a warning letter from the Education Department but for the serious over-enrolment of the York kindergartens.  He suffered humiliation and fines were imposed.  He resigned as supervisor after the incident.

198.The petitioner denied that the 1^st respondent was not aware of the over-enrolment problem at the schools managed by her because No. 57, which was managed by the 1^st and 2^nd respondents, was likewise over enrolled at the time.  Besides, the respondents would have known from the annual headcounts of students under the Management Agreement and the audited accounts that the student number had exceeded the number in the permitted accommodation certificate issued by the Education Department.  She denied that the over-enrolled students were not included in the annual headcounts.

199.This incident of over-enrolment was seven years ago.  There was no suggestion of any repeated contravention.  This is again a stale complaint.  I reject the allegation that students in the hidden classes were not included in the annual headcounts by the petitioner.  I decline to find unfairly prejudicial conduct as would justify relief.

Wrongful drawing of monies

200.On or about 16 June 1997, the petitioner and the 1^st respondent had an argument over the accounts of the schools.  As a result, without consultation or consent of the 1^st respondent, the petitioner attempted to transfer HK$4,692,000.00 from the two school accounts at a bank to her own account by drawing a total of 782 cheques of HK$6,000.00 each, which was the maximum amount allowed for a cheque with a single signature.  When the bank alerted the 1^st respondent to this, he declined to confirm the cheques and countermanded payment.  The attempted drawing was made in the middle of the month and it was alleged that the total amount to be drawn was down to the last cent in the accounts.  The 1^st respondent complained that the petitioner had abused her power to sign cheques and attempted to put the operation of the schools to a complete halt.

201.The petitioner claimed that this matter had long been settled.  She said she was driven to issue cheques in that manner because the 1^st respondent was unwilling to return the sum of HK$4,692,000.00 owed to her.  Subsequently, he acknowledged that there was a debt of the said sum to her and consented to the return of this amount to her from the school bank accounts.  Two cheques were then issued in favour of the petitioner dated 9 July 1997 in the total sum of HK$4,738,431.00.  The amount covered by the two cheques was more than HK$4,692,000.00 because the latter figure was an approximate estimation subject to verification and final payment.

202.The 1^st respondent initially denied he had signed the two cheques, but there is no doubt from the bank statements produced by the petitioner that the cheques were paid.  He had clearly acquiesced to the payment of these cheques to the petitioner.  Further, it did not appear from the bank statements that the operation of the schools would have been paralysed even if the petitioner had withdrawn HK$4.6 million on 16 June 1997.

203.The 1^st respondent’s counsel sought to make mileage out of the inconsistencies in the petitioner’s evidence whether there was actual injection of cash into the schools of HK$4.6 million or merely some form of accounting entry which required adjustment.  I do not think anything of substance should turn on this.  The fact remains that HK$4.73 million was subsequently paid to her out of the school accounts, with the consent of the 1^st respondent.  There was clearly an agreement as the petitioner at the same time consented to an amount paid to the 1^st respondent in the sum of HK$1,300,578.00.  I also decline to find unfairly prejudicial conduct for this complaint.

Conclusion on the 1^st respondent’s complaints of unfairly prejudicial conduct

204.In summary, I find that the 1^st respondent has failed to establish a case of unfairly prejudicial conduct against the petitioner in respect of the affairs of Active Team, Advance Wise, Wise Apex and Richmond.

The appropriate reliefs

205.As the petitioner has established unfairly prejudicial conduct on the part of the 1^st respondent in respect of each of the companies, the court would have power to grant relief under section 168A.  There is no doubt about the width of the statutory language of s.168A(2).  The court may, with a view to bringing to an end the matters complained of, grant an injunction, order a derivative action to be brought, appoint a receiver or manager, or make such other order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company.  As stated by Lord Scott of Foscote, NPJ in Re Chime Corporation Ltd. [2004] 3 HKLRD 922 at 940, paragraph 39:

“The view has been expressed in relation to ss.459 and 461 of the United Kingdom’s Companies Act 1985, under which the court ‘may make such order as it thinks fit for giving relief in respect of the matters complained of’ (s.461(1)), that ‘... the greatest possible flexibility was intended by the legislature to be given to the courts’ (per Lindsay J in Re Little Olympian Each Ways Ltd [1994] 2 BCLC 420 at p.424). Lindsay J said that the history of the legislation, from s.210 of the Companies Act 1948 down to ss.459 and 461 of the 1985 Act, was:

‘... at least consistent with there having been engendered in the legislature by 1985 a sense that the thing to do was to give a very wide jurisdiction and to let the courts get on with it.’

The same could perhaps be said of s.168A.”

206.The petitioner seeks the following reliefs:

(1)     a full account of the assets and liabilities of Active Team, Advance Wise, Wise Apex and Richmond is to be taken by an independent valuer appointed by the court and the independent valuer is to value the shares held by the 1^st respondent in Active Team and Advance Wise and the shares held by the petitioner in Wise Apex;

(2)     the petitioner is to purchase the 1^st respondent’s shares in Active Team and Advance Wise at the price as valued by the independent valuer;

(3)     the 1^st respondent is to purchase the petitioners’ shares in Wise Apex at the price as valued by the independent valuer;

(4)     an independent surveyor is to be appointed by the court to give a valuation of the market price of the properties held by Richmond at Nos. 49 and 57 Cumberland Road;

(5)     the petitioner is to purchase No. 49 Cumberland Road at the price as determined by the independent surveyor;

(6)     the 1^st and 2^nd respondents are to purchase No. 57 Cumberland Road at the price as determined by the independent surveyor;

(7)     the 1^st respondent is to pay to Richmond HK$2,955,486.85 (being the rental of HK$4,110,000.00 due from the 1^st respondent to Richmond from November 1997 to February 2000, less the amount of HK$1,154,513.00 credited to the director’s account of Mr. Fung in Richmond) or such sum as the court may found due on taking the account in (1) above, with interest at such rate and for such period as the court may think fit;

(8)     Advance Wise is to pay to Richmond the sum of HK$2,100,000.00 (being the rent due for No. 49 Cumberland Road from October 2001 to February 2003) or such sum as the court may found due on taking the account in (1) above, with interest at such rate and for such period as the court may think fit;

(9)     Wise Apex is to pay to Richmond the sum of HK$5,190,000.00 (being the rent due for No. 57 Cumberland Road from March 2000 to February 2003) or such sum as the court may found due on taking the account in (1) above, with interest at such rate and for such period as the court may think fit;

(10)   the final entitlements of the petitioner and the 1^st respondent be calculated taking into account the adjustment of bonus payments for the school years of 1994/95, 1995/96 and 1996/97 and that the dividends of Active Team, Advance Wise, Wise Apex and Richmond be determined and distributed to their shareholders up to the date of valuation of the shares;

(11)   the 1^st respondent is to resign as a director of Active Team and the school manager of No. 14;

(12)   the 1^st respondent is to resign as a director of Advance Wise and the school manager of Nos. 8, 10 and 49;

(13)   the petitioner is to resign as a director of Wise Apex and the school manager of No. 57;

(14)   a declaration that all intellectual property rights in the name of “York English and Chinese Kindergarten” have been vested in Active Team since its incorporation on 10 January 1997;

(15)   a declaration that all intellectual property rights in the name of “York English Primary School and Kindergarten” have been vested in Advance Wise since its incorporation on 21 March 1997, and that neither the petitioner nor the 1^st respondent has any surviving interest in that name following the dissolution of YPK (Kwai Chung) in 1998;

(16)   a declaration that all intellectual property rights in the name of “St. Nicholas English Primary School” have been vested in Wise Apex since its incorporation on 27 January 1997;

(17)   a declaration that the petitioner and the 2^nd respondents be entitled to the outstanding bonuses as per the Bonus Agreement from the school year of 1997/98 until the date of the valuation of the shares as determined by the court;

(18)   a declaration that the Management Agreement has been terminated on 16 August 2003;

(19)   each of the petitioner and the 1^st respondent is to bear the cost and keep all the miscellaneous fee income irrespective of when during the school semester the income was received;

(20)   the 1^st respondent is to reimburse Advance Wise for the rental of No. 49 since the suspension of the primary school of YPK at No. 49;

(21)   a declaration that the rental of No. 10 should be included as an expense of Advance Wise; and

(22)   the 1^st respondent is to pay interest on the net amount due to the petitioner, and the amount to be repaid by him to the companies after taking into account the Management Agreement, the Bonus Agreement, and the adjustments to the accounts.

207.The 1^st respondent did not oppose the reliefs sought in (1) to (6).  It is necessary to fix a date for valuing the shares in the three companies and the two properties held by Richmond.  No buy-out relief was sought as regards the shares in Richmond.  The petitioner would appear to be content with an order that provisions be made for the shareholders to purchase the two properties of Richmond.

208.For the reliefs sought in (7) to (9) regarding the payments to be made to Richmond, the 1^st respondent did not dispute the amounts to be paid by Advance Wise (HK$2,100,000.00) and Wise Apex (HK$5,190,000.00).  He objected to paying interest on any of the amounts in (7) to (9), as the transactions of rentals did not involve cash payments to Richmond but were put through in his accounts with Richmond and Wise Apex and the accounting treatment of these transactions in the books of the companies was approved by the directors.  He also objected to paying interest on the net amount due to the petitioner and the amount he is to repay to the companies as sought in (22).

209.The 1^st respondent did not oppose the relief in (10) for determination of the dividends and distribution of the final entitlements, in the event that the court should rule against him that the accounting treatment of the bonus payments for the school years of 1994/95 to 1996/97 was not proper and that adjustments should be made.

210.The reliefs sought in (11) to (16) were not opposed.

211.It followed from the substantive grounds of opposition advanced on behalf of the 1^st respondent that the reliefs in (17) to (21) were opposed.  As I have already made findings against the 1^st respondents on the bonus payments and the miscellaneous fee income, there would be relief in terms of (17) and (19).  

212.The relief sought in (18) may be dealt with shortly.  On 26 July 2003, the petitioner gave notice to the 1^st respondent to terminate the Management Agreement with effect from 16 August 2003.  This agreement was not for a fixed period with no right of termination by notice.  In such circumstances, one party could give reasonable notice of termination to the other party.  There was no suggestion that the period of notice given by the petitioner was unreasonable or inadequate.  I find that the Management Agreement was validly and effectively terminated from 16 August 2003.  The consequence of this is that all income and expenditure of the Kowloon Tong Schools would be shared and borne by the petitioner and the 1^st respondent on an equal basis from 16 August 2003.  I will make the declaration sought in (18).

213.The outstanding matters that require determination concerning the reliefs sought would be dealt with in the order set out below:

(i)      the amount of distributable profits to the shareholders being their final entitlements (the relief in (10));

(ii)     whether interest should be awarded (the reliefs in (7) to (9) and (22));

(iii)    the date of valuation of the shares and the properties (the reliefs in (1) to (6));

(iv)    if the 1^st respondent should reimburse Advance Wise for the rental of No. 49 since the suspension of the school at No. 49 (the relief in (20));

(v)     if the rental of No.10 should be included as an expense of Advance Wise (the relief in (21)); and

(vi)    costs.

The amount of distributable profits to the shareholders

214.The total amount of distributable profits of the Kowloon Tong Schools since the incorporation of the three companies in 1997 until the financial year of 2002/03 was HK$137,238,242.00.  As I have found in favour of the petitioner on the bonus payments and the miscellaneous fee income, it would follow that the amount of distributable profits would be as worked out by the petitioner.

215.According to the petitioner’s calculation, the respective amounts which ought to be paid to the petitioner and the 1^st respondent as reimbursement under the Management Agreement for seven years commencing from 1996/97 to 2002/03 would be HK$39,644,354.79 and HK$22,596,075.99 respectively, making a total of HK$62,240,430.78.

216.After providing for the said sum of HK$62,240,430.78 and the sum of HK$9,130,036.21 representing the outstanding bonus payable to the petitioner and the 2^nd respondent under the Bonus Agreement from the accumulated profits of HK$137 million odd, there would remain the amount of HK$65,867,775.01 available for distribution between the petitioner and the 1^st respondent on an equal basis.

217.To calculate the net amount that each party would be entitled to receive from the companies, the current account of each maintained with the companies would need to be examined to ascertain what each has owed to the companies.

218.As at 31 July 2003, there was a debit balance of HK$67,332,050.10 on the current accounts of the petitioner and Prime Concord, and a debit balance of HK$61,427,723.90 on the current accounts of the 1^st respondent and South Harvest.  After the debit balances on their current accounts are set off against their respective shares of distributable profits in Active Team, Advance Wise and Wise Apex, the net amount payable to the petitioner by the companies is HK$11,861,075.90, whereas the 1^st respondent would have to repay the companies HK$3,382,607.90.  So there will be an order to that effect for the relief sought in (10), insofar as Active Team, Advance Wise and Wise Apex are concerned.

Whether interest should be awarded

219.These are the questions relating to interest:

(i)      whether Advance Wise and Wise Apex should pay interest on the outstanding rent of HK$7,290,000.00 due to Richmond (the reliefs sought in (8) and (9)), and, if so, for what period and at what rate or rates;

(ii)     whether the 1^st respondent should pay interest on HK$2,955,486.85 (the relief sought in (7)) being the amount due to Richmond, and, if so, for what period and at what rate or rates; and

(iii)    whether the petitioner should be entitled to be paid interest by the 1^st respondent on her final entitlement (HK$11,861,075.90, the relief sought in (10)) and whether the 1^st respondent should pay interest on the final amount he owed to the companies (HK$3,382,607.90, the relief sought in (10)).

220.Mr. Law accepted that it is within the jurisdiction of the court to award interest on the sums found due, but submitted that the discretion should not be exercised to order the 1^st respondent to pay interest on any of the amounts he is ordered to pay to any of the companies or to the petitioner for the reasons mentioned earlier.

221.Mr. Hingorani submitted that the 1^st respondent should pay interest on the final sum owed to the companies.  It is within the discretion of the court to award interest to give the oppressed shareholder what is in effect money compensation for the injury done to that shareholder, citing Dynasty Pty. Ltd. & Ors. v. Coombs [1996] 138 ALR 64 at 85.

222.I do not think it material that there was no agreement between the parties if interest was to be paid on outstanding sums in the directors’ accounts.  Here, the petitioner had long been denied her bonuses due to the 1^st respondent’s wrongful refusal to perform the Bonus Agreement.  Further, the 1^st respondent had refused to rectify the improper accounting treatment of the pre-incorporation bonuses.  Last but not least, the petitioner had been denied the dividends which should have been declared and distributed, due to the 1^st respondent’s refusal to finalise the accounts according to the Management Agreement, and his unreasonable demand that the petitioner should first accept the accounts of the Kwai Chung Schools.  I agree with Mr. Hingorani that an appropriate case is made out for the award of interest to be borne by the 1^st respondent in respect of (iii).

223.I see no reason not to award interest in respect of (ii).  There was no good reason why Richmond should be kept out of HK$2,955,486.85, alleged to be an interest-free advance to the 1^st respondent with no fixed term of repayment.  Likewise, for the rent owed by Advance Wise and Wise Apex to Richmond, interest should be paid in the ordinary way.

224.In respect of all items of interest awarded, they should run from the date of the presentation of the petition at the prevailing judgment rate until payment.

Date of valuation of the shares and the properties

225.Mr. Hingorani submitted that the appropriate date of valuation of the shares of Active Team, Advance Wise and Wise Apex is the date the petition was presented, being 17 September 2004, that being the time when the petitioner crystallised her position in claiming to be entitled to cease association with the 1^st and 2^nd respondents in the companies, and was prima facie a convenient date to value the shares (Re Tai Lap Investment Co. Ltd. [1998] 4 HKC 438 at 444B).  All the audited accounts up to the date of the petition have been prepared and placed before the court; the accounts as at this date are more reliable as there is lesser risk of artificial adjustment by either party.  Further, several events occurred before 2004, which marked a clear divergence in the direction of the companies and the business decisions made: in August 2003, the 1^st respondent made his first objection to the continuation of the Bonus Agreement, he insisted on the continuation of the Management Agreement on the same terms notwithstanding the significant drop in student numbers, and he objected to the renewal of the lease of No. 10.

226.Mr. Hingorani submitted it would not be fair to adopt a later date for valuation, as the 1^st and 2^nd respondents should not enjoy the profits due to the hard work of the petitioner in subsequent years (In re London School of Electronics Ltd. [1986] 1 Ch 211 at 224H to 225B).  The 1^st and 2^nd respondents were heavily involved in running their own school in Zhongshan, they had shown apathy and disinterest towards the schools in Hong Kong under their management.  The profits made by the Kowloon Tong Schools were at a low in 2004, due to the poor performance in local economy at the time.  If the financial position of the schools had improved since then, it would be due entirely to the efforts and hard work of the petitioner. 

227.It was further contended that it would not be appropriate to adopt an earlier date for valuation, as moving the valuation date before the occurrence of the unfairly prejudicial conduct would cause injustice.  The purchase price would fail to account for the unfairly prejudicial conduct committed by the 1^st respondent. 

228.As for the date of valuation of the properties of Richmond, Mr. Hingorani submitted that the date of valuation should follow that of the valuation of shares of the other three companies, given that the properties are an indispensable part of the schools.

229.Mr. Law submitted that it would be fairer to use the date that the order is made as the date of valuation, as the schools are going concerns and prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased (In re London School of Electronics Ltd., supra. at 224A to B).  There was no allegation that the 1^st respondent had channelled money away from the schools.  He contended that if the court should find that the petitioner would be entitled to be paid bonuses under the Bonus Agreement after the companies took over the schools, she would be rewarded for her hard work from the bonus payments anyway, and the force of the argument that the 1^st respondent should not reap the benefits of her subsequent hard work would be weakened. 

230.The overriding requirement for choosing a date of valuation is that it should be fair on the facts of the particular case (In re London School of Electronics Ltd., supra. at 224B).  The court has to perform a balancing exercise.  I am persuaded by Mr. Hingorani that the date of the valuation of the shares of the three companies and the properties of Richmond should be the date of the presentation of the petition.  The fact that the petitioner would receive bonuses under the Bonus Agreement for the subsequent years does not, in my view, justify deferring the date of valuation to a later date.

231.Mr. Hingorani also submitted that for the valuation of the properties of Richmond, directions should be given to the valuer that the valuation should be made on the basis that they are to be used as kindergartens, given that the properties are intended for such use.  So consideration should be taken of their locations as kindergartens, their permitted student accommodation numbers, the fact that No. 57 is fully fitted for use as a kindergarten, and the money needed to convert or renovate No. 49 to be used as a kindergarten.  Under the reliefs sought, the petitioner is to purchase No. 49 and the 1^st and 2^nd respondents are to purchase No. 57.

232.Mr. Law argued to the contrary.  The properties should be valued on the open market value, no regard should be had to the actual or intended use by the parties, as the premises are not limited to use as a kindergarten. 

233.Insofar as the properties of Richmond are to be sold to its shareholders, they should be sold at a fair open market value.  I am not persuaded that special consideration should be given to the actual or intended use of the properties by the petitioner or the 1^st and 2^nd respondents.  So I decline to make any direction on the lines as proposed by Mr. Hingorani.

If the 1^st respondent should reimburse Advance Wise for the rental of No. 49 since the suspension of the school

234.Advance Wise remained as the tenant of Richmond at No. 49 after the school was suspended.  I have found the 1^st respondent’s conduct unreasonable in declining to put the premises to any proper commercial use for the benefit of Advance Wise and Richmond.  It would be appropriate to order the 1^st respondent to reimburse Advance Wise for the rental the latter would have to pay to Richmond.  However, I would not order such payment to run from the suspension of the school at No. 49 in July 2004.  I would allow for the lapse of a reasonable period of time before the 1^st respondent should be made liable.  Taking into account the exchange of correspondence between the parties, as mentioned earlier, I order the 1^st respondent to make reimbursement of rent to Advance Wise from 1 January 2006.

If the rental of No.10 should be included as an expense of Advance Wise

235.The petitioner seeks a declaration that the rental of No. 10 be included as an expense of Advance Wise.  I have found that the petitioner was justified in renewing the lease at No. 10.  I make the declaration sought.  I understand the rental of No.10 had already been included in the audited accounts of Advance Wise, the 1^st respondent has not disputed this sum, and there is no need to make further adjustments to the accounts for this item.

Costs

236.The petitioner seeks an order that the 1^st and 2^nd respondents do pay her costs of the petition, and requests a special direction to ensure that the costs of the 1^st and 2^nd respondents should not be paid out of the companies.  I think it would be appropriate to so order, having found in favour of the petitioner on the complaints in her petition.  So there will be an order nisi to that effect.

237.The petitioner also seeks an order of costs in her favour on a more generous basis of taxation for these reasons.  The 1^st respondent chose not to respond to the bulk of the petitioner’s allegations.  He filed his 5^th affirmation and obtained an accounting report from his substitute expert Mr. Ho at an extremely late stage, the petitioner had to incur additional costs to answer his allegations.  There were also complaints of ambush tactics by the other side at trial.

238.I have given this matter anxious consideration.  In the end, and not without misgiving, I decline to depart from costs on a party and party basis. 

Orders

239.I grant all the reliefs sought in (1) to (22), subject to the qualifications and rulings mentioned in the foregoing paragraphs.  A draft order should be drawn up for the approval of the court.  I will give liberty to apply generally.

240.For the appointment of an independent valuer and an independent surveyor, if the parties are unable to agree on these appointments within 14 days hereof, the parties are to seek directions by letter.

Mr. Jeevan Hingorani and Miss Theresa Low, instructed by Messrs. J. Chan, Yip, So & Partners, for the Petitioner

Mr. Dennis Law and Mr. Lawrence Cheung, instructed by Messrs. Howell & Co., for the 1^st and 2^nd Respondents