ANTHONY JAMES HATTON v DOROTHY JANE FURNESS

HCMP 838/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 838 OF 2007

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BETWEEN

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HCMP 839/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 839 OF 2007

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BETWEEN

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HCMP 840/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 840 OF 2007

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BETWEEN

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HCMP 842/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 842 OF 2007

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BETWEEN

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HCMP 843/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 843 OF 2007

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BETWEEN

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HCMP 844/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 844 OF 2007

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BETWEEN

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HCMP 845/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 845 OF 2007

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BETWEEN

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HCMP 846/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 846 OF 2007

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BETWEEN

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HCMP 847/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 847 OF 2007

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BETWEEN

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HCMP 848/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 848 OF 2007

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BETWEEN

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HCMP 849/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 849 OF 2007

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BETWEEN

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HCMP 850/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 850 OF 2007

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BETWEEN

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HCMP 851/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 851 OF 2007

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BETWEEN

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(Consolidated by the Order of The Honourable Madam Justice Kwan dated 31 May 2007)

HCMP 1208/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1208 OF 2007

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BETWEEN

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HCA 2712/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2712 OF 2006

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BETWEEN

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Before: Hon Kwan J in Chambers

Date of Hearing: 12 October 2007

Date of Handing Down of Decision: 26 October 2007

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D E C I S I O N

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The applications

1.  The applications before me are three in kind, to strike out various petitions presented under section 168A of the Companies Ordinance, Cap. 32, to amend these and other petitions, and to consolidate all these petitions with High Court Action No. 2712 of 2006 (“the High Court Action”).

2.  The striking out applications are brought by Dorothy Jane Furness and Raphael Homer Echaluce, who are a married couple. They have also brought the applications for consolidation. They are the 1^st and 2^nd respondents in the petitions under section 168A, and the 1^st and 2^nd defendants in the High Court Action. I shall refer to them as “the respondents”.

3.  The amendment application is brought by Anthony James Hatton or Yearich Limited (“Yearich”), who presented the petitions. Yearich is beneficially owned by Mr. Hatton. In this decision, Mr. Hatton or Yearich shall be referred to as “the petitioner”.

4.  The 3^rd respondent in the petitions, Stephen Smout, did not take an active part in the proceedings or in the present applications. He is joined as a nominal respondent as he is affected by the unfairly prejudicial conduct alleged in the petitions.

The progress of the 14 petitions

5.  On 7 May 2007, the petitioner presented 13 petitions under section 168A in respect of each of these companies:

6.  The contents of the petitions are substantially the same. At the first directions hearing of these petitions on 31 May 2007, I made an order that all 13 petitions be consolidated and be heard together. I also gave directions that each of the petitions is to stand as the points of claim, that the respondents are to file consolidated points of defence and evidence in opposition, and other consequential directions.

7.  On 26 June 2007, the petitioner and Rustem Limited (“Rustem”) presented an additional similar petition under section 168A, bringing the total number of petitions to 14. The proceedings number and the name of the subject company are as follows:

8.  No objection was raised to any of the petitions by the respondents when the 13 petitions were consolidated. It was only at the second directions hearing on 11 July 2007 that they indicated objections would be taken. In view of that, I did not give directions for filing pleadings and evidence in the petition concerning Sparkling Wine. On 25  July 2007, the respondents issued their summonses in the consolidated petitions and in HCMP No. 1208 of 2007 to strike out the whole of the petitions for 11 companies. The only companies that are not the subject of the strike out applications are Step By Step, Step Up and New Success.

9.  The strike out applications were made under Order 18 rule 19(1) of the Rules of the High Court and the inherent jurisdiction of the court, on the grounds that the petitions disclose no reasonable cause of action, or are frivolous or vexatious, or otherwise an abuse of process of the court. The respondents filed affirmations in support of the application on 25 July 2007 and a corrective affirmation on 15 August 2007. The petitioner filed an affidavit in answer on 8 August 2007.

10.  On 26 June 2007, the same day when the petition for the 14^th  company was presented, the petitioner issued a summons in the consolidated petitions to amend each of the 13 petitions. As the proposed amendments have already been incorporated in the last of the petitions filed on 26 June 2007, it is not necessary to amend the petition for Sparkling Wine. On 14 August 2007, I ordered the amendment application to be heard with the strike out applications, and the summonses issued by the respondents on 6 July 2007 to consolidate the consolidated petitions, HCMP No. 1208 of 2007, and the High Court Action.

11.  It would be convenient to consider the strike out applications first.

The 19 companies

12.  Save for Insomnia Singapore and Sparkling Wine, the companies which are the subject of the petitions were all incorporated in Hong Kong and have common beneficial owners. The individuals are Mr. Hatton, Mr. Smout, and Ms. Furness or Mr. Echaluce, each owning one-third of the issued shares. In some of the companies, the shares are held by separate companies for each – Yearich for Mr. Hatton, Mostop Limited for Ms. Furness, and Craigside Company Limited for Mr. Smout. In the case of Insomnia Singapore, a Singaporean was made a fourth shareholder but this person only holds the shares on trust for Mr. Hatton, Mr. Echaluce and Mr. Smout. In the case of Sparkling Wine, a company incorporated in the British Virgin Islands, all the shares are held by Rustem which holds as nominee or trustee in the proportion of one-third each for Mr. Hatton, Ms.  Furness and Mr. Smout.

13.  Save for Insomnia Singapore, the other 13 companies all have corporate directors.

14.  The 14 companies are among 19 companies in which the shareholding in each is owned beneficially in equal one-third shares as described above. I do not know the reason why petitions have not been presented for the remaining five companies.

15.  The 19 companies are not a “group of companies” as defined in section 2 of Cap. 32. The statutory definition for a “group of companies” is “any 2 or more companies or bodies corporate one of which is the holding company of the other or others”. In section 2(7), it is provided that “a reference in this Ordinance to the holding company of a company shall be read as a reference to a company of which that last-mentioned company is a subsidiary”. In section 2(4), it is provided that for the purpose of Cap. 32, a company shall be deemed to be a subsidiary of another company if (a) that other company controls the composition of the board of directors of the first-mentioned company, or controls more than half of the voting power of the first-mentioned company, or holds more than half of the issued share capital of the first-mentioned company; or (b)  the first-mentioned company is a subsidiary of any company which is that other company’s subsidiary.

16.  Here, the 19 companies hold no shares in one another and none are subsidiaries of a common holding company, so they are not a “group of companies” as defined in Cap. 32.

17.  The 14 companies that are the subject of petitions may be categorised in this way:

(1)     the management company – Step By Step;

(2)     the companies holding bar restaurants – Step Up, Step Further, New Success, and Insomnia Singapore;

(3)     the companies holding properties – Glory Sun, Step Onward, New Sun, and Excel Sun;

(4)     the company holding intellectual property rights – Sparkling Wine; and

(5)     the shelf companies – Rich Sun, Harbour Sun, Gain Sun, and Step Higher.

The companies holding bar restaurants

18.  Four bar restaurants are operated by each of these four companies. They are in Wanchai, Lan Kwai Fong, Singapore and Tsim Sha Tsui and are as follows:

19.  The respondents only seek to strike out the petitions for Insomnia Singapore and Step Further.

The companies holding properties

20.  According to the petitions, Mr. Hatton, Mr. Smout, Ms.  Furness and Mr. Echaluce had orally agreed that the profits of their companies should not be distributed by dividend but re-invested in business with a view to expansion and to maintain sufficient working capital. Further, it was orally agreed that, where possible, the premises of each bar restaurant should be purchased to provide security for the business and, where possible, premises of other bar restaurants operated by successful competitors should be purchased.

21.  Four properties are held by each of these four companies and are as follows:

22.  The respondents seek to strike out the petitions for all four companies holding properties.

The shelf companies

23.  As mentioned above, the four shelf companies are Rich Sun, Harbour Sun, Gain Sun, and Step Higher. In each of the petitions, it is pleaded that they were established as shelf companies to purchase potential properties in Hong Kong and that, to date, none of these companies own any property or other assets.

24.  The respondents seek to strike out the petitions for the four shelf companies.

Step By Step

25.  Step By Step, which was established in 2000 as the centralised management company, is not the subject of any strike out application.

26.  According to the petitions, it is responsible for managing and supervising the business affairs of each of the 19 companies, and managing and employing all personnel in the operation of each of the four bar restaurants. Step By Step entered into management agreements with Step In Limited (not the subject of any petition), Step Up, New Success and Insomnia Singapore.

27.  As for the other companies, it is pleaded that although there are no formal management agreements, Step By Step has managed the other companies on substantially the same basis in that:

(1)     it manages all the income and expenditure of the 19 companies;

(2)     it employs a third-party accountancy firm to prepare accounting records and management accounts for all the companies;

(3)     it employs a third-party secretarial firm to provide company secretarial services to each company;

(4)     it employs a third-party auditor to prepare annual audited financial statements for each company;

(5)     it is responsible for rent collection and payment, and arranges mortgage finance for the properties held by the property-holding companies; and

(6)     it attends the incorporated owners meetings for each of the properties held, and liaises with the building management company relating to each property.

28.  Between May 2000 and May 2006, Ms. Furness was employed by Step By Step as an executive and was the operations director of the bar restaurants. From May 2000 to December 2006, Mr. Echaluce was employed by Step By Step as an executive and was the musical director, responsible for the musical entertainment in the bar restaurants.

Sparkling Wine

29.  Sparkling Wine holds the intellectual property rights used in the design and operation of the bar restaurants. It owns the concepts of “Dusk Till Dawn”, “insomnia” and “All Night Long” and has registered the concepts of “Dusk Till Dawn” and “insomnia” as trademarks in 40  jurisdictions. It has entered into royalty agreements with each of the four companies operating bar restaurants.

The complaints in the petitions

30.  The complaints of unfairly prejudicial conduct in each of the petitions are identical and may be summarised as follows.

31.  The respondents were de facto directors of each of the companies for which petitions were presented and owed fiduciary duties to each company.

32.  From at least July 2004 to May 2006, Ms. Furness, with the knowledge and complicity of Mr. Echaluce, misappropriated substantial funds from Step Up and New Success, the operators of two of the bar restaurants. She was dismissed summarily by Step By Step on 12 May 2006, when the misappropriation of monies was discovered.

33.  In late 2004, the respondents established a competing bar restaurant in secret, called “Sticky Fingers”, in Tsim Sha Tsui East. Its ownership by the respondents was not discovered by the petitioner until October 2006.

34.  In March 2007, they were appointed as directors of Mad Dogs Wanchai Public House Limited, which operated a bar restaurant next door to “Dusk till Dawn” in Jaffe Road, Wanchai and its name will be changed to “Spicy Fingers”.

35.  On 5 December 2006, Step By Step, Step Up and New  Success issued a writ against the respondents in the High Court Action for fraud, breach of fiduciary duty and breach of contract.

36.  Since the commencement of the High Court Action, the respondents have sought to destroy or seriously damage the 19 companies by misappropriating and interfering with the staff and business know-how, directly competing with the bar restaurants, and deliberately interfering with or disrupting the relationship of the 19 companies with critical third parties, namely, the auditors, the bankers, the staff and the Inland Revenue Department.

37.  Further, since the discovery of the unfairly prejudicial conduct and the High Court Action, the affairs of the 19 companies are in a state of impasse. The impasse has affected the two main businesses, investment in properties and the operation of bar restaurants, it has also provided the respondents with commercial advantage in competing with the bar restaurants. Substantial business opportunities are lost, such as listing on the London Stock Exchange Second Board Alternative Investment Market (“AIM”), expanding the bar restaurant business, and acquiring suitable commercial properties as investments.

38.  The petitioner claims that any relationship of trust and confidence between the shareholders in the 19 companies has irretrievably broken down and the substantial cause of the breakdown was the respondents’ misconduct. The petitioner seeks an order that the shares of the respondents in each of the 14 companies be purchased by the company that is the subject of the petition, alternatively by Mr. Hatton, at a fair value, subject to appropriate discounts to reflect the minority shareholding of the respondents and their unfairly prejudicial conduct.

The basis for striking out

39.  The broad basis for striking out is that there is no arguable cause of action. The contention is that in the petitions of 11 companies, the conduct complained of in each petition as constituting unfair prejudice is the conduct by companies or individuals other than the subject company in each petition. Hence, the matters relied on in each petition as constituting unfair prejudice do not concern the conduct of the affairs of each of the companies and cannot be unfair prejudice in the conduct of the affairs of each company.

The approach for striking out

40.  The burden is on the respondents to establish in each of the 11 petitions that it is plain and obvious the petitions are bound to fail. “The fact that the court might consider the case weak is not sufficient nor would it be appropriate to strike out a petition based on pleading points if such deficiencies are capable of being cured by amendment” (Re Forecast Nominees Ltd. [1996] 4 HKC 12 at 18D).

41.  In their affirmations filed in these applications, the respondents have not challenged any of the matters stated in the petitions or in the affidavit filed by the petitioner to oppose the applications. For the purpose of the present exercise, the matters alleged by the petitioner are to be assumed in the petitioner’s favour. The applications do not involve an assessment of disputed factual issues.

42.  Mr. Chua, SC for the petitioner submitted that as the strike out applications turn on the determination of a legal issue, it would be inappropriate to entertain the applications where a serious question of law is raised in a developing area of law. Mr. Harris, SC for the respondents argued to the contrary, he contended that there is nothing unmanageable about the strike out applications, as the legal principle involved has been “sufficiently defined to cover the question at hand” (Guang Xin Enterprises Ltd. v. Kwan Wong Tan & Fong [2002] 2 HKLRD 319 at 323D, para. 10). With this, I turn to the legal issue involved.

Formulation of a case under section 168A

43.  I begin with section 168A(1) which provides as follows:

“Any member of a specified corporation who complains that the affairs of the specified corporation are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) … may make an application to the court by petition for an order under this section.”

44.  The material words “the affairs of the specified corporation are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members” or similar wording in section 459(1) of the Companies Act 1985 have been considered in a number of cases: Re a company (No. 001761 of 1986) [1987] BCLC 141 at 143g to h, 144e to h; Re Unisoft Group Ltd. (No. 3) [1994] 1 BCLC 609 at 611a to g, 622i to 623g; Re Astec (BSR) plc [1998] 2 BCLC 556 at 568g, 578c; Re Legal Costs Negotiators Ltd. [1999] 2 BCLC 171 at 181h to 182d, 183a, 196b to c; Re Ka Ka Realty Ltd. [2004] 1 HKLRD 832 at 838G to 843H, paras. 13 to 27).

45.  It is unnecessary to set out in extenso the relevant extracts. It is fairly well established that to found a petition under section 168A, the conduct complained of must be conduct in the subject company’s affairs, so an act or omission by a director or shareholder in his personal capacity would not suffice. It does not appear to me that the concluding words of section 459(1) (“or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”), which are not found in our section 168A(1), should make any material difference to the construction of our legislation. As pointed out by Mr. Harris, the additional concluding words in section 459(1) are disjunctive and there is nothing in the English cases to suggest that conduct has to be that of the subject company is limited to the situation covered by those concluding words.

46.  What is more debateable is the situation where the conduct of the affairs of one company may be regarded as the conduct of the affairs of another company.

47.  The way in which a parent company exercises its powers as a majority shareholder of its subsidiary can constitute conduct in the affairs of its subsidiary (Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; Nicholas v. Soundcraft Electronics Ltd. [1993] BCLC 360 at 363d to 365c, 367b to 371i). Conversely, the way in which the affairs of a subsidiary are conducted can constitute unfairly prejudicial conduct in respect to the parent company’s affairs (Re Citybranch Group Ltd., Rackind v. Gross [2005] 1 WLR 3505 at 3511C to 3515C, paras. 21 to 33; In re Norvabron Pty. Ltd. (No. 2) (1986) 11 ACLR 279 at 292; In re Dernacourt Investments Pty. Ltd. (1990) ACSR 553 at 556, 561; Re Dartina Development Ltd., HCCW No. 368 of 2005, 12 October 2005, paras. 30 to 37). The requisite element of de facto control by one company over the affairs of another company would normally be satisfied in the situation of a parent and subsidiary, via the control of the composition of the board of directors, or by the control of the voting power exercisable by the shareholders.

48.  Where the companies are not a parent and subsidiary, it is not so clear if the conduct of the affairs of one may be regarded as that of another. Jesner v Jarrad Properties Ltd. [1993] BCLC 1032 would appear to provide support for the proposition that where two companies had been run together as one business in effect, so that the conduct of affairs of one company would impinge on the affairs of another company, it might be proper to look at the affairs of another company to determine whether there was unfairly prejudicial conduct in the affairs of the subject company. In that case, the shareholders of the subject company set up for property investment were members of the same family and they held shares in another company set up for a garage business. The court looked at the entire background in which the same directors operated the two companies as one business in what they perceived to be in the best interests of the family members as a whole.

49.  In Ka Ka Realty Ltd., also in the context of a striking out application, I expressed the view that unless the acts or omissions of the other companies are interactions with the subject company, they should have no place in the determination of unfairly prejudicial conduct in the affairs of the subject company (supra. at 842I to 843G, paras. 24(4) to 26; Jesner v Jarrad Properties, supra. at 1035d to i, 1036e to 1037b).

50.  For the purpose of these strike out applications, Mr. Harris is content to accept that statement of the law in Ka Ka Realty Ltd. It is not necessary for me to arrive at a firm view whether, absent the relationship of a parent and subsidiary, as in the case of related or associated companies, some degree of interaction in the affairs of another company with the subject company would suffice.

51.  Last but not least, it must be emphasised that section 168A(1) warrants the courts in looking at the business realities of a situation and does not confine them to a narrow legalistic view (per Lord President Cooper in Meyer v. Scottish Co-operative Wholesale Society Ltd. [1954] S.C. 381 at 391, approved by the House of Lords in Scottish Co-operative Wholesale Society Ltd. v. Meyer, supra. at 343, 362 and in Nicholas v. Soundcraft Electronics, supra. at 368b to f).

52.  I am inclined to agree with Mr. Harris that insofar as the legal issue is concerned, there is nothing unmanageable about these applications to make it inappropriate for the petitions to be struck out, provided that I am satisfied, in applying the legal principles to the matters alleged by the petitioner, whether in the petitions or in the proposed amendments, that the result contended for by the petitioner (namely, that the conduct of affairs of other companies may be regarded as unfairly prejudicial conduct in the affairs of the subject company) is plainly untenable, as a matter of law.

53.  Mr. Chua has made lengthy submissions on what kinds of matters are capable of constituting the “affairs” of a company, and what may constitute “conduct” of the affairs of a company, in support of his contention that conduct in the affairs of a company should be liberally construed. It is not necessary to express a view on those parts of his submissions. As submitted by Mr. Harris, even if one were to accept that the matters alleged are capable of constituting the conduct of the affairs of a company, the petitioner would still need to show that it is or may be regarded as the conduct of the affairs of the subject company.

54.  I propose to consider the 11 petitions in various groups, as Mr. Harris has done in his submissions.

Striking out the petitions concerning the shelf companies

55.  Of the four shelf companies, Rich Sun was incorporated on 13 January 2006, Harbour Sun on 2 June 2005, Gain Sun on 2 September 2005, and Step Higher on 30 December 2005. As mentioned earlier, they were established to purchase potential properties in Hong Kong and none of them hold any property or assets as at the presentation of the petitions.

56.  In paragraph 43 of each of the petitions, it is asserted that as a result of the matters set out in paragraphs 34 to 42 of the petitions (which relate to the functions performed by Step By Step as the centralised management company, the investment of profits in purchasing real estate, and the furnishing of security to obtain banking facilities), the affairs of each of the 19 companies are in practice “substantially interlinked, and coordinated through [Step By Step] as the Group’s management company [the Group is made up of the 19 companies], such that the conduct of one company’s affairs will materially affect other Group companies.” Whether that is correct remains to be seen on a careful analysis of the petition for each of the companies.

57.  Mr. Harris made the point that the complaints in each petition are the same and that each petition would appear to have been drafted on the assumption that the affairs of what concerned the 19 companies, referred to as a “Group” in the petition, are capable of constituting the conduct of the affairs of the subject company, despite the lack of attempt to link a particular allegation of conduct to a particular company. He submitted that this is particularly obvious in the case of the shelf companies and the companies holding properties, which are not commercially active.

58.  Mr. Harris went through the following exercise of analysing the petitions.

59.  Paragraphs 29 to 33 of the petitions deal with the respondents becoming directors of a number of companies. In paragraph 33, it is pleaded that the respondents were at all material times de facto directors of each subject company. Although it is asserted that the respondents made decisions on the direction of the 19 companies including the subject company, no particulars are given of any decision in respect of the shelf companies. I would agree it is difficult to see how the matters relied on as making the respondents de facto directors of a subject company would have relevance or application in the case of a dormant shelf company.

60.  The next section of the petitions, being paragraphs 34 to 43, deals with the management of various companies by Step By Step and the real estate investment and are the matters relied on in paragraph 43 which rendered the affairs of the 19 companies “substantially interlinked” in that “the conduct of one company’s affairs will materially affect other Group companies”. There is no express reference to any of the shelf companies in the paragraphs concerning the management functions performed by Step By Step. It would seem fair to infer that Step By Step had little or no real involvement with these shelf companies. As for real estate investment, the shelf companies were set up so that they may be used to purchase properties if opportunities should arise, and they have not been used for that purpose up to the date of the petitions. I find it difficult to see how the conduct of affairs of other companies referred to in paragraphs 34 to 42 had in substance affected the dormant companies. 

61.  Paragraphs 44 to 51 relate to the fiduciary and contractual duties of the respondents as directors. The respondents’ employment contracts were with Step By Step. As with the foregoing paragraphs, I have the same difficulty in relating the alleged fiduciary duties to the dormant shelf companies, even assuming the respondents might be regarded as their de facto directors. Paragraph 45 alleges that the respondents were also trustees of the subject company’s assets and property in their possession or control from time to time. However, none of the shelf companies own any assets or property at any time. 

62.  Paragraph 52 onwards pleads the matters contended by the petitioner to constitute the affairs of the subject company and are, or were, conducted in a manner unfairly prejudicial to the petitioner.

63.  In paragraphs 52 to 75, it is alleged that in establishing a competing bar restaurant “Sticky Fingers” in secret in 2004, the respondents had acted in breach of their duties to “the Group”. Most of the matters complained of pre-date the incorporation of each of the shelf companies. There is no reference to any of the shelf companies in this section.

64.  Paragraphs 76 to 83 deal with the misappropriation of monies from the cash takings of New Success (the operator of “Dusk till Dawn”) and Step Up (the operator of “insomnia” (Hong Kong)) between July 2004 to May 2006, to finance the competing secret business of “Sticky Fingers”. For a large part of this period, the shelf companies had not been incorporated. I agree it is not apparent how the misappropriations had involved the shelf companies or that they had any impact on the shelf companies.

65.  The next section, from paragraphs 84 to 92, deals with fraud, conspiracy and breaches of fiduciary and contractual duties. Paragraphs 84 and 85 allege the respondents had breached fiduciary duties in the misappropriation of funds from New Success and Step Up. Paragraph 86 alleges Mr. Echaluce had acted in breach of his fiduciary duties to Step By Step and the “relevant companies” and/or trust of the subject company’s assets and property, in dishonestly assisting Ms. Furness to carry out the misappropriations, or to conceal the misappropriations from “the Group”. Paragraphs 87 to 89 allege the respondents had conspired to defraud Step  By Step, New Success, Step Up and Mr. Hatton and to conceal the fraud from them, the unlawful acts and means by which the same were injured, and the acts in breach of their fiduciary duties to the same. Paragraph 90 alleges the respondents were in breach of their employment contracts with Step By Step. The entire section contains no allegation of wrongful acts by the respondents against the shelf companies.

66.  As I understand Mr. Chua’s submission here, even though monies were misappropriated from two companies only, and the competing business affected the companies that operated bar restaurants, it was contended that the misconduct of the respondents was sufficient to destroy the relationship of trust and confidence with shareholders who hold shares with the respondents in other companies, such as the shelf companies, so that the conduct complained of in respect of other companies could constitute conduct of the affairs of the shelf companies. If there is any interaction at all, this seems to me to be of a most tenuous nature. As rightly pointed out by Mr. Harris, a loose business connection of these 19 companies does not make the affairs of one the affairs of the other.

67.  Mr. Chua has placed particular reliance on the paragraphs that follow as they deal with the affairs of “the Group” and showed that the affairs of companies in “the Group” are interlinked. My difficulty with this contention is that these paragraphs, by and large, make no specific reference to any of the shelf companies. I am not able to envisage how the alleged conduct of affairs of “the Group” would in substance impact on the dormant companies.

68.  Paragraphs 93, 94, 120 to 138 are concerned with the respondents’ vendetta after the commencement of the High Court Action. The misappropriation and interference with “Group assets” being staff and knowhow, and the direct competition with the bar business did not involve or affect the shelf companies. As for the respondents’ interference with the auditors, Grant Thornton, who were not appointed auditors of the shelf companies, this could not be properly characterised as the conduct of the affairs of the shelf companies. The same applies to the problem with the filing of tax returns of Step By Step, New Success, Step Up, Step Onward, and Sparkling Wine. Likewise, there is no allegation that the interference with and disruption of relations with the bankers had affected the shelf companies.

69.  Paragraphs 95 to 98, 100 to 119 deal with the state of impasse and the neglect of duties of the respondents to the subject company and “the Group” in favour of their own self interest. The complaints are that as a result of the continuing dispute and impasse, and the respondents’ unwillingness to guarantee further borrowing from the bank, “the Group” cannot expand the bar restaurant operations, purchase additional investment properties, or be listed as a public company on AIM. Further, the respondents have established their competing business using the same business models as “the Group”. In paragraph 114, it is stated that in February 2006, one of the shelf companies, Rich Sun, made unsuccessful offers to purchase a property in Lan Kwai Fong. In view of the dispute with the respondents, when the negotiations with the property owner were resumed in October 2006, a different company was used as the potential purchaser, with only Mr. Hatton and Mr. Smout as the beneficial owners. I am inclined to agree with Mr. Harris that the shelf companies are but passive bystanders, the unsuccessful offer of Rich Sun to purchase a property is just a background matter not involving unfair prejudice, and the conduct of the affairs alleged in respect of other companies cannot properly be regarded as conduct of the affairs of the shelf companies.

70.  Paragraph 99 alleges a commercial advantage to the respondents with a head start in their direct competition with the bar restaurants. There is no reference to the shelf companies.

71.  Paragraphs 139 to 142 deal with continuing fiduciary duties of the respondents after their employment with Step By Step was terminated in May 2006 and December 2006 and they ceased to be de facto directors. I agree the matters relied on are not capable of having anything to do with the conduct of the affairs of the dormant shelf companies.

72.  Paragraphs 143 to 148 do not add to the allegations of the conduct relied on. They merely explain why the alleged conduct is unfairly prejudicial to Mr. Hatton. The cause of the irretrievable breakdown in trust between the shareholders, alleged in paragraph 146, has to be in the conduct of the affairs of the subject company, not in the conduct of affairs of any other company.

73.  The unfairly prejudicial conduct complained of must be in substance and reality the conduct of the affairs of the subject company. In the case of a dormant company set up for one or two years, which has not been engaged in business activity and owns no asset at any time, it would be very difficult to envisage how there could be conduct in its affairs that could constitute unfair prejudice to found relief under section 168A. I agree with the analysis of Mr. Harris that none of the affairs alleged to be unfairly prejudicial to the petitioner are in any sense the affairs of any of the shelf companies. Nor am I able to see how the petitioner is affected as a member of each of the shelf companies by the conduct of affairs alleged to be unfairly prejudicial. There is no averment in these petitions that the value of any asset of the shelf companies was adversely affected, or that any shelf company had lost a business opportunity. The petitions are plainly untenable as they do not contain any complaint which may properly be regarded as the conduct of the affairs of the shelf companies. I order the petitions for the four shelf companies to be struck out.

Striking out the petitions concerning the companies holding properties

74.  I am concerned here with the petitions relating to Step Onward, Glory Sun, New Sun and Excel Sun. Step Onward was incorporated on 11 September 1998, Glory Sun on 13 September 2004, New Sun on 15  April 2005, and Excel Sun on 30 December 2005.

75.  Mr. Harris repeated his analysis and submissions for the shelf companies. He submitted that there are no allegations of conduct in the petitions attributed specifically to the property-holding companies, their directors or agents or which could sensibly be so. Hence, there are no complaints in the petitions that would found relief under section 168A.

76.  It is correct that the property-holding companies have not been commercially active. But unlike the shelf companies, they do have business activities in that they lease out the properties they hold to Step Up, Step Further and an independent third party. Each of the properties they hold is mortgaged to a bank, to obtain financing for the purchase of the properties and for the operation of the bar restaurant business. The banking facilities are further secured by the corporate guarantees of the bar restaurant companies in Hong Kong and of Sparkling Wine and the personal guarantees of Mr. Hatton and the respondents. Step By Step managed the income and expenses of the property-holding companies. Management accounts prepared for these companies have been audited, except for Excel Sun. Tax returns have been filed. As these companies own valuable commercial properties, they would form a very important part of the entity or the group of companies in the event of the listing as a public company on AIM.

77.  There would appear to be financial interdependence and interaction between the property-holding companies and the companies that are commercially active.

78.  It is correct that the misappropriation of funds from Step Up and New Success and the setting up of a bar restaurant in secret did not affect the property-holding companies directly. There are, however, other allegations of unfairly prejudicial conduct in the latter part of the petition, from paragraphs 93 to 138, which are asserted to affect the affairs of “the Group”. These allegations, attributable to the alleged misconduct of the respondents, may have some impact on the affairs of the property-holding companies:

(1)     the proposed listing on AIM is impossible and impracticable, while the respondents remain as shareholders;

(2)     the refusal of the bank to grant a loan of HK$15 million for additional working capital required for, inter alia, listing on AIM, acquiring suitable commercial properties, and opening additional bar restaurants;

(3)     the inability to purchase additional properties for investment, due to the complex interdependent structure of existing mortgage finance arrangements with the bank, which would require any mortgage and commercial loan facility to be dependent upon (among other things): the personal guarantees of the respondents, the financial reports of the companies in “the Group” in which the respondents held shares, and the provision of mortgage collateral security by guarantees from companies in “the Group” in which the respondents hold shares;

(4)     interference with the relations with the auditors, Grant  Thornton, which led to delay in completion of the audit for 2006; and

(5)     exposure to the risk of penalties and estimated profits tax assessments by the Inland Revenue Department, due to the delay in filing tax returns in 2007, which depended on the production of the 2006 audited accounts.

79.  It does not seem to be plain and obvious that the degree of interaction in the affairs of the property-holding companies with those of other companies is clearly insufficient so that the matters relied on as constituting unfair prejudice in the petitions do not concern the conduct of affairs of each of the property-holding companies. I decline to strike out the petitions of the property-holding companies.

Striking out the petition concerning Sparkling Wine

80.  Sparkling Wine holds the intellectual property rights used in the design and operations of the bar restaurants and has entered into separate royalty agreements with each of the bar restaurant companies. It has provided corporate guarantees to secure mortgage loans granted by the bank to the property-holding companies.

81.  Mr. Harris made similar submissions that the misappropriation of funds from Step Up and New Success and the setting up of a bar restaurant in secret did not affect Sparkling Wine. He also pointed out that the petition does not contain any complaint that Sparkling Wine as a co-guarantor of the mortgages had been prejudiced as a result of any of the acts pleaded.

82.  I do not agree it is plainly unarguable that none of the complaints in the petition would found relief sought in the prayer. The allegations of unfairly prejudicial conduct in the paragraphs 93 to 138 of the petition may have similar impact on the affairs of Sparkling Wine, as in the case of the property-holding companies considered earlier. There would appear to be some financial interdependence and interaction between Sparkling Wine and the companies that are commercially active. Whether that degree of interaction is sufficient so that the conduct of the affairs of other companies may sensibly be regarded as conduct of the affairs of Sparkling Wine is not so plain and obvious to admit of a clear-cut solution in a striking out application.

83.  I decline to strike out the petition for Sparkling Wine.

Striking out the petition concerning Step Further

84.  Step Further operates the bar restaurant “All Night Long”, which was opened in October 2006. It was incorporated in June 2000 but the petition does not mention if it was engaged in any activity before it operates the bar restaurant. The respondents and their company, Full Power Limited, were never directors or employees of Step Further.

85.  By the time Step Further commenced the bar restaurant business, Ms Furness had ceased to be involved in the management of any of the 19 companies (having been dismissed by Step By Step in May 2006) and Mr. Echaluce was excluded from the activities of the companies by October 2006 (he tendered his resignation to Step By Step on 16 October  2006 and his employment ended on 6 December 2006). It is alleged in the petition that all material decisions relating to the opening of  “All Night Long” had been taken prior to the dismissal of Ms. Furness.

86.  Mr. Harris submitted that there is no allegation that the assets of Step Further were misappropriated and the large majority of the complaints in the petition have nothing to do with Step Further. This is correct up to a point.

87.  There are some allegations and complaints in the latter part of the petition that concern Step Further. They are as follows:

(1)     Notwithstanding the resignation of the respondents as de facto directors of Step By Step and other companies in “the Group”, they continue to owe fiduciary duties to Step Further for at least two years from the termination of their de facto directorships.

(2)     In breach of their fiduciary duties, the respondents are engaged in bar restaurant business in direct competition with the bar restaurants operated by “the Group”, which included “All Night Long”. The respondents’ bar restaurant business has numerous similar features to the business of “the Group”, such that customers and fellow competitors believed “Sticky Fingers” to be one of the bar restaurants operated by “the Group”.

(3)     The respondents had interfered with the musicians employed by Step By Step for the bar restaurants operated by “the Group” and caused disruption in their relationship with “the Group”.

88.  Apart from the above, it may also be argued that as an operator of a bar-restaurant, Step Further would be considered a valuable part of the entity or group of companies in the proposed listing on AIM and it has lost that substantial business opportunity as a result of the respondents’ misconduct, albeit in the affairs of other companies.

89.  I do not think it is plain and obvious at this stage that none of the above complaints would support the relief sought in the petition. I decline to strike out the petition in respect of Step Further.

Striking out the petition concerning Insomnia Singapore

90.  Insomnia Singapore operates a bar restaurant in Singapore. Mr.  Harris pointed out that all the matters in the petition relate to matters in Hong Kong and it is difficult to see any matter in the petition connected with the company incorporated in Singapore. There are no complaints that Insomnia Singapore had made decisions which prejudiced the petitioner as a shareholder, or that the respondents have set up a competing bar restaurant in Singapore, or that they have misappropriated money from Insomnia Singapore.

91.  I think there are two complaints that may have some impact on Insomnia.

92.  The first is the loss of a substantial business opportunity in the proposed listing on AIM. As the operator of a bar restaurant, Insomnia Singapore would be regarded as an important part of the group of companies in the event of such a listing.

93.  The other complaint that might have a bearing of some substance to Insomnia Singapore is the interference with the musicians employed by Step By Step in the bar restaurants of “the Group”. It is pleaded in the petition that of some 155 employees currently employed in “the Group”, over one-third are musicians and musical entertainment is critical to the operation and success of the bar restaurants. According to Mr. Hatton’s affidavit, musical staff are rotated between Hong Kong and Singapore and Step By Step commonly sends its musical employees to perform in Singapore for tours of duty of two to three months, to ensure consistency of quality, style and content of the musical performances in both Hong Kong and Singapore. Apart from other acts of interference with musical staff, Mr. Echaluce was seen in April 2007 to make approaches to a bandleader employed by Step By Step when the band was performing at “insomnia” in Singapore. It is alleged he sought to procure up to one-third of the musicians to leave en masse.

94.  I am not inclined to strike out the petition in respect of Insomnia Singapore, as I do not think it plain and obvious that none of the complaints in the petition would support the relief in the prayer.

Orders on the strike out applications

95.  In the summons for striking out issued in the consolidated petitions, I make the following orders:

(1)    the petitions in HCMP Nos. 846, 848, 849 and 851 of 2007 be struck out and dismissed; and

(2)     the applications to strike out the petitions in HCMP Nos. 840, 842, 843, 845, 847 and 850 of 2007 be dismissed.

96.  In the summons for striking out issued in HCMP No. 1208 of 2007, I order as follows:

the application to strike out the petition be dismissed.

97.  I make the following order nisi as to the costs of the above summonses. I would make a global order as the summonses were dealt with together. Instead of ordering the petitioner to bear the respondents’ costs for the petitions which were struck out and the respondents to bear the petitioners’ costs for those petitions in which the respondents are unsuccessful, I would simply award half of the costs incurred in all the striking out applications to the respondents, to be paid forthwith by the petitioner.

The amendment application

98.  The petitioner seeks leave to amend the petitions which were consolidated by order on 31 May 2007.

99.  The respondents do not oppose the amendment application for the petitions concerning Step By Step, Step Up and New Success, which are not the subject of the strike out applications. They oppose the amendment application for the other 11 petitions as it is contended that these petitions should be struck out. As I have now disposed of the strike out applications, and have considered the petitions with the proposed amendments in the strike out applications, it follows that leave to amend should be granted for all the petitions which I have declined to strike out.

100.  The petitioner submitted a revised draft amended petition at the hearing, to incorporate amendments to some figures in respect of loans owing by the respondents to “the Group” in paragraphs 82(5) and 92(5). These further amendments are not opposed. 

101.  The title of the proceedings in the consolidated petitions should be amended to remove the petitions that have been struck out.

Orders on the amendment application

102.  In the summons for amendment in the consolidated petitions, I make the following orders:

(1)     leave to amend the petitions in HCMP Nos. 838, 839, 840, 842, 843, 844, 845, 847 and 850 of 2007 as per the draft amended petition submitted on 12 October 2007;

(2)     the petitioner is to file and serve the amended petitions within 7 days hereof, save as provided in (3) below; and

(3)     leave to the petitioner in HCMP No. 845 of 2007 to issue a concurrent amended petition and to serve a sealed copy of the same and of this order, out of the jurisdiction, on the 4^th  respondent and the 5^th respondent in Singapore, within 28  days hereof.

103.  I make an order nisi that the costs of and occasioned by the amendment be to the respondents in any event.

The consolidation applications

104.  The respondents issued 3 summonses on 6 July 2007 in the consolidated petitions, HCMP No. 1208 of 2007 and the High Court Action, for an order that the High Court Action and HCMP No. 1208  of 2007 be consolidated and tried either together or one immediately after another with the consolidated petitions filed on 7 May 2007.

105.  The petitioner does not oppose consolidating HCMP No. 1208 of 2007 with the consolidated petitions. Both the petitioner and the 3^rd respondent oppose the application to consolidate the petitions with the High Court Action. Mr. Smout and his company Craigside Company Limited are not involved in the High Court Action.

106.  The High Court Action was brought by Step By Step, New  Success and Step Up against the respondents initially, when the writ was issued in December 2006. In July 2007, the writ was amended to join Entertainment Company Limited (“Entertainment”) and Mad Dogs Wanchai Public House Limited (“Mad Dogs”) as the 3^rd and 4^th defendants. Ms Furness is a beneficial owner of shares in Entertainment, which operates “Sticky Fingers”. The respondents have been directors of Mad Dogs since 15 March 2007 and this company is to operate “Spicy Fingers”.

107.  In the High Court Action, the plaintiffs claim against the defendants these reliefs: damages for conspiracy, breach of fiduciary duties, breach of trust, and breach of the employment contracts with Step By Step; an inquiry and account of all monies and benefits received, profits and losses and an order for payment of the sums found due; equitable compensation for knowing receipt; accounts and inquiries to trace and recover monies, benefits and profits and substitute assets; declarations that the business and assets of Entertainment, “Sticky Fingers”, Mad Dogs, “Spicy Fingers”, and the property of the respondents in Sai Kung are held on constructive trust for New Success and Step Up and subject to their proprietary claims; an order that the assets held on constructive trust be sold and the proceeds be paid to New Success and Step Up, alternatively an equitable charge or lien on such assets. The claims are founded on the misappropriations from the cash takings of the bar restaurants operated by New Success and Step Up and the setting up of a bar restaurant business in competition with the business of the plaintiffs.

108.  Mr. Harris advanced two grounds for the applications to consolidate. Firstly, there are common issues of fact and law in the petitions and the High Court Action. Secondly, the outcome of the High Court Action would have a bearing on whether any relief should be granted in the petitions. If the plaintiffs have obtained relief in the High Court Action, this would bring to the end the unfair prejudice complained of by the petitioner and the petitioner should not have relief under section 168A. I am in agreement with the first ground. I am somewhat sceptical about the second ground, it is unnecessary to go into this in any detail at this stage.

109.  The reasons for opposing consolidation of the High Court Action with the petitions are various: the application is premature as the respondents have not yet served points of defence or filed evidence in the petitions; it would lead to substantial delay in the trial of the petitions as consolidation would add to time, costs and complexity.

110.  The High Court Action has reached the stage when all four defendants have filed their defence and the plaintiffs have served their reply to the amended defence of the 1^st and 2^nd defendants (Ms. Furness and Mr. Echaluce) on 11 October 2007. Although the respondents have not served points of defence or filed evidence in the petitions, it is unlikely that they are going to advance a case that departs from their case as pleaded in the amended defence in the High Court Action. I do not think it necessary to defer the application for consolidation until after the close of pleadings in the petitions.

111.  As for the contention that to order consolidation of proceedings would lead to overloading of issues and generate unnecessary complexity, that argument could be employed much too readily to resist an application for consolidation. I do not think that should be a reason to deter the court from ordering cases to be tried one after the other before the same judge or be heard together, if it is just and convenient to do so. With proper case management, the court could still make appropriate directions to enable the consolidated proceedings to be determined expeditiously and inexpensively; it would not allow the proceedings to get out of hand.

112.  I have no doubt that the High Court Action and the petitions should be tried by the same judge, in view of the common issues of fact and law in all these proceedings. I have not come to a view if both sets of proceedings should be heard at the same time or whether one after the other and, if so, which of the proceedings should be tried first. Directions in that respect could be made at a later stage, depending on the progress and development in each set of proceedings. 

113.  With one judge keeping an eye on both sets of proceedings, they are to proceed in tandem at a proper pace. This should ensure that a party would not be allowed to delay the progress in one set of proceedings due to the lack of progress in the other.

Orders on the consolidation applications

114.  In each of the three summonses for consolidation, I make the following orders:

(1)     HCMP No. 1208 of 2007 be consolidated with the petitions in HCMP Nos. 838, 839, 840, 842, 843, 844, 845, 847 and 850 of 2007;

(2)     the directions made on 31 May 2007 in HCMP Nos. 838, 839, 840, 842, 843, 844, 845, 847 and 850 of 2007 are to apply to HCMP No. 1208 of 2007; and

(3)     High Court Action No. 2712 of 2006 be consolidated with the petitions in (1), to be tried by the same judge; further directions are to be given at a subsequent stage whether both sets of proceedings are to be tried together or one after the other, and if so, the sequence in which they should be tried.

115.  I make an order nisi that the costs of each of the summonses be in the cause of the respective proceedings.

Mr.  Chua Guan-Hock, SC and Miss Frances Lok, instructed by Messrs. Allen & Overy, for the Petitioner in HCMP Nos. 838 to 840 of 2007, 842 to 851 of 2007, and 1208 of 2007 and for the Plaintiffs in HCA  No. 2712 of 2006

Mr. Jonathan Harris, SC, instructed by Messrs. Tanner De Witt, for the 1^st  and 2^nd Respondents in HCMP Nos. 838 to 840 of 2007 and 842  to 845 of 2007, the 2^nd Respondent in HCMP Nos. 846 to 851 of 2007, the 1^st and 2^nd Respondents in HCMP No. 1208 of 2007 and for the 1^st and 2^nd Defendants in HCA No. 2712 of 2006

Mr. Nicholas Luxton, of Messrs. Holman, Fenwick and Willan, for the 3^rd  Respondent in HCMP Nos. 838 to 840 of 2007, 842 to 851 of 2007, and 1208 of 2007