Lo Yan Wah v. Pacific Building Material Supplies (HK) Ltd and Others
Read the full judgment text of HCCW 551/2009 on BabelCite. This High Court CFI judgment was delivered on 23 July 2010.
1. The 2 nd and 3 rd Respondents apply to strike out the Amended Petition on the grounds that it discloses no reasonable cause of action and, alternatively, is frivolous and vexatious and, alternatively is an abuse of process. In the alternative they also apply to strike out the prayer for a winding-up order.
Cites 3 cases
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HCCW 551/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 551 OF 2009 ----------------------
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---------------------- Before: Hon Harris J in Chambers Date of Hearing: 7 June 2010 Date of Decision: 23 July 2010 ---------------------- D E C I S I O N ---------------------- Application 1.The 2nd and 3rd Respondents apply to strike out the Amended Petition on the grounds that it discloses no reasonable cause of action and, alternatively, is frivolous and vexatious and, alternatively is an abuse of process. In the alternative they also apply to strike out the prayer for a winding-up order. Introduction 2.The 2nd Respondent incorporated the Company on 2 April 1997. Shortly thereafter and at the 2nd Respondent’s suggestion that the Petitioner take an interest in the Company and as a result the Petitioner pro’s wife became a shareholder. From June 1998 the Company had 10,000 issued shares of which the Petitioner held 20%, the 2nd Respondent held 45% and the 3rd Respondent held the remaining 35%. 3.The Company was set up to sell tiles. The Petitioner and the 2nd Respondent had worked together at a company called Harbour Building, which specialised in selling imported European tiles. The Company was intended to build on the Petitioner and the 2nd Respondent’s knowledge and expertise in this field. Between February 1998 and November 2004 the Company opened 4 shops all of which sold various sorts of tiles imported from Europe. There is no dispute between the parties that the Company was intended to operate on the basis of mutual trust and confidence and that the Petitioner was responsible for overseeing and managing the shops. It is also common ground that the Petitioner and the 1st and 2nd Respondents were intended to receive a monthly salary and dividends. 4.It appears that the parties’ relationship began to deteriorate during 2003 and in November 2003 it was agreed in principle that the 2nd and 3rd Respondents would purchase the Petitioner’s shares in the Company. This required a valuation of the Company to be undertaken. During this process the 2nd and 3rd Respondents had difficulty in obtaining accounting records from the shops. The resulting investigations resulted in a number of members of staff informing the 2nd Respondent that there had been some accounting malpractices, which further investigation involved fraud by the Petitioner. In broad terms this involved the Petitioner producing 2 sets of invoices. A genuine set for customers and another recording a lower sale price, which was entered into the Company’s records. The discrepancy in price between the 2 sets of invoices was roughly 20%. The Petitioner was charged and convicted of conspiracy to defraud the Company during the period 1 September 1999 to 10 June 2003 and sentenced to a term of imprisonment. Unsurprisingly the Petitioner was excluded from the affairs to the Company from the time of the discovery of his fraud. 5.There is no dispute, and of course could be none, that there is a breakdown of trust and confidence between the parties. The 2nd and 3rd Respondents are prepared to buy the Petitioner’s shares, but unsurprisingly expect him to repay the amount that he took from the Company and an outstanding costs order made in the Company’s favour in the trial it has commenced to recover the amount misappropriated in respect of which it has obtained judgment on liability. I digress here to note that I was told during argument that in the High Court Action the Petitioner (as defendant) has recently issued an application to stay the proceedings pending the outcome of this Petition apparently, so Mr. Albert Poon who appeared for the Petitioner told me, on the basis that it should properly be taken into account in the valuation of the shares. As I explained during the hearing in my view this is misconceived and I would not expect the Companies Court to have to undertake an assessment of how much the Petitioner had misappropriated. This should be dealt with separately in the High Court Action. 6.It is perhaps surprising against this background that the Petitioner issued an unfair prejudice and winding up Petition on 15 September 2009. The Petition 7.The Petition is in my view a disingenuous document. It says (paragraph 30) that by reason of the unfairly prejudicial conduct of the 2nd and 3rd Respondents there is a breakdown of trust and confidence. The Petitioner complains that he has been denied an equal opportunity to participate in the management of the Company and have access to business and accounting records. This state of affairs is said in paragraph 28 to arise from the following matters:
8.Towards the end of this litany of complaints one finds in the obscurely numbered sub-paragraph 28(e)(ii)(5) reference to the Petitioner’s fraud, which is in these terms: “The 2nd Respondent then became hostile towards your Petitioner and allowed no room for negotiations. The parties’ relationship totally broke down and the 2nd Respondent reported your Petitioner and others to the police and your Petitioner, among others, was prosecuted, convicted and sentenced to immediate imprisonment under the criminal case DCCC 1060/2005. The 2nd Respondent also had stated civil proceedings against, amongst others, your Petitioner under HCA 1651/2007.” This hints at there being some connection between the fraud and the 2nd and 3rd Respondents’ conduct, but it is nowhere made clear. 9.During the hearing Mr. Poon told me that the Petitioner would not rely on the complaint that he had been excluded from management and accepted that the real issue between the parties is the price at which the Petitioner’s shares should be sold. I asked him at what date the Petitioner’s shares should be valued and he told the date the Petition was issued. This if of course the date on which the Court commonly orders that shares are valued when making an order in section 168A proceedings but the Court may direct a different date. My impression, and I put it no higher than that, is that that these proceedings on premised on the assumption that the Petitioner will be able to obtain part of the increase in the value of the Company, which has continued to grow, since his fraud was discovered. His expectation is that this will exceed or at least reduce the amounts that he owes the Company. If this is the assumption that has been made in my view it is an optimistic one, as I would expect any Court to be reluctant to give the Petitioner a windfall profit, which brings me to the question of why a price has not been agreed. 10.The 2nd and 3rd Respondents’ position is that they cannot sensibly be expected to agree a valuation of the Company’s shares and pay it without knowing how much the Petitioner stole and his agreement to pay what he owes the Company. This seems to be obviously fair. The Petitioner has not provided any information or documents evidencing how much he took, which has prevented an assessment of how much he owes the Company neither has he paid the costs order against him in the High Court Action. The position at the time the Petition was issued is quite clear. The parties had agreed that their relationship had broken down and that the Petitioner’s shares should be purchased. The price could not be agreed because the Petitioner has failed to provide the information necessary to allow an assessment of how much he owes the Company. The Petitioner’s attempt to suggest that he had been unfairly prejudiced by reason of the matters complained of in the Petition is a disingenuous characterisation of the present position. If the Petitioner had provided the 2nd and 3rd Respondents with the information necessary in order to quantify the claim against him and a list of the matters, some of which appear in the Petition, which he says need to be taken into account in valuing the Company and the 2nd and 3rd Respondent had failed to deal with the material and stonewalled there might perhaps be some basis for him suggesting that he was being unfairly prejudiced, but this is not the case. So far as I can see the Petitioner has never suggested prior to issue of the Petition to the 2nd and 3rd Respondents that a fair valuation needs to take into account any of the matters of which he complains in the Petition. In fact it is unclear from the evidence before what attempts the Petitioner made prior to issue of the Petition. The exhibits contain correspondence in 2003 and early 2004. There is then a gap until 7 August 2009 when a letter is written by the Petitioner’s solicitors to the 2nd and 3rd Respondents summarising the complaints, which subsequently appearing in the Petition and requiring an offer for the Petitioner’s shares within 7 days or an agreement to appoint a valuer. The 2nd and 3rd Respondents replied on 13 August saying they needed to consult their advisers and say that they required 14 days to reply and adding that they were receptive to the idea of negotiating a settlement. The Petitioner’s solicitors replied on 18 August requesting certain documents and stating that if they did not receive audited financial statements by 21 August they would commence legal proceedings. On 15 September the Petition was issued. 11.The Company had obtained judgment for an account of the profit he made as a result of his fraud on 12 November 2008 and the costs had been taxed in the sum of $382,272 on 18 August 2009. The timing suggests that the prospect of an unavoidable demand for money and the unavoidable progress of the High Court Action to an assessment of the sums appropriated were the catalyst for the Petitioner suddenly raising through his solicitors the demand for the sale of his shares. It seems to me wholly unrealistic to suggest in August that he was being unfairly prejudiced by the matters of which he complains as the proximate cause of his exclusion from the business was his own dishonesty and the failure of the sale was a combination of the discovery of his dishonesty and his own failure to take any steps to resurrect the negotiation of the sale on a sensible basis and within a sensible time frame, which necessarily would have involved being forthcoming about the amount he had misappropriated. The tone and content of his solicitors’ letter was self-evidently inappropriate and unhelpful. 12.During his address to the Court I asked Mr. Poon how much his client estimated he had misappropriated. Having taken instructions he told me that it was between $3,000,000 and $4,000,000. Apparently this was the first occasion on which the Petitioner had mentioned a figure, and one, which the 2nd and 3rd Respondents believe is too low. It is reasonable to assume that the Petitioner will also have to pay compound interest on this sum for the last 6 or so years. The 2nd and 3rd Respondents’ position is that the total figure is likely to exceed the value of the Petitioner’s 20% interest in the Company whatever valuation date is used and will certainly do so if the valuation takes place at the end of 2003/2004 financial year. Given the profit of the Company for the year ending 31 March 2008 and 2009 was $993,000 and 3,453,319 respectively and the net assets for the same years were $21,576,896 and 20,583,868 respectively (representing equity of $3,000,000 in each year and the balance being retained earnings) this does not seem an unreasonable working assumption. As I have already mentioned he has not provided any documents to assist in calculating a more accurate figure. The Petitioner’s excuse is that he does not have the relevant documents because they were seized by the ICAC. He has not, however, taken any steps to obtain them. Relevant legal principles 13.The parties agreed that the principles governing an application to strike out are as summarised by Kwan J (as she then was) in Re Four Twenty Co Ltd HCCW 278/2004, 6 January 2005 at paragraph 5:
14.Although Ms. Chan accepted that these were the applicable principles her submissions on occasions were inconsistent with them. The summons had been amended to specify the grounds on which the 2nd and 3rd Respondents seek to strike out the Petition. This includes it being frivolous and vexatious. During the hearing Ms. Chan sought to demonstrate when dealing with the allegations in paragraph 28 of the Petition that there was nothing in the Petitioner’s complaints and on occasions her attempts to demonstrate this went beyond a forensic analysis of the Petitioner’s Petition and evidence and involved looking at the 2nd and 3rd Respondents’ evidence. In this regard I was being asked to depart from the assumption referred to in paragraph 13, namely, that that the Petitioner’s factual case would be established. Is this a legitimate approach? Order 18 r19(3) provides that the rule applies to petitions and I see nothing objectionable, although I was not addressed on this point, in an application being made to strike out a petition on the grounds that it is frivolous or vexatious, which is generally understood to mean unsustainable: see paragraph 18/19/8 of the Hong Kong Civil Procedure 2010 vol. 1. The court may admit and take into account evidence filed by the applicant in determining an application made on this basis as long as it is evidence that does not itself require to be tested by cross-examination. In my view documents could properly be introduced. So could background information, which is not contentious, but which has been omitted by a petitioner because it is unhelpful to his case as is so in the present proceedings. Broadly speaking evidence that allows the Court to assess a petition in context is permissible and may be taken into account if an application is being made on the ground that a complaint is frivolous and unsustainable. 15.The Petition is brought under both section 168A and section 177(1)(f) relying in the case of the latter on a break down in trust and confidence. In the present case the 2nd and 3rd Respondents argue that when considering the Petition for relief under section 168A it is necessary to consider not only whether or not the Petitioner has any prospect of establishing prejudicial conduct but also whether or not he can demonstrate that such prejudice is unfair to him. The unusual facts of the present case bring the 2 elements of the statutory criteria to be found in section 168 into focus because as will be readily appreciated from the factual background recited in the introduction exclusion from involvement in the affairs of the Company, termination of the Petitioner’s directorship and his employment all resulted from the discovery of his fraud. Ms. Linda Chan who appeared with Ms. Elizabeth Cheung for the 2nd and 3rd Respondents argued that where a petitioner has caused the conduct said to be prejudicial such prejudice might not be unfair. I agree. In Gore-Browne on Companies, 45th ed., Vol. 1, §19[17], the position is explained as follows:
16.In Chow Yat Tim v Tang Hing Keung, (HCMP 418/2008, unreported 30 June 2009), Kwan J, as she then was, stated the principles as follow (at §115):
17.The position is different in respect of an application for a winding up pursuant to section 177(1)(f). A petitioner has to establish that it is just and equitable to wind up a company and this is commonly done by demonstrating that a company was intended to operate as a partnership (in the general commercial sense) and on the basis of mutual trust and confidence and that such trust has broken down because one party is advancing his own interests at the expense of the other. Accordingly the considerations referred to in the previous paragraph do not apply directly to a petition under section 177(1)(f) although the petitioner’s own conduct may be relevant when the court comes to assess whether or not it is just and equitable to wind up the company. Discussion 18.Ms. Chan’s attack on the Petition can be divided into 2 parts. First, there is the general complaint that the reality of the situation is that the only argument between the parties is the price to be paid by the 2nd and 3rd Respondents for the Petitioner’s shares. The reason it has not proved possible to agree the price is that the Petitioner has failed to provide the necessary information in order to establish how much he owes the Company. Ms. Chan also makes the point that in so far as it might be argued that Lord Hoffman’s judgement in O’Neil v Phillips [2002] 1 HKLRD 267 suggests that once a shareholder is excluded from his anticipated role in a company he is unfairly prejudiced unless he is made a reasonable offer for his shares this view was rejected by the Law Reform Commission. It would be wrong, so Ms. Chan argued, for the court to proceed on the basis that a shareholder in the position of the present Petitioner is entitled to receive a reasonable offer and if he does not this fact is sufficient to justify bring a petition under section 168A. I agree with Ms. Chan. 19.Mr. Poon did not have an answer to this complaint except to suggest that the Petitioner could provide limited assistance as the ICAC had taken such documents as the Petitioner once had that contained information about his misappropriations. The fact is that the Petitioner has not attempted to obtain such documents and until a figure was proffered at my request the Petitioner had not given any indication to the Respondents of the amount he had taken. It seems to me that the 2nd and 3rd Respondents are correct and that the true nature of the dispute between the parties relates to who owes whom what sum. 20.Secondly, Ms. Chan argues that there is nothing in the particular complaints made in the Petition, which I have summarised in paragraph 7. The way in which Ms. Chan advanced this submission invited the Court to assess the Petition against what it is common ground are the circumstances in which the dispute has arisen rather than assess it on the artificial basis that the Petition on its face invites, namely, that the problems that have arisen should be assessed in isolation from the fact that in 2004 the Petitioner’s fraud was discovered and that he had been excluded from the business since that date for that reason and that the sale of his shares has not been completed largely through his own default. The question is this: Even if the vague complaints advanced in the Petition were made out at trial is there any prospect of the Court finding that there has been unfair prejudice? The Petition does not suggest that anything that has occurred since 2004 is unfairly prejudicial. It is common ground that prior to that date the parties differences were intended to be resolved by the 2nd and 3rd Respondents buying out the Petitioner. It is not suggested in the Petition that this failed to take place for reasons, which were unfairly prejudicial. It seems to me that it would be wholly artificial for the Court to assess whether or not the Petitioner has been unfairly prejudiced in isolation from what took place in 2004 and subsequently. Accordingly the question is not whether the matters asserted in paragraph 28a to e viewed in isolation from what took place after 2003 are capable of constituting unfair prejudice, but whether viewed in the context of what too place from 2004 they are capable of constituting unfair prejudice such as to justify the court making an order under section 168A. In my view they are not. The fact is that the real issue between the Parties is not whether what took place prior to 2004 was unfairly prejudicial, but how much the Petitioner should be paid for his shares. What is relevant is whether or not the 2nd and 3rd Respondents have dealt with the Petitioner unfairly since 2004 and there is no allegation in the Petition that they have done so and it is difficult in my view to see how it could be so argued as the Petitioner has not repaid the money he misappropriated. I would, therefore, strike out the Petition. 21.So far as the individual complaints particularised in paragraph 28 are concerned in my view when considered in context it quickly becomes apparent that there is no prospect of them being found to justify the relief that the Petitioner seeks. For completeness sake I will deal with them individually. The Petitioner not receiving notice of any general meetings of the Company or given any minutes. 22.This complaint is made in paragraph 28(a) of the Petition. It is so general that it is unclear to what period it relates. The 2nd and 3rd Respondents take it as a complaint that he was not given access to all the books and records of the Company in its early years, but say that this was remedied in 2003. Since the discovery of his fraud and removal as a director he has ceased to be entitled to access to the books and records of the Company. The Petitioner’s removal as a director in May 2004. 23.Given the reason why he was removed (which I do not understand to be in dispute) it is difficult to see how this complaint is capable of being unfairly prejudicial. The Petitioner not being provided with copies of audited accounts. 24.The Petitioner complains that he has not been given audited financial statements. As a shareholder he should have been sent a copy of this document: sections 122 and 129G of the Companies Ordinance. If this was not done it is prima facie unfairly prejudicial, although as an isolated event it might not be sufficient to justify the intervention by the court pursuant to section 168A. The Petitioner being refused access to books and accounts. 25.The complaint is that since his removal as a director of the Company in 2004 he has not been given access to the books and records of the Company. As a shareholder he is not entitled to such access. This is not in itself conclusive as a petitioner who had some expectation that he would receive such information because of the nature of the commercial arrangements leading to the establishment of a company might be unfairly prejudiced if he were not to be provided with such information. However, the complaint in the Petition is not tied to any alleged legal right or ground of expectation. The non-payment of dividend other than $20,000 in 1999. 26.There is no suggestion that dividends have been paid to some shareholders, but not others. The suggestion appears to be that dividends could have been declared out of profits, but have not been. What the 2nd and 3rd Respondents have done instead is to use the “Company funds for personal purposes at least as referred to herein below”: see paragraph 28c of the Petition. 27.The personal use appears to be matters referred to in paragraph 28e of the Petition. There is first a complaint that back in late 1999 the 2nd and 3rd Respondents granted themselves a loan without asking him first. It is not suggested that this was not repaid and the documentary evidence records him as approving the loan. 28.There is then a complaint that the 2nd and 3rd Respondents speculated in foreign exchange and on the stock market. There is a dispute in the evidence about whether or not the 2nd and 3rd Respondents were speculating or, as they argue, hedging currencies in which products the Company bought were priced. This was, so the Petitioner says, one of the matters, which lead him to enter into the discussions to sell his shares that ultimately lead to the discovery of his fraud. In other words the matters complained of, as is apparent from the Petition, occurred before 2004. The 2nd and 3rd Respondents’ breach of director’s duties by setting up a competing business. 29.The Petitioner complains in paragraph 28d of the Petition that the 2nd and 3rd Defendants have set up businesses that compete with the Company, namely, Pacific (Lifestyle) Limited and Pacific Building Material (Project) Limited and that the existing business of the Company has been channelled into these companies “and/or other companies businesses” including Pacific Tiles Collection, La Casa, Pacific Gallery, Pacific Tiles Collection and Pacific Lifestyle. No further particulars of these allegations are provided in the Petition. 30.During his submissions Mr. Poon stated that these allegations would not be pursued in respect of businesses set up after the breakdown in relations, which was the 2nd half of 2003. In paragraph 12 of his 2nd affirmation the Petitioner sets out details of the commencement of the competing businesses and who operated them. Once the businesses commenced from 2004 and those operated by the Company are removed from the list it is unclear that there is anything left to argue about. The 2nd and 3rd Respondents’ granting themselves a loan to make a down payment for a flat. 31.This I have discussed above. Speculation in foreign currencies and on the stock market. The Petitioner alleges in sub-paragraph 28(e)(ii)(1) was the matter that caused him to decide to leave the Company. 32.This I have discussed above. A complaint about the level of profits 33.This complaint appears in paragraph 28e(ii)(3). It is vague in the extreme and it is unclear what point is being made. It would appear that the complaint relates to the period prior to 2004. A reduction of his commission in 1999. 34.This complaint relates to a decision in April 1999 to reduce the Petitioner’s commission to 1/3 of 1% (of what is not specified) on the grounds that the commission of 1% had to be shared with the 1st and 2nd Respondents. This is said to be unfair, but it is not stated it why it is so. Prayer for a winding up order 35.Had I not concluded that the whole of the Petition should be struck out I would have struck out the prayer for winding up relief. It is quite clear that the Company is a solvent business and that the 2nd and 3rd Respondents will buy out the Petitioner when a fair price is established. The Petitioner has not demonstrated any reason for maintaining this prayer. Order 36.I make an order that the Petition be struck out and a costs order nisi that the Petitioner pays the Respondents costs of the Action. If any party wishes to seek a different costs order they should so notify the court within 7 days of the handing down of this decision failing which the order shall become absolute on the expiry of the 7 day period.
Mr Albert Poon, instructed by Messrs Christine F.L. Ip & Young, for the Petitioner Ms Linda Chan & Ms Elizabeth Cheung, instructed by Messrs Benjamin Au & Billy Chan, for the 2nd and 3rd Respondents Official Receiver - Attendance Excused |