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HCCW 478/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES (WINDING-UP) NO. 478 OF 2008
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IN THE MATTER of SILVER BELL UNIFORM LIMITED（銀玲制服有限公司）
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and
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IN THE MATTER of Sections 168A and 177(1)(f) of the Companies Ordinance, Chapter 32
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BETWEEN
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LEE, NG LOUISE |
Petitioner |
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and
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SILVER BELL UNIFORM LIMITED |
1st Respondent |
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SILVER BELL FASHION LIMITED |
2nd Respondent |
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Before: Hon Harris J in Court
Dates of Hearing: 14-17 and 23 February 2011
Date of Judgment: 9 March 2011
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J U D G M E N T
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Introduction
1.On the 13 October 2008 Mrs. Lee, Ng Louise issued a petition for orders that the 2nd Respondent purchase her shares in the 1st Respondent (“Company”) alternatively that it should be wound up. The Company was incorporated in April 1992 in the following circumstances. In 1991 the petitioner and Mrs. Shen Liang Yien Hwa (“Mrs. Shen”) came to know each other when they both worked in a company called Hollywood & Co., which specialised in the production and sale of uniforms. In 1992, Hollywood & Co ceased business. Mrs. Shen and the Petitioner decided to set up the Company to do the same kind of business.
2.The Company initially had 10,000 issued shares of which the Petitioner held 40%, the 2nd Respondent held 50% and a friend of Mrs. Shen, Ms. Chen Chak Yung (“Ms. Chen”) held 10% as Mrs. Shen’s Family’s nominee. The 2nd Respondent was owned by Mrs. Shen’s Family and manufactured clothing. The Petitioner and the 2nd Respondent paid $200,000 and $300,000 respectively for the shares allotted to them and Ms. Chen. In or about 2004 or 2005 Ms. Chen transferred her shares to Mr. Shen Chung (“David Shen”) and Ms. Ginam Shen (“Ginam Shen”). From then on, David Shen and Ginam Shen each held 5% of the issued shares of the Company. David Shen and Ginam Shen are the children of Mrs. Shen. They took no part in the operations of the Company.
3.Between the date of incorporation and 2008 the Company had 3 directors. They were the Petitioner, Mrs. Shen, and her husband Mr. Shen Meng Fai (“Mr. Shen”). Mr. Shen took no part in the running of the Company and I do not understand it to be in dispute that in practice he played little role as a director as the Company did not have board meetings, but was run informally by the Petitioner and Mrs. Shen, who were the decision makers. Mrs. Shen acted as the Company’s managing director and the Petitioner acted as its general manager. Both the Petitioner and Mrs. Shen received salaries. Mr. Shen did not receive any director’s fee.
4.The Petitioner and Mrs. Shen divided responsibilities. The Petitioner was responsible for sales, liaison with customers, designs and general administration. Mrs. Shen was responsible for the production of the uniforms. This arrangement proved successful. The Company was profitable and the Petitioner and Mrs. Shen appear to have maintained a good relationship.
5.Unfortunately Mrs. Shen became ill in 2006 and left the running of the Company largely in the Petitioner’s hand until she died in April 2008. It is not dispute that during the period of Mrs. Shen’s illness no steps were taken by Mrs. Shen or the 2nd Respondent to appoint a replacement for her or for any other member of the Shen Family to take an active role in the management of the Company.
6.In May 2008 the Petitioner and members of the Shen Family began to discuss replacing Mrs. Shen. The Shen Family wanted to appoint a member of their Family as the managing director of the Company. Initially they suggested Mr. Shen, which did not meet with the Petitioner’s approval on the grounds that he was too old.
7.Mr. Shen and the Petitioner then held, what is perhaps best described as, an informal board meeting on 29 May 2008 attended by David Shen, who was not at that time a director. Mr. Shen made a proposal to appoint David Shen as Managing Director. The Petitioner objected to him on the grounds that he was not suitable as he did not have any experience of the Company. I note that the Petitioner did not suggest an alternative candidate and that she has accepted that in due course the position would need to be filled. The Shen Family took the view that, notwithstanding the Petitioner’s objections, David Shen should be appointed managing director and on 10 June they circulated an announcement to staff and customers informing them that David Shen would be managing director with effect from 16 June 2008. As David Shen was not at this time a director this was irregular, but nothing turns on it. It is not in dispute that given the Shen Family shareholding it was possible for them to appoint a new director to replace Mrs. Shen and cause their preferred candidate to be appointed managing director. It is also not in dispute that the Shen Family appreciated that the Petitioner would be unhappy if they insisted on replacing Mrs. Shen with Mr. Shen or David Shen.
8.As a consequence of the Shen Family’s insistence on appointing David Shen the Petitioner had discussions with Mr. Shen in early June 2008 in which she proposed that either the Shen Family buy her shares or the Company be wound up. It appears that Mr. Shen’s response was sufficiently positive that the Company’s accounts officer was instructed to get quotes for a valuation of the shares, but this did not progress as the quotes were considered too high.
9.In early September 2008, the Petitioner, David Shen and Ginam Shen had a meeting in Pizza Hut. At that meeting David Shen and his Sister made it clear that they wished the Petitioner to remain with the Company, and that the Shen Family did not wish to buy her shares or wind up the Company. The Petitioner explained that she did not wish to remain with the Company. She said that she wished to leave and set up a competing business. It is not in dispute that David and Ginam Shen accepted this and that the meeting was generally amicable. There is a dispute as to whether or not during the discussions the Petitioner said that she envisaged competing for business from existing customers of the Company and that David and Ginam agreed to this. Nothing turns on this issue. My impression of the evidence was that the discussions were probably fairly general with both parties trying to be polite and helpful and probably failing to make it clear precisely what they intended in the future.
10.On 12 September 2008, the Petitioner submitted her resignation letter resigning from the post as general manager with effect from 16 October 2008. The Shen Family then began to receive information that indicated that the Petitioner was beginning to approach the Company’s customers and staff, which was not what they expected to happen, so David and Ginam Shen told me in their evidence. They had expected the Petitioner to compete for new customers and not, as they saw it, plunder the Company’s contacts and staff. As a result the Shen Family purported to terminate her employment on 23 September 2008. The Petitioner wrote letters on 30 September 2008, 2 October 2008, 6 October 2008 and 8 October 2008 repeating her offer to sell her shares. The Shen Family maintained their refusal to buy them. The Parties’ respective positions polarised leading to the presentation of the Petition on 13 October 2008.
11.Although, both Parties have filed affirmations in which they argue about what precisely had been discussed and agreed at various meetings following Mrs. Shen’s death and, in particular, whether or not it had been agreed that the Petitioner could compete for orders from existing clients and approach the Company’s staff after the meeting on 10 June 2008 at Pizza Hut, both Mr. Fong, who appeared for the Petitioner, and Mr. Remedios, who appeared for the 1st Respondent, accepted that the latter issue was immaterial and that many of the relevant facts were not in dispute. Those, which they agreed, are as follows:
(i) The Petitioner had not been excluded from the business of the Company. She had chosen to resign as an employee.
(ii) The Shen Family (the 2nd Respondent) had, prior to her resignation, wanted the Petitioner to remain with the Company.
(iii) The Shen Family had agreed in principle on 10 June 2008 to the Petitioner setting up a competing business when she left the Company and, in practice, and despite their complaints about the way she had gone about doing so, had not done anything to stop her competing for orders from existing customers of the Company or offering existing staff employment with her new company.
12.The following factual matters are in dispute. Whether or not Mrs. Shen and the Petitioner had, as the Petitioner alleges in paragraph 9(h) of the Petition, agreed at the time they established the Company that if either the 2nd Respondent or the Petitioner wished to withdraw from the Company either the remaining shareholder should buy the departing shareholder’s shares or the Company should be wound up. There is also a dispute as to whether or not the Company was run in such a manner as to make it inequitable for the 2nd Respondent to insist on the Petitioner remaining as a shareholder if the 2nd Respondent wished to replace Mrs. Shen with a managing director of whom the petitioner did not approve.
13.Mr. Remedios accepted during his closing submissions that if I were to find that the agreement as alleged by the Petitioner had been reached she was entitled to the relief that she seeks in which case the 2nd Respondent would buy her shares rather than have the Company wound up. The Petitioner would also prefer to have her shares purchased and does not insist on a winding up of the Company.
14.The issues, which I have to decide, are:
(i) Whether or not the alleged agreement was made?
(ii) If no such agreement was made did the Petitioner and the 2nd Respondent, through Mrs. Shen, conduct their affairs in such a way that the relationship between the Parties give rise to equitable considerations, which impact on their legal rights?
(iii) Whether or not the 2nd Respondent’s insistence on appointing David Shen as managing director was unfair and prejudicial to the interests of the Petitioner?
(iv) What, if any relief, is the Petitioner entitled to?
The agreement
15.The Petitioner has given evidence that at the time the Company was established she and Mrs. Shen discussed how they would conduct the Company’s affairs and that they agreed that the Petitioner would become the general manager responsible for matters other than production and Mrs. Shen would become the managing director and be responsible for production. The 2nd Respondent does not dispute this. Neither does it dispute that the Company’s other director, Mr. Shen, had no involvement in the initial discussions between the Petitioner and Mrs. Shen, which led to establishment of the Company. It appears that neither the Petitioner nor Mrs. Shen kept any written records and that to the extent that Mr. Shen or any other member of the Shen Family was kept informed of what had been discussed they did not keep a record. Mr. Shen did not give any evidence in these proceedings. The only evidence filed from a person, other than the Petitioner, who had any firsthand knowledge of the establishment of the Company at all, was an affirmation of Lam Cheung Shu, who was not called at the trial, a director of the 2nd Respondent. I note that Mr. Lam was not able to say anything about the arrangements that Mrs. Shen had agreed with the Petitioner. David Shen and Ginam Shen both disputed that their Mother had agreed that if either Party wished to leave the Company the other would buy that Party’s shares or the Company would be wound up, but they did not give any particular reason for doing so. I also note that despite emphasising in the 2nd Respondent’s affirmation evidence that the Company was its subsidiary and that the Petitioner had a secondary role in it, the fact is that only Mrs. Shen was actively involved in the management of the Company and that for a period of 2 years prior to her death, the management of the Company’s affairs was left in the Petitioner’s hands. The 2nd Respondent does not appear to have felt it necessary to appoint somebody to assist the Petitioner or protect the 2nd Respondent’s interests. This is consistent with the Petitioner’s characterisation of the Company as being in practice a business venture between herself and Mrs. Shen.
16.Mr. Remedios submitted that I should not accept the Petitioner’s evidence for the following reasons:
(i) As the agreement is alleged to have been made with a deceased person my assessment of the Petitioner’s evidence should be in accordance with the principles set out in Yung Shu Wu v Vivienne Sung Wu FACV No. 17 of 2009. Lord Walker said this:
“73. Secondly, and in tension with the first point, Vivienne is making a claim against the estate of a deceased person who cannot give evidence against her claim. The court has always approached such claims with some suspicion, especially (in the case of an alleged gift) where the only or principal witness in support of the claim is the donee. Corroboration is not essential in every case. But as Plowman J said in Thomas v. The Times Book Co. Ltd [1966] 2 All ER 241, 244 (the curious case about ownership of the manuscript of Dylan Thomas’ Under Milk Wood),
“Therefore, not only in this case is the onus of proof on the defendants [who were resisting a claim by the poet’s administratrix], but I am enjoined by authority to approach their story with suspicion having regard to the fact that the other actor in the story, the late Dylan Thomas, is dead and cannot therefore give his own version of what took place.”
This principle has been applied in Cheung Cho Kam Sindy v. Cheung Yuet Ying Rose (Deputy High Court Judge Muttrie, 13 July 2007).
74. This Court has to give effect to both these rules. A written instrument signed by the deceased was not essential, as a matter of law, for a valid disposition of his equitable interest in the Good Harvest and Vacha accounts. Nor is corroboration essential as a matter of law. But here Vivienne was the sole witness to an alleged oral gift amounting (if she is right) to the entirety of the deceased’s assets in Hong Kong, worth millions of US dollars, at a time when the deceased’s liver cancer had not yet been confirmed (it was confirmed by the specialist on 28 December 2001 and its advanced state was disclosed later than that). She was undertaking a very heavy burden of proof to satisfy the court that the deceased made what Sargant J in Re Westerton [1919] 2 Ch 104, 109 referred to as “a clear gift then and there … an out and out gift and not an expression of a mere desire to make a gift”.
75. The Court of Appeal held that the deputy judge had been wrong to conclude that Vivienne had discharged that heavy burden. The Court of Appeal’s reasons were expressed fairly briefly, in paras 40 to 45 of the Vice‑President’s judgment. They were, in brief summary (i) the absence of clear and reliable evidence of words of gift; (ii) the corroborative evidence (of statements made by the deceased to relatives and friends of Vivienne) being much weaker, on close examination, than the deputy judge had supposed; and (iii) the probabilities arising from the parties’ situation (and in particular the inequality in 2001 of the New York and Hong Kong assets, on which the deputy judge had misunderstood Mr Frey’s evidence).
76. The first of these reasons must in the end be the most crucial, and Mr Ho SC (for Vivienne) attacked it, drawing attention to a passage in Vivienne’s witness statement (para.38(3)) quoted in para.27 above and another in para.40 of the witness statement (“KS simply told me that he gave his shares in the monies to me”). But in my judgment the Court of Appeal was right to hold that Vivienne had not discharged the heavy burden of proof that was on her, and that the deputy judge was wrong to hold otherwise. The Court of Appeal was rightly looking for evidence that was clear and reliable. Vivienne’s pleaded case was of an oral gift by the deceased of “all his assets outside New York”. This is in contrast to the wording in para.40 of the witness statement. There was no clear evidence of where, when and what the deceased said in making the alleged gift. Nor was Vivienne’s evidence obviously reliable. …”
(ii) This statement was made in the context of claims against the estate of a deceased person, a context in which the Courts have developed particular principles that I do not accept are of general application. Mr. Remedios has not been able to cite any authority which suggests otherwise. It is also relevant that the question that I am here considering is not simply whether or not there was a discussion that can be properly be construed as giving rise to a binding agreement, but whether or not what was said at the time gives rise to equitable considerations when determining the Parties’ rights. To that extent it does not seem to me that it is appropriate to apply the strict constraints suggested by Mr. Remedios and I do not, therefore, accept that corroboration is necessary or that clear evidence is required of where, when and what Mrs. Shen said.
(iii) The term does not make commercial sense. I disagree. It seems to be perfectly sensible and the kind of provision I would have expected to be included, or its inclusion to have at least been considered, in a properly drafted shareholders agreement. It seems to me more likely than not that sensible business people discussing establishing a company would have considered what would happen if one of them wanted to leave the company and it is more likely than not that they would have agreed what the Petitioner says was agreed.
(iv) The agreement is not referred to in any contemporaneous documents. Neither are any of the matters that the 1st Respondent accepts were agreed.
(v) There is no evidence that the Petitioner mentioned the agreement to the Shen Family after Mrs. Shen died. This is factually correct. It needs to be considered in context. It was not the fact of Mrs. Shen’s death alone that caused the Petitioner to decide that she wished to leave the Company. The catalyst was the Shen Family’s insistence that David Shen should be appointed managing director. It appears that after the meeting at Pizza Hut, during which it was made clear to her that the Shen Family insisted on this, that she quickly discussed with Mr. Shen selling her shares.
(vi) The Petitioner did not refer to the agreement until the Petition was issued. This is factually correct. The Petitioner did, however, write on 30 September 2008 repeating her proposal that her shares be purchased, alternatively that she purchase the Shen Family’s shares or the Company be wound up. Mr. Shen had not responded negatively when the subject was first raised (although I accept that his Children did at the Pizza Hut meeting) and it may have seemed to the Petitioner sensible and fair for the Shen Family to buy her out if she decided that she no longer wished to continue in business with them now the person she had been dealing with had died. The business had apparently been conducted successfully and amicably for 16 years and I do not think unreasonable that the Petitioner might have expected that, if the Shen Family were being fair, they would respect her views and buy her shares. I note that there had been no suggestion that they could not afford to do so and there was, on their own case, an affinity between the business of the Company and that of the 1st Respondent. In these circumstances I do not think it surprising that she would have written in the way she did and not framed her proposal in terms of asserting a right to sell her shares because of what she had agreed many years before with Mrs. Shen. The alleged agreement was, it will be remembered, expressly referred to in the Petition which was issued the following month.
(vii) The Petitioner was not a reliable witness. Mr. Remedios makes 3 points. The first 2 are that in cross-examination the Petitioner denied that she is bound by the Company’s articles and that she owed the Company fiduciary duties. As she is no longer a director of the Company she was correct as regards the 2nd matter, but even accepting that she may have misunderstood the strict legal position it does not seem to me that much can be read into this. What it seemed to me she was saying was that she took the view her rights were as agreed with Mrs. Shen rather than as written in any technical company document. The third matter was that she was less than frank when answering questions about the employment of Billy San, who had worked for the Company. She denied he worked for her. As it transpired he worked for a company owned by her Husband and her Brother in Law and provided some consulting services to the Petitioner’s company. I am not persuaded that what might, I accept, be regarded as unhelpful answers to this line of questions calls into question the integrity of her evidence more generally.
17.I found the Petitioner generally to be an intelligent witness, who gave her evidence clearly and explained her case coherently. As I have already noted the agreement that she says she made with Mrs. Shen makes commercial sense. The 1st Respondent has not called any evidence that is inconsistent with the Petitioner’s evidence on this issue and I can see no good reason not to accept it. I, therefore, find that the Petitioner and Mrs. Shen did agree at the time the Company was established that if one of them wished to leave the Company the other shareholder would buy the departing Party’s shares. This is enough to dispose of the case in the light of Mr. Remedios’s acceptance that if I so found the Petitioner was entitled to relief and the Parties’ agreement that they both preferred for her shares to be sold to the 1st Respondent. I shall, however, address the alternative arguments briefly.
Sections 177(1)(f) and 168A
18.Mr. Fong argued that even if the agreement as alleged had not been reached or was so vague as not of itself to be determinative of the Parties’ rights, the way in which the Company had been founded and, alternatively, operated demonstrated that the Company had been operated on the basis of the mutual trust and confidence existing between the Petitioner and Mrs. Shen. In these circumstances it was unfair and in equitable to require the Petitioner to remain in business with the 2nd Respondent. The case, Mr. Fong argued, can be analysed either as a breakdown of trust and confidence sufficient to engage section 177(1)(f) of the Companies Ordinance and justify a winding up of the Company, alternatively as the 1st Respondent’s (the Shen Family in practice) insistence on foisting on the Petitioner a new business partner, as constituting an unfair exercise of its rights sufficient to engage section 168A of the Companies Ordinance.
19.I shall deal first with the application of section 177(1)(f). Lord Wilberforce explained the circumstances in which the court might find that a company had come to be established in a manner that brought into play the just and equitable provisions of the English equivalent to section 177(1)(f) of the Companies Ordinance at pages 379B of his judgment in In re Westbourne Galleries [1973] AC 360:
“… The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to ‘quasi-partnerships’ or ‘in substance partnerships’ may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words ‘just and equitable’ sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.”
20.I accept, indeed it is not in dispute, that the Petitioner and Mrs. Shen agreed to establish that both of them should participate in the business of the Company. To this extent it might be said, as Mr. Fong submits, that the Company was a “quasi-partnership”, but to do so is misleading and demonstrates the danger of using, and thinking in terms of such labels. What is relevant is whether or not the facts and matters relied on by the Petitioner engage the just and equitable jurisdiction to be found in section 177(1)(f). There is no complaint of exclusion here. The Petitioner objected to the appointment of David Shen and, as a consequence, being required to work with somebody she had not agreed to work with when the Company was established. Do the circumstances in which the Company was established and managed for 16 years make this unjust – it not being dispute that it was (or would have been if done correctly) the result of the majority shareholders’ lawful exercise of their rights? In arguing that it did Mr. Fong referred me to the judgment of George Bompas Q.C. sitting as a deputy judge of the English High Court in Re Baumler (UK) Ltd. [2005] 1 BCLC 92, a petition brought under section 459(1) of the Companies Act 1985, which is the equivalent of our section 168A, in which he said this:
“ [181] Broadly I accept Mr Snowden’s summary. However there are two points which I think require qualification.
(i) The first point is that in the case of a quasi-partnership company a breach of duty by one participant may not in the event be causative of ‘prejudice or loss’ to the company, but may nevertheless lead to such a loss of confidence on the part of another, innocent, participant and breakdown in relations that the innocent participant is entitled to relief under s 461 of the 1985 Act. In effect the unfairness lies in compelling the innocent participant to remain a member of what was once a company formed with the characteristics which made it capable of being given the label of ‘quasi-partnership’, unsatisfactory as that label might be. In this respect I refer to the part of the speech of Lord Hoffmann in O’Neill v Phillips [1999] 2 BCLC 1 at 11, [1999] 1 WLR 1092 at 1101, where he said:
‘I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of s 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree ...’”
21.Although, as I have noted, these statements were made in the context of an unfair prejudice petition, as were those in O’Neill v Phillips [1999] 1WLR 1092, [1992] 2 BCLC 1, in my view they are relevant to a consideration of whether or not it is just and equitable to wind up a company, although I note that section 177(1)(f) does not require unfairness to be shown.
22.It does not seem to me that it was unreasonable for the Shen Family to want to replace Mrs. Shen and it does not seem to me unreasonable for them to have proposed David Shen. On the other hand I accept that from the Petitioner’s perspective it might seem unsatisfactory to find herself dealing with somebody new. Nobody was to blame for the impasse that arose, it was an unfortunate consequence of Mrs. Shen’s death. I am not here concerned with allocation of blame, there being no blame to allocate in my view, I am concerned with whether or not the way in which the Company had been operated for 16 years and the understandings, implicit perhaps rather than express, underlying the way in which its affairs were conducted make it unjust to require the Petitioner to remain a shareholder. I have concluded that it does. In reaching this conclusion I have particular regard to the fact that between 2006 and 2008 the Shen Family did not take any steps to replace Mrs. Shen or assist the Petitioner in the management of the Company. This suggests that the Company was generally understood by the Petitioner, Mrs. Shen and the other members of her Family to be a venture between the Petitioner and Mrs. Shen. In those circumstances I consider it unjust to require the Petitioner to have to work with a new partner in whom she does not have the confidence she obviously had in Mrs. Shen.
23.The unfair prejudice relied on by the Petitioner is the appointment of David Shen as managing director. I think it useful to quote some of the parts of Lord Hoffman’s judgment in O’Neill v Phillips that precedes the part quoted in Re Baumler. His Lordship said this beginning at page 1098D:
“… the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons PIc. [1995] 1 B.C.L.C 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J. E. Cade & Son Ltd [1992] B.C.L.C 213, 227:
‘The court … has a very wide discretion, but it does not sit under a palm tree.’
Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (“it’s not cricket”) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.
In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith, One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.
This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships’ House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of “just and equitable” as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:
‘The words [‘just and equitable’] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act [1948] and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’
I would apply the same reasoning to the concept of unfairness in section 459. The Law Commission, in its Report on Shareholder Remedies (1997) (Law Com. No. 246), p. 43, para. 4.11, expresses some concern that defining the content of the unfairness concept in the way I have suggested might unduly limit its scope and that “conduct which would appear to be deserving of a remedy may be left unremedied ... ” In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under section 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible “and wholly undesirable” to define the circumstances in which the application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.
I should make it clear that the parallel I have drawn between the notion of “just and equitable” as explained by Lord Wilberforce in In re Westbourne Galleries Ltd. and the notion of fairness in section 459 does not mean that conduct will not be unfair unless it would have justified an order to wind up the company.”
24.In my view the way in which the affairs of the Company were conducted prior to Mrs. Shen’s death gives rise to equitable considerations, which I have referred to in the earlier paragraphs of this judgment dealing with section 177(1)(f), that made it unfair for the Shen Family to insist on their de facto right to replace Mrs. Shen with their preferred nominee without offering to buy the Petitioner’s shares.
Conclusion
25.In the light of the agreement of the Parties that if I found in the Petitioner’s favour their preferred course is that I order a buyout, I will direct the following:
(1) The Petitioner shall file and serve its proposed terms of order within 7 clear days of the date of handing down this judgment;
(2) The 1st Respondent shall file and serve any comments it has on the terms of the order within 5 clear days thereafter.
26.If the Parties are unable to agree the terms of the order, including costs, which I would expect to follow the event, the matter should be relisted before me.
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(J Harris)
Judge of the Court of First Instance
High Court |
Mr Raymond Fong, instructed by Messrs Kelvin Cheung & Co, for the Petitioner
Mr Leo Remedios, instructed by Messrs Lily Fenn & Partners, for the 2nd Respondent
Messrs Woo, Kwan, Lee & Lo, for the 1st Respondent, excused from attendance
The Official Receiver, excused from attendance
Appeal by the 2nd Respondent to Court of Appeal dismissed with costs. Please refer to CACV62/2011 dated 21 December 2011 |