Lehman & Co. Management Ltd v. Effiscient Ltd and Another

HCCW 377/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 377 OF 2010

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BETWEEN

AND

HCCW 383/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 383 OF 2010

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_____________

BETWEEN

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(Actions consolidated pursuant to the order of Hon. Harris, J dated 17.1.2011)

Before: Hon Harris J in Court

Dates of Trial: 3, 4, 6, 7, 10-13 October 2011

Date of Application for re-opening the trial: 9 November 2011

Date of Judgment: 15 November 2011

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J U D G M E N T

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Introduction

1.The present proceedings concern LehmanBrown Limited (“Company”).  The Company is incorporated in Hong Kong, but carries on business in the Mainland.  It is a full service accounting firm providing audit and corporate advisory services.  It has 2 shareholders, who each own 50% of the Company.  They are Effiscient Limited (“Effiscient”), which is owned by Russell Brown and his Wife, Zhou Han Brown, and Lehman & Co. Management Limited (formerly known as Lehman, Lee & Xu Patent and Trademark Agents Limited and which I shall refer to as “Lehman Management”), which is beneficially owned by Karolina Lehman, although her Husband, Edward Lehman, would appear to exercise de facto control over its affairs, at least in so far as they concern the Company.

2.The business of the Company was established by Mr. Lehman and Mr. Brown in 2001.  Mr. Brown became a director at the outset and remains one to this day.  Mr. Lehman and his Wife chose not to be appointed directors and nominated a service company called Million Strong Limited (“Million Strong”) to represent them on the board.  Million Strong ceased to be a director and was replaced on 16 November 2010 by Mrs. Brown.

3.Mr. Lehman is a founding partner in a Mainland law firm called Lehman, Lee & Xu (“LLX”).  LLX practices Chinese law and according to its website is currently the 3^rd largest corporate and commercial law firm in the Mainland.  It goes onto to describe itself as “China’s leading corporate & commercial law firm”.  Mr. Lehman describes himself in his witness statement as “experienced in foreign direct investment in China”.  Mr. Lehman, who is qualified in the United States, has been working in the Mainland since 1992.  His Wife, who is a Polish national, was born in the Mainland.

4.Mr. Brown is an accountant.  He is a Fellow of the Chartered Institute of Management Accountants in the United Kingdom and in 2007 became an associate of the Institute of Chartered Accountants of England and Wales.  In November 1990 Mr. Brown joined a public relations company, Shandwick Asia Pacific Limited, and worked for them in Hong Kong for 4 years.  He remained with the Shandwick Group until April 2001 working in London, Singapore and Minneapolis and reaching the position of Global Chief Financial Officer before leaving them following their merger with another large public relations firm called Weber.  Mr. Brown’s Wife, Zhou Nan, is Chinese and has degrees in international trade and economics from Chinese universities and the London School of Economics.  She worked for various financial institutions in the United Kingdom between 1995 and 2000.

5.There is a dispute about the circumstances in which Mr. Lehman and Mr. Brown came to meet and establish the Company.  For the purposes of this introduction it suffices to say that they met in 2001 after Mr. Brown had left Shandwick and at a time when he was interested in establishing an accountancy firm in China and Mr. Lehman was considering doing the same with a view to exploiting LLX’s client base. Initially the Company operated from within the premises rented by LLX in Beijing.  During this period there was not a clear demarcation between the administration of LLX’s business and that of the Company.  All payments and receipts went through LLX and Mrs. Lehman operated the HSBC hexagon system through which payments were made and also the Company’s HSBC account in Hong Kong.

6.Initially Mr. Lehman paid the Company’s operating costs, but by about April or May 2002 the Company had become financially independent and other than rent it became unnecessary for Mr. Lehman to continue to pay them.  By the end of 2002 the Company started to render its own invoices for its fees.  At about this time Mr. Lehman began to request greater involvement in the running of what was becoming an increasingly successful business.  This is illustrated by an email he wrote to Mr. Brown on 1 December 2002 stating that he “would like to take an active role in the management of LB”.  The implication is that he had not previously played such a role.

7.This was the inception of the disagreements between the Parties that has lead to the present proceedings.  Mr. Brown’s position was that he and Mr. Lehman had agreed when the Company was established that he was to manage the business on a day to day basis.  Although he was prepared to consult Mr. Lehman over the management of the Company he was not prepared to accede to Mr. Lehman’s requests that he have a role in the day to day management of its affairs.  As time passed Mr. Lehman’s requests to become involved became more assertive.

8.In 2004 their relationship deteriorated further.  In September 2004 Mr. Lehman made his first demand for a dividend payment and suggested US$300,000.  Mr. Brown refused on the grounds that provision needed to be made for future business expenses and that until the cash flow projections for 2005 had been finalized it was premature to pay a dividend.  Mr. Lehman was not satisfied with this response.  He sent an email to Mr. Brown on 22 September 2004, in response to one from Mr. Brown on 20 September, complaining that Mr. Brown was receiving a salary, but that he got nothing from the Company, and reiterating his view that he was entitled to manage and run the affairs of the Company with Mr. Brown on a day to day basis.  He also repeated his demand for a dividend.

9.On 19 October 2004 Mrs. Brown discovered that US$118,335 had been taken from the Company’s bank account without authorization.  In an email of 20 October 2002 Mr. Lehman explained this as a step taken by him to secure rental payments due to LLX.  This withdrawal by Mrs. Brown had not been authorised either by Mr. Brown or by the Board of the Company.  The Company had signed a sub-lease with L&A International Patent and Trademark Agents Limited, which was one of the companies used by Mr. Lehman, in respect of the premises it shared with LLX at a rental of US$1,000 per month.  Effiscient says that it is clear from the terms of that agreement (which appears on its face to be correct) that the Company owed US$8,000 for the period up to 15 July 2004 and something for the period up to October 2004, but certainly nothing like US$118,000.  At the time Mr. Lehman was demanding a dividend of US$150,000 to which Mr. Brown did not agree.  Mr. Lehman also knew that Mr. and Mrs. Brown had received salaries totalling US$102,480.  Mr. Brown took the view that Mr. Lehman was simply taking what he decided he was entitled to and the appropriation had nothing to do with rent.

10.In October 2004 Mr. Lehman began to send increasingly confrontational emails to Mr. Brown.  On 14 November 2004 he wrote as follows to Mr. Brown:

“To the best of my knowledge you have systematically embezzled money, manipulated accounts and client money in both Hong Kong and China. You have not reported to the shareholders properly and we are left with no other choice but to commence civil legal action, notify the governmental authorities regarding your criminal actions, as well as notify your professional accrediting body on the actions you have taken either internally or through gross negligence.”

11.In late November 2004, LLX moved offices in Beijing.  The Company did not.  The intention was that it lease part of what had previously been occupied by LLX and the Company.  It is Effiscient’s case that Mr. and Mrs. Lehman instructed or permitted LLX’s staff to damage, during the removal process, that part of the premises they knew the Company would continue to occupy.

12.It might be thought that in these circumstances one or other of the shareholders would have taken action to terminate their business relationship and, indeed, in an email of 29 October 2004 Mr. Lehman seems to be suggesting this.  However, this did not happen.  The Company continued to grow successfully under Mr. Brown’s management.  Mr. Lehman continued to make demands for dividends and for a number of years Mr. Brown seems to have been able to accommodate these demands to an extent that Mr. Lehman found tolerable.  Mr. Brown says that between October 2005 and February 2009 Mr. Lehman received dividends totalling US$705,000 and that long before this he had been repaid those expenses he had covered during the first year or so of the Company’s operations.

13.Mr. Lehman did not accept that the schedule of dividend payments Mr. Brown had prepared showing the dates and amounts of payments is accurate, but neither has he produced any alternative information.  I can see no reason not to accept what Mr. Brown says.

14.During the period October 2005 to February 2009 Mr. Lehman’s involvement with the affairs of the Company was limited to demands for information.  The implication is that he was receiving sufficient dividends to assuage his frustration at being, as he saw it, excluded from the degree of involvement in the affairs of the Company to which he was entitled.  However, this began to change towards the end of 2008.

15.On 2 December 2008 Mr. Lehman demanded that a dividend of US$350,000 to be paid that day.  This request was made after the draft financial statements for 2007 were sent to him.  Mr. Brown says that Mr. Lehman subsequently told him that he would instruct Million Strong to sign the financial statement if he was provided with details of the salaries and bonuses of Mr. and Mrs. Brown and another senior member of staff, Dickson Leung.  On 14 December 2008 he sent this information to Mr. Lehman by email reminding him that the information had in fact already been provided to his representatives. Mr. Lehman did not cause the financial statements to be signed, repeated his demand for immediate payment of dividends and informed Mr. Brown that he was looking for a buyer for Lehman Management’s shares in the Company.

16.During the later part of 2008 Mr. Lehman began to make complaints about Mr. Brown to various regulatory bodies.  He caused complaints about alleged trade mark infringements to be made to the relevant authorities in the Mainland, which resulted in raids on the Company’s premises. He also became highly abusive at meetings, as demonstrated by a recording which was made at one such meeting, and began to cause defamatory statements to be published about Mr. Brown, which resulted in proceedings being brought against him in Hong Kong.  An injunction was obtained on 23 July 2010 prohibiting the continued publication of defamatory statements.  Mr. Lehman breached the injunction.  An application was made for an order that Mr. Lehman be fined and committed for contempt of court.  On 19 April 2011 Mr. Lehman admitted that he had breached the injunction, made an unreserved apology and was fined of HK$200,000.

17.On 17 September 2010 Lehman Management issued a Petition seeking an order that it purchase Effiscient’s shares in the Company. On 20 September 2010 Effiscient issued a Cross-Petition seeking an order, inter alia, that Lehman Management sell its shares in the Company to Effiscient. The 2 Petitions have been heard together.

18.There is no dispute that one of the Parties should be ordered to buy the others shares in the Company.  I need to decide which one of them has established that they have been unfairly prejudiced and is entitled to the relief, which they seek.

The Issues

19.Lehman Management’s complaints are set out in paragraph 17 of the Petition.  The complaints are fleshed-out and to some extent reformulated in the Points of Claim.  In paragraph 17 of the Points of Claim it is asserted that Lehman Management had a legitimate expectation and legal right, by reason of being a 50% shareholder and having been primarily responsible for setting up the Company, that it could participate in the management of the Company.  In paragraph 18 it is asserted that by 2008 the relationship between the Parties had broken down largely due to the unfair and prejudicial conduct of Mr. and Mrs. Brown.  There then follows a long series of complaints many of which have not been supported by the evidence that was subsequently filed.  The complaints that were pursued at trial and which form the substance of Lehman Management’s case are as follows.

20.First, that Lehman Management was not provided with information and documentation about the Company’s affairs to which it was entitled.  This information and documentation sought concerned financial matters and in particular what Mr. and Mrs. Brown and Dickson Leung received from the Company.

21.Secondly, that Mr. Brown prevented the Company paying dividends when it was profitable and thus prevented Mr. Lehman benefiting from the success of the Company as he did not receive any director’s remuneration.

22.Thirdly, that Lehman Management were excluded from participation in management of the Company.

23.Fourthly, Mr. Brown caused the Company to employ his Wife and Dickson in senior positions without his consent.  In the case of Mrs. Brown it was suggested during the trial that she did not have relevant experience or skills and was overpaid.

24.Fifthly, that Mr. Brown established an accounting firm in Hong Kong, LehmanBrown CPA Co. Ltd without Mr. Lehman’s knowledge or consent.

25.Sixthly, Mr. Brown took advantage of deregistration of Million Strong to appoint his Wife as a director of the Company and thus exclude Lehman Management from participation as a director of the Company.

26.Paragraph 18 of the Points of Claim sets out how these matters unfairly prejudice Lehman Management.  Surprisingly the reasons given do not include Lehman Management’s exclusion from management and participation in the Board.  Instead there are complaints focusing on the Company’s inability to approve its financial statements and the resulting infringement of relevant corporate and tax regulations, damage to reputation and loss of business.  I note that no evidence has been adduced of Mr. Brown’s conduct damaging the Company’s reputation in the market place or causing any loss.  At trial the thrust of Lehman Management’s complaint was that Mr. Lehman had been excluded from participation in the management and control of the Company and there had been a complete breakdown in the Parties trust and confidence.  The latter is not in dispute.

27.The Cross-Petition alleges, unsurprisingly, that it is Mr. Lehman who has caused the breakdown in their relationship.  It is alleged that Effiscient has been unfairly prejudiced as a consequence of various matters.  The following are those upon which Effiscient relied at the trial.

28.First, Mr. Lehman’s Wife, Karolina, misappropriating US$118,335 from the Company in late 2004.

29.Secondly, encouraging or permitting the damage to the Company’s premises in late 2004.

30.Thirdly, operating a business in the Mainland in competition with the Company.

31.Fourthly, misappropriating the Company’s trademark.

32.Fifthly, unreasonably refusing to authorise Million Strong to sign audited financial statements.

33.Sixthly, harassment and intimidation of Mr. and Mrs. Brown.

34.Effiscient alleges that this is unfairly prejudicial to its interests as a member because it has caused loss to the Company, wasted management time and exposed the Company needlessly to prosecution by the Hong Kong tax authorities and investigation by the Mainland authorities concerned with intellectual property rights protection.

Relevant Legal Principles

35.There was no difference between the parties as to the principles by reference to which the Petitions should be determined.  It was accepted by both parties that one or other of them should be ordered to buy the shares of the other.  The outcome of the trial was largely to turn on whose version of events I preferred.  It is not, therefore, necessary for me to say much about the applicable legal principles.

36.The court has a wide discretion when dealing with unfair prejudice petition, but like all discretions it must be exercised judicially and in accordance with rational principles.  The court must be satisfied that the petitioner has demonstrated that the interests of members have been unfairly prejudiced.  A member does not have a right to sell his shares simply because he had decided that he wishes to exit a company.  He must show that he has been prejudiced, and unfairly so, in order to obtain relief from the court.  If this is not demonstrated the court should not grant relief.  Commonly a petitioner demonstrates this by establishing breaches of agreements (other than the articles) made by members concerning how the affairs of the conduct of the company are to be conducted.  Lord Hoffman put it this way in O’Neill v Phillips [1999] 1 WLR 1092 at page 1099:

“ a member of a company will not ordinarily by 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 …. 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.”

37.It other cases it may not be possible to point to infringement of a particular agreement, but the circumstances in which the company came to be formed are such that equitable considerations render the exercise of legal powers unfair.  These are what are commonly referred to as the “quasi-partnership” cases: Ebrahimi v Westbourne Galleries Ltd. [1973] AC 360 at 379-380.

38.The above types of case may result from the relationship between the parties changing overtime and genuine disagreements arising over business decisions and how the affairs of the company are to be conducted.  They do not necessarily import any notion of moral turpitude.  So long as an objective examination of the facts demonstrates that the petitioner’s rights as a member have been unfairly prejudiced section 168A of the Companies Ordinance is engaged.  There may be other cases, of which I have concluded this is an example, in which the conduct of one party is unethical and inimicable to the best interests of the company and its members.  Such cases do not turn on a breach of an agreement or their inconsistency with the characteristics of the relationship of the parties when the company was formed; they are simply by their nature prejudicial and unfair.  Obvious examples are misappropriation of the company’s assets or establishing a competing business in breach of fiduciary duties by a director, who is also a member.

39.In considering whether or not there has been unfair prejudice the court will have regard to the conduct of the petitioner and whether or not it was the cause of the conduct complained of.  If it is, conduct which is prejudicial might not be unfair.  Similarly, if the conduct, which is subject to complaint, is consistent with a pre-existing agreement it will be difficult to establish that such conduct is unfairly prejudicial, thus where there has been an express agreement to the contrary, it will be difficult for a petitioner to demonstrate that he had a legitimate expectation of involvement in management: Re a company, ex parte Schwarcz (No 2) 1989 BCLC 427.

40.In exercising its discretion to order a buyout of shares, the court will have regard to which party is actively engaged in the management of the business of the company.  This is particularly so where the petitioner is a majority shareholder who is willing and able to buy out the respondent at a fair price: Re a company, ex parte Kremer [1989] BCLC 365, at 367-368; Ronald Li-kai Chu v Deacon Te-ken Chui [1991] 2 HKLRD 572.  The parties in the present case have equal shareholdings.  However, in my view the principle will generally apply to the case of a significant shareholder who has been managing the business of the company.

The Witnesses

41.Before embarking on a detailed consideration of the issues and the evidence it is helpful if I consider first my view of the evidence that has been given by the 4 witnesses who were called: Mr. and Mrs. Lehman and Mr. Scott Garner for Lehman Management and Mr. Brown for Effiscient, and the conduct of Mr. Lehman.

42.A striking feature of this case is Mr. Lehman’s conduct.  As I have already mentioned he is a commercial lawyer and senior partner of a law firm, which holds itself out as being one of the preeminent commercial law practices in the Mainland.  He describes the project that he discussed with Mr. Brown in the following terms in paragraphs 5 and 6 of his witness statement:

“5.   Being an attorney experienced in foreign direct investment in China, I suggested to purchase an already existing shelf company in Hong Kong, then change the name to LehmanBrown Limited (“the Company”), and whose purpose was to own, control, and manage an accounting management and foreign direct investment, book-keeping and consultancy WFOE in Beijing, China. I explained that the local Chinese accounting firm would allow the Company to meet the governmental regulations to perform audits while the WFOE would allow the Company to manage the accounting firm and charge for consultancy, tax advisory and ancillary services to clients (which were not limited to Chinese accounting firms and to which foreign professionals could directly advise) in mainland China and invoice (at least initially) out of Hong Kong. During the transition period, invoices could be raised by the WFOE in China and the re-branded Chinese accounting firm managed by the WFOE.

6.   The plan was that we would then set up branch offices throughout China, Hong Kong, Macau and eventually other countries. The Company planned to eventually set up a separate CPA firm in Hong Kong, the European Union and the USA.”

43.This suggests that he had in mind a major new business venture, which he anticipated would be very successful and develop into an international accounting services company.  Given his asserted experience in investment in the Mainland one would have expected him to have carefully documented his agreements with Mr. Brown to establish an accounting practice.  This he did not do.  The only contemporaneous documentation, which records their discussions, is a brief exchange of emails.  In the first quarter of 2002 Mr. Brown suggested that they have a shareholders’ agreement prepared. Mr. Lehman did not object to this.  He left it to Mr. Brown to approach one of the lawyers in LLX to draft one.  A draft was produced by a Mr. Scott Kerr.  An additional agreement was subsequently produced by Mr. Scott Kerr dealing primarily with restrictions on the use of confidential information of each Party to the new venture.

44.Mr. Lehman said in evidence that he did not read the 2^nd agreement.  In respect of the 1^st agreement he said that when a 2^nd lawyer with LLX became involved, Richard Wageman, he told Mr. Lehman that the agreement did not make sense.  Mr. Lehman did nothing further.  Mr. Lehman has offered no explanation for why he did not ensure that a draft he found satisfactory was produced in the early stages of the new venture when his relationship with Mr. Brown was cordial.

45.I asked the Parties to address me on 3 questions in closing.  They went to the issue of whether or not Lehman Management had been wrongly refused access to documents to which it was entitled and in particular whether or not its nominee director Million Strong had requested documents and been refused.  The 3 questions were:

(1)   What evidence is there of Mr. Lehman directing Million Strong to request documents?

(2)   What evidence is there of Million Strong doing so, or refusing to do so?

(3)   What evidence is there of Mr. Lehman explaining why he did not do so?

46.Mr. Allman-Brown, who appeared for Lehman Management, accepted that there is no such evidence.  In other words Lehman Management and Mr. Lehman did not at any point in time seek to obtain documents through Million Strong.  Mr. Brown’s alleged refusal to provide documents is one of Lehman Management’s principal complaints in this case.  It is extraordinary that if Mr. Lehman had the serious concerns that he professed at the time about Mr. Brown’s management and conduct of the Company’s financial affairs, and has repeated during the trial, that he did not cause Million Strong to make a formal demand for documents and, if the demand was not complied with, apply to court for an order compelling production of documents to which Million Strong was entitled.

47.One possible explanation is that Mr. Lehman’s complaints were exaggerated, or as Effiscient contends completely without foundation, but another lies in the manner in which Mr. Lehman reacts to not getting his own way.   I have already referred to Mr. Lehman’s email of 14 November 2004 in which he makes serious allegations, which in my view he has manifestly failed to justify.  Mr. Lehman seems to have no inhibition about making serious and unfounded accusations about people who have proved uncooperative.

48.As I have already mentioned the relationship between Mr. Lehman and Mr. Brown was relatively calm between 2005 and 2008.  However, by the end of 2008 serious disagreements arose again.  Mr. Lehman reacted aggressively.  On 16 December 2009 he sent an email to Mr. Brown informing him that he was in the process of making complaints to his professional body, which he subsequently did.  He orchestrated complaints to the China Trademarks Office about infringement by the Company of the Lehman Brown trademark, a subject to which I return in more detail later, which lead to members of the Office visiting various of the Company’s offices including Guangzhou on 26 December 2008 to inspect documents.  On 22 January 2009 Mr. Lehman and Mr. and Mrs. Brown had a meeting at the Kempinski Hotel in Beijing.  I have been provided with a recording of that meeting.  I recognise that tempers fray and that expletives are used for emphasis on occasions rather than as an insult, but it is clear from listening to the tape that Mr. Lehman was resorting to bullying and abuse; the nadir being him saying to Mrs. Brown “Get the f*** out of here, you’re dumb.  She is dumb.  She really is.  She is a typical Chinese w****”.

49.Mr. Lehman seems to have decided that the best means of dealing with what he obviously saw as an unsatisfactory position was to harass Mr. Brown.  This is illustrated by an email of 17 May 2009, amongst others, to Mr. Boni de Nobili of LLX stating “Please do something on a daily basis to find a way to bother Russell and remind the authorities”.

50.From February 2009 to June 2010 Mr. Lehman instigated the publication of web postings and press releases as well emails and letters that contained defamatory statements, some of which were of a particularly offensive nature.  As I have already noted this resulted in proceedings against him in Hong Kong.  It is quite clear from reading the press releases that Mr. Lehman was trying to bully and intimate Mr. Brown.  Quite what by this time he was seeking to achieve is unclear, because for reasons which I explain when dealing with Lehman Management’s allegations that it was not provided with documentation it reasonably requested, it seems to me that Mr. Lehman’s staff were given comprehensive access to financial records.  What is clear is that Mr. Lehman was excluded from the management on a day to day basis of the Company and did not control it.  It may be that he was simply frustrated at not being able to obtain control of the management of the Company and that he just kept pushing Mr. Brown to bend to his will.

51.Whatever may be the reason for Mr. Lehman’s conduct it was a remarkable way for a lawyer to behave.  One might reasonably have expected Mr. Lehman to resort to legal means to redress his grievances. There does not appear to have been any financial or logistical impediment to him doing so.

52.His behaviour seems to me to be relevant to a consideration of his credibility as a witness.  His behaviour suggests a disregard for proper conduct and a willingness to behave improperly to achieve his desired result.  In my view he approached giving evidence in a similar manner.  He frequently gave answers to questions, which Mr. Manzoni, who appeared for Effiscient, was able to demonstrate by reference to contemporary documents were wrong or likely to be wrong.  This happened sufficiently frequently that in the later stage of his cross-examination when he disputed something that was put to him he added a qualification: “unless you can show me a document”.  He continued to assert that he believed that money had been embezzled, but could not give any convincing reason why this was a fair conclusion to draw from the information that was available at trial.  This cavalier approach to making serious allegations extended to the auditor, Ms. Wendy Tsang, who he suggested had not audited the financial statements properly.  When asked his reason for thinking this he could do no more than suggest it was because she had been introduced by Mr. Brown.  As I have already mentioned he was frequently tripped up by Mr. Manzoni during cross-examination as a consequence of not being familiar with the documents.  A particularly surprising example of his lack of familiarity with the evidence and also his willingness to give what he thought was an answer helpful to his case, rather than an honest one, was his denial of using abusive language at the meeting on 22 January 2009.  He said he could either not recall using, or denied using, language that he can be heard using on the recording of the meeting.

53.In my view Mr. Lehman was clearly not an honest witness.  By contrast I found Mr. Brown to be straightforward and his recollection of events supported by contemporaneous correspondence.  Where there is a conflict between the evidence of the 2 men I prefer the evidence of Mr. Brown.

54.Lehman Management also called 2 other witnesses.  The first was Mrs. Lehman.  My impression of Mrs. Lehman was that she sided completely with her Husband’s view of events and the rights of the matter.  Her evidence parroted his story and is unreliable.

55.The second witness was Mr. Scott Garner, who is an American attorney working for LLX.  Mr. Garner’s evidence was more balanced than that of Mr. Lehman, but in a number of respects, which I identify later, was not consistent with the contemporaneous documents.  Where there is a conflict I prefer the tenor of the contemporary documents as my assessment of Mr. Garner was that his evidence strayed into advocating Lehman Management’s case.

56.Before turning to address the various issues in what I consider to be the most logical order, I need to deal with an application made by Lehman Management after the trial had finished on 12 October 2011.

Lehman Management’s application to reopen the evidence

57.On 26 October 2011 Miller Peart, solicitors for Lehman Management, sent to the court a copy of a letter to Richards Butler, solicitors for Effiscient, foreshadowing an application to recall Mr. Brown for further cross-examination and also to subpoena Mr. Kevin Bowers of Richards Butler for examination concerning the provenance of a signed copy of the Company’s 2006 financial statements.  As it transpired certain assumptions made by Miller Peart in their letter, including the ill-advised and intemperate accusation that Richards Butler had in a letter to the court of 12 October 2011 made a “knowingly false statement”, were wrong.  Notwithstanding this Lehman Management issued a notice of motion for leave to re-examine Mr. Brown, subpoena a new witness, Lily Chan, who had signed the 2006 Financial Statement on behalf of  Million Strong and make further submissions following the new evidence.

58.Mr. Allman-Brown advanced the following argument in support of Lehman Management’s application:

(1)   Both Lehman Management and its previous solicitors had been in possession of the signed 2006 financial statement prior to Lehman Management’s solicitors preparing the hearing bundle.  Inadvertently, it would appear, they included an unsigned copy of the 2006 financial statement in the hearing bundle.  The copy in the hearing bundles probably came from Richards Butler.

(2)   Richards Butler did not point this out prior to trial.  Mr. Manzoni did so on the first day of the trial and told the court that Richards Butler had copies available in court of the signed 2006 financial statement.

(3)   Neither Miller Peart nor Mr. Allman-Brown asked for a copy.

(4)   Mr. Allman-Brown submitted that Richards Butler were in breach of their duties in not causing copies of the signed version of the 2006 financial statements to be inserted into the hearing bundle.  If they had inserted a copy into his bundle, he would have read it and noticed that it was dated 31 December 2007, which is inconsistent with an exchange of emails in the hearing bundle which indicates that Mr. Lehman had only agreed to sign them in January 2008.

(5)   This suggests, and I quote from Miller Peart’s letter of 26 October:

“i) Wendy Tsang was no longer a director of MS in order to continue Mr Lehman’s ‘illusion’, induced by Mr Brown, that, through Wendy Tsang, Mr Lehman was able to give instructions to MS, a director of LB, and, by such means exercise a director’s control over the affairs of LB;

ii) MS was controlled by Mr Brown himself - and had been so controlled since MS was made a director of LB at the instruction of Mr Brown - despite the representations made by Mr Brown to Mr Lehman that MS was Mr Lehman’s corporate nominee director to instruct -, and, that he, Mr Brown had already instructed MS to sign the 2006 LB Financial Statements which it had done as described earlier above;

iii) Mr Lehman played no role in the decisions of the board of LB and Mr Brown’s words and actions to the effect that Mr Lehman did play such a role through Wendy Tsang/MS were a deception played by Mr Brown on Mr Lehman from the beginning of their partnership - [see Vol C - 30 @ p 4266 3rd paragraph from top of page] - commencing in 2001;

iv) as stated and confirmed by Wendy Tsang in her email to Mr Lehman and Mr Brown dated 3 February 2009 - [Vol C - 34 @ p4853 ] - the true fact is that MS was throughout its directorship of LB a “nominee director” of LB and not a nominee of/for Mr Lehman/the Petitioner, as, put forward by Wendy Tsang’s solicitors letter of 2011 which, inter alia, asserted that Wendy Tsang had no recollection of MS ever acting as nominee for the Petitioner/Mr Lehman.”

59.It seems to me quite clear that no blame can be laid at the door of Richards Butler for Lehman Management’s legal team’s failure to identify what is now argued is an inconsistency between the date on the signed 2006 financial statement and some subsequent emails.  The blame falls squarely on Lehman Management’s legal team for not availing themselves of the opportunity, offered by Mr. Manzoni, of taking one of the copies Richards Butler made available on the first day of the trial.  I also am not convinced by Mr. Allman-Brown’s suggestion that if Richards Butler had taken it upon themselves to insert a copy in Mr. Allman-Brown’s bundle (and the suggestion that they, rather than Miller Peart, should have done so strikes me as farfetched) he would have spotted the inconsistency between the date on the financial statement and the emails.  Through-out the trial Mr. Allman-Brown demonstrated a striking lack of familiarity with the documents and in particular the contents of the financial statements.  For example, Mr. Allman-Brown cross-examined Mr. Brown on where in the financial statements it showed his remuneration.  These questions were obviously premised on the assumption that the information was not contained in the financial statements.  Mr. Brown demonstrated quite readily that the information was included in each of the financial statements he was asked to look at.  It was obvious that this came as a surprise to Mr. Allman-Brown despite the fact that it should have been apparent on just a moderately careful reading of the documents that the information was contained in the notes to the financial statements.

60.I also do not accept that the fact the financial statement was dated on 31 December 2007 and signed by Lily Chan rather than Wendy Tsang suggests that Mr. Brown, rather than Wendy Tsang’s accounting firm, was in control of Million Strong.  This argument is relevant, as I understand it, to Lehman Management’s 6^th complaint, as developed by Mr. Allman-Brown in his closing submissions that from the outset Mr. Brown set things up to take control of the Company and to take advantage of Mr. Lehman.  For reasons, which appear in the part of this judgment dealing with Lehman Management’s 6^th complaint, I have rejected this argument.  I can see no sensible reason for thinking that an exploration of why the financial statements were dated 31 December 2007 and signed by Lily Chan, which on his own case has been known to Mr. Lehman and his advisers since early 2008, would have made a difference to my conclusion.

61.I, therefore, dismissed the application.

Exclusion of Lehman Brown from involvement in management (Lehman Management’s 3^rd complaint)

62.Mr. Brown says that he agreed with Mr. Lehman that they should be equal shareholders and each have directorships, but that he should manage on a day to day basis the business of the Company.  He accepts that consistent with this agreement Mr. Lehman was entitled, albeit through his nominee director Million Strong, to the type of information that a director is commonly entitled to and to be consulted about the more important business decisions.  This, Mr. Brown says, is what took place.

63.Mr. Brown’s recollection of what was agreed is supported by an email sent to him by Mr. Lehman on 22 August 2001 the material part of which reads as follows:

“We co-office with the law firm. Launch a guerrilla marketing campaign on both companies. I cover the overhead of rental we split the costs and have a 50-50 venture on both comparatives. You would be the manager of the operations on a day to day basis we would have to find a manger for Shanghai.”

64.Mr. Lehman disputes that it was agreed that Mr. Brown had the right to manage operations of the Company on a day to day basis. Mr. Lehman also sort to down play Mr. Brown’s role in formulating the Company’s business strategy suggesting that he originally wished to open a business focusing on selling accounting related soft ware.  He suggested that Mr. Brown had little experience of the Mainland, little love for the place and sort to portray him as a man down on his luck who Mr. Lehman magnanimously agreed to offer 50% of what was really Mr. Lehman’s new venture.  He went onto suggest that he actively managed the Company until it ceased to share premises with LLX at the end of 2004.  I do not accept any of this.

65.It is clear from Mr. Brown’s email of 21 August 2001 to Mr. Lehman that Mr. Brown was proposing setting up an accounting firm, albeit an accounting firm, which he envisaged offering in addition to traditional accounting services, services more in the nature of management consulting.  He had had a successful career until he left Shandwick following its merger with Weber.  His Wife is from the Mainland and highly educated.  His email does not suggest, as does Mr. Lehman, that he was man who wanted to make a quick buck and leave the Mainland after 5 years.

66.I asked to be addressed in closing on what evidence there was of Mr. Lehman being actively involved in the day to day management of the Company during the first couple of years.  There is none.  In fact he expressly states that he had let Mr. Brown run the business in an email to him dated 22 September 2004.  The contrary suggestion that he now advances makes little sense.  He is not an accountant and, I assume, he was busy with his own legal practice.  It is also inconsistent with his case that he was not provided with information about the Company’s finances.  If he had been actively involved in running the business at a time when the Company shared premises and facilities with LLX one would have expected him to have had ready access to the financial information, which he complains he was not given.

67.It also seems to me that the structure of Mr. Lehman’s involvement in the new venture reflected a desire to distance himself to some degree from the appearance of being too closely involved in its affairs.  For example, in an email of 3 June 2002 to a client Mr. Lehman’s says there are no partners in the accounting firm common to the law firm.  He also says that LehmanBrown is managed by Russell Brown and Dickson Leung.  There is no suggestion that he has much involvement in the Company, on the contrary he seeks to give the opposite impression.  Mr. Lehman decided not to hold shares in the Company in his own name, which I accept is not of itself unusual, but he consciously chose to have a nominee director rather than be appointed himself. This I find rather more unusual.  In answer to questions from me about why he did so he said that it was to distance himself from any liability for the Company’s affairs; in itself not a positive reflection of his approach to corporate governance, but it also suggests that he did not want to be identified closely with the Company.

68.I find that Mr. Lehman and Mr. Brown did agree that Mr. Brown would manage the affairs of the Company on a day to day basis and that Mr. Lehman had no greater right to information and involvement than that which accrued by virtue of the directorship, which he chose to hold through a nominee.  Whether or not Lehman Management received all the information that it was entitled to by virtue of Million Strong being a director, and also the requisite level of participation, I address in my consideration of Lehman Management’s next complaint.

Failure to provide information and documents (Lehman Management’s 1^st complaint)

69.I have already noted that Lehman Management failed to assert a right to information and documentation through Million Strong.  Although it is odd that it did not do so given the fact that Mr. Lehman is a lawyer, it still seems to me open to Lehman Management to say that its failure to do so reflected a lack of formality in the way the Company conducted its affairs at a higher managerial level and that it is not now precluded from complaining that it was not given all that it was entitled to expect as an equal shareholder in the Company with representation on the Board.  The question, therefore, becomes: was it given what it asked for through its representatives, such as Mr. Lehman, and was entitled to inspect?  Similarly in relation to participation in the affairs of the Company the question becomes: was it given, through the involvement of its representatives such as Mr. Lehman, the degree of participation, which it was entitled to expect?

70.Mr. Lehman began to request greater involvement in the management of the Company in December 2002.  Mr. Brown wrote an email to Mr. Lehman on 21 December 2002 with information about the Company and welcoming his advice and suggestions and himself suggesting that they sit down and discuss Mr. Lehman’s further involvement.  I have been shown nothing in reply taking up this suggestion or complaining about the level of information that had been provided.  The next relevant email is Mr. Lehman’s email of 29 January 2003 asking to be consulted before people were recruited or salaries set and to attend “all meetings’.  It is unclear what meetings are referred to.  Mr. Brown replied on 29 January 2003 in conciliatory terms providing information about recruitment and salaries and proposing a meeting to formalise “business arrangements for LehmanBrown”.  I have not been shown anything that suggests that at this time Mr. Lehman was not being given the level of information or involvement that one would expect of a director.  Mr. Allman-Brown in his written closing submissions suggests that Mr. Brown began to exclude Mr. Lehman from equal participation in the Company from about September 2004.  This date is based on an exchange of emails in September, which have their origin in Mr. Lehman’s desire that a dividend be paid.  This Mr. Brown did not agree.  He gave 2 reasons for this in his evidence before me.  First, he explained that he took the view that the Company needed to maintain reserves.  Secondly, he did not want to pay a dividend until the Company’s financial statements had been audited.  This was taking sometime because the Company’s accounts had been intermingled with those of LLX and it proved difficult to obtain information from LLX about income and expenditure. He explained that initially all invoicing had taken place through LLX and LLX had received the fees.

71.The thrust of Mr. Lehman’s emails at this time is that the accounts have not been finalised and a dividend has not been paid. There are no complaints about a lack of specific information about the Company or its finances.  The assertion of right to manage the affairs of the Company on a day to day basis seems to be a reaction to the failure to pay a dividend. Mr. Lehman begins to become more aggressive as he becomes frustrated that he is not getting his way.  We see in an email of 8 October 2004 the first reference to a “criminal issue”.  In an email of the same month from his Wife to Mrs. Brown we also see an aggressive tone adopted.

72.There does not appear to be any obvious failure to provide information when it is requested at this time.  On 17 October 2004 Mrs. Brown sent to Mrs. Lehman 2 files containing a bank reconciliation and a summary of Mr. and Mrs. Brown’s salaries.  On 19 October Mrs. Lehman requested a list of all bank accounts and bank statements since the opening of the accounts.  Mrs. Brown replied agreeing to compile a list of all the accounts. She invited Mrs. Lehman to come and inspect the bank statements as for security reasons she did not wish to have copies made.  No objection to this was made.

73.Mr. Allman-Brown submitted that the emails at this time expressly or impliedly indicate that Mr. Brown’s decisions as general manager of the Company were not subject to the review of the Board.  I do not read the emails as suggesting that the Board’s rights to direct the affairs of the Company were curtailed.  Mr. Brown makes it clear, however, in an email of 20 September 2004 what his position is: “We will have a monthly shareholders meeting with other shareholders Zhou Nan and Dickson and address all of the material issues in the meetings.  For day to day you will not be involved.  It was agreed at the beginning that I ran the business, back in our email correspondence in August 2001 and if you have an issue with this then we have a fundamental problem with our partnership.  Additionally, a lawyer cannot run an accounting firm, just as I would not expect to try and run a law firm”. Mr. Lehman can have been under no illusion from this time about what Mr. Brown understood they had agreed and how he intended that the business of the Company be managed; indeed it is apparent from Mr. Lehman’s email of 22 September that he understood Mr. Brown’s position.

74.On 10 October 2004 Mr. Brown sent Mr. Lehman a package of information including draft consolidated accounts.  Mr. Brown remained adamant, however, that he remain in day to day control of the Company and that there should not be any immediate distribution of dividends.  Mr. Lehman at this time begins, as I have mentioned earlier, to start to send emails stating that the failure to finalise accounts “bears both criminal and civil liability”.  On 14 November 2004 he wrote suggesting that Mr. Brown had entered “into a systematic pattern of activities to defraud shareholders”; an allegation for which it is quite clear Mr. Lehman has no basis.  My impression is that what he did not like was his inability to get his own way.

75.Mr. Brown’s response to Mr. Lehman’s threats was remarkably moderate and he continued to explain how he was progressing with finalising the accounts for the Company and their audit.

76.I do not find at this stage any attempt to exclude Mr. Lehman from the type of role a director would normally undertake and I note that in paragraph 13(b) of the Amended Petition the complaint is that it was after LLX moved out of the shared premises at the end of 2004 that Mr. Brown began to freeze Mr. Lehman out of control and participation in the Company.  Paragraph 16 of the Points of Claim pleads that it had been agreed that Mr. Brown would be the manager of the Company for the first 5 years.  Both of these assertions are inconsistent with both Mr. Lehman’s evidence and Mr. Allman-Brown’s submissions.

77.On 10 January 2005 Mr. Brown sent Mr. Lehman draft accounts and other documents and proposals for various matters of a sort that one might expect directors of the Company to be discussing.  Mr. Lehman replied asking for all supporting documents for the accounts, which he said that he needed in order to approve the audited accounts.  I can see no reason why he needed the supporting documents for this reason.  The financial statements were being audited and no reason was advanced, or has ever been advanced, for thinking that the financial statements were not properly audited.  This seems to have been a pretext for obtaining further information. On 19 January Mr. Lehman writes saying that from February he would come on board as co-general manager.  During the following months similar demands were made, but Mr. Brown remained adamant that Mr. Lehman would not become involved in the day to day affairs of the Company.

78.On 10 May 2005 Mr. Lehman writes that he would like to hire an independent audit firm to audit the Company.  Mr. Brown replied the next day agreeing and adding in the final paragraph of the email this comment: “You can arrange an audit team any time, however, I would appreciate if we could meet so I can explain the business and get you involved as soon as possible in its running.  At the same time, we have had the figures audited and you can get can direct any questions to the auditors if you like, that is what they are there for”.  Mr. Lehman did not hire an independent auditor neither did he take up the offer to sit down with the Company’s auditors and discuss any concerns he had with them.  A striking feature of Mr. Lehman’s continual complaints over the years about lack of financial information is that at no time does he seem to have thought to speak to the auditors about such concerns as he had.  Another striking feature is that when he was cross-examined on the Company’s financial statements, which he had caused to have signed, he appeared to have no familiarity with their contents and demonstrated that he did not have even the most rudimentary knowledge of how to read them. 

79.By 26 August 2005 the Company had caught up with its accounting and Mr. Lehman was sent, for his review, draft audited accounts for LehmanBrown Limited and also consolidated accounts for the Group.  Mr. Lehman in due course signed them and he was paid a dividend for the 2004 financial year of US$155,000 on 24 October 2005.  This figure is derived from an email sent on 19 February 2009 by Mr. Brown to Mr. McKee of LLX attaching a schedule listing when dividend payments were made.  There was no suggestion at the time that it was not accurate, although Mr. Lehman was not prepared to accept its accuracy in cross-examination.  He has not, however, produced any alternative information about when he was paid and I can see no reason to treat the schedule as other than accurate, which I do.  The schedule shows that Mr. Lehman received further dividends of US$200,000 for the 2005 financial year on 27 September 2006, US$100,000 and US$130,000 for the 2006 financial year on 26 April 2007 and 16 May 2008 respectively and dividends for the financial year 2007 of US$120,000 and US$155,000 on 16 May 2008 and in February 2008 respectively.

80.Things were relatively quiet between the middle of 2005 and late 2007 when Mr. Garner began to become involved.  I note at this juncture that it was during this period that Mr. Lehman began to establish a competing accountancy firm in China.  A subject that I deal with in more detail below. The first meeting with Mr. Garner appears to have taken place on 16 November 2007.  During 2008 Mr. Garner and Mr. Brown had a series of meetings and exchanged emails.

81.During the initial discussions Mr. Garner attempted to increase Mr. Lehman’s access to books and to obtain a greater involvement in the business.  Mr. Brown was concerned with having the business’ trademark transferred to the Company.  The discussions were friendly and constructive.  On 15 January 2008 Mr. Garner writes “Things seem to be progressing at a fast pace with LehmanBrown.  We have their financial statements and they are sending me a detailed report of all dividends declared and paid for the past 5 years.  At least one of our goals has been accomplished.”  On 10 April he writes “Thanks again for letting me use your conference room yesterday and allowing me to through your financials, 2008 budget, and projected cash flow for 2008”.  It is clear from another email of the same date from Mr. Garner and an attached schedule that he had been given access to management accounts and considerable information.  Some of Mr. Garner’s questions are very detailed.  For example, he asks about the allocation of expenses for professional and news publication to the Company rather than the WFOE or other mainland entities where he assumes the people who read them are based.  On 16 April Mr. Garner writes to Mr. Lehman explaining in detail what Mr. Brown, Mrs. Brown and Dickson Leung were being paid.  He concludes that if the information he had been given is accurate, and he does not suggest any reason to think it was not accurate, that what Mr. Brown and Dickson Leung are receiving is reasonable, although he suggests that Mrs. Brown is overpaid.  Although the email is not entirely clear it appears that Mr. Garner thought that the dividend distribution that Mr. Brown proposed was reasonable.

82.On 30 April 2008 Mr. Garner sent to Mr. Lehman an email, which contains a note at the end which is inconsistent with what he had said in his earlier emails.  He says that he has continually mentioned to Mr. and Mrs. Brown that they receive between them a combined sum of US$1,000,000 per year and they have not corrected him.  He does not explain where this figure comes from.  It seems to have been taken by Mr. Lehman as indicating that they must have been cheating him because the figures shown to Mr. Garner are lower.  Mr. Lehman during his cross-examination referred to this on a number of occasions as the justification for his allegations that Mr. Brown was embezzling money.

83.Mr. Garner does not in his emails express a concern that Mr. Brown is dishonest and certainly does not point to any evidence that he has found to suggest that money is being misappropriated or that any other type of misfeasance is taking place.  Rather on the face of the emails his concern seems to be that things are going too smoothly. In an email of 20 June 2008 to Mr. Murdock of LLX Mr. Garner says this “If I remain in communication with Russell and ZhouHan, it will be very inconsistent if we argue that we are locked out of management and yet they continue to give what I ask for.  I will do whatever you need me to, want me to do, ask me to do, I just don’t want to give Russell and ZhouHan evidence that they are being cooperative.  If I do stay involved, I will make all sorts of requests that I know they will flat out reject, just so I can show they are being difficult.  I don’t want to make this any easier for them than it may already be”.  The implication is that Mr. Brown is being cooperative and is likely to remain so unless unreasonable requests are made.  There is no suggestion that any information that was required had not been provided.  It is also apparent from the final paragraph of the email that Mr. Garner is contemplating there being litigation.  It would appear from other emails at that time circulating between Mr. Lehman’s team of advisers that what they are aiming for is significant changes in the management of what has become an increasingly successful business with the result that Mr. Lehman has a greater degree of involvement in the running of the Company either directly or through his nominees.  The concern is not a lack of reliable information.

84.During his cross-examination sought to paint a different picture.  He suggested that it had been difficult to obtain information, that he had not been satisfied about the degree of access he had been given and that the emails painted too positive a view of a process, which in practice involved him having to beg for information he thought should have been readily provided.  Whilst it is clear that Mr. and Mrs. Brown were wary of allowing Mr. Lehman too ready access to details of the Company’s activities, the contemporary emails, particularly those between Mr. Garner and others in Mr. Lehman’s camp, do not suggest that he was having great difficulty in obtaining information.  When asked by Mr. Manzoni for an illustration of information that was being withheld, Mr. Garner gave education expenses.  This was a particularly bad example as at the material time the Browns only had one 18 month old baby.  In my view Mr. Garner’s evidence before me was slanted towards supporting Mr. Lehman’s case rather than being entirely candid.

85.Mr. Lehman’s position by June 2008 is set out in an email to Mr. Murdock on 6^th June:

“They vote themselves benefits, bonuses and salaries without consulting the board. They start up businesses and open offices without consulting the board. They keep promising but keep keep refusing to have ordinary meetings. They refuse to take shareholders telephone calls, E-mails and requests to set up meetings on a periodic basis. They delay payments of dividends without any accountability or reason. What needs to happen is we need to look at the HK corporations ordinance and use working from there or different cases to show that this has broken down. We need to use the proper language. We’ve been billed $8800 and don’t even have a letter - it costs that much to get an LLM from HKU. You know what this idea of leaving it open for 8 days - lets leave it open for 14 - I want closure even if it means litigation. I don’t care if its a bad case - there’s no such thing as a bad case. I’d like to get the letter out today with the changes. Either we’ll do it or AO should do it. Take a look at the wording of the MOU and see if there’s anything relevant.

Eion I fully appreciate your comments and changes - its just that I’ve been at this for 7 years now and its time to draw a line in the sand, even if it means litigating to wind this thing up.”

86.Mr. Lehman clearly was not prepared to accept being kept, as he saw it, at arm’s length from the management of the Company. The email also illustrates some of the problems that bedevil Mr. Lehman’s approach to this matter.  The complaints are over simplistic and exaggerated. They are an off the cuff reaction to an irritating situation.  He does not think through the legal position or remedies properly; instead one finds sound bites: “I don’t care if it’s a bad case – there’s no such thing as a bad case.” Unfortunately, for Mr. Lehman this is wrong. 

87.The relationship deteriorated during the remainder of the year.  It is clear that Mr. Lehman was not prepared to accept the status quo that had existed from about 2005 to early 2008.  Mr. Brown was also becoming increasingly concerned about the situation.  He had discovered that Mr. Lehman had established a competing accountancy firm in China and was marketing it in a way calculated to give the impression that it was LehmanBrown.  He was also concerned about the refusal to transfer the trademark.  The differences had become far more fundamental then whether or not Mr. Lehman has been provided with information to which he was entitled.

88.In my view the evidence does not support Lehman Management’s complaint that it has been deprived of information and the degree of participation to which it was entitled having regard to its position as a shareholder, its nominee directorship and the agreement made at the time the Company was established.  The evidence demonstrates that Mr. Lehman had the opportunity readily to obtain information up to the end of 2004.  The difficulties that arose seem to have their origin in the heavy handed way he chose to approach Mr. Brown and his insistence on a degree of involvement with the management of the Company, which was inconsistent with what had originally been agreed.  The problem got worse over time, but in my view the contemporaneous documents demonstrate that when Mr. Brown was approached in a sensible way with coherent requests for information he was prepared to accede to them.  As I have noted he raised no objection to an independent audit in 2005 and suggested that Mr. Lehman might like to sit down with the Company’s auditors and ask them any questions he had.  Mr. Lehman chose not to do so.  Neither does Mr. Lehman seem to have taken Mr. Brown up on his offer of regular meetings.  Mr. Lehman seems to largely himself to blame for the gradual deterioration in the working relationship between the parties.  I do not find these complaints 2 and 3 made out.

Employment of Dickson Leung and Mrs. Brown (Lehman Management’s complaint 4)

89.I shall deal first with the complaint in respect of Dickson Leung.  It was suggested at the commencement of the trial that Mr. Brown had employed Mr. Leung in 2002 without Mr. Lehman’s consent.  The contemporaneous emails demonstrate that this is wrong and that Mr. Lehman was involved in the process of offering him job and left Mr. Brown to finalise the terms of his employment, which he did.

90.Mr. Lehman also complains about Mr. Leung’s advancement in the Company.  Mr. Leung was held out as a partner of the Company, although this description was legally inapposite.  Mr. Brown proposed paying him a “dividend” of 15% of the profits, which in reality would have been a bonus as he had no shares in the Company.

91.Mr. Brown says Mr. Lehman was aware that Mr. Leung was held out as a partner.  It was clear from his name card that this was the case.  Mr. Brown says that Mr. Lehman also agreed in 2003 that Mr. Leung he would be paid 15% of the profits of the Company.  I prefer Mr. Brown’s evidence.  The contemporaneous emails are consistent with his evidence about Mr. Leung’s recruitment and as I have already stated I find Mr. Brown a more reliable witness than Mr. Lehman.

92.It is clear that Mr. Lehman knew that Mrs. Brown had joined the Company in 2003 and that he raised no objection to this at the time.  This is perhaps unsurprising given the fact that he seems to have involved his own Wife in the affairs of both the Company and LLX.  Mrs. Lehman had signing rights in respect of the Company’s Hong Kong account and operated the HSBC hexagon system to pay expenses incurred at the time when LLX was paying both its own and the Company’s operating costs.  Mr. Lehman’s complaints about Mrs. Brown commenced once the relationship between the Browns and Mr. Lehman had begun to deteriorate.

93.Mr. Lehman complains that Mrs. Brown was overpaid.  Mr. Garner also assert this in an email he sent to Mr. Lehman on 16 April 2008 saying that he felt that she was overpaid.  However, no evidence has been produced that explains why either Mr. Lehman or Mr. Garner thought this and it is unclear on what basis Mr. Garner, who had only been in the Mainland for about 6 months in April 2008, was in a position to take an informed view on what was a realistic salary to pay a highly educated woman, who it appears from the contemporaneous documents had a high standard of English.

94.As I have already explained I have been shown no evidence that suggests that Mr. Brown was misappropriating money from the Company and Mr. Garner accepted that his remuneration was acceptable.  Lehman Management has failed to demonstrate that Mrs. Brown was overpaid or unqualified or unable to carry out her role of helping run the Company.

Mr. Brown prevented the Company paying dividends and thus prevented Mr. Lehman benefitting from the success of the Company (Leman Management’s complaint 2)

95.I have already accepted Mr. Brown’s evidence concerning the payments of dividends by the Company.  By February 2009 Mr. Lehman had received US$860,000.  He had been repaid the expenses which he borne in the early days of the Company long before this.  No evidence has been adduced, which demonstrates that Mr. Brown has behaved unreasonably in preferring to retain earnings within the Company to ensure that it had adequate cash and could finance expansion.  No exercise has been undertaken by any of Lehman Management’s witnesses or in cross-examination of Mr. Brown or by an examination of the documents in submissions to demonstrate that Mr. Brown’s assessment of how much dividends should be paid was unsound and unfair to Lehman Management.  As Mr. Brown fairly pointed out, he stood to benefit as much from a distribution of dividends as did Mr. Lehman.  Lehman Management has not suggested any reason why Mr. Brown would have benefited in some ulterior way from retaining more money within the Company than was necessary.

96.I accept that the reserves of the Company were considerable in relation to the Company’s turnover.  For example, in 2009 revenue was US$5,029,307, reserves were US$2,924,124 and retained earnings totalled US$1,909,800.  I take these figures from the financial statement for the year ending 31 December 2009.  From 2009 revenues began to decline as a result, Mr. Brown stated in evidence, of Mr. Lehman’s actions.  However, in the absence of any sensible critique of Mr. Brown’s reasoning for deciding maintaining this level of reserves I can see no basis for accepting Lehman Management’s 2^nd complaint and rejecting Mr. Brown’s explanation that he was being financially prudent.

The establishment of an accounting firm in Hong Kong without Mr. Lehman’s knowledge (Lehman Management’s 5^th compliant)

97.This complaint did not feature in Mr. Allman-Brown’s submissions and I have been provided with almost no information about the accounting firm in Hong Kong.  It is not suggested that the activities of the accounting firm in Hong Kong in anyway prejudices Lehman Management.  Mr. Brown was asked very little about this complaint in cross-examination.  He was asked if he had discussed setting up an accounting firm in Hong Kong.  He said yes.  It was not suggested to him that this was wrong.  Mr. Brown did accept that he had not discussed with Mr. Lehman making Mr. Leung a shareholder in the Hong Kong firm as by this time their relationship had broken down.  Mr. Brown went on to explain that the Hong Kong firm was formed by taking over a local practice, which enabled the Company to provide accounting services, which previously it had had to out-source.

98.Lehman Management has not demonstrated that the establishment of, what Mr. Brown describes in his witness statement as a small local firm, has caused any material prejudice to Lehman Management.

Mr. Brown took advantage of the deregistration of Million Strong to appoint his Wife as a director of the Company and to exclude Lehman Management from participation as a director (Lehman Management’s 6^th complaint)

99.Mr. Allman-Brown expanded this complaint during his Closing Submissions and suggested that it had all along been Mr. Brown’s intention to take control of the Company.  He suggested that Mr. Brown had engineered the appointment of Million Strong at the outset because he was able to influence Ms. Tsang.  The appointment of his Wife as a director in place of Lehman Management’s nominee was the culmination of his plan.  Mr. Allman-Brown relied on the following matters to support this submission.

100.The indemnity given by Mr. Brown to Mr. Lehman “purporting to appoint Million Strong as nominee of P in 2001 was inherently flawed”.  The indemnity is said to be flawed because the indemnity is addressed to Lehman, Lee & Xu Patent and Trademark Agency Limited and the name of Lehman Management at the time was Lehman, Lee & Xu Patent and Trademark Agents Limited.  This submits Mr. Allman-Brown was a calculated mistake by Mr. Brown in order, as I understand the argument, to allow it to be argued at some later date that Million Strong was not Lehman Management’s nominee.  This in my view is a thoroughly bad argument.

101.There is no evidence that Mr. Brown drafted, or procured the drafting, of the indemnity.  Mr. Brown says he cannot recall whether he gave the indemnity to Mr. Lehman or it was sent by Ms. Tsang.  Mr. Lehman gave no evidence on this issue.

102.The indemnity is no more than that - an indemnity for any liabilities incurred by Million Nominee whilst acting as Lehman Management’s nominee.  It is not in dispute that it was intended that Million Strong act as Lehman Management’s nominee and that this is what happened.  Even if the indemnity had been in some way defective this would have inured to Lehman Management’s benefit and had no impact on Million Strong’s status and Lehman Management’s ability to direct its actions as a director of the Company.

103.The indemnity is signed by Mr. Lehman and chopped with the correct name.  The only sensible reading of the document is that there is a typographical mistake in the heading and in the name typed at the bottom of the page.  Any argument that the indemnity is ineffective because it was given to the wrong party is specious.  What the indemnity does serve to do is to provide yet another illustration of Mr. Lehman’s sloppiness.

104.Mr. Allman-Brown submitted that the draft shareholders agreement (that was never signed) contained provisions that conflicted with the original agreement and was part of Mr. Brown’s plan to engineer his control of the Company.  I can see nothing in the draft agreements, and Mr. Allman-Brown has pointed to none, which would have resulted in Mr. Brown obtaining greater control then he would otherwise have had. The fact that the drafts, as one would have expected, contained terms that were not in the original short oral agreement is nothing to the point.

105.The next ground relied on is rather muddled.  It appears that at a meeting in 2008 between Mr. Brown and Mr. Lehman, Mr. Brown agreed that a company Mr. Lehman controlled, Union Trade Limited, should be appointed as his nominee in place of Million Strong.  At the time the parties seem to have proceeded on the basis that it was an informal meeting.  At the time it was not suggested by Mr. Lehman that the shareholders had resolved to replace Million Strong.

106.Mr. Allman-Brown sought to argue in closing that the meeting was a shareholders meeting, the shareholders resolved to appoint Union Trade and Mr. Brown prevented the resolution being implemented.  This argument is founded on the fact that there are notices of shareholders meetings in 2008 and a written resolution of the directors, signed by Mr. Brown but not Million Strong, recording the resignation of Million Strong and its replacement with Union Trade.  However, this is not a complaint mentioned in Lehman Management’s Amended Petition, the Points of Claim, Mr. Lehman’s witness statement or Mr. Allman-Brown’s opening submissions.  It is an afterthought.

107.On the basis of the evidence before me it is unclear whether Mr. Brown and Mr. Lehman thought they were having a shareholders’ meeting, or something less formal, at which they agreed that, subject to dealing with the formalities, Union Trade would replace Million Strong.  A number of things are, however, clear.  Mr. Lehman did nothing at the time or in these proceedings prior to cross-examination of Mr. Brown, to suggest that a shareholders resolution had been passed.  Mr. Brown accepts that he agreed in principle to Union Trade being appointed, but changed his mind when he found out subsequently that Union Trade held, improperly in his view, the trademark for the LehmanBrown name in Hong Kong.  There is no evidence of Lehman Management’s ability to direct Million Strong’s actions being affected.

108.I do not accept that the refusal to agree to steps being taken to change the directorship from Million Strong to Union Trade caused any unfair prejudice during the period to which the complaint is directed, namely, 2008.  It does, however, have some bearing on the complaint that Mr. Brown took advantage of Million Strong’s resignation to replace Mr. Lehman’s nominee with his own, namely, his Wife.

109.Million Strong was deregistered on 12 November 2010.  Mr. Brown accepted that by this time he had had enough of Mr. Lehman and what he saw as his destructive behaviour and that he took this opportunity to take steps to replace Mr. Lehman’s nominee with his Wife.  It seems doubtful to me whether the purported appointment was effective as the Company only had 1 director at the time and on the face of the matter could not convene a valid director’s meeting, as Mr. Brown purported to do, to resolve that the vacancy caused by Million Strong’s registration be filled by his Wife.  This was not an issue that either party explored.  Be that as it may, the fact is that Mr. Brown did appoint his Wife rather than a representative of Lehman Management.  This was inconsistent with their original agreement.  If Union Trade had been appointed in place of Million Strong the opportunity would not have arisen for Mr. Brown to appoint his Wife to the Board.

110.Effiscient submits that the exclusion of Lehman Management from the Board was not unfairly prejudicial because it was justified having regard to Mr. Lehman’s conduct.  The authorities show that the court will have regard to a petitioner’s own conduct in deciding whether or not he had been treated unfairly.  If his conduct is detrimental to the interests of the company this may justify exclusion from management and conduct, which might otherwise have been treated as unfairly prejudicial, will not be so.  In Mears v Re Mears & Co. (Holdings) Ltd. [2002] 2 BCLC 1, Laddie J. held the forced removal of the petitioner from the board of the company because he had been involved in forgery, deception, bribery and misuse of money which he knew did not belong to the company, was not unfair because it was clearly justified.  This approach accords with common sense.  If a person has by his own poor behaviour caused the conduct of which he complains such conduct is unlikely to be unfair to him even if it is prejudicial. 

111.Excluding an equal shareholder from the representation that it was agreed that he would have on the board is prejudicial to him.  I accept that appointing Mrs. Brown to the Board (assuming that Mrs. Brown was successfully appointed) was prejudicial to Lehman Management. However, I accept Mr. Manzoni’s submission that by the time this occurred Mr. Lehman’s conduct had become so manifestly inconsistent with the best interests of the Company that appointing somebody as a director, other than Mr. Lehman’s nominee, was justified.  I explain why this is so in the later sections of this judgment in which I deal with Effiscient’s complaints against Mr. Lehman.

112.As I explained at the outset of this section of the judgment Mr. Allman-Brown expanded the original complaint in his closing submissions and suggested that right from the outset Mr. Brown had intended to engineer a takeover of control of the Company.  This is pure speculation and clearly inconsistent with the circumstances in which Million Strong came to be appointed.  As Mr. Lehman explained in evidence he chose not to be a director of the Company in order to reduce the risk of liabilities attaching to the office of director.  It has never been suggested that Mr. Brown had any role in this decision.  Having decided that he wanted to have a nominee director Mr. Lehman appears to have simply chosen the cheapest option, which was a small accounting and company secretarial firm, Million Strong, which Mr. Brown had come to know while he was at Shadwick.  The contemporaneous emails contain no suggestion at all that Mr. Brown engineered this decision.  There is also no evidence to suggest that Mr. Lehman had any trouble in contacting Ms. Tsang.  He simply did not bother to do so.  There is no evidence to suggest that subsequent to the commencement of the business Mr. Brown hatched a plot to take over what he recognised had the prospect of becoming a very successful business.  As I have already explained the difficulties that arose between the parties did so because Mr. Lehman wanted a greater degree of involvement in the running of the business than had originally been agreed and over time his behaviour became highly objectionable and inconsistent with the best interests of the Company.

Lehman Management’s Petition - Conclusion

113.For the reasons explained in the previous sections of this judgment, Leman Management has not demonstrated that it has been unfairly prejudiced by Effiscient’s conduct and I dismiss its petition with costs to the Effiscient.

Effiscient’s Petition

114.I now turn to consider the six complaints of unfairly prejudicial conduct relied on by Effiscient.

Misappropriation of US$118,335 (Effiscient’s complaint 1)

115.I have already referred to this matter in paragraph 9 of the judgment.  I accept Effiscient’s evidence that Mrs. Lehman transferred this sum out of the Company’s account without authorization.  I also accept that this sum did not represent LehmanBrown’s contribution to the rent for the shared premises.  I note that Lehman Management has not produced any documents and calculations, which purport to show that the sum of US$118,335 represented Mr. or Mrs. Lehman’s calculation of the rent owed by LehmanBrown at the time.

116.Mr. Allman-Brown sought to argue that subsequent to the appropriation of the money Mr. Brown and Mr. Lehman agreed that a proportion of it should be treated as rent (US$72,172) and that the balance would be treated as an advance of dividend and thus Mr. Brown had accepted that there had been no misappropriation.  This is not what the emails say.  Mr. Brown states clearly that he had not approved the withdrawal of US$118,335 by Mrs. Lehman and that the rent owed by the Company was far less than the amount taken.

117.It seems to me quite clear that Mr. Lehman decided in November 2004 to take what he thought he was entitled to.  It may be that he thought that he was owed some rent at the time, but that was not the primary purpose of asking his Wife to make the transfer.  The transfer was a misappropriation.

Encouraging or permitting damage to the Company’s premises in late 2004 (Effiscient’s complaint 2)

118.Effiscient complains that when LLX moved out of the premises in November 2004, which they had shared with the Company, LLX’s staff damaged the premises by cutting computer cables, tearing wall paper and damaging the door locks.  Lehman Management accepts that some of its staff intentionally cut computer cables, although Mrs. Lehman explains in her witness statement that this was not instigated by her or her Husband and when they found out they reprimanded the staff involved.  I have no other evidence as regards the cables.  I am not satisfied that it has been shown that as regards the cables Mrs. Lehman’s explanation has been shown to be incorrect.

119.Mr. Lehman explained in cross-examination that the wall paper was very valuable and that “my wife runs a company that makes this wallpaper and sells this wallpaper and it is able to be sued and it is able to be removed and put in another premises”.  The intention was to remove the wallpaper and use it in LLX’s new premises not damage décor of the Company’s offices.  Mrs. Lehman states in her witness statement that the locks were removed because they belonged to LLX and Mrs. Lehman and Mrs. Brown had not been able to agree a price for them.

120.It seems clear that the premises were damaged unnecessarily.  It is also apparent from Mrs. Lehman’s evidence in relation to the damage to computer cables and the inability to agree the price of the locks to the office, which can have been worth very little, that by November 2004 the parties’ working relationship was poor.

121.I find Mrs. Lehman’s evidence that it was intended to remove wallpaper and use it elsewhere unconvincing.  In her witness statement Mrs. Lehman describes the wallpaper as “hand-painted chinoiserie wall coverings”.  In cross-examination Mrs. Lehman told me that the wallpaper could be removed if affixed with appropriate glue.  She said that she flew, from the factory, an expert team to remove the wallpaper and hang it in the new premises. As it transpired the wrong glue had been used and it had not proved possible to remove the wallpaper without damaging it.  It seems to me inherently unlikely that the wallpaper we see in the photographs was so valuable that it would have been worth the considerable cost of removing it and hanging it elsewhere.  It also seems unlikely that if it were as valuable as Mrs. Lehman suggests, it would have been installed with the wrong glue.  I also note that the photographs show damage consistent with a casual approach to removal of the wallpaper rather than a careful one.  If what Mrs. Lehman says is true I would have expected to have been provided with documents which demonstrated the value of the wallpaper and the fact that it is reusable.  This should have been easy if, as Mr Lehman said, his Wife runs the company that produces it.  In my view this story has been fabricated to explain the damage shown in the photographs. That is not to say that LLX may not have been entitled to remove the wallpaper if it so wished, as it is not in dispute that it was installed by it at a time when it was the sole occupier of the premises.  They is also true of the locks.  I do not think that this complaint of itself constitutes unfair prejudice although.  It does, however, provide another example of Mr. Lehman’s antagonistic behaviour and the unreliability of his own and his Wife’s evidence.

Operating a business in the Mainland in competition with the Company (Effiscient’s complaint 3)

122.In cross-examination Mr. Lehman accepted that he had established a competing accountancy firm in the Mainland after his relationship with Mr. Brown broke down; something, which he had denied in his witness statement.  Effiscient says that this is objectionable for 2 reasons. First, that in so far as Mr. Lehman considered himself a director of the Company it was clearly inconsistent with his fiduciary duties.  Secondly, it was inconsistent with the agreement made at the outset in which Mr. Brown says it was clearly agreed and understood that neither party would compete with the other.

123.Mr. Lehman has blown hot and cold about his status as a director.  When it suited him he expected to be treated as a director.  When accusations were made that he was in breach of his fiduciary duties he responded that he was not a director.  This is consistent with his explanation that he wanted a corporate nominee appointed as Lehman Management’s representative director in order to distance himself from liabilities he might otherwise be under.  This does not reflect well on Mr. Lehman’s sense of corporate governance.  More importantly it does not seem to me to make any difference. Million Strong was Mr. Lehman’s nominee and for these purposes his alter ego. Mr. Lehman described himself as a “shadow director”.  If Mr. Lehman acted in a way inconsistent with a director’s fiduciary duties, which he manifestly did, it seems to me that he cannot avoid the conclusion that Effiscient was unfairly prejudiced merely because he chose to distance himself from the Company by causing his nominee to be appointed director.

124.I also accept Mr. Brown’s evidence that he agreed with Mr. Lehman that neither party could compete with the other once LehmanBrown was established.  This is what one would have expected.

125.Mr. Manzoni spent some time in cross-examination demonstrating that not only had Mr. Lehman established a competing business, but he had gone about it in a way calculated to direct prospective clients of LehmanBrown to firms controlled by him.  I say “firms” because Mr. Lehman used various different firms to offer accounting services overtime: Lehman & Co., Lehman Tax and Accounting and LehmanBowen.  His modus operandi included using the same meta names and metatags for the LehmanBowen site (LehmanBowen being a name obviously calculated to sound like LehmanBrown) as appeared on the Company’s site and giving the LehmanBowen site the address lehmanBrown.biz. The Company’s web address is LehmanBrown.com.  The links on the LLX web site, which are described as to the Company were, in fact, to LehmanBowen.

126.These acts were highly, and very obviously, prejudicial to Effiscient’s interest in the Company.

Misappropriating the Company’s trademark (Effiscient’s complaint 4)

127.The original agreement as evidenced by Mr. Lehman’s email dated 22 August 2001 recorded that the Company would trademark its brand.  It appears from an email from Christine Hu of LLX to Mr. Brown dated 12 November 2001, that Mr. Lehman registered the trademark in his own name and, consistent with the original agreement.  He then appears to have executed an irrevocable agreement on 16 November 2001 to transfer the trademark to the Company.  I say “appears” because for the first time in cross-examination Mr. Lehman said this: “I did not write this letter.  This letter is not a valid letter.  It’s been adjudicated in Chinese courts over three years that this letter is doctored document.  No, this is not my letter”. Mr. Lehman went on to suggest that, what appears to have been his signature was computer generated.

128.Mr. Manzoni demonstrated subsequently during his cross-examination of Mr. Lehman that in the litigation to which Mr. Lehman referred, which was before the China Trademark Office, there had been such finding.  What had been found was that the letter was irrelevant to the issue that the Office had to consider.  Mr. Lehman’s explanation for his earlier error was that he was told by his trademark lawyers “that it was considered a forgery by the Trademark Office and it went to the Second Intermediate Court in Beijing and that it was also considered to be a doctored document and not valid evidence”.  I do not accept this explanation.  Mr. Lehman had earlier in his evidence claimed to have expertise in intellectual property law.  It is difficult to see how he could possibly have thought that a court could have concluded that a letter, which he appeared to have signed, was a forgery in proceedings in which he had no involvement.  Who, for example, gave evidence that it was a forgery?

129.I agree with Mr Manzoni’s submission that this was the low point in Mr. Lehman’s evidence.  I do not accept that he believed the China Tradmark Office had found that the agreement was a forgery.  His evidence was a fabrication produced in order to his denial of signing the agreement of November 2001, which I find he did sign.

130.I find that in breach of his agreement he misappropriated the Company’s trademark by transferring it to his Wife’s company, Home & Garden, and refusing when requested, to cause it to be transferred to the Company.  This resulted in litigation between Home & Garden and the Company.  Home & Garden succeeded in this litigation, because, as I would have expected Mr. Lehman to know, the agreement he had signed was not relevant to what the Trademark’s Office saw as the relevant issue, which, as I understand it, was who had title to trademark and this the Office decided was determined by who first registered the mark.  Having succeeded Home & Garden made complaints about infringement of the mark, which lead to raids on the Company’s offices in Beijing, Shanghai, Shenzhen and Guangzhou.  This was obviously calculated to damage the Company’s business and exert pressure on Mr. Brown.  This conduct was highly, and unfairly, prejudicial.

Unreasonably refusing to authorize Million Strong to sign audited financial statements (Effiscient’s complaint 5)

131.Given my previous findings I do not consider it necessary to go through the history of the signing of the financial statements in detail.  In my view, however, it is clear that Mr. Lehman delayed instructing Million Strong to sign to pressure Mr. Brown into conceding his demands rather than because he had any genuine concerns about the contents of the draft financial statements he had been sent.  This contributed to delays, which resulted in prosecution by the Inland Revenue.  Viewed in isolation I do not think this is a significant complaint in part because, in the early years, there does appear to have been delays in production of the financial statements, which had nothing to do with Mr. Lehman.  It simply forms part of the broader picture of Mr. Lehman’s conduct.

Harassment and intimidation of Mr. and Mrs. Brown (Effiscient complaint 6)

132.I have already addressed Mr. Lehman’s conduct earlier in this judgment.  It is quite clear that his behaviour went well beyond what is acceptable.  Mr. Lehman was attempting to pressure Mr. Brown to accede to his demands, demands which were inconsistent with their original agreement.  Mr. Lehman’s conduct must have destroyed whatever trust and confidence remained at the end of 2004.  His attempts to use illegitimate means to force concessions out of Mr. Brown was, in my judgment, prejudicial, and clearly unfairly so.

Effiscient’s Cross-Petition - conclusion

133.Lehman Management’s conduct, which I have identified above as unfairly prejudicial, clearly had a serious negative impact on the Company and Effiscient’s interest in it.  Mr. Lehman made considerable and persistent efforts to inconvenience Mr. Brown and make the management of the Company difficult.  The clearest example is making reports to the Chinese Trademarks Office resulting in raids on the Company’s offices.  His campaign of harassment must not only have been personally unsettling and distracting to Mr. Brown, but bad for the Company’s image.  He also took steps to try and direct business away from the Company by the actions referred to in paragraph 125 of this judgment.  In these circumstances I am satisfied that Effiscient is entitled to the relief it seeks from the court. As Mr. Brown is an accountant and has been running the Company since its inception the appropriate order is that Lehman Management should sell its shares to Effiscient.  I now turn to consider the form of the order.

Order

134.Mr. Manzoni produced a draft order with his opening submissions to which he made a few minor amendments in his closing. Mr. Allman-Brown did not take issue with the valuation and payment provisions included in the draft order.

135.The draft order is novel in that it seeks a transfer of the shares before their valuation is completed and payment made. The justification for this is said to be that it is desirable that control of the Company is transferred as soon as possible.  I accept that in the circumstances of this case it is desirable that Mr. Brown obtains control of the Company as soon as possible.  However, this would leave Lehman Management without any security for the purchase price.  I suggested to Mr. Manzoni that a more appropriate way to deal with the control would be to give Effiscient voting rights in the shares, which could be done by Lehman Management giving Effiscient a proxy, which would be irrevocable save with the leave of the court.  The valuation of the shares could then proceed as the valuation provisions in the order contemplate.

136.In addition to seeking an order that Lehman Management sell its shares, Effiscient also seeks an order the Lehman Management pay damages to Effiscient in respect of the loss caused by the matters of which they complain and a number of other matters and that such damages are set off against the purchase price of the shares.  The draft order envisages the damages being assessed in the first instance by the valuer and then referred to the court for final determination.

137.I deal first with the question of whether or not damages should be awarded.  I have found that Effiscient’s complaints have been made out.  In so far as I am able to determine at this stage that those complaints have caused financial loss to the Company I accept that such loss should be paid by Lehman Management to Effiscient.  However, not all the matters referred to in the draft order fall into this category and some of them are either not such as I consider it appropriate, on normal principles, to so order (for example, lost management time in dealing with these proceedings) or are too nebulous and vaguely formulated for them to be sensibly be referred to a valuer for quantification (for example, the difference between the original investment in fact made by Lehman Management and Effiscient and the investments they agreed to make to each other) or which I think it is too late to quantify or they have been largely overtaken by events (for example, the damages to the premises in November 2004 and the misappropriation of US$118,335).  I will order that the damages caused by the following unfairly prejudicial behaviour be assessed:

(1)   The operation of a professional services firm offering accountancy services within the People’s Republic of China by Mr. Edward Lehman through his nominee or nominees.

(2)   Misappropriation and infringement of the trademark of the Company’s business name registered in the first instance by Mr. Edward Lehman.

138.I accept that such damages should be set-off against the purchase price and that until the damages have been quantified the purchase price for the shares should not be paid.  I set out the detailed terms of my order in the Appendix to this judgment.

139.The order also provides for the provision of a proxy in respect of Lehman Management’s voting rights, which can only be revoked with the leave of the court.

140.So far as costs are concerned I make the order sought in Mr. Manzoni’s draft order, namely, that the costs of both proceedings should be paid by Lehman Management to Effiscient.

Mr Allman-Brown, instructed by Messrs Miller & Peart, for the Petitioner

Mr Charles Manzoni, instructed by Messrs Reed Smith Richards Butler, for the Cross-Petitioner

The 2^nd Respondent (in HCCW 377/2010) & the 1^st Respondent (in HCCW 383/2010), LehmanBrown Limited, in person, Absent

The Official Receiver – excused from attendance

HCCW 377/2010 & 383/2010

APPENDIX TO JUDGMENT OF 15 NOVEMBER 2011

IT IS ORDERED THAT:-

1. The Petitioner’s Amended Petition is dismissed.

2. The Cross-Petitioner’s Petition is allowed upon the terms set out in the Order below.

3. The Petitioner shall sell its one share in LehmanBrown Limited (“Company”) (representing a 50% shareholding in the Company) to the Cross-Petitioner at a price to be determined by this court (“the Purchase Price”), absent any agreement between the Parties.

4. The Court shall within 21 days of this Order appoint a Hong Kong qualified accountant (“Court Expert”) to prepare a report upon the value of the Petitioner’s share in the Company (“Expert Valuation Report”).

5. The Court Expert shall report to the Court on the value of the shares in the Company as at the date of the Petitioner’s Petition (“the Valuation Date”).  The Expert Valuation Report shall value the shares in the Company on the basis of the fair market value of the business as at the Valuation Date, but not having regard to the extent to which the Cross-Petitioner may expand and grow the business after the valuation date without the involvement or interference of the Petitioner and/or by Mr. Edward Lehman, the Petitioner’s Authorized Representative (“Petitioner’s Authorized Representative”) and/or by the Petitioner’s Beneficial Owner, Ms. Karolina Lehman (“Petitioner’s Beneficial Owner”).

6. The Petitioner shall pay to the Cross-Petitioner damages to be assessed by the Court to reflect the damage suffered by the Cross-Petitioner as a result of the unfairly prejudicial conduct of the Petitioner and/or the Petitioner’s Authorized Representative and/or by the Petitioner’s Beneficial Owner, including but not limited to:

(a) the accountancy firm, set up, run and operated in competition with the Company by the Petitioner’s Authorized Representative on his own behalf and/or on behalf of the Petitioner, or the Petitioner’s Beneficial Owner;

(b) the misappropriation and infringement of the Company’s Chinese and Hong Kong trademarks by the Petitioner’s Authorized Representative on his own behalf and/or on behalf of the Petitioner, or the Petitioner’s Beneficial Owner;

7. The Court Expert shall report to the Court his opinion of the level of damages suffered by the Cross Petitioner as a result of the matters set out in paragraph 6 above in a separate section within the Expert Valuation Report.

8. The Court Expert shall deliver the Expert Valuation Report to the Court within 3 months of the date of this Order or such other date as the Court shall order.

9. The fees of the Court Expert (including a proper sum for each day that the Court Expert is present in Court) as fixed by the Court (or as agreed between the parties) shall be paid equally between the Petitioner and the Cross-Petitioner, with either one being entitled to pay such fees as are necessary to ensure that the Expert Valuation Report is completed and the Court Expert attends court as necessary. To the extent that the Petitioner or Cross Petitioner pays more than 50% of those fees there shall be added or deducted to the final net balance payable hereunder as appropriate such an amount so as to ensure that each party has paid 50%.

10. The hearing of the Court’s determination of the purchase price of the Petitioner’s share in the Company and the assessment of damages shall be adjourned to a date to be fixed in consultation with Counsel’s diaries with 3 days reserved on the first available date after 31 March 2012.

11. The Cross-Petitioner shall be entitled to set off against the Purchase Price to be paid for the Petitioner’s share in the Company:

(a) the damages assessed by this Court as arising from the unfairly prejudicial conduct;

(b) any damages and costs which may be due to the Cross-Petitioner in the defamation proceedings action number HCA 959/2010; and

(c) any costs which may be due to the Cross-Petitioner as a result of these proceedings.

12. The balance due either from the Petitioner to the Cross-Petitioner, or from the Cross-Petitioner the Petitioner, after the set off set out in paragraph 11 above has been finally determined or agreed, and after the accounting for fees as set out paragraph 9 above, will be paid by the appropriate paying party to the other in quarterly instalments on 30 April, 31 July, 31 October 2012 and 31 January of each year immediately following such final determination or agreement, over a period not exceeding 3 years.

13. The Petitioner shall within 5 clear days of the making of this Order provide to the solicitors for the Cross-Petitioner (Reed Smith Richards Butler) a general proxy in respect of its voting rights in its one share in the Company, such proxy to be irrevocable save with the leave of the Court.

14. There be liberty to apply.

15. The Petitioner shall pay the Cross-Petitioner’s costs of the Petition and of the Cross-Petition, to be taxed if not agreed.

Dated this [  ] day of October 2011.

Registrar