HO PO YENG v. HO MING CHUN AND OTHERS

HCCW 100/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 100 OF 2011

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BETWEEN

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J U D G M E N T

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Introduction

1.  The Petitioner is one of 3 shareholders of the Company. He petitions for a winding up of the Company pursuant to section l77(1)(f) of the Company's Ordinance or a buy-out of his shares in the Company pursuant to section 168A of that Ordinance.

2.  Prior to the Company's incorporation in 1971 the Petitioner, in partnership with Ho Wai Man and Kwong Chok Sam, carried on business maintaining machinery under the name Hang Sang Engineering Factory.  The Company was incorporated to continue this business and expand it to include the manufacture of plastic injection moulding machinery.  ThePetitioner, Mr Ho and Mr Kwong each held 5 shares.  The Petitioner was in charge of production, Mr Ho administration and finance and Mr Kwong sales and marketing.  In1972 further shares were allotted.  As a result Mr Ho held 50%, the Petitioner 40% and Mr Kwong 10% of the shares.

3.  In 1974 Mr Ho's son, the 1st Respondent, joined the Company as an apprentice. In 1978 Mr Ho transferred some of his shares to the 1st Respondent, who became a director of the Company in the following year. In 1988 the Petitioner's nephew, Ng Wai Sang, joined the Company as a technician. In 1993 Mr Kwong died. In 1996 his son, Kwong Lap Wai, took over his Father's role in charge of sales and marketing. During this period the Petitioner relocated to Canada for emigration purposes and Ng Wai Sang began to take an active role in the management of the Company.

4.  In August 1996 the Company expanded its manufacturing capacity by establishing a joint venture in Shenzhen. In 2002 the joint venture company changed its name to Hang Sang Machinery (Shenzhen) Co Ltd ("HSS"). Also in 2002 the Company became the sole shareholder in HSS.

5.  In August 1997 Mr Ho transferred more shares to the 1st Respondent and the Petitioner transferred half his shares to his nephew. In June 1998 Kwong Lap Wai and Ng Wai Sang were appointed additional directors of the Company.

6.  In June 2004 Mr Ho's other son, the 2nd Respondent, became a shareholder after his Father transferred the majority of his shares to him. The shareholding of the Company then became:

Petitioner	20%
Ng Wai Sang	20%
Kwong Lap Wai	10%
Mr Ho	5%
1st Respondent	30%
2nd Respondent	15%

7.  NgWaiSangbecame the general manager and Kwong Lap Wai became the deputy general manager.  The Company's business was described in its audited financial statement for the financial year ending 2002 as trading in plastic injection moulding machines.  However, the Company had retained properties originally bought for its own use after it moved its machinery business to Shenzhen and they were let out and produced significant rental income. In the financial year ending 31 December 2004 the total rental income was HK$1,763,800.

8.  Disputes began to arise between the shareholders and on 16 May 2005 Ng Wai Sang and Kwong Lap Wai presented a petition under section 168A of the Companies Ordinance. They contended that the Company was a quasi‑partnership. Mr Ho died in July 2005. By the end of 2005 the Company's trading business turnover had dwindled to HK$85,662.68.

9.  Kwan J, as she then was, handed down judgment on 20 March 2007 in favour of Ng Wai Sang and Kwong Lap Wai and ordered that the Petitioner and 1st and 2nd Respondents in these proceedings buy out their shares. As is far too often the case in matters such as these it took a considerable time for the shares to be valued. In the meantime neither the Petitioner nor the 1st and 2nd Respondents seem to have paid any attention to the affairs of HSS, which was under the control of Ng Wai Sang and Kwong Lap Wai. The sale of the shares was not completed until the middle of 2010. On completion the shareholdings became:

Petitioner	28%
1st Respondent	30%
2nd Respondent	37%
Estate of Mr Ho	5%

10.  On 21 June 2010 Ng Wai Sang and Kwong Lap Wai handed over management of HSS to the Parties.  It is not clear to what extent HSS had problems before the handover, but it appears to be common ground that difficulties were quickly encountered, which were not, at least at the outset, the fault of the Petitioner or the 1^st and 2^nd Respondents.  The principal one was the payment of employees’ wages.  Failure to pay the wages that the employees claimed they were owed led to the commencement of arbitration proceedings and by sometime around September or October the Factory had ceased operation altogether. 

11.  In short the Petitioner’s complaint is that it was the 1^st and 2^nd Respondents’ responsibility to sort these problems out and their failure to do so caused the breakdown of trust and confidence that justifies the Court making a winding-up order on the just and equitable ground under section 177(1)(f) of the Companies Ordinance, alternatively an order under section 168A that they buy his shares.  Although in the Petition it is also asserted that the 1^st and 2^nd Respondents had misappropriated the Company’s assets, this complaint was abandoned at trial.

12.  There is also an assertion in paragraph 33 of the Petition that there was an understanding between the founding members of the Company that the business of machinery maintenance and the manufacture of plastic injection moulding would be continued, but in the event that it ceased to continue the Company would be wound up.  As an alternative to the claim referred to in the previous paragraphs, the Petitioner claims that as the business, which was conducted by HSS has ceased it follows in accordance with the understanding that the Company should be wound up.  Mr Paul Leung, who appeared for the Petitioner, put his client’s case differently at trial.  He described the cessation of the machinery business carried out by HSS as resulting in the loss of the Company’s substratum, which is a recognised ground for winding up a company on the just and equitable ground.

13.  The Petitioner does not assert that the matters of which he complains arose from any breach by the 1^st and 2^nd Respondents of any legal duties or obligations they were under.  He asserts that the understandings and agreements between the Parties and the predecessors in title to their shares import equitable criteria into a consideration of their conduct and whether their conduct was such as to make it just and equitable to wind up the Company or was unfairly prejudicial and justifies an order being made under section 168A for the purchase by them of the Petitioner’s shares.  Before turning to consider the complaints made against the 1^st and 2^nd Respondents in detail it is, therefore, appropriate to consider the principles by reference to which the Court determines Petitions of this sort.

Unfair prejudice and just and equitable petitions

14.  In summary the Petitioner’s argument as I understand it is this.  The Company was originally formed by the 3 partners in Hang Sang Engineering Factory.  In its original form it was what might be described as a classic case in which the Court finds that the relationship between the shareholders, having its origin in their relationship as partners, imported the type of duties and obligations that exist between true legal partners, and thus engages the application of equitable considerations when assessing whether or not one of the shareholders has behaved in a way which is unjust, inequitable or unfairly prejudicial: see Ebrahim v Westbourne Galleries Ltd [1973] AC 360, 379.  The 1^st and 2^nd Respondents became shareholders against a background, and they dealt with the Petitioner in a manner, which demonstrated that they accepted that their business relationship had a personal element to it and that the Parties’ conduct was consistent with the maintenance of trust and confidence being an important component of their relationship as shareholders in the Company.  The assessment of whether or not it is just that the Company is wound up or whether there has been unfairly prejudicial behavior, which justifies a buy‑out order pursuant to section 168A of the Companies Ordinance has to be considered in this context.

15.  The Petitioner argues that when the 1^st and 2^nd Respondents became shareholders they did so on the basis on which the original shareholders carried on business, which involved mutual trust and confidence.  The Petitioner’s case is that although this was not expressly stated it is demonstrated by the fact that business decisions continued to be made on the basis of unanimous consent and that the 1^st and 2^nd Respondents referred to the Petitioner as “Da Gong”.  I do not understand the 1^st and 2^nd Respondents to dispute the nature of the relationship between the Parties and I accept that it imported the equitable principles referred to in the previous paragraph.  The 1^st and 2^nd Respondents take issue, however, with whether or not the type of complaints which the Petitioner makes, which I address in detail later, justify a winding-up order on the just and equitable ground or are capable of constituting unfair prejudice.  They point out correctly that loss of confidence is not of itself sufficient to justify the intervention of the Court.  A disgruntled shareholder does not have a right to withdraw from a company simply because he has become unhappy with the conduct of its affairs: O’Neill v Phillips[1].  Consistent with this approach poor management decisions by those in control of a company leading to a loss of confidenceare not of themselves sufficient to constitute unfair prejudice or engage the just and equitable principles described above.  What is required is something more serious: Re Elgindata[2].  It seems to me that what would normally be required is management of a company’s affairs, which is sufficiently bad that it goes materially beyond the range of mistakes and errors of judgment that might be expected of management of the competency that the shareholder can reasonably be assumed to have anticipated when acquiring his interest in the company.  Whether or not the conduct complained of is this extreme needs to be considered in context.  Regard has to be had to what the parties can reasonably have expected in terms of competence from management and the circumstances in which management found itself.  For example, if a company’s business is declining because of a general down turn in the industry in which it operates a complaint that management should have diversified into another industry is unlikely to be sufficient to demonstrate unfair prejudice.  I return to this issue later in the judgment.

16.  As will become apparent in the next section of this judgment in which I address the Petitioner’s complaints in detail, his complaints concern the way in which the 1^st and 2^nd Respondents dealt with HSS when they obtained control over it in June 2010.  HSS was a wholly owned subsidiary of the Company.  The way in which the affairs of a subsidiary are dealt with are capable of constituting, for the purposes of petitions issued under sections 168A and 177(1)(f) the affairs of a holding company, which is the subject of such a petition.[3]

Mismanagement

17.  The complaint concerning the 1^st and 2^nd Respondents’ conduct as set out in the Petition is not very long and rather than summarise it I will quote it:

“35. Ng Wai Sang and Kwong Lap Wai handed over the management of the Shenzhen Company to the 1^st and 2^nd Respondents in or about June 2010. Therefore, pursuant to the Respondents’ Promise, the 1^st and 2^nd Respondent should actively and diligently manage the business from June 2010. However, due to their mismanagement, or no-management, the factories in Shenzhen were closed down in or about September to October 2010.

36. Since about July 2010, employees of the Shenzhen Company requested Your Petitioner and the 1^st and 2^nd Respondents to cause to pay their salaries and to settle various charges and expenses including utilities bills and local government taxes.

37. In the light of the crisis, Your Petitioner hoped to convene an emergency board meeting with a view to urge the 1^st and 2^nd Respondents to take immediate actions addressing the problems. Your Petitioner had also proposed a number of solutions to solve the financial crisis of the Shenzhen Company including by injecting funds into the Shenzhen Company by the Company through bank finance.

38. Despite Your Petitioner’s requests and suggestions, the 1^st and/or the 2^nd Respondents failed to promptly reply to him, or take any prompt and constructive actions to pay heed to the crisis. The 1^st and 2^nd Respondents simply have shown no interest in, or that they were simply incapable of, running the business.

39. Since or about July 2010, the Petitioner has stopped receiving his monthly salary in the sum of $35,000 and back pay salary in the sum of $15,000.

40. Due to their inaction, the factory in China has not been in production since about September to October 2010. They failed to pay the workers their salaries. Eventually, the factory was completely closed down in or about September to October 2010.

41. Currently, the business of the Shenzhen Company has, to all intents and purposes, ground to a halt.

42.    By reason of the matters aforesaid, the 1^st and 2^nd Respondents have acted in breach of the Respondents’ Promises.  Further, due to the close down of the business, the 1^st and 2^nd Respondents have also acted in breach of the continuation of the business understanding.”

18.  The complaint relates to HSS not the Company’s activities in Hong Kong, which were limited to managing the property it owned.  I have already mentioned that prior to June 2010 Ng Wai Sang and Kwong Lap Wai were in charge of HSS.  None of the Parties seem to have taken any interest in monitoring what they were doing or developing a plan for the transfer of management.  In paragraph 34 of the Petition there is reference to the Petitioner having told the 1^st and 2^nd Respondents that due to his age (he was 79 in 2010) he did not intend to run the business and that they should manage it actively and diligently.  They, he states, agreed.  He does not describe in the Petition when he said this or what the Parties were expecting had to be done at that time.  However, paragraph 34 is admitted in paragraph 44 of the 1^st Respondent’s first affirmation. The 1^st Respondent refers to paragraphs 121 and 122 of Kwan J’s judgment in HCCW 456/2005, as I understand it, to show that he said that he was confident that HSS would be unsuccessful under new management during the first trial in March 2007.  He then goes onto explain that when the Parties to these proceedings came to take over management of HSS over 3 years later the process was extremely chaotic and Ng Wai Sang and Kwong Lap Wai were uncooperative, none of which I understand to be disputed by the Petitioner. The implication is that things were not as he assumed at the time he gave evidence in March 2007, which is reasonable and I accept. The 1^st Respondent goes on to explain in his evidence that not all financial records were handed over and that at the time he made his 1^st affirmation in May 2011 he still did not have a clear picture of the financial and operational condition of HSS. 

19.  The Petitioner in his 2^nd affirmation does not dispute any of this, save that he says that HSS’s business had closed down by September or October 2010 and that the 1^st and 2^nd Respondents have taken no steps to revive it.  The Petitioner does not state what he says they could have done to revive it.  In his affirmation evidence he states that he sent notices between 15 September 2010 and the middle of October 2010 (the last notice is undated) to the 1^st Respondent requesting that the 1^st and 2^nd Respondents address the difficulties at HSS.  In evidence in chief he said that he did so by post to the Company’s address and by email.  The 1^st Respondent say that he only received the first, second and fifth notices.  The Petitioner says that this is not plausible, but as the thrust of all the letters is the same and the Petitioner spoke to the 1^st Respondent over the telephone during this period it seems to me that nothing turns on this.

20.  In the notice of 15 September 2010 the Petitioner describes the problems that the Parties discovered when they visited HSS’s factory.  He says that they all boil down to a failure to pay money owed to various parties including labour.  He suggests that money should be raised to settle HSS’s debts and proposes they consider mortgaging the Company’s Hong Kong property.  The Petitioner sent a second notice on 17 September 2010. He complains that no operating strategy has been formulated and that this is the responsibility of the Chairman of the directors.  He repeats his concerns about the non-payment of creditors.  He suggests a meeting of the directors to discuss these problems.  The fifth notice is dated 4 October 2010 and refers to the four earlier notices that the Petitioner says that he had sent. He complains that he has not had a response to the earlier notices.  He makes similar points to those made in the first and second notices.  In paragraph 4 he refers to the fact that he has not been able to contact the 1^st Respondent by telephone.  He says that he had spoken to the 2^nd Respondent on a number of occasions and suggested they all meet.  He says that the 2^nd Respondent has suggested they meet together with professionals and then sign documents in order to get financing to raise money to inject into the Company.  He complains that the 2^nd Respondent was unclear who they were to meet and why.  This is to some degree consistent with paragraph 66 of the 1^st Respondent’s first affirmation in which he says that the Petitioner was invited on numerous occasions to meetings with the solicitors who had represented them during the first trial and a firm of accountants, Tony Kwok Tung Ng & Co CPA, to discuss options for saving the business in the Mainland.  The Petitioner accepts this in his 2^nd affirmation, but explains, and he said the same thing in cross‑examination, that he did not do so because they would not explain what they intended to discuss and he was suspicious of their motive because the meetings were to be held at the offices of the professionals so that documents could be signed.  He was not able to explain in cross‑examination what he was suspicious the 1^st and 2^nd Respondents might be planning.

21.  I accept that the Petitioner felt that the 1^st and 2^nd Respondents were not addressing the serious problems HSS was experiencing.  However, although he argues that the 1^st and 2^nd Respondents had agreed to run the Company, he does not suggest that they should simply have got on and dealt with the problems at HSS without reference to him.  Indeed he accepted that he had gone to Shenzhen with them initially and it is obvious from his notices that he saw himself as having a role to play in addressing the problems.  It does seem to me that in these circumstances his unwillingness to meet on the basis proposed by the 2^nd Respondent was unhelpful.  However, what is more important is whether the 1^st and 2^nd Respondents’ failure to solve the problems was sufficiently serious to be unfairly prejudicial or to justify intervention under section 177(1)(f).  This has to be assessed taking into account the failure of any of the Parties to plan for taking control of HSS.

22.  The principal problem at HSS was its outstanding debts.  By the autumn of 2010 HSS’s bank account in the Mainland had been frozen and it was not producing revenue out of which these debts could be settled.  The Petitioner’s case on what should have been done to solve these problems is unhelpfully vague in the Petition and his affirmations.  The Petitioner suggested in his cross-examination that what was necessary was some short term financing to settle the most urgent debts and for control to be taken of HSS.  He suggested that if control had been taken of HSS this would have given workers confidence to return to work and operations recommence.  It would also have been possible to have sold inventory to raise money.  It was not, the Petitioner said, necessary to inject very large sums, which would have encountered the exchange control problems that the 1^st and 2^nd Respondents say was a serious impediment to solving HSS’s financial difficulties.  The Petitioner’s evidence amounts to a suggestion that the 1^st and 2^nd Respondents were mesmerised by the problems faced by HSS and were incapable of getting to grips with them.

23.  The 1^st and 2^nd Respondents’ case as set out in the 1^st Respondent’s affirmation (there were no pleadings in this case) is simple.  At the time the 1^st Respondent gave evidence before Kwan J he was optimistic about the prospects for the Company and HSS.  However, by the time the Parties took control of HSS its affairs were chaotic.  The Parties did have informal meetings to discuss HSS, which the Petitioner accepts in paragraph 16 of his 2^nd affirmation.  As the Petitioner was aware HSS’s financial difficulties were difficult to resolve because the Company’s bank accounts remained frozen until about March 2011.  Company revenue received after the first Petition was issued was deposited into his bank account.  The implication of his evidence is that there was insufficient money retained to pay HSS’s debts.  It is also the implication of the 1^st Respondent’s evidence that the Petitioner issued the Petition on 16 March prematurely.  The import of this evidence is that the 1^st and 2^nd Respondents did not independently do anything of substance to address HSS’s problems, however, this was a consequence of a lack of available funds; a problem that it was not possible to address before the Petition was issued. 

24.  This evidence is addressed in the Petitioner’s 2^nd affirmation.  The Petitioner does not dispute the substance of the material parts of the 1^st Respondent’s evidence.  His response is set out in paragraph 17 in which he complains that the 1^st and 2^nd Respondents should have opened a new bank account into which the rental income from the Company’s properties could be deposited.  When he pointed this out to them, they suggested that any two of the signatories to a new account should be able to operate it.  He objected that he should be a necessary signatory to any new account.  It seems to me that this is inconsistent with the thrust of his main complaint in the Petition.  The Petitioner argues that it was principally the responsibility of the 1^st and 2^nd Respondents to manage the Company and HSS.  This necessarily means that he must have trusted them to do this.  It seems odd in these circumstances to object to them having the ability to operate the Company’s bank account without reference to him.  If the Petitioner was required to be consulted every time a payment had to be made this would necessarily have resulted in him having a fairly high level of involvement in the running of the Company.  This seems to be inconsistent with his argument that the running of the Company was to be left primarily in the hands of the 1^st and 2^nd Respondents.

25.  In paragraph 23 the Petitioner says this when addressing the 1^st Respondent’s evidence in relation the cessation of salaries to the Parties:

“23. In paragraphs 70 to 72 of R1’s Affirmation, the 1^st Respondent mentioned that the Company has stopped paying ours salaries since July 2010. I accept that. Indeed, it was intended that the money would be utilized to salvage the Shenzhen Company. However, I do not agree that I refused to join the 1^st and 2^nd Respondents to discuss options for bailing out the business. As seen in the notices I sent to them, I repeatedly asked them to take prompt action. I was just too old to take physical actions. But there was nothing to stop the 1^st and 2^nd Respondent to take active steps to salvage the business. They however had simply taken no action at all. As I mentioned above, they did not take any positives steps to take charge of the matters. They merely paid lip-service to my complaints and suggestions.”

This is strikingly lacking in details of what the Petitioner suggests that they should have done and how the immediate financial problems were to be solved.

26.  The 2^nd Respondent’s affirmation was filed after the Petitioner’s 2^nd affirmation.  The 2^nd Respondent fleshes out some of the points made by the 1^st Respondent.  He explains that in early July 2010 the Parties advanced their own money in the sum of RMB 500,000 through C.L. Chow & Co to pay HSS’s staff.  He says that the Petitioner refused to advance any further money to pay HSS’s staff.  The Petitioner said that any further payments should be made by the Company.  The 2^nd Respondent explains that as they were different companies he was concerned that this might be in breach of legal and accounting requirements in Hong Kong.  He says that to ensure things were dealt with properly he suggested sitting down with professionals to discuss how best to inject new capital into HSS.

27.  The Petitioner responds to this in his 3^rd affirmation.  He says that he was not invited to see an accountant.  This evidence sits ill with paragraph 21 of his 2^nd affirmation in which he seems to accept paragraph 66 of the 1^st Respondent’s affirmation in which it is alleged that he was invited to meet Tony Kwok Tung Ng & Co CPA.  He points out, correctly I accept, that even if he was not willing to meet an accountant there was nothing to stop the 1^st and 2^nd Respondents doing so.  He suggests that there was no reason for the 1^st and 2^nd Respondents to think it was necessary to get an accountant’s advice and says that this issue was not genuine, although he does not explain why, if it was not genuine, it was being raised.

28.  As I have previously explained, it is not in dispute that the Parties agreed that the 1^st and 2^nd Respondents were to manage the business.  However, there is nothing to suggest that at the time of the trial before Kwan J the Parties anticipated that if they lost it would take a few years before they obtained control of HSS and that when they did so its affairs would be in a chaotic state.  The Parties’ expectation at that time may genuinely have been positive and optimistic.  The Petitioner may have thought that he could trust the 1^st and 2^nd Respondents to manage the business.  This judgment was made, I think one must reasonably assume, on the assumption that HSS would operate much as it was at the time the first trial took place.  Support for this view is to be found in paragraph 8 of the Petitioner’s 3^rd affirmation in which he says: “I am afraid to say that it is all too late to revive the business of Shenzhen Company.  Besides, the 1^st and 2^nd Respondents simply lack the ability and experience in operating the business, let alone the big task of resurrecting it.”  This evidence seems to be damaging to the Petitioner’s case.  If this reflects his views at the time of the first trial it follows that his suggestion that he intended to leave the management of the Company and HSS in the 1^st and 2^nd Respondents hands was neither sensible nor reasonable.  If it is his judgment after seeing how they dealt with the events of 2010 it reflects the fact that the adverse change in anticipated situation was beyond their competence.  It does not seem to me that this is unfairly prejudicial to him.

29.  As my description of the Petitioner’s affirmation evidence demonstrates his case is very general.  He does not suggest that the Parties reached any agreements about who would do what in relation to the Company and HSS after Kwan J’s judgment was handed down and that these agreements were not complied with.  His complaint, as I have already observed, is about inactivity.  The 1^st and 2^nd Respondents see the problems faced by HSS as very much financial problems which the Petitioner did little to assist resolve.

30.  The rather insubstantial affirmation evidence does not in my view give a very useful picture of what either the Petitioner or the 1^st and 2^nd Respondents were attempting to do.  Presumably neither camp wanted to see HSS’s business to collapse unnecessarily.  Cross‑examination provided more detail, but little to bring the problems into clear focus.  The Petitioner accepted in cross-examination that he had declined the invitation to meet because he wished to deal with both the debt problem and discuss a business plan at the same time.  He also said that he did not go to the proposed meeting because he was not told what financing proposal they wished to discuss.  He said that he had not been told by the 1^st Respondent about the difficulty the 1^st Respondent understood existed in transferring money to HSS from Hong Kong.  Neither had he been told that there were funds in Hong Kong, held by the 1^st Respondent on behalf of the Company, that could be made available to settle some of HSS’s debts.  In his closing submissions Mr Leung argued that it is not credible that if the 1^st Respondent had, as he demonstrated during the trial was the case, nearly HK$1,000,000 of the Company’s money in his bank account in October, he and the 2^nd Respondent could not have found a way to use it to pay HSS’s creditors if they had really wanted to do so.  He argued that their inactivity was inexplicable other than in terms of incompetence or bad faith.  The result was that by October 2010 HSS’s business had ceased to exist and the Petitioner had lost all trust in them

31.  The 1^st Respondent said in cross-examination that he had told the Petitioner about the difficulty in transferring money to the Mainland from Hong Kong when they went to the bank in Shenzhen with a view to getting money from HSS’s account.  The 2^nd Respondent gave evidence that he had had a number of discussions with the Petitioner at which he had explained their concerns about transferring money and the reasons for going to C.L. Chow’s office.  He had also told the Petitioner that there was money available to be transferred to the Mainland. 

32.  The 1^st and 2^nd Respondents argue in their closing submissions that the suggestion that they were not interested in saving HSS is unrealistic.  They point out that they had had to pay HK$22,000,000 to obtain control of HSS and in June, along with the Petitioner, had taken HK$500,000 to Shenzhen to pay salaries.  No reason has been advanced by the Petitioner why in these circumstances they would have decided to let HSS die.  They wanted any further transfers of funds to HSS to comply with the necessary regulations and formalities.  The Petitioner does not seem to have understood this and his unwillingness to meet with the 1^st and 2^nd Respondents and professional advisers to agree a proper method for the transfers stood in the way of a resolution of HSS’s financial problems.  It is their case that HSS can be revived and used to conduct new business; this is why they object to a winding up of the Company.

33.  Neither party seems to have dealt with the problems faced by HSS sensibly.  If the 1^st and 2^nd Respondents could not get the Petitioner to understand what they were trying to do there was nothing to stop them meeting with the Company’s solicitors or accountants, obtaining advice and then passing it to the Petitioner.  Conversely it seems ill advised and unhelpfully stubborn of the Petitioner to decline the 1^st and 2^nd Respondents request to meet with professional advisers.  The suggestion that the Petitioner was concerned that this was a plan to get him to sign something adverse to his interests is unconvincing.  He did not strike me from his cross-examination as a man who would be readily browbeaten into signing something not in his interests and even by the end of the trial Mr Leung was unable to identify what it was the 1^st and 2^nd Respondents might have been contemplating.

34.  In my view both the Petitioner and the 1^st and 2^nd Respondents are to some degree to blame for the collapse of HSS’s business by October 2010.  They failed to give proper thought to the takeover of control of HSS in advance as I would have expected any prudent businessman to have done.  As I have explained above the response of all 3 was unsatisfactory in some regard.  However, there is an important difference between their respective positions.  The 1^st and 2^nd Respondents have accepted in paragraph 44 of the 1^st Respondent’s first affirmation that it was their understanding with the Petitioner that they would run the Company’s business including HSS.  The result is that it was their responsibility in the first instance to address the problems faced by HSS.  They could have planned for the takeover of HSS in advance.  As Mr Leung correctly submitted they were educated men who might reasonably have been expected to do so.  It seems to me to follow from their acceptance that they were to be principally responsible for the management of HSS that if they felt it was desirable or necessary for professionals to be consulted and a proper arrangement put in place for injecting new funds into HSS, it was their responsibility in the first place to formulate such an arrangement.  It could then have been put to the Petitioner.  If they had done so and he refused to agree it would be difficult for him now to complain.  The fact is that they did not do so.  In this respect in my opinion they were at fault.  Similarly in my view the Petitioner’s complaint that they did not formulate a plan for reviving HSS’s business is justified.  I accept that this was unsatisfactory and I accept that the Petitioner has lost confidence in the 1^st and 2^nd Respondents as a result.  Do these failures constitute matters which justify a just and equitable winding up or relief under section 168A?

35.  In Re Elgindata Ltd[4] Warner J said this in the context of an unfair prejudice petition:

“I do not doubt that in an appropriate case it is open to the court to find that serious mismanagement of a company’s business constitutes conduct that is unfairly prejudicial to the interests of minority shareholders. But I share Peter Gibson J’s view that the court will normally be very reluctant to accept that managerial decisions can amount to unfairly prejudicial conduct.

Two considerations seem to me to be relevant. First, there will be cases where there is disagreement between petitioners and respondents as to whether a particular managerial decision was, as a matter of commercial judgment, the right one to make, or as to whether a particular proposal relating to the conduct of the company’s business is commercially sound…..

Secondly, as was persuasively argued by Mr Chivers, a shareholder acquires shares in a company knowing that their value will depend in some measure on the competence of the management.  He takes the risk that that management may prove not to be of the highest quality.  Short of a breach by a director of his duty of skill and are (and no such breach on the part of either Mr Purslow or Mrs Purslow was alleged) there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor.  It occurred to me during the argument that one example of a case where the court might none the less find that there was unfair prejudice to minority shareholders would be one where the majority shareholders, for reasons of their own, persisted in retaining in charge of the management of the company’s business a member of their family who was demonstrably incompetent.  That of course would be a very different case from this.  Mr Rowland deliberately invested in a company controlled and managed by Mr Purslow, whom he had known for five years or so.  Indeed, he did so, despite Mr Purslow’s reluctance to have him as a shareholder in his company, Mr Nurse submitted that Mr Rowland had a right to expect a reasonable standard of general management from Mr Purslow.  In my view, he had no such right.  He took the risk that Mr Purslow’s management of the company might not be up to the standard that he, Mr Rowland, had hoped and expected.”

36.  However, specific acts of mismanagement, particularly if they occur over an extended period of time, as opposed to occasional mistakes, are capable of constituting unfair prejudice[5]. Normally these would have to be sufficiently serious that they constitute breaches of director’s duties.  Isolated breaches of duty are unlikely to constitute unfair prejudice unless they are particularly severe.

37.  In the present case it has not been alleged that the 1^st and 2^nd Respondents were in breach of their duties as directors of the Company in failing to deal adequately with HSS’s problems.  Mr Leung characterised them as mismanagement in his submissions, which is how they are described in the Petition.  As Warner J explains in Elgindata there is nothing prima facie unfair in the management of a company turning out to be poor.  It seems to me that there is nothing unfair to the Petitioner in the 1^st and 2^nd Respondents not being up to the job of resolving the problems that arose at HSS in June to October 2010.  It also does not seem to me that the fact that the Petitioner may have lost confidence in the 1^st and 2^nd Respondents management abilities in circumstances such as those in the present case is a justification for winding up the Company on the just and equitable ground.  The fact that a person becomes a shareholder on the basis that he can trust the probity and competence of his fellow shareholders and directors does not mean that if at sometime in the future an unforeseen event occurs and certain of the directors deal with it unsatisfactorily that the Court’s equitable powers under section 177(1)(f) are engaged.  A shareholder must reasonably be assumed to have understood that over time unexpected problems might arise and other directors might prove not to be capable of handling them.  This is a commercial risk inherent in going into business with other people.

Loss of substratum

38.  As I explain in the introduction to this judgment as an alternative to the claim based on mismanagement the Petitioner asserts in paragraph 33 of the Petition that there was an understanding between the founding members of the Company that the business of machinery maintenance and the manufacture of plastic injection moulding would be continued, but in the event that it ceased to continue the Company wound up. Mr Leung developed the Petitioner’s case as follows in his submissions.  The Company was set up to carry out a machinery business.  The properties were retained after the machinery business was moved to the mainland, but they were incidental to the Company’s business, which was conducted by HSS.  HSS has ceased business.  Despite the 1^st and 2^nd Respondents’ evidence that HSS’s business can be resurrected and that workers and suppliers are sympathetic to the difficulties its current owners have experienced the fact is that this has not happened and it is unrealistic to treat the business as anything other than at an end.  Loss of substratum is a recognised ground for winding up a company under the just and equitable ground and provides an independent basis for the Court to make a winding-up order: Shareholders’ Rights[6]. Mr Leung referred me to various authorities as illustrating this principle. 

39.  The 1^st and 2^nd Respondents argue that the Petitioner down plays the significance of the properties.  Since at least 1998 the Company has been letting out rental properties in Hong Kong for income, which has been distributed to the Parties as directors’ remuneration.  The significance of this activity is recognised in the audited financial statements of the Company, which by the 2006 financial year were describing the Company’s principal activities in the Report of Directors as “property investment for rental income and sale of machine parts.  There were no significant changes in the nature of the activities from those of the previous year”.  By 2004 the Company’s rental income (HK$1,763,800) had significantly outstripped its turnover generated from the sale of machinery (HK$151,958) and hiring rental from plant and machines in the Mainland (HK$826,800).  In following years the revenue from the machine business declined further as that business was taken over fully by HSS.  Holding and letting out rental property is consistent with the objects in the Company’s memorandum.  There is nothing to suggest that the Petitioner objected to the Company carrying on this activity.  On the contrary he accepted the position for over 10 years and benefited from it.

40.  Mr Valentine Yim, who appeared for the 1^st and 2^nd Respondents, referred me to the judgment of Scott J in Re Perfectair Holdings Limited[7]in which the Judge considered the principles upon which the Court acts when determining petitions relying on what the authorities generally refer to as the loss of substratum cases.  The principles identified by Scott J can be summarised as follows:

(1)    If the principal commercial object described in the memorandum can no longer be achieved then grounds are shown for a winding-up order to be made at the instance of a contributory.

(2)    A company will not be wound up on the just and equitable ground on the basis that a particular prominent purpose, even the most important and most prominent purpose, identified by the Company in its memorandum is no longer capable of being achieved if other commercial purposes authorised by the memorandum remain capable of being achieved and some members wish that commercial purpose to be pursued, unless there is more to the case than loss of the prominent purpose relied on.

41.  It follows that the starting point is an assessment of the Company’s objects described in the memorandum.  The objects clause of the Company is drafted in typically wide terms allowing the Company to carry out many types of business many of them unrelated.  The principle purposes of the Company are described in clause 3(a) of the memorandum:

“(a) To carry on the business as manufacturers of and dealers in plant, machinery and all kinds of products, engineering contractors, owners of engineering works, general merchants, importers, exporters, wholesale and retail traders, storekeepers, publishers, furnishers, ironmongers, shipowners, shipping agents, carriers, commission and insurance agents, estate and property owners or agents, manufacturers’ agents, warehouse-men, lightermen, contractors, builders, owners or keepers of hotels, restaurants, tea-houses and shops, wharf and dock owners or lessees, owners of mining, planting and other properties wherever situate, investors in shares and stock, brokers, general or special agents, managers and secretaries in Hong Kong and elsewhere.”

42.  Manufacturing and dealing in plant and machinery are the first of the commercial activities described in the sub-clause and it can fairly be described as a prominent purpose.  However, given the width and language of the clause I do not think it can properly be said that this is the principal purpose described in the clause; rather it is the most prominent amongst many.  The clause expressly includes carrying on business as property owners and Mr Leung did not suggest that owning rental property did not come within the objects clause.  The position therefore is that a commercial purpose authorised by the memorandum not only can be pursued, but has been pursued without objection for 12 years prior to issue of the Petition and the majority of the shareholders wish the Company to continue to pursue it.  In these circumstances the petition under this head must also fail.

Conclusion

43.  I dismiss the Petition and make an order nisi that the costs of the Petition be paid by the Petitioner to the Respondents such costs to be taxed if not agreed.  If any party wishes to vary the costs order they should notify the Court in writing within 10 clear days of handing down of this judgment.