CATHY LAI, JOHN TSANG & CO. v. NG SHING YAM

HCCW 483/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) No. 483 of 1995

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DECISION

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1. This is an application by liquidators of Polytex Thread Mfg Ltd ("the Company") for directions under s.200 Companies Ordinance as to

(1) whether, and if so the extent to which, they should regard as valid and enforceable the claim of the Respondent to wages in arrears, commission, end of year payment, accrued holiday pay and severance pay, in the total sum of $1,060,180, and

(2) whether they should pay the same out of the assets of the Company.

The Company

2. The background of this matter is as follows. The Company was incorporated in 1981. The Petitioner Hui Chun Mou was the holder of 27.3% of the Company's shares. The other shareholders were the Respondent (also as to 27.3%), Chan Fat Wai (also as to 27.3%) and Ho Yik Ming as to 18.1%.

3. The Petitioner and the Respondent were the only two directors of the Company from the date of incorporation, until 10 July 1995, when Chan and Tran Tuong Khanh ("Tran") were appointed directors. Tran is the Respondent's wife and Chan is her father. According to the Company's financial statements for the year ended 31 March 1996, the Petitioner resigned as a director of the Company on 28 December 1995, shortly after the petition was presented.

4. About 3 years after the Company was incorporated, in 1984 the Petitioner emigrated, returning to Hong Kong only occasionally and leaving the business of the Company in the Respondent's hands as the (then) only remaining director.

5. It has been alleged by the Petitioner that after his emigration, the Respondent ran the Company as if it were a sole proprietorship. Although the Petitioner was given the audited financial statements upon request, he asserted that his calls for dividends were ignored, and his requests for access to the Company's books were impeded. The Petitioner's main complaint was that the Respondent had obtained more benefits and remuneration than he should have been entitled to. It was also alleged by the Petitioner that the Respondent allowed his wife's company to benefit from business opportunities at the expense of the Company.

Petition

6. A petition for the winding-up of the Company was presented on 17 October 1995 by the Petitioner on the just and equitable basis, with alternative relief sought in the form of a "buy-out" order. Although the petition did not state on whom it was intended to be served, it would appear from paragraph (2) of the prayer for relief that the "buy-out" order was sought against the Respondent, and Chan and Ho the other shareholders of the Company.

7. Although the petition was initially opposed, a winding-up order was eventually made on 19 January 1999 on the first day of the hearing, without opposition by any of the respondents.

Effect of s.182

8. Under s.184(2) CO, the winding-up of a company by the Court shall be deemed to commence at the time of presentation of the petition, in this case on 17 October 1995.

9. Under s.182 CO, in a winding-up by the court, any disposition of the property of the company made after the commencement of the winding-up, shall, unless the court otherwise orders, be void.

10. Notwithstanding the presentation of the petition and the effect of s.182, however, it would appear that no application for a validation order was made and the Company continued to carry on business for more than 31/2 years after the presentation of the petition, even though the Company was operating at a loss for the year ended 1997.

Respondent's claim

11. After the Company was wound-up and liquidators appointed, the Respondent claimed to be a creditor of the Company for the sums listed in paragraph 1 above.

12. The liquidators have queried whether the Respondent was entitled to those payments and they have issued the present proceedings for the Court's directions. At the hearing, they accepted that as a matter of arithmetic only (assuming the facts were as alleged by the Respondent), he would be entitled to the sum claimed, save the amount of $31,000 as pay in lieu of notice which the liquidators say could not be claimed together with a claim for redundancy. Counsel for the Respondent has not sought to challenge that position.

13. The fundamental question was whether the Respondent has established that he is a creditor of the Company for the sum claimed, alternatively whether he should be entitled to a quantum meruit. In my view, he has failed to do so.

Purported resolution at board of directors' meeting

14. The Respondent has based his claim upon a purported resolution of the board of directors evidenced by a minute entitled "Board of Directors' Minutes As of 1 April 1998". It was purportedly resolved at that meeting that the "directors' emoluments for the year ended 31 March 1999 is hereby ratified as follows ...". There then followed terms of a salary and commission for the Respondent and terms of a salary only for Tran.

15. The purported meeting was apparently attended only by the Respondent and Tran, as the minute was signed only by the two of them as directors.

16. I should first deal with Tran's appointment as a director, which had been referred to in the Petition. Although the Petitioner had alleged in paragraph 25 of the Petition that he had not received notice of the Extraordinary General Meeting called for the appointment of Tran and Chan as directors, he raised that allegation only as an illustration of oppression on the part of the Respondent. He had not proceeded to challenge the legality of the appointment, and indeed accepted its validity in paragraph 6 of the Petition in which he stated that "by an ordinary resolution passed on 10 July 1995, Chan Fat Wai and Tran Tuong Khanh were also appointed as directors. The present members of the Board of Directors are therefore:- Ng Shing Yam, your Petitioner, Chan Fat Wai, Tran Tuong Khanh".

17. I therefore take it to be the case that Tran was a director at the time of the purported resolution of 1 April 1998. However the issue is whether that purported resolution was valid to bind the Company to pay the Respondent the sums claimed by him.

18. There is first the point raised by the liquidators that the alleged minute had not been produced from the statutory books. Further and more importantly, salaries and commission payable to the directors would be part of directors' remuneration (as had been acknowledged in previous financial statements of the Company). As such, the salaries and commission should have been determined by the Company at general meeting under article 78 of Table A, which applied to the Company. Further, if, contrary to the above, it might be considered that the commission was not part of directors' remuneration but constituted a separate contract or arrangement with the Respondent, then there should have been a disclosure of his interests at the purported meeting of 1 April 1998 pursuant to article 86 of Table A, and he should not have voted on the resolution.

19. Accordingly, I take the view that the purported resolution of 1 April 1998 did not bind the Company to pay the Respondent the sum claimed.

Claim to quantum meruit

20. Counsel for the Respondent has submitted alternatively that the Court should direct the liquidators to assess a "quantum meruit" payable to the Respondent in the light of payments previously made to him.

21. However, I find it difficult to direct the liquidators to accept a claim to a "quantum meruit" in the absence of relevant materials as to the worth of the Respondent's services. Such materials as have been put before the Court do not show any consistency or trend in the quantum of the sums allegedly received by him as salary or commission, nor was there before the Court any material to show any correlation between the Company's turnover and the rate of commission over the years or the extent to which the Respondent was responsible for effecting sales.

22. Although counsel for the Respondent asked the Court not to determine the matter at the hearing and submitted that the liquidators should be directed to make further inquiries as to the value of the Respondent's services upon consideration of other materials, he was not able to specify what further materials were available which could have assisted the liquidators in dealing with the Respondent's claim for a quantum meruit. Further, the Court would, in the absence of evidence to the contrary, expect court-appointed liquidators to give a proper professional opinion as to whether they had any other materials that would assist in the suggested exercise, and they have indicated that there are none.

23. In my view, therefore, the Court should direct the liquidators to reject the Respondent's claim, whether to the quantified sum or to a quantum meruit. The Respondent has in a sense brought this state of affairs upon himself. Given that the petition had been presented in 1995, in which the Petitioner was questioning the propriety of payments made by the Company to himself, and given that the Company was making a loss in the year ended 1997, he had chosen to conduct affairs relating to his remuneration without the protection of a proper resolution of the Company and a validation order.

24. In the circumstances, the answers to the liquidators' questions at paragraphs (1) and (2) of the summons should both be in the negative. The summons did not seek any specific order as to costs and I would give both parties liberty to apply.