MAK KWOK SING v. INTER-ASSOCIATION PHYSIOTHERAPY CENTRE LTD AND OTHERS

HCCW 1229/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1229 OF 2001

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JUDGMENT

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1. This is a petition for an order that the 2nd and 3rd Respondents purchase the shares of the Petitioner in Inter-Association Physiotherapy Centre Limited ("the Company"), alternatively that the Company be wound-up. The petition did not state under which provision of the Companies Ordinance the Petitioner was seeking the alternative remedy of winding-up, but from the title and contents of the petition, it can be assumed that the Petitioner's case for winding-up was based on s.177(1)(f) Companies Ordinance, which provides that a company may be wound up by the court if the court was of the opinion that it was just and equitable that the company should be wound up.

Background

2. The Company was incorporated in 1987 and originally had five shareholders. It was in the business of providing physiotherapy services at centres located in different areas of Hong Kong.

3. By 1993, the issued share capital was 510,000 shares, with 1/3 being held by each of the Petitioner, the 2nd Respondent and the 3rd Respondent who were all physiotherapists.

4. Each of them was a director of the Company. (There were three other directors, being the service company of the Petitioner, the mother of the 2nd Respondent and the mother of the 3rd Respondent, but they played no independent part, as presumably these latter three directors represented the three respective shareholders).

5. There seems little doubt that this was a quasi-partnership. It is not disputed that the way the Company was run was that each shareholder-director would be solely responsible for the management of one centre at which he would provide physiotherapy services. However the income derived would be deposited into the Company's bank account at monthly intervals and expenses would be paid from the Company's bank account. Each shareholder-director would render monthly accounts to the Company, recording income and expenditure, and keep verifying records, such as patient lists, appointment records, etc.

6. Earlier in 1993, there had been alleged professional and financial transgressions on the part of the Petitioner. In the end, however, the parties signed a "settlement agreement", and the Petitioner continued as a shareholder and director of the Company, and his service company continued as a consultant to the Company.

7. It has however been alleged by the Petitioner that since that time (1993), the 2nd and 3rd Respondents have taken over control of the Company's finances, excluding him.

8. The Company was successful and had enough profits to invest in a flat in Tin Shui Wai and 2 taxis. The flat was acquired in 1997.

9. It was towards the end of 2000 that a number of events relevant to this Petition occurred.

10. In November 2000, the three met together and discussed a proposal of the 2nd and 3rd Respondents that all 3 shareholder-directors withhold receiving remuneration from the Company in January-February 2001 to enable it to have sufficient cash flow to pay a tax bill estimated at about $200,000 in January 2001 and double-pay for staff at Chinese New Year.

11. According to the 2nd and 3rd Respondents, the matter was discussed again on 4 December 2000 and agreed.

12. The Petitioner denies that there was a meeting in December 2000, although he does not deny that there was one in November 2000, at which he was opposed to the proposal. The Petitioner's case is that this caused a breakdown in his working relationship with the 2nd and 3rd Respondents.

13. No remuneration was therefore paid by the Company to any of the shareholder-directors in January and February 2001.

14. According to the 2nd and 3rd Respondents, starting from January 2001 the Petitioner failed to deposit the takings from his centre and one of the taxis that he dealt with into the Company's bank account punctually, and failed to render monthly accounts.

15. Further, it later transpired that on 19 January 2001, a company called Health Guard was incorporated of which the Petitioner was a director.

16. In March 2001, the Petitioner allegedly surrendered the tenancy of his centre but thereafter he continued to provide services to patients at the same premises but now including the name of Health Guard.

17. It is alleged by the 3rd Respondent that on 10 March 2001 he and an accountant from the Company's accountants went to the centre run by the Petitioner with a view to inspecting the books and records kept there. The Petitioner allegedly refused access on the grounds that the tenancy had been surrendered and the business transferred.

18. At the same time, the Petitioner issued proceedings against the Company in the Labour Tribunal.

19. On 23 April 2001, there was a board meeting of the Company at which it was resolved amongst other things that the Petitioner be "temporarily suspended" from his position as a director with effect from 20 April 2001 pending further investigations into suspected activities of depriving the Company of its assets and takings (although the legality of this resolution would be subject to legal advice), and that should any director seek any of the Company's documents from the accountants, a prior application should first be made to the 3rd Respondent.

20. On 3 May 2001, the Company sued the Petitioner in HCA 193/01 for, amongst other things, (1) accounts and an inquiry into the business at the clinic run by the Petitioner since January 2001 and (2) accounts and an inquiry into the profits and expenditure in relation to one of the taxis which the Petitioner dealt with; (3) damages for breach of fiduciary duty. In September 2001, the claim was amended to include a claim that the Petitioner was liable to account to the Company for its equipment and patient records, and for any benefits received by him as a director of Health Guard.

21. Thereafter on 9 May 2001, the Petitioner wrote to the accountants asking, as a director and shareholder, for copies of "all account books and records, statutory books and minutes of board and shareholders meetings" for the past years.

22. On 11 May 2001, the Company replied referring to the resolution of 23 April 2001 and repeating that the 3rd Respondent was responsible for liaison with the accountants. The Company said that should the Petitioner wish to obtain any materials from it, he should immediately give written notice so as to avoid delay.

23. On 24 May 2001, the Petitioner wrote a letter to the 3rd Respondent (asking for the same materials as in his letter to the accountants) in response to the Company's letter of 11 May 2001.

24. On 31 May 2001, the Company wrote to the Petitioner referring to the 11 May 2001 letter and alleging that it had not received any written request, asking for a notice as soon as possible. There was no reference to the 24 May 2001 letter.

25. Be that as it may, it is not disputed that on advice from its lawyers and/or accountants, the Company only provided documents to the Petitioner to which he was entitled in his capacity as shareholder, and did not provide documents to the Petitioner to which he was entitled in his capacity as director.

26. On 12 November 2001, it was resolved at a board meeting that the Petitioner's application for inspection of documents be rejected as he was in breach of his fiduciary duties in having joined Health Guard, a matter for which the Company was in litigation with him.

27. The next day, this petition was presented.

28. On 7 December 2001, at the annual general meeting of the Company, the Petitioner was not re-elected as a director.

Complaints of unfair prejudice

29. The Petition contained basically 4 complaints of unfair prejudice:-

(a) that the 2nd and 3rd Respondents had taken over control of the Company's finances, excluding the Petitioner, since 1993:

(b) that the 2nd and 3rd Respondents caused the Company to enter into a Sale and Purchase Agreement for the flat in 1997, without having first obtained the Petitioner's consent, even though he was liable as guarantor;

(c) that his remuneration (as with that of the other shareholder-directors) was withheld from January 2001; and

(d) that he was only given limited access to the Company's documents.

(A) Exclusion from financial control since 1993

30. As far as complaint (a) was concerned, the way the Company was run did not give anyone control over the Company's finances. Each centre was managed by one shareholder-director individually, subject to the same rules which applied to all of them. Cheques could be signed by any 2 of the 3 directors, including the Petitioner. All had access to information about bank balances. There was no evidence that until the events of early 2001, any director did not enjoy unrestricted access to the Company's books.

31. In any event, even if the 2nd and 3rd Respondents had taken over control of the Company's finances since 1993, the fact was that the Petitioner had carried on with this arrangement for 7 years and he must be taken therefore to have waived any unfair prejudice to him arising from it.

(B) Acquisition of flat without prior consent

32. As far as complaint (b) was concerned, the flat had been acquired in 1997, some 4 years before the Petition. There was no evidence of any serious complaint made by the Petitioner during that period of time. Again, this suggests that this was no more than a makeweight argument.

(C) Withholding of remuneration

33. It is not disputed that remuneration was withheld starting from January 2001 as a result of the board's decision at the end of 2000. However I do not find that this was an act which was unfairly prejudicial to the interests of the Petitioner, or which would render it just and equitable that the Company should be wound up.

34. In the course of submissions, Miss Law counsel for the Petitioner sought to throw doubt on the evidence from the 3rd Respondent that the withholding of remuneration had been discussed at meetings in November and December 2000 and agreed.

35. The parties were in the habit of meeting informally at restaurants and no formal minutes were taken at these meetings. It does not seem to me to be important whether there was one meeting or two at which the matter was discussed, or whether the proposal was unanimously passed or passed by a majority of 2-1.

36. What are more important are first, that it was clear that this was not directed at the Petitioner. The resolution applied to all shareholder-directors. Further, the reason for the resolution was so that the Company could have sufficient cash flow to meet its tax liability and other expenditure at the start of the year. It was submitted by Miss Law that there were other options open to the company, such as seeking the Revenue's agreement to a postponement of payment, or appealing the amount of liability, or borrowing. However there was no evidence as to the prospects of success of any requests or appeals that the Company would have to make to the Revenue, and of course the Company would incur interest if it chose to borrow. On the other side, there was evidence from the audited financial statements for the year ended 31 March 2000 that the estimated liability for profits tax had been assessed by the accountants at $196,025, and although the Company was profit-making, its net current liabilities could not be said to be insubstantial given the mortgage liabilities for the flat and the taxis.

37. In light of the above, applying an objective test of unfairness, it is clear that a reasonable bystander, considering the reasons for the resolution to withhold remuneration, would not regard it as unfairly prejudicing the Petitioner's interests. It may be, as the Petitioner alleged, that this episode led to the breakdown of his relationship with the 2nd and 3rd Respondents, but if that were so, that would only have been because of his unwillingness to accept the majority decision (if it was not unanimous).

(D) Limited access to documents

38. However, it would appear that that disagreement led to certain actions being taken by the Petitioner. The 3rd Respondent has in his witness statement alleged that since January 2001 the Petitioner has breached his duties to the Company in the ways pleaded in the Amended Statement of Claim in the action, including failure to account for income and participation in a rival organization. In his oral evidence, the 3rd Respondent emphasized the value of information such as patient lists and billing documents such as invoices. It was in an effort to protect such information from the Petitioner that the board had resolved to "temporarily suspend" the Petitioner from his position as a director.

39. First, I have to note that it has not been shown to me how a director can be "suspended". Under s.157B Companies Ordinance, there are provisions for the "removal" of a director - there are none for the suspension of a director. Nor are there any such provisions in the articles of association of this company.

40. However, the Petitioner has not sought to explain his actions which are the subject-matter of the Company's action for breach of fiduciary duty, including involvement in the setting-up of a rival organization, in the course of which knowledge of the Company's books of account would be useful. In view of the lack of any substantive response explaining those actions, there is at least prima facie evidence before this court that the Petitioner has acted in such a way that would reasonably cause the Company to be concerned about misuse of its books, leading to the risk of loss to the Company.

41. The law is clear that a director is entitled under s.121(3) Companies Ordinance to inspect the company's books of account, but a court will not allow a director to abuse his rights, and if the company satisfies the court that inspection would injure it, inspection would not be ordered (Law Wai Duen & anor v Boldwin Construction Co. Ltd and others [2001] 4 HKC 403, 408). It may be that if the Petitioner had issued an application to the court to allow access to the Company's books, there might have been an opportunity for some fine-tuning and some documents may be ordered to be disclosed, but that is not the application before the court.

42. Instead the Petitioner reacted with a petition for a buy-out order or a winding-up order on the grounds that restricting access to the company books was unfairly prejudicial to him. However in the present case, given the serious charges made by the Company against the Petitioner, which have gone unanswered in this court, I am of the view that the Company's restrictions on his access to its books were not unfairly prejudicial acts that would entitle him to a buy-out order under s.168A and that there are no grounds for a winding-up on the just and equitable ground under s.177(1)(f).

Order

43. In the circumstances, I would dismiss the petition with an order nisi that the Petitioner bear the costs of the petition. As the Petitioner has also sought an order for winding-up against the Company, the order nisi would include the costs of the Company incurred in defending that part of the petition only (Boyle and Marshall, Practice and Procedure of the Companies Court para. 7.8.18).