LAM SIU LEUNG AND ANOTHER v. KOOVER WOOLLEN KNITTING FACTORY LTD. AND OTHERS

MP6321/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6321 OF 1998

--------------------

-----------------

JUDGMENT

-----------------

1. This is an application under s.168A of the Companies Ordinance.

2. Section 168A(1) provides that any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of members generally or some part of the members may make an application to the Court for an order under that section.

3. Section 168A(2) provides, amongst other things, that the conduct may consist of an isolated act or a series of acts. It further provides that, with a view to bringing to an end the matters complained of, the Court may (a) make an order restraining the commission of any such act or the continuance of such conduct; (b) order that such proceedings as the Court may think fit be brought in the name of the company against such persons and on such terms as the Court may order; (c) appoint a receiver or manager of the company's property or business, in whole or in part; and (d) make any such order as it thinks fit for regulating the conduct of the company's affairs in future or for the purchase of the shares of any members by any other members or by the company itself.

4. Before I deal with the many issues that have arisen, it may be helpful to briefly introduce the parties.

The parties

5. The Petitioners are husband and wife, to whom I shall refer as Mr and Mrs Lam. Each holds 20% of the shares in the 1st Respondent Company ("the Company").

6. The 5th Respondent, Yuen Chi Hung ("the elder Mr Yuen") is Mrs Lam's father. The 4th Respondent, Yuen Kwing Yeung ("Yeung") is Mrs Lam's brother. They each hold 20% of the shares in the Company. The balance of the shares is held by another brother Yuen Kwing Tong ("Tong").

7. The 2nd Respondent company ("Hoover") is a company that was incorporated in March 1998 and its shareholders are Yeung and Tong. The 3rd Respondent ("China Woollen") is a company that Mr and Mrs Lam allege is controlled by Yeung and/or the elder Mr Yuen, which allegation has been denied.

8. In the course of these proceedings, allegations have been made by Mr and Mrs Lam against Tong even though he has not been named as a respondent. For their part, Yeung and Tong have also made allegations against Mr and Mrs Lam's son George Lam Ting Wah ("George").

9. It would thus be seen that this case was very much a dispute within an extended family, with the Lams in one camp and the Yuens in the other. All of them gave evidence in Court. Apart from Mr Lam (who remained somewhat distant from the dispute) and the elder Mr Yuen (who was unable to remember anything of significance), it was clear from the testimony that emotions ran high. It is regrettable to see a family being divided in the way that this one has now become.

The Company

10. The Company was incorporated on 8 March 1977. Before its incorporation, the business had started in the 1960's on a small scale in modest circumstances. Mr Lam was a knitter, and he and his wife ran a small knitting factory on a small lot of land provided by the Government to the elder Mr Yuen for the rearing of animals. Through the efforts of Mr and Mrs Lam, the factory became successful.

11. By the early 1970's, if not earlier, Mrs Lam's father and brothers became interested in the business. The elder Mr Yuen had some means. As for his sons, Tong helped generally and Yeung took charge of the business side, including pricing and contacts with customers. In this way, they complemented the production skills of Mr and Mrs Lam to further advance the Company's business.

12. The Company was incorporated in 1977. As noted above, the state of the present shareholding is that the Lams hold 40% and the Yuens hold 60% of the shares in the Company.

13. All five shareholders are directors of the Company. George was also appointed a director in September 1991 upon his return to Hong Kong from studies in the United States. Therefore, as far as the board is concerned, the Lams and the Yuens are equally matched.

14. By the 1990's, the Company had obviously become fairly prosperous. Apart from purchasing factory premises in Hong Kong, in about 1991 it had built a factory in Sheung Ping on the Mainland. This was a complex, with a factory building of several storeys, and quarters for the staff and directors respectively. I shall refer to these premises as "the SP factory".

15. However, a number of events occurred in the 1990's which culminated in litigation. Apart from the present petition which was commenced in 1998, there were 2 other proceedings involving this company. In February 1999, the elder Mr Yuen, Yeung and Tong issued proceedings against Mr and Mrs Lam. That was not proceeded with. Then in November 1999, shortly before the hearing of these proceedings, a writ was issued in the name of the Company against Mr and Mrs Lam, George and George's company I Cashmere Co. Ltd. I shall refer to the November 1999 proceedings later in the course of this Judgment.

Events

16. The events that led to the litigation between the 2 camps can be briefly summarised as follows.

Issues

17. The issues that arise can broadly be summarised as follows:-

(A) Did Yeung misappropriate the Company's funds and property and in dealing with his misappropriations, have the affairs of the company been conducted in a manner unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

(B) Was the change of the bank mandate on the 2 occasions in July 1997 and February 1998 conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

(C) Was there diversion of the Company's business to Hoover and China Woollen and did the Company cause or permit such diversion, such as to amount to conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

(D) Did Mr and Mrs Lam waive the above conduct by accepting payments in respect of the insurance premiums, and the "commissions" and "refunds"?

(E) Are Mr and Mrs Lam precluded from relief under this petition on the ground that they have been guilty of misconduct in

(1) exploiting the premises, lorry and licence of the Company for the benefit of I Cashmere?

(2) prioritizing I Cashmere's orders such that the Company had to pay for air freight for delivery of its goods?

(3) taking more than 11,000 pieces of stock goods from the SP factory?

(4) distributing the Sunflower amount unfairly?

(5) causing the banks to freeze the bank accounts?

(6) refusing to participate in the outstanding orders in the final months of the Company's operations?

(F) In all the circumstances, especially the fact that the Company has ceased operations, should relief be granted? If so, what relief should be granted?

Legal principles

18. In Ringtower Holdings plc [1989] 5 BCC 82, Peter Gibson J set out a helpful summary of the relevant legal principles guiding the Court's decision in a petition under the English equivalent of s.168A. He said (90 E-H) :-

"Four points on the wording of the relevant section are to be noted:-

(1) the relevant conduct (of commission or omission) must relate to the affairs of the Company of which the petitioners are members;

(2) the conduct must be both prejudicial (in the sense of causing prejudice or harm) to the relevant interests and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and in neither case would the section be satisfied;

(3) the test is of unfair prejudice, not of unlawfulness, and conduct may be lawful but unfairly prejudicial;

(4) the relevant interests are the interests of members (including the petitioners) as members, but such interests are not necessarily limited to strict legal rights under the company's constitution, and the court may take into account wider equitable considerations such as any legitimate expectations which a member has which go beyond his legal rights".

19. In considering whether there has been unfair prejudice, the Court should take into account the whole of the circumstances at the date of the hearing.

20. I shall deal with each of the issues set out above in turn. There were many disputes of fact which emerged in the course of the hearing. In this judgment, I have set out my findings on only those disputes which I find to be relevant to the issues.

(A) Did Yeung misappropriate the Company's funds and property and in dealing with his misappropriations, have the affairs of the company been conducted in a manner unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

- Insurance moneys

21. First, it is not disputed that in 1992, it was discovered by George that Yeung had used the Company's funds to pay the premiums for insurance policies for the exclusive benefit of his wife. When this was discovered, Yeung repaid $650,000 to each of the 5 shareholders.

22. I find that this episode does not amount to conduct unfairly prejudicial to Mr and Mrs Lam as shareholders.

23. It is well-established law that a distinction should be drawn between conduct "in" the Company and conduct "dehors" the Company. It is only conduct in the affairs of the Company that can be the subject-matter of a petition founded on unfair prejudice.

24. In paragraph 4-033 of Hollington's Minority Shareholders' Rights 3rd ed., the author illustrated the distinction as follows:-

"Conduct `dehors the company' is illustrated by the example of a director who steals cash from the company's safe. This act would constitute conduct by a director in his personal capacity. It would, however, be otherwise if the director in question used his dominant position in the company to stifle any proceedings by the company against himself. In those circumstances, it would be that use of a dominant position that constituted the conduct complained of."

25. Applied to the facts of the present case, it is clear that Yeung's misuse of the Company's funds in itself does not constitute conduct in the affairs of the Company that is unfairly prejudicial to Mr and Mrs Lam as shareholders. What should be considered is how the Company dealt with his misappropriations, and whether that conduct was unfairly prejudicial to the interests of Mr and Mrs Lam.

26. There was nothing in the Company's conduct concerning this episode that can be said to be unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders. In any event, the Company carried on for more than 5 years after that without complaint from Mr and Mrs Lam concerning this aspect.

27. As far as payment was concerned, in the normal course, a director who has taken money from a company improperly should repay the money to the company, and if the company was solvent and the company so decides, that amount could then be distributed to the shareholders.

28. Payment could also be made directly by the director to the shareholders, instead of using the company's bank account as a channel for the passing of funds, so long as the company's books properly reflect the situation set out in the above paragraph. In relation to the insurance moneys, there is no evidence that this was not done.

- "Commissions"

29. Then there is the money which was taken by Yeung as "commissions" for customers. In fact, the money was given to Yeung in the form of cash cheques.

30. In his oral evidence, Yeung claimed for the first time that this was also for entertainment, although he admitted that he had not mentioned this at any stage in the 3 years from 1996 to the time of the hearing. This explanation is unacceptable, as it would be impossible for him to have "forgotten" this explanation for his use of the money throughout this period.

31. The amount so taken was a substantial amount. The principal amount was some $3,136,000, which with interest came up to $6,850,000 by September 1996 when a letter of demand was sent to him by solicitors acting for the Company.

32. As will be seen later, the manner in which Yeung's regurgitation of the "commission" payments with interest was dealt with by the Company is relevant to these proceedings.

33. In October 1996 there was a meeting at which the figure of $6,850,000 was divided by 5, and Yeung agreed to pay Mrs Lam and Tong $1,370,000 each. He also agreed to pay Mr Lam $1,200,000. Mr Lam's evidence, which I accept, was that he agreed to take a smaller amount as Yeung appeared to be remorseful and promised to change his ways.

34. The total amount of these payments to Mr and Mrs Lam and Tong was thus $3,940,000. This amount was paid in 4 instalments. For the 1st 2 instalments (totalling $1,710,000), Mr and Mrs Lam and Tong were paid with the Company's cheques. For the latter 2 instalments, Yeung paid them with his personal cheques.

35. As far as the $1,710,000 was concerned, Yeung alleged that he had paid $1,310,000 to the Company in various sums starting in June 1996, before the meeting in October 1996. The balance of $400,000 was the bonus which the Company was to pay him. It is evident from a note that George had made either at the time of the meeting, or shortly thereafter, that this was accepted by the Lams.

36. As for book entries, instructions were given to the book-keeper that the amount totalling $1,710,000 was not to be entered as a loan to the Company by Yeung, and that the payments by the Company to Mr and Mrs Lam and Tong were to be recorded as repayment by the Company of deposits made by these directors. It would appear that no specific instructions were given to the book-keeper about the latter 2 instalments.

37. There was a dispute between the witnesses as to who had proposed that such instructions be given. Mr Lam and George alleged that it was Yeung who had proposed this arrangement. Yeung said it was George who had directed the book-keeper to make these entries. The other witnesses did not give any significant evidence on this aspect.

38. I find that probably both Yeung and George agreed on this arrangement. By this time, and not without justification, George was suspicious about the way the Company's books and accounts were maintained. He described payments into the Company's accounts as "moneys lost in an abyss". For his part, Yeung would have preferred to make payments in this way so that on the books, the fact of his misappropriation and part repayment remained concealed. The repayment was only in part because, out of the misappropriation of $6,850,000, only $3,940,000 was repaid. Even if one "set-off" his own "share", there remained $1,370,000 unrepaid, as no payment was made either to the elder Mr Yuen or to the Company.

39. The relevance of this episode to the present proceedings is this: - in November 1999, shortly before the hearing, a writ was issued by the Company against Mr and Mrs Lam. Yeung admitted in evidence that he and the other shareholders in the Yuen group had given instructions for the issue of the writ.

40. It pleaded, amongst other things, that there was a settlement between the Company and Yeung and/or amongst the shareholders of the Company that Yeung agreed to pay a total of $3,940,000 to the Company. It further pleaded that Yeung then paid a total of $3,940,000 to Mr and Mrs Lam and Tong in the manner already described above and that Mr and Mrs Lam's receipt of their respective amounts totalling $2,570,000 was a wrongful appropriation by them of money belonging to the Company.

41. However, Tong has not been sued, even though he had also received $1,370,000 in the same manner and at the same time as Mr and Mrs Lam. When cross-examined why he was not sued when Mr and Mrs Lam were, he said that that was because he had repaid the amount to the Company when the Company's bank accounts were frozen and the Company needed funds.

42. I find that that could not be the reason why the Company has treated him differently from Mr and Mrs Lam. It would be noted that the Statement of Claim specifically pleads that by virtue of the payments to Mr and Mrs Lam and Tong, the Company has suffered loss and damage in the sum of $3,940,000. That amount includes the sum paid to Tong. It therefore directly contradicts Tong's evidence that he has repaid the sum to the Company.

43. Further, it would appear from the minutes of the meeting dated 18 May 1998 that the amount that Tong alleges he repaid the Company was by way of an interest-bearing loan. It could not therefore be by way of repayment to the Company. When cross-examined on the minutes, he then changed his evidence to say that only amounts over and above the amount of $1,370,000 would be interest-bearing. That however was not recorded in the minutes at all.

44. It is therefore clear that the Company has chosen, in the November 1999 proceedings, to target Mr and Mrs Lam and not Tong, in respect of their receipt of the "commission" repayments from Yeung. In my judgment, on this act alone, it is clear that the affairs of the Company are being conducted in a manner unfairly prejudicial to the interests of Mr and Mrs Lam.

- "Refunds"

45. I then come to Yeung's further act of misappropriation of the Company's funds, this time by entering payments made by the Company's customers in the Company's books as loans made by himself. Those customers' "debts" would then be written off as bad debts. He would then obtain cash which would be recorded as "refunds" made by the Company to himself.

46. The Company's accounts staff had in September 1997 been able to compile a table showing, amongst other things, 2 lots of figures said to be owing by Yeung. For convenience, I will refer to those as "the 2 tranches".

47. The 2nd tranche comprised amounts totalling $604,464.93 entered in the books as "loans" made by Yeung, which tallied with amounts paid by customers as shown in supporting documentation. Between May and September 1997, Yeung had repaid this principal amount. However, he had not paid anything by way of interest, and by December 1997, the interest on this amount had grown to $328,695.

48. The 1st tranche comprised amounts totalling $633,827.57 which were recorded as "No Supporting Query Amt". However, in the course of Yeung's cross-examination, it was clear that, other than an amount of about $160,000, supporting documentation has been found which tallied with the amounts of the "loans" he purportedly made to the Company.

49. In respect of these 2 tranches, Yeung had said in his last affirmation, made shortly before the hearing, that he only owed the Company the 2nd tranche. In Court, however, he accepted that he owed the 1st tranche as well, except for the amounts of $160,000 or so.

50. He alleged however that the Company had waived the payment of the 1st tranche at the meeting of 20 December 1997 when he agreed to pay the interest on the 2nd tranche.

51. The English minutes of the meeting do not disclose a waiver. A Chinese memorandum written by Tong was worded too briefly and too ambiguously to evidence a waiver. Whilst Mrs Lam said she thought there was a settlement at that meeting (although it is not clear which tranche of $600,000 she was referring to), Mr Lam said he did not know at the time whether Yeung owed the Company anything other than the 2nd tranche - that could be because the table might not have been produced at the meeting.

52. George said that he did ask about the 1st tranche but Tong said that he would not pursue it, and if George wanted to, he (George) would have to do it himself.

53. Tong however said in evidence in Court that there was no specific agreement on what to do about the 1st tranche, and that the focus at the meeting was on interest payable on the 2nd tranche. Since that was the case, there was no waiver and one would have expected Tong to agree with George to pursue the 1st tranche. He did not do so.

54. In the light of the above, one has to ask why the Company has failed to pursue Yeung for repayment of the 1st tranche (or at least that part less the $160,000 odd without supporting documentation), which together with interest, would come to a not insubstantial sum. In the absence of any acceptable explanation, in my judgment, the Company's failure to consider legal proceedings against Yeung for this 2nd episode of misappropriation of the Company's funds amounts to conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders.

55. In the interests of completeness, I should note here that evidence was also adduced on 3 other matters alleged to be associated with misappropriation:- (a) Yeung's failure to procure that both the Company's bankers release the directors from their personal guarantees; (b) an amount of $300,000 said to have been lent to a Benny Chan, such loan being authorised by Yeung; and (c) an allegation that the elder Mr Yuen had also been involved in misappropriation of moneys paid to the Company by customers.

56. I do not see any substance in any of these matters. Whatever promise Yeung had made to Mr and Mrs Lam, it was a personal one, and it would appear that the guarantees were given by Mr and Mrs Lam in their capacity as directors, not as shareholders.

57. As for the Benny Chan loan, I am not satisfied that it was anything other than a genuine loan made by Yeung to accommodate an old customer, whose deal to sell goods to a East European buyer subsequently fell through. There was no evidence to suggest that the Company's inability to recover this loan was due to anything other than an error of judgment by Yeung as to Benny Chan's financial viability.

58. As to the elder Mr Yuen, Yeung gave evidence (which I accept) that he had simply parked some funds in his father's account to offset "98" (equivalent to 2%) rebates given by the Company to customers.

- Property

59. I then come to the alleged misappropriation of machines which were moved to the Yuens' part of the SP factory after the Cessation Agreement.

60. I do not attach much significance to this aspect, because there was no detailed evidence of the nature or value of these machines, and such evidence as there were pointed to these being "old" machines, from which the Court is asked to infer that they were of little value.

(B) Was the change of the bank mandate on the 2 occasions in July 1997 and February 1998 conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

61. The 2 groups had in March 1995 resolved that the Company's cheques had to be signed by one director from each group. On 12 July 1997, at a directors meeting at which none of the Lams was present, the Yuen group directors purported to authorise the bank to accept cheques drawn by them only. The Lams immediately protested and the original bank mandate was restored the next day.

62. There was no good reason at all for that act, which ignored both the letter and the spirit of the Extraordinary General Meeting in March 1995. The only excuse given was that it was inconvenient to get signatures from the Lam group because Mr and Mrs Lam were stationed in the SP factory and George was studying full-time at the university. That excuse can only be described as lame, because it had not been suggested that any cheques had to be issued urgently and George was accessible by telephone.

63. Although the conduct was unfair, it was not prejudicial because the original mandate was restored the next day. Having said that, however, it is an illustration of the Yuen group's disregard for the Lam group's rights, which can be taken into account as part of the circumstances of this case.

64. The 2nd occasion when the bank mandate was changed arose in this way. There was an incident in the SP factory in February 1998 when (so the Lams allege) Tong assaulted Mr Lam. George (who was in Hong Kong) had been in the office signing cheques when this incident was reported to him by his brother.

65. George's reaction was to tear up the cheques which he had signed, together with some banking documents. He also wrote a letter giving an ultimatum to the shareholders to proceed to a division of the property of the Company immediately or to dismiss Tong, failing which he would refuse to sign any further cheques.

66. Although I accept the news might well have been upsetting to him, this was, in my judgment, an over-reaction by George. Even if Tong had really assaulted Mr Lam (on which I make no finding as there was no evidence adduced), that could not justify George refusing to sign cheques in the course of the Company's normal operation.

67. In his evidence, George sought to ameliorate the effect of his conduct by saying that he had intended that to be only a holding measure until a meeting was called to discuss the situation. He also pointed to his having signed a Delivery Order dated 23 February 1998. Having said that, he accepted that he did not know the date when he had signed that document, as there was a possibility that the document could have been post-dated. In my view, it is unlikely that George signed the Delivery Order as late as 23 February 1998. By that date, the Yuens had purported to suspend George from his position as director, the parties were no longer co-operating, and if George were undertaking normal duties, it is strange that only 1 Delivery Order bore his signature.

68. What the Company ought to have done in response to George's act and letter was to call a meeting to discuss a change in the bank mandate. Instead, (apparently without calling any meeting at all) the Yuen group directors proceeded to instruct solicitors to inform George that his position as a director was suspended. Apparently they also informed the banks that the Lam group had been removed as authorized signatories.

69. The Lam group then protested to the banks, the result of which was that the bank accounts were "frozen" by the banks. The accounts were not re-activated until quite some time later.

70. It would be seen from the above that the Company's conduct in changing the bank mandate on the 2nd occasion had been incited by George's unjustifiable conduct. It is of course true that two wrongs do not make a right, but in the light of George's conduct, the Company's conduct in response could not be said, in my view, to be so disproportionate to his wrongful act as to be conduct unfairly prejudicial to Mr and Mrs Lam.

(C) Was there diversion of the Company's business to Hoover and China Woollen and did the Company cause or permit such diversion, such as to amount to conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders?

- Hoover

71. I deal first with Hoover. This was a company formed in March 1998 by Yeung and Tong. However there is no evidence that it had undertaken any business. Therefore, there could not have been any prejudice caused to Mr and Mrs Lam merely by its incorporation.

- China Woollen

72. As far as China Woollen is concerned, Mr and Mrs Lam's allegations were that it was controlled by Yeung and/or the elder Mr Yuen.

73. I find that this allegation has not been made out. Yeung admits to being a consultant and his conversation with the enquiry agents employed by Mr and Mrs Lam is consistent with his working for the company. However, it is to be noted that he had not at any stage claimed to own or control the company. Further, I was impressed by his evidence that at the age of 61, he was getting too old to concern himself with being the proprietor of a business, which he described as getting more difficult. He was however happy to help out his brother-in-law Tse Pak Lam who owns half the shares in China Woollen.

74. I find that China Woollen is managed and partly-controlled by Tse Pak Lam. The Lams' evidence was that Tse had been working only in odd jobs for the Company and that he could only have been a front-man for Yeung. However, I found his evidence very impressive.

75. In cross-examination, he was confident and straightforward. He showed that he was extremely knowledgeable about the process of manufacture. He was also able to explain how he could come up with the share capital of $300,000. It should also be noted that the Yuens had accommodated him as an extended relative by giving him a cushion of a 6-month rent free period for their part of the SP factory.

76. The other part-owner of China Woollen was a woman by the name of Chan Lai Mei. She was the sister-in-law of Tong. However the Lams did not know her, and were unable to show that she did not have the financial capability of part-owning China Woollen. Certainly there was no evidence that she was the nominee of the elder Mr Yuen, as had been alleged in the Amended Petition.

- Texfield Order

77. I then come to the Texfield order. Texfield had previously no business with the Company. Then on 26 February 1998, it sent a purchase order to the Company. It may be that prior to the sending of the order, there may have been oral contact, but there was no evidence as to when that took place.

78. On 24 December 1997, the Company had resolved that it would only perform those orders that could be completed by the end of February 1998 and that it would not take on new orders. This is common ground. Yeung said that he had told the staff of this, including Miss Lee.

79. For some reason, Miss Lee had not informed Texfield of this. I find it could not have slipped her mind as the servicing of this order required positive steps of commission on her part, such as the supply of a reference number to material suppliers. What was more, she carried on servicing Texfield even after the end of February 1998, when the Company's employees (except for a few) had been laid off for redundancy.

80. There was no reason for Miss Lee to go on a frolic of her own in servicing this customer, and I find that she had been instructed by Yeung to do so in order that when China Woollen got under way, it could take over the order, as in fact it did. Texfield cancelled its order with the Company on 28 March 1998.

81. It was suggested to the petitioners that they could not object to this conduct because it is said that at a meeting of the shareholders at the SP factory on 9 March 1998, they (together with the Yuen group) had agreed to George's proposal that the Yuen group could form a new company to trade in the same field as the Company and to approach clients of the Company with a view to trade.

82. In relation to this meeting, Mr and Mrs Lam denied having received notice of it and said that they did not participate in it, although they did stay for a few minutes as a matter of courtesy to greet certain local officials who had been asked to attend the meeting.

83. I accept this evidence. If Mr and Mrs Lam really had received due notice of the meeting (and the evidence of service of the notice is vague), one would have expected them to have informed George, who would no doubt have made sure that he was there to accompany them, as apart from this item, there were other items on the agenda.

84. Further the evidence of Wong Wai Tung, an employee of the Company present at the meeting, was that as soon as Mr and Mrs Lam learnt about the meeting at the factory that day, they both denied they had received notice of it. This is consistent with their evidence now.

85. The evidence from the local officials adduced against the petitioners appears to be inconsistent. Although one statement said that Mr and Mrs Lam had attended, another said that nothing had been agreed and there was no conclusion.

86. Accordingly, in my judgment, there was no valid resolution that the shareholders could form a new company to trade in the same field as the Company and to approach clients of the Company with a view to trade.

87. Having said that, it does not matter in the present proceedings. Under the Cessation Agreement, the Company had resolved to cease operations after February 1998. Whether or not that agreement was fully implemented, the fact remained that most of the Company's employees had been made redundant as at 28 February 1998.

88. Therefore, assuming Miss Lee did not intervene for the benefit of China Woollen, if Texfield had approached the Company with the purchase order, clearly the order would have been rejected. Further, there was no restraint of trade clause which would have restrained the Company's former employees from servicing its customers.

89. It is true that China Woollen did use some of the Company's resources (such as the lorry and the licence), but that was to a limited extent. China Woollen applied for a licence in mid-June 1998 and in any event it would appear that the expense was limited.

90. Therefore, given that the shareholders had agreed that the Company should turn away new orders, it could not be the case (as pleaded in paragraph 9D of the Amended Petition) that the Texfield order was the "remaining business of the Company" or that it was "the Company's outstanding order". China Woollen's takeover of the Texfield order could not therefore be conduct unfairly prejudicial to the interests of Mr and Mrs Lam as shareholders.

(D) Did Mr and Mrs Lam waive the above conduct by accepting payments in respect of the insurance premiums, and the "commissions" and "refunds"?

91. A person can only be said to have "waived" a wrong done to him if he has acted in a manner which is consistent only with his choosing to abandon a right of which he is aware.

92. As far as the insurance premiums were concerned, it is clear that Mr and Mrs Lam had waived the conduct by failing to complain about it and by carrying on with the business of the Company for so many years afterwards.

93. As for the "commissions", the unfair prejudice lies in its aftermath. Mr and Mrs Lam have been sued by the Company for receiving payment from it when Tong has not. This is quite apart from the question whether Yeung owes any balance (of the $6,850,000) to the Company. I see no place for any waiver argument when the Company has now taken the offensive.

94. As for "refunds", there was a close temporal relationship between the meeting dealing with Yeung's payment of the refunds and the Cessation Agreement. It is clear that the matter of the refunds alienated the 2 groups even more than before. As such, I do not see any evidence of waiver of the unfair prejudice arising from the Company's protection of Yeung from litigation.

(E) Are Mr and Mrs Lam precluded from relief under this petition on the ground that they have been guilty of misconduct?

- Exploiting Company assets for I Cashmere's benefit

95. A number of factors have been referred to. First, it has been alleged that they had exploited the premises, lorry and licence of the Company for the benefit of I Cashmere.

96. As far as premises were concerned, the evidence was that I Cashmere started on a small scale in 1994, with George basically learning the trade as he was going along. At first, when I Cashmere had orders, the Company undertook their processing. I Cashmere itself did not occupy any space at the SP factory.

97. Gradually, however, as I Cashmere became more successful, it employed its own workers. They occupied an area that had been reserved for the training of new workers. Mr Lam said that in mid-1996, there were 20-30 workers. However a headcount done by the local tax authorities showed that by April 1997, the numbers had grown to 70, and in late December 1997, there were 140 workers there.

98. There is no doubt that these workers would have occupied space at the factory premises of the Company. However, that factory had been built on a large scale and it would appear that no-one was concerned about I Cashmere workers taking up space until the relationship between the 2 groups took a turn for the worse in mid-1997.

99. It was not until October 1997 that the Company first demanded rent from I Cashmere. This was apparently done without any meetings of the board being called. The matter was then put on the agenda for the meeting on 20 December 1997, at which the shareholders agreed that rent should be paid. Thereupon I Cashmere started paying rent at the rate demanded.

100. Therefore, it would be seen that the payment of rent by I Cashmere was not a big issue, and indeed Yeung admitted in cross-examination that that was the case.

101. I find that the same situation applied to I Cashmere's use of the Company's lorry and import licence. As far as the lorry was concerned, the Company did not send a debit note until May 1997. Even though these debit notes were not promptly paid, their amounts were small and the evidence was that the Company and I Cashmere had a running account which was settled from time to time.

102. As for the import licence, the Company permitted I Cashmere to use it, in the same way as it let China Woollen use it. Indeed, Yeung said in cross-examination that as a matter of convenience, the Company also let fellow traders near Sheung Ping use it. The charge was so small as to be minimal. There was evidence that in a period of one and a half months, the portion attributable to I Cashmere goods was only $300 or so, and Tong also agreed in cross-examination that it did not matter.

103. I find therefore that although I Cashmere did use the premises, lorry and licence of the Company, that had been done with the consent of all the shareholders and that there could not be said to be any exploitation by Mr and Mrs Lam as to amount to misconduct disentitling them to relief.

- Prioritizing I Cashmere production

104. Secondly, there is the issue whether Mr and Mrs Lam had caused the Company to lose money by having to pay air freight because they had prioritized I Cashmere production.

105. There is no satisfactory evidence of this. There were some statements from workers on the Mainland but the weight of these statements was small because Mrs Lam testified that these workers had a grudge against them, and the workers were not available to be cross-examined.

106. To counter that allegation, there was evidence that Yeung kept close supervision over the production schedule at the factory. A production schedule was prepared and provided to him as from February 1995 at the latest, and every section at the factory had a work record. Therefore, even though the production schedule showed only export goods and not I Cashmere goods, he could keep track over production section by section and compare their records with the general production schedule.

107. Mr Lam's evidence (which I accept) was also that he would not prioritize I Cashmere's goods because the Company's export orders were much bigger than I Cashmere's, so that if there were urgent I Cashmere orders, he would simply arrange for them to be sub-contracted out to nearby factories.

108. A comparison of the amounts spent in 1995/6 for freight was not useful because no differentiation was made between air and other types of transport, and it was acknowledged that that was a good year for business with the Company's production schedule being fully packed.

109. Further, although this had been placed on the agenda for the 20 December 1997 meeting, it had not been discussed. Accordingly I find that there was no misconduct on the part of Mr and Mrs Lam on this score.

- Stock Goods

110. Thirdly, there is the issue of the stock goods. These goods have also been referred to as "internal goods", as they were for sale internally, i.e. on the Mainland. They were made from materials left over after production of goods ordered by customers, and were made during the factory's slack periods. Designs were haphazard and apparently there was little in the way of records to show how many stock goods there were from time to time. Mrs Lam said if they could be sold, the sale price would not be more than $20 a piece. There was no evidence to the contrary.

111. When George first started I Cashmere, some of these stock goods were given to him for him to offer for sale in Hong Kong. Thereafter stock goods were delivered from time to time to the Lams' residence, which deliveries were recorded by a member of the staff of the SP factory and faxed to Yeung in Hong Kong.

112. The Lams' evidence was that about 1,000 pcs had been so delivered. The total quantity as shown on the faxes was about 11,000 pcs. Yet a third figure was thrown up in a resolution of a meeting of shareholders and directors on 10 June 1997 when it was resolved that each shareholder would be apportioned 1,500 pcs and Mr and Mrs Lam had already received theirs.

113. This resolution was not signed by Yeung as he objected to it. It was signed by Tong but he said he had not read the bottom half of the page when he signed it, and when he did read it the next day, he did not bother to do anything about it. It also bore the signature of the elder Mr Yuen but he was unable to remember anything of significance when he gave evidence in Court. I do not find this lack of recollection suspicious as he was an elderly gentleman and it would appear that he had not been taking an active part in the business, leaving it to his sons instead.

114. I find the faxes, being contemporaneous documentary evidence produced by an independent party, to be the most reliable as to the quantity of stock goods taken by Mr and Mrs Lam.

115. However, I also find that the other shareholders were not concerned with Mr and Mrs Lam's taking of the stock goods because they were worth so little.

116. The faxes were available to Yeung every time a delivery was made starting in 1994 but he made no complaint about it until 1997. By that stage, he used the Lams' taking of the stock goods as leverage as they were pressing him for repayment of the misappropriated funds.

117. As for Tong, he did not care enough about the stock goods to bother to complain about the "1,500 pcs" quantity even when he said he had noticed it in the resolution the day after the meeting.

118. Accordingly I find that although Mr and Mrs Lam did take more stock goods than they admitted to in the resolution of 10 June 1997, it did not amount to such misconduct as to disentitle them to relief in the present proceedings.

119. Apart from the stock goods, there was a separate issue about 7,657 pcs of goods found in the factory bearing the I Cashmere labels. I am satisfied on Mr Lams' evidence that these were stock goods on which defective I Cashmere labels had been sewn in an attempt to make them more attractive to buyers. There was therefore nothing in the point.

- Sunflower distribution

120. The evidence concerning this matter was by no means clear and the absence of documentary evidence did not assist. As far as business registrations went, Mrs Lam was originally the sole proprietor of the business but this was later changed to a Miss Wong. It would appear that she was simply a nominee.

121. It would appear that in the mid-1980's, Mr and Mrs Lam had started to operate a small factory in Mr Lam's native village in Wai Yeung which was called Sun Lok Factory. This was a small scale production which was started by Mr Lam to provide employment for fellow villagers. It became successful and it was later subsumed by Sunflower which was regarded as the Company's associated company.

122. For the purposes of the original factory, the machines were first paid for by the Company, who charged Sunflower interest on the loan. The debt was set-off from time to time against the price of goods produced by Sunflower for the Company.

123. When the Company built the SP factory, it was no longer necessary to have the Sunflower factory and it was closed down with the machines being moved to the SP factory. It was therefore considered that the Company should buy back the machines from Sunflower.

124. In January 1997, the Company paid Mrs Lam a total of $980,000 odd for the machines, presumably on the basis that they were owned by her as sole proprietor of Sunflower.

125. By mid-June 1997, however, Yeung was using this payment as a counter against the Lams when they were pursuing him for repayment of the money he had taken from the Company. Accordingly, Mrs Lam repaid a similar amount to the shareholders but in different proportions to the shareholding in the Company and in fact, her mother also received a share.

126. Tong agreed with the redistribution. As I have said, although the resolution bear the signature of the elder Mr Yuen, his evidence was that he could not remember anything of significance. Yeung said he objected to it, as evidenced by his refusal to sign the resolution.

127. I am not satisfied on the evidence that the Company was entitled to the money in the first place, given the history of Sun Lok and Sunflower. I accept that the Sunflower distribution was a discrete matter separate from the Company, which accounts for money being distributed to the mother. It would further be noted that this was not raised in the agenda of 20 December 1997.

128. Accordingly this is not misconduct that would disentitle Mr and Mrs Lam to relief.

- Freezing of bank accounts

129. I have dealt with this in detail above. Given that the Company did not call a meeting before suspending George and purporting to change the mandate, it is not surprising that the Lams notified the banks and that the banks froze the bank accounts.

130. Accordingly this is also not misconduct that would disentitle Mr and Mrs Lam to relief.

- Failure to participate in outstanding orders

131. Yeung's evidence was that some customers refused to take back their orders so that the Company had to finish the orders at a time when the bank accounts had been frozen. The Yuen group therefore had to inject money into the Company, whereas Mr and Mrs Lam did not.

132. The evidence of Mr and Mrs Lam was that theye did not even know about the outstanding orders. They were stationed in China and they did not even realise the Company was carrying out these orders as the Cessation Agreement was that operations should cease by end of February 1998 when the employees would be laid off.

133. There was a letter dated 25 February 1998 which the Yuen group said they had sent to Mr and Mrs Lam by asking a guard to give it to them. Mr and Mrs Lam said they had not received it. The guard was not called, so the evidence on this matter is not conclusive.

134. I find therefore that there is insufficient evidence to amount to misconduct that would disentitle Mr and Mrs Lam to relief.

(F) In all the circumstances, especially the fact that the Company has ceased operations, should relief be granted? If so, what relief should be granted?

135. It would be seen from the above findings that in my judgment, there has been conduct unfairly prejudicial to Mr and Mrs Lam and that they have not been guilty of misconduct disentitling them to relief.

136. What has however caused me concern is the fact that pursuant to the Cessation Agreement, the shareholders had agreed to cease business and there has been distribution of most of the assets of the Company. There had also been an offer by the Yuen group to acquire the shares of Mr and Mrs Lam in March or April 1998 but there was disagreement as to value.

137. In those circumstances, should not the Court simply leave the Company to completion of the cessation agreement, given that a petition based on unfair prejudice cannot be based simply on the ordinary grounds of breakdown of trust and confidence or mere deadlock (Re a Company (No.001761 of 1986) [1987] BCLC 141, 142h-i)?

138. If all that the petitioners were relying upon were past conduct, I would have been inclined not to grant relief and to let the parties sort matters out by themselves in the process of cessation. However, I have found that the Yuen group is still using the Company to act to the unfair prejudice of Mr and Mrs Lam. I refer to the institution of the November 1999 proceedings against them and not against Tong, nor against Yeung in relation to the balance of the funds he took by way of "refunds". I have dealt with these matters in detail in the earlier part of this judgment and I will not repeat them here.

139. I would therefore order that as against Yeung and the elder Mr Yuen (there being no claim as against Tong), that they purchase the shares of Mr and Mrs Lam at a fair price to be assessed by an accountant to be appointed by agreement between the parties, failing which agreement, to be appointed by the Court. I will hear the parties as to the directions for implementation of this order.

140. I would dismiss the petition as against Hoover as there was no substantive evidence against it. I would also dismiss the petition as against China Woollen as the petitioners have made no claims against it independently, but only as a company controlled by Yeung and/or the elder Mr Yuen, which claim I have not found proved.

141. I will hear the parties as to costs. It only remains for me to thank all counsel for their assistance.