WONG CHUN KWONG IVAN AND ANOTHER v. CANADIAN EDUCATION FOUNDATION (CHINA) LTD AND OTHERS

HCCW 130/2016

[2024] HKCFI 3167

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO. 130 OF 2016

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J U D G M E N T

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1.  By a Petition filed by the 1^st and 2^nd Petitioners (“Wong” and “Chan”)  on 10 May 2016 (Amended Petition re-filed on 20 January 2017), the following relief, amongst others, are sought: (1)  winding up of the Company under s 177 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32, on just and equitable ground as well as insolvency; and (2)  in the alternative, unfair prejudice relief under s 725 of the Companies Ordinance, Cap 622. This is the trial of the Amended Petition.

2.  This trial is only concerned with Wong’s case.  Chan had passed away in 2017 and his attendance in these proceedings had been excused[1].  The 3^rd Respondent (“Hung”)  also took no part in the trial[2].  The 2^nd, 4^th to 7^th Respondents (“Fortune”, “CH Yeung”, “Yeung”, “Ma” and “Atwell”)  were represented by Mr Lam and Mr Yeung.  For convenience, references to “Respondents” hereafter are references to these Respondents.

Issues

3.  There is an Agreed List of Issues filed pursuant to the directions of the court.  Mr Leung, who appeared with Mr Sunny Chan and Mr Samkei Chan for Wong, had encapsulated the issues as follows :

Quasi-partnership and shareholders’ mutual understanding

Whether the Company was formed on the basis of quasi-partnership?  

Whether there was a Shareholders’ Agreement and Understanding?

(Issues 1 and 2)

Misappropriation claims and financial affairs of the School 

Whether the Yeung Family had misappropriated funds from the Company by various withdrawals of funds from the School[3] between 1995 and 2017?  Whether the Respondents had failed to distribute and account for the distributable profits of the School? 

Whether the “long-term payable debt” due by the School as recorded in its accounts was properly incurred?

(Issues 4 to 7)

Disposal of the School

Whether the Yeung Family had purported to dispose of the Company’s interest in the School without the Petitioners’ consent in 2014? 

Whether the purported sale of the Company’s interest in the School to Cheong Shing in 2017 constituted unfairly prejudicial conduct?

(Issues 8 and 9)

Exclusion from management

Whether Wong was excluded from the management of the Company and the School since 2000?

Whether the transfer of the shares of Fortune and Hung in the Company to Atwell constituted unfairly prejudicial conduct?

(Issues 3 and 10)

Relief and remedies

Whether Wong’s shares in the Company should be bought out (and if so, on what terms)? 

Whether the Company should be wound up on just and equitable ground?

(Issues 12 and 13)

4.  It is the case of the Respondents that all of complaints are without substance and wholly misconceived, both in fact and in law.

5.  At the beginning of the trial, Mr Leung had made clear to the court that Wong is not pursuing Issue 11, nor seeks to wind up the Company on insolvency ground. 

Background

6.  There is a Statement of Agreed Facts filed pursuant to the directions of the court.  The following summary of the background facts are uncontroversial unless indicated otherwise.  The Company is the holding company of an international school named Zhaoqing Canadian-American School (肇慶嘉美海外學校)  (“School”)  in Zhaoqing, Guangdong Province. It has no other business.

7.  At all material times, the Company’s shareholders were: (1)  Wong (17.5%), (2)  Chan (7.5%), (3)  Hung (25%)  and (4)  Fortune (50%).

8.  Fortune was (and is)  a BVI company which represented the interest of the Yeung family.  Ma is Yeung’s wife and CH Yeung is their son. 

Establishment of the Company and the School

9.  The Company was incorporated in Hong Kong on 21 December 1993.  The Company’s shareholders and directors since its incorporation can be found in the Statement of Agreed Facts.

10.  On 28 September 1994, the Company entered into a written joint venture agreement (“JVA”)  with a Mainland company called 肇慶七星發展有限公司 for the establishment and operation of the School. 

11.  With effect from 18 November 1994, the School was operated through a Sino-foreign Cooperative Joint Venture (中外合作經營企業)  which was registered with the Mainland authorities (“Joint Venture”). 

12.  The Board of the Joint Venture (“JV Board”)  was the School’s highest authority and should decide all its major business (JVA, Article 9.3).

Wong’s role in the School

13.  From 1994 to 2000, Wong was in charge of the day-to-day management of the School.

14.  In around 2000, Wong’s health deteriorated and he returned to Hong Kong where he underwent surgeries at the Prince of Wales Hospital.  Thereafter, he ceased to be responsible for the day-to-day management of the School.

15.  Wong was appointed as a director of the Company in November 1994.  He remains a director to date.  He was a director of the JV Board up to 12 November 2014. 

Transfer of the School in 2014

16.  The approval for the Joint Venture to operate the School was due to expire on 17 November 2014.  There is evidence before the court (not accepted by Wong)  that, as the expiry date approached, the School was required by Mainland authorities to convert to a domestic enterprise (內資企業).  For that purpose, the School had to be owned by a PRC resident.  The change was necessitated by a new policy in the Mainland.

17.  By a Share Nominee Declaration dated 16 September 2014, Ms Yeung Man (“Ms Yeung”), Yeung’s niece and a PRC resident, declared that: (1)  she would hold all the Company’s shares in the School to be transferred to her on trust for the Company; and (2)  the beneficial interest in such shares remained with the Company (“Trust Arrangement”).

18.  By a Share Transfer Agreement dated 28 October 2014 and signed by Ma on behalf of the Company (“Share Transfer Agreement”), the Company transferred its shares in the School to Ms Yeung, who then became the sole shareholder of the School.  The Joint Venture ceased to exist thereafter.

19.  There were two sets of resolutions related to the transfer.  First, by resolutions of the JV Board dated 18 October 2014, the transfer to Ms Yeung was approved and the School would become a domestic enterprise thereafter.  Applications would be made to the authorities for approval of the transaction.  The minutes recorded that Wong did not attend the meeting. 

20.  Second, by resolutions of the Company’s Board on 28 December 2015, the Company approved, confirmed and ratified the Trust Arrangement and the Share Transfer Agreement.  However, neither Wong nor Chan was recorded as having attended the meeting or signed the minutes.

Incomplete transfer of shares to Atwell in 2014

21.  By Instruments of Transfer and Bought and Sold Notes dated 1 September 2014, Fortune and Hung agreed to sell their respective shareholding in the Company (totalling 75%)  to Atwell.  It is not in dispute that these transfers have not been completed.

Aborted sale of the School in 2017

22.  On 10 May 2016, Wong and Chan commenced these proceedings.

23.  In early 2017, there were negotiations between Yeung and Cheong Shing Securities Co Ltd (“Cheong Shing”), which proposed to acquire the Company’s interest in the School at a consideration of RMB420,000,000.  It is not disputed that this sale did not come to fruition.

Witnesses

24.  Wong gave evidence at the trial.  He called no other witness. 

25.  Yeung was the only Respondent who gave evidence.  In addition, the following witnesses gave evidence for the Respondents: Ms Li Weihong (“Li”), the head of Finance Department of the School (“FD”); Mr Tsang Suet Fu (“Tsang”)  who oversaw the application of the School’s funds from about August 1995 to 2004; and Mr Ng Kwok Hing (“Ng”)  who was the auditor of the School. 

26.  Further, the witness statements of Ms Yeung, Ms Li Kum and Ms Lau Wang Tai were admitted as evidence without cross-examination.  Finally, the witness statement of Mr Tse Ming Shing (“Tse”)  was admitted as hearsay evidence because he was unable to attend the trial. The weight of Tse’s evidence will have to be assessed by the court.

27.  I shall say a few words about my impression of the live witnesses.  In the analysis of the issues below, the relevant evidence of the witnesses will be dealt with.

28.  Wong was educated in the US.  He described himself as well-educated with management experience in a multi-national company.  Although he is only in his late 60s, probably due to the fact that he had experienced life threatening heart condition, he was slower than expected with his understanding of the questions put to him in cross-examination, in answering questions and in recalling the past events. 

29.  Despite many valid criticisms made by Mr Lam of Wong’s evidence, I hesitate to characterise him as an untruthful witness. However, I do not believe that he is a reliable witness.  It will be seen below that much of his case did not stand up to the scrutiny of cross-examination. Wong often appeared confused in the witness box, and sometimes his evidence contradicted the Statement of Agreed Facts (whether he was hospitalised in 2000)  and his own witness statement (whether the additional fundings made available by the other shareholders to the School were shareholders’ loans[4]).

30.  On the other hand, there were reasons for Wong to be concerned with the withdrawals of funds from the School which had admittedly gone to Yeung or for his benefit.  It is likely that such concern, coupled with this litigation, had spoiled the relationship between Wong and Chan on one hand and Yeung on the other.  The deteriorated relationship and litigation might have clouded Wong’s judgment and served to magnify his complaints. 

31.  I find Yeung to be a good witness.  Despite his inability to understand English, he is clearly a successful businessman.  He is of the type who makes decisions and leaves the details to his assistants.  With one exception, Yeung’s evidence under cross-examination was spontaneous, straightforward and firm.  His evidence is generally consistent with the contemporaneous documents.  The exception concerned the question whether one of Yeung’s businesses in the Mainland was a nightclub.  Yeung was protective and did not want to answer the question.  He probably thought that it was irrelevant to the issues in this case.

32.  There was no challenge to the credibility of Li and Ng (Mr Leung submitted that Li is a credible witness).  As for Tsang, there was one factual issue on which he differed with Wong, ie, whether he attended a meeting referred to as the “Fishing Point Meeting” (“FPM”).  Tsang was not pressed in cross-examination on the point and it is fair to say that his credibility was not challenged either. 

Applicable principles

Unfair prejudice

33.  With one exception, there is no issue between the parties on all the applicable principles.  The general principles concerning the unfair prejudice remedy are well-established.  The salient points were summarised in Re Nobility School Ltd [2020] HKCFI 1503.

34.  In an unfair prejudice petition, the burden is on the petitioner to establish that (a)  the affairs of the company in question have been conducted (b)  in a manner which is unfairly (c)  prejudicial to the interests of the petitioner or the shareholders generally: Nobility School, [28].

Affairs of the company

35.  The conduct complained of must be conduct in the affairs of the company, or which is an actual or proposed act or omission by or on behalf of the company: Nobility School, [29].

36.  Shareholders’ dealings with their shares in the sense of their private position do not generally constitute conduct in the affairs of the company, or acts or omissions on behalf of the company: Nobility School, §29.  It was held by Harman J in Re Unisoft Group Ltd (No 2) [1994] BCC 766 at 777B-D :

“It is important to remember that shareholders’ rights to deal with or vote their shares are separate from the rights of the company as a corporate entity and shareholders’ relationships with it. Shareholders are entitled to sell their shares, to vote their shares, to take any course they like in general meeting without regard to any other person’s rights or position …

In my judgment, it is vitally important to hold that shareholders’ disputes concerning dealings with their shares are not the same as unfair conduct of the company’s business.  Shareholders must be kept distinct from the company so far as their private position as shareholders is concerned.”

Unfairness

37.  As explained in Nobility School, [32], unfairness is an objective concept.  The conduct in question is to be assessed against the legal background of the corporate structure under consideration :

(1)  The starting point is to ascertain whether there is any breach of the Articles of Association or any collateral agreements and understandings between shareholders which identify their rights and obligations as members of the company;

(2)  The terms of the corporate structure are further subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable;

(3)  It follows that it will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its Articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration.

38.  The agreements and understandings relied upon by a petitioner to engage the equitable principles need not have contractual force. However, where such agreements and understandings are to be found outside the company’s constitution, they must have a definite basis in evidence: Minority Shareholders: Law, Practice and Procedure, 7^th edn, [5.134]. 

Quasi-partnership

39.  It has often been said that the terms of a corporate structure are subject to equitable restraints in a “quasi-partnership”.  It is a fact sensitive question whether and if so what equitable restraints would apply: Hollington on Shareholders’ Rights, 10^th edn, [7-01(3)(vii)].

40.  In determining whether any particular company is a quasi-partnership, the shareholders’ personal relationship is key.  What is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former: see Minority Shareholders, [5.111-5.112].  

41.  A company is not to be treated as a quasi-partnership merely because the shareholders and directors have, or need to have, confidence in each other and work together openly and in cooperation to manage the company affairs: Minority Shareholders, [5.115].  Indeed, it would be rare for a company to be formed if the shareholders did not trust one another.  Something more will almost always be necessary before a quasi-partnership can be established: Re China Sonangol International Ltd [2019] HKCFI 1443, [16]. 

42.  Likewise, the shareholders would normally have had preliminary discussions and reached understandings and agreements about how the company’s management and business is to be conducted.  Unless these were intended to be more than a managerial decision of the sort that all companies constantly have to make to operate the business and revise as the company evolves, such agreements cannot be treated as a restriction on a shareholder exercising his legal rights: Re T-Hero Industrial Co Ltd [2023] HKCFI 3118, [19].

43.  The essence of a quasi-partnership is that the shareholders intend to conduct their business affairs not as directors and shareholders whose rights are defined by the corporate constitution but on the basis of mutual confidence and mutual duties of fidelity, trust, and openness and their joint management of the company’s affairs: Minority Shareholders, [5.115].

44.  A departure from arrangements between shareholders as to the conduct of the company’s affairs may not be unfairly prejudicial if caused by a change of circumstances not anticipated by the parties: Nobility School, [36].

Prejudice

45.  To establish a case of unfair prejudice, the conduct complained of must be both unfair and prejudicial, which are distinct concepts: Nobility School, [31]. 

46.  The court takes a wide view of prejudice suffered by a shareholder, which is essentially a question of fact.  Prejudice does not have to be demonstrable financial loss.  However, the court will not grant any remedy where the petitioner cannot show that he is, from a practical point of view, substantially in a worse position as a result of the alleged unfairly prejudicial conduct: Nobility School, [33].

Delay and acquiescence

47.  A petitioner’s delay and acquiescence in the conduct complained of can have an impact on his unfair prejudice claim.

48.  First, the fact that the conduct complained of may have continued without protest for a long period may show that there has been acquiescence and no unfair prejudice: Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch), [72].

49.  Second, unjustified delay on the part of the petitioner or acquiescence in the state of affairs complained of may affect the exercise of the court’s discretion to grant relief, ie, the court may refuse relief in its exercise of discretion: Re Cherry Hill Skip Hire Ltd [2023] BCC 1, CA, [36].

Buy out order

50.  A buy out order cannot be made (even with agreement of the parties)  unless unfairly prejudicial conduct is proved.  It is not enough merely to show that the relationship between the parties has irretrievably broken down.  There is no right of unilateral withdrawal for a shareholder where trust and confidence between shareholders no longer exist: Nobility School, [34].

Winding up on just and equitable ground

51.  Winding up on a contributory’s petition is a remedy of last resort and would not be granted if the petitioner is acting unreasonably in insisting upon it instead of pursuing an available alternative remedy: Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618 at 623D-E.

52.  The principal alternative remedy is an order on unfair prejudice ground, eg, a buy out order.  The concept of unfairness in the unfair prejudice remedy runs parallel to the concept of “just and equitable” in the winding up remedy.  The same equitable principles apply, but the two statutory remedies are not coterminous and need to be separately analysed: Hollington on Shareholders’ Rights, [10-02(2)]; Loveridge v Loveridge [2022] BCC 324, [146]; O’Neill v Philips [1999] 1 WLR 1092, 1104D-H.

53.  Winding up a solvent company is not in the interests of any of its members.  It may result in the sale of assets at break-up value, without regard to the company’s goodwill and know-how: Wong To Yick, 624H.

Need for investigation

54.  The parties differ on whether the need to have the affairs of the company investigated, eg, due to misappropriation of the company’s funds, is per se a ground for winding up the company.  Mr Leung contended that it is.  Mr Lam submitted that the point relates to whether the petitioner has shown a tangible interest in the winding up, and is not an independent ground for winding up, ie, without needing to establish the matters complained of.

55.  This was the view taken by the court in a strike out application in Re Sang Kee Restaurant Ltd [2021] HKCFI 1817 at [15], [31]-[35].  In particular, the need for investigation goes to the issue whether there is a benefit of sufficient advantage in the making of a winding up order even if the company has no assets – in such cases the need for investigation is relevant because the investigation may reveal that there are available assets ([34(3)]).  Further, where the alleged matters for investigation will be tried at the trial of the unfair prejudice petition, the need for investigation cannot provide a basis to justify the petitioner seeking a winding up relief against the company ([35]).

56.  Mr Lam submitted, and I agree, that this stands to reason.  The established case law is that a petitioner has to establish on the balance of probabilities the complaints relied on, eg, breach of fiduciary duties or equitable considerations arising from a quasi-partnership.  There is no separate basis for winding up simply because there are reasons to investigate the same complaints or part of them, which is a much lower standard.

57.  The two cases cited by Mr Leung in his opening do not say otherwise.  They were concerned with the requirement to show a tangible interest in the winding up, and it was held that a reason to investigate would meet that requirement: Re China International Business Development (HK)  Ltd, unrep, CACV 94/2005, 18 November 2005, [17]-[23]; Re K Vision International Investment (HK)  Ltd, unrep, HCCW 1277/2004, 11 January 2006, [79(1)], [81] and [82].  Two further authorities were cited by Mr Leung in his closing submissions, Shing Tai Ginseng Co Ltd [2021] HKCFI 892, [9(1)]-[9(3)] and Carnival Group International Holdings Ltd [2022] HKCFI 2668, [19]-[27]. I do not believe that these cases take the matter any further.

Analysis

58.  I shall deal with the majority of Wong’s complaints succinctly and then focus on his case on (a)  whether there was an agreement to pay interest on the additional fundings agreed at the FPM and (b)  whether Yeung[5] had misappropriated the School’s funds.  These points go hand in hand.  No doubt acting advisedly, these were the focus of Mr Leung’s submissions.

59.  It is unnecessary to deal with the incomplete sale of the shares of Fortune and Hung to Atwell (Issue 10).  When asked by the court to explain what his complaint was, Wong was unable to explain why it formed part of his complaints.  In short, he confirmed that there is no reason for the court to adjudicate on this matter. 

Quasi-partnership (Issue 1)

60.  I agree with Mr Lam that the relevant time for consideration was the time when Wong, Chan, Hung and Yeung (through Fortune)  became shareholders of the Company (in about April 1998). 

61.  Wong’s unchallenged evidence is that there were 4 “shareholders” of the Company, each holding 25% shares in the same.  Wong and Chan were regarded as one shareholder holding between the two of them 25%. Yeung and Hung were each a shareholder with each holding 25%.  The 4^th shareholder was made up of Mr Chung Kwee (“Chung”)  and Mr Cheung Ming (“Cheung”)  who collectively held the remaining 25%.  According to Yeung, Chung and Cheung were his business associates[6] and their investments in the Company were also channelled through Fortune.  The explanation is consistent with the fact that Fortune holds 50% of the shares in the Company (made up of Yeung’s 25% and the 25% of Chung and Cheung).

62.  Wong’s evidence on the relationship between the shareholders leaves no doubt that, with the exception of the relationship between Wong and Chan, there was no personal relationship based on mutual trust and confidence which could have grounded a case of quasi-partnership.  Wong did not know Yeung before the latter became an investor in the Company.  Their relationship was not close.  Wong trusted Yeung because Chan knew him and trusted him.  There was no direct contact between Wong and Yeung on the School’s affairs.  Instead, they would act via intermediaries, eg, Yeung would speak to Chan and ask him to consult Wong and Wong would speak to Tsang who represented Yeung.

63.  The relationship between Wong and Hung was not much different.  They became investors in the Company in November 1994 (prior to Yeung’s involvement).  Although Wong said that Hung was a friend of his father, he did not personally know Hung.  Wong trusted Hung because of his business reputation, not due to personal relationship.  Wong did not have any direct communication with Hung about the affairs of the School.

64.  As for Chung and Cheung, Wong hardly knew them. He said that he saw them at the opening of the School and did not communicate with them. 

65.  The only reasonable conclusion to be drawn from Wong’s evidence is that the 4 shareholders certainly had sufficient trust of each other to invest jointly in the Company (and the School)  but the relationship fell far short of one of quasi-partnership.

66.  There are a number of “mutual understanding” between Wong, Chan, Hung and Yeung (Chung and Cheung did not feature in Wong’s pleading), which had been admitted by the Respondents in their pleading.  I therefore agree with Mr Leung that Issue 2 on Shareholders’ Agreement and Understanding is largely a non-issue.  The admitted mutual understanding are :

(1)  After the departure of the previous shareholders and their respective disposal of the shares in the Company, the Company would be used as a corporate vehicle for holding the business of the School;

(2)  All of the “quasi-partners” would jointly invest in the business of the School as shareholders of the Company;

(3)  The purpose of establishing the Company and maintaining it as a going concern is to provide an investment holding corporate vehicle for its shareholders in respect of their investment in the setting-up and running of the School;

(4)  The Company would maintain control over the management and assets of the School at all times;

(5)  In particular, Wong and Chan would be entitled to participate in the management of the Company and the School;

(6)  Upon the expiry of the initial 20-year term of the Joint-Venture, save for exceptional circumstances, the Company would procure the extension of the Joint-Venture or otherwise retain its control over the management and assets of the School in the same or more favourable terms;

(7)  All shareholders of the Company are equally entitled to the returns/profits of their investments in the School in accordance with their respective proportions of contributions made.  No shareholders should receive returns/profits earlier than others, or to receive a return that exceeds his or her respective proportion of investment contributions;

(8)  The Company would procure the directors appointed by it to the JV Board to ensure that the affairs of the School are conducted in manners that are fair to all shareholders, that all shareholders’ investment interests in the School are equally protected, and that the mutual agreements and understandings between the shareholders will be adhered to and complied with.

67.  I do not believe that such mutual understanding changes the picture presented by the viva voce evidence or the conclusion at para 65 above.

Exclusion from management (Issue 3)

68.  To being with, it should be borne in mind that on the evidence Hung, Chung and Cheung seemed to have taken no or little active part in the affairs of the School or the Company.  Further, the shareholders of the Company conducted their affairs in the old fashion manner, ie, no written agreement was made; no actual meeting of the JV Board or the Company’s Board was held; and when minutes of board meetings were needed, they would be circulated and signed.  It was a state of affairs which had been going on for many years, and the parties were seemingly content with the same.

69.  Mr Lam described Wong’s complaint of exclusion from management as having “completely imploded at trial”.  It is not an unfair description. 

70.  Wong’s complaint focused on the time after he had fallen ill in 2000.  Prior to that he was in charge of the day-to-day management of the School.  Even after Tsang, who worked for Yeung, was put in place to oversee the application of the School’s funds, Wong continued to exercise his power to approve expenditures of the School from time to time and remained one of the signatories of its bank account.  However, although Wong agreed that he was the highest authority at the School, he was disinterested in its finance.  On the other hand, the FD would provide Wong with the information he wanted.  The School’s Audited Accounts were signed by Wong. 

71.  Under cross-examination, Wong agreed that when he returned to Hong Kong for medical treatment in about November 2000 he passed the management of the School to Tsang temporarily.  He agreed that after 2000 he was still regarded by the staff as leader (領導)  of the School.  He further agreed that (a)  during his hospitalisation no one took any step to exclude him from the School management; (b)  no one stopped him from returning to the School or to participate in its management; (c)  it was his choice not to return to participate in management; and (d)  he had no quarrel with leaving the School’s operation to its staff and Tsang. 

72.  Finally, Wong’s evidence is that after 2000 and until his father passed away in 2021 he mainly assisted his father in taking care of his business for which he was remunerated.  Wong mainly stayed in Hong Kong after 2000.  It appears to me that, after a life threatening medical experience, Wong had chosen to stay close to his family in Hong Kong.

73.  Independently, there is an important pointer suggesting that Wong’s position in the School was not in any way undermined. He was free to ask Li for the financial information of the School and she would oblige.  Such information included the payments into and out of the School by or to entities associated with Yeung in respect of which Wong was rather concerned.  Further, Mr Leung Kai Cheong (“Leung”), one of the School staff, acted as a representative of Wong and Chan, and Wong was free to ask him about the financial information of the School as well as its other affairs.

74.  It is an agreed fact that Wong remained a member of the JV Board until 2014 (see below on the purported sale of the School to Ms Yeung).  Wong’s evidence is that the JV Board did not perform any function.  It is also an agreed fact that Wong is still a member of the Company’s Board.

75.  I do not propose to deal with a litany of miscellaneous complaints by Wong under this Issue.  Suffice to say that they are minor in nature, addressed in Mr Lam’s closing submissions[7] and I find no real substance in them. 

76.  In short, the complaint of exclusion from management is not made out on the evidence.

Distributable profits (Issue 4)

77.  The issue here is confined to 1995 to 2017.  In his closing submissions, Mr Leung did not seek to dispute the fact that the School’s Audited Accounts showed that it had no distributable profits until the end of 2016.  For that year, the School had distributable profits of RMB 7,751,207.77.  For 2017, the distributable profits had accumulated to RMB 20,092,797.79.

78.  No submission was made that these Audited Accounts, or at least the recorded distributable profits, should not be relied upon.  The court was referred by Mr Lam to Re T-Hero Industrial Co Ltd [2023] HKCFI 3118, [37], for the proposition that the court does not go behind audited financial statements unless there is an evidential basis that the accounts may be inaccurate. 

79.  There seems to be an assumption in Wong’s case that the distributable profits must be distributed.  Such an assumption is not one which the court can accept without question.  It is common sense that there might have been legitimate commercial reason(s)  why no distribution was made. 

80.  Yeung was the only witness cross-examined on this topic.  He gave 2 reasons for making no distribution.  First, he said that the interest accrued from 1995 on the funds he injected into the School had not been taken into consideration in the Audited Accounts because it was an internal agreement between the shareholders.  However, even if one is to consider only the long term payables recorded in the Audited Accounts, the sum for 2016 was RMB 12,062,061.23.  This itself was a legitimate reason for making no distribution of profits in that year.  For 2017, the long term payables had reduced to RMB 1,050,217.23.

81.  The second reason given by Yeung was the need to keep the profits for operational funding.  On the face of it, this was not an unreasonable suggestion bearing in mind that the School had required substantial injection of further funding and it had only started to turn a profit in 2016. 

82.  Mr Lam submitted that there can be no answer to the point that the Petition in this case had already been presented in May 2016 in which a winding up order against the Company was sought, and no profits could have been distributed by the Company to Wong.  The submission was not answered and I agree with it.

83.  In the premises, I do not believe that this complaint has been made out.

“Long term payable debt” (Issue 7)

84.  Central to this issue is the qualified opinions issued by the auditors over the Audited Accounts of the School for 2007 to 2015.

85.  The unchallenged evidence of the Ng is as follows :

(1)  The only reason for the qualified opinions was the Company’s failure to return audit confirmations to verify the amount of shareholder’s loan and interest on the School’s accounts;  

(2)  For the Audited Accounts for 2013 to 2015, unqualified opinions had been issued after the audit confirmations were obtained; 

(3)  As to the Audited Accounts for 2007 to 2012, once the Company had produced the relevant audit confirmations and made a request for re-auditing, those Accounts would be re-audited like the ones for 2013 to 2015. 

86.  Mr Lam submitted that once the relevant audit confirmations for 2007 to 2012 had been provided, the Accounts for those 5 years would also become unqualified, and no contrary case was put to Ng during cross-examination.  It is, I believe, a proper inference from the evidence.

87.  Mr Lam also submitted that the unqualified opinion of the Audited Accounts for 2013 to 2015 (after the re-audit)  also demonstrated that the figures for the previous years were accurate, as the figures for 2013-2015 must be based on those in the previous years.  I can see some force in the submission, but the point was not explored in evidence and I do not believe that it is, per se, a complete answer to the criticism over the Accounts for 2007 to 2012. 

88.  Mr Leung submitted that there is no explanation why Ng was not instructed to re-audit the Accounts for 2007 to 2012.  On the other hand, Wong’s attack under this issue is whether the long term payables were “properly incurred”.  I have to bear in mind Li’s evidence that the shareholders’ loans and interest thereon were properly booked by the School, as well as Ng’s confirmation that all the accounting materials required for his audits were available to him. 

89.  I am not, in the premises, satisfied that there is anything in this complaint.

Purported disposal of the School (Issue 8)

90.  Quite rightly, there is no challenge to the Respondents’ evidence about the change in policy which necessitated the transformation of the School into a domestic enterprise.  Likewise, Yeung’s evidence of the reason why it was necessary for the School to be owned by a PRC resident, Ms Yeung, was not disputed. 

91.  Wong accepted under cross-examination that, despite the transfer to Ms Yeung, the Company remains the owner and controller of the School.  This is supported by the Share Nominee Declaration and Ms Yeung’s unchallenged evidence. 

92.  As regards Wong’s removal from the JV Board, I am inclined to agree with the evidence of Yeung that it was a requirement of the Mainland authorities that the Board of the School be consisted of PRC residents, notwithstanding Mr Leung’s criticism that there was no independent evidence to support Yeung’s evidence.  Notably, the entire JV Board was abolished and the timing of abolition, 28 October 2014, coincided with the change of policy. 

93.  Criticism was made by Mr Leung on the fact that the Share Transfer Agreement was signed by Ma who was not a director of the Company at the time.  I believe that it was probably arranged by Yeung, who did not have sufficient regard to sound corporate governance.  However, I fail to see anything sinister in the matter. 

94.  In respect of Wong’s complaint that he was not consulted on the transfer.  Firstly, something of such significance would not have escaped the attention of Leung who probably would have reported the matter to Wong.  In any case, Yeung’s evidence is that he had, through Chan and Leung, repeatedly consulted Wong about the arrangement.  Li also gave evidence that in 2014 and in response to Wong’s enquiry she informed him of the change in policy, and told him that he might consider transferring his shares in the Company to a nominee who was a PRC resident. 

95.  I fail to see any sensible reason why this matter was kept from Wong, and I do not accept that he was not consulted about the transfer.

96.  For these reasons, the complaint under Issue 7 is not accepted.

Aborted sale to Cheong Shing (Issue 9)

97.  Bluntly, this compliant is a waste of time. When asked to explain his grievance of this aborted sale, Wong said that he did not know how much money would be paid to him under the sale.

98.  As pointed out by Mr Lam, Wong’s pleaded case is that it was anticipated that the Company would receive net sale proceeds of RMB 330 million.  In any case, Wong would receive 17.5% of the proceeds to reflect his shareholding.  No further time should be spent on this aborted sale. 

Misappropriate of the School’s funds (Issue 5)  and whether the withdrawals from the School were properly reflected in its Audited Accounts (Issue 6)

99.  I now turn to the focus of Wong’s case.  These Issues are related.  I should first resolve the key factual dispute in this case, namely, the agreement reached at the FPM.  Once it is resolved, much of the controversies under these Issues may dissipate. 

FPM

100.  According to the Statement of Agreed Facts, in about August 1995, a meeting was held at the Fishing Point Seafood Restaurant in Tsim Sha Tsui East which was attended by, inter alios, Wong, Chan, Yeung and Tse.  What was agreed at the FPM is disputed, but it is not in dispute that (a)  a further sum of HK$45 million was to be invested into the School; and (b)  Tsang was to be appointed to approve and monitor the application of the School’s funds. 

101.  According to the Respondents’ case, it was also agreed at the FPM that :

(1)  Wong and Chan did not have funds for the further investment, and the HK$45 million would be provided by Fortune (acting for Yeung)  and Hung;

(2)  In case further funds were required by the School in addition to the HK$45 million, Fortune would provide the same by way of loan to the School;

(3)  The above loans would be subject to an interest rate of 6% p.a.;

(4)  Fortune and Hung should be repaid first if the School was in a position to make any repayment of debts.

102.  Yeung’s uncontradicted evidence is that the HK$45 million was subsequently provided by him (HK$40 million)  and Hung (HK$5 million)  via Fortune.

103.  Despite Wong’s denial on his pleading, there was no challenge by him in evidence that Fortune had advanced substantial sums of money (over and above the HK$45 million)  to the School over the years as loans for its operation (“Fortune Loans”).  Yeung’s undisputed evidence is that, save for the HK$5 million, all the moneys belonged to him.  Further, such loans were booked in the Audited Accounts of the School as payables by the School to the Company, including the Accounts for 1996-2000 which were signed off by Wong himself.

104.  In light of the above, the key dispute is whether there was an agreement that interest of 6% p.a. was payable on the Fortune Loans (“Interest Agreement”).  It is not an easy factual dispute to resolve given the lack of documentation, which is the focus of Mr Leung’s criticisms of the Respondents’ case.  He maintains that the court should prefer the evidence of Wong that there was no Interest Agreement.  The court was referred to Leung Chin Sing v Ko Chun Hey [2021] HKCFI 2242, [41]-[44] on the principles on evaluating disputed evidence. 

105.  In respect of any dispute over the further funding (over and above the HK$45 million)  provided by Fortune via different entities, it cannot be disputed that the moneys went to the School.  There is no evidence that any of the shareholders of the Company, other than Yeung, had provided further funding to the School.  Moreover, the great majority of such funding were documented.

106.  The lack of documentation over the FPM is not necessarily decisive given the fact that there was no record made of the Meeting at all despite certain agreement having been reached.  The absence of record is consistent with the informal or old fashion manner in which the shareholders conducted their business.  Further, as Yeung explained, the investors considered that the loans were made to their own company and Tsang’s appointment to monitor the School’s funds was sufficient to safeguard their interests.

107.  Mr Leung sought to draw support from the fact that the Interest Agreement is inconsistent with the resolution of the JV Board dated 1 February 2008 (“2008 Resolution”).  Based on the unchallenged evidence, in around 2006, when it was anticipated that the School was about to turn a profit, there was a suggestion by the School’s auditor that under PRC rules interest expenses of up to 6% could be deducted from the School’s profits such that it would result in tax benefits.  The matter was first raised by the auditor with Li, who suggested this to Tsang, who in turn suggested this to Yeung, who agreed to adopt it.  It was for this purpose that the 2008 Resolution was later prepared.

108.  The 2008 Resolution stated as follows (based on agreed translation)  :

“As of 31^st December 1995, [the School] had received a registered capital of US$2.1 million from [the Company], which had been verified by [auditors]. Subsequently, due to operational needs, some individual shareholders of [the Company] continued to invest funds. For many years, to ensure the stable development of [the School], [the Company] has never calculated interest on the loan to [the School]. Now that the development of the School has stabilised, it is proposed that starting from 1 January 2007, interest be payable on the shareholder’s loan based on bank interest rate and computation method for the same period and such interest be paid to [Yeung]. As of 31 December 2006, interest is payable on the loan amount of RMB 42,441,943.68.

RESOLVED: The attending board members unanimously agree to pay interest on the loan based on the bank interest rate and computation method for the period starting from 1 January 2007.  The payable interest is (RMB 42,441,943.68 x 6% = RMB 2,546,516.62).  The accrued interest is payable to [Yeung], a shareholder of [the Company].  The relevant expenses and associated costs for such interest shall be borne by the said shareholder.”

109.  The 2008 Resolution was signed by, inter alios, Yeung, Wong and Chan.

110.  Mr Leung submitted that :

(1)  The 2008 Resolution made no reference at all to the FPM or the Interest Agreement;

(2)  Although the Respondents allege that back in August 1995, it was agreed that the Fortune Loans would be subject to an interest rate of 6% p.a., the 2008 Resolution only resolved that interest be payable on the shareholder’s loan from 1 January 2007.

111.  There is force in Mr Leung’s submissions.  On the other hand, the evidence is that the 2008 Resolution came about for a different purpose.  Importantly, the resolution was drafted by Li who did not know about the Interest Agreement.  Her unchallenged evidence is that she was never informed of the Interest Agreement until Tse spoke to her in 2014.

112.  Mr Leung made 3 other points.  First, the 6% interest was arbitrary and not properly explained.  Yeung’s evidence, which I accept, is that at the time the prevailing bank lending rate was 10-11%, and it was Chan who suggested that the interest should not be more than 6%.  The suggested prevailing interest rate is supported by documentary evidence.  I fail to see anything arbitrary in fixing the interest rate favourably given that the School was in its infancy and running into financial trouble.

113.  Second, it was said that if the Interest Agreement was genuine, Yeung would have informed his subordinates to “record, calculate and execute the 6% interest”.  However, as pointed out by Mr Lam, Tse, who worked for Yeung, was at the FPM.  Moreover, the School had made no profits for many years.  Until it turned a profit, it was plausible that the payment of interest for the Fortune Loans had received no attention.

114.  Third, Mr Leung sought to capitalize on the discrepancy between the amount of shareholder’s loan stated on the 2008 Resolution and the record complied by Li on the same.  With respect, the point was not at all explored in cross-examination.  There might well have been innocent explanation for the discrepancy, especially when Li was the author of the resolution.  It is unfair and impermissible for the point to the taken under such circumstances. 

115.  Wong was adamant that there was no Interest Agreement.  I bear in mind that a poor witness may nevertheless remember things important to him.  Similarly, although I find Yeung to be a credible witness, it does not follow that he should be believed on everything.  Tse did not give evidence, and I am reluctant to give weight to his witness statement without cross-examination.

116.  Ultimately, the court can only be guided by the inherent probabilities and commercial common sense.  It is not disputed that the HK$45 million and other injections made by Fortune into the School were loans.  Plainly, the most important terms for any loan are the duration and interest.  Importantly, apart from Yeung and Hung, the other shareholders were not contributing to the loans.  Although Wong said that he was managing the School, and he and Chan were regarded as one shareholder, Wong was in fact paid for his work. 

117.  Under these circumstances, I find it inherently improbable that Yeung and Hung would have agreed to extend an interest free loan to the School, which was hardly a safe or well-established business.  It was a time of high interest rate.  More probable than not, the shareholders agreed that the Fortune Loans should attract a favourable interest rate of 6%, and that when the School was in a position to repaid its debts, the Fortune Loans should first be paid.

118.  In the premises, I uphold the Respondents’ case on what was agreed at the FPM.

Misappropriation

119.  To begin with, Wong’s pleaded case, which is reflected by Issue 5, only concerns withdrawal of funds up to March 2017.  In his closing submissions, Mr Leung sought to extend that to the end of 2018, which is both unfair and impermissible. 

120.  In light of (a)  the factual findings on what was agreed at the FPM, in particular the Interest Agreement; and (b)  Li’s unchallenged evidence on the injections by Fortune into the School (via various entities associated with Yeung), the payment out from the School (again to various entities associated with Yeung)  and the calculation of accrued interest, the complaint here is reduced to the fact that the vast majority of the payment application vouchers (part of the supporting documents for the outward payments)  did not refer to repayment of loan but to various purposes which were unrelated to the business of the School, eg, payments of family expenses for Yeung and payments to entities not known to the School. 

121.  I do sympathize with Wong’s complaint.  Putting aside the fact that the School was indebted to his company (Fortune), the documents suggest that Yeung was using the funds of the School as and when he pleased as if it was his ATM.  However, with the indisputable evidence on the School’s indebtedness to Fortune and Yeung’s acceptance that all the withdrawals were for the repayment of such indebtedness (whether as principal or interest), the allegation of misappropriation cannot be made out.

122.  In respect of the supporting documents, on which there was much cross-examination of Li.  Her evidence is that the descriptions on the vouchers were filled in by the handling staff based on the apparent nature of the transaction (經濟業務).  The sums involved might then be temporarily booked as “other receivables”.  After a year, if these “receivables” were not repaid, they would be booked as part of the current account with the Company under long term payables (長期應付款)  based on the instructions of Yeung’s representative that these “receivables” should be set off against the Fortune Loans.

123.  Mr Lam submitted that based on his own evidence, Wong knew that Yeung had been withdrawing tuition fees from the School since the 1990s, ie, before he fell ill.  It was Yeung’s practice to inject moneys to and withdraw moneys from the School via various individuals and entities.  Wong clearly accepted this practice, took no legal steps in response, and did not even engage an accountant to study the materials available to him.

124.  This was thus a situation where the conduct complained of persisted without protest for a considerable period and Wong has acquiesced in the same.  The withdrawals (even if prejudicial)  cannot possibly be unfair to Wong.  Mr Lam referred the court to Minority Shareholders, [5.279] and Re KTA Group Ltd [2022] EWHC 1880 (Ch), [134], [137(v)-(vii)  and (xi)]. 

125.  There is clearly force in the argument, but it is unnecessary to analyse it further in light of the finding that the allegation of misappropriation cannot be made out. 

Whether the Audited Accounts reflected the withdrawals

126.  It can be seen from the Audited Accounts of the School from 1998 to 2017 that for each end of the year the School was indebted to the Company (the Fortune Loans were booked as debts to the Company).  It should be noted that in the Audited Accounts, interest was only calculated as from 2007 in accordance with the 2008 Resolution. 

127.  In light of (a)  Li’s evidence referred to in para 122 above; (b)  Ng’s unchallenged evidence that he was given unfettered access to all necessary accounts and documents for audit purposes; and (c)  the acceptance of Wong in cross-examination that the withdrawals (at least those which took place whilst he was managing the School)  were properly taken into account and reflected in the School’s accounting records and Audited Accounts, there is little substance in this complaint and it is not accepted. 

Disposition

128.  For these reasons, the Amended Petition is dismissed with costs to the Respondents.  I approve the costs order proposed under paras 101.1 to 101.4 of the Respondents’ closing submissions with the exception that costs be taxed on party and party basis, if not agreed. 

129.  I would have acceded to the indemnity costs order sought by Mr Lam if not for the fact that Yeung had been using the School as his ATM.  It is high time that proper corporate governance be observed and such behaviour should cease. 

130.  Last but not least, I am grateful to counsel for their assistance.