KOIDE KEITA AND ANOTHER v. KOIDE EIJIRO AND OTHERS

HCCW 691/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 691 OF 2009

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REASONS   FOR   DECISION

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Introduction

1.  The 2^nd Petitioner is a Japanese company founded in 1975 and owned and controlled by 9 members of the Koide Family including the 1^st Respondent (who owns 34.375% of the shares) and the 1^st Petitioner (who owns 0.2125% of the shares), who are Father and Son.  The remaining shares (and thus the majority) are owned by the 1^st Respondent’s 4 Brothers, 2 Brothers in law and 1 Sister in Law.  The 2^nd Petitioner was established in order to carry on the Family business, which was designing and making industrial moulds and electronic components.  The 5^th Respondent (“Company”) was incorporated in Hong Kong in 1993 in order to carry on a similar business in Southern China.  As at March 2009 the 1^st and 2^nd Petitioners owned 15% and 35% respectively and the 1^st and 2^nd Respondents 30% and 20% respectively of the 5^th Respondent.  The 2^nd Respondent is the daughter of the 1^st Respondent.

2.  It is the Petitioners’ case that in about September 2008 members of the Koide Family discovered that since 2003 the 1^st Respondent had misappropriated substantial sums from the 2^nd Petitioner.  Litigation was commenced in Japan, which resulted in a settlement agreement being made on 26 March 2009 between the 2^nd Petitioner and the 1^st and 2^nd Respondents, which required the 1^st and 2^nd Respondents to resign from the board of the 2^nd Petitioner by 6 April 2009 and to relinquish control over the Family business, which the Petitioners understood to include the Company.  Unbeknown to the Petitioners shortly prior to the 26 March the 1^st and 2^nd Respondent’s began to implement a scheme to obtain control of the Company.

3.  On 18 March 2009 the 2^nd Respondent in her capacity as shareholder requested the Company to hold an extraordinary general meeting as soon as possible to appoint her and her Sister (the 4^th Respondent) to the Company’s board.  On the same day the 1^st Respondent as director of the Company issued a notice to shareholders convening an extraordinary general meeting to be held on 3 April 2009.  The 1^st and 2^nd Respondents were prior to 6 April 2009 the Chairman and Vice-Chairman respectively of the 2^nd Petitioner’s board of directors.  On 21 March the 1^st Respondent without the knowledge of the board of directors of the 2^nd Petitioner purportedly caused the 2^nd Petitioner to transfer 490 of its shares in the Company to the 3^rd Respondent who is the Husband of the 4^thRespondent thus giving the 1^st Respondent and those aligned with him slightly more than 50% of the shares.  The result was that the 1^st Respondent obtained control of the board of the Company.

4.  The 1^st Respondent’s case is that the Company and its operating subsidiaries were not part of the Koide Family business, but were his personal business venture.  He also says that the management of the Company was vested in him alone and that the Petitioners have no legitimate expectation of management of the Company or its operating subsidiaries.  In response to the Petitioners’ objection that since June 2006 the 1^st Petitioner has been the legal representative of Company’s subsidiaries in the Mainland the 1^st Respondent says that the documents affecting this were forgeries.

5.  The Company carries on its business through 2 wholly owned subsidiaries incorporated in the Mainland, which the parties refer to by the acronym “WOFEs”.  It is control of these 2 companies that is the subject of the present application.

6.  The Petitioners say that since 1998 the 1^st Petitioner has had responsibility for running the WOFEs and that this arrangement culminated in the official transfer of the office of legal representative, which gives the holder control of the companies, to the 1^st Petitioner in June 2006, although in fact he had been acting as legal representative for some time.  The 1^st Petitioner accepts that it is possible that the 1^st Respondent did not execute the documents transferring the office to him, but says if that is the case it reflects what had been the position for sometime, namely, that he would sign documents on the 1^st Respondent’s behalf as the 1^st Respondent was frequently in Japan and unavailable to do so.  He says that this was well known to his Father.  More importantly he says that his Father undoubtedly knew of and approved the formal transfer of the office to him as evidenced by photographs, which he has exhibited, recording a handing over ceremony.

7.  After the 1^st Respondent gained control of the board of the Company on 26 June 2009 he took steps to reappoint himself as the legal representatives of the WOFEs.  The 1^st Petitioner commenced 2 sets of proceedings in Huizhou in Guangzhou to seek an order declaring the change of legal representative to be invalid.  These applications were dismissed on 19 November 2009.  The 1^st Petitioner has appealed and is awaiting judgment.  The 1^st Petitioner was advised after the original proceedings were dismissed that the prospect of his appeal being successful was slim.  The Petitioners were concerned that if the appeal were to be unsuccessful the 1^st Respondent would take control of the WOFEs.  The Petitioners concern is not simply that the 1^st Petitioner has the right to be the legal representative.  The Petitioners are concerned that the 1^st Respondent will not manage the WOFEs effectively and may dispose of their assets for his own benefit.

The Application

8.  On 24 March 2010 the Petitioners issued a summons seeking the following orders:

(1)    Until further order and pending the trial of this action, each of the 1^st, 2^nd, 3^rd, 4^th and 5^th Respondents be restrained (whether by herself and/or her agent(s) and/or servant(s)) from howsoever removing or replacing and/or taking steps to remove or replace the 1^st Petitioner as the authorized representative (法定代表人) of Wako Giken (H.Z.) Co Ltd (和幸科技工業（惠州）有限公司) and Wako Tech (H.Z.) Co Ltd (和幸技研（惠州）有限公司)(collectively “WOFEs”);

(2)    Until further order and pending the trial of this action, each of the 1^st, 2^nd, 3^rd, 4^th and 5^th Respondents be restrained (whether by herself and/or her agent(s) and/or servant(s)) from howsoever acting and/or taking steps to act as the authorized representative of the WOFEs;

(3)    Without prejudice to the generality of the foregoing, until further order and pending the trial of this action, each of the 1^st, 2^nd, 3^rd, 4^th and 5^th Respondents be restrained (whether by herself and/or her agent(s) and/or servant(s)) from howsoever applying to and/or taking any further steps to apply to any relevant authorities in Huizhou, Guangdong Province, PRC (including but not limited to the Commercial and Industrial Bureau of Huizhou City（惠州市工商局）to remove or replace the 1^st Petitioner as the authorized representative of the WOFEs;

(4)    Without prejudice to the generality of the foregoing, each of the 1^st, 2^nd, 3^rd, 4^th and 5^th Respondents be compelled to withdraw, and, insofar as may be necessary take all necessary steps to facilitate the withdrawal of, the application dated 26 June 2009 made to the Commercial and Industrial Bureau of Huizhou City （惠州市工商局）to remove or replace the 1^st Petitioner as the authorized representative of the WOFEs; and

(5)    Until further order and pending the trial of this action, each of the 1^st, 2^nd, 3^rd, 4^th and 5^th Respondents be restrained (whether by herself and/or her agent(s) and/or servant(s)) from howsoever selling, disposing of, transferring away and/or dissipating and/or taking steps to sell, dispose of, transfer away and/or dissipate the WOFEs, the interests therein and/or assets thereof.

(6)    Costs of this application be provided for.

9.  The summons first came on before me on 13 April 2009 and I made orders for the filing of evidence and the Respondents gave undertakings, amongst others, not to dispose of the assets of the Company pending the determination of the present summons.  The Respondents offer to continue the present undertakings until trial, but the Petitioners consider this unsatisfactory as it does not address their concern that 1^st Respondent will not deal competently and properly with the WOFEs business and assets.  The Petitioners have, however, offered like undertakings if I grant the order that they seek.

10.  The substantive hearing took place on 23 and 25 June 2010.  I informed the Parties at the end of the hearing that I was on leave from 26 June to 3 July and that given the state of my diary on my return it would be difficult for me to produce a comprehensive reasoned judgment quickly.  The Parties told me that they would prefer a quick decision with shorter reasons rather than have to wait.  This is that decision.

The Argument

11.  In their skeleton arguments the parties make much of their respective allegations that the other camp has misappropriated money and shown themselves to be untrustworthy.  As the arguments were originally presented the application was factually very complex in no small part because by the time the hearing came on all the evidence had been filed for trial and the parties various allegations and counter-allegations run to almost 400 pages of affirmations.  As the hearing developed both Mr. Smith S.C., who appeared with Mr. Anson Wong and Mr. Alan Kwong for the Petitioners, and Mr. Jose Maurellet, who appeared with Mr. Harry Liu for the 1^st to 4^th Respondents, agreed that the court could not reach conclusions in respect of the complaints before it and that it could proceed on the basis that there is a triable issue and that the principal issue in this application is whether the management of the WOFEs should be left in the hands of the 1^st Petitioner pending trial.

12.  The Petitioners seek in their Petition a winding up order or alternatively an order that the 1^st Respondent buy their shares in the Company.  During the hearing Mr. Maurellet informed me that the 1^st Respondent was prepared in principle to buy out the Petitioners.  This was an offer, which as Mr. Smith pointed out, had not previously been made.  As I understand the Petitioners’ position they would be content to be bought out at a fair price.  They are concerned that given the claims against the 1^st Respondent in Japan and the value of the Company that the 1^st Respondent could not afford to buy their shares.  There position is accordingly that the Court should proceed on the basis that there is a real possibility that if they are successful at trial the Company will be wound up.  This is relevant to the present application in this way.  If the Petitioners have made out an arguable case, as it is accepted in the present case they have, the next question to be addressed is whether it is just and convenient to grant an injunction.  The Court asks, by analogy with the test in American Cyanamid v Ethicon Limited [1975] AC 396, whether a petitioner can be adequately compensated for the matters of which he complains by an order that the Court can make under section 168A and which a petitioner seeks, or might reasonably be expected to seek.  If what is sought is a buy out and the matters complained of can be taken into account in the valuation of shares an injunction will prima facie not be necessary.  Similarly, it will normally be difficult to justify an interim order that keeps a petitioner rather than a respondent in control until judgment of the affairs of a company of which a petitioner argues a respondent should be required to become the owner.  In such circumstances it will generally be appropriate to allow a prospective purchaser to manage the affairs of a company as to the extent that leaving the management of a company’s affairs in his control results in some loss either it will make no difference to the petitioner at all as it post dates the date of valuation of the shares (which is normally the date of issue of a petition) or it can be taken into account in the share valuation if it is necessary: see the discussion in Pringle and others v Callard [2008] BCLC 505, Arden L.J. at paragraphs 23 to 27.

13.  Mr. Smith accepted these principles, but argued that as there was a real possibility of a winding up of the Company it was desirable that its affairs be well managed in order to maintain its value pending a sale of its business by a liquidator.  On the alternative assumption that the 1^st Respondent is able to buy out the Petitioners it was impractical, he argued, to leave the adverse consequences of allowing the 1^st Respondent to manage the affairs of the Company to be assessed during the valuation process, as by their nature such consequences would be difficult to quantify.  I accept that there is a real prospect that if the Petitioners are successful at trial a winding up order will be made and that in those circumstances it may not be easy to assess what the adverse financial consequences may have been of the 1^st Respondent (assuming that he becomes legal representative of the WOFEs) mismanaging the affairs of the WOFEs.

14.  In the Parties respective written submissions they both argue that the evidence shows that the other party cannot be trusted and this is something to be taken into account in determining whether it is just and convenient to grant an injunction.  These allegations emerge from evidence filed for the purposes of the trial and not specifically for this application.  Although as I have already mentioned the Parties accepted during argument that the Court cannot determine the merits of the Parties’ respective cases the 1^st to 4^th Respondents approach in particular invites me to take a preliminary view on the substance of some of the complaints made against the 1^st Petitioner.  Mr. Maurellet argued that the 1^st Petitioner on his own case has shown himself unfit to be left in charge of the WOFEs.  The 1^st Petitioner has accepted that at his direction money has been taken out of the WOFEs and false receipts produced and false accounting entries made in respect of the payments in the books of the WOFEs.  It would appear that the WOFEs records show or showed the companies as continuing to employ and pay in particular Japanese staff, who had left the companies.  In addition the 1^st Petitioner accepts that he may on occasion have signed formal documentation in his Father’s name; which Mr. Maurellet characterises as forged documents.  The 1^st Petitioner response is that none of this was a secret.  The reason for taking money out of the WOFEs on the pretence that staff salaries were being paid was to create a fund out of which local officials could be “entertained”; this I take to be to at least some extent a euphemism.  The signing of the documents including those changing the identity of the legal representative (assuming that the 1^st Petitioner did sign such documents which he accepts he may have done but has not admitted) was consistent with the understanding that the 1^st Petitioner could sign on his Father’s behalf when he was not around.  In the case of the change of legal representative this was something that was agreed and has never prior to the present dispute arising been challenged.  On the contrary, and as I have already mentioned, the 1^st Petitioner has adduced evidence showing his Father attending a handing-over ceremony.

15.  I accept that the 1^st Petitioner has conducted the affairs of the WOFEs in a manner, which in various respects is obviously unsatisfactory, but I do not think that I can at this stage discount as implausible his explanation that this was not done to enrich him personally, but was a necessary way of carrying on business in an unconventional commercial environment and that these practices were known to the 1^st Respondent.  It also seems to me that in so far as I am being invited to take into account the business ethics of one party when deciding who is the most trustworthy person to take charge of the WOFEs pending trial it is necessary to take into account the propriety of the 1^st Respondent’s conduct.

16.  The case against the 1^st to 4^th Respondents is that the 1^st Respondent has misappropriated significant sums from the 2^nd Petitioner and then caused the accounts of the 2^nd Petitioner to treat sum of such sums as loans due to it from the Company and causing loans borrowed by the 2^nd Petitioner from the Company to be used to repay loans he had taken.  The 1^st Respondent answers these complaints in very general terms, which do not go much beyond a simple denial.  It appears to be the 1^st Respondent’s case that the issue of misappropriation of assets from the 2^nd Petitioner should be dealt with in proceedings in Japan.  So far as the transfer of shares in the Company from the 2^nd Petitioner to the 3^rd Respondent is concerned the 1^st Respondent admits that the Board of the 2nd Petitioner did not approve this.  His answer to this complaint is that it was not necessary as a matter of Japanese Law because the asset transferred did not constitute an important asset of the 2^nd Petitioner and, therefore, the Board’s consent was not necessary.  This is a matter presently before the Japanese Court, but even if correct it does not seem to me to be a entirely satisfactory response to the complaint.  The settlement agreement was made on 26 March 2009 and the documents transferring 490 shares were executed on 21 March at a time when the settlement agreement was being negotiated.  The 1^st Respondent’s explanation for this is (and I quote from paragraph 132 of his 2^nd affirmation) that his “concern remained that the 1^st Petitioner and My Brothers were advancing their own personal interests and pursuing a vendetta against me to the detriment of the shareholders of the 5^th Respondent as a whole”.  The 1^st Petitioner and his Uncles and other relations associated with them owned approximately 65% of the 2^nd Petitioner, which at the relevant time owned 50% of the Company.  The settlement agreement required the 1^st Respondent to resign as Chairman and director of the 2^nd Petitioner.  It is difficult not to read the 1^st Respondent’s evidence as a tacit acceptance that he caused the share transfer to take place at a time when he knew it was not what the majority shareholders of the 2^nd Petitioner wanted and when he knew he was intended to cease to have any control over the 2^nd Petitioner and that the transfer was done with the specific intention of giving the 1^st Respondent control of the Company, which he would not otherwise have.  It may be that when all relevant matters are explored at trial it will become apparent that this course of conduct was not underhand, but in my view there is grounds for suggesting at this stage that it was so particularly when set against the background of the incomplete answers (at least in these proceedings) to the allegations of misappropriations by the 1^st Respondent from the 2^nd Petitioner and the Company.  As a consequence in my view it is not possible to say at this stage that it is desirable that the 1^st Respondent be put in charge of the WOFEs because on the basis of the parties’ respective previous conduct it appears that he can be trusted to look after their affairs with greater honesty and impartiality than the 1^st Petitioner.

17.  There is one further aspect of the 1^st Respondent’s case that I would mention as it is directly relevant to the decision I have to make in the present application and that is who had control of the WOFEs before the dispute arose.  It seems to me that the evidence currently before the Court suggests that despite what he says the 1^st Respondent was aware and accepted that 1^st Petitioner had become the WOFEs’ legal representatives in 2006.  This is consistent with the 1^st Petitioner’s case that he had been primarily responsible for running the WOFEs since 1998.  The 1^st Respondent’s case is that the Company was set up as a personal venture of his own (see paragraph 26 of his 2^nd affirmation) and that he had “control of the management of the 5^th Respondent” (see paragraph 35 of his 2^nd affirmation).  The 1^st Respondent accepts, however, that when the Company was established he did not acquire a controlling shareholding in it and that this gives the impression of being inconsistent with his case that it was his personal venture.  My impression is that the 1^st Respondent is consciously drawing a distinction between the management of the affairs of the Company and the WOFEs and that he is tacitly admitting that day-to-day control of the WOFEs was left in the hands of the 1^st Petitioner.

18.  The issue, which I am asked to decide is whether it is just and convenient to leave control of the WOFEs in the hands of the 1^st Petitioner.  In my view for reasons which I have explained earlier it is not possible or appropriate to decide this application by trying to make a preliminary assessment of the relative integrity of parties in their conduct of the affairs of the Company, the WOFEs and the 2^nd Petitioner.

19.  Mr. Maurellet advanced various reasons why the 1^st Respondent should not be left in charge.  The first is his history of misappropriating money and forging documents.  Secondly that adequate safeguards are provided by the undertakings offered by the 1^st to 4^th Respondents.  Thirdly the Company will not provide financing to the WOFEs if the 1^st Respondent is the legal representative.

20.  The first reason invites me to at least take a preliminary view on the case against the 1^st Petitioner, which as I have already indicated I do not think it is appropriate to do accept to say that a serious issue has been raised concerning the propriety of his conduct.  This has to be balanced against the consideration that a serious issue has been raised concerning the 1^st Respondent’s integrity and that at this stage of the proceedings I am unable to discount the 1^st Petitioner’s explanation for the complaints made against him or to reject as improbable the similar concerns that he and the 2^nd Petitioner have raised concerning the 1^st Respondent and those aligned with him.  It is also relevant that the complaints made against the 1^st Petitioner go to his honesty rather than general business competence.  The Petitioners have offered the like undertakings to those proffered by the 1^st to 4^th Respondents, which prohibit diminution of the assets of the Company and require the Petitioners to provide comprehensive information to the Company concerning the WOFEs’ financial affairs.  I see no reason to treat the undertakings as worthless and as they provide protection from misappropriation of assets this leaves the determinative issue as whom it is most fair and convenient to leave as legal representative and in charge of management of the WOFEs.  So far as Mr. Maurellet’s second point is concerned I do not think that the undertakings offered by the 1^st to 4^th Respondents are a significant consideration because they do not address the question of who is best placed to manage the day-to-day operations of the WOFEs.

21.  Finally, there is the threat that the Company will cut-off financial assistance to the WOFEs if the 1^st Petitioner is in charge of them.  The consequences of such action is a commercial matter the impact of which in my view is one to be taken into account by the Parties in deciding what is in their best interests depending on the view that the Court takes on what, but for this factor, is the fair and convenient order to make.  If I am of the view, as I am, that the fair and convenient thing to do is to make an order, which leaves the 1^st Petitioner in control of the WOFEs I am not inclined to decline to do otherwise, because of a threat from the 1^st to the 4^th Respondents.  I also take into account that it is the evidence of the 1^st Petitioner, supported by the 2^nd Petitioner, that because of arrangements put in place with their customers the WOFEs are now self-financing and do not require funding from the WOFEs.  I see no reason to assume that the Petitioners, in whose best interests it is to maintain the WOFEs as successful businesses, do not for good reason genuinely believe this to be the case.

Mandatory injunction

22.  The order that is sought includes in paragraph 5 a mandatory injunction.  At one stage of the proceedings it seemed that the 1^st to 4^th Respondents might suggest that as a consequence the strength of the applicant’s case on the merits had to be demonstrated to be stronger than would be the case if what was sought was a prohibitory injunction.  I accept Mr. Smith’s submission that such an argument would be bad.  As the Lord Hoffman observes in National Commercial Bank Jamaica v Olint Corp. [20009] 1 WLR 1405 at page 1409G-H, arguments over whether or not an injunction should be classified as prohibitive or mandatory and the consequences of such classification are barren and that what matters is the practical consequence of the injunction which is sought.  The Court is concerned with questions such as whether irremediable prejudice will be caused to the defendant, how expensive will it be to implement the injunction and whether it prejudges the outcome of the trial?  In my view the injunction will not cause irremediable damage to the 1^st to 4^th Respondents, it will continue the status quo as it existed prior to the conflict arising and it will cost nothing to implement.  As I have made clear at this stage the decision that I make does not reflect a judgment as to the likely outcome at trial, but, so far as the merits are concerned, a view taken as to whether or not a serious issue has been raised, a matter, which by the time this matter came on before me was not in dispute in any event.

Delay

23.  The application was made almost 4 months after the Petition was issued and approximately 9 months after the 1^st Petitioner commenced proceedings in Huizhou.  Mr. Maurellet argued that this was a matter to be taken in to account in considering whether or not to grant the injunction and that it weighed against granting it.  It did so he argued for the following reasons.  The Petitioners could have brought the present application earlier and certainly should have done so once their initial application had been dismissed on 19 November 2009.  The Petitioners are making a 2^nd attempt to maintain control of the WOFEs and Mr. Maurellet characterised this as a prejudicial tactical approach to the litigation.  Whilst I can see some force in the criticism that the application should have been made as soon as the proceedings in the Mainland were dismissed I have difficulty identifying any particular prejudice to the 1^st to 4^th Respondents.  As I understand the position despite the filing of documents to change the legal representative back to the 1^st Respondent in June 2009 the process has never been completed and the 1^st Petitioner remains the legal representative and in charge of the WOFEs.  If the change had been effective and what was sought was an order that required the position to be reversed I can see how it might be argued that delay had caused prejudice, but this is not the present case.

24.  I of course accept that applications for interlocutory injunctions should be made promptly and that there are authorities that suggest that mere delay can be fatal to an application, but as Spry observes at page 488 of the 8^th edition of The Principles of Equitable Remedies “Statements such as these, however, are in several respects misleading and do not reflect the actual practice of the courts of equity.”  In my view the correct approach is summarised by Eichelbaum J. in Monsanto Company v Stauffer Chemical Company [1984] FSR 599 at 571:

“Further, and without wishing to detract from the proposition that equitable relief needs to be sought promptly, it is not sufficient for a defendant to show that the applicant has delayed unreasonably. It must be shown that because of that delay, it would be unreasonable to grant the remedy; that it has become practically unjust to do so. As Megarry J. said in: Legg v. Inner London Education Authority [1972] 1 W.L.R. 1245:

‘What seems to me important is not so much the length of the delay per se, but whether the delay has in some ways made it unjust to grant the injunction claimed.’ (pp. 1259-1260).

And see Lindsay Petroleum Co. v. Hurd (1874) L.R. 5 P.C. 221, 240 and Spry, Equitable Remedies, 2^nd Ed., pp. 405, 454 – 455.”

25.  I do not think that because of the delay in bringing this application it would be unreasonable or unjust to grant the order sought by the Petitioners.

Fortification of the undertaking in damages

26.  The Petitioners offer the normal undertaking as to damages in addition to the other undertakings that I have already mentioned.  The 1^st to 4^th Respondents complain that in the case of the 1^st Petitioner this is worth little because even on his own evidence he has little assets and in fact still owes approximately HK$7,000,000 to the Company.  However, this application is made by both Petitioners and given the fact that between them they own almost 50% of the Company I see no real risk of them not being able to settle any order the Court may make if it is subsequently found that the injunction should not have been granted.

Order

27.  I will make an order in the terms of paragraphs 1 to 5 of the summons dated 24 March and an order that the costs of this application be the Petitioners’ costs in the cause.

28.  I also give the parties general liberty to apply.