Re Shanghai Tai Pan Food Manufacture Co. Ltd.

HCCW 832/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 832 OF 1999

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REASONS FOR JUDGMENT

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1. This is a Petition to wind up a company known as Shanghai Tai Pan Food Manufacture Company Limited (上海大班食品有限公司). The Petitioner is a company called Tai Pan (China) Limited which is itself a wholly owned subsidiary of a company called Vast Luck Company Limited. Vast Luck Company Limited is also the parent company of Tai Pan Bread and Cakes Company Limited which owns the system for the conducting of the business of bakeries and retailers of food products (called Tai Pan Bakeries) which comprise, amongst other things, features such as the words "Tai Pan" registered as trade marks, a logo including the words "Tai Pan" 大班 (the logo), an original design, signage and unique decoration of bakeries and shops, and unique recipes and baking procedures for bakery products using standard ingredients and quality control ("System").

2. In April 1993, there was a preliminary agreement reached between Tai Pan Bread and Cakes and a company by the name of Cambergs Limited, which is a Hong Kong private company controlled by a Mr Lei Meng San, his wife Madam Hua Bei Ling and Madam Hua's brother, Mr Hua Bai Wei. As a result of the preliminary agreement, the Company was incorporated in May 1993. The day following the incorporation of the Company, a joint venture agreement (later superceded) was signed. In July 1993, Tai Pan Bread and Cakes granted a licence to Tai Pan (China) i.e. the Petitioner, for the use of the System on the Mainland.

3. On 30 July 1993, a joint venture agreement was entered into between Cambergs of the one part and the Petitioner of the other part. The joint venture was such that Cambergs owned 75% of the shares of the Company and the Petitioner owned 25% of the Company. The joint venture agreement was to the effect, briefly, that the Company would operate Tai Pan Bakeries in Shanghai under the trade name in accordance with the System under a franchise to be given to the Company by the Petitioner. On the same day as the joint venture agreement, a franchise agreement was granted by the Petitioner as franchisor to the Company as franchisee. This franchise was intended to be effective until 2008.

4. I would note that it was a condition of the joint venture agreement that the Company was bound to operate according to the franchise given by the Petitioner to the Company. However, it would appear that very soon after the joint venture agreement was signed and operations started in Shanghai, it was discovered that matters were not being implemented by Cambergs in the way that had been envisaged. I shall deal later with the various ways in which the franchise had been breached and the effect of that on the relationship between the Petitioner and Cambergs as joint venturers for the set up and operation of the Company.

5. The effect of the deterioration in the relationship between the parties was that in May 1997, the franchise was terminated by the Petitioner. Thereafter the parties continued as shareholders of the Company with the Petitioner asking for access to accounts. These were not provided by Cambergs and eventually the Petition in this case was presented in September 1999.

6. Cambergs gave Notice of Intention to appear to oppose the Petition. Its position was that the Company should be wound up, but it disputed the grounds alleged in the Petition.

7. However, shortly before the hearing of the Petition, solicitors acting for Cambergs ceased to act for it. No new legal representatives were appointed by Cambergs. At the hearing of the Petition, Cambergs did not appear. An order had been made on 21 January 2000 that all affidavits stand as evidence in chief and all deponents attend for part-examination failing which their evidence may be excluded. In view of that, since there was no one seeking to cross-examine the deponents of the affidavits filed on behalf of the Petitioner, I proceeded with the hearing of the Petition on the basis that those evidence were evidence in chief and counsel for the Petitioner then took me through the documentary evidence. At the end of court sitting hours for the day, I gave an order in terms of paragraphs 1 and 4 of the Petition. In view of the time, I indicated that I would reduce the reasons for my judgment into writing and would hand them down in due course which I do now.

8. The first issue is whether the Petitioner has satisfied me that this was a quasi-partnership so as to enable the Petitioner to seek a winding up on the ground that the affairs of the Company are being conducted in a manner unfairly prejudicial to the Petitioner. The Petitioner has alleged that by reasons of the matters set out in the petition and which will be set out later in this judgment, it has lost all trust and confidence in Cambergs Limited and its shareholders and directors and in their willingness to conduct the affairs of the Company in accordance with the joint venture agreement and franchise agreement.

9. It is clear that although a joint venture agreement indicates expressly that the joint venturers are not entering into a partnership, that does not bar the court from winding up a joint venture company on the basis that it had been a quasi-partnership. In re A Company (No. 003028 of 1987) [1988] BCLC 282 at 295, Scott J (as he then was) held:

"A joint venture is not ....... precluded from applying to wind up a company on the just and equitable ground simply because in the legal agreement between himself and his co-venturers, partnership is expressly excluded.

That may well be a feature, and perhaps an important feature, that the court must take into account in coming to a decision; but it does not bar the making of a winding-up order if the underlying facts of the case taken as a whole justify the conclusion that it would be just and equitable to wind up the company."

From the matters set out in the joint venture agreement and the intended operation of the Company, I was satisfied that the Petitioner did have grounds in this case to present the Petition on the just and equitable ground and to have the Company wound up on the ground that it has been unfairly prejudiced by the acts of Cambergs and the directors representing Cambergs in the Company.

10. I now deal with the various features of the joint venture agreement and the franchise agreement. First of all, it is clear from the joint venture agreement at clause 4.18 that the Petitioner and Cambergs had agreed that the Company would itself be operating the System in Shanghai whether by itself or as the parent of a subsidiary to be wholly owned by the Company. Thus it was a term of the joint venture agreement that each of the shareholders of the Company shall take or cause to be taken various steps including the subscription by the Company of 100% of the share capital of a company registered in Shanghai under whose name the Company shall operate the business.

11. Notwithstanding that agreement, on 21 May 1993 that is to say after the Company was incorporated and the first joint venture agreement signed, Cambergs entered into a Sino-Foreign joint venture agreement with a PRC company by the name of Kit May Food Company (in Chinese 上海市盧灣區洁美糧油食品廠) to form a company in Shanghai by the name of 上海大班食品有限公司. It would be noted that the Chinese name of this company is identical with that of the Company. In respect of this Sino-Foreign joint venture agreement, Cambergs had registered itself as the 100% foreign investor. Therefore as far as the Chinese party and the Chinese authorities were concerned, neither the Petitioner nor the Company had any share whatsoever in this Sino-Foreign joint venture company.

12. In late 1993, Tai Pan (China) discovered that the Company was not the owner of Shanghai Daban Food Company Limited （上海大班食品有限公司）. When the Petitioner confronted Cambergs with this fact, Cambergs at first said that this was only a preliminary step and that it would proceed to procure that Cambergs would be replaced by the Company. However, time passed without that being done. In April 1995 a representative of Cambergs told representatives of the Petitioner that it was not possible to replace Cambergs with the Company, and Cambergs agreed to find an alternative method to recognise the Petitioner's interest in the Shanghai company. Eventually in May 1995, a certificate was signed by a representative of Shanghai Daban Company and Cambergs acknowledging that the Company was the 100% beneficial shareholder of Shanghai Daban and that the Petitioner was itself a 25% shareholder of the Company.

13. However, notwithstanding this written acknowledgment by Cambergs of the Petitioner's indirect interest in Shanghai Daban Company, Cambergs subsequently sought to deny the effect of that certificate. In November 1997, after the Petitioner had sought to inspect the accounts of Shanghai Daban, Shanghai Daban wrote to the Petitioner saying that the Petitioner has no interest in it (Shanghai Daban). It was said that the certificate had been signed as a result of a mistake. It is not clear what that mistake is said to be in light of the clear terms of the joint venture agreement.

14. It would therefore appear to be clear that this repudiation of the Petitioner's interest in the Shanghai company was due to Cambergs' reluctance to enable the Petitioner to have access to the Shanghai company's books in order to find out the financial situation of the Shanghai company. In my view, that in itself would be a sufficient ground on which to wind up the Company, as the denial of the interest of the Petitioner through the Company in the Shanghai company is such a blatant breach of the joint venture agreement as to justifiably cause the Petitioner to lose all confidence in Cambergs, its co-venturer.

15. As indicated previously, the joint venture agreement was pegged to the franchise agreement. The joint venture agreement contains clear terms to the effect that the shareholders shall exercise all powers of control available to them in relation to the Company so as to procure that neither the Company nor any subsidiary of the Company shall, without the prior written consent of all the shareholders, fail to observe or perform any of the provisions of the franchise agreement on the part of the Company to be observed or performed. Clause 21.1.3 of the joint venture agreement also provided that the agreement shall continue until the date of the termination of the franchise agreement for any reason. Therefore, it is clear that it was imperative to the continuation of the joint venture that the Company should continue to comply with the franchise agreement.

16. However, it is clear that soon after the start of operations on the Mainland that Cambergs operated the Company in such a way as to breach the franchise agreement. First of all, the franchise agreement is clear that the Company shall not operate the bakeries which is licensed to operate from any location other than the location previously approved in writing for that purpose by the Petitioner. The System was to be unique in that at Clause 5(j) of the franchise agreement, it was the Company's obligation to use every reasonable means in the conduct of the bakeries to encourage the use of the System and to cooperate in promoting and developing the recognition of the System. It was also the Company's obligation under Clause 5(u) not to use or claim any right to the System, the trade marks, symbols or advertising owned or licensed by the Petitioner or to commit any acts which may adversely affect or be detrimental to the Petitioner as franchisor or the trade mark or System. Clause 5(v) of the franchise agreement also provided that the Company should use and limit use of the System solely in the connection with its business as franchisee. Clause 5(x) of the franchise agreement also provided that the Company should not use the trade name except in conjunction with the bakeries to be operated under the joint venture agreement. It was clear that the Company would not be permitted to even sell goods outside Shanghai without the prior written approval of the Petitioner.

17. However, in clear breach of these provisions in the franchise agreement, in April 1996 it was discovered by the Petitioner that the same name and packaging as Tai Pan was being operated from Wuxi. It was discovered by the Petitioner that Cambergs was involved in the setting up of this bakery in Wuxi. The Petitioner's representative warned Cambergs' representatives against this breach of the franchise agreement and Cambergs apparently sought to explain this by reference to the fact that business was difficult. It would appear that the Wuxi bakery sold leftover goods remaining from the Shanghai operations.

18. It is clear that Cambergs' representatives knew that this was in breach of the franchise agreement. On 15 April 1996 there was a fax from Mr Hua to the Petitioner asking for permission to sell goods to Wuxi. On 22 April 1996 the Petitioner gave conditional approval for this, the conditions being that the goods sold must be fresh goods and not stale materials, and that the Wuxi bakery should not use the System. It is obvious that these were reasonable conditions as they sought to maintain the reputation of the Tai Pan System. However, on 25 April 1996, Cambergs' representatives responded to the effect that it could not fulfill the conditions sought by the Petitioner. This being the case, on 10 May 1996 the Petitioner's representatives issued a notice to the staff of Shanghai Daban informing them that there was no authority for the operation of the Wuxi bakery. However, this notice was withdrawn by Cambergs' representatives. In my view, this is a blatant breach of the franchise agreement, and with it the joint venture agreement.

19. In October 1996, there was a meeting between the representatives of Cambergs and of the Petitioner, at which Cambergs' representatives said that they were selling goods to Wuxi through a company called Jing Wai because the Petitioner would not agree to Cambergs' method of operating the Wuxi bakery as stated above. It would appear that Jing Wai was a PRC company with which Cambergs had a close relationship. Subsequently, what Cambergs actually did was to, in effect, franchise outlets which were operated by Jing Wai at locations within Shanghai which had not been approved by the Petitioner. When the representatives of the Petitioner sought to confront Cambergs' representatives with this at a meeting on 25 April 1997 in Shanghai, Cambergs' representatives simply said that they would be "responsible" and, if necessary, they would bear financial responsibility by charging their shares in the Company. When asked by the Petitioner's representatives why it was that in effect the Tai Pan Bakeries were being franchised to Jing Wai, the only excuse that was given by the Cambergs' representatives was that Jing Wai's outlets were "not identical" to the Company's bakeries. However, when asked how they were different, he did not say and simply asked the Petitioner's representatives to see for themselves. I have looked at photographs taken of these other outlets and they would appear to be certainly very close imitations of the Company's bakeries.

20. All these led to the termination of the franchise by the Petitioner. Under Clause 9(b) of the franchise agreement, it was provided that if a breach was not capable of remedy, then simply a notice of termination could be given. If, however, the breach were capable of remedy, then what the Petitioner was to do was to give notice to remedy that breach, and if it were not remedied within 30 days of the notice, the agreement could be terminated under Clause 9(c).

21. In the present case, the Petitioner terminated the franchise under Clause 9(b). In my view, that was justified because the breaches of the franchise agreement referred to above were so fundamental and so blatant as to be incapable of remedy. In any event, even if under Clause 9(c), 30 days' notice should have been given, it would appear that nothing had been done in any event by Cambergs to remedy the Company's breach of the franchise agreement. Indeed even after the termination, the Tai Pan logo and name carried on being used until September 1997 when the authorities ordered them to be removed.

22. Further to the above, as I have stated, the Petitioner sought to inspect the accounts of Shanghai Daban which it had been doing regularly until after the termination of the franchise. Thereafter its requests to have inspection of the accounts were met with complete refusal. Two requests were made by the Petitioner in July 1998 which were delayed by Cambergs. In November 1998, there was a third request which was again put off with excuses. In April 1999, there was still no access to Shanghai Daban's books which led ultimately to the presentation of this Petition.

23. I take the view, in light of the clear breaches by Cambergs of the joint venture agreement as set out above, that it would only be just and equitable for the court to wind up the Company. In the Petition, there are also references to a number of other matters which Cambergs had done or had caused the Company to do, such as the suspected use of the Tai Pan logo after the termination of the franchise, the use of the words "Tai Pan" as part of a restaurant, the loan by the Shanghai Company of funds to the restaurant apparently without any commercial benefit to the Company and possibly, the making of secret profits by the sale by Shanghai Daban of goods to Jing Wai with the goods being resold to the Company at a mark-up.

24. I do not need to deal with these less serious features of the joint venture agreement because, in my view, the operating of the Wuxi and other bakeries in clear breach of the franchise agreement and joint venture agreement would be such as to entitle the Petitioner to consider that it had been unfairly prejudiced by Cambergs' act.

25. In the circumstances, I ordered the Company to be wound up and I made an order that Cambergs pay the costs of and occasioned by this Petition.