ELECTRONIC CONTROL TECHNOLOGY LTD v. COBO ASIA LTD AND ANOTHER

HCMP 362/2021, HCA 835/2022,

HCA 1524/2022, HCA 87 & 908/2022

[2026] HKCFI 2696

HCMP 362/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 362 OF 2021

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AND

HCA 835/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 835 OF 2022

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AND

HCA 1524/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1524 OF 2022

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AND

HCA 87 & 908/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 89 AND 908 OF 2022

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J U D G M E N T

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1.  There are before the court 5 proceedings which concern Cobo Asia Ltd (“Company”):

(1)     The petition in HCMP 362/2021 (“UP Proceedings”) presented by Electronic Control Technology Limited (“ECT”) on 17 March 2021[1] seeking relief under ss.724 and 725 of the Companies Ordinance (Cap.622) against the majority shareholder, COBO S.p.A. (“Cobo SPA”).

(2)     A common law derivative action in HCA 1524/2022 (“Derivative Action”) brought by ECT on 9 November 2022 on behalf of the Company against Mr Wolfango Cozzi (“Cozzi”), Mr Enrico Linetti (“Linetti”), Mr Alessandro Lamantia (“Lamantia”) and Cobo SPA (collectively “Majority Camp”) seeking account of profit, equitable compensation or damages as a result of the implementation of the “2020 Board Meeting” (as defined in §34 below) and diversion of business[2].

(3)     An action in HCA 835/2022 (“HCA Action”) brought by the Company and Cobo SPA on 7 July 2022 against ECT and Mr. Liang Tianxiang[3] (梁天翔) (“Liang”) seeking equitable compensation or account of profit for diversion of business and carrying on competing business[4]; and

(4)     An action in HCA 87/2022 brought by the Company against Liang on 20 December 2022 for repayment of various sums paid to Liang without proper authority and in breach of duties as employee[5].  Another action in HCA 908/2022 brought by Liang against the Company on 20 March 2022 for payment of various sums following termination of the Labour Contract (as defined below) on 29 January 2021[6]. The 2 actions have since 29 August 2022 been consolidated with the Company as plaintiff and Liang as defendant (together “Labour Actions”). 

A.     BACKGROUND FACTS

2.  Save where otherwise stated, the following facts are not in dispute or are indisputable.

A1.    Parties

3.  Liang holds a master degree in engineering science in electrical and electronic engineering from the University of New South Wales.  By 2005, he had 20 years’ experience in industrial controls and automation in particular, in crane and lifting applications, having worked as a regional manager at GE Industrial Systems (in USA) on port and lifting machinery, and a partner in Portek Singapore (a listed company).  Liang established his own business in Hong Kong, Guangzhou, Chengdu and Tianjin in the same industry in 2001 during which he came to know the founders of “3B6 Italy” (defined below), who also wanted to develop machinery manufacturing market in port and lifting industry in Mainland China[7].

4.  ECT:

(1)     was incorporated under the former Companies Ordinance (Cap. 32) on 31 March 2003[8], with Liang and his wife, Ms Hu Grace Feng Yi (“Grace”), as its only shareholders and directors[9];

(2)     carries on business in providing industrial automation solutions including design and supply of control systems for port cranes, lifting machines and aerial working platforms[10]; and

(3)     has always been represented by Liang.  There is no dispute that Liang has authority to act on behalf of ECT and his knowledge can be attributed to, and his actions bind, ECT.

5.  Cobo SPA is a private company incorporated in Italy and is the parent company of Cobo Group founded in 1949 in Brescia, Italy[11]. Cobo SPA develops, manufactures and sells systems, hardware and software components for automotive and off-highway vehicle sectors, and has subsidiaries across the world with factories in numerous countries and a worldwide distribution network[12].

6.  Amongst the Majority Camp:

(1)     Cozzi and Linetti are executive directors and shareholders of Cobo SPA[13].

(2)     Although Cobo SPA has other directors and shareholders, there is no dispute that Cozzi and Linetti (and each of them) have authority to act on behalf of Cobo SPA and their knowledge and actions bind Cobo SPA.   

7.  The Company:

(1)     was incorporated under the former Companies Ordinance (Cap. 32) on 25 August 2005[14];

(2)     had issued share capital of HK$1,000,000[15] until 2015 when it was increased to HK$12,200,000[16] as part of the 2014 Restructuring (defined below);

(3)     was the joint venture vehicle between “3B6 Italy” (defined in §9 below) and ECT, which held 66% (through a vehicle) and 34% respectively;

(4)     had ECT and Cobo SPA as its only shareholders from November 2006 until 8 March 2014 after Cobo SPA acquired 3B6 Italy’s 66% shareholding; and

(5)     has since 8 March 2014 been owned by ECT and Cobo SPA as to 40% and 60% respectively[17]. 

8.  The following entities established in the Mainland are affiliated with Liang or his extended family[18]:

(1)     “GZ Econ”: Guangzhou Econ Automation Engineering Co. Ltd(广州市易控自动化工程有限公司) established on 9 September 2009.  Its founder is Ms Liang Wanhong (梁万紅), Liang’s sister (“WH Liang”), who holds 70% of its equity.  Liang was its executive director and legal representative.

(2)     “GZ Aoxiang”: Guangzhou AoxiangIOT Technology Co., Limited / Guangzhou Harbour Cross Technology Co. Ltd(广州傲翔物联科技有限公司)[19] established on 30 November 2020.  Its equity is held by Mr Liang Zewei Thomas (梁澤維) (“Thomas”), the son of Liang and Grace as to 40%, and Ms Chen Yongyi (陈咏仪) (“YY Chen”), the daughter of WH Liang.  Thomas was its legal representative, executive director and manager while YY Chen was its supervisor.

(3)     “Hunan Aoxiang”: Hunan Aoxiang IOT Technology Co. Ltd (湖南傲翔智能科技有限公司) established on 24 March 2021.  YY Chen holds 25% of its equity and was its supervisor. 

(4)     “Horner”: Horner Automation (Tianjin) Co Ltd (浩纳尔（天津）自动化科技有限公司) established on 23 August 2006.  ECT holds 27% of its equity and has been its director, Chairman of the board and legal representative, without any remuneration.

A2.    Inception of Company

9.  Between 1997 and 2005, Liang was a shareholder and director of Portek Singapore during which he actively participated in its harbour and mobile crane business.  It was during this tenure that he came to know the founders of 3B6 Sistemi Elettronici Industriali S.p.A., a company incorporated in Italy (“3B6 Italy”).[20]

10.  In 2003, Liang and Grace founded ECT which engaged in provision of industrial automation solutions, focusing on the design and supply of control systems for port cranes and various lifting machines.

11.  Shortly after its formation, ECT began a collaborative relationship with 3B6 Italy, which enabled ECT to broaden its control systems business to encompass mobile machinery, with particular emphasis on aerial working platforms and mobile cranes.[21]

12.  The collaboration between ECT and 3B6 Italy resulted in the incorporation of the Company on 25 August 2005 which was effectively their joint venture vehicle in that:

(1)     From its incorporation to 2006, the Company’s shares were held by ECT and Technocore SA (a vehicle of 3B6 Italy) as to 34% and 66% respectively[22];

(2)     ECT and Technocore SA were appointed as the first directors of the Company[23].  They resigned on 25 July 2006 when Mr Alessandro Bertola[24], Mr Carlo Linetti and Liang were appointed as directors[25]; and

(3)     Until 2014, the Company (through Cobo GZ) carried on business of assembling and distributing 3B6 brand of electronic control systems[26] and installation and maintenance of port cranes and lifting machines[27].

13.  Until 29 January 2021, Liang was part of the Company’s senior management and was involved in its decision-making process in that:[28]

(1)     Liang was as a director of the Company from 25 July 2006 to 29 January 2021;

(2)     Liang was appointed as the Company’s managing director from 25 August 2005 to 3 July 2014 and its general manager (“GM”) from 4 July 2014 to 29 January 2021 during which his responsibility in managing the Company’s operations remained substantially the same[29];

(3)     Liang was the sole authorised signatory of the Company’s bank account from 2005 until May 2020, and one of the 3 authorised bank signatories (together with Cozzi and Linetti) until February 2021[30].

14.  Both ECT and 3B6 Italy were key to the Company’s business and operations.  Whilst ECT contributed its market know-how, application engineering, and its established sales and service network in the Mainland and other Asian countries, 3B6 Italy provided its know-how in European lifting safety standards and the manufacturing of control and sensor products.[31]

15.  On 1 September 2005, the Company entered into an exclusive Distributor Agreement with 3B6 Italy.  This gave the Company exclusive rights to market, sell, distribute and integrate the whole range of products manufactured by 3B6 Italy with its own electrical control or automation systems in the Asia Pacific region excluding Australia, New Zealand, India and Japan.[32]

16.  Prior to 2006, the Company’s principal business (which was Liang’s expertise) was installation and maintenance of port cranes and lifting machines, which was the specialised business of 3B6 Italy[33].

17.  On 13 January 2006, Cobo (Guangzhou) Electronic Systems and Components Co Ltd (广州蔻博电子系统及元器件有限公司) (“Cobo GZ”) was established with ECT holding 45% and 3B6 Italy holding 55% of its equity[34].

(1)     The Company and Cobo GZ together became the vehicles through which the products of 3B6 Italy (and later Cobo SPA) were distributed in Mainland China, with Cobo GZ served as a system integrator for the design, development, and assembly of 3B6 Italy’s control systems within the Mainland. 

(2)     In the words of Cozzi, Cobo GZ’s main purpose was to provide local installation and after-sales assistance to customers on the ground in the Mainland.[35]

(3)     Liang was responsible for Cobo GZ’s overall management and day-to-day operations until early 2021.  He was Cobo GZ’s GM and director from 13 January 2006 to 29 January 2021, its legal representative from 13 January 2006 to 10 February 2021 and sole authorised bank signatory from 2006 until 11 March 2021[36]. 

A3.    Cobo SPA’s acquisition of 3B6 Italy

18.  In July 2006, Cobo SPA acquired 3B6 Italy.  The purpose of the acquisition was to acquire 3B6 Italy’s expertise in the business of cranes and lifting machines.[37]At that time:

(1)     Cobo Group’s primary focus was manufacturing electrical components and software products for automotive and off-highway vehicle sectors.  The acquisition of 3B6 Italy allowed Cobo Group to expand into production of electronic integrated system solutions, which was a new product line for Cobo Group. 

(2)     Cobo SPA had been selling and distributing Cobo Group’s products through an importer and agent based in Beijing, Beijing Engineering Technology Co. (“BETC”)[38].

19.  Notwithstanding the acquisition:

(1)     It was only on 3 November 2006 that Technocore SA’s 66% shareholding in the Company was transferred to Cobo SPA[39].

(2)     On 17 November 2008, that the Company changed to its current name (Cobo Asia Ltd), to reflect the takeover.[40]

(3)     There was little change in the Company’s business and operations.  The Company mainly continued with its previous business of installing and maintaining port cranes and lifting machines.  It also started to carry out a few additional business, essentially trading in 3B6 brand of electronic control systems[41]. 

(4)     Cobo SPA continued with the distribution, installation and sale of Cobo Group’s other products in the Mainland through BETC[42]. 

A4.    2014 Restructuring

20.  In 2014, both Liang and Cobo SPA wanted to restructure the Company and Cobo GZ:

(1)     Cobo SPA wanted to achieve direct marketing and selling of Cobo Group’s products and services by providing an integrated and streamlined solution to its customers in the Mainland.[43]  In the words of Cozzi, Cobo SPA wanted to turn the Company/Cobo GZ into a part of Cobo Group’s “Whole Integrated System” business model to satisfy the customers and enhance its presence in the Mainland market[44].

(2)     ECT/Liang regarded Cobo SPA’s proposed restructuring as an effort to expand the Company’s business to industrial vehicles in particular agricultural automotive sector, which was one of Cobo SPA’s main line of products. 

(3)     Liang also considered that the Company needed to raise additional working capital to finance Gobo GZ’s development of products for use in the next generation of scissor control system (a new line of products) which Dingli (a major customer of Cobo GZ since 2007) had started developing since 2013.  By 31 December 2014, the Company had advanced HK$8.8 million to Cobo GZ for such purpose.[45]

21.  The proposed restructuring involved interposing the Company between Cobo SPA and Cobo GZ so as to bring about the following benefits[46]:

(1)     The Company would distribute Cobo SPA’s full range of products as components and re-sell them to Cobo GZ for use in manufacturing and/or integration as a total system solution for its customers in the Mainland[47].

(2)     The Company and Cobo GZ would capture the fast growing safety control system market comprising “scissor control system” and “boom lift control system” for lifting machines in particular, the opportunity to supply components for Dingli’s next generation of scissor control system[48].

(3)     The Company would act as Cobo Group’s main trading entity, reducing the final cost of products sold in the Mainland. As a Hong Kong company, it could access trade financing more flexibly and without subject to any foreign currency controls.  Retaining the trading profits in Hong Kong would reduce overall tax liabilities[49].

(4)     The restructuring would create synergy with the Company’s Southeast Asian trading activities, which generated about 5% of its revenue.[50]

(5)     BETC would continue to handle import and distribution of simple, traditional components produced by Cobo Group. 

22.  The parties entered into discussions and negotiations during the period between March 2014 and September 2014, with Lamantia acting as spokesperson for Cobo SPA and Liang representing ECT[51]. During this period, the parties entered into a series of agreements (collectively “2014 Agreements”) to govern their rights and obligations:

(1)     A Letter of Intent dated March 2014 between Cobo SPA and ECT setting out the framework for the restructuring (“LOI”) which provides inter alia (a) a new governance structure involving a board of directors consisting of 3 to 5 members and for the first 2 years, 2 members would be nominated by Cobo SPA and one by ECT; (b) Liang would be appointed as GM and legal representative of both the Company and Cobo GZ for the first 3 years;

(2)     A Labour Contract dated 4 July 2014[52] between Liang and the Company (“Labour Contract”) which provides inter alia (a) appointment of Liang as GM on a full time basis for 3 years subject to renewal by the board; (b) annual salary including a variable compensation amount (“Variable Pay”) and entitlement to paid leave; (c) Liang will not personally or through any company directly or indirectly engage in any business in competition or in conflict with the Company, Cobo SPA or any company controlled or invested by Cobo SPA (together “Cobo SPA Parties”) during and within 2 years after his employment;

(3)     A Labour Contract dated 4 July 2014 between Liang and Cobo GZ (“GZ Labour Contract”);

(4)     A Non-Competition, Non-Solicitation and Confidentiality Agreement between Cobo SPA and ECT (signed by ECT on 4 July 2014 and Cobo SPA on 4 August 2014) (“NCA”) which provides inter alia that during the period when ECT remains a shareholder of the Company and an indirect shareholder of Cobo GZ and up to 2 years after ECT ceases to be such shareholder (“Term”) ECT shall not within Hong Kong and Mainland China (a) engage in the same or similar business of Cobo SPA Parties; (b) divulge any confidential information regarding Cobo SPA Parties; and (c) solicit or entice away from Cobo SPA Parties any staff or adviser;

(5)     Two sales agreements namely, (a) Cobo GZ Sales Agreement between Cobo GZ and Cobo SPA (signed by Cobo GZ on 4 July 2014 and Cobo SPA on 8 August 2014) ; and (b) Cobo Asia Sales Agreement between the Company and Cobo SPA signed on 3 September 2014 (collectively “Sales Agreement”);

(6)     Two trademark licensing agreements namely, (a) Cobo GZ Trademark Agreement between Cobo GZ (signed on 4 July 2014) and Cobo SPA (signed on 4 August 2014); and (b) Cobo Asia Trademark Agreement between the Company and Cobo SPA (signed on 3 September 2014)

(7)     Two know-how and technology agreements namely, (a)  Cobo GZ Know-how Agreement between Cobo GZ (signed on 4 July 2014) and Cobo SPA (signed on 4 August 2014); and (b) Cobo Asia Know-how Agreement between the Company and Cobo SPA (signed on 3 September 2014)

(8)     A Shareholders Agreement between Cobo SPA and ECT signed on 8 September 2014 (“SHA”), which supersedes and prevails over any previous agreement or articles of association; and

(9)     A Conclusive Agreement between Cobo SPA, ECT and Liang signed on 8 September 2014 (“CA”).

23.  In the LOI and the NCA, ECT made the following disclosures to Cobo SPA:

(1)     LOI: (a) ECT is an investor in Horner, which core business is PLC and OEM controllers for industrial automation; (b) Liang is an investor of GZ Econ, which core business is distribution of industrial automation products (cl. 7); and

(2)     NCA: (a) ECT is a 25% shareholder and Liang is a non-salary director and legal representative of Horner, which core business in PLC and OEM controller for industrial automation; (b) Horner APG Asia Ltd, a holding company of Horner and 100% held by Horner APG LLC in USA, of which Liang is a non-salary, non-executive director; and (c) GZ Econ which core business is inverter and its system integration for industrial automation, of which Liang is a non-salary legal representative (cl. 5).

24.  To implement the 2014 Agreements, the following changes were made to the Company and Cobo GZ (collectively “2014 Restructuring”):

(1)     On 8 March 2014, Cobo SPA’s shareholding in the Company was reduced from 66% to 60% while ECT’s shareholding was increased from 34% to 40%^[53]. 

(2)     On 4 July 2014, Liang was employed as GM of the Company for a fixed term of 3 years, which is renewable subject to approval of the board[54].

(3)     Also on 4 July 2014, Liang was employed as GM of Cobo GZ, which is renewable subject to approval of the board[55].

(4)     On 25 August 2014, Mr Carlo Linetti resigned as director of the Company, and Cozzi and Linetti were appointed as directors^[56]. This was done pursuant to art. 9.2 of the SHA, which sets out the term and composition of the first board of directors of the Company[57].

(5)     On 14 October 2014, the Company’s Articles of Association (“Articles”) were amended pursuant to a special resolution passed by the Company on that date[58].

(6)     On 12 May 2015, Cobo GZ became a wholly owned subsidiary of the Company^[59]. On the same day, Cozzi and Linetti were appointed as directors of Cobo GZ and Liang remained a director^[60].

25.  From 25 August 2014 and until 29 January 2021, the Company was  managed by 3 directors, being Cozzi, Linetti and Liang.  Liang was the GM of the Company and Cobo GZ, responsible for their day-to-day management and operations[61]. Cozzi and Linetti had always been based in Italy, while Liang was the only director on the ground, and he split his time between managing the operations of the Company in Hong Kong and those of Cobo GZ in the Mainland. 

A5.    Mode of operations post-2014 Restructuring  

26.  Since the 2014 Restructuring and until the 2020 Board Meeting, the Company’s main business was to purchase from Cobo SPA electronic components and controllers and sell them to Cobo GZ and earned the profit margin on the sales.  The modus operandi of the business of the Company and Cobo GZ was as follows[62]:

(1)     When Cobo GZ received an order from its customers for electronic components, it would issue a purchase order to the Company for those components;

(2)     The Company would place a purchase order for the same components with Cobo SPA;

(3)     Cobo SPA would ship the components to the Company, which would then deliver them to Cobo GZ’s warehouse;

(4)     Cobo GZ would use the components to manufacture an integrated system for its customers or sell the components to the customers directly; and

(5)     Over 95% of the Company’s revenue came from sales to Cobo GZ[63].

27.  Cobo GZ rented a premises in Guangzhou and used it as a factory to keep all the components, equipment and facilities required for assembling integrated systems for its customers (“Premises”). The landlord of the Premises was Guangzhou Guangying Property Management Co Ltd (广州市广鹰物业管理有限公司) (“Landlord”).

A6.    Significant growth from 2016 to 2020

28.  It is not in dispute that during Liang’s tenure as GM, the Company and Cobo GZ achieved significant growth in their revenue in that:

(1)     Between 2016 and 2020, the consolidated revenue of the Company and Cobo GZ grew between 21% and 58%.  In 2020 alone, the consolidated EBITDA of the Company and Cobo GZ increased by 140.5%[64].

(2)     In 2012, the Company declared and paid dividend in the total amount of HK$3 million to the shareholders[65].

(3)     According to the audited financial statements of the Company (“AFS”) for the years ended 31 December 2014 (“2014 AFS”) to 2021 (“2021 AFS”)[66], the revenue and net profits of the Company were as follows:

Year ended	Revenue HK$	Gross Profit	Net Profit / (Loss) HK$
31/12/2014	8,575,290	1,994,524	(1,154,369)
31/12/2015	6,251,344	1,538,620	(1,625,395)
31/12/2016	33,675,715	6,132,710	2,266,415
31/12/2017	59,489,361	9,896,246	5,817,562
31/12/2018	62,704,185	9,935,352	3,541,933
31/12/2019	44,607,711	6,747,085	1,092,749
31/12/2020	48,894,955	6,441,734	90,638
31/12/2021	8,684,544	2,303,023	(77,260)

29.  The Company and Cobo GZ developed and expanded sales to a number of key customers in the Mainland which included:

(1)     “Dingli”: Zhejiang Dingli Machinery Co. Ltd (浙江鼎力机械股份有限公司), a producer of scissor lift and boom lift platform in the Mainland, which had since 2006 been purchasing 3B6 integrated systems for its then new line of engine-driven platform products[67];

(2)     “LGMG”: Lingong Group Heavy Machinery Co Ltd (临工集团济南重机有限公司) which had since November 2017 been a customer of Cobo GZ for purchase of 14m articulated boom lifts[68];

(3)     “Litian”: Changsha Litian Mechanical and Electrical Equipment Co Ltd (长沙利天机电设备有限公司), a dealer based in Changsha, Hunan Province, which had since the beginning of 2018 been purchasing boom lifts from Cobo GZ for supplying the same to Zoomlion (an existing customer of Cobo GZ) and other manufactures in Hunan Province[69];

(4)     “Sinoboom”: Hunan Sinoboom Intelligent Equipment Co., Ltd (湖南星邦智能装备股份有限公司), a customer of Cobo GZ; and

(5)     “XCMG”: XCMG Special Vehicles Co Ltd, a customer of Cobo GZ.

30.  The parties disagree on the reasons for the growth in the Company/Cobo GZ’s business:

(1)     ECT/Liang contends that the growth was attributable to Liang’s vast experience in industrial control and automation in particular in crane and lifting industry and his established sales and customer network in the Mainland[70].

(2)     The Majority Camp, on the other hand, contends that the growth was attributable to the products which were traded inter-company, as well as the manpower, resources, Mainland customers, financial support, transfer of production lines and technical know-how contributed by Cobo SPA to the Company[71].

31.  It is however not disputed that Cobo SPA made substantial contributions to the business and operations of the Company/Cobo GZ in that:

(1)     Between 2013-2019, Cobo SPA dispatched its staff on regular and periodical trips to the Company, Cobo GZ, as well as on-site to the major customer like Dingli to support the Company’s business.  Among the staff were Scapin and Mr Leslan Tu[72]. 

(2)     Cobo SPA hosted Cobo GZ’s staff for training programs at its headquarters in Italy[73].

(3)     Linetti and Cozzi provided technical and managerial know-how and engaged all departments to provide on-site and remote support.  The agreements with the major customers of Cobo GZ were negotiated and executed by them.  They were in regular contact and held formal meetings with Liang on a quarterly basis to discuss and adopt business and managerial decisions as appropriate[74].

(4)     Cobo SPA provided technical and managerial support to the Company including transferring production lines, software development and financial support.  Cobo SPA provided long-term payment plans and a high degree of flexibility to the Company for repayment of the products purchased from Cobo SPA[75].

(5)     Cobo SPA granted the Company and Cobo GZ the right to use Cobo trademarks under the 2014 Agreements.[76]

(6)     On 1 August 2019, Mr Stefano Scapin (“Scapin”), Cobo SPA’s Chief Business Development Officer for APAC, was seconded to the Company[77]. By letter dated 30 July 2019, the Company agreed to bear the cost of Scapin’s accommodation and his daughter’s education fees in Hong Kong, while his salary continued to be paid by Cobo SPA. 

A7.    Disagreements between parties

32.  It is ECT/Liang’s case that in May 2020, the Majority Camp began to push the Company/Cobo GZ to buy more components from Cobo SPA or other Italian members of the Cobo Group even though they cost more and took longer delivery time than sourcing from suppliers in the Mainland.  Liang considered that these demands only increased costs and delivery time when the customers had been demanding price cuts and faster shipments, and he repeatedly raised the concern with the Majority Camp.[78]

33.  It can be seen from the email sent  by Liang to Cozzi (copied to Linetti and Lamantia) that by 16 October 2020, the relationship between Liang and the Majority Camp had become strained inasmuch that Liang resorted to using strong language to refute Cozzi’s allegation that he had failed to perform his duty as GM and complained that Cobo SPA’s staff had been ignoring his requests for information regarding feasibility study or cost analysis on sourcing non-essential components and parts from Italy as compared to sourcing them from local suppliers[79].

A8.    2020 Board Meeting

34.  By email dated 14 October 2020 (Wednesday), Lamantia sent a notice of board meeting dated 13 October 2020 to be held on 21 October 2020 at 8:30pm Hong Kong time (2:30pm Italy time) to discuss the following matters (“2020 Board Notice”):

(1)     Supply chain from Cobo SPA and related decisions;

(2)     Integration of the organisation within Cobo Group;

(3)     New organisation chart and job descriptions;

(4)     Outsourcing services for administration and human resources departments;

(5)     Technical support guidelines from Cobo SPA;

(6)     Appoint company secretary;

(7)     Exclusive use of the office;

(8)     Exclusive commitment of the staff

(9)     Company car; and

(10)     Compensation adjustment of GM.

35.  By email sent to Cozzi, Linetti and Lamantia on 19 October 2020 (Monday), Liang (1) asked if detailed information on the agenda items would be sent to him before the meeting as many of them were not clear to him; and (2) requested the meeting to be held between 2-6pm Hong Kong time as it was inappropriate to hold the meeting after office-hours[80].

36.  The Majority Camp did not respond to Liang’s email and proceeded to hold the board meeting on 21 October 2020 which lasted for 15 minutes (from 2:53pm to 3:08pm, Italy time) (“2020 Board Meeting”) and was  attended by Cozzi and Linetti (as directors), Lamantia (as adviser to Cobo Group) and Liang was absent. 

37.  At the 2020 Board Meeting, 10 resolutions were considered and passed (collectively “2020 Board Resolutions”):[81]

(1)     Three specific lines of products viz., steering column kits, Display Canview4 and Traction Module (collectively “Family Products”) would be supplied, delivered and invoiced directly by Cobo SPA to Cobo GZ without passing through the Company; the selling prices of the Family Products would be set according to “transfer price international standards” (“Transfer Prices”), “such list of products can be further updated anytime, based on the market needs”; and the GM (Liang) was “requested to comply and execute accordingly from October 26, 2020” (“Resolution 1”);

(2)     Lamantia was appointed to supervise the integration process and he had all the power and authorities necessary to access any office or department as required to collect information and documents, and Liang was requested to comply and execute accordingly (“Resolution 2”);

(3)     The Company should adopt the new organisation chart (“Organisation Chart”) and job description whereby Scapin should be responsible (“Resolution 3”):

“to manage, co-ordinate and supervise the sales and back office team, visit Customers and potential Customers, review and negotiate terms and conditions of sales contracts with existing or new Customers reporting to the Chairman of the Company. In connection with the performance of his duties, he, and any other personals so designated by him, is granted all powers and authorities as required to access any Office or Department and to collect information and documents including, but not limited to, sales offers and sales contracts, from any relevant Office and Department of the Company”.

(4)     The Organization Chart showed that under the board:

(a)     Liang (as GM) would be in charge of (i) HR & administration carried on by Grace; and (ii) accounting carried on by Elaine Yueh, both of whom are part time staff;

(b)     Cozzi (as chairman) would be in charge of Sales & Marketing which was headed by Scapin and covered (i) back office carried on by Lee Bik Yee and (ii) sales / service engineer carried on by Au Wai Sum. 

(5)     Lamantia was appointed to search for qualified service providers for the purpose of outsourcing some functions such as administration, accounting, payroll for the board to select and decide on the appointment (“Resolution 4”);

(6)     Cobo SPA had implemented Technical Support Guidelines with daily and hourly rates on 1 January 2020 and would charge the Company for the Technical Support provided from 26 October 2020 (“Resolution 5”);

(7)     A new qualified professional company secretary, GOP Company Secretary Limited, was appointed as company secretary (“Resolution 6”);

(8)     Liang should confirm by 26 October 2020 whether (a) the office unit at One Island South, Wong Chuk Hang (“Office”) was leased to the Company as sole and exclusive tenant; (b) any other company was registered at the Office; (c) any other business was managed or conducted by any person or entity at the Office; and (d) any person other than the Company’s staff could have access to the Office (“Resolution 7”);

(9)     Liang should confirm by 26 October 2020 whether all staff employed by the Company were fully and exclusively committed to the Company on a full time basis; and whether any staff was requested to perform any activity for ECT or its shareholders or director (“Resolution 8”);

(10)     In addition to the car lease at the monthly cost of HK$15,083 for TJ5412 (“Car”), from 15 January 2020, the Company would only bear up to HK$2,000 for all other cost and expenses (“Resolution 9”); and

(11)     The compensation to Liang was adjusted by (a) cancelling the bonus, Variable Pay and any benefit to GM for year 2020; (b) reducing his annual salary from HK$500,000 to HK$450,000 with effect from 26 October 2020; and (c) reducing his annual housing allowance from HK$840,000 to HK$648,000 with effect from 26 October 2020 (“Resolution 10”).

38.  On 5 November 2020, ECT resigned as company secretary of the Company[82].

39.  The Majority Camp admits that from 26 October 2020 to 20 February 2021, Cobo SPA supplied the Family Products to Cobo GZ directly, albeit on “limited occasions” and “for minimal amounts”.[83]

A9.    2021 AGM

40.  On 29 January 2021, the annual general meeting of the Company (“2021 AGM”) was held which was attended by Cozzi as Chairman of the board, Linetti (representing Cobo SPA) and Liang (representing ECT) during which the following resolutions were passed[84]:

(1)     The audited financial statements for the year ended 31 December 2019 (“2019 AFS”) was approved unanimously[85];

(2)     Cozzi was re-elected as Chairman of the Board and a director, and Linetti was re-elected as director with no remuneration[86];

(3)     Liang was not re-elected as a director, and Lamantia was elected as director with no remuneration, to fill the vacancy[87];

(4)     As Liang’s term as GM had expired and the Labour Contract would be terminated, Lamantia was appointed as GM and he would be supported and assisted by a temporary manager, to be selected by the Board.  The remuneration and terms and conditions of the GM and temporary manager would be decided by the Board[88];

(5)     The appointment of GOP Secretaries Limited as company secretary in place of ECT was ratified[89]; and

(6)     Lehman, Lee & Xu (“LLX”) would prepare a draft amended articles of association of Cobo GZ which would be approved by the Board[90].

41.  At the 2021 AGM, Cozzi informed the members that on 28 January 2021, the “Supervisor” of Cobo GZ and “Adviser” of the Company (i.e. Lamantia) had delivered a report to the members.  As Cobo GZ was the “main asset” of the Company, the report was read at the meeting for members’ consideration[91].

42.  As a result of the resolutions passed at the 2021 AGM, Liang ceased to hold any executive role in the Company[92].

43.  On 30 January 2021, Lamantia replaced Liang as director and subsequently, as legal representative of Cobo GZ[93].

A10.     Events after 2021 AGM

44.  It is not in dispute that from 20 February 2021 until around 9 June 2022, there was a complete closure of the Premises during which Cobo GZ was unable to satisfy the production requests made by its customers[94]. The parties differ on the reason for the closure:

(1)     The Majority Camp says that the closure was attributed to the disruptive actions taken by Liang.

(2)     On the other hand, ECT/Liang says that the closure was the decision of the Landlord as it was uncertain about who had proper authority to act for Cobo GZ.

45.  On 17 February 2021, the handover of the Office was completed whereupon a handover list was signed by Liang, Mr Davide De Rosa (employee of new company secretary) (“De Rosa”) and Mr Massimiliano Martinello (“Martinello”) (temporary manager appointed by Lamantia).   

A11.     Direct sales of Additional Products to Cobo GZ’s customers

46.  It is ECT/Liang’s case that since March 2021, there has been further diversion of business from the Company/Cobo GZ to Cobo SPA:

(1)     In around March 2021, Cozzi, Linetti and Lamantia bypassed the Company/Cobo GZ by allowing Cobo SPA to sell and invoice components for aerial working platforms (boom lift and scissor lift components) (collectively “Additional Products”) directly to Cobo GZ’s customers including Dingli, LGMG and Litian[95], which accounted for 63.59%, 10.13% and 3.51% respectively of Cobo GZ’s sales revenue in 2020 or a combined revenue of 77.23%[96] (“Further Diversion of Business”).

(2)     The Majority Camp admits that after 20 February 2021, Cobo SPA sold and supplied the Family Products to Cobo GZ’s customers directly, which was later extended to the Additional Products (including steering column kits “SCK”) from March 2021.  Their case is that due to Liang’s disruptive actions, from 20 February 2021 onwards, Cobo GZ’s operations has been crippled and its representative (Lamantia) was unable to access the Premises where the components for fulfilling Litian’s orders were stored.[97]  Faced with the customers’ demands for supply in a timely manner and to mitigate and reduce the threats of customers claiming substantial damages against the Company and/or Cobo GZ, Cobo SPA had no choice but to directly fulfil the orders placed by the customers in the Mainland.  However, not all the orders could be satisfied which resulted in a significant and permanent loss of part of Cobo Group’s market share in the Mainland[98].

B.     ISSUES FOR DETERMINATION

47.  In the UP Proceedings, ECT contends that by reason of the following complaints, the affairs of the Company have been conducted by the Majority Camp in an unfairly prejudicial manner:

(1)     Exclusion from management: ECT/Liang have been excluded from management of the Company since (a) the 2020 Board Meeting and/or (b) the 2021 AGM when Liang’s appointment as director and GM came to an end[99].  This is said to be contrary to the Company being “founded upon the basis of a quasi-partnership and/or a relationship of trust and confidence” between ECT and Cobo SPA (“Quasi-partnership”) and the “Fundamental Understanding” between them (defined in §61 below), the latter is evidenced by the appointment of Liang as GM and director of the Company and Cobo GZ as well as the provisions of SHA and the Articles[100];

(2)     Diversion of business: Resolution 1 was passed by Cozzi and Linetti in breach of their fiduciary duties owed to the Company as they allowed Cobo SPA to sell the Family Products to Cobo GZ (which constituted 5.37% of the Company’s sales to Cobo GZ and gross profit of EUR 303,503.47 in 2020) and deprived the Company of the revenue and profits generated from such sales[101];

(3)     Unfair dealing through direct sales: Cobo SPA deprived the Company of a substantial part of its business by directly contacting and supplying its products to Cobo GZ’s major customers viz., Dingli, LGMG and Litian, which accounted for 77% of Cobo GZ’s revenue in 2020[102].  (This is the same complaint referred to as “Further Diversion of Business since March 2021” in the Derivative Action, see §48(1)(b), (2) below; and

(4)     Unfair dealing through price increases: In passing Resolution 1 thereby allowing Cobo SPA to increase the selling prices to the Company in accordance with the Transfer Prices without any sufficient justification, Cozzi and Linetti acted in breach of their fiduciary duties owed to the Company.  It is said that the Transfer Prices implemented on 11 November 2020 had the overall effect of increasing the Company’s cost by 35.7% (“11/11 List”) while the Transfer Prices implemented on 9 December 2020 increased the Company’s cost by 7.4% (“9/12 List”)[103].

48.  In the Derivative Action, ECT relies on substantially the same complaints about diversion of business and unfair dealings and seeks relief (on behalf of the Company) against the Majority Camp.  In summary, ECT alleges that:

(1)     Cozzi and Linetti breached their directors’ duties and misused Cobo SPA’s majority voting power (both at board and shareholder level) to further the interests of Cobo SPA to the detriment of the Company by:

(a)     passing Resolution 1 which had the effect of depriving the Company of the profits generated from selling the Family Products to Cobo GZ[104];

(b)     supplying SCK ordered by Litian to BETC since March 2021, thereby depriving the Company of the opportunity to earn profits on those sales[105];

(2)     Cozzi, Linetti and Lamantia acted in breach of their directors’ duties and misused Cobo SPA’s majority voting power by engaging in the Further Diversion of Business from March 2021 to September 2022, which resulted in the Company losing sale revenue of HK$35,873,495.56, being the Company’s total revenue for 2020 x 95% x 77.23%, and the profits generated from such sales[106]; and

(3)     Cobo SPA dishonestly assisted or facilitated Cozzi, Linetti, and Lamantia’s breaches of duties in respect of Resolution 1 and/or the Further Diversion of Business[107].

49.  In the HCA Action, the Company/Cobo SPA claim that:

(1)     Liang acted in breach of his fiduciary duties owed to the Company by carrying on business in conflict and/or in competition with the Company through Horner, GZ Econ, GZ Aoxiang and Hunan Aoxiang (see §8 above). These companies engaged in manufacturing or selling products identical to or in competition with Cobo Group’s products, and using the Company’s Office and staff, and the Company suffered a loss in revenue in the amount of EUR 2.1 million in 2021[108];

(2)     Liang acted in breach of the Labour Contract[109] in that he:

(a)     failed to comply with the directions of the Company’s board to conduct a threat assessment in relation to Jiangsu Ningwen Technology Co Ltd (江苏宁文科技有限公司), a supplier of machinery parts which purchased SCK parts from Cobo GZ (“Ningwen”), and continued to sell and supply components to Ningwen, resulting in loss of a major customer, XCMG[110];

(b)     refused to provide the Company’s new management with access to the Office, documents and records, and continued to represent himself as being still affiliated with the Company after cessation as GM which led to the Company incurring additional expense of HK$12,615 and EUR5,340[111];

(3)     ECT breached the SHA by failing to procure Liang’s compliance with his fiduciary duties and/or the contractual obligations owed by ECT to Cobo SPA[112]; and

(4)     ECT dishonestly assisted Liang in respect of Liang’s aforesaid breaches[113].

50.  As for the Labour Actions, the Company claims against Liang for damages or compensation for:

(1)     Breaches of duties as employee and obligations under the Labour Contract by:

(a)     making unauthorised Variable Pay for 2019 in the amount of HK$250,00 to himself on 31 March 2020,[114] and attempted to make another Variable Pay for 2020 on 23 January 2021 when the 4 conditions for such payments had not been met[115];

(b)     making unauthorised payment of HK$36,333.86 to himself by encashing a cheque (dated 7 January 2021) on 2 February 2021 as reimbursement of annual premium for medical insurance when his employment had already been terminated on 21 January 2021 and he was only entitled to insurance coverage of HK$28,548[116];

(c)     failing to report damage to the Car to the insurer or the Company, which resulted in the Company unable to recover the repair cost of HK$29,000 from the insurer[117]; and

(d)     causing the Company to pay (a) HK$85,000 for a valuation of the Company prepared by B.I. Appraisals Limited (“BIA”) in January 2020 (“Valuation”) and (b) HK$20,000 for consultancy services provided by Macro Finder Limited (“MFL”)[118]; and

(2)     Breach of duty to obey the lawful and reasonable orders of the Company under Resolution 3 by denying Scapin’s access to the Office on 22 October, 5, 11, and 25 November 2020[119].

51.  In the Labour Actions, Liang counterclaims against the Company for:

(1)     Wrongful termination of his employment without notice or payment in lieu, contrary to art. 9.1 of the Labour Contract and s.6, alternatively ss.7 & 8A of the Employment Ordinance (Cap. 57) (“EO”) in the amount of HK$292,970.33 (being 3 months’ pay in lieu of notice in the amount of HK$404,637 less HK$111,666.67 paid by the Company)[120];

(2)     Failure to pay the balance of Liang’s annual leave pay in the amount of HK$336,950.35, contrary to cl. 6.1 of the Labour Contract and s.41D of the EO[121];

(3)     Failure to pay the Variable Pay for 2020 in the amount of HK$250,000 when the Company’s actual revenue for 2020 (HK$48,894,955) exceeded 85% of targeted revenue (HK$42,955,000)[122]; and

(4)     Failure to pay the balance of Liang’s long service pay in the sum of HK$131,593.15 (being HK$25,000 x 2/3 x 15 years and 158 days employment, less HK$99,000 paid by the Company), in breach of s. 31R of the EO[123].

52.  Accordingly, the issues which require determination by the court are:

(1)     Whether the exclusion of Liang from management of the Company/Cobo GZ from the 2020 Board Meeting and/or 2021 AGM was unfair (Exclusion Issue);

(2)     Whether the direct sale of the Family Products to Cobo GZ from 26 October 2020 constituted breach of duties on the part of Cozzi/Linetti and diversion of business on the part of Cobo SPA (§§47(2), 48(1)(a) above) (Diversion of Business Issue);

(3)     Whether the direct sale of the Additional Products to Cobo GZ’s major customers (Dingli, LGMG and Litian) from March 2021 constituted breach of duties on the part of Cozzi/Linetti/Lamantia, and unfair dealing and/or dishonest assistance on the part of Cobo SPA (§§47(3), 48(1)(b), 48(2)-(3) above) (Further Diversion of Business Issue);

(4)     Whether the increase in Transfer Prices as per the 11/11 List and the 9/12 List constituted unfair dealing on the part of Cobo SPA (§47(4) above) (Prices Increase Issue);

(5)     Whether Liang carried on competing business through Horner, GZ Econ, GZ Aoxiang and Hunan Aoxiang and if so, whether it constituted breach of the SHA and/or dishonest assistance on the part of ECT (§49(1), (3)-(4) above) (Competing Business Issue);

(6)     Whether Liang failed to comply with the Company’s directions in respect of Ningwen and if so, whether it constituted breach of the SHA and/or dishonest assistance on the part of ECT (§49(2)(a), (3)-(4) above) (Ningwen Issue);

(7)     Whether Liang failed to provide the new management with access to the Office and the Company’s documents and, if so, whether it constituted breach of the SHA and/or dishonest assistance on the part of ECT (§§49(2)(b), (3)-(4), 50(2) above) (Access Issue);

(8)     Whether Liang was entitled to receive Variable Pay for 2019 and 2020 (§§50(1)(a), 51(3) above) (Variable Pay Issue);

(9)     Whether Liang was entitled to receive reimbursement of medical insurance paid by him on 21 January 2021 (§50(1)(b) above) (Medical Insurance Issue);

(10)     Whether Liang was liable to compensate the Company for the cost of repairing the Car (§50(1)(c) above) (Car Issue);

(11)     Whether the Valuation and consultancy service expenses were properly charged to the Company (§50(1)(d) above) (Service Expenses Issue);

(12)     Whether Liang was entitled to receive payment in lieu of notice for 3 months (§51(1) above) (Payment in Lieu Issue);

(13)     Whether Liang was entitled to annual leave pay (§51(2) above) (Annual Leave Pay Issue); and

(14)     Whether Liang was entitled to long service payment for 15.5 years’ service (§51(4) above) (Long Service Pay Issue).

C.     ASSESSMENT OF WITNESSES

53.  The approach of the court in fact finding and assessment of credibility has been summarized in Vigers Hong Kong Limited v Michael Binney & ors [2022] HKCFI 261 §48[124] as follows:

(1)     Generally, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.

(2)     In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.

(3)     In determining a witness’ credibility, it is important to consider the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence as between his oral testimony and witness statement.

(4)     The court has to guard against the danger of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses, or from the assessment of the witnesses’ character.

54.  As regards burden of proof, the persuasive burden lies upon the party who substantively asserts the affirmative of the issue.  In deciding which party asserts the affirmative, regard must be to the substance of the issue and not merely to its grammatical form.  Where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegations rests on him (Vigers, §49[125]).

C1.    ECT/Liang’s witnesses

55.  ECT/Liang call 7 witnesses to give evidence on their behalf.  They are Liang, Grace, Xia Jun (former employee of Cobo GZ), YY Chen, WH Liang, Thomas and Mr Au Wai Sum (former employee of the Company) (“Sam Au”). 

(1)     Each of them has been subject to cross-examination by Mr Cheng and their evidence remains largely consistent and accord with the objective facts. 

(2)     In particular, Liang has been subject to extensive cross-examination for more than 3 days.[126]  Throughout his cross-examination, Liang gives evidence in a direct and forthcoming manner and his evidence is generally consistent with objective facts and documentary evidence adduced by the parties.  He readily accepts facts and propositions put to him even though some of them are damaging to his/ECT’s case.  Overall, I find that Liang is a honest witness and I accept his evidence on the facts. 

C2.    Majority Camp’s witnesses

56.  The Majority Camp calls 8 witnesses to give evidence on their behalf.  They are Cozzi, Linetti, Lamantia, Scapin, Mr Massimo Mainini, Mr Gianpaolo Garuffo, Martinello and Rick Li (employee of Cobo GZ). 

(1)     I find that each of the witness who gives evidence at trial[127] does so in a candid and forthcoming manner, and each of them tries his best to answers the questions put to him in accordance with their recollection or view.  Their factual evidence is largely consistent with objective facts and documentary evidence and is credible. 

(2)     As will be seen in the discussion on specific issues, where this Court does not accept the case advanced by the Majority Camp, it is on the basis that I do not accept the subjective view or belief held by the witnesses on the issues in question.  It is not an indication that the court has any doubt on their honesty in holding their subjective view or belief. 

D.     DISCUSSION

57.  The principles governing unfair prejudice petition are well-established.  As submitted by Mr Henry Cheng[128], counsel for the Majority Camp:

(1)     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 (Re Nobility School Ltd [2020] HKCFI 1503, §28; Hollington, Shareholders’ Rights, 8^th ed, §7-01). 

(2)     A buy-out order cannot be made, even with the agreement of the parties, unless unfairly prejudicial conduct is proved.  It is not enough to merely show that the relationship between the parties has irretrievably broken down as there is no unilateral right to withdraw from a company when the trust and confidence between the shareholders no longer exist (Re Nobility School, §34).

D1.     Exclusion Issue

D1.1    Applicable principles

58.  In considering whether exclusion from management is unfair:

(1)     The starting point is that shareholders are required to act in accordance with the contractual bargains (Re CEIBS Publishing Group Ltd [2021] HKCFI 3513, §82).

(2)     It will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration (Re Nobility School Ltd, §32). 

(3)     The burden is on the petitioner to satisfy the court that there is “something more” beyond what the parties agreed in contracts, the “something more” may be considerations of a personal character between one individual and another (Re CEIBS Publishing Group Ltd, §82; Ebrahimi v Westbourne Galleries [1973] AC 360, 379B-G, per Lord Wilberforce). 

(4)     In order to give rise to an equitable constraint on the exercise of legal rights (including the power to vote at shareholders’ and board meeting) based on mutual understanding or “legitimate expectation”, 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 the exercise such as will affect the conscience of the former (Re Astec (BSR) plc [1998] 2 BCLC 556, 588e-f, per Jonathan Parker J (as he then was)). 

59.  Mr Jonathan Chang SC[129], counsel for ECT/Liang, cites Re Harsen Engineering Ltd [2024] HKCFI 1563 where this Court explained (at §§83-86) the inter-play between the shareholders’ legal rights and the equitable considerations which may render the exercise of legal rights  to become unfair:

(1)     Shareholders ordinarily enjoy the right to act in accordance with the company’s articles of association and any governing agreements.  However, equity may intervene to constrain the exercise of these rights.  Such equitable considerations arise when (a) the company is formed or maintained on the basis of personal relationship and mutual confidence existed between the shareholders which makes it unjust or inequitable to insist on legal rights or to exercise them in a particular way; (b) there is an agreement or understanding, whether formal or informal or legally enforceable, that all, or certain, shareholders will participate in the company’s management; and (c) there are restrictions on transfer of shares.

(2)     Fairness is not a matter of subjective perception.  The court applies it according to established, rational principles, with close attention to context.  Personal relationships and mutual understandings, whether or not reduced to writing, may inform the court’s assessment, especially if those understandings shape the parties’ conduct over time.

(3)     A petitioner must prove that the respondents breached either: (a) contractual rights including those in the articles of association; or (b) established practices or understandings about how the company’s affairs should be managed – even if those practices depart from the company’s formal documents.  To rely on the latter, the petitioner must show that the relevant practice was accepted by all concerned shareholders for a substantial period, so that strict legal rights cannot now be enforced to the contrary.

(4)     Even if the respondents did not breach any legal right, the court may grant relief where their conduct, while strictly lawful, violates an equitable constraint over the exercise of that legal right.  This often arises where a shareholder entitled to participate in management is excluded by the majority’s use of voting right, such as by removing the petitioner as a director.

60.  Where the company was formed by a group of highly sophisticated and experienced business people and investors, with little or no prior relationship between many of them, and where the articles of association and a shareholders’ agreement were negotiated and drafted, containing lengthy and complex provisions governing their relationship, the court found it hard to overlay the contractual arrangements with equitable considerations (Re Coroin (No. 2) [2013] 2 BCLC 583, §§635-636, per David Richards J (as he then was)).

D1.2    ECT’s pleaded case

61.  ECT’s case, as pleaded in the petition, is that since the 2020 Board Meeting and/or the 2021 AGM, it has been excluded from management of the Company/Cobo GZ, contrary to the basis upon which the Company was founded as a Quasi-partnership and “an agreement or understanding existed between [ECT and Cobo SPA] to the following effect” (“Fundamental Understanding”) [130]:

(1)     That each of ECT and Cobo SPA should be entitled to be represented on the Company’s and Cobo GZ’s board of directors and be involved in and consulted on the making of major or strategic decisions affecting the Company’s and Cobo GZ’s affairs;

(2)     That they should be treated equally, including having an equal say in making major or strategic decisions affecting the Company’s affairs;

(3)     ECT’s nominee, Liang, should be employed by the Company as GM or an equivalent executive management capacity;

(4)     Each of ECT and Cobo SPA would receive reasonable return for its investment in the Company by way of fair and reasonable dividends distribution;

(5)     Each member would have equal access to the books and records of the Company, including its financial records; and

(6)     Given Liang’s experience, business contacts, understanding of the Chinese culture and the language, he would continue to act as GM and director of the Company and director and legal representative of Cobo GZ, and would carry on day-to-day management and operations of both companies including sales, research and development and procurement, which had been left by Cobo SPA to Liang since it became a shareholder in 2006.

62.  The Fundamental Understanding is said to be evidenced by the following facts:

(1)     The background of the Company, with ECT being a “founder shareholder” of the Company, which was a joint venture with 3B6 Italy, Liang’s involvement in managing the Company/Cobo GZ from their inception until the 2021 AGM and the 2014 Agreements[131].

(2)     Liang was at all material times until the 2021 AGM represented on the board of the Company/Cobo GZ and was their GM[132]. 

(3)     The provisions in the SHA: art. 3.4 (profits and losses be shared in proportion to shareholding), art. 6.1 (ECT and Cobo SPA shall be collectively responsible for handling the matters stated therein), art. 8.2 (matters requiring unanimous approval of ECT and Cobo SPA), art. 9.2 (term of first board and first chairman shall be for 3 years, with one director appointed by ECT and 2 by Cobo SPA and thereafter, the board and chairman shall be elected by shareholders and the term will be one year), art. 9.4 (board shall decide all issues concerning business development and strategies of the Company within the guidelines set by the shareholders, and shall delegate daily operations and implementation of resolutions to the GM), art. 10.1 (the management office shall be headed by the GM and the first GM shall be appointed by ECT and thereafter, appointed by the shareholders meeting), art. 10.3 (GM’s responsibility to carry out the decisions of the board)[133].

(4)     Articles 4-5 of the Articles[134].

63.  The above is ECT’s entire pleaded case on Quasi-Partnership and Fundamental Understanding. 

64.  Although the exclusion complaint is framed as commencing from the 2020 Board Meeting and/or the 2021 AGM, Mr Chang (rightly) does not pursue the former alternative as Liang remained a director and GM of the Company after the 2020 Board Meeting. 

65.  In my judgment, ECT’s case on Quasi-partnership and Fundamental Understanding is demurrable for the following reasons:

(1)     As regards Quasi-partnership, other than an assertion that ECT and Cobo SPA “came to collaborate and form the quais-partnership of the Company”[135], there is no plea on the facts or matters in support of ECT’s case that the Company was founded on the basis of a quasi-partnership or a relationship of trust and confidence between ECT and Cobo SPA. 

(2)     The absence of such plea is unsurprising.  The objective fact (pleaded as background in the petition) is that the Company was formed as the joint venture vehicle between ECT and 3B6 Italy in August 2005, and Cobo SPA only became a shareholder of the Company in 2006 as a result of its acquisition of 3B6 Italy.  There was simply no prior relationship, let alone a personal one, between ECT and Cobo SPA when Cobo SPA became a majority shareholder of the Company in 2006.   

(3)     As for the Fundamental Understanding, there is no averment as to when the Fundamental Understanding, said to be “an agreement or understanding” between ECT and Cobo SPA, was reached.  Nor is there any plea on the basis for contending that the Fundamental Understanding (even if existed prior to the SHA) could survive or continue to govern the relationship between ECT and Cobo SPA in view of the entire agreement clause in art. 3.3 of the SHA, which provides that the SHA “supersedes and shall prevail on any other previous agreement or articles of association signed by the parties on the same matters”.

(4)     The reliance on the provisions on the SHA and the Articles do not assist ECT as none of them confers any right or entitlement to ECT to be represented at the board or be involved in the management of the Company, whether as GM or in any other capacity.  To the contrary, the parties expressly agreed under the SHA that:

(a)     after the first 3 years, the board of directors and the chairman “shall be elected by the Shareholders meeting and their term will be one year”; and

(b)     after the term of office of the first GM, the new GM “shall be appointed by the Shareholders meeting” (art. 10.1).

66.  As ECT’s pleaded case on Quasi-partnership and Fundamental Understanding is demurrable, there is no basis for ECT to complain that the exercise of voting right by Cobo SPA at the 2021 AGM in (1) not re-electing Liang as a director of the Company, and (2) not re-appointing Liang as GM of the Company is unfair. 

D1.3    Unpleaded matters

67.  In his Opening and Closing, Mr Chang bolsters his arguments on exclusion from management by relying on the following facts and matters, none of which have been pleaded in the Petition:

(1)     After the 2014 Restructuring, on 4 May 2015, ECT injected HK$2.46 million into the Company.  That sort of investment would not have been forthcoming if Liang could have been removed at the Majority Camp’s discretion.  Relying on Quinlan v Essex Hinge Co Ltd [1997] BCC 53 and Shareholder Actions, 3^rd ed, 2022, §9.77, Mr Chang argues that this capital injection gave rise to a legitimate expectation of continued management participation[136].

(2)     Both sides understood that ECT retained equal weight in key decisions.[137]

(3)     Articles 9.2 and 10.1 of the SHA, which stated that Liang’s term as the director and GM of the Company was to last for an initial term of 3 years, did not give the Majority Camp “an open licence”[138] to remove Liang.  Instead, they were a minimum guarantee of tenure.  ECT and the Majority Camp intended to maintain the Company as a partnership model[139], and the key provisions[140] of the SHA were consistent with the parties’ Fundamental Understanding, as they required joint decision-making and reciprocal pre-emption rights,[141] collective responsibility concerning certain operational matters, as well as the requirement of unanimous shareholder approval for fundamental changes affecting the Company[142].

(4)     If any terms depart from the Fundamental Understanding, they merit little weight as Cobo SPA alone drafted the documents, tilting them heavily in their favour[143].

68.  I do not think that it is open to ECT to expand or supplement its case on exclusion from management by relying on the unpleaded matters identified by Mr Chang.  It is well established that a petition defines the scope of the matters in issue and the disputes that the court has to resolve.  A petition must set out with precision and sufficient particulars the matters complained of or relied on by the petitioner in justifying a winding up order on just and equitable ground (Re Tourmaline Ltd [2000] 4 HKC 348, 354C-D, per Chu J (as she then was)).  The same principle applies to an unfair prejudice petition.

69.  Even if, contrary to my view, ECT is entitled to rely on the aforesaid unpleaded matters and other evidence adduced at trial, I do not think that ECT has discharged the burden of establishing that Company was formed as a Quasi-partnership or that the Fundamental Understanding existed, still less that ECT has any legitimate expectation to participation in the management of the Company/Cobo GZ.

70.  First, the nature of the relationship between the parties is purely commercial.  As Liang accepts under cross-examination, there was no prior personal relationship between himself and Cozzi, Linetti or Carlo Linetti, but a working relationship solely because of Cobo SPA’s acquisition of 3B6 Italy in 2006[144].

71.  Second, the express terms of the 2014 Agreements are inconsistent with the Fundamental Understanding or any legitimate expectation on the part of ECT in having indefinite management participation:

(1)     Art. 9.2 of the SHA provides that the first Board of Directors and Chairman will serve an initial term of 3 years, after which they shall be elected by the Shareholders’ meeting for one-year term.

(2)     Art. 10.1 of the SHA and art.1.2 of the Labour Contract and GZ Labour Contract all provide an initial term of 3 years for Liang’s appointment as GM, renewable subject to approval of the Board.

(3)     The history of negotiation between Liang/ECT and the Majority Camp (even if admissible, which I do not think it is) shows that the parties did put their minds to the question of tenure.  During negotiations, Liang proposed that ECT-appointed directors would remain in office “unless and until [he] consent[ed] to remove or replace them”, but that proposal did not find its way in the SHA[145].

72.  Third, irrespective of how the Company/Cobo GZ had been managed in the past, the parties came to the 2014 Agreements and agreed that their rights and obligations should be governed by their terms.  The 2014 Agreements comprehensively set out the parties’ rights and obligations and make clear that their terms represent all the agreements governing their relationship:

(1)     Art. 3.3 of the SHA provides that the SHA “supersedes and shall prevail on any other previous agreement or articles of association signed by the parties on the same matters”. 

(2)     Art. 2 of the CA provides that “All matters regarding the management, the operations, the governance, the relations between the Shareholders of [the Company] have been agreed by and between [ECT] and [Cobo SPA] and confirmed with the signature of the [SHA] dated September 8, 2014 and the Articles of Association”.

(3)     Liang accepts under cross-examination that these clauses mean that the SHA prevails over any previous agreement or way of conducting business, and other matters outside of these 2014 Agreements are irrelevant to the relationship between the shareholders[146]. 

73.  The evidence confirms that the association between Cobo SPA and ECT was plainly not formed or continued on the basis of any personal relationship involving mutual confidence[147], and the Fundamental Understanding (even if existed, which has not been established) ceased to govern the parties’ relationship after the SHA upon the parties entering into the SHA.    

74.  Fourth, even if the evidence on negotiation of the 2014 Agreements is admissible (which it is not), it supports the Majority Camp’s case that the 2014 Agreements were negotiated and concluded through arm’s length negotiation between experienced commercial parties, rather than ECT lacked bargaining position or benefit of legal advice as suggested by ECT[148]:

(1)     Liang is admittedly a very experienced businessman.  He has established and has been involved in managing various companies in the same industry for over 30 years[149].

(2)     Liang was involved in giving comments on the draft SHA:

(a)     The parties engaged in multiple rounds of negotiation[150].  Liang accepts under cross-examination that he made counter-proposals on the draft SHA terms, although some of his proposals were ultimately not accepted by the Majority Camp.[151]

(b)     In his email dated 2 April 2014, Liang stated that he provided comments on the draft terms of the SHA “after [he] consulted with [his] lawyer”[152].

(c)     Liang also accepts during cross-examination that he spoke to PRC lawyers during the negotiations regarding the draft SHA.[153]

(d)     Liang raised various matters during negotiations, including remuneration arrangements and dividend policy[154], which were ultimately not incorporated into the 2014 Agreements.

75.  Fifth, ECT’s capital injection of HK$2.46 million does not establish any legitimate expectation of management participation:

(1)     Mr Chang’s reliance on Quinlan does not advance ECT’s case.  In Quinlan, the court found that the petitioner had established a legitimate expectation of continued management participation on the basis that he had made a significant input to management decisions beyond the strict terms of his service agreement, and the parties’ dealings displayed the characteristics of a quasi-partnership.  In other words, there is “something more”.

(2)     In the present case, there is nothing more beyond contractual obligation:

(a)     The capital injection of HK$2.46 million was a contractual obligation under art. 5.1 of the SHA.

(b)     The term of Liang’s employment and his role as GM for the initial 3-year term subject to renewal by the Board were set out in the SHA, the Labour Contract and the GZ Labour Contract. 

76.  It follows that Cobo SPA was entitled to exercise its legal rights under the SHA and the Articles by voting in accordance with its wishes at the 2021 AGM.  The exclusion of Liang from management from 29 January 2021 was not unfair and therefore, could not constitute unfair prejudice (Re Nobility School Ltd, §32). 

D2.     Diversion of Business Issue

D2.1    Applicable principles

77.  The principles are well-established.  Diversion of a company’s business opportunities by those in control of the company is capable of amounting to unfair prejudice, in particular to those shareholders who have been excluded from full participation in the profits of their company (Re GO DPO EU Compliance Limited [2021] EWHC 1765, §138). 

78.  Similarly, a breach of directors’ duties can ground a claim in unfair prejudice (Chung Shun Ying v Wong Wah On [2024] HKCFI 1281, §§142-143).  In this respect:

(1)     Fiduciary duties include the requirements to act honestly, in good faith and in the interests of the company; to act for proper purposes; to avoid situations where the director’s interest may conflict with that of the company; not to obtain any undisclosed profit through his position; and to exercise due and reasonable care, skill and diligence (SFC v Wong Kam Leong[2020] HKCFI 606,§§27-28 per Coleman J).

(2)     The no conflict and no profit rules are proscriptive duties and are strictly enforced, even in the absence of conscious wrongdoing; and regardless of whether any actual harm to the company is proven (China Metal Recycling (Holdings) Ltd v Chun Chi Wai[2021] HKCFI 378, §60). The test for breach of “no conflict” duty is an objective one: a violation occurs where a reasonable person would think that there is a “real sensible possibility of conflict” or “a real or substantial possibility of conflict” between the director’s duty and personal interest (China Metal, §61[155]).[156]

79.  Once the petitioner establishes a prima facie case that the directors acted in breach of fiduciary duties, the evidential burden shifts to the directors to demonstrate the propriety of their actions or decisions (Re South Asia Group (HK) Ltd [2024] HKCFI 2070, §§76-77).

80.  In the context of group companies, Mr Chang submits that the law imposes a strict duty on directors to act in the best interests of the company, instead of the broader interests of the corporate group or any other group entity:[157]

(1)     In Liquidator of Wing Fai Construction Co Ltd v Yip Kwong Robert & Ors [2018] 1 HKC 472, G Lam J (as he then was) observed that:

“235. As a matter of principle, it is not a sufficient justification for the directors involved in such payments to say that they looked to the benefit of the group as a whole. Each company, albeit within a group, is a separate legal person with separate interests and separate and probably different creditors. It is the duty of the directors of a company ‘to consult its interests and its interests alone’ in deciding how to exercise their powers as directors of that company; they are not entitled to sacrifice the interests of that company in order to promote the interests of other group companies, even if they are also directors of them…” (underlined added)

(2)     In Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324, the House of Lords held that where the interests of a subsidiary and a parent company are in conflict, it would be wrong for the director to put their duty to the parent above their duty to the subsidiary.  As Lord Denning put it (at 367) “By subordinating the interests of the [subsidiary] to those of [parent], [the directors] conducted  the affairs of the [subsidiary] in a manner oppressive to other shareholders”.[158]

(3)     However, this does not mean that a transaction undertaken for the benefit of a group can never be in the interests of the member of the group.  A transaction would only be upheld if in the circumstances it is for the benefit of the particular company that the group or the other members of the group (even with outside shareholders) should be assisted by the transaction (Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1992) 9 ACSR 199 at 240).[159]

81.  Mr Cheng argues that in the context of a corporate group, the test for determining whether the director acted in breach of his fiduciary duties is that set out in Charterbridge Corpn Ltd v Lloyds Bank [1970] Ch 62 at 74C-F, per Pennycuick J, that is, even if the director did not actually consider the separate interests of the company, if an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. 

82.  I do not think that the passage in Charterbridge represents the correct test in determining whether a director acted in breach of his fiduciary duties owed to the company concerned:

(1)     The issue in Charterbridge was whether the legal charge entered into by the company was outside the scope of powers of the company and therefore ultra vires, which is to be determined by an objective test.  On the facts, the directors were not parties to the action and it was not alleged that they had incurred any liability.  There was thus no issue of whether the directors acted in breach of fiduciary duties and the passage in Charterbridge test (at 74C-F) was obiter. 

(2)     In any event, Pennycuick J’s reasoning makes clear that each company within a group is a separate entity and the directors of a company are not entitled to sacrifice the interest of that company to those of the group, particularly given that each company has its own creditors.  His Lordship rejected the contention that“it is sufficient that the directors of Castleford looked to the benefit of the group as a whole”(74D-E).  The so-called Charterbridge  test, at the highest, should be understood as relaxing or modifying the strict fiduciary duty owed by a director to act in the best interests of the company and only the company.

(3)     In Akai Holdings Ltd v Thanakharn Kasikorn Thai Chamkat (Mahachon), HCCL 59/2004, 26 May 2008, §330-332, Stone J considered and rejected the Charterbridge  test as the appropriate test for determining whether a director acted in  breach of his fiduciary duties in this way:

“330. … if and in so far as the so-called ‘Charterbridge test’ of the intelligent and honest director reasonably believing that the action taken was for the benefit of the company is held to represent the relevant benchmark, I do not read Charterbridge as inviting or mandating the application of such objective test absent any indication of that which the director in question, in this instance Mr Ting, had been intending.

331.     To put the proposition another way, I do not consider that the criterion of the ‘honest and reasonable director’ properly can be applied within an evidential vacuum in order to rationalize or to justify what in fact may have been done for reasons totally other than the interests of Akai.  Nor, as I have indicated, am I disposed in the circumstances to assume the honesty of Mr Ting in taking the course which he did; the overwhelming probability, I should have thought, is to the contrary.

332.     In my view, therefore, speculative inference of what could have been in Mr Ting’s mind – and it must not be forgotten that this is a man whose part in the ultimate asset-stripping of Akai achieved breathtaking proportions – does not suffice to discharge the evidential burden which is on the defendant as a result of the undisputed actions of Mr Ting which, when taken at face value, raise a strong prima facie case of breach of fiduciary duty.” (underlined added)

(4)     On appeal in Akai Holdings Ltd v Kasikorn Bank Plc [2010] 3 HKC 153, Tang VP (as he then was) did not decide whether the discussion in Equiticorp to the effect that the Charterbridge test only applies where the directors have actually considered the separate interests of the company concerned, as His Lordship doubted whether mere failure to consider the separate interest of the relevant company, for example due to incompetence, would ipso facto amount to a breach of fiduciary duty (§§62-64).  On the facts, Stone J found that the director had not considered the separate interests of Akai before causing it to enter into the impugned transaction and the transaction was in “blatant disregard” of the interests of Akai, and it was “wrong for there to have been any equation between the interests of Akai on the one hand and those of [the other company] merely by reason of the existence of a common shareholder”.  The Charterbridge test was thus irrelevant (§§63, 65).

(5)     Le Pichon JA, on the other hand, considered that the Charterbridge test was formulated by Pennycuick J within the ultra vires context.  It had little relevance to and was inappropriate where what had to be determined was whether there had been a breach of fiduciary duty by a director (§§171-175).

D2.2    ECT’s case & undisputed evidence

83.  ECT’s complaint is that in passing Resolution 1, Cozzi/ Linetti allowed Cobo SPA to sell the Family Products to Cobo GZ directly (which constituted 5.37% of the Company’s sales to Cobo GZ and gross profit of EUR 303,503.47 in 2020) and  deprived the Company of the revenue and profits generated from such sales, which constituted a breach of their fiduciary duties owed to the Company.[160]

84.  It is not in dispute that:

(1)     There was no discussion amongst the 3 directors on the proposed direct sales of the Family Products prior to the 2020 Board Meeting. 

(2)     Indeed, the proposed sale was not mentioned in the 2020 Board Notice, and Liang’s request for provision on information on the agenda items to be discussed at the 2020 Board Meeting was ignored by the Majority Camp.    

(3)     The 2020 Board Minutes prepared by the Majority Camp did not record any discussion on the proposal, still less whether the proposal would be in the best interests of the Company. 

(4)     When asked about how the proposed direct sales would benefit the Company, and whether that issue was considered at the 2020 Board Meeting, Linetti’s evidence is that[161]:

(a)     Cobo GZ would  have a higher margin and lower cost, which he considered was a “positive impact” and a benefit to Cobo GZ, and a benefit to Cobo GZ would be a benefit to the Company as Cobo GZ is a wholly owned subsidiary of the Company. 

(b)     He accepts that the Company and Cobo GZ were separate entities and each of them had its own creditors/liabilities and revenues, but considered that a benefit to Cobo GZ would be a benefit enjoyed by the Company as the value of Cobo GZ would be enhanced by the direct sales, and once Cobo GZ earned more money, it could distribute dividend to the Company.  This is despite the fact that no such dividend had in fact been paid to the Company in the past which, according to him, was attributable to the need to retain funds for investment and sustaining Cobo GZ’s business[162].

(c)     Neither him nor Cozzi had done any calculation on how the Company would benefit from the proposed direct sales, whether in terms of projections on revenues or profitsor a comparison of the loss to the Company and the gain to Cobo GZ, and the issue was not discussed at the 2020 Board Meeting.  This was because he believed that any benefit to Cobo GZ would be “mirrored” by the loss of revenue on the part of the Company, and it was not necessary to do any cost-benefit analysis on the proposal. 

(d)     The Family Products were chosen because they were more important products, and “most exposed to competition”.

(5)     As for Cozzi, his evidence on the proposed direct sales of the Family Products to Cobo GZ and the reason for approving Resolution 1 is that[163]:

(a)     The proposed direct sale would eliminate the Company’s mark up on those products, so as to lower the cost of Cobo GZ.  He considered that there was “no reason to go through the Company”.  The competition faced by the Family Products became very strong in China and it was justifiable to eliminate the Company’s mark up as it had no added value.

(b)     From the Company’s perspective, its objective was to develop Cobo GZ, which was its only asset.  By increasing the value of Cobo GZ, the Company would benefit.

(c)     There was no discussion at the 2020 Board Meeting on how the proposed direct sale would benefit the Company, as he and Linetti had to safeguard the asset of the Company, so it was “obvious” that this was the reason. 

(d)     He and Linetti had discussed the objective of the proposed direct sale, which took place a few days before the 2020 Board Meeting.  They made a decision before the 2020 Board Meeting to make Cobo GZ more competitive, and found a solution to make Cobo GZ more competitive in respect of the Family Products.  There was no discussion on how the Company would benefit from the proposed direct sale given that “the reason was obvious, to make Cobo GZ more competitive”. 

(e)     It was not necessary to discuss how the Company’s loss in revenue would be compensated because the aim of the Company, as holding company, was not to earn a mark-up in the sales.  It was to increase the value of Cobo GZ so that the value of the Company would increase, as Cobo GZ could distribute dividend in this holding relationship. 

(6)     Resolution 1 was passed at the 2020 Board Meeting and was implemented from 26 October 2020[164]. Since then, the Company was bypassed and deprived of the opportunity to earn revenue and profits which would have been generated from selling the Family Products to Cobo GZ.   

D2.3    Prima facie case of breach of fiduciary duties

85.  In my judgment, ECT has discharged the burden of establishing a prima facie case that Resolution 1, insofar as it approved cutting off the Company from the sale of the Family Products to Cobo GZ, was passed by Cozzi/Linetti in breach of their fiduciary duties owed to the Company for the following reasons.

86.  First, the proposed direct sales had the effect of depriving the Company of the revenue and profits which it would have earned from purchasing the Family Products from Cobo SPA and selling the same to Cobo GZ.  Prima facie, it would not be in the interests of the Company to be deprived of such  revenue and profits. 

87.  Second, the proposed direct sales represented a departure from the modus operandi of the Company which had since 2014 been in place and has contributed to the growth in the Company’s revenue and profits.  There was no reason or justification (none has been identified at the 2020 Board Meeting) to explain why the modus operandi should be changed or why it would be in its best interests of the Company to change the status quo ante.

88.  Third, Cozzi/Linetti did not consider the separate interests of the Company, let alone whether it would be in the best interests of the Company to be cut-off from the sales of the Family Products to Cobo GZ. In this regard, Cozzi admits during cross-examination that the discussion between him and Linetti took place “days before” the 2020 Board Meeting, and Resolution 1 merely “documented and formalised” a decision already made outside the 202 Board Meeting[165]. This confirms that there was no consideration of the Company’s separate interests at the 2020 Board Meeting. 

89.  Fourth, as directors of both the Company, and directors and shareholders of Cobo SPA[166], Cozzi and Linetti were in a position of conflict in that:

(1)     It would be in the interests of Cobo SPA to be able to bypass the Company.  An increase in the competitiveness and market share of Cobo GZ, as suggest by Cozzi/Linetti, would result in more sales from Cobo SPA to Cobo GZ.

(2)     On the other hand, it would be in the interests of the Company to continue to purchase and on-sell the Family Products and earn the mark-up or margin from the sales even though it would mean lower profit margin to Cobo SPA and Cobo GZ. 

(3)     Where the same individuals occupy both positions, their obligation to advance the Company’s interests and consider them independently of Cobo SPA’s is heightened[167].

(4)     The evidence shows that this obligation was not discharged.  Cozzi/Linetti acted to advance the interests of Cobo SPA and Cobo GZ by removing the Company from the supply chain:

(a)     Cozzi describes the Company’s markup as “unjustifiable”[168], and states that the goal of Resolution 1 was to “eliminate the passage that was [the Company], which did not have any added value”[169].

(b)     He further explains that, “in the years following the Company’s incorporation”, Cobo SPA began to question whether it was “really necessary to have everything going through [the Company]”within the supply chain, and Resolution 1 was the culmination of that view [170].

(5)     In the circumstances, Cozzi and Linetti not only failed to consider the Company’s separate interests; they knowingly subordinated them to Cobo SPA’s interests even if the Charterbridge test is appropriate (which it is not).  This is not a case where the directors, in acting for the interests of a group, failed to consider the separate interests of a company.  Rather,  the directors had considered and decided to sacrifice the Company’s interests in favour of Cobo SPA.

90.  It follows that the evidential burden is on Cozzi/Linetti to justify their decision in cutting off the Company from the supply chain in respect of Family Products. 

D2.4    Majority Camp’s justifications

91.  The justifications put forward by the Majority Camp are as follows:

(1)     It was necessary “to review the supply chain for some products in order to increase the competitiveness and efficiency and reduce lead times in the Chinese market”[171].  Mr Cheng argues that this shows that Cozzi/Linetti had the best interests of the Company in mind when they passed Resolution 1.[172] 

(2)     No loss or damage was caused to the Company since Cobo GZ, a wholly owned subsidiary of the Company, benefitted from the arrangement as it “facilitated [Cobo GZ] to be more competitive in the China market and maintain its market share”[173].

(3)     Cobo SPA was entitled to sell the Family Products directly to Cobo GZ under the Sales Agreement, which provided that the Company was a non-exclusive distributor of the products manufactured by Cobo SPA.[174]

(4)     The sales of the Family Products represented “a minor percentage of the total volume of the Company’s sales”, and not the amounts pleaded in the petition[175].

(5)     Liang “breaches of fiduciary and/or contractual duty” as director and under the SHA, the Sales Agreements and the NCA[176] and, therefore, ECT does not come to the court with “clean hand”. 

92.  In his Closing, Mr Cheng advances 2 further points as “defence” to the Diversion of Business complaint:

(1)     “A course of action which benefits Cobo GZ could lead to derivative benefits to the Company, even if it may come at the short-term expense of the Company”[177].

(2)     “Objectively, the direct sales of the Family Products was for the purpose of benefitting, and did bring actual benefits to, Cobo GZ and in turn the Company.”[178]

93.  These points are merely different ways of putting the second justification and do not take the matter further. 

94.  I do not think that any of the 5 matters put forward by Cobo SPA go anywhere near to justifying the propriety of the decision of Cozzi/Linetti in cutting off the Company from the sales of Family Products for the reasons explained below. 

95.  First, the stated need “to review of the supply chain for some products and in order to increase the competitiveness and reduce lead times in the Chinese market”[179] (§91(1) above) was a benefit to Cobo SPA and Cobo GZ:

(1)     Viewed objectively, these advantages could only have been advantages to Cobo SPA and Cobo GZ but not the Company, as the Company was completely cut off from the supply chain in respect of the Family Products. 

(2)     I am unable to see how the Company could benefit from being cut off from the sales and the profits generated therefrom.  Indeed, other than equating the interests of the Company with those of Cobo GZ (a matter I will return to), the Majority Camp has not been able to articulate how, from the perspective of the Company, it would be in its interests to be cut off. 

(3)     At trial, Liang’s evidence on the estimated loss of profits for the Companyin the amount of at least EUR 303,503.47 each year, based on the Company’s total profit margin from the sales of Family Products in 2020[180] has not been challenged. 

96.  Second, there is no proper basis or evidence in support of Cozzi/Linetti’s view that the interests of the Company are the same as those of Cobo GZ or that a benefit to Cobo GZ was a benefit to the Company (§§91(2), 92 above):

(1)     Both Linetti and Cozzi say that they believed safeguarding Cobo GZ’s market share and profitability would benefit the Company as its parent, because Cobo GZ is the Company’s only asset[181].  Cozzi admits that the 2020 Board Meeting was “very short”, and he saw “no need” to discuss the Company’s separate interests because he assumed that what benefitted Cobo GZ benefitted the “overall entity[182]. Linetti similarly testifies that he viewed the Company and Cobo GZ as “one entity”[183].

(2)     However, their subjective belief is not based on or supported by any objective or financial data:

(a)     No comparative profit/loss or pros/cons analysis had ever been prepared before Cozzi/Linetti decided to implement the proposed direct sales.  Nor did they cause any such analysis to be prepared after implementation of the direct sales to see if their subjective belief was justified. 

(b)     No evidence in particular, no financial statements of Cobo GZ, whether audited or unaudited, have been disclosed or adduced[184] to show that the Company’s loss in profits have been translated into additional profits at Cobo GZ, still less that the profits are available for distribution to the Company by way of dividend. 

97.  For this reason alone, I am unable to accept Cozzi/Linetti’s stated belief that the interests of Cobo GZ were the same as those of the Company or that a benefit to Cobo GZ was a benefit to the Company.

98.  If and insofar as it is necessary to consider the Majority Camp’s “one consolidated entity” theory any further, I agree with Mr Chang’s submissions that:

(1)     As a matter of law, it is wrong to equate a subsidiary’s profit or loss with that of its parent, even if their financial statements have been consolidated.[185]  Nor can one assume that a benefit to Cobo GZ would automatically redound to the Company[186]. 

(2)     Cobo GZ has never distributed any dividend to the Company.  Thus, whatever benefits Cobo GZ might have realised, they have not flowed up to the Company[187].

(3)     The “one entity” theory collapses.  According to Cozzi’s evidence, by 2023, the majority of Cobo SPA’s products were once again supplied through the Company to Cobo GZ.  The reason for the change was because by then, the Company was struggling financially, and they wished to “restore the business lost” by reinstating the Company’s role in the supply chain “to give some means to [the Company]”.[188]  The evidence confirms ECT/Liang’s concern that the Company’s financial viability depended on its ability to earn the mark-up on the sale of Cobo SPA’s products to Cobo GZ.

(4)     The conduct of the Majority Camp shows that they did not believe in the “one entity” theory given that when Liang requested for Cobo GZ’s AFS, the Majority Camp refused on the ground that Liang was not a shareholder or director of Cobo GZ[189].

99.  For completeness, I do not think that there is any probative value in Mr Cheng’s analysis which, he contends, shows that “the direct sale of the 3 Family Products by Cobo SPA would result in an overall a lower price for Cobo GZ”[190] when the Majority Camp has never undertaken such analysis.  Nor have Cozzi or Linetti  considered or adopted the analysis as their evidence.  For the same reason, I do not accept Mr Cheng’s argument that as a matter of common sense, “cutting off one participant from the supply chain can and should lead to an increase in efficiency, and the reduction of associated costs and expenses”[191]. 

100.  Third, as regards Cobo SPA’s contractual entitlement to supply the Family Products to Cobo GZ directly (§91(3) above), it is simply irrelevant and, in any event, does not constitute a justification for Cozzi/Linett’s decision in cutting off the Company from the supply chain.  This was particularly so when the change would have the effect of changing the modus operandi of the Company and taking away Cobo GZ as a customer of the Company in respect of the Family Products. 

101.  Fourth, the contention that the Family Products represented a “minor percentage” of the Company’s sales (§91(4) above) is not established for the same reasons explained in §96(2) above.  In any event, it does not provide a justification for cutting off the Company from the sale of the Family Products. 

102.  Fifth, the alleged breaches of fiduciary or contractual duties on the part of Liang (§91(5) above) even if established, does not provide a justification for Cozzi/Linetti’s decision given that:

(1)     Cobo SPA has not pleaded any “clean hands” defence[192]. It is not open to Cobo SPA to contend that Liang’s alleged misconduct should debar ECT from obtaining relief (Re Smartplace Ltd,[2021] HKCFI 560 §10, per Harris J; First Subsea Ltd v Balltec Ltd [2013] EWHC 1033, §§45-46, per Norris J). 

(2)     On the Majority Camp’s case, the breaches only came about after Resolution 1 had been passed and implemented.  They have nothing to do with Cozzi/Linetti’s decision in cutting off the Company from the supply chain.

D2.5    Conclusion on Diversion of Business Issue

103.  As the Majority Camp has failed to discharge the evidential burden of justifying Cozzi/Linetti’s decision in cutting off the Company from the supply chain, there is no basis to displace the prima facie case that in approving Resolution 1, Cozzi/Linetti acted in breach of their fiduciary duties owed to the Company.  As a result of their decision, from 26 October 2020, the Company lost all the revenue and profits from re-selling the Family Products to Cobo GZ.  The conduct of Cozzi/Linetti, which can be regarded as the conduct of Cobo SPA (see §6(2) above), is unfair and prejudicial to the interests of the Company. 

104.  The conduct of the Majority Camp is particularly unfair to ECT when viewed against the manner in which they pushed through the change in cutting off the Company from the supply chain in that the 2 of them:

(1)     discussed the proposed direct sale without the involvement of Liang, even though he was a director and GM of the Company and the only person “on the ground” in dealing with the business and operations of both the Company and Cobo GZ;

(2)     made the decision to cut off the Company from the supply chain, which represented a departure from the modus operandi of the Company and did not consider the sperate interests of the Company;

(3)     withheld from Liang any notice or information regarding their decision ahead of the 2020 Board Meeting, which continued even after Liang asked for provision of details and information regarding the agenda items; and

(4)     passed Resolution 1 without any regard to the separate interests of the Company or any objection which might be raised by Liang. 

105.  For all the above reasons, I find that the Diversion of Business is unfair and prejudicial to the interests of the Company.     

D3.     Further Diversion of Business Issue

D3.1    Parties’ pleaded cases

106.  This concerns ECT’s complaint that from 20 February 2021, Cobo SPA deprived the Company of a substantial part of its business by selling the Additional Products to Dingli, LGMG and Litian, which accounted for 77% of Cobo GZ’s revenue in 2020, thereby bypassing both the Company and Cobo GZ in the sales and caused considerable loss to both the Company and Cobo GZ.  Such conduct is prejudicial to ECT’s interests in the Company[193].

107.  The Majority Camp’s defence may be summarised as follows:

(1)     The Sales Agreement were non-exclusive[194]. Neither the Company nor Cobo GZ were exclusive distributors of Cobo Group’s products and Cobo SPA was not bound to sell its products to the Company or Cobo GZ[195].

(2)     Owing to Liang’s failure to handover all the Company’s records, denied the Company’s management of access to the Office, prevented Cobo GZ from carrying on its business and operations and complete closure of the Premises, from 20 February 2021, Cobo SPA had no choice but to contact Cobo GZ’s customers directly so as to meet their demands and to mitigate and reduce the threats of customers’ claims[196].

(3)     During the period when Cobo GZ’s activities were crippled by Liang, it had to established a new office in Mainland China to conduct its business, and only resumed partial operations in July 2021.  It was only until June 2022 that Cobo GZ was able to regain access to the Premises which were under Liang’s control[197].

(4)     The Company did not suffer any loss from the Further Diversion of Business[198].

(5)     Cobo SPA, as a separate entity, was entitled to make its commercial decisions and acted in accordance with the parties’ rights and obligations under the SHA, and it was in Cobo SPA’s best interest to increase the value of its stake in the Company[199].

108.  In response to the Majority Camp’s contention that the Further Diversion of Business was necessitated by the closure of the Premises, ECT denies that Liang had anything to do with preventing Lamantia from accessing the Premises from 20 February 2021 and contends that[200]:

(1)     Liang left Guangzhou on 7 February 2021 and only returned on 1 April 2021. 

(2)     At the material time, the Landlord restricted access and entry to the Premises.

(3)     Liang wrote to the Landlord on 13 March 2021, 17 March 2021 and 29 March 2021 to persuade the Landlord to allow Cobo GZ’s employees to access the Premises and to pick up components required to enable Cobo GZ to fulfil its obligations to LGMG and Dingli. 

D3.2    Whether an affair of the Company ?

109.  Mr Cheng argues that on ECT’s pleaded case, the Further Diversion of Business did not form part of Cozzi/Linetti’s conduct at the 2020 Board Meeting or an affair of the Company[201]. Rather, it was an “unfair dealing by Cobo SPA”[202]. As such, the complaint, even if established, could not constitute an unfairly prejudicial conduct for the purpose of the UP Proceedings. 

110.  It is not open to Cobo SPA to raise the point as it does not form part of Cobo SPA’s defence in the UP Proceedings. 

111.  In any event, the argument is completely devoid of merit:

(1)     Unfair dealing on the part of Cobo SPA which resulted in cutting off the Company/Cobo GZ from the supply chain of the Additional Products was an affair of the Company.  The dealing was unfair as it represented a departure from the modus operandi of the Company which the shareholders had put in place under the 2014 Restructuring. 

(2)     It is well-established that the failure of directors to take steps to defend their company’s interests falls within the scope of the company’s affairs.  As Kwan J (as she then was) observed in Re Ka Ka Realty Ltd [2024] 1 HKLRD 832 at §16:

“In Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, a distinction was drawn between two sets of conduct: the acts of the majority shareholder in diverting contracts to itself from the company, and the omission of the three directors nominated to the board of the company by the majority shareholder in failing to take action to defend the company’s interest in that situation. The first was conduct by the majority shareholder of its own affairs, and although adverse to the interest of the company would not have founded relief under s.210 as that was not conduct in the course of the company’s business. The second was conduct in the affairs of the company and would be relevant conduct for s.210.” (underlined added)

(3)     While the decision to bypass the Company/Cobo GZ was ostensibly taken by Cobo SPA, as directors of the Company, Cozzi/Linetti/Lamantia were under a duty to consider and protect the Company’s interests.  This was particularly so when the interests of Cobo SPA were in conflict with those of the Company/Cobo GZ. 

(4)     Their failure to raise any objection to the Further Diversion of Business, with the result that the Company/Cobo GZ be deprived of the revenue and profits from the sale of the Additional Products, was an affair of the Company[203]

D3.3    Whether Majority Camp’s conduct was unfair or constituted breach of fiduciary duties ?

112.  There is no dispute that the Premises was closed and was inaccessible to Cobo GZ’s personnel including Scapin/Lamantia from 20 February 2021 until June 2022. 

113.  The evidence shows that the closure of the Premises has caused substantial disruption to Cobo GZ’s business and operations:

(1)     According to Lamantia, because the Premises were closed, Cobo GZ’s computers, servers, accounting records, documents, inventory, goods and instruments were all locked inside[204].

(2)     Cobo SPA had to rent another office premises to meet the operational demands of Cobo GZ:

(a)     Scapin’s evidence is that he and Lamantia began to work from their hotel in Guangzhou[205].

(b)     Lamantia’s evidence is that he rented a temporary office at a co‑working office in Nanfenghui, Guangzhou from April 2021 (“Nanfenghui Office”)[206].

(c)     Rick Li testifies that when he started to work on 23 February 2021, the office was first at Langham Hotel and later moved to the Nanfenghui Office[207].

(3)     Lamantia further testifies that the employees had to purchase new tools, equipment and computers because the original items were locked in the Premises; only small deliveries could be made initially, and business resumed only gradually, step by step, by sourcing them directly from Italy.  It was only until 9 June 2022 that Lamantia finally regained possession of the Premises and its assets, including the production lines and testing equipment[208].

(4)     Liang accepts under cross‑examination that the Premises were  closed at the time and that there was a “de facto suspension of work and production”[209].

(5)     WH Liang also confirms under cross-examination that the Premises were completely closed and this affected all customers of Cobo GZ[210].

114.  Both parties put forward much evidence and arguments to address the reason for the closure of the Premises – the Majority Camp puts the blame on Liang, while Liang claims that closure was the decision of the Landlord and he had nothing to do with such decision. 

115.  In my view, the real issue is whether as a result of the closure of the Premises from 20 February 2021, which rendered Cobo GZ unable to carry on its business and operations or to fulfil the customers’ demands, the Majority Camp was justified in adopting the alternative measure of  fulfilling the customers’ demands by allowing Cobo SPA to sell the Additional Products directly to the customers, without passing through Cobo GZ. If they were justified in doing so, the direct sales could not be unfair or constituted a breach of fiduciary duties.   

116.  For the reasons explained below, I do not think that the Further Diversion of Business was unfair or that Cozzi/Linetti/Lamantia acted in breach of their fiduciary duties in allowing the Additional Products to be sold directly to Dingli, LGMG and Litian. 

117.  As a result of the closure of the Premises from 20 February 2021, Cobo GZ had been unable to carry on any business and could not comply with the orders placed or to be placed by its customers.  The evidence shows that:

(1)     In the case of Dingli, the emails from Dingli to Scapin show that Dingli urgently required large quantities of products in March 2021 and indicated that it would collect the inventory from Cobo SPA first[211].

(2)     The position with LGMG was similar.  In its email dated 12 March 2021 to Cozzi, LGMG referred to production delays and requested that production at the Premises be resumed as soon as possible to meet its needs.  It was in this context that Scapin and Rick Li proposed that Cobo SPA would supply directly[212].

(3)     As regards Litian, the contemporaneous evidence clearly shows that Litian repeatedly applied pressure demanding Cobo GZ to continue with the supply following the closure of the Premises[213]:

(a)     WeChat records between Rick Li and Mr Pan of Litian on 24 and 25 February 2021 show that Mr Pan requested deliveries due to urgent deadlines and warned that internal issues at Cobo GZ should not delay or derail supply, whereupon Rick Li arranged delivery through BETC.

(b)     In its email dated 8 March 2021 to BETC, Litian stated that, “due to [Cobo GZ’s] own reasons, the contract signed with our company could not be fulfilled”.

118.  Faced with the situation, it must be incumbent upon the directors to do what they could in order to fulfil the customers’ demands, particularly when the demands came from major customers like Dingli, LGMG and Litian. 

(1)     This was necessary not only to retain these major customers but also to minimise the risk of having to pay compensation to any them if the orders were not fulfilled. 

(2)     Cozzi/Linetti/Lamantia did precisely that.  From March 2021, they arranged Cobo SPA to sell and supply the components and products required by these customers following their demands and, at times, complaints made by them. 

(3)     It is Lamantia’s clear evidence, which I accept, that following the closure of the Premises, the situation became very dire in that the entire operation of Cobo GZ came to a complete halt; the employees were unable to fulfil any orders previously placed by the customers; and Cobo GZ did not even have an office to carry on any work. 

119.  I am unable to see how the Majority Camp’s conduct in arranging components and products to be sold by Cobo SPA directly to Dingli, LGMG and Litian can be characterised as “unfair dealing” or “dishonest assistance” or that the directors acted in breach of their fiduciary duties owed to the Company or Cobo GZ.

120.  Mr Chang argues that the disruptions to Cobo GZ were not the reason or justification for Cobo SPA to sell the Additional Products to Dingli, LGMG and Litian, relying on some correspondence between Dingli and Cozzi and some sales carried out by Cobo GZ in 2021, which he contends, confirms that Cobo GZ’s operations continued beyond February 2021 and undermines the Majority Camp’s claim that restricted access to the Premises justified the Further Diversion of Business[214]. 

121.  Far from supporting ECT’s contention, the correspondence reinforces the Majority Camp’s case that they had no alternative but to cause Cobo SPA to sell the Additional Products to these customers directly from March 2021:   

(1)     While it is correct that Dingli ultimately changed supplier notwithstanding Cozzi’s email of 26 March 2021 stating that Cobo SPA would resume production of over 1,000 units in Italy within 2 weeks[215], that assurance was made by Cozzi after he had received Dingli’s complaints about Cobo GZ’s failure to deliver the components ordered. 

(2)     Dingli referred to the “long time shut up in [Cobo GZ] facility” as the cause of non‑delivery, and acknowledged that Cobo SPA had worked “quite hard with delivery”, but there was still a significant shortfall between units available and its demand for boom‑lift components[216].

(3)     The very limited sales in 2021 carried out by Cobo GZ were, as explained by Lamantia, the few deliveries from Cobo SPA to Cobo GZ during the period from August to December 2021. After Lamantia had established the Nanfenghui Office, Cobo GZ was able to partially resume its business including receiving and storing small quantities of products.  His evidence is consistent with Linetti’s evidence (which I accept) that the Nanfenghui Office allowed Cobo GZ to carry out limited activities such as storing small amounts of inventory required for its business[217].

122.  As to ECT’s contention that even if Liang disrupted Cobo GZ’s operations, this did not justify the Majority Camp bypassing the Company in the sale of the Additional Products, it is wholly without merit:

(1)     As explains by Cozzi in his evidence, which I accept, the Company lacked assembly capacity necessary to fulfil the customer orders. 

(2)     Scapin also explains in his evidence that the Company did not hold the requisite ISO certification to supply certain customers directly, whereas Cobo SPA did.

(3)     Their evidence is consistent with the fact that the Company has always been a trading company and all the assembly and production activities have been carried out at Cobo GZ’s level. 

123.  It is unnecessary to consider the Majority Camp’s contention that the Company/Cobo GZ were non-exclusive distributors of Cobo SPA.  That said, I am unable to see how the non-exclusive distributorship can provide a defence to the claim that the Further Diversion of Business, if established, constituted an unfair dealing and breach of fiduciary duties on the part of the Majority Camp.  This is because as directors of the Company/Cobo GZ, Cozzi/Linetti/Lamantia were under  a duty to act in the best interests of both companies, and they cannot put the interests of Cobo SPA ahead of the interests of the Company/Cobo GZ.  Allowing Cobo SPA to bypass both the Company and Cobo GZ prima facie would constitute a breach of duties on the part of the directors.

D3.4    Reason for closure of Premises

124.  I do not think that the reason for closure of the Premises is relevant to any of the claims made by the parties.  The Majority Camp has not raised any “clean hand” defence in the UP Proceedings.  Nor has it made any claim or counterclaim, whether in the name of Cobo SPA or the Company, against ECT or Liang in the HCA Action or the Derivative Action.   

125.  Nevertheless, I shall consider the parties’ respective contentions and state my view on the issue. 

126.  Mr Chang contends that ECT/Liang did not cause the closure of the Premises for the following reasons:

(1)     Cobo GZ brought proceedings against the Landlord in the Mainland, where the court held that the Landlord had obstructed the site transfer and breached the lease^[218]. 

(2)     Cobo GZ itself in the Mainland proceedings and correspondence attributed blame to the Landlord rather than Liang[219].  Liang actively sought to resolve the situation, writing repeatedly to the Landlord in March 2021 to request access for employees and customers to retrieve goods necessary to fulfil orders for key clients such as LGMG and Dingli[220].

(3)     Liang was justified in challenging the Majority Camp’s right to access the Premises based on legal advice on PRC law, which stated that Lamantia’s new business licence had been obtained through misrepresentation regarding the loss of earlier corporate documents[221]. 

(4)     Finally, while the resumption of Cobo GZ’s operations was pleaded, the allegation that the Company itself resumed the same pattern of transactions was not[222]. In any event, ECT contends that the evidence purporting to show such resumption is lacking or unconvincing[223].

127.  It is not in dispute that:

(1)     On 30 January 2021, Liang was notified that his appointment as director, GM and legal representative of Cobo GZ was terminated, and Lamantia would attend the Premises on 3 February 2021 to undertake handover work[224].

(2)     By email dated 19 February 2021, LLX (the Mainland law firm retained by Lamantia and the Company) confirmed to Liang that “our client had reached an arrangement with you for handover tomorrow, Saturday 20 February 2021 at 9:00am”.

(3)     Liang never signed any notice agreeing to step down as legal representative of Cobo GZ.  Nor did he hand over the business licence of Cobo GZ to the Majority Camp.  Nevertheless, the Majority Camp caused documents to be filed with the relevant departments in Guangzhou claiming that the business licence had been lost and successfully obtained a new business licence with Lamantia as the legal representative of Cobo GZ.  Liang was advised by his PRC lawyer that the new business licence was “illegal” and administration proceedings could be commenced to ask for revocation of the same, and Liang did commence such proceedings[225].

(4)     The unchallenged evidence of Lamantia and Scapin is that they were not allowed to enter the Premises on the day fixed for the handover or thereafter:

(a)     Lamantia testifies that access to the Premises was blocked from 20 February 2021 until 9 June 2022.  He attempted to enter the Premises on a weekly basis but on each occasion, he was refused entry by the security guards stationed there[226].

(b)     Scapin likewise testifies that he together with Lamantia tried to enter the Premises on numerous occasions over the ensuing months but was repeatedly refused entry by the security guards[227].

(5)     The evidence of Lamantia/Scapin is consistent with contemporaneous correspondence and notices which show that the Premises were closed, and Liang did not agree to handover the Premises to the Majority Camp:

(a)     Liang admits issuing a letter to “all Guangzhou employees” on 19 February 2021, stating that Cobo SPA was attempting an “illegal takeover” and that “[this Italian] has no right to force his entry and interfere with the company’s operations”[228].

(b)     Although Liang surmises that it was “impossible” for this letter to have reached everyone, WH Liang (an employee of Cobo GZ), confirms that she received the letter via the staff WeChat group[229].

(c)     On 20 February 2021, Liang issued a further notice to Cobo GZ’s employees stating that “representatives appointed by Italy... wanted to take over the company in a tough way” but had “left the park premises voluntarily” following intervention by local authorities[230].  WH Liang confirms receipt of this notice via WeChat[231].

(d)     On 23 February 2021, LLX emailed Liang stating that “the gates of COBO GZ are now shut, resulting in a de facto suspension of work and production”, and requesting his cooperation on the handover. 

(e)     On 24 February 2021, Liang’s lawyer replied unequivocally, “At this stage Mr Liang does not agree to any handover of COBO GZ’s business, including customer relations”.

128.  In my judgment, the closure of the Premises was the result of Liang’s refusal to cooperate with the Majority Camp in handing over Cobo GZ and the Premises to the Majority Camp:

(1)     While it was the Landlord which did not allow the Majority Camp and Cobo GZ’s staff to have access to the Premises, that was the direct result of Liang informing the Landlord that there was a dispute in control over Cobo GZ. 

(a)     In the Landlord’s own announcement,[232] it stated that the restrictions on access were imposed because “internal management issues within [Cobo GZ]” had caused instability that seriously affected the normal operations of other companies in the park and the management order.

(b)     The “internal management issues” arose because Liang refused to accept that his appointment as director, GM and legal representative had been terminated or that Lamantia was properly appointed to such positions, and he told the Cobo GZ’s employees that the Majority Camp lacked authority to enter the Premises. 

(c)     In the proceedings between Cobo GZ and the Landlord, the Guangzhou Court found that “since Liang Tianxiang, the original legal representative of [Cobo GZ], was unwilling to hand over the control of the company, the new legal representative encountered obstruction from relevant personnel in the process of taking over the company’s office space”[233]. 

(2)     The fact that Liang acted on legal advice is irrelevant. Even if the licence had been irregularly obtained, the fact remains that Liang’s appointment as director and GM of Cobo GZ had been terminated by resolution passed at the Company’s level.  Upon termination of his appointment, he should cooperate, rather than object to the handover of Cobo GZ and the Premises to the Majority Camp.

(3)     As to Liang’s reliance on his correspondence with the Landlord in March 2021 seeking to resolve the access issue, I do not consider this materially alters the analysis:

(a)     By February 2021, access to Cobo GZ’s premises had already been effectively blocked, and this resulted from Liang’s own communications and conduct. 

(b)     In any event, only one of the letters requested the Landlord to restore access to the Premises for resumption of Cobo GZ’s operations, but the letter continued to emphasise that the shareholders’ dispute remained unresolved.  Unsurprisingly, the Landlord did not restore access in response.

D3.5    Conclusion on Further Diversion Issue

129.  The Further Diversion of Business was necessitated by the closure of the Premises from 20 February 2021, and the Majority Camp was justified in souring the Additional Products from Cobo SPA to fulfil the demands and requests made by the customers including Dingli, LGMG and Litian.  The Majority Camp did not act in breach of fiduciary duties owed to the Company or Cobo GZ and their conduct was not unfair, let alone prejudicial to the interests of the Company.   

130.  The closure of the Premises was the result of Liang’s refusal to cooperate with the Majority Camp in handing over the Premises after his appointment as director, GM and legal representative of Cobo GZ had been validly terminated. 

D4.    Prices Increase Issue

131.  ECT complains that the increases in Transfer Prices through Resolution 1 and subsequently implemented by the 11/11 List and the 9/12 List constituted unfair dealing on the part of Cobo SPA as the increases in prices were without sufficient justification.  In particular, ECT contends that:

(1)     In the 11/11 List, there were significant and unexplained increases in the prices of the Company’s top 22 items were increased with one item increased by 79%[234].

(2)     The 11/11 List was superseded by the 9/12 List due to incorrect calculation on some items.  Some prices returned to original levels, but others increased further – with one item increased by 285%[235].

(3)     These increases raised the Company’s costs by 35.7% (per 11/11 List) and a further 7.4% (per 9/12 List),[236] and adversely affected the profitability of the Company/Cobo GZ at the time when major customers in the Mainland had been requesting for price reductions of up to 15% due to COVID-19[237].

(4)     The Majority Camp offered no explanation on how the price hikes could benefit the Company rather than Cobo SPA.  The price difference represented the Company’s usual markup, which was diverted to Cobo SPA[238]. 

132.  The Majority Camp denies that the calculations put forward by ECT are correct[239] or that the price adjustments were unfairly  prejudicial on the following grounds:

(1)     The supply and sale price of the components by Cobo SPA was subject to an annual review, “which were adjusted both upward or downwards on a commercial basis”[240].

(2)     Cobo SPA was under no obligation to sell its products to the Company at a preferential rate and was entitled to sell its products to any customers, and it was reasonable for Cobo SPA “to adjust its prices whenever it considers appropriate”[241].

(3)     The Company was entitled “to set its own resale price in coordination and within the guidelines and sales policies of [Cobo SPA] which are consistent with an optimal development of the business”, relying on art.  6 of the Sales Agreement[242].

133.  At trial, Mr Cheng advances the following arguments:

(1)     ECT’s calculations on the overall cost increases of 35.7% and 7.38% are unreliable, selective, and analytically unsound in that:

(a)     The stated overall cost increases were calculated based on figures on “import amount” data compiled up to 20 November 2020.  There is no proper identification of the underlying source data supporting those import amount figures;[243] and

(b)     The analysis focuses on only 22[244] (or 23[245]) items, notwithstanding that the 9/12 List comprised 1,340 items.  On 9/12 List, the prices of 565 actually decreased (including reduction of over 60%), and only 376 items increased.  ECT’s analysis is thus incapable of showing that there was any effective overall increase in the Company’s costs.[246]

134.  For the reasons explained below, I am not satisfied that the price adjustments by the 11/11 List or the 9/12 List constituted unfair dealing or unfair prejudice to the Company.

135.  First, the clear and consistent evidence before the court is that the Transfer Prices were adjusted by Cobo SPA periodically based on changes in cost, and the adjustments applied to all companies within the Cobo Group:

(1)     Scapin’s evidence, which I accept, is that Transfer Prices were calculated by reference to international transfer-pricing standards, which reflected movements in the cost of raw materials and supplier charges. 

(2)     Linetti’s evidence is that Transfer Price list was reviewed usually on an annual basis.  Liang confirms that during his tenure as GM  and director of the Company, the prices of products sold by Cobo SPA to the Company were adjusted regularly on either annual or biennial basis.[247]

(3)     Liang’s email of 17 November 2020 referred to an earlier price adjustment made July 2019.  That earlier adjustment was also based on international transfer-pricing standards.

(4)     It is the consistent evidence of Scapin and Cozzi that under Italian Tax law, Cobo SPA had to sell its products to all of its subsidiaries based on the same Transfer Prices, including the Company/Cobo GZ.

(5)     Linetti also explains that uniform pricing adjustments were made to ensure consistent pricing across all group companies as if they were independent customers, so as to avoid potential inquiries from tax authorities regarding transfer pricing arrangements.[248]

136.  Second, while there might be some basis for Liang to be concerned about  the price increases under the 11/11 List and the 9/12 List which, on their face, appeared to be excessive, however, any such concern should have been alleviated by 16 December 2020 when Scapin stated that there had been errors in the earlier Lists, and provided a revised Transfer Price list (“16/12 List”) and confirmed that all the purchase orders issued by the Company would be adjusted and revised according to the 16/12 List[249].  This is reinforced by:

(1)     Scapin’s evidence is that the 11/11 List and 9/12 List were never implemented.  They were superseded by the 16/12 List, which “nullifie[d] and replace[d] any other edition”.  The 16/12 List incorporated revisions (including price decreases) following the identification of incorrect data and calculation errors in earlier versions, as determined by the controlling department of Cobo SPA[250]. 

(2)     Scapin’s email dated 30 December 2020, where he said that he was unaware of any actual price increases being applied and requested that Liang immediately provide all information and documentation relating to transactions which applied the price increase.  Liang confirms at trial that he received this email but never responded.[251]

137.  Third, there is no evidence to show that the Company has suffered any loss or prejudice as a result of the increases in prices under the 11/11 List or 9/12 List:  

(1)     Liang accepts under cross-examination that the overall cost increase calculations were based on import figures up to 20 November 2020[252], and did not reflect the price changes under the 9/12 List or the 16/12 List. 

(2)     There is no evidence to show that the price increases under the 11/11 List or the 9/12 List were in fact implemented.  When this is put to Liang under cross-examination, he explains that there was an 8-week lead time for purchase orders placed by the Company with Cobo SPA and, therefore, he did not necessarily have been aware of their implementation[253].

138.  For completeness, I reject Mr Chang’s argument that the sharp decline in the Company’s revenue, as recorded in the 2021 AFS and 2022 AFS, is prima facie attributable to the business diversion and price increases[254]:

(1)     The burden is on ECT to show that the Company has suffered any real prejudice from the so-called unfair dealing, which it has not shown.   

(2)     The decline must be seen against the fact that from 20 February 2021 onwards, Cobo GZ was unable to carry on any business or operations at the Premises.  Once Cobo GZ’s operations were paralysed, it was inevitable that the revenue of the Company would also decline as 95% of the Company’s revenue came from selling products to Cobo GZ.

139.  In the premises, ECT has not discharged the burden of proving that the increases in prices as stated in the 11/11 List and the 9/12 List were actually implemented.  It follows that ECT’s complaint that Resolution 1, insofar as it approved the increases in prices, constitutes unfair prejudicial conduct on the part of Cobo SPA, must fail.    

D5.    Competing Business Issue

140.  This concerns the claims in HCA Action made by the Company and Cobo SPA for:

(1)     breach of fiduciary duties owed by Liang to the Company by carrying on business in conflict and/or in competition with the Company through Horner, GZ Econ, GZ Aoxiang and Hunan Aoxiang. These entities engaged in manufacturing or selling products identical to or in competition with Cobo Group’s products, and used the Company’s Office and staff, and the Company suffered a loss in revenue in the amount of EUR 2.1 million in 2021;[255]

(2)     breach of the SHA by ECT for failing to procure Liang’s compliance with his fiduciary duties and/or the contractual obligations owed by ECT to Cobo SPA[256]; and

(3)     dishonest assistance by ECT in assisting Liang’s breach of fiduciary duties.[257]

D5.1    Majority Camp’s pleaded case

141.  The competing businesses, as pleaded in the SOC(HCA), are as follows:

(1)     Liang used the Office and staff, Sam Au, to carry on trading of inverters for lifts, security cameras, and “other parallel business”, including products manufactured or traded by Horner, Sam Au was listed as Horner’s contact person using the Company’s phone number.[258]

(2)     From 3 March 2020 to 31 July 2020, Liang and/or ECT purchased angle/length sensors for aerial work platforms from Cobo Group’s competitor, TSM Sensors S.r.l (“TSM”) in order to sell them to Dingli through GZ Econ.[259]

(3)     On 13 July 2020, Bridget Lee (an employee of the Company), on behalf of ECT, purchased displays/controller samples from Exor Embedded S.r.l. (“Exor”) which were resold by Horner.[260]

(4)     On 4 March 2021, Liang/ECT used GZ Aoxiang to sell cable reels (“ACQs”) identical to those manufactured by Cobo Group and bore “3B6 logo” to a client of Cobo GZ, Changsha Hepauto Trading Co. Ltd (“Hepauto”), resulting in Hepauto reducing orders from Cobo GZ[261].

(5)     Liang/ECT used Hunan Aoxiang to sell ACQs to Sinoboom Intelligent Equipment Co., Ltd (“Sinoboom”), one of Cobo GZ’s major clients, which resulted in Sinoboom ceasing to place orders for ACQs from Cobo GZ and Cobo SPA from March 2021[262].

(6)     In April 2022, various products manufactured by Cobo Group were on display for sale at GZ Aoxiang’s showroom and several former employee of Cobo GZ have been employed at the showroom[263].

[264]

(7) Liang/ECT used GZ Aoxiang to sell angle sensors/inclinometers for aerial work platforms bearing the trademark “HCT”, which were identical to those manufactured by Cobo Group to Dingli, causing Dingli to reduce purchase of angle sensors/inclinometers from Cobo GZ/the Company from 1 May 2022.

(8)     In May 2022, Liang/ECT “were in the process of ordering electronic modules, key components from Exor to manufacture displays which are similar to those manufactured by the Cobo Group and in direct competition with [Cobo SPA]”.  This caused further lost sales and secret profits.[265]

(9)     The foregoing activities constituted a breach of Art. 2.5, 2.8, 3.1, 8.1 and 9.6 of the Labour Contract.[266]

D5.2    Claims during employment/directorship

142.  Amongst the above claims, only the first 3 pre-dated termination of Liang’s employment/directorship with the Company.  I will deal with the claims in the same order as they appear in the preceding paragraph. 

143.  The first claim concerning Sam Au/Horner (§141(1) above) is wholly without merit:

(1)     While Sam Au was listed as the contact person of ECT and Horner, the relevant webpage referred to the Company’s address pre-2012[267].

(2)     As for Alibaba page where Sam Au was listed as the contact person of ECT, Sam Au confirms that he created the page on his own accord.  There is no reason for Sam Au to lie about this, particularly when he has no continuing connection with Liang or ECT, after he left the Company more than 4 years ago[268].

(3)     Prior to the 2014 Restructuring, Sam Au had already been handling Horner’s aftermarket trading, on behalf of the Company, as part of his role as sales & service engineer[269]. 

(4)     Sam Au’s evidence is that as sales and service manager of the Company, he was responsible for sale of Cobo SPA’s products including integrated solutions which utilized products manufactured by other companies including Horner.  In particular, in 2020, Horner’s XL4 was adopted by Cobo SPA as part of its standard product specification for use as a data logger for “SLIM / VIEW” crane safety system.  After the 2014 Restructuring, Sam Au has not been involved in selling any Horner’s products which were not sold together or integrated with Cobo SPA’s products[270].  Sam Au’s evidence remains unshaken during cross-examination and I accept his evidence.

(5)     As the products sold by Horner were only sold together with or as part of an integrated solution sold by the Company/Cobo GZ, such business could not constitute competing business.

(6)     Nor could the business of Horner constitute a breach of any of the 2014 Agreements as Liang and ECT’s interests and involvement in Horner have been disclosed in the LOI and NCA (see §23 above).

144.  The second claim regarding ECT’s purchases of angle/length sensors from TSM for sale to Dingli via GZ Econ (§141(2) above) is equally without merit:

(1)     The evidence of Liang and WH Liang[271], amply supported by contemporaneous documents, is that Dingli stopped purchasing sensors manufactured by Cobo SPA due to major quality and design issues:

(a)     From September 2018, significant issues emerged with Cobo Group’s angle/length sensors, especially CCR2 (part of Cobo Group’s integrated platform solution)[272];

(b)     On 15-16 April 2019, Cobo GZ staff reported to Cobo SPA the faults in CCR2 sensors supplied to a customer including irregular fluctuations in analog length signal values;

(c)     On 17 June 2019, Liang received report stating that Dingli had found multiple CCR 2 failures, and the staff commented that CCR 2 quality “completely uncontrollable…even if we do a full inspection”.

(d)     This was followed by testing proposal, with Cobo GZ proposed CCR2 testing to be done with a customer instead of Dingli and numerous returned CCR2 sample parts causing frustration to Dingli, to which Liang agreed. 

(e)     By October 2019, Dingli refused to test any further CCR2 prototypes due to repeated failures and sought replacement sensors. 

(f)     From October 2019 to April 2021, Dingli purchased 1,869 TSM sensors from GZ Econ (which sourced the same from ECT).  Cobo SPA was aware of this by 16 December 2019. 

(g)     Under cross-examination, Liang admits that ECT had sold 1,869 TSM sensors to Dingli but explains that this was driven by his commitment to advancing the Company/Cobo GZ’s interests as the sensors formed part of an integrated system developed by Cobo GZ, and if the system did not work, that would jeopardise the relationship with Dingli and risk losing the sale of the entire system in future[273].

(h)     After April 2021, GZ Econ ceased to be involved, and Dingli began to purchase alternative sensors from Nanjing Sailing and Baumer Group. 

(2)     Faced with Dingli’s prolonged dissatisfaction with the CCR 2 manufactured by Cobo SPA and its decision to source alternative sensors, it was justified for Liang to address the issue by sourcing alternative sensor from TSM so as to ensure that Dingli would continue to purchase and use the integrated systems sold by Cobo GZ.  As Liang says in his evidence, the value of the sensors was very low as compared to the price of entire integrated system sold by Cobo GZ, and it was important to maintain Cobo GZ’s business in selling the integrated system to Dingli.

(3)     Far from suffering any loss from the so-called competing business, Cobo GZ in fact benefitted from ECT’s conduct in procuring alternative sensors from TSM to satisfy Dingli’s demands and avoid the risk of losing Dingli as a major customer Cobo GZ. 

145.  The third claim regarding Bridget Lee/Exor (§141(3) above) cannot get off the ground:

(1)     It is a complaint that Bridget Lee[274], a full time employee of the Company, acted in breach of her duties by ordering 3 displays/controller samples from Exor and selling them to Horner. 

(2)     All that Mr Cheng can point to is that (a) Liang accepts during cross-examination that ECT paid for the samples; and (b) the relevant sales records were found in the Company’s Office.  At the highest, it was a single incident where Bridget Lee did some work for ECT. 

(3)     There is no evidence to suggest that Bridget Lee did such work on the instruction of Liang.  Even if the Majority Camp is able to prove that Bridget Lee carried out the work on the instruction of Liang, it has not been shown what loss has been suffered by the Company. 

(4)     More importantly, the Majority Camp has not articulated, let alone established, how ECT’s purchase of 3 samples manufactured by Exor from Horner could constitute a competing business of the Company. 

D5.3    Claims post-employment/directorship demurrable

146.  I turn to the remaining 5 claims which took place after  Liang’s employment and directorship came to an end on 29 January 2021 (described in §141(4)-(8) above).  In my judgment, the claims are demurrable and cannot constitute a breach of fiduciary duties on the part of Liang for the following reasons.

147.  First, Liang was not under any fiduciary duties at the time the so-called competing businesses were carried out.  As submitted by Mr Chang:

(1)     From 29 January 2021, the fiduciary relationship came to an end and Liang ceased to owe any fiduciary duties to the Company. 

(2)     As a matter of law, a former fiduciary is liable to account for the profits obtained from a maturing business opportunity arising during the subsistence of the fiduciary relationship, and the opportunity must be mature at the time the fiduciary was in the position of trust and confidence (Kwok Lau Chu v Kwok Chi Yau, HCA 3197/2016, 31 August 2017, §§95-100[275]).

(3)     In SOC(HCA), all the competing activities pleaded in §§15-19 took place after 29 January 2021. 

(4)     There is no plea that the activities complained of were maturing business opportunities.  Nor is there any plea that Liang took advantage of some maturing business opportunities while still in office.  To make such claim, the Majority Camp must plead and prove (a) specific opportunity was being actively pursued or negotiated by the Company and (b) Liang resigned intentionally to appropriate the opportunity for himself (Kao Lee & Yip §71; Thermascan Ltd v Norman [2011] BCC 535, §14(7)). 

148.  Second, any fiduciary duties were owed to the Company and the Company alone, given that:

(1)     The HCA Action is brought by the Company in its own right and Cobo GZ is not a plaintiff. 

(2)     The Majority Camp’s contention that the fiduciary duties owed by Liang to the Company “would equally apply to his management and operation of Cobo GZ”[276] is unsustainable.  As a matter of law, there is no basis to impose any fiduciary duties owed by Liang to the Company to any other Cobo entities including Cobo GZ. 

(3)     The Majority Camp’s contention is also wrong in fact.  As Mr Chang submits, the Company functioned as an intermediary in the supply chain.  To compete with the Company in any meaningful sense, it has to be alleged and proved that the activities had the effect of taking over the Company’s intermediary role, that is, by selling Cobo SPA’s products directly to Cobo GZ.  No such allegation has been pleaded. 

(4)     The activities pleaded, at most, only amount to competition with Cobo SPA, but Liang did not owe any fiduciary duties to Cobo SPA. 

149.  Third, it is not open to the Majority Camp to rely on any terms of the Labour Contract given that:

(1)     In the SOC(HCA), there is no plea on how any of the post-employment/directorship activities constituted a breach of the Labour Contract and which specific terms have been breached by those activities;

(2)     Although in the FBP(HCA), there is a reference to art. 2.5, 2.5, 3.1, 8.1 and 9.6 of the Labour Contract, still there is no plea on how these post-employment/directorship activities constituted a breach of which specific terms (Leung Cha See Pharmaceutical Ltd [2025] HKCFI 2003§36; Silver Stone Development Ltd v Lau Kwok Ching [2006] 4 HKLRD 308, 324G (§45)).

D5.4    Art. 8.1 prima facie void and unenforceable

150.  Even if, contrary to my view, the Majority Camp is entitled to rely on art. 8.1 of the Labour Contract (“Art. 8.1”), in my judgment, Art. 8.1 is prima facie void and unenforceable.

151.  First, Art. 8.1 imposes a 2-year post-employment restriction on Liang, without any compensation or payment.  The period of restriction is prima facie unenforceable:

(1)     As Reyes J observed in Cantor Fitzgerald Europe & Ors v Boyer, HCA 1160/2011, 29 February 2012, “typically, the Courts treat a 12-month duration for a non-solicitation clause as prima facie too long” (§§94-100, 145-146). 

(2)     The position must be a fortiori for a non-compete clause, which is generally considered more difficult to justify than a non-solicitation clause (Employment Covenants and Confidential Information, 4^th ed, §§11.34, 11.37).

(3)     There is no plea or proof that any specific confidential information or knowledge held by Liang whose disclosure within the 2‑year period would cause material detriment to the Company’s business (cf. Manulife FinancialAsia Limited vKenneth Joseph Rappold§46).

152.  Second, Art. 8.1 purports to restrain Liang from carrying on any activities or have interest in “any business directly or indirectly in competition or in conflict” with Cobo SPA or any Cobo SPA Parties.  A covenant by an employee of a company intended to protect not merely the business of that company but also the business of associated or subsidiary companies in which he does not serve is an unreasonable restraint (Chitty on Contracts, 36^th ed, §19-235.)[277]

153.  Third, the restraint on Liang to invest in or have any interest in any business directly or indirectly in competition or in conflict with the Company is far too wide and general.  This was particularly so when Liang’s expertise accumulated over his 30 years’ working experience in the same industry.   

154.  Fourth, as submitted by Mr Chang, any contractual non-compete duty, even if valid, should be narrowly construed and the obligation only extends to activities that are truly competitive with the employer’s business:

(1)     There can be no breach unless the Company, in fact, engaged in business in the relevant area during the material period. 

(2)     Where the Company’s business presence was “insignificant”, there can be no meaningful competition (Axel Threlfall v ECD Insight Limited, Glenn Whitney [2012] EWHC 3543 §§93, 107-110). 

(3)     Here, the Majority Camp has not pleaded or proved that the Company (as opposed to Cobo GZ) had carried on any substantial business activity in relation to (a) ACQs manufactured by Cobo Group, (b) angle sensors/inclinometers manufactured by HCT or (c) electronic modules/key components manufactured by Exor.    

D5.5    Justifications pleaded by Majority Camp

155.  In his D&CC(HCA), Liang pleaded that Art.  8.1 “is an unreasonable restraint of trade covenant and is therefore void and unenforceable”[278] in that it extends to Cobo SPA Parties, does not define with any precision the business covered and the period is excessive.  In reply, the Majority Camp pleaded the following matters as justifications for contending that the restraint under Art. 8.1 is reasonable[279]:

(1)     Liang’s role as director and GM of the Company and Cobo GZ meant that he was “entrusted with day-to-day management of Cobo SPA’s PRC business operations conducted through [the Company] and Cobo GZ, armed with substantial knowledge of its business and operations in Hong Kong and the PRC including but not limited to highly confidential client information, frequent contact with clients, financial data and trade secrets including technical data regarding Cobo SPA’s products” (“1^st Justification”).

(2)     As the Company’s business “is in fact Cobo SPA’s PRC business”, Art. 8.1 is necessary and reasonable to protect the Company and Cobo SPA’s legitimate business and goodwill (“2^nd Justification”);

(3)     Alternatively, “any reference to Cobo SPA can be excluded by way of blue pencil test if necessary”;

(4)     The business covered by Art. 8.1 is defined at the Background section of the Labour Contract as “the production and sale of components for the automotive and off-highway vehicle sectors” (“3^rd Justification”);

(5)     2 years after termination is reasonable in the circumstances as Liang would continue to have an indirect interest in the Company through ECT (“4^th Justification”); and

(6)     “many of the competing activities were carried out or commenced during the term of the Labour Contract and only thereafter discovered by Ps” (“5^th Justification”).

156.  In my judgment, none of the matters put forward by the Majority Camp justifies the reasonableness of the restraint under Art. 8.1.

157.  As regards the 1^st Justification:

(1)     The so-called highly confidential information is far too vague and general and covers every information which came to Liang during his employment.  Liang was employed by the Company for over 15 years (see Section D14  below), it is untenable to suggest that all information he came across during his employment was highly confidential. 

(2)     The position is not improved by Linetti’s testimony.  Under cross-examination, Linetti suggests that the legitimate interest which Art. 8.1 sought to protect was “the know-how, the intellectual property, the personnel, the staff, and the relationships with suppliers”.  Upon further probing, it becomes clear that none of these applied to the Company as the Company possessed no independent IP or technical know‑how, and the Company only employed 2 part-time staff and 2 full time staff (Sam Au and Bridget Lee).  Linetti’s answers are directed to Cobo GZ.[280]

(3)     In any event, the need to safeguard confidential information is already addressed by the confidentiality clause in art. 7, making Art. 8.1 redundant (Midland Business Management Ltd v Lo Man Kui [2011] 1 HKLRD 470§15).  The existence of one restraint reduces the need for others, or increases the burden to justify them (Stenhouse Australia Ltd v Phillips [1974] AC 391at 402-403).

158.  As for the 2^nd Justification, the plea that the business of the Company is “Cobo SPA’s PRC business” is plainly wrong in fact and in law.

159.  As regards the 3^rd Justification:

(1)     The definition of “business” in the Background section is far too general.  It has not been shown that all information relating to that industry was confidential. 

(2)     It is not in dispute that prior to the Labour Contract, Liang already had much knowledge and experience in the production and sale of components for the automotive and off-highway vehicle industry. There was no justification for restricting Liang from using his knowledge and information after he left the employment of the Company.  A skilled employee such as Liang must be free to use his expertise in future work (The Restraint of Trade Doctrine, 4^th ed,pp.127-128; PCCW-HKT Telephone Ltd v Aitken (2009) 12 HKCFAR 114 §21, per Ribeiro PJ).

160.  The 4^th Justification is wholly irrelevant and does not provide a justification for the restraint.

161.  The 5^th Justification is no more than a re-gurgitation of the Majority Camp’s allegations and adds nothing to the analysis.

162.  For the above reasons, I hold that Art. 8.1 is an unreasonable restraint of trade and, therefore, void and unenforceable. 

D5.6    Pleaded cases on enforceability of NCA/SHA

163.  It is ECT’s pleaded case that the NCA is unenforceable as a matter of law because[281]:

(1)     It is not supported by any consideration;

(2)     It imposes obligations on ECT only but does not confer any benefit on ECT or impose any detriment on Cobo SPA;

(3)     Art. 1 of the NCT is an unreasonable restraint of trade covenant and is therefore void and unenforceable in that:

(a)     the clause does not pursue any legitimate business interests of Cobo SPA in precluding ECT from competing with Cobo SPA or any Cobo SPA Parties;

(b)     the clause does not identify or define with any precision the business covered by the covenant;

(c)     the territorial scope is unduly wide, covering Hong Kong and Mainland China;

(4)     The temporal scope of art. 5 of NCA (2 years after ECT ceased to be a shareholder of the Company or an indirect shareholder of Cobo GZ) is excessive; and

(5)     At the time of the NCA, Cobo SPA was made aware of ECT’s interest in Horner, Horner’s core business, Liang’s position in Horner, Horner APC LLC, GZ Econ and GZ Econ’s core business, and the further disclosure made by Liang in 2009 and 2010 of his positions at GZ Econ.

164.  The Majority Camp also claims that the competing activities constituted a breach of the SHA, relying on the following covenants (together “SHA Covenants”):

(1)     Art. 9.3 of the SHA, which prohibits a director (or a substitute director) appointed by ECT to directly or indirectly compete and/or have interest in conflict with the Company and/or Cobo SPA or any Cobo SPA Parties including be involved in any title/position or has any interest directly or indirectly in conflict with the Company and/or Cobo SPA and/or Cobo SPA Parties; and

(2)     Art. 10.2 of the SHA, which prohibits a GM appointed by ECT to engage in the aforesaid acts . 

165.  It is ECT’s pleaded case that the SHA Covenants are unreasonable restraint of trade covenants and therefore void and unenforceable in that[282]:

(1)     They do not pursue any legitimate business interests of Cobo SPA in precluding ECT from competing with Cobo SPA or any Cobo SPA Parties; and

(2)     they do not identify or define with any precision the business covered by the covenants.

166.  Further, on a proper construction of the SHA[283]:

(1)     The SHA Covenants do not impose any obligations on ECT to prevent any director or substitute director from competing or having any interest in conflict with the Company and/or Cobo SPA and Cobo SPA Parties;

(2)     The SHA Covenants do not bind any director or GM appointed by ECT as they are not parties to the SHA. 

167.  It is Cobo SPA’s pleaded case that the NCA is supported by consideration for the following reasons[284]:

(1)     NCA was one of the agreements entered into by the parties in the course of Cobo SPA agreeing to conduct its “PRC business through [the Company] and Cobo GZ”;

(2)     As a result of the above, ECT benefitted, as a shareholder of the Company, from Cobo Group’s “long standing and well established brand, reputation, extensive product line and worldwide distribution network”;

(3)     SPA was only prepared to allow ECT (and Liang) to participate in “Cobo SPA's PRC business” by taking a minority stake in the Company on the condition that they agreed to the non-competition covenants contained in the NCA, SHA, Labour Contract and all the other agreements which were simultaneously executed by the parties;

(4)     If ECT (and Liang) were unwilling to abide by the aforesaid non-competition covenants, Cobo SPA would have chosen to conduct its “PRC business” with another candidate instead; and

(5)     ECT and Liang were paid a total sum of EUR70,000 upon their entering into the various written agreements including  the NCA. 

168.  As regards the restrictive covenants under the NCT/SHA, Cobo SPA’s case is that by reason of the following matters, the restrictive covenants are reasonable:

(1)     The 1^st Justification[285];

(2)     Art. 1 of NCA and art. 9.3 of SHA are necessary and reasonable to protect the Company and Cobo SPA’s legitimate business interests[286];

(3)     The business scope covered by art. 9.3 of SHA is identified and defined by art. 4.1 of SHA[287];

(4)     In the course of negotiations commencing with the LOI and ending with the CA, “it was at all material times understood by the parties that the business is the production and sale of Cobo Group’s components for the automotive and off-highway vehicles sectors”[288];

(5)     The territorial scope of art. 1 of the NCA is not unduly wide as Cobo SPA’s business conducted via the Company and Cobo GZ was in Hong Kong and the PRC.  This is effectively the same as the 2^nd Justification[289];

(6)     The temporal scope of 2 years after ECT ceased to be a direct shareholder of the Company is not excessive and is justified.  As such shareholder, ECT “is privy to confidential information belonging to Cobo Group” including but not limited to “highly confidential client information, frequent contact with clients, financial data and trade secrets such as technical data regarding Cobo SPA’s products”[290].  This is effectively a repetition of the 1^st Justification.

(7)     Cobo SPA was aware of Horner/GZ Econ’s core business but does not admit the truthfulness of ECT’s disclosures in the NCA.  It was all along understood between the parties that “whilst Horner and GZ Econ could conduct business not in conflict or competition with [the Company], they would be restrained from conducting any business involving the automotive and off-highway vehicles sectors as such business would conflict with the interests of and be in competition with [the Company]”[291].  The Company and Cobo SPA did not know or consent to Liang receiving fee for acting as director of GZ Econ[292].

D5.7    Whether NCA void for want of consideration

169.  I shall first consider whether the NCA is unenforceable for want of consideration. 

170.  In his Opening and Closing, the only argument advanced by  Mr Cheng is that as recited in the preamble, the NCA forms part of a larger picture of the 2014 Restructuring in which ECT became a 40% shareholder of the Company.  The arrangement was encapsulated in the CA which was signed after the NCA, which provided inter alia that (1) the NCA was signed by ECT on 4 July 2014 and by Cobo SPA on 4 August 2014 (Art. 14); and (2) payment of EUR 35,000 to each of ECT and Liang (Art. 15).

171.  In my judgment, the NCA is unenforceable as it is not supported by any consideration.

172.  First, no consideration has been recorded in the NCA.

(1)     It cannot be said that the consideration was self-evident from the NCA itself as there was no mutual obligation between ECT and Cobo SPA.  All the obligations were on ECT, not Cobo SPA. 

(2)     There is no plea or proof as to why the Majority Camp should be allowed to introduce the extraneous facts and matters (as pleaded in §10 of Reply(HCA)) into the NCA when the parties chose not to do so. 

173.  Second, the payment of EUR 35,000 to each of ECT and Liang had nothing to do with the NCA:

(1)     There was no reference in the NCA to the payment of EUR 70,000, still less as consideration for the NCA. 

(2)     As explained by Liang under cross-examination, the payment of EUR 35,000 to each of ECT and Liang was to compensate ECT and him for giving up ETC’s 45% equity in Cobo GZ and transferring it to the Company without receiving any actual payment from the Company, given that Cobo GZ was a much more valuable company as it had its own clients and  carried on substantial business in the Mainland. 

(3)     I accept Liang’s evidence, which is consistent with (a) the fact that the NCA did not mention any payment having been made as consideration for entering into the NCA; (b) the undisputed fact that Cobo GZ was a much more valuable business as compared to the Company, which only acted as an intermediary between Cobo SPA and Cobo GZ; (c) under the 2014 Restructuring, ECT’s interest in Cobo GZ was reduced from a direct equity of 45% (pre-2014 restructuring) to an indirect equity of 40%. 

174.  Third, even if, contrary to my view, Cobo SPA is entitled to rely on any extraneous facts and matters, its reliance on the alleged “benefit” conferred on ECT by entering into SHA is wholly without basis given that:

(1)     The SHA was not conditional upon execution of NCA.  The 2 agreements made no reference to one another.

(2)     The NCA was unrelated to ECT’s and Cobo SPA’s rights and obligations vis-à-vis the Company as shareholders, which was the subject-matter of SHA.  The 2 agreements cannot be said to form part and parcel of a single transaction (cf. Chitty§6-030).

175.  Fourth, the assertions that (1) ECT benefitted from Cobo Group’s standing, reputation and distribution network; (2) Cobo SPA was only prepared to allow ECT to participate in “Cobo SPA’s PRC business” by taking a minority stake in the Company; and (c) if ECT were unwilling to abide by the restrictive covenants, Cobo SPA would have chosen another candidate to conduct its “PRC business” (see§166(2)-(4) above) are inconsistent with the objective facts that Cobo SPA only came into the picture as a result of the acquisition of 3B6 Italy, and the 2014 Restructuring was to restructure the business to bring about the benefits to the Company and Cobo GZ as I so find (see Section A4 above).

176.  In view of my holding that the NCA is void for want of consideration, it is not necessary to consider the other arguments advanced by the parties as to whether the restrictive covenants were valid and enforceable beyond stating that the reasons stated in Section D5.5 apply mutatis mutandis to the covenants under the NCA, which I consider to be unreasonable restraint of trade clauses and therefore are void and unenforceable. 

D5.8    SHA Covenants   

177.  In my view, the Majority Camp’s reliance on the SHA Covenants as a basis of their claims against ECT or Liang is misplaced:

(1)     The SHA Covenants purport to preclude any GM, director or substitute director appointed by ECT from competing or having any interest in conflict with the Company, Cobo SPA and any Cobo SPA Parties.  These individuals are not parties to the SHA and, as such, they cannot be bound by the restrictions.   

(2)     Cobo SPA has no legitimate interest in shielding itself (or any Cobo SPA Parties) from competition of this kind.

(3)     Art. 9.3 only applies during Liang’s tenure as director of the Company.  It has no application once his appointment came to an end on 29 January 2021. 

(4)     Art. 10.2 only applies during Liang tenure as GM of the Company.  It has no application once Liang ceased to be a GM. 

D5.9    Post-termination activities not directed by ECT or Liang

178.  Even if, contrary to my view, the Majority Camp is able to overcome all the hurdles discussed in Sections D5.3 to D5.8 above, I do not think that they have discharged the burden of proving, on a balance of probability, that the so-called competing activities were directed by Liang or that there is any basis to attribute such activities to Liang or ECT.

179.  As regards GZ Aoxiang’s sale of ACQs manufactured by Cobo Group to Hepauto in March 2021 (§141(4) above):

(1)     There is no basis (none has been pleaded[293]) to attribute the activities of GZ Aoxiang to ECT or Liang at all.

(2)     Nor is there any evidence to show that Liang had any involvement in the sale. 

(3)     It is Thomas’ clear and consistent evidence, which I accept, that GZ Aoxiang has always been operated by him independently.  Given the level of Thomas’s business skill and experience in industrial IoT technologies, there is no basis to doubt his ability to set up and manage GZ Aoxiang. This is reinforced by the fact that Thomas was recognized as an emerging entrepreneur in his own right[294] and under his leadership, “GZ Aoxiang was one of the few companies in China capable of independently developing safety controllers for engineering vehicles and obtaining product safety certification in Europe”.   

(4)     The “HFG Reports” which purport to show that Liang had paid a few visits to GZ Aoxiang’s office is inadmissible as the makers of the reports fail to attend trial and be cross-examined on their reports.  The alleged “fears for their safety” is wholly unparticularized and substantiated and must be rejected. 

(5)     As Liang explains during cross-examination, ACQ is merely a cable extension transfuser, the relevant technology is 10-20 years old and well established in the automation field.  It is perfectly possible for any company to develop its own ACQ within a short time.[295]

(6)     Similarly, Thomas’ evidence is that ACQ is a “very simple product” which can be developed within a month or 2.  He is able to explains how ACQ came to be developed and his evidence in this respect is (rightly) not challenged[296]. Thomas’ evidence that GZ Aoxiang independently developed its own ACQ is corroborated by the fact that it was able to apply for patent for its ACQs[297].

(7)     In any event, the so-called competing activity was merely an instance when GZ Aoxiang sold 2 ACQs to Hepauto in March 2021 for RMB 4,330.  As Thomas explains, the sale was done to assist Hepauto in an emergency, following the sudden closure of the Premises[298].   

180.  As for Hunan Aoxiang’s sale of ACQs to Sinoboom in April 2021 (§141(5) above):

(1)     There is no basis (none has been pleaded) to attribute the activities of Hunan Aoxiang, a separate entity, to ECT or Liang at all. 

(2)     The evidence shows that Hunan Aoxiang was owned by Mr Li Li and YY Chen as to 75% and 25% respectively and Mr Li Li was its executive director and manager.  Liang had never contributed any capital to, nor had any involvement in Hunan Aoxiang’s operations[299].  The Majority Camp has not adduced any evidence to contradict YY Chen and Liang’s evidence in this respect. 

(3)     In any event, I am unable to see how the sale of the ACQs by GZ Aoxiang to Sinoboom can be said to be competing with the Company, when the ACQs have been developed by GZ Aoxiang and sold by GZ Aoxiang to Sinoboom.  At most, Hunan Aoxiang was competing with Cobo SPA, but Cobo SPA was not immune from competition.    

181.  As for the display of Cobo Group’s products for sale at GZ Aoxiang’s showroom (§141(6) above), it is impossible to see how the display of Cobo Group’s products for sale could pose a competition to the Company or what loss could have been suffered by the Company.

182.  In respect of GZ Aoxiang’s sale of angle sensors/inclinometers bearing “HCT” trademark to Dingli (§141(7) above):

(1)     There is no basis (none has been pleaded) to attribute the activities of GZ Aoxiang to ECT or Liang.

(2)     Nor is there any evidence to show that Liang had any involvement in the sale. 

(3)     As stated above, the evidence shows that GZ Aoxiang has always been operated by Thomas independently, and Liang had no involvement. 

(4)     The evidence on the sale shows that:

(a)     GZ Aoxiang via GZ Econ procured “TLJ 100” sensors from ECT (which in turn sourced them from TSM) and modified them before selling them to Dingli. 

(b)     The sensor bearing HCT logo is different from the angle sensor (AMU) of Cobo Group, as can be seen from the photos of the products.  The HCT angle sensors were designed for Parker Hannifin Corporation’s control system, and GZ Aoxiang customized them according to Dingli’s requirements. 

(c)     The emails[300] show that GZ Aoxiang sent instructions to Liang (as ECT’s representative) regarding labelling for TSM products, and TSM corresponded directly with GZ Aoxiang, copying ECT.  Liang/ECT only acted as intermediary transmitting information between TSM and GZ Aoxiang, consistent with its role as a trading company.  When asked about these emails during cross-examination, Liang and Thomas give clear and consistent evidence regarding the involvement of Liang/ECT in the email chain[301]. 

(d)     In any event, the sale of angle sensors/inclinometers bearing HCT logo by GZ Aoxiang to Dingli, at the highest, only amount to competition with Cobo SPA, but Cobo SPA was not immune from competition.

183.  As regards ECT having engaged in the process of ordering electronic modules/components from Exor to manufacture displays similar to those manufactured by Cobo Group (§141(8) above):

(1)     The only particulars pleaded are that on 5-9 May 2022 Liang exchanged emails with Exor about testing and ordering (unidentified) components to manufacture displays, said to be in direct competition with Cobo Group.

(2)     However, in the “Scott Schedule”[302], Mr Cheng makes much complaint about “Canview 4”, model of 4.3 display or human-machine interface and Electronic system-on modules model no. nS02-003 produced by Exor for use in GZ Aoxiang’s 4.3 display or human-machine interface, neither of which have been pleaded in SOC(HCA) or FBP(HCA). 

(3)     It is not open to the Majority Camp to run an unpleaded case of competing business in this manner. 

(4)     In any event, I am unable to see why ECT or GZ Aoxiang could not source any components from another manufacturer (Exor) for the purpose of their own business. 

184.  For all the reasons stated in Section D5.9, the Majority Camp has failed to discharge the burden of proving that the competing activities, as pleaded in SOC(HCA), were directed by Liang or that such activities could be attributed to Liang or ECT. 

185.  It follows that all the claims for (1) breach of fiduciary duties against Liang; (2) breach of contractual obligations against ECT; and (3) dishonest assistance against ECT fail for these additional reasons. 

D6.     Ningwen Issue

186.  The pleaded claim in relation to Ningwen[303] consists of 3 sub-paragraphs where the Company/Cobo SPA allege that:

(1)     Liang failed in his duties as director and GM “to conduct any threat assessment and/or take any steps including preparation of market strategy and price adjustment plans in relation to a competitor company in the PRC, [Ningwen], to whom components of Cobo Group products were supplied enabling [Ningwen] to supply steering columns similar to those manufactured by the Cobo Group in the PRC and ignored the concerns raised by Ps’ board of directors in relation to the threats posed by [Ningwen] as Cobo Group’s competitor contained in a letter sent by its Chairman on 26 November 2020”;

(2)     Liang ignored the concerns of the Company/Cobo SPA and failed to stop supplying to Ningwen components which enabled them to manufacture products infringing and competing with Cobo Group products;

(3)     The aforesaid resulted in one of the Company/Cobo SPA’ existing customers, XCMG, to stop ordering products from Cobo Group completely and, instead, purchased products infringing Cobo Group’s design from Ningwen resulting in the Company/Cobo SPA suffering a loss of turnover of EUR300,00 for 2019, EUR400,000 for 2020 and EUR 500,000 for 2021 and, thereafter, EUR 650,000 per year.

187.  The claim is wholly without merit:

(1)     There is no particulars as to what “threat assessment”, “market strategy” and “price adjustment plans” ought to have been undertaken or how such assessment, strategy and plans, if taken, would have avoided the competition posed by Ningwen, still less the loss of XCMG as a customer of the Company and Cobo SPA.

(2)     Far from supporting the Majority Camp’s claim, the letter dated 20 November 2020 from Cozzi to Liang shows that the directors were fully aware of the “risks and threats” posed by Ningwen as the concern had “already been discussed many times in the past”. 

(3)     The claim is made on an assumption that without the (unidentified) components supplied to Ningwen, Ningwen would not have been able to manufacture “steering columns similar to those manufactured by Cobo Group”, but no evidence has been adduced to prove such assumption. 

(4)     As Liang explains during cross-examination, SCK (steering columns kits)  manufactured by different companies look very similar and one cannot accuse another for copying its design simply by looking at photographs of the SCK in question.  When Liang asked Scapin if Cobo SPA held any patent for its SCK, none was identified[304]. 

(5)     More importantly, the objective facts show that Liang did respond to the concern as soon as it was raised and stopped supplying Ningwen with any products, notwithstanding his belief that the allegations were unfounded:

(a)     On 13 July 2018, Bridget Lee forwarded Ningwen’s purchase order to Cobo SPA.  Upon Scapin’s enquiry, Liang explained that Ningwen was a system integrator, not a competitor, and suggested signing a non-competition agreement and invited Scapin to visit Ningwen if he wished.

(b)     On 16 November 2018, Liang informed Scapin that XCMG “had some internal commercial issue” and requested if Cobo GZ could sell directly to Ningwen (a system integrator), and suggested selling the parts to XCMG through Ningwen and asked for Scapin’s comments.

(c)     On 16 January 2020, Liang informed Scapin that Ningwen had ordered 300 sets of switches for XCMG and other projects and asked if he had any concerns.  Scapin replied stating that Ningwen had copied Cobo’s Mercury SCK and he was concerned that XCMG might decide (sooner or later) to switch to Nignwen, and asked if Liang knew Ningwen’s selling price, whether it started mass production and whether he could get a sample for “gap” analysis.

(d)     On 17 January 2020, Liang replied that Ningwen had a partnership agreement with XCMG for investment in tools, and if Cobo GZ chose not to sell the switches it would force Ningwen to buy from other supplier.

(e)     On 20 January 2020, Scapin decided that Cobo GZ should not supply any parts directly to Ningwen, whereupon Liang immediately put the order on hold.

(f)     Further correspondence during January to April 2020 between Scapin and Liang on Ningwen/XCMG shows that in compliance with Scapin’s direction, no further products were sold to Ningwen.

(6)     The above correspondence show that it was Scapin’s decision not to sell any parts to Ningwen in view of Ningwen’s partnership with XCMG in manufacturing tools. 

188.  The loss of XCMG as a customer was the result of Scapin’s decision that no further Cobo products should be sold to Ningwen or to comply with XCMG’s request.  It was not caused by the alleged or any breach of duties on the part of Liang. 

189.  It follows that the claim for alleged breach of Labour Contract in dealing with Ningwen must be rejected. 

D7.    Access Issue

190.  The Majority Camp claims that Liang acted in breach of the Labour Contract in that:

(1)     he refused to provide the Company’s new management with access to the Office, documents and records, and continued to represent himself as being still affiliated with the Company after cessation as GM which led to the Company incurring additional expense of HK$12,615 and EUR5,340;[305] and

(2)     he failed to obey the lawful and reasonable orders of the Company under Resolution 3 by denying Scapin’s access to the Office on 22 October, 5, 11, and 25 November 2020.[306]

191.  As regards the handover of the Office and documents to the new management, the objective evidence shows that Liang never refused to provide access to the Office or the Company’s books and records after he ceased to be a director and GM of the Company:

(1)     On 31 January 2021, Lamantia emailed Liang demanding handover of the Company’s documents and stating that he would access the Office on 1 February 2021.

(2)     On 1 February 2021, Lamantia sent a notice to all employees of the Company, informing them of the “recent management changes”, and they required onsite participation of the employees at the Office to assist their review of company records.  The notice stated that all work from home arrangements ended and ordered the staff to work at the Office from 2 February 2021 failing which the Company would take appropriate disciplinary action against the employees.

(3)     On the same day, Grace replied to Lamantia, stating that due to the 4^th wave of COVID-19 in Hong Kong and the Chinese New Year approaching, the employees had been informed to start their holiday early.

(4)     On 2 and 3 February 2021, De Rosa and Martinello attempted to access the Office but unable to do so.  Grace arranged Bridget Lee to attend the Office but she was unable to open the door after PIN access failed and the system was locked.  The door remained locked until 17 February 2021 when Sam Au resumed duty and opened the door.  At the time, Liang was in Guangzhou, and he emailed Lamantia on 3 February 2021 to explain the work-from-home arrangement due to COVID-19[307].

(5)     On 17 February 2021, Sam Au and Liang attended the Office and the handover was completed on the day, and handover list was signed by De Rosa, Martinello and Liang.  In the handover list, Liang declared inter alia that he would be available, if need be, to attend the Office for further assistance in relation to the handover.

(6)     By email dated 18 February 2021 sent to Liang, De Rosa thanked Liang for his cooperation and assistance during the handover and confirmed that he had received 2 chops of the Company not listed in the handover list.

(7)     No request for assistance in relation to the handover of the Company was ever made to Liang after the handover. 

192.  There can be no breach of duty on the part of Liang as he never refused to provide access or handover the Office and the Company’s records to the new management.

193.  As regards the alleged failure to obey Resolution 3 by denying Scapin’s access to the Office on 22 October, 5, 11, and 25 November 2020, there is no plea or proof that the Company has suffered any loss.  For this reason alone, the claim falls to be dismissed.

D8.    Variable Pay Issue

194.  Art. 4.1 of the Labour Contract provides that the Company “agrees to pay to [Liang] an amount as set out in Annex 1”.  Provided that in relation to Variable Pay, (i) Liang will be entitled to Variable Pay for a particular year, at the end of such financial year and will only be paid such amount once the annual accounts of the Company for the relevant year have been audited; and (ii) Liang will not be entitled to receive the Variable Pay for a particular year if he ceases to be employed by the Company before the end of such financial year. 

195.  Article 4.1 and Part II of Annex 1 states that the Variable Pay is HK$250,000 on “85% BP”, “to be paid only once the accounts of the Company for the previous year have been audited”.

196.  There is no dispute that:

(1)     The end of financial year of the Company is 31 December;

(2)     “BP” is a reference to the Company’s business plan;

(3)     Variable Pay is effectively a “bonus” to Liang upon achieving “85% BP”; and

(4)     The Company achieved 85% of its targeted revenue as stated in the business plan/annual budget for each of 2019 and 2020.[308]

197.  The Majority Camp claims that Liang acted in breach of his duties as employees and the obligations under the Labour Contract by making unauthorised Variable Pay for 2019 in the amount of HK$250,000 to himself on 31 March 2020;[309] and attempting to make another Variable Pay for 2020 on 23 January 2021 when in both instances, the 3 conditions for triggering entitlement to receive Variable Pay had not been met.[310]  The 3 conditions were:

(1)     The Board being satisfied that all the targets set by it from time to time had been met by Liang[311];

(2)     The AFS for the relevant year had been completed[312]; and

(3)     Compliance with a reporting procedure.[313]

198.  Liang contends that he was entitled to Variable Pay for 2019 and 2020, and counterclaims the Variable Pay for 2020.[314]  His case is that:

(1)     The only condition for entitlement to Variable Pay was “85% BP”, which was a reference to the targeted revenue for that financial year[315];

(2)     While Part II of Annex 1 referred to a requirement for AFS before Variable Pay is paid, the Board routinely waived this in practice, often allowing payment before the audit was completed;

(3)     Even if the requirement for AFS was breached, the Company suffered no loss; and

(4)     The reporting procedure did not exist at the time of payment.[316]

199.  The key issue between the parties is the meaning of “85% BP”:

(1)     The Majority Camp contends that (a) it referred “to reaching 85% of the targets set for the [Company] each year”.  When Liang presented the annual budget to the Board, the Board would discuss and approve targets for the Company and Liang to achieve.  Although these targets were not expressly written or recorded as “business plan” or “target”, the parties “understood at all material times that whether these targets were achieved would be one of the determining factors for [Liang’s] eligibility for [Variable Pay]”[317]; (b) the targets were not limited to revenue but included a number of other targets including (i) decreasing financial and commercial indebtedness, (ii) debt reduction and improvement of accounts payable, (iii) diversification of clientele and (iv) harmonisation of the Company’s organisation structure within the Cobo Group.

(2)     On the other hand, Liang contends that “85% BP” was a reference to targeted revenue as stated in the business plan or annual budget for the previous financial year[318].   

200.  In my view, the meaning of “85% BP” was a reference to the targeted revenue in the business plan/annual budget presented by Liang and approved by the Board for that year.  There are 4 reasons for this. 

201.  First, the meaning of “85% BP” is a matter of contractual interpretation. The relevant principles have been sufficiently stated in Maeda Kensetsu Kogyo Kabushiki Kaisha v China State Construction Engineering (Hong Kong) Ltd [2020] HKCA 158 §29(1). 

202.  As submitted by Mr Chang, where, as here, an employer seeks to deprive an employee of a bonus earned through extra effort:

(1)     Any such term must be made clear to the employee before the work is performed (Lightfoot-Webber v Lawcommercial Trading Ltd, Employment Tribunals, Case No. 1402947/2022, 22 March 2023, §78);

(2)     If a bonus is purely discretionary, the employer “should say so openly”, and a clause “qualified by a slight phrase which does not make it absolutely clear that there is in fact no entitlement at all” is not sufficient for that purpose (Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715 §39 (Jacob LJ); Lightfoot-Webber §85);

(3)     The contra proferentem rule applies - any ambiguity in the employment contract is construed against the employer which  drafted the contract (Lexi Holdings Plc v Stainforth [2006] EWCA Civ 988 §20 (Carnwath LJ)).

203.  In the present case, the Labour Contract only referred to “85% BP” as the criterion for entitlement to Variable Pay.  There was no reference to any other targets as suggested by the Majority Camp.  The contra proferentem rule applies and the Majority Camp is not entitled to raise any other targets not mentioned in the Labour Contract as the criteria for determining Liang’s entitlement to receive Variable Pay.

204.  Second, the objective facts show that “85% BP” was a reference to targeted revenue for a financial year:

(1)     This is corroborated by the fact that when the Board discussed Liang’s business plan/annual budget for a given year, the directors always focused on agreeing on a clear and objective targeted revenue. These can be seen from their contemporaneous communications.[319]

(2)     The Majority Camp’s suggestion that “85% BP” was a reference to a series of qualitative targets, such as diversifying clientele, harmonising the Company’s organisational structure within the Cobo Group and developing marketing strategies, makes no commercial sense as it was impossible to measure whether 85% was achieved in respect of such targets.[320]  Indeed, when this is put to Cozzi, he is unable to explain how the qualitative targets worked other than asserting that “the target is generic, it is not a specific number” – an odd claim, since “85%” is by definition a “specific number”.[321]

205.  Third, while I do not doubt that Cozzi took the view that the Variable Pay was “wholly discretionary” [322] and he considered that “it is not the number [85%] that justified [payment of the bonus], it would be actually the efforts to be taken into account”,[323] that view was premised on his erroneous assumption that the Company had a discretion in deciding whether Liang was entitled to receive Variable Pay when the Company did not have such discretion under the Labour Contract.  There is no evidence to suggest that the Majority Camp had ever informed Liang about the Company having any discretion as suggested in Cozzi’s evidence before the Labour Contract was signed.

206.  Fourth, the Majority Camp’s case on the meaning of “85% BP” keeps changing.  This shows that the idea that Variable Pay was subject to compliance with a whole series of other targets was a mere afterthought, rather than what the parties agreed when the Labour Contract was entered into:

(1)     In the SOC(LA), the targets are said to be inclusive of the 4 matters pleaded.  Whereas in Cozzi’s evidence, he describes the targets in even more generic terms and considers that the Variable Pay is “wholly discretionary”.

(2)     The Company is unable to identify what other targets it had set for Liang to achieve in 2019 and 2020:

(a)     For 2019, the Company claims the targets were implementing marketing strategies and projects, expanding into new S.E. Asian markets, and securing repayment of the Company’s debt without external financing.[324] But these are offered as examples.  None of them has been mentioned in the business plan/budgets or recorded in writing, let alone minutes of Board meeting.  When asked about what targets had been set for 2019 which were not reached, Cozzi is unable to “remember the details at this point”,[325] before adding that they included strategies “to fight off the Chinese competitors”, which is only raised for the first time in his evidence.[326]

(b)     For 2020, the Company concedes that no other targets were set at all – supposedly because Liang “was becoming increasingly difficult to deal with”.[327]

207.  As regards the requirement for completion of audit:

(1)     While at the time the Variable Pay for 2009 was paid to Liang on 30 March 2020, the AFS had not been completed, at most, it was a technical breach and no loss has been suffered by the Company. 

(2)     More importantly, by the time the Labour Actions were commenced, the requirement had long been met as the 2019 AFS and 2020 AFS had been signed by the auditors and approved by the Board on 10 September 2020[328] and 30 July 2021 respectively[329].

208.  As for reporting procedure:

(1)     The Company is only able to point to 2 emails sent by Lamantia and Cozzi to Liang,[330] neither of which was issued by the Board. 

(2)     The reporting procedure requirement was no more than a condition unilaterally imposed by the Majority Camp, which did not bind the Company or Liang.

(3)     The Majority Camp’s assertion that the reporting procedure introduced in 2020 could be “incorporated” into  the Labour Contract[331] only falls to be rejected.  No basis for incorporating such requirement into the Labour Contract has been identified, still less established. 

209.  For the above reasons, I hold that Liang was entitled to receive Variable Pay for 2019 and 2020. 

210.  The Variable Pay for 2020 was payable from the date the 2021 AFS had been approved by the Board, that is, 30 July 2021[332].

D9.    Medical Insurance Issue

211.  The following facts are not in dispute:

(1)     Art. 4.1 of the Labour Contract provides that the Company “agrees to pay to [Liang] an amount as set out in Annex 1”.  Part III of Annex 1 states that Liang is entitled to “medical and life insurance costs” in the amount of HK$28,548 per annum.

(2)     On 21 January 2021, Liang (through his credit card) paid HK$36,333.86 to Bupa as premium for his medical insurance policy.[333]

(3)     By a cheque dated 7 January 2021 (signed by Liang), the Company paid HK$36,333.86 to Liang [334].  On 1 February 2021, Liang encashed the cheque[335].

(4)     Under the Labour Contract, Liang was entitled to receive reimbursement of medical insurance premium paid up to HK$28,548 per annum.  Liang accepts that he is liable to repay the difference (HK$7,785.86) to the Company. 

212.  The only issue is whether Liang was entitled to receive reimbursement of medical insurance premium in the amount of HK$28,548.

213.  Mr Cheng argues that the payment was made by Liang to Bupa on 21 January 2021, 8 days before his employment ended.  Consistent with the normal practice of payment in advance for an annual premium for insurance policy, this sum must have constituted the premium for the upcoming year[336].  The cheque reimbursing Liang for the sum was encashed on 1 February 2021, after his employment ceased.  After the termination of his employment, Liang should not be entitled to coverage for the rest of the year.  At most, Liang’s entitlement was a pro rata amount up to 29 January 2021, i.e. HK$36,333.86 / 365 x 8 days = HK$796.32.

214.  On the other hand, Mr Chang submits that Liang was entitled to reimbursement of the cost of medical insurance premium paid by him before termination of his employment given that:

(1)     The benefit is labelled as a “cost”, forming part of the “Total Cost to Company (1+2+3)”[337].  This reflects the total financial burden the Company promised to bear for Liang.  It therefore covers the actual cost incurred for insurance, including reimbursement, and subject only to the cap of HK$28,548.

(2)     Since Liang’s employment ended on 29 January 2021 and the Bupa payment was made on 21 January 2021, the Company’s reimbursement obligation had already arisen before his employment ended.  Crucially, there is no temporal limit on the obligation to reimburse Liang.  Contrast this with the provision on variable compensation, which expressly bars payment after termination.  The omission of such wording here shows the parties did not intend to limit reimbursement – the sole question being whether the obligation arose, which it clearly did.

(3)     The notion that Liang should have refunded the Company on a pro-rata basis is unsound.[338]  The Company has not articulated any basis (contractual, restitutionary, or otherwise) for such a refund.

215.  I agree with Mr Chang’s argument, which is consistent with the plain wordings of Art. 4.1 and Part III of Annex 1.  The Company agreed to reimburse the cost of medical insurance premium incurred by Liang during his employment.  The entitlement to reimbursement was not subject to any qualification or reduction on pro-rata basis as suggested by the Majority Camp. 

216.  It follows that Liang was entitled to reimbursement of the cost of medical insurance premium in the amount of HK$28,548.  The amount overpaid to Liang (HK$7,785.86) is to be deducted from the amount payable by the Company to Liang. 

D10.    Car Issue

217.  The following facts are not in dispute:

(1)     The Car was the Company’s property and had been used by  Liang since 15 January 2020.[339]

(2)     On 19 February 2021, Liang informed De Rosa that he had passed 2 keys to a staff of the Company and the Car was parked at Level 1M[340].

(3)     As Martinello accepts under cross-examination, he did not check the condition of the Car when it was handed over by Liang.  Nor did he send anyone to do so.   

(4)     The Car was later found to have been damaged, and the costs of repair were HK$29,000.   

218.  Mr Cheng argues that Liang is entitled to compensate the Company for the cost of repairing the Car for the following reasons:

(1)     Pursuant to Art. 2.5(i) of the Labour Contract, Liang as GM was required to “manage the Company, its assets and its image with care and dignity”.  Art. 2.2 also provided that Liang would “immediately inform [the Company] and the Board about any claims, suits, loss, damage, infringements, imitations related to the Company, its business, its assets and property…”.  If there was any loss or damage to the Car, it would have clearly been within the obligation of Liang to immediately inform the Company of the same.

(2)     That Liang had use of the Car up to 20 February 2021, thus if  any damage was caused during his use, he would have known about it.   Liang should have complied with the requirements under the Labour Contract and reported the damage accordingly.   

(3)     It was due to Liang’s failure to report the damage to the Company or its insurer as per the policy[341] that the Company was denied insurance coverage and suffered a loss in the amount of HK$29,000[342].   

219.  In my view, the claim is wholly without merit:

(1)     The photo taken by Liang on 20 February 2021 at the parking area confirms that the Car had no visible damage.

(2)     On 20 February 2021, Martinello collected the spare keys from the Car.  He accepts that he saw nothing amiss.[343] Although he says that he “did not closely examine” the Car, he would have opened the door to retrieve the key from a drawer beside the driver’s seat.  Had the damage depicted in the photographs (which were taken more than 2 months later)[344] already existed at the handover, it is inconceivable that Martinello would have missed it.

(3)     Martinello fairly accepts that he did not investigate whether the damage occurred during the period between the handover and the discovery.  He also accepts that he is “not a car technician”, and his belief that Liang scraped a wall[345] was based solely on the “white” marks, and could equally have come from another white car.[346]

220.  There is no evidence to show that the Car was damaged during the period when it was used by Liang.  The claim that Liang acted in breach of duty in reporting the damage to the Company or the insurer must fail. 

D11.     Service Expenses Issue

221.  It is not in dispute that:

(1)     In June/July 2020, Liang caused the Company to pay HK$20,000 to MFL as retainer fee[347];

(2)     In January 2020, Liang caused the Company to pay 2 sums totalling HK$85,000 to BIA for preparation of the Valuation; and

(3)     Both payments had not been considered or approved by the Board of the Company.

222.  The Majority Camp claims that both payments were unauthorised payments in that:

(1)     The Board was never informed of the purpose of engaging MFL, nor did the Board request for the service;

(2)     The payment to MPL was not incurred for the benefit of the Company andLiang was not authorised by the Board to cause the Company to pay any amount to MFL;[348] and

(3)     Liang was not authorised to cause the Company to pay BIA[349] and the Valuation was not conducted for the Company’s benefit.    

223.  In my view, neither claim has any merit. 

224.  As regards the HK$20,000 paid to MFL:

(1)     The objective evidence shows that it was the annual service fee paid to MFL for provision of corporate advisory services including drafting board and shareholders’ resolutions and rendering oral advice on corporate governance matters of the Company.[350]

(2)     Art. 2.5 of the Labour Contract set out the power of Liang as GM of the Company.  The engagement of MFL to provide corporate governance service and pay retainer fee for such services plainly fell within his power.[351]

(3)     Contrary to the Majority Camp’s contention that Board approval was required for payment of such fee[352], engagement of adviser was not listed as one of the matters which required approval of the Board.  

225.  As for payment of HK$85,000 to BIA:

(1)     It was within Liang’s power as GM (under art. 2.5(a) of the Labour Contract) to engage BIA to prepare the Valuation, which was a valuation prepared on the instructions of the Company. 

(2)     In any event, the contemporaneous correspondence show that Liang specifically sought and received Cozzi’s approval to obtain a valuation of the Company before engaging BIA to prepare the Valuation:

(a)     By email to Cozzi dated 17 December 2019, Liang stated that he disagreed with Cozzi’s “investment analysis based on ‘any change’ regarding shareholdership”, and said if Cozzi agreed, he would look for a professional third party to make such valuation of the Company as at 31 December 2019 for his consideration. 

(b)     On 23 December 2019, Cozzi replied to Liang stating “As in phone conversation, please proceed to make a valutation [sic] of the COBO ASIA Limited by your trusted consultant”.

(c)     Had there been any prior agreement that Liang/ECT should bear the costs personally, there was no reason why Liang had to seek Cozzi’s approval before proceeding to engage BIA to conduct the Valuation.

(3)     The Valuationitself stated that it was conducted on the Company’s instructions: “We refer to recent instructions from [the Company] to us to conduct a valuation on 40% equity interest of Cobo Asia Limited and its subsidiaries… This report is prepared solely for the use of the directors and management of the Company”[353].

(4)     The Valuationwas sent to Cozzi/Linetti on 23 March 2020, and contact details of the valuer were provided so that they could contact him directly for any clarification[354]. The Majority Camp never raised any objection to the engagement of BIA by the Company. 

226.  It follows that the Majority Camp’s claim in respect of the service expenses paid by the Company must be rejected. 

D12.    Payment in Lieu Issue

227.  The following facts are not in dispute:

(1)     Art. 9.1 of the Labour Contract provides that the contract may be terminated by the Company “at any time by prior written notice of three months or the payment of equivalent salary instead of such notice”.  If Liang is terminated for a “cause” in accordance with art. 9.2, then Liang will not be entitled to any notice or payment in lieu of notice.

(2)     The original 3-year term expired in July 2017.  Since then, by operation of law, the Labour Contract became renewable from month to month.

(3)     Liang’s employment as GM of the Company was terminated on 29 January 2021, without any 3 months’ notice.

(4)     At the time of termination, the Company did not state that his employment was terminated for “cause”.   

(5)     The Company paid HK$111,666.67 to Liang as payment in lieu of notice, equivalent to one month’s salary. 

228.  Liang counterclaims HK$292,970.33, being the unpaid balance of 3 months’ salary in lieu of notice, calculated as HK$1,618,548 (total annual salary)/12 x 3 months, less HK$111,666.67 already received[355].

229.  Mr Cheng argues that the Company is not liable to pay the amount claimed for the following reasons:

(1)     After expiry of the original 3-year fixed term of the Labour Contract, Liang’s employment continued on the basis of a one-month contract on the same terms, renewable from month to month pursuant to s.5(1) of the EO[356].

(2)     Given that the term of the Labour Contract has changed from a 3-year fixed-term contract to one that is statutorily deemed to be for “one month renewable from month to month”, to maintain a notice period of 3 months would obviously lead to logical difficulties.   

(3)     In Elizabeth Harrington v Cap Gemini Ernst & Young Hong Kong Ltd, HCCL 10/2002, 17 May 2004, §§103-104, an employment contract was similarly deemed under s.5 of the EO to be a contract for one month, renewable from month to month, the argument that the notice period was 2 months was remarked by the court as “ambitious, to say the least”.   

(4)     In the present case, irrespective of whether s.6(2)(a) or (b) of the EO  applies, by reason of the operation of s.5(1) of the EO, the maximum notice period should in any case be one month only.

230.  On the other hand, Mr Chang submits that:

(1)     Duration and notice are distinct concepts.  Duration defines how long the contract lasts absent termination; notice defines how either party may end it.  A contract can run indefinitely, renewing month‑to‑month, while still requiring 3 months’ notice to terminate – an arrangement that offers continuity and fairness, giving both sides time to plan for closure.[357]

(2)     The Company’s reading runs afoul of the statutory language and purpose given that:

(a)     The effect of s.5(1) EO is confined to duration of the contract.  It does not override express terms governing notice, pay, or other service conditions. 

(b)     Section 6 of EO sets a floor, not a ceiling, for the notice period – its language “not less than” invites parties to agree on more generous terms if they see fit.  As noted in Employment Law and Practice in Hong Kong, 2^nd ed.,§3.052, s.6 imposes a “minimum length of notice” and the EO “does not prohibit different notice periods required for an employer and its employee”.  This reading fits the statute’s purpose: to shield employees from uncertainty and ensure continuity of pay and security.  It does not strip away more favourable, privately negotiated terms.  Indeed, s.70 bars only terms that “extinguish or reduce” statutory rights, not those granting additional benefits (鄺惠玲v麗景酒店有限公司經營麗景酒店 HCME1/2011, 10 October 2011,  §15).

(3)     If the Company were right, the words “not less than” in s.6(2)(a) would be surplusage – a notice period under a month-to-month contract could never exceed one month, so the statutory phrase would functionally mean “shall be one month”.  Likewise, their view of s.6(2)(b) would effectively add the phrase “nor more than 1 month” after “the agreed period, but not less than 7 days”.  This is not interpretation but a rewriting of the provision. 

(4)     The Company’s case here would also have implications for s.5(2) of EO, which deems a contract to be renewable from month to month unless evidenced in writing.  To accept the Company’s argument would be to allow an employer to evade the obligations of an agreed notice period simply by omitting to record that agreement in writing. 

231.  In my judgment, Liang is entitled to 3 months’ payment in lieu of notice.  In addition to the reasons submitted by Mr Chang (which I agree), it seems to me that:

(1)     The Majority Camp’s contention is based on a conflation of the duration/term of the employment (prescribed by s.5(1) of the EO) and the requirement of giving notice to terminate Liang’s employment (governed by art. 9.1 of the Labour Contract), which is a different issue. 

(2)     There is nothing in s.5(1) of the EO to override the notice requirement stipulated in art. 9.1 of the Labour Contract.

(3)     Mr Cheng is unable to cite any authority in support of his contention that once an employment contract becomes renewable on a month-to-month basis, it has the effect of overriding or superseding the express term governing the requirement to give notice for termination or payment in lieu of notice. 

232.  As for quantum, Mr Cheng submits that if the court finds that the notice period should be 3 months, the basis for calculating the “monthly average of wages” pursuant to s.7(1A) of EO should only consist of base annual salary of HK$1,340,000 per annum, divided by 12 months.  The quantum under this head should be 2 months’ payment in lieu of notice, that is, HK$223,333.33[358]. Mr Chang accepts that this is the correct amount for payment in lieu of 2 months’ notice. 

233.  Accordingly, the Company is liable to pay HK$223,333.33 to Liang, being the unpaid balance of his entitlement to 3 months’ payment in lieu of notice.

D13.    Annual Leave Pay Issue

D13.1  When Liang’s employment commenced

234.  The main issue between the parties is when Liang’s employment commenced.

235.  The principles are not in dispute.  In determining whether an individual is an employee:

(1)     The court should consider all aspects of the relationship, viewed in their proper context and against the established indicia of employment.  The inquiry is holistic, no single factor is decisive.  The court is to form an overall impression, drawing upon the accumulation of relevant details (Poon Chau Nam v Yim Siu Cheung (2007) 10 HKCFAR 156 at §18 (Ribeiro PJ); Ho Wai Keung v Billion Rich Investments Ltd [2023] HKCA 929 at §§24-25 (Chow JA)).

(2)     To assist in this exercise, the court has developed a list of indicia for identifying the existence of an employer-employee relationship.[359]  Their relative weight will always depend on the particular circumstances.  These factors are guides, not rules (Ho Wai Keung, §§26-27).

(3)     The indicia – particularly the element of control – may have limited utility where the issue is whether a shareholder-director of a small company is also its employee (Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld [2009] BCC 687, §33).  As Rimer LJ further observed (§85), what matters in such cases is how the individual functioned in practice: Was he paid a salary, suggesting employment, or only director’s fees?  And were his actions those of a director managing the company, or of an employee working for it?

236.  Mr Chang contends that Liang began his employment with the Company on 25 August 2005, relying on the following facts and matters:

(1)     Liang’s employment with the Company began from its very inception on 25 August 2005.[360]

(2)     The Labour Contract merely formalised the continuation of Liang’s longstanding relationship with the Company, in which he had served as managing director/GM since 25 August 2005.[361]  Cozzi’s testimony confirms that Liang’s job responsibilities after the Labour Contract was executed were “very similar” to those prior to 2014.  The only distinction was that before 2014, Liang had autonomous authority to manage the Company’s operations, whereas after 2014, he was required to report to the Board on the Company’s affairs.  Cozzi agrees that the titles “Managing Director” (pre‑2014) and “General Manager” (post‑2014) were effectively equivalent in meaning.  [362]

(3)     Accordingly, if Liang’s status as an employee is accepted under the post-2014 Labour Contract, it must equally be recognised that he served in the same employed capacity before its execution.  In this regard, the “absence of a written agreement” is of no moment if the parties’ conduct shows there was an employment relationship (Neufeld at 714H, per Rimer LJ).

(4)     Throughout his tenure as GM, Liang was responsible not only for the Company’s high-level management, but also its day-to-day operations:

(a)     Both Cozzi and Linetti say that “prior to 2014, [Liang]  was predominantly involved in the [Company’s] activities from an operational point of view”.[363]  Linetti goes further and says prior to 2014, “everything in Cobo Asia and Cobo GZ were left to Liang to handle and deal with”.[364]  He was for instance responsible for hiring staff (including Sam Au) for the Company before 2014.

(b)     The fact that Liang was “engaged for the purposes of managing the business… and [his] work form[ed] an integral part of the business” means he was not merely a director but also an employee (Tolley’s Employment Handbook, 37^th ed, §10.4, pp,133-134). For example, in Trussed Steel Concrete Company Limited v Green [1946] Ch 115,  121, Cohen J held that it is “impossible to say”a director was not employed by the company where he was bound to devote his whole time to its affairs and develop its business. 

(5)     The Company has since Liang assumed the role of managing director or GM in 2005 consistently filed employer’s returns with the IRD.  In the 2006 form, the Company expressly stated the “Date of Commencement of Employment” as 1 July 2005  and specified the “Monthly Rate of Fixed Income” as HK$27,000; the form also shows that Liang was paid a salary, not director’s fees, indicating an employment relationship (Neufeld, 714B).  These filings, made years before 2014, put to rest any notion that he was not in the Company’s employ prior to that date. 

(6)     The Company’s 2010 AFS also recorded HK$390,000 paid for “salary”(rather than “fees”), consistent with the IRD returns, and undermines the Company’s claim that the payments were merely director’s fees.  Since the Company’s AFS, accessible to Cobo SPA[365], classified the payments as employee compensation, they must be accepted as accurate and fair absent any challenge (Tsui Lai Lai Lily v Grimstone Ltd,HCMP 490/2011, 15 December 2021, §§16-19, per Barma J (as he then was)).

237.  Mr Cheng contends that Liang has failed to discharge the burden of proving that his employment commenced from 25 August 2005 given that:

(1)     Liang admits that there was no written contract of employment between himself and the Company during the period.   While he asserts that there was an oral contract made with Bertola as evidenced by some emails, he is unable to recall any terms of the contract including the salary.  His explanation that he has lost relevant correspondence due to lapse of time is dubious given that he has been able to produce the contract with Cobo GZ dated 2006 and various emails dating back to 2013.   

(2)     Liang’s evidence on remuneration as employee is equally dubious.  For example, his assertion that he was paid the sum of HK$33,000 as housing allowance on top of salary of HK$27,000 is contradicted by his employer’s return, which did not state any payment of HK$33,000 by the employer.  Further, while Liang asserts that he did not make MPF contributions because he was a member of an equivalent scheme (CPF) in Singapore, he has not been able to produce any CPF records.

(3)     Apart from the employer’s notification and employer’s returns signed by himself and Grace, Liang has not produced any other documentary evidence of his employment, not even tax returns.   

238.  It is surprising to see that the Majority Camp even takes issue with the commencement date of  Liang’s employment as managing director/GM of the Company from its inception when:

(1)     All the objective facts, including those undisputable facts identified by Mr Chang (§236(4)-(6) above), point to the same conclusion - that Liang commenced his employment with the Company on 25 August 2005. 

(2)     Art. 15 of the CA, upon which the Majority Camp heavily relies, expressly refers to Liang’s “job” on behalf of the Company (and Cobo GZ) “since the foundation of these companies”.

(3)     Indeed, other than pointing to the absence of a written employment contract, which is understandable given the informal manner in which the Company had been managed pre-2014, Mr Cheng is unable to refute any of the objective facts.   

(4)     The fact that Liang is a Singapore citizen and the CPF scheme applies to him are not in dispute.  While no MPF contributions were made on Liang’s behalf before 2019, this was on his tax consultant’s advice that his Singapore retirement scheme exempted him from any MPF obligations.[366]  The Company has produced no contrary tax evidence and cannot reasonably dispute that advice.  In any case, the same arrangement applied from 2016-2017, when Liang’s employment status was undisputed.  Thus, the absence of MPF contributions does not negate his employment. 

D13.2  Unpleaded case based on CA/Waiver Clause

239.  The Majority Camp relies on the CA and the payment of €70,000 to Liang and ECT pursuant to such agreement.  Mr Cheng’s arguments run like this:   

(1)     Even if Liang were an employee prior to the Labour Contract, Art. 15 of the CA pursuant to which a total sum of €70,000 was paid by Cobo SPA to ECT (€35,000) and Liang (€35,000), in exchange for waivers and releases provided by Liang to the Company.  By such provision, the parties were plainly envisaging a “clean break” after signing all of the 2014 Agreements, including the Labour Contract.  By accepting such payment, Liang accepted that the previous arrangement between him and the Company (whatever it may have been) would be terminated and he would commence his employment with the Company afresh as its GM starting from 4 July 2014.  Accordingly, the proper period of employment should in any event begin on 4 July 2014.   

(2)     The effect of this waiver is not affected by the fact that the Company was not a party to the CA. Liang himself was a party, and for the principle of waiver (in the sense of abandonment of a right which arises by virtue of a party making an election) to operate, it must be shown that: (a) a party has a right under a contract or by operation of law; (b) he knows of the existence of the right or the facts giving rise to such right; and (c) he has, “by conduct, clearly and unequivocally abandoned his right or indicated that he is not exercising such a right” (Trafalgar House Construction (Asia) Ltd & Another v The Owners and/or Demise Charterers of MV “Thor Scan” [1999] 2 HKLRD 136, at 149D-H).

(3)     Here, if Liang at the time of signing the CA was indeed an employee, he would have had employment rights and entitlements as against the Company which he must have known about.  Yet, he proceeded to sign the CA and receives the €35,000, and by art. 15, Liang clearly and unequivocally “confirmed that [he] [has] no right to claim individually … any other sum for any other reason from [Cobo SPA], [the Company], and [Cobo GZ] except the rights arising from the signature of the [2014 Agreements] and the [Amended] Articles of Association” (“Waiver Clause”). The requirements for a binding waiver are made out, and Liang should be considered as having accepted that any previous arrangement between him and the Company had been terminated and he would commence his employment under the Labour Contract anew starting from 4 July 2014[367].

240.  Although the CA and the Waiver Clause have been pleaded at §4(b) of Reply(LA), it is not the Majority Camp’s pleaded case that the CA and the Waiver Clause form part of its defence to Liang’s claim for annual leave pay[368]. It is not properly open to the Company to run an unpleaded defence raised only in Mr Cheng’s Opening and Closing and without any application to amend its pleadings. 

D13.3     Parties’ pleaded cases

241.  Liang claims outstanding annual leave pay for the period from 25 August 2014 to 29 January 2021 in the total sum of HK$336,950.35 on the following bases:

(1)     The Company continuously employed him as its GM from 25 August 2005 to 29 January 2021.  By 25 August 2014, that was already more than 9 years of service[369].  Liang was entitled to annual leave of 14 days (s.41AA of the EO).

(2)     Liang did not take any annual leave from 25 August 2014 to 28 January 2021[370].

(3)     Under s.41D of the EO, upon the cessation of Liang’s employment with the Company on 29 January 2021, Liang was entitled to be paid the sums particularised in the Schedule.  After giving credit to the sum of HK$62,410.96 paid by the Company, the outstanding sum is HK$336,950.35.

242.  The Company’s pleaded defence to the claim is that (1) Liang was not an employee of the Company until 4 July 2014 and he was only employed for 6.58 years; (2) Liang took annual leave at least during July 2015, 11-14 September 2018 and 15-21 April 2019; and (3) Liang cannot rely on the absence of any application or record of his annual leave as it was the result of his failure to submit and record his leave application, which constituted a breach of duties and abuse of power[371]. 

243.  Liang’s entitlement to annual leave is governed by art. 6.1 of the Labour Contract, which incorporated the statutory requirements concerning annual leave pay as set out in the EO, in particular ss.41A to 41G[372]. 

244.  In view of the finding that Liang commenced his employment on 25 August 2005, by the time the Labour Contract was signed, he had more than 9 years of service and therefore, was entitled to annual leave for 14 days per annum. 

245.  As to whether Liang took any annual leave during his employment, Mr Cheng argues that:

(1)     while there are within the Company’s records leave applications made by other staff, there were conspicuously no the Company records of annual leave taken by Liang.  Yet, at the same time, there are email records showing that Liang did regularly go on holidays and trips – which would have required taking annual leave.[373].  All in all, Liang’s case that he did not take any annual leave from the entire period of 25 August 2014 and 28 January 2021 is incredible.   

(2)     In any event, Liang as GM should have been the one to keep his own annual leave records.  If he had failed to do so, it lies ill in his mouth to say that because he has no annual leave records, he should be taken as if he had not taken any annual leave throughout the years, and be entitled to full annual leave pay

246.  On the other hand, Mr Chang submits that Liang plainly did not take any annual leave during the relevant period:

(1)     It is the Company’s burden to disprove Liang’s claim.  None of the emails relied upon by the Company contradict Liang’s evidence[374] that he did not take annual leave between 25 August 2014 and 28 January 2021.  Liang was working during these trips.  He traveled at the Company’s behest to meet clients and conduct business – not for leisure, and not for rest.  As Langstaff J put it in Truslove v Scottish Ambulance Service [2014] ICR 1232 §22: “the purpose of the entitlement to annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure”[375]. Employees required to stay overnight away from home for work are not “at rest” (§§29-30, 32).

(2)     Even if Liang enjoyed periods of personal or leisure time while travelling, this does not transform such time into annual leave.  An employer’s duty to grant annual leave is not discharged simply because an employee was at times unoccupied or had free time on the job (Mok Hon Kin Patrick v C3S Far East Ltd[2019] HKDC 798 §191).

(3)     The Company claims Liang breached a “fiduciary duty” by failing to “ensure all employees (including himself) take their accrued annual leave within the prescribed time”[376].  But the notion that by not taking/enforcing leave could somehow amount to a fiduciary breach is novel and illogical.  The Company has pleaded no basis for such an obligation.  The same flaw attaches to the asserted duty to “keep a record of his annual leave taken”.[377]  It is unclear how this arises under either the Labour Contract or any recognised fiduciary principle.  And if the Company intends to imply such a term, it has not pleaded whether it is implied in law or in fact, nor the facts from which that inference could be drawn (cf. Hong Kong Civil Procedure 2026§18/12/19).

(4)     In any event, any such breach of duty would not deprive Liang of his contractual and/or statutory entitlement to annual leave pay.  His entitlement stands independently of any alleged fiduciary obligation (Mok Hon Kin §§192-196).

247.  I accept Liang’s evidence that he did not take any annual leave during the relevant period owing to the immense workload and responsibilities he had in acting as director/GM of both the Company and Cobo GZ, which required him to manage the business and day-to-day operations of both companies; travel between their offices; develop and grow their business including meeting with the customers of Cob GZ and carrying on the export business of the Company.  On any view, these were heavy responsibilities and required much time and effort in dealing with them.  Moreover, owing to the time difference, effectively, Liang had to work way beyond normal working hours as he had to deal with communications from Cobo SPA during its office hours in Italy.  It is plausible and credible that Liang was not able to take any annual leave during his tenure. 

248.  As pointed out by Mr Chang, the emails identified by the Majority Camp do not show that Liang took annual leave during those trips as they were business trips.  In any event, there is no basis to doubt Liang’s evidence that whilst traveling, he continued to attend and deal with the affairs of the Company and Cobo GZ and any communications with Cobo SPA and clients of Cobo GZ. 

249.  For the above reasons, I find that Liang did not take any annual leave during the period from 25 August 2014 to 29 January 2021. 

250.  As for quantum, Liang was entitled to annual leave pay for 90 days, being 14 days x 6.43 year[378].  In view of Mr Chang’s acceptance that the annual salary of Liang was HK$1,340,000 per annum (see §232 above), the Company was liable to pay annual leave pay in the amount of HK$330,410.96.  After deducting the HK$62,410.96 paid by the Company, the net amount payable for annual leave pay is HK$268,000.   

D14.    Long Service Pay Issue

251.  Mr Chang submits that Liang was entitled to long service pay for 15.43 years on the following bases:  

(1)     Pursuant to Part VB of the EO, Liang is entitled to claim a long service payment. 

(2)     Under s.31V of the EO, in the case of a monthly-rated employee, the rate of long service payment is two-thirds of the employee’s last full month’s wages or two-thirds of HK$22,500, whichever is less, for every year he was employed. 

(3)     By 29 January 2021, Liang had been employed by the Company for 15 years and 158 days.

(4)     Accordingly, the amount of long service pay due is (HK$22,500 x 2/3) x (15 + 158/365) = HK$231,493.15. After giving credit to the sum of HK$99,900 paid by the Company, the outstanding sum is HK$131,593.15.

252.  In the Reply(LA), reliance is placed on the CA and the Waiver Clause.  Mr Cheng’s argument has been set out in §239 above.

253.  In my view, it is not open to the Company to rely on the CA and the Waiver Clause and argues that Liang’s entitlement to long service payment has been waived for the following reasons:

(1)     The Company was not a party to the CA. The doctrine of privity applies where the contract between 2 parties purport to confer a benefit on a non-party, unless one of the exceptions to the doctrine of privity can be invoked against Liang (Chitty on Contracts, 36^th ed., §18-139).  No exception has been pleaded or established.   

(2)     Although Cobo SPA was a party to the CA, it has not been joined as a plaintiff in the Labour Actions.  There is therefore no party who has the right to invoke or enforce the Waiver Clause as against Liang. 

(3)     In any event, as submitted by Mr Chang, by virtue of s.70 of the EO, any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred upon an employee by the EO shall be void. 

254.  Mr Cheng takes issue with the calculation.  He contends that if Liang had been an employee during the disputed period, the long service payment payable on termination of his employment should be HK$99,900 (being HK$22,500 x 2/3 x 6.6 years)[379] and the sum has already been paid.

255.  In view of my holding that Liang was employed by the Company from 25 August 2005 to 29 January 2021, he was entitled to long service payment in the amount of HK$231,493.15.  After giving credit to the amount paid, the outstanding sum is HK$131,593.15.

E.     DISPOSITION

E1.    Relief in UP Proceedings

256.  In view of the findings that Cobo SPA engaged in Diversion of Business from 26 October 2020 and the conduct was unfair and prejudicial to the interests of the Company, in particular how the Majority Camp pushed through a change in the modus operandi of the Company without any discussion with Liang who was at the time still a director and GM of the Company (see Section D2 above), the only way to put an end to the matter complained of by ECT is to make a buy-out order requiring Cobo SPA to purchase ETC’s shares at a fair price, to be determined by the court. 

257.  Indeed, it is clear that both Cobo SPA and ECT consider that a buy-out is the only way to end the relationship as shareholders of the Company given that:

(1)     The parties have since December 2019 been discussing parting of way with Cobo SPA acquiring the 40% shares held by ECT.  The only reason why no buy-out could be made was because they disagreed on the valuation on the Company and ECT’s 40% shareholding.   

(2)     Since the termination of Liang as director/GM of the Company/Cobo GZ, the Majority Camp has been operating the Company/Cobo GZ as if it were the sole shareholder even though ECT remains a 40% shareholder of the Company.  Other than the AFS of the Company, no other documents and information pertaining to the Company or Cobo GZ has been provided to ECT. 

(3)     In particular, while Cozzi and Linetti in their evidence, repeatedly emphasise that the Company and Cobo GZ is a single or consolidated entity, and Cobo GZ (but not the Company) is the valuable entity as it carries on actual business with the customers, not a single financial statement of Cobo GZ, whether audited or unaudited, has been provided to ECT since January 2021 because the Majority Camp considered such documents to be “confidential”.  Coupled with the fact that no consolidated financial statements have been prepared by the Company, there is no means through which ECT can ascertain or monitor the performance of Cobo GZ even though it is admittedly the more valuable entity.   

(4)     Indeed, even after completion of trial, the parties continue to make open offer to the other on the basis that Cobo SPA buys out ECT’s 40% shareholding in the Company albeit that no agreement could be reached on the value of shares.

258.  I turn to the parameters of the buy-out order.

259.  Mr Cheng submits that if the court decides to make a buy-out order, the court should  leave the issues of (1) valuation date; (2) basis of valuation; (3) minority discount; and (4) applicable adjustments, to the trial on quantum[380].   Indeed, the court may remit to a quantum hearing any issue from the liability trial that is more conveniently dealt with at the further hearing, provided that it is not procedurally unfair to do so (Re Tobian Properties Ltd[2013] BCC 98, §49).

260.  I disagree. 

261.  A trial on “liability” in the context of unfair prejudicial proceedings, the court may decide on the parameters of the buy-out order.  In general, this would be the desired course as the parties can proceed to deal with valuation on the basis of the findings made by the court including the question of what adjustments should be made to the valuation on the basis of the conduct found to have been unfairly prejudicial which has financial ramifications on the assets/value of the company.  The court should determine the parameters of the buy-out order to the extent that it is possible to do so at the “liability” stage.

262.  First, the value of the Company should be assessed at its fair market value, that is, the price a “willing buyer” would pay and a “willing seller” would sell in open market, neither being under any compulsion to buy or sell.  This is consistent with the established approach in assessing the fair market value of an asset (Re Luk Fai Holdings Company Limited [2023] HKCFI 2268, 4 September 2023, §107(2)-(3)).

263.  Second, the value of the Company should be assessed on the basis that it is a going concern.  This accords with the undisputed fact that the Company and Cobo GZ have always been operating companies and have been making profits since the 2014 Restructuring.   

264.  Third, the value of ECT’s 40% shareholding should be at 40% of the fair market value of the Company without any minority discount.  It is well established that where, as here, the court finds that there has been unfairly prejudicial conduct and a buy-out order is made against the majority shareholder, the usual term is that there should be no minority discount (Re Hong Kong Agricultural Special Zone Ltd HCMP 729/2012, 28 April 2017, §§306, 311;Re Blue Index Ltd [2014] EWHC 2680, §26).[381]

265.  Fourth, as regards the date of valuation:

(1)     Mr Chang submits that the value of the Company should be assessed as at the date of 20 October 2020, that is, immediately before 2020 Board Meeting where the act of unfair prejudice took place.  An earlier valuation date is appropriate where a company has been deprived of its business, and the effect is not one which can be ascertained or quantified easily – which, as this Court noted at Day 9 of the trial, appears to be the case here (Re Sound Global Ltd[2025] HKCFI 2052 §22(3)).[382]

(2)     Mr Cheng contends that if the court finds that both parties have been at fault, it would be difficult to assess the impact of their respective conduct on the value of the Company.  In any event, where as here the Company is a going concern, the date of the buy-out order would be more appropriate, reliance is placed on Re London School of Electronics Ltd [1986] Ch. 211, at 224 where Nourse J said:

“Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased. But whatever the general rule might be it seems very probable that the overriding requirement that the valuation should be fair on the facts of the particular case would, by exceptions, reduce it to no rule at all”.

266.  In the ordinary case, it would be appropriate to value the shares on the date of the order, not least because the company has continued to operate and make profits and the outgoing shareholder would be able to receive his share of the profits up to the date his shares are bought by the other party. 

267.  However, in the present case, there are a number of complications which make it not possible, at this stage, to decide the appropriate date of valuation:

(1)     On the one hand, it may be said that fairness requires the court to take into account the fact that the Premises were closed for over a year during which Cobo GZ’s business came to a halt, and it cannot be said that Liang had nothing to do with the closure as it all started because he disputed the authority of Lamantia and made known such dispute to the Landlord.   

(2)     The Company/Cobo GZ have since February 2021 been operated by the Majority Camp without any involvement of ECT.  If and to the extent that the revenue and profits have declined due to the way the Majority Camp managed the business of the Company/Cobo GZ, such decline should be borne by Cobo SPA alone and should not affect the value of ECT’s 40% shareholding.

(3)     The Majority Camp has refused to provide any financial statements of Cobo GZ on the ground that they contain “confidential” information.  While I do not think that it is right or fair for the Majority Camp not to provide any financial statements of Cobo GZ to ECT, if I accede to Mr Cheng’s submissions and decide that the date of valuation should be the date of the order, the usual directions on valuation will require complete transparency in terms of making available all the financial information required by the valuer and with the same information being provided to ECT, whether this is something which the Majority Camp is prepared to do remains to be seen, particularly when it will soon be buying out ECT’s 40% shareholding such that it will have no further entitlement to receive and consider the financial information of Cobo GZ. 

268.  For the above reasons, I shall state my preliminary view on the issue and allow the parties to reflect on the issue and make further submissions at the directions hearing (see below) in the event that they disagree with the preliminary view of this Court.  The question on interest on the price of the buy-out order, if any, will be dealt with at the directions hearing.

269.  The preliminary view is that:

(1)     The date of valuation should be the date of the 2020 Board Meeting, which I consider to be fair and appropriate in the circumstances given that from that date onwards, there was Diversion of Business to the prejudice of the Company and the loss suffered by the Company from such conduct is difficult to assess and quantify. 

(2)     There should be adjustment to the value of the Company to reflect the fact that Cobo GZ’s business/operations were paralysed during the period from March 2021 to 9 June 2022.  How such adjustment is to be made is a matter to be considered by the valuer and the parties are at liberty to take issue on the valuer’s opinion on the adjustment in this respect at the hearing on valuation.   

270.  As neither the Further Diversion of Business nor the Competing Business is made out, no other adjustments need to be made to the valuation of the Company.  On this issue, I give liberty to the parties to make further submissions at the directions hearing on the question whether any further adjustments need to be made to the valuation, but solely on the basis of the findings contained in this Judgment. 

271.  The parties shall fix a directions hearing with 3 hours reserved on a date to be fixed in accordance with one counsel’s diary from each side for the purpose of making submissions on the question of valuation, including the appropriate directions for appointment of Court-appointed expert to assess the fair market value of the Company along the parameters set out above.

E2.    Derivative Action

272.  The loss suffered by the Company in the Diversion of Business will be addressed in the buy-out order, it is not necessary to make any order in the Derivative Action.  This is accepted by Mr Chang.

273.  The other claim in the Derivative Action fail. 

274.  The Derivative Action is dismissed.

E3.    HCA Action

275.  All the claims advanced by the Majority Claim against ECT/Liang fail. 

276.  The HCA Action is dismissed.

E4.    Labour Actions

277.  All the claims made in the name of the Company against Liang fail.   

278.  As for the claims made by Liang against the Company, I order that the Company do pay to Liang the following sums:

(1)     Variable Pay in the amount of HK$250,000, which was payable on 30 July 2021 (§210 above);

(2)     Payment in lieu of notice in the amount of HK$223,333.33 (§233 above);

(3)     Annual leave pay in the amount of HK$268,000 (§250 above); and

(4)     Long service payment in the amount of HK$131,593.15 (§255 above). 

279.  The total amount payable under §278(2), (3) and (4) above is HK$622,926.48, less the HK$7,785.86 overpaid to Liang for medical insurance premium (§211(4) above), the amount payable by the Company to Liang is HK$615,140.62. 

280.  As regards interest, I order that interest shall be paid as follows:

(1)     On the amount HK$615,140.62, from 29 January 2021 up to the date of this Judgment at HSBC prime lending rate + 2% p.a. and thereafter, at judgment rate until payment.

(2)     On the amount of HK$250,000, from 31 July 2021 up to the date of this Judgment at HSBC prime lending rate + 2% p.a. and thereafter, at judgment rate until payment.

E5.    Costs

281.  As for costs, I make a costs order nisi that:

(1)     There be no order as to costs in respect of  the UP Proceedings. 

(2)     There be no order as to costs in respect of the Derivative Action.

(3)     The Company do pay the costs of and occasioned by the HCA Action to ECT and Liang, to be taxed if not agreed, with certificate for 2 counsel.

(4)     The Company do pay the costs of and occasioned by the Labour Actions to Liang, to be taxed if not agreed, with certificate for 2 counsel.

(5)     The costs payable by the Company in HCA Action and the Labour Actions shall not be taken into account in the valuation of the Company.

(6)     For the purpose of apportionment of the costs of the trial of the 5 proceedings, I assess the costs of (a) the UP Proceedings at 30%; (b) the Derivative Action at 20%; (c) the HCA Action at 30%; and (d) the Labour Actions at 20%.

282.  Although the Company is the plaintiff in the HCA Action and the Labour Actions, the proceedings were brought at the behest of the Majority Camp which has complete control over the Company.  Having failed to establish the claims in the HCA Action and the Labour Actions, it is only fair that such adverse costs should not be taken into account in the valuation of the Company.

283.  That the adverse costs incurred by the Company in the HCA Action and the Labour Actions may ultimately be borne by Cobo SPA was a matter specifically raised by this Court at the CMC, and counsel then acting for the Majority Camp confirmed that the matter had been explained to the Majority Camp. 

284.  Although ECT is the successful party in the UP Proceedings in the sense that it obtains a buy-out relief sought in the Petition, I consider that a fair order should be no order as to costs as it fails in 3 out of the 4 complaints raised in the Petition.  Taking into account its success in establishing one complaint and the general costs, ECT should be entitled to recover 30% of its costs in the UP Proceedings. However, instead of ordering Cobo SPA to pay 30% costs (which is a more substantial proceeding), and ECT to pay 70% of the costs of the Derivative Action, it would be more costs effective to order no order as to costs in respect of both proceedings.   

285.  As for the costs of the Derivative Action, I consider that its commencement was unnecessary as the same complaints have already been made in the Petition and the court does have power to order Cobo SPA to pay compensation to the Company if the Diversion of Business and Further Diversion of Business are established.  Further, ECT fails in the Further Diversion of Business which is a far more substantial complaint than the Diversion of Business claim. A fair order is that ECT should pay 70% of the costs of the Derivative Action to the Majority Camp.