WONG KWOK SUN, ERNEST v. TONG YING YUNG, JAMES AND ANOTHER

HCMP 1538/00

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1538 OF 2000

(Formerly Companies Winding-Up No. 1007 of 1999)

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JUDGMENT

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1. In these proceedings, the Petitioner, a shareholder of Sparkle Consultants (Hong Kong) Limited ("the Company") is seeking an order under s.168A of the Companies Ordinance cap. 32 that the 1st and 2nd Respondents, who are the other shareholders of the Company, and/or the 3rd Respondent, the Company, purchase his shares in the Company on the ground that the affairs of the Company have been conducted in a manner which is unfairly prejudicial to his interests.

2. To understand the issues, it is first necessary to summarize the background facts.

The Petitioner and the 1st Respondent

3. The Petitioner and the 1st Respondent came to know each other when they were classmates in secondary school in the mid-1970's.

4. The Petitioner worked first as an insurance agent. In 1986, he started his own company called Sparkle Life Ltd ("SLL"). Sparkle Life Ltd carried on the business of agents in life insurance and general insurance.

5. In 1992, the Petitioner started another insurance agency company bearing the Sparkle name, called Sparkle Underwriting Management Ltd. ("SUML"). Apparently, the reason why a second company was established was because an insurance agency could only represent four insurance companies, so that another agency company had to be established to represent more insurance companies. The shares in SUML were held, as to 70% by the Petitioner and as to 30% by his wife.

6. In January 1998, SUML was awarded a "long-term" agency by Royal and Sun Alliance International Financial Services Ltd. The nature of this agency was different from SLL's and SUML's, in that this involved financial planning business.

7. At about this time, the 1st Respondent was an investment service manager in C.A. Portfolio Management Ltd involved in financial planning. In January 1998, the C.A. Pacific group collapsed.

8. The Petitioner and 1st Respondent therefore considered joining up in a "one-stop" business which would service clients in both insurance and financial planning, as the Petitioner was experienced in the former and the 1st Respondent the latter.

9. The idea was that each of them would bring his own talents into the business. As far as the Petitioner was concerned, he had built up a reputation in the "Sparkle" name, and had an existing client base and connections with insurance companies. Further, the Confederation of Insurance Brokers ("CIB") required that each member company had a qualified Chief Executive approved by the CIB. The Petitioner had the necessary qualifications. He also had experience in overseeing the preparation of accounts.

10. As far as the 1st Respondent was concerned, his experience was in financial planning. He also had connections with former clients and colleagues at the C.A. Pacific group.

Formation of the Company

11. Consequently, on 17 March 1998, the Petitioner's wife transferred her 30% shares in SUML to the 1st Respondent, and the latter became a director of that company, together with the Petitioner.

12. Prior to that time, SUML and SLL were occupying an office unit in Mongkok, owned by the Petitioner through SLL or another of his personal companies. With a view to expansion, SUML took a tenancy of an office unit in Tung Ying Building, Tsimshatsui.

13. It then transpired that it was inappropriate for SUML to carry out the "one-stop" business the Petitioner and 1st Respondent intended. Consequently, on 30 March 1998, the Company was incorporated.

14. As with SUML, the Petitioner held 70% of the shares , and the 1st Respondent, 30%. They were the only 2 directors.

15. On 1 April 1998, an application was made to the CIB for the Petitioner to be the Company's Chief Executive, and this application was approved on 14 April 1998.

16. Thus in mid-May 1998, the Company carried on business from the Tung Ying Building office.

17. It is common ground that SUML transferred all its business to the Company. As for SLL, it transferred to the Company the pensions business (known as "ORSO") placed with Prudential Assurance Co. Ltd. One of the issues in the present case is whether the Petitioner had promised the 1st Respondent to transfer to the Company all the business of SLL, and not just the Prudential ORSO business.

The 2nd Respondent

18. In May 1998, the 2nd Respondent, who had worked for SUML for some years previously, became a principal consultant of the Company.

19. As far as his remuneration was concerned, as with all consultants of the Company, he signed a contract setting out the terms of the commission he would receive from business he transacted. Under his contract, he would get 80% of the commission received by the Company.

The Company's business

20. It may be helpful here to set out my understanding of the Company's business.

21. The Company was in effect a middle-man between clients of the one part, and financial planning companies (eg Royal and Sun-Alliance) and insurance companies (eg Manulife) of the other part.

22. Apart from the 2 directors, the Company had sales consultants (who were called "producers", as were the directors) whose job was to introduce clients to financial planning and insurance schemes (called "products") offered by financial planning companies and insurance companies.

23. When that was done, the financial planning company or insurance company would pay commission to the Company. Depending on the type of product, different financial planning companies and insurance companies would pay different rates of commission to the Company.

24. The Company would in turn pay a proportion of that commission to the relevant producer as his remuneration, that proportion having been previously fixed for each individual. As far as sales consultants were concerned, this was set out in their contracts.

25. It should also be noted that for some products, commissions were paid in advance, so that if a client failed to keep up with a scheme, the Company would have to regurgitate the commission it had received in advance.

26. Apart from commissions, the Company could also receive from the financial planning companies or insurance companies bonuses known as "market allowances". These were quite sizeable bonuses which the financial planning companies or insurance companies would pay to the Company if it managed to place a prescribed target amount of business.

27. Sometimes these bonuses were also called "overrides". However this is not to be confused with "overriding commission" which was payable by the Company to the leader of a team of producers when a member of that team had introduced a client who had taken up a product.

Document signed on 21 October 1998

28. In the summer of 1998, the 2nd Respondent was approached to join the Company as a shareholder. It is an issue in this case whether the approach was made by the Petitioner or by the 1st Respondent. The terms of the commission that he was to obtain upon becoming a shareholder are also in issue.

29. Before the allotment of shares to the 2nd Respondent took place however, a document entitled "Shareholders' Agreement dated 21st October 1998" governing the rights and duties of the Petitioner and the 1st Respondent was prepared, but this was not signed.

30. Instead on the same day, a document entitled "Minutes of Directors Meeting" was prepared and signed by the Petitioner and the 1st Respondent as the Company's directors. This document was similar to the document entitled "Shareholders Agreement" but there were some variations to the wording, and some further clauses were added, including a new Section III headed "Existing and Prospective Shareholding Structure".

31. Two sections are particularly worth noting. Section III contained a resolution that "no alteration of shareholding structure would be allowed without 100% consent from all shareholders". Four phases were set out, Phase I providing for only the 2 existing shareholders, Phase II providing for the addition of the 2nd Respondent as shareholder, Phase III providing for the addition of a company called Sparkle-Hall Portfolio Managers Ltd that the Petitioner and 1st Respondent intended to establish for investment adviser business, and Phase IV providing for the addition of a person called Ivan Yiu.

32. Section V set out a Commission Schedule for the Petitioner and the 1st Respondent. It set out the percentage of commission (initial and renewal) that was payable by the Company to each of them for individual products.

33. In addition, there was a note to that section which set out the limits of entitlement of each of them to market allowances (i.e. the bonuses paid by the financial planning companies or insurance companies to the Company). The Petitioner and the 1st Respondent would only be entitled to market allowances for financial planning and life insurance business written for the individual director and his immediate family members. In other words, apart from that exception (which presumably would be a proportion of the market allowance that was attributable to the business written for the director or his family), all market allowances would be retained by the Company.

34. One of the issues in the present case is what is the nature of that document signed by the Petitioner and the 1st Respondent on 21 October 1998; the Petitioner alleges that this was a shareholders' agreement and the 1st Respondent alleges that these were minutes of a board meeting, and had nothing to do with shareholders. This document will be referred to in this Judgment as "the October document".

35. The last section of the document read "this agreement is to take effect from 1st November 1998".

Allotment of shares

36. On 3 November 1998, a further allotment of shares took place, with the effect that after that allotment, the Petitioner and the 1st Respondent each held 3/7 of the total shareholding and the 2nd Respondent, 1/7.

37. The 2nd Respondent paid cash of $100,000 for his shares, whereas the Petitioner and the 1st Respondent had the required amount debited against the credit balances in their respective current accounts with the Company. One of the issues in this case is whether the Petitioner was entitled to do so, in view of the fact that his credit balance came from a transfer of the credit balance in SUML's account with the Company.

Sparkle Life Ltd's move back to Mongkok

38. On 13 November 1998, the staff of SLL moved back to its original office in Mongkok. From that time onwards, the Petitioner spent only part of his time in the Company's premises in Tung Ying Building, and the relationship between him and the 1st Respondent deteriorated.

39. One of the issues in the case is the reason for that move. The Petitioner's case as originally stated in the Amended Petition was that the relationship between the parties had become so poor that he had to move out of the Company's office. However, that original case was not supported by the Petitioner's evidence, which was to the effect that the move had been agreed upon in the October document, and the purpose for the move was so that space could be freed for Sparkle-Hall, the new investment adviser company that he and the 1st Respondent intended to establish. This was the company referred to in the October document as being a potential shareholder, contingent upon its obtaining an investment adviser licence.

40. The 1st and 2nd Respondents' case was that SLL (which was owned and controlled by the Petitioner) had been carrying on business which should have been transferred to the Company, and it was moving back to Mongkok so that the 1st and 2nd Respondents would not become aware of the extent of that business.

Meeting on New Year's Eve

41. The relationship between the Petitioner and the 1st Respondent deteriorated after the move.

42. On New Year's Eve, the 3 shareholders met at a cafe to see if a solution could be worked out. The Petitioner wished to leave the Company and wanted to be bought out. There is some dispute between the Petitioner and the 1st Respondent as to what price was offered by whom at that meeting, but the upshot of it was that the parties could not agree on a value for the shares. The Petitioner then expressed his intention to wind up the Company.

Petitioner's proposal by fax

43. On 2 January 1999, a fax was sent by the Petitioner to the 2nd Respondent. In this fax, the Petitioner expressed his view that it would be unfair to the 2nd Respondent if the Company were to be wound up, and set out 9 conditions for his voluntary departure from management of the Company whilst retaining his shareholding.

44. Condition 1 was that he (the Petitioner) would set up his own brokerage company independently from the Company.

45. Condition 2 dealt with the transfer of the Petitioner's general and life insurance business in the Company to the new brokerage company.

46. Condition 3 was that the new management undertook to pay him commission he was entitled to according to the "directors' minute dated 21/10/98" for business he had brought into the Company.

47. Condition 4 was for the termination of a service agreement (referred to in the October document) under which the Company paid a fee to SLL for the latter to perform policy quotation services for the Company.

48. Condition 5 was for the termination of the Petitioner's entitlement to overriding commission in the Company in respect of business placed with Manulife and other life companies and general insurance businesses.

49. Condition 6 was for the termination of the Petitioner's production commitment and entertainment budget as director, pursuant to Sections VI and Section VII of the October document.

50. Condition 7 proposed that the bonus agreement that the Company had with Manulife, Hong Kong and Shanghai Insurance and China be re-negotiated.

51. Condition 8 was that the existing and proposed shareholding structure remained as per Section III of the same minute.

52. Condition 9 was that after the Petitioner resigned as Chief Executive, the 1st Respondent would become the Chief Executive, assisted by the 2nd Respondent.

Meeting on 4 January 1999

53. It is common ground that the 3 shareholders met again on 4 January 1999, but what happened at that meeting is disputed.

54. It is the Petitioner's case that after he had sent the fax on 2 January 1999, the 2nd Respondent had informed him that the 1st Respondent was agreeable to his terms, so he (the Petitioner) resigned as director and company secretary on 4 January 1999. He agreed to stay on as Chief Executive, as the 1st Respondent had to apply to CIB for approval to become Chief Executive of the Company.

55. It is the 1st and 2nd Respondents' case that when the 2nd Respondent received the fax of 2 January 1999, he became aware, for the first time, of the October document. He was angry with the Petitioner for not having informed him about it, and demanded that there be a written record of the terms that the Petitioner had allegedly promised him when he was approached to join as a shareholder the previous summer, viz. full commission paid by the financial planning companies, overriding commission for business done by his sales team and market allowances.

56. The 1st and 2nd Respondents allege that at the meeting on 4 January 1999, the 2nd Respondent confronted the Petitioner who had nothing to say, but when the 2nd Respondent asked for a written record of the terms the Petitioner had allegedly promised him, he (the Petitioner) asked the 1st Respondent to provide it instead, as he was leaving as director.

57. According to the 1st and 2nd Respondents, the Petitioner resigned as director without asking for any of the conditions that he had set out in his fax 2 days earlier.

58. A brief letter of resignation dated 4 January 1999 was signed by the Petitioner for lodging with the Companies Registry, and the 2nd Respondent was appointed a director of the Company in his place.

Letter of 5 January 1999

59. On the following day, a document on the Company's letterhead entitled "Change of Production Commission for Jimmy Wong" [the 2nd Respondent] was signed by the 1st Respondent.

60. It said that "since you are the new shareholder and director of the company, in order to encourage you to produce business of financial services, the Company would like to offer you the following new commission terms".

61. This included a term that the 2nd Respondent would be entitled to the full commission paid to the Company by the financial planning companies of all financial planning products, including bonus and/or market allowance. The entitlement to market allowances was not restricted to business done for himself or his family members (in contrast to the commission for the Petitioner and the 1st Respondent under the October document).

62. The letter also stated that the terms were the same for all existing shareholders. It is the 1st and 2nd Respondents' case that this had been agreed on 4 January 1999 with the Petitioner as well. This is denied by the Petitioner. One of the issues in this case is whether the 1st and 2nd Respondents have, since the Petitioner's departure from the directorship of the Company, been depleting the Company of its income by paying the market allowances to themselves.

Events after the Petitioner's departure from the board of directors

63. On 12 January 1999, the 1st Respondent applied to the CIB to be approved as Chief Executive of the Company.

64. On 13 January 1999, the Petitioner started his new brokerage company called Sparkle Insurance Brokers Ltd ("SIB").

65. On 23 February 1999, the 1st Respondent was informed by CIB that he lacked the necessary qualifications to be approved as Chief Executive as he had not worked for the necessary period of time in management. The 1st Respondent asked the Petitioner to write to the CIB to say that he (the 1st Respondent) had worked for the required period of time in management, but the Petitioner refused. At the hearing of the petition, the 1st Respondent admitted that he was asking the Petitioner "to lie for him". Nevertheless, the 1st Respondent was upset by the Petitioner's refusal to help, especially when around the same time, on 25 February 1999, the CIB approved the Petitioner's appointment as Chief Executive of SIB, his new brokerage company.

66. On 3 March 1999, the Petitioner resigned as Chief Executive of the Company. He says that this was because on 1 March 1999, he had written to the Company asking about its business affairs and had not received a reply, and as Chief Executive, he was responsible for the day to day supervision and control of the Company. In fact, under the CIB's Regulations, a Chief Executive had to be a director or full-time employee of the member company.

67. On 8 March 1999, the Company rejected the Petitioner's resignation as Chief Executive because the Company would be left without a Chief Executive approved by the CIB and the scope of its business activities curtailed.

68. Notwithstanding the Company's rejection of his resignation, on 10 March 1999, the Petitioner informed the CIB of his resignation as Chief Executive.

69. In the meantime, after the CIB had declined to approve the 1st Respondent as Chief Executive, a new application was made by Thomas Chiu. On 16 April 1999, the Company dismissed the Petitioner as Chief Executive and on 26 April 1999, Thomas Chiu was appointed to that post.

Company's writ against the Petitioner

70. At the Company's financial year end on 30 April 1999, the Company changed the accounting treatment in respect of the transfer of SUML's credit balance to the Petitioner's and the 1st Respondent's current accounts, which accounts had been debited for the allotment of shares in November 1998. The Petitioner was debited with $70,000.

71. Further, an amount of $3,500 which had been charged to the Company for moving expenses was debited by the Company to Petitioner's account.

72. In August 1999, the Company caused a writ to be issued against the Petitioner for the total sum of $73,500. The Petitioner filed a defence. The action has apparently not progressed since then.

Petitioner's proceedings to hold AGM

73. Later that month, the Petitioner caused proceedings to be issued for an order that the Company hold its AGM. The AGM was then convened in September 1999 when the Petitioner raised the issue as to why the 1st and 2nd Respondents were receiving more commissions by way of market allowances than had been stipulated in the October document.

Further allotment of shares

74. In October 1999, the Company issued further shares. The Petitioner did not take up further shares, as a result of which his shareholding was reduced from 42% to 23%.

Presentation of petition

75. In November 1999, after some disputes as to the Petitioner's access to the statutory books, the petition was presented. Two months before, in September 1999, the 2nd Respondent had offered to buy the Petitioner's shares at $30,000, or 10% of their par value.

76. In his Amended Petition, the Petitioner has alleged that since his departure from the board, the affairs of the Company have been conducted in a manner which is unfairly prejudicial to his interests, in that:-

(i) the 1st and 2nd Respondents have excluded the Petitioner from management of the Company;

(ii) the 1st and 2nd Respondents have depleted the income of the Company by paying the market allowances to themselves instead of retaining it in the Company;

(iii) the 1st and 2nd Respondents have caused the Company to issue new shares, thereby changing the shareholding structure, without having obtained the unanimous consent of all shareholders, in breach of the agreement in the October document;

(iv) the Company did not hold an AGM until proceedings were issued by the Petitioner for that purpose;

(v) the 1st and 2nd Respondents had denied the Petitioner access to the statutory books;

(vi) since May 1999, a company called Sparkle Insurance Services Ltd ("SIS") (in which the 1st and 2nd Respondents, but not the Petitioner, are interested) has shared office space with the Company free of charge.

77. The 1st and 2nd Respondents, in addition to denying that there has been any exclusion or grounds for unfair prejudice as set out above, have alleged that the Court should not exercise its discretion to order that the Petitioner's shares be bought out, on the grounds that:-

(i) the Petitioner had promised to transfer the business of SLL to the Company and had failed to do so;

(ii) the Petitioner had competed with the Company by starting SIB in January 1999;

(iii) the Petitioner has refused to pay the total sum of $73,500 to the Company.

Law

78. It is well-settled that s.168A provides a remedy to a shareholder if there has been conduct which is unfair and which prejudices the interests of all or any of the shareholders of the company. There is a lengthy discussion of this statutory remedy in Hong Kong Company Law I [8252] et seq. There is no dispute in the present case as to the principles of law; the dispute is on the facts and on the applicability of the law to the facts as found.

Issues

79. The parties have agreed a list of issues. The issues are detailed and I will not repeat them here. It may be helpful to summarize them chronologically as follows:-

(a) was there an agreement that the Petitioner transfer the entire business of SLL to the Company?

(b) if so, was that agreement superceded in October 1998?

(c) what was the nature and effect of the October document?

(d) were terms promised to the 2nd Respondent for his joining as shareholder set out in the 5 January 1999 letter?

(e) did the Petitioner have to move back to the Mongkok office in mid-November 1998 because he had been excluded from the Company?

(f) did the 1st and 2nd Respondents agree to the terms of the Petitioner's withdrawal from management as set out in his fax dated 2 January 1999?

(g) was there a shareholders' agreement on the terms of commission set out in the 5 January 1999 letter?

(h) if not, did the 1st and 2nd Respondents' conduct in fixing those terms deplete the income of the Company and amount to conduct which was unfair and prejudicial to the Petitioner?

(i) did the Petitioner compete with the Company by setting up SIB, and if so, should the Court by reason thereof exercise its discretion against making an order under s.168A?

(j) did the Petitioner owe the Company a total sum of $73,500 as at year ended 30.4.1999, and if so, should the Court by reason thereof exercise its discretion against making an order under s.168A?

(k) was the Company justified in sharing office space with SIS free of charge?

(l) was the further allotment of shares conduct which was unfair and prejudicial to the Petitioner?

(m) was the Company's failure to hold the AGM conduct which was unfair and prejudicial to the Petitioner?

(n) did the Company not give the Petitioner access to the statutory books? If so, is this conduct which was unfair and prejudicial to the Petitioner?

(o) if, in the light of the above, the Court makes a buy-out order, what is the appropriate date for the valuation of the shares?

(a) No agreement that Petitioner transfer all of SLL's business

80. I find that there was no agreement by the Petitioner that he would transfer the entirety of SLL's business to the Company. The Petitioner caused SLL to transfer to the Company only the ORSO (employee benefits) business placed with Prudential because that was similar to financial planning. The Petitioner and the 1st Respondent intended that apart from that, SLL would retain its own business.

81. First, the contemporaneous documentary evidence makes it clear that SLL was intended to carry on independently of the Company. After the Company was established, it wrote to insurance companies asking that business introduced by SLL and by itself be accumulated for the purposes of obtaining bonuses, and that the bonuses should be paid to SLL first, for that company to appropriate the relevant sum to the Company. Those letters were signed not only by the Petitioner but also by the 1st Respondent. They show clearly that SLL was intended to carry on business separately from the Company, as otherwise there would have been no need for appropriation of the bonuses between SLL and the Company, and the 1st Respondent would not have agreed to sign those letters. No explanation was given by the 1st Respondent for signing those letters.

82. Further, the Petitioner said in evidence (which was not challenged) that mortgage payments for his residence and the Mongkok office unit were financed by SLL. The 1st Respondent also said in his evidence that it was a heavy burden for the Petitioner to have to support 2 mortgages. Since these properties had not been injected into the Company, it would have been unlikely for the Petitioner to have agreed that all of SLL's business be transferred to the Company, leaving SLL no means to finance the mortgage repayments.

83. Further, there are many references in the October document which show that the Petitioner and the 1st Respondent had intended that SLL would carry on as a separate business.

84. First, in Section IV, the last paragraph in the general section stated that the Petitioner and the 1st Respondent should place all their new business with the Company, but that "insurance renewal business in Sparkle Life Limited would not fall into this principle". The 1st Respondent admitted that he had read the document before he signed it. Clearly, therefore, the parties contemplated that SLL would retain a separate business.

85. Further, in Section IV(A), there is a reiteration that production bonuses payable by Manulife would be apportioned between SLL and the Company.

86. Further, in Section IV(C)(i), it was stated that for 2 years from 16 November 1998, the Company would "sub-contract" premium rate quotations and policy administration in relation to general insurance business to SLL, for which the Company would pay 24% of the commission received to SLL. The service agreement was to be renewed after the 2 year period. In this connection, the Petitioner had said in evidence that the staff of SLL had at first helped out the Company informally by guiding the staff of the Company on premium quotations, but that since SLL was moving back to the Mongkok office, it was thought that there should be a formal arrangement. Again, there would have been no ground for such a service agreement if there had been an agreement between the Petitioner and the 1st Respondent that SLL's business was to be taken over entirely by the Company.

87. In giving evidence, the 1st Respondent said that the Petitioner had been responsible for drafting the October document. I accept that evidence. It was clear in the course of the hearing that the Petitioner was the more meticulous and methodical person of the two.

88. Although the Petitioner had drafted the October document, the 1st Respondent had to accept that no-one forced him to sign it. Nevertheless, he said he did so unwillingly. I do not accept that. No one could have made him sign the document if it did not represent the agreement between himself and the Petitioner. He was one of only two directors of the Company. Although he was minority shareholder at the time, he had the expertise in the area of financial planning which the Petitioner lacked and which was intended to be the principal activity of the Company (as was expressly stated in Section II).

89. Accordingly, I find that the contemporaneous documentary evidence and the evidence concerning the need to keep SLL's business going to finance the mortgages show clearly that SLL was intended to be a separate business, and that the Petitioner had not agreed to transfer its entire business to the Company.

(b) No prior agreement superceded by October agreement

90. Having found that there was no prior agreement that SLL would transfer its entire business to the Company, it follows that there was no superceding of any prior agreement by the October document.

91. Indeed, this was expressly confirmed by the 1st Respondent when he signed the October document which stated in the opening paragraph that the document "includes a reiteration [as opposed to a variation] of material facts about [the Company] and her directors".

(c) Nature and effect of the October document

92. The parties disputed the nature and effect of the October document. The Petitioner said it was a shareholders' agreement, and the 1st Respondent said it was minutes of a directors' meeting. As far as the 2nd Respondent is concerned, his case is that it was not binding on him at all as he had not joined as a shareholder or director at that stage.

93. The October document was not drafted by solicitors, and it was signed at a time when the two shareholders were also the two directors.

94. It was originally prepared as a shareholders' agreement, and even as signed, contained an additional part that one would expect to find in a shareholders' agreement, i.e. Section III on existing and prospective shareholding structure. On the other hand, the document is entitled "minutes of directors' meeting". It omitted the references to "shareholders" in the introduction in the unsigned Shareholders' Agreement, which had stated that it was a "shareholders' agreement ... of facts about [the Company] and her directors and shareholders ... comprising of the agreement between the existing shareholders and directors pertaining to the business development of the Company".

95. The Petitioner said that it was drafted in that way because the 1st Respondent said it should be done that way. I do not think the Petitioner would have subjected himself to such a direction by the 1st Respondent if he had not agreed with it. After all, he (the Petitioner) was the majority shareholder, the registered Chief Executive and the company secretary.

96. The 1st Respondent said in evidence that the Petitioner had told him that it would be safer for the two of them to sign such a document as a directors' minute, as "outsiders" were "invading", i.e. the 2nd Respondent (an outsider compared with these two old friends, as they then were) was soon joining the Company as shareholder.

97. I find that to be the more plausible explanation. Apart from the 2nd Respondent, the Petitioner and the 1st Respondent were also envisaging (as evidenced in the prospective shareholding structure) the possibility of being joined by Ivan Yiu. It was entirely reasonable for the two of them to have thought that if their agreement were incorporated in a shareholders' agreement only, it might be argued in the future, to their detriment, that it did not bind the Company once more "outsiders" joined.

98. I find that the October document was a record of the shareholders' agreement which had formed the basis of the relationship between the Petitioner and the 1st Respondent, the terms of which were also incorporated into a resolution of the board of the Company for the purpose of making the Company a party to, and hence bound by, it.

(d) 2nd Respondent's terms not as per 5.1.1999 letter

99. It was the 1st and 2nd Respondents' case that in the summer of 1998, the Petitioner approached the 2nd Respondent with a view to inviting him to join the Company as a shareholder. The Petitioner denied that it was he who had made the approach, and said that it was the 1st Respondent who had done so.

100. I find that it was more likely that the approach had been made by the Petitioner as he had known the 2nd Respondent for a longer period of time and was the majority shareholder of the Company. The 2nd Respondent had worked for the Petitioner in SUML for a number of years, prior to the 1st Respondent joining it as director and shareholder in March 1998, just a few months before the summer. Although the 1st Respondent had been a part-time "adviser" to SUML previously, he would hardly have worked as closely with the 2nd Respondent as the Petitioner.

101. However, I do not accept the 2nd Respondent's allegation that when he was approached, the Petitioner promised him the terms that were set out in the letter of 5 January 1999. Those terms (allegedly promised in the summer of 1998) were to the effect that not only would he get the entirety of the commission paid by the financial planning companies to the Company, he would also be given the bonuses or market allowances for all financial planning business he placed, not just for products placed for himself and his immediate family members.

102. If this were true, it would have meant that the 2nd Respondent (as the smallest shareholder) would be getting more favourable commission terms for the main activity of the Company than the Petitioner and the 1st Respondent (the founding members) themselves.

103. There was no good reason why the Petitioner and the 1st Respondent would have agreed to that in the summer, and yet in October, they still restricted themselves to bonuses or market allowances for products sold to immediate family members only. The 2nd Respondent was only putting in $100,000, which although in cash, was still less than what the two of them had put into the Company in one form or another ($300,000 each). Further, it was not as if the 2nd Respondent was able to drive a hard bargain by having secured a number of clients waiting in the wings to buy financial planning products upon his joining as shareholder. According to the 2nd Respondent, between November 1998 and January 1999, he had not been able to sell any financial planning products at all and in fact it was not until April 1999 that he was able to generate business.

104. Further, the language of the letter dated 5 January 1999 shows that the terms were new. The introductory paragraph said "since you are the new shareholder and director of the Company, in order to encourage you to produce business of financial services, the Company would like to offer you the following new commission terms ..." [my emphasis]. In other words, these were new terms which were being offered because the 2nd Respondent was the new shareholder and director of the Company. The 2nd Respondent did not become a director until 4 January 1999.

105. In the light of the above, I do not accept the 2nd Respondent's allegation that in the summer of 1998, the Petitioner had promised him the terms which were set out in the letter of 5 January 1999. As will be seen later, this finding has an impact on later issues.

(e) Petitioner not compelled to move to Mongkok

106. In mid-November 1998, the staff of SLL moved back to the Mongkok office which they had vacated for a few months.

107. The Petitioner's case in the Amended Petition was that he had to move out because relations between the parties were poor. However that was disavowed by the Petitioner in his oral evidence, and his affirmations did not support the case in the Amended Petition either.

108. Indeed, the October document showed that in fact, the parties contemplated that SLL would move out in mid-November. In Section C(i), it was stated that as from 16 November 1998, the Company would be sub-contracting out the policy quotation work to SLL, and that the operation would be carried out at SLL's office in Mongkok for an agreed fee. The fact that the parties were still on sufficiently good terms to be contemplating a new venture shows that the relationship had not deteriorated to the extent that the Petitioner had to move out with his staff in SLL.

109. Having said that, I do not accept the 1st and 2nd Respondents' allegation that the Petitioner left because the latter was trying to conceal the fact that SLL still had its own business instead of having transferred all its business to the Company. I have found (for the reasons set out under issue (a) above) that there had not been any agreement that the entire business of SLL was to be transferred to the Company. Consequently there would have been nothing to conceal.

110. I find that the relationship between the Petitioner and the 1st Respondent deteriorated after the move, as a result of the Petitioner spending less time at the Tung Ying Building office giving rise to the 1st Respondent's discontent and management disagreements.

(f) Agreement to Petitioner's terms for departure

111. It is common ground that at the New Year's Eve meeting, the Petitioner and the 1st Respondent were unable to agree on the price of the shares to be sold. The Petitioner said that he wanted to wind up the Company. The 2nd Respondent was worried by this as he had joined the Company only 2 months ago, and asked the Petitioner what he really had in mind. The Petitioner then reduced his demands into writing in the fax he sent to the 2nd Respondent on 2 January 1999.

112. It is obvious that the Petitioner had the upper hand. He had another established business running at SLL, whereas the 1st Respondent had lost his job at C.A. Portfolio Management less than a year ago and could not have relished the thought of starting afresh yet again. Indeed the 1st Respondent admitted that when the Petitioner threatened to place the Company in liquidation, he asked him not to do so.

113. Therefore, when the Petitioner sent his fax of 2 January 1999 to the 2nd Respondent proposing that instead of proceeding to a winding-up, he would only leave the board of the Company leaving his shares intact, there was every reason for the 1st and 2nd Respondents to agree. The fax was written in language of reconciliation, proposing an amicable atmosphere for an agreement and wishing the Company well.

114. There were no terms to which the 1st and 2nd Respondents would have been averse and I find that the 1st and 2nd Respondents did agree to the Petitioner's departure on those terms. The Company would remain, there would be no withdrawals of share capital and with the Petitioner's departure from the board, there would be no further management disagreements. As for the Petitioner's setting up his own brokerage company, the 1st Respondent said in his evidence that he had not thought that the Petitioner would succeed in doing so. Indeed, he was shocked when he heard in late February 1999 that SIB had been approved by the CIB. In any event, the principal activity of the Company was financial planning, and the Petitioner had no expertise in that field. Further, the Petitioner was continuing as Chief Executive while the 1st Respondent applied to the CIB for approval.

115. The 1st and 2nd Respondents' case was that the terms were not discussed at all because they had no opportunity to do so. According to their oral evidence, the 2nd Respondent confronted the Petitioner on 4 January 1999 with the October document which he (the former) had not seen before, and the Petitioner did not reply or press for the terms in his fax.

116. I reject the 1st and 2nd Respondents' case on this aspect. There was no mention at all in their affirmations about such an alleged confrontation and the consequential unconditional departure of the Petitioner from the board. If there had been such a dramatic event as described in their oral evidence, one would have expected this incident to have been at the forefront of their minds and to have been recounted in their affirmations. Instead, in paragraph 34 of the 1st Respondent's 1st affirmation, he said that on 4 January 1999, "solely on his own initiative, and to the 2nd Respondent's and my surprise, the Petitioner resigned as secretary and director of the Company". The 2nd Respondent's affirmation did not even mention the meeting specifically.

117. In any event, even if the 2nd Respondent had not seen the October document prior to the Petitioner's reference to it in his fax of 2 January 1999, I do not see why that should cause the 2nd Respondent to be aggrieved when his case was that he would be getting the full commission and bonuses or market allowances, and the October document showed that the majority shareholders were allowed to receive the proportion of bonuses or market allowances on products sold to their immediate family only.

118. Further, there was no evidence to explain why any alleged discontent of the 2nd Respondent with the alleged concealment of the October document should cause the Petitioner to completely surrender the terms he had set out in his fax of 2 January 1999. As discussed earlier, the Petitioner had the upper hand as far as the future was concerned. He could have reverted to his initial option of winding-up the Company.

119. I find therefore that there was no such confrontation as alleged by the 1st and 2nd Respondents, and that they accepted the Petitioner's terms for his departure from the board.

(g) Petitioner did not agree to new commission terms

120. One of the more important issues is whether the Petitioner had agreed to the new commission terms set out in the 1st Respondent's letter to the 2nd Respondent on 5 January 1999. The Petitioner claims that by paying the bonuses and market allowances to themselves instead of to the Company, the 1st and 2nd Respondents have been depleting the Company of its income.

121. The 2nd Respondent has frankly admitted that as far as he was concerned, the Company existed merely as a vehicle for him to earn commissions and bonuses. He said in cross-examination that he "did not need to care about the Company". He was "making use of the Company to get commissions. Everybody knew that the Company was not there to make profit but to be used to make commissions". He said the point of the exercise was to get as much commission as possible, "even at the expense of the Company so long as it was in the interests of all the shareholders".

122. The 1st Respondent admitted in cross-examination that there would be little left for the Company after the new commission terms applied, but he said that the new terms had been agreed among all the shareholders (including the Petitioner) on 4 January 1999.

123. The Petitioner denied that the commission terms had been agreed and his case was that it was in breach of the shareholders' agreement between himself and the 1st Respondent, and the resolutions adopted by the then directors of the Company in October 1998.

124. I find it unlikely that the Petitioner would have agreed to these commission terms in January 1999. He was going to set up his own brokerage firm and he was only going to remain as a shareholder of the Company. There would have been no reason for him to agree at this time to reduce the money available to the Company (from which dividends would be paid), when in October he had agreed to retain all market allowances except for business for immediate family members.

125. Further, if (as the 1st and 2nd Respondents allege) the new commission terms had been agreed among all the shareholders, one would have expected minutes drawn up to reflect that. There were none. The letter was not counter-signed by the Petitioner. No copy was given to him. The 1st Respondent provided no explanation for why he had not asked the Petitioner to indicate his agreement in writing, saying simply that it did not occur to him to do so. This was even though the 1st Respondent claimed that after 4 January 1999, the relationship between him and the Petitioner was "not bad", though not as good as before.

126. In the circumstances, it is clear in my view that the new commission terms had not in fact been agreed at the meeting on 4 January 1999 but was an arrangement made by the 1st and 2nd Respondents without the knowledge or consent of the Petitioner.

(h) Conduct unfair and prejudicial to Petitioner

127. As a result of the new commission terms, the 1st and 2nd Respondents have received money which should have been retained by the Company. As far as the 1st Respondent was concerned, he received 10% more on the commission from Transamerica and he received bonus or market allowances on business generated for persons outside his family. According to the Petitioner's calculations, the 1st Respondent has received $367,573 more under the new commission terms.

128. As for the 2nd Respondent, the Petitioner has calculated that he has received $624,678 more under the new commission terms. In answer to this, the 2nd Respondent has in his oral evidence identified some family members who had bought products. However, it is not the 1st and 2nd Respondents' case that the shareholders had agreed on 4 January 1999 that the 2nd Respondent should receive the same commission terms as the Petitioner and the 1st Respondent, and there is no evidence of any such agreement. It is their case that the shareholders had agreed on the terms in the letter dated 5 January 1999, which case I have rejected.

129. In granting better commission terms to themselves, the 1st and 2nd Respondents have reduced the income of the Company. This clearly would reduce the profits available for the payment of dividends and would not be in the best interests of the Company.

130. I find that is conduct which was unfair and which prejudiced the Petitioner as a shareholder. The fact that the 1st and 2nd Respondents agreed that the same commission terms should also apply to the Petitioner does not negative or even mitigate the unfairness and prejudice, because it was known that the Petitioner would be setting up his own brokerage company and was only going to remain a shareholder of the Company.

(i) Petitioner's conduct in setting up SIB

131. The 1st and 2nd Respondents have contended that even if the Court should find that there has been unfair prejudice, it should not exercise its discretion to order a buy-out because the Petitioner had set up SIB in competition with the Company.

132. However the short answer to this contention is that the Petitioner had put forward the establishment of his own brokerage company in his fax of 2 January 1999, and this had been agreed to by the 1st and 2nd Respondents as an alternative to the Petitioner's proposal to wind up the Company. There was no evidence to show that the Petitioner had set up SIB at any stage before 4 January 1999.

133. Accordingly, I find there is nothing in the 1st and 2nd Respondents' contention.

(j) Petitioner's indebtedness of $73,500

134. Another contention was that the Petitioner was indebted to the Company in the sum of $73,500. The point arises as follows. The Tung Ying Building office was first rented by SUML. A 2-month rental deposit and a 1-month advance rent was paid, amounting in total to slightly more than $100,000. Thus, at 1 April 1998, SUML's account with the Company was in credit in the sum of $107,000 odd.

135. The Petitioner and the 1st Respondent owned respectively 70% and 30% of SUML. When the allotment of new shares was proposed, on 29 October 1998, the Company transferred SUML's credit balance of $100,000 to SUML's two shareholders, as to 70% ($70,000) to the Petitioner and as to 30% ($30,000) to the 1st Respondent. This was recorded in the accounts of all three. The transfer was made on the instructions of the Petitioner who was responsible for overseeing the accounts of the Company, and it was known to the 1st Respondent.

136. However, at year end 30 April 1999 (i.e. after the Petitioner had left the board of the Company), there was a new accounting treatment. The Company's directors took the point that there had been no written authority of SUML permitting the transfer of the credit, even though the only shareholders and directors of SUML were the Petitioner and the 1st Respondent. Accordingly, they reversed the transfer, resulting in a debit in the Petitioner's account of $70,000.

137. This reversal of transfer was made without any inquiry being made to SUML to see what its position was regarding the account between it and the Company. Apparently, no confirmation of balances had been sent to SUML. The reversal of transfer was therefore premature and in my view, a strategy designed to produce an indebtedness by the Petitioner to the Company. It is not such as to warrant the Court exercising its discretion against the remedy sought.

138. As to the balance of about $3,000, apparently that was removal costs which are the subject of dispute between the parties. It is not necessary for me to determine whether those costs should be charged to the Company, since in any event, a minimal sum such as that would not tip the scales one way or the other.

(k) Company sharing space with SIS

139. This issue was not actively pursued at the hearing of the petition and I shall deal with this briefly. Sparkle Insurance Services Ltd was set up by the 1st and 2nd Respondents after SLL terminated its quotation sub-contracting services as a term of the Petitioner's departure from the board of the Company. It was therefore necessary for the Company to find a replacement for SLL. In any event there was no evidence as to whether its staff occupied any space in the Tung Ying Building office, and if so, how much.

(l) Further allotment of shares

140. It would appear that the further allotment of shares was necessary because the Company's income was reduced by reason of the extra commissions which the 1st and 2nd Respondents paid to themselves after 5 January 1999. In my view, therefore, whether or not the further allotment might of itself have been prejudicial conduct, it was in this case a consequence of the unfairly prejudicial conduct.

(m) Failure to hold AGM

(n) Access to statutory books

141. The failure to hold the AGM has been remedied and has no further relevance.

142. As for the provision of access to the statutory books, there is a dispute on the facts as to whether access had been denied. The parties rightly did not expend time and costs in investigating this issue, which would have been sterile anyway, as access had been provided by the time of the hearing of the petition.

Order

143. By reason of the matters set out above, I have found that the payment by the 1st and 2nd Respondents to themselves of extra commission and bonuses or market allowances at the expense of the Company, reducing the profits from which dividends could be received by the Petitioner as shareholder, was conduct which was unfair and prejudicial to the Petitioner, and warrants the making of an order under s.168A of the Companies Ordinance that the 1st and 2nd Respondents be ordered to purchase the Petitioner's shares in the Company.

144. Although the Amended Petition also seeks relief that the 3rd Respondent Company do purchase the Petitioner's shares, such an order has not been specifically sought on behalf of the Petitioner at the hearing. In light of the Company's present financial position, I do not think it appropriate to make that order in this case in any event.

145. The 1st and 2nd Respondents were represented by the same advisers and there was no argument before me as to the proportion which each of them should bear should I make an order that they purchase the Petitioner's shares. I would think that in order not to upset the structure of the existing shareholding as between themselves, the order should be that the 1st Respondent and the 2nd Respondent purchase the Petitioner's shares in the same proportion as their existing shareholding. However I will give all parties liberty to restore for this particular aspect of the order to be argued should it be necessary, any such application to be made within 7 days of the order herein. In the absence of any such application, the order would be that the 1st Respondent and the 2nd Respondent purchase the Petitioner's shares in the same proportion as their existing shareholding.

(o) Date of valuation

146. The Petitioner has calculated that the net asset value of the Company would be substantially increased had it not been for the 1st and 2nd Respondents' conduct, and that his shares are worth $1.226 each. However, the Petitioner is not a qualified accountant and his calculations have not been agreed. Further, part of his calculations were based upon unreconciled items in the accounts, and they were done without the benefit of inspecting the Company's ledgers. In the premises, I would order that, in the absence of agreement between the parties as to such value, the Petitioner's shares be valued by a professional accountant to be agreed by the parties, and failing agreement, to be nominated by the Court.

147. As for the date when the shares should be valued, it was held in Re London School of Electronics Ltd [1986] 1 Ch 211, 224 that if there were to be such a thing as a general rule, then it would be the date of the order or the actual valuation, rather than the date of the presentation of the petition or the unfair prejudice. I see no reason why, the general rule should be departed from in the present case and no particular circumstances have been advanced against its application.

148. In the present case, since the Company is a going concern, I would order that the Petitioner's shares be valued as at the date of the order, but since the extra commission and bonus or market allowances have reduced the income and thus diminished the value of the shares, I would order that the valuation be made on the footing that that conduct had not occurred.

149. Finally, I would make a costs order nisi that the costs of the petition be paid by the 1st and 2nd Respondents.