TSOI CHIK SANG LAWRENCE AND OTHERS v. TASTY CATERING GROUP LTD AND OTHERS

HCMP 812/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 812 OF 2017

________________________

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REASONS FOR DECISION

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1.  This was an application by Tsoi Chik Sang Lawrence (“P1”), Fonduet Industrial Limited (“P2”) and Choi Tsig Cheung (“P3”) (collectively “the petitioners”) by summons dated 7 April 2017 for the appointment of receivers and managers of Hang Heung Cake Shop Company Limited (“HHCS”) until the trial of the petition or further order. At the conclusion of the hearing, the court allowed the petitioners’ application. I now hand down the Reasons.

2.  At the outset of the hearing, the petitioners applied to amend their application to provide for Miss Tiffany Wong and Mr Patrick Cowley, partners of KPMG Advisory (Hong Kong) Limited to be their preferred choice for appointment if approved by the court.  The amendment was allowed.

Factual background

3.  HHCS’s business is in the manufacture of cakes and other bakery and food products for sale under the name “Hang Heung” and is best known for its “wife’s cakes”.  It was incorporated in 1981 with the business dating back to the 1920s when it was founded by the father of Cheng Hung Kit (“CHK”) and Choi Kwai Choi (“the deceased”), the grandfather of P1 and P3.

4.  Prior to 24 December 2009, HHCS had 60,000 issued shares held by the Cheng and Choi families as follows:

Cheng		Choi
CHK	21,200	P1	100
KT Holdings Limited (KTHL)	11,300	P3	100
Honlex Investment Ltd	10,000	The deceased’s estate	9,800
Cheng Hung Kung	2,500	P2	5,000
	________		________
	45,000		15,000
	=======		=======

The dispute over the majority shareholding in HHCS

5.  It will be seen from the above that the holdings of CHK and KTHL totalling 32,500 shares represented 54.1% of the issued capital of HHCS (“the disputed HHCS shares”).  Since mid-2011, those shares have been at the centre of a dispute between CHK and KTHL on the one hand and Tasty Catering Group Limited (“Tasty”) and Federal Management Limited (“Federal”) on the other.  Tasty and Federal had apparently acquired the disputed HHCS shares in February 2011 from 3 BVI companies to whom, allegedly, the disputed HHCS shares had been transferred on 24 December 2009.

6.  Tasty and Federal took over de facto control of HHCS in mid- 2011.  On 6 July 2011, they issued proceedings against CHK, KTHL and HHCS asserting ownership of the disputed HHCS shares (HCA 1130/2011).  On the same day, CHK, KTHL and others issued proceedings against Tasty, Federal and others disputing this (HCA 1137/2011) and who applied for interim relief on 11 July 2011.  The substantive hearing for the injunction in HCA 1137 was adjourned on 15 July 2011 upon certain undertakings given by Tasty and Federal (subsequently varied on 14 December 2011).  No hearing date for the adjourned summons has ever been fixed.

7.  On 16 December 2014 the summons dated 4 June 2014 taken out by Tasty and Federal to strike out HCA 1137 was dismissed and the two actions over the true ownership of the disputed HHCS shares (an issue which does not concern the petitioners) were ordered to be consolidated (“the consolidated actions”).  The second CMC of the consolidated actions is scheduled for 6 September 2017.

8.  The petitioners’ status as shareholders of HHCS is not the subject of any challenge.  Prior to 24 December 2009 and at least until 30 April 2011^[1] the shares held by the petitioners constituted 25% of the issued share capital of HHCS.

Directorships and management of HHCS

9.  Prior to 23 April 2010, HHCS had 5 directors, namely, CHK, Cheng Hung Sang (CHK’s younger brother), Chung Ying Hung (CHK’s wife), P1 and P3.

10.  On 23 April 2010, at an EGM of HHCS convened by the BVI companies, the 5 directors named in §9 were purportedly removed by resolution (“the 2010 removal resolution”).  Both the Cheng and Choi families disputed the validity of that resolution.

11.  Tasty and Federal (collectively “the respondents”)^[2] assert that they are “corporate directors” of HHCS and have been directors since mid-2011 but it is common ground that there is no evidence of such appointment at a general meeting of HHCS.   

12.  That aside, article 20 of HHCS’s articles of association provides for the term of office of directors to be one year although retiring directors are eligible for re-election. The consequence of that would be that by the end of 2012 the term of office of all HHCS’s directors would have expired.‌ 

13.  As no AGM has been convened since 2011, there has been no re-election of any directors or new appointments made.  Therefore, it would appear that, currently, HHCS has no de jure directors.

14.  On 3 April 2017 the respondents served notices convening an EGM of HHCS on 28 April 2017 for an ordinary resolution to be passed to ratify the 2010 removal resolution.  Upon the court’s ‘commendation’ of 18 April 2017 (to defer the EGM scheduled for 28 April 2017), on 21 April 2017, the respondents agreed to defer the EGM but only to a date after September 2017. 

15.  As will later become apparent, in the interim between 3 and 21 April 2017, various events occurred.  But before setting those out, the narrative should continue with proceedings P1 commenced against the respondents in June 2016 to which I now turn.

HCMP 1447/2016 (“the document access proceedings”)

16.  On 8 June 2016, P1 commenced the document access proceedings against the respondents for the production of or access to the books and records of HHCS particularised in an attached schedule.  The respondents did not appear at the hearing to contest the application and Harris J made an order in terms on 19 July 2016 (“the disclosure order”).

17.  In mid-August 2016, the petitioners were given access to a number of documents and according to Lai Cheuk Ting, Crystal (“Ms Lai”), a director of each of the respondents, over 2500 pages were supplied.  The documents discovered included the financial statements of HHCS for the years ended 31 March 2013, 2014 and 2015 but which had not been sent to shareholders nor approved by them in general meeting.

18.  Note 14 of the 2013 accounts made reference to a ‘special’ resolution dated 3 August 2011 (“the August resolution”) said to increase the share capital of HHCS from $6 million to $12 million and for the new shares to be offered to the existing shareholders on a pro rata basis. The petitioners deny receiving any notice of the meeting or that they were offered the new shares.  The resolution allegedly took place during the year ended 2012[3]. 

19.  The documents discovered did not include a copy of the August resolution. Repeated requests for it to be produced were ignored. As P1 considered that the respondents had failed to comply fully with the disclosure order, he obtained leave on 16 January 2017 to commence committal proceedings against Ms Lai who has been managing HHCS on the respondents’ behalf since mid-2011. 

20.  Meanwhile, on 31 March 2017, the respondents applied to set aside the disclosure order and leave to commence contempt proceedings. (According to the respondents, those applications were taken out following the respondents’ discovery in December 2016 of the Franchise Agreement referred to in §87 below.)  Those applications are scheduled to be heard substantively on 20 September 2017.

21.  On 3 April 2017, the EGM notices mentioned in §14 above were issued.  That, in turn, precipitated the filing of the present petition on 6 April 2017, followed by the present summons for the appointment of receivers and managers the following day.

Legal principles

22.  The passage in Lightman & Moss, The Law of Administrators and Receivers of Companies (5^th edition, 2011) at §29-003 neatly encapsulates the typical situations appropriate for the court’s intervention in the affairs of a company by the appointment of receivers and managers.‌ 

23.  The court has a discretion to appoint receivers and managers where, for example, the company is incapable of managing its own affairs because of the absence of a properly constituted board or deadlock on the board.  Another typical situation is where the company’s assets are in jeopardy because of the risk of misappropriation and/or dissipation by those in control of its affairs. 

24.  It is a temporary measure pending the resolution of the difficulties that prevent the board from exercising control of the company’s affairs.  The duration of the appointment naturally varies from case to case, depending on the problems to be resolved.

25.  Both parties cited a number of authorities relating to the exercise of the court’s discretionary power to appoint receivers.  In my view, observations made in the authorities cited need to be understood contextually. Whether and to what extent they are applicable to the matter under consideration depends entirely on the facts.

26.  What is evident is that the exercise of the court’s discretion is highly fact-sensitive.  Since the appointment is an invasive remedy, the court will have to be satisfied that less invasive measures will not provide sufficient protection and that the circumstances warrant the appointment. 

The petitioners’ case

27.  Mr Joffe who appeared for the petitioners submitted that unquestionably there is a serious issue to be tried as to the management of HHCS arising from the following: (a) the absence of a properly constituted board; (b) share capital and dilution; (c) misappropriation/misapplication of assets; (d) serious mismanagement; and (e) lack of probity.  Those issues will be considered in turn.

(a)  The absence of a properly constituted board

28.  As earlier noted (§6 above), the respondents began exercising de facto control over the company in mid-2011 and have been managing HHCS ever since.  They accept that there is no evidence of their appointment as directors.  In the words of Lord Simonds in Morris v Kanssen [1946] AC 459 at 471, they are ‘usurpers’ of the office of director ‘without colour of authority’ from the outset.  Lord Simonds was there explaining the vital distinction between a case of a defective appointment and one with no appointment at all.  It is only in the former that the director could be considered a de facto director.

29.  P1 and P3 were 2 of the 5 directors of HHCS at the time the respondents appeared on the scene and there is no question but that P1 and P3 had been validly appointed to the board.  It should be noted that they are named as the directors in the Directors’ Reports^[4] for the years ended 31 March 2013 and 2014 respectively and their status as directors was not challenged until 2016. 

30.  But as earlier noted, the effect of article 20 of HHCS’s articles would appear to be that all directors ceased to hold office after 31 March 2012. 

31.  That a company should have no functioning or properly constituted board is obviously undesirable given, inter alia, the statutory obligations imposed on the company and/or its directors under the Companies Ordinance Cap 622 (“the Ordinance”) the breach of which constitutes a criminal offence. 

32.  Those obligations include the appointment of an auditor by resolution at the annual general meeting (section 396), the laying of reporting documents (financial statements, director’s report and auditor’s report required by section 357(2)) in annual general meeting (section 429), the sending of financial statements to members before annual general meeting (section 430), the requirement to hold annual general meeting (section 610) and the requirement to deliver the annual return to the Company Registry (section 662).

33.  The respondents’ answer is that as a practical matter they have been in control of HHCS and that it has not caused or given rise to any practical issues; that as de jure or de facto directors, they owe fiduciary duties discharged by their representative Ms Lai and, further, prayed in aid the provisions of section 461(1)(c) of the Ordinance for any issue that might be raised by third parties concerning their appointment.

34.  The response belies a fundamental lack of appreciation of the responsibilities of a director and of the statutory obligations of the company, a breach of which attracts criminal penalties.  Further elaboration is hardly called for.  One matter is clear beyond doubt: the respondents could not be considered de jure directors on any view.

35.  It should be noted that section 461 will not avail the respondents as they are not de facto directors, never ever having been validly appointed in the first place: as noted in §28 above, that is quite different from their appointment being defective.  In any case, the section 461 is retrospective (designed to protect third parties) rather than prospective in nature.

36.  In so far as it is asserted that HHCS has prospered under the respondents’ management, the only evidence is a schedule of particulars (“the Particulars”) at §27 of Ms Lai’s affirmation dated 20 June 2017 purporting to show, inter alia, the annual turnover, costs of sales, gross profit, administrative expenses and net profits of HHCS from 2005/2006 to 2015/2016 with an “Internal forecast” for 2016/2017.

37.  It suffices to reproduce the Particulars for the following years: 

Items	2010/2011	2015/2016	Internal forecast 2016/2017
Turnover	88,036,044	65,877,214	62,928,427
Other Revenue	145,593	333,559
	88,181,637	66,210,773	62,928,427
Cost of sales	53,892,061	32,349,359	14,755,470
Gross Profit	34,289,576	33,861,414	48,172,957
Administrative expenses	32,328,107	33,183,629	44,360,669
Finance costs	308,346	5,536
Other operating expenses
Selling and distribution costs
Net Profit	1,653,123	672,249	3,812,288

38.  Notably, the figures for 2010/2011 when compared with those for 2015/2016 show that the turnover dropped by 25% while profits plunged by 60%.  Even taking the internal forecast at face value, the significant projected increase (from $672,000 odd to $3.8 million representing a $3 million or 560% increase in profits) pales into insignificance and is easily offset/accounted for by an unexplained increase in projected administrative expenses from $33 million to $44 million.

39.  That aside, the critical matter to note is that the figures are not backed up by documentation. Their provenance is not stated. They are no more than Ms Lai’s bald assertions.‌ 

40.  Further, HHCS’s financial statements for the years ended 31 March 2013, 2014 and 2015 which are in evidence show that for each of those financial years, the auditors were unable to express an opinion on the financial statements as to whether they give a true and fair view of the state of the company’s affairs at the relevant year end and of its profit and cash flows:

“ Because of the significance of the matters described in the basis for disclaimer of opinion paragraph”, [the auditors had not been able] “to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion”.

41.  For those reasons, the reliability of the figures given by the respondents in §27 of her affirmation becomes questionable.

(b)  Share capital and dilution

42.  The petitioners submitted that the matters arising from the auditors’ reports for the years 2013 through 2015 alone justify the appointment of receivers. 

43.  The reason the auditors issue a disclaimer opinion have been set out in §40 above.  That aside, serious issues emerge from those accounts in relation to (i) the true state of the company’s share capital, (ii) the possibility that the minority shareholdings of the petitioners may have been diluted; and (iii) the competence of management. 

44.  As at 24 December 2009, the issued capital was $6 million divided into 60,000 ordinary shares of $100 each.  That apparently remained the position through the 2012 financial year.  In the 2013 accounts, the share capital is shown is to have increased from $6 million to $12 million pursuant to a special resolution passed on 3 August 2011[5].  The $12 million share capital then remained unchanged in the 2014 and 2015 accounts.

45.  On the day prior to the hearing, the respondents produced minutes of an EGM purportedly held on 30 April 2011 pertaining to a resolution increasing the share capital from $6 million to $12 million with the new shares to be offered on a pro rata basis to existing members (“the April resolution”).  The minutes recorded that the Chairman reported that due notice of the meeting had been given to each member of HHCS and that, inter alia, the petitioners “wrote letters in response to such notice”.

46.  Pausing here, the contents of note 14 to the 2013 accounts are inexplicable if the EGM minutes of the April resolution are accurate.  One might well ask what information had been provided to the auditors.  Had they made a fundamental error? 

47.  That is not all:

   (a)  At §§67–68 of her affirmation of 20 June 2017 in opposition, in addressing the reference in the petition[6] to “a resolution dated 3 August 2011” (in the context being a reference to the August resolution, the subject matter of note 14 to the 2013 accounts), Ms Lai exhibited a document she claims is that resolution.  On perusal, the exhibited document purports to increase the share capital from $12 million to $24 million[7] rather than from $6 million to $12 million.

  (b)   Further, contrary to what is stated in the financial statements which Ms Lai signed as Chairman of Federal on behalf of the Board, she claimed that the further share distribution did not take place and that the shareholdings remained the same as they were when she took over the management of HHCS in mid-2011.

48.  It would now appear that 2 resolutions were allegedly passed in 2011: the April resolution increasing the share capital from $6 million to $12 million and the August resolution increasing the share capital from $12 million to $24 million.

49.  There is clearly some substance to Mr Joffe’s submission that either the accounts are wrong or Ms Lai’s evidence is wrong: they cannot both be right.

50.  It is also to be noted that the April resolution was not produced from the company’s records but was an exhibit to CHK’s affirmation in the consolidated action.  That would suggest that the respondents have failed to keep proper books and records of HHCS.

51.  The petitioners’ evidence is that they never received any notice of the April resolution.  Late in the afternoon of the first day, counsel for the respondents applied for leave to admit a letter from P1 objecting to the notice of 3 April 2011 which application was refused.  It was simply too late to attempt to do so at that stage of the hearing.

52.  Further, despite the fact that the petitioners’ solicitors have made requests repeatedly between September and December 2016 for evidence of injection of $6 million to the share capital, no response was ever received. 

53.  The matters considered in §§43 – 52 above at a minimum demonstrate the chaotic state of HHCS’s records for which the respondents are clearly responsible.

54.  That aside, they raise serious questions (amongst others) concerning the real state of HHCS’s share capital, the possibility of dilution of the petitioners’ shareholdings, and the competence/suitability of the respondents in managing the affairs of HHCS.

(c)  Misappropriation/misapplication of assets—jeopardy to assets

(i)  Legal and professional fees

55.  The entries below reflect the amounts shown as legal and professional fees extracted from the schedule of general and administrative expenses the respondents produced pursuant to the disclosure order (“the Schedule”):

	Non audit	Audited	Audited	Audited	Audited
	2016	2015	2014	2013	2012
…	HK$	HK$	HK$	HK$	HK$
Legal and professional fee	251,000.00	474,574.50	399,858.50	3,551,496.66	1,389,792.66
…

56.  Legal fees amounting to $1.4 million and $3.5 million were shown to have been incurred by HHCS for the financial years 2012 and 2013 respectively.  Despite a number of letters written between September and December 2016 seeking clarification for the substantial increase, the respondents have not provided any answers.

57.  The petitioners submitted that the entries are questionable: HHCS has a financial reporting year that ends 31 March and the relevant period during which legal expenses were incurred were from 1 April 2011 to 31 March 2012 and 1 April 2012 to 31 March 2013 (being the relevant financial reporting years for 2012 and 2013).   

58.  While the respondents have produced a list of 9 pieces of litigation in response, they have not identified which are relevant to the issue of legal costs incurred by the company for FY 2013 and no documentary evidence (such as solicitors’ bills) have been produced to substantiate the legal fees incurred.  In so far as the consolidated actions are concerned, HHCS’s involvement was but as a nominal party and during that period its costs in that capacity could not have been significant.

59.  The petitioners are concerned that the respondents’ own fees incurred for the consolidated action might have been paid by HHCS.  A detailed (and in my view persuasive) rebuttal relating to the litigation list produced by the respondents is to be found in §26 of the petitioners’ reply affirmation.  The substantial increase remains unexplained notwithstanding the present proceedings.

(ii)  General and administrative expenses

60.  The Schedule (CB 27/756) also shows a substantial increase in general and administrative expenses:

	Non audit	Audited	Audited	Audited	Audited
	2016	2015	2014	2013	2012
	HK$	HK$	HK$	HK$	HK$
…
Consultancy fee	1,609,005.00	35,400.00	17,500.00	211,300.00	570,800.00
…
Exhibition commission	2,139,313.72	465,178.08	305,037.74	111,307.21	–
…
Salaries and allowance	17,668,709.48	7,177,324.81	6,746,667.75	7,918,547.91	8,663,330.03
…
Utility expenses	3,058,220.90	774,967.89	639,578.39	709,553.00	770,647.65
	46,325,257.04	29,767,991.65	30,120,445.40	32,633,737.87	32,143,268.92

61.  The petitioners highlighted the following matters.  First, comparing the 2015 and 2016 figures, it will be seen that the total amount of expenses increased from $29.7 million to $46.3 million, an increase of over 55%.  Items attracting significant increases included salaries and allowance (120%), consultancy fees (450%), exhibition commission (450%) and utilities (400%).  Ms Lai has provided no explanation in her evidence for the dramatic increases.

62.  The figures stated for administrative expenses for the years 2011/2012 through 2014/2015 (inclusive) in the Schedule are audited figures.  As the corresponding figures stated in the Particulars of §27 of Ms Lai’s affirmation match those in the Schedule, they would also be audited figures.

63.  The Schedule then showed a single additional column headed “Non-audit 2016” while in the Particulars two further columns appear: one headed 2015/2016 (showing a figure that is in line with those of preceding years) and one headed “Internal forecast for 2016/2017”.

64.  Given the matters noted in §62, one would have expected to see matching figures for 2016.  But the one shown for 2015/2016 in the Particulars is a third less than the 2016 non-audit figure.  That is not the only oddity.  Non-audit figures would normally have been based on management accounts reflecting actual income and expenditure as distinct from forecasts which may be speculative.  In fact, the closest corresponding entry in the Particulars appears under the ‘Internal forecast’ column for 2016/2017.

65.  In the circumstances, I do not discount the possibility that the internal forecast column was ‘created’ to provide a receptacle for the significant increase, enabling the excess to be shifted to 2017 as part of the forecast and hence putting it in the speculative realm.

66.  But Ms Lai does not address those issues head on and such explanation as was given made little sense.  That in turn reflects on her suitability and competence in managing the company.

67.  It should also be noted that, in addition, the disclaimer of opinion in the 2014 and 2015 accounts had highlighted the lack of evidence available for a proper audit of receivables of $33 million odd.  The respondents have made no attempt to clarify or provide particulars of those receivables notwithstanding the present application.

(iii)  Conclusion

68.  I am more than satisfied that the petitioners have shown a prima facie case of misapplication / misappropriation by the respondents and of its assets being in jeopardy.

(d)  Serious mismanagement

69.  The petitioners rely on various matters in support.  It is unnecessary to address them in detail as I consider that more than sufficient grounds have already been set out that warrant the appointment of receivers.  Nevertheless, the following matters serve to highlight the respondents’ past mismanagement of HHCS.

(i)  Putting the bakery licence at risk

70.  There is evidence that the respondents permitted the sale of cooked chickens at the main factory in May 2016, an activity that is not permitted by the bakery licence.  That breach exposed HHCS to a possible revocation of the licence.

(ii)  Putting HHCS’s operations at risk

71.  The bakery business is carried on under a Short Term Waiver (“STW”) from Government permitting the use of the agricultural land where the main factory is situated for business use/food manufacturing purposes.  In January 2017, it came to the petitioners’ attention that despite several demands from Government, fees for the STW had not been paid for over a year.  Non-payment could lead to enforcement action and the termination of the STW which in turn would jeopardise HHCS’s operations.

72.  There is also a piece of land (“the unleased plot”) adjoining the main factory owned by government which granted a Short Term Tenancy (“STT”) to Brilliant Great Investment Ltd.  HHCS occupies the unleased plot as office premises which it leases from Brilliant Great.

73.  In seeking to answer the petitioners’ complaint concerning the STW, Ms Lai exhibited letters and demand notes referable to the STT and have nothing to do with the STW.  It would appear that Ms Lai was confused over the STW and the STT.  Payment by HHCS in May 2017 in respect of administration and initial toleration fees are relevant only to the STT and had nothing to do with the STW.

(iii)  Macau food safety incident

74.  Newspaper reports in Macau in September and October 2016 revealed that mooncakes manufactured by HHCS breached food safety standards.  While the respondents caused certain tests to be taken subsequently which were negative, there was no attempt by the respondents to find out and address the root cause of the incident.

(e)   Lack of probity—unsuitability of respondents as directors

(i)  HH Shenzhen

75.  In September 2016, the petitioners discovered that a company known as HHCS (Shenzhen) Company Limited (“HH Shenzhen”) had been incorporated on 18 October 2011.  Although bearing the “Hang Heung” trade name it is an entirely distinct and separate company wholly owned by Chen Chi Wing its sole shareholder.  Mr Chen is known to be closely associated with the respondents.  HH Shenzhen’s supervisor is none other than Ms Lai.

76.  The respondents sought to explain that HH Shenzhen was incorporated with the intent to preserving the use of the trade name “Hang Heung” and expanding its business in the PRC.  Its incorporation was said to have been precipitated by the discovery that CHK had established a factory in China with numerous selling posts in the Pearl River Delta Region.

77.  However, it is not explained how the incorporation of HH Shenzhen would “preserve the use of the trade name” when there is already a trademark registration of Hang Heung in the PRC.  Further, HH Shenzhen is not a subsidiary of HHCS.  It is an independent entity over which the respondents have no control.

78.  P1 and P3 are not aware of any resolution having been put to the board for the setting up or operation of HH Shenzhen in October 2011 when, seemingly, they were still directors[8]. If made out, the incorporation would have been unauthorised.  In those circumstances, it would appear that there is some justification for the petitioners’ concern of it being a device for the furtherance of improper purposes detrimental to the interests of HHCS.

(ii)  Sham orders

79.  In July 2011 when CHK applied for an interim injunction prohibiting the respondents from taking over control of HHCS, the respondents relied on evidence introduced immediately before the hearing to the effect that HHCS had received orders for 800,000 boxes of mooncakes from 7 customers for the mid-autumn festival in 2011 with a gross value of $76 million.  But as soon as the injunction application was adjourned to a date to be fixed upon the respondents’ undertakings, the 7 orders were cancelled.  P1 was informed in mid-2012 of the apparent cancellation of the orders which CHK only learnt in January 2012 when he attended the offices of HHCS to review its accounts and found the deletion/‌removal of the entry of $76 million in a statement of customer balances.

80.  The petitioners consider that the timing and circumstances of those orders were sham transactions for the apparent purpose of persuading the court to make the July 2011 to permit the respondents to continue to have de facto management of the company.  Suffice it to say that the evidence on that issue amply justify such an inference.

The defence

81.  In addressing the various grounds advanced by the petitioners in support of their application for the appointment of receivers, where relevant, I have already taken into consideration the respondents’ explanations/‌answers in response.  In addition to the ‘clean hands’ point taken in his written submissions, Mr Harry (counsel for the respondents) also made some general observations (which I will deal with below)

(a)  No pre-action letter

82.  Much was made of the absence of any pre-action letter before the petition was filed and the present application made.  At a call-over hearing before Harris J held on 4 April 2017 relating to the committal proceedings, Mr Joffe mentioned that a petition would be filed shortly. That was the only intimation made to the respondents.

83.  It was said that the petition came out of the blue (as it were) and that the petitioners could easily have asked for undertakings to address their concerns first before filing the petition.  It was also said that the respondents have been operating HHCS with no input from the petitioners since July 2011.  So there has been a 7-year delay in seeking relief and, in any event, no urgency has been shown.

84.  In making those general observations, it seems that the respondents have overlooked the effect of their own notice dated 3 April 2017 (see §§14 – 21 above) to ratify the 2010 removal resolution, injecting an urgency into the equation that left no elbow room for niceties.  

85.  As to the giving of undertakings, I do not consider that the petitioners’ concerns are capable of being addressed by the giving of undertakings on the part of the respondents as those would necessarily involve the relinquishment of control (albeit temporarily) over the operations of HHCS.  Further, in July 2011 the respondents had given undertakings regarding the application of the company’s assets.  Yet, there is now a serious issue to be tried concerning administrative and legal expenses of the company over which the respondents had control.  Had the undertakings the respondents given been effective, no such issue should have arisen.

(b)  Clean hands

86.  The respondents submitted that P1 (and P3) should be disqualified from seeking equitable relief because of the absence of ‘clean hands’.  They rely on two matters each of which is the subject matter of proceedings that are pending:

(i)  HCA 3351 of 2016

87.  On 20 December 2016, the respondents issued proceedings by writ with a general endorsement of claim against P1 and P3 for trademark infringement.  The allegation is that they entered into a Franchise Agreement with third parties without any authority from HHCS.  On the same day the respondents issued a summons seeking urgent interlocutory to restrain P1 and P3 from holding themselves out as directors of HHCS or entering into any arrangements on behalf of the company. 

88.  As no urgency was shown, the summons was adjourned to 15 February 2017.  Upon certain undertakings given by P1 and P3, no injunction was granted and the substantive hearing was fixed to be heard on 15 November 2017.

89.  However, the respondents have not progressed the main action underlying the interlocutory proceedings.  The statement of claim which should have been served on P1 in January and on P2 in February 2017 was only received very recently but seemingly no requisite leave was obtained to serve the same out of time.

90.  On those facts, demonstrably, the respondents have failed to show that the ‘clean hands’ doctrine is applicable at all and, in any event, that doctrine cannot and does not apply to P2.

(ii)  HCA 1327 of 2013

91.  On 19 July 2013 the respondents caused HHCS to commence an action against P1 for the price of goods delivered, repayment of a loan, passing off, infringement of intellectual property rights and compensation for breach of fiduciary duty.  At the time, P1 was a distributor of the company’s products and operated a shop in Sheung Shui (“the shop”). Pleadings closed in early 2014 but the action has been in abeyance because (it was said) the shop (which was a principal subject matter of that action) closed down in September 2013.

92.  Mr Joffe submitted the abeyance is either indicative of a lack of merit in the claim or failure on the part of the respondents to properly protect the company’s interest should the claims have any merit at all.  I would agree.

Exercise of the court’s discretion

93.  On the evidence adduced, this case cries out for the appointment of receivers.  First and foremost, the absence of a properly constituted board of a company that is actively trading alone would be sufficient reason.  The shareholder dispute (which is unlikely to be resolved in the near future) creates an insuperable obstacle in the way of resolving the problem by convening a meeting of members to appoint the directors.  Meanwhile, HHCS continues to be in breach of its statutory obligations that are criminal offences, a state of affairs that should not be allowed to continue.  

94.  The practical solution lies in the appointment of receivers.  It would enable applications to be made for a meeting to be held limited to the presentation of financial statements, director’s reports etc to meet the statutory obligations.

95.  In my view, when that is coupled with uncertainty over share capital, the possibility of dilution having taken place and jeopardy to HHCS’s assets, the case for the exercise of the court’s discretion was overwhelming.  The respondents have not been able to put forward any good reason for not making the appointment that would outweigh those considerations.  In the circumstances, the court had no hesitation in making the appointment.