YIP KWAI CHOR v. KING FUNG CONSTRUCTION WORK CO LTD AND ANOTHER

CACV 381/2007 & CACV 54/2008

CACV 381/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 381 OF 2007

(ON APPEAL FROM HCMP NO. 375 OF 2005)

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REASONS FOR JUDGMENT

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Hon Tang VP (giving the reasons for judgment of the Court):

1.  These appeals arose out of two proceedings, which were heard together  by Recorder Ambrose Ho, SC.

2.  The protagonists are: Lau Kai Yan and King Fung Construction Work Company Limited (“the company”) on the one side; and Yip Kwai Chor and Sing Yip Construction Engineering Ltd (“Sing Yip”) on the other side.

3.  Mr Yip was at all material times the controlling shareholder of Sing Yip which carried on business as a building contractor specializing in the erection of wooden formwork for the moulding of concrete in construction sites.  The company was in the same business. 

4.  The company was incorporated in March 2001.  Mr Lau and his brother-in-law, a Mr Chung, were the two subscribers of the company’s shares.  On record, Mr Lau held 70% of the issued shares and Mr Chung the remaining 30%.  They were the only directors.

5.  In March 2002, Mr Yip replaced Mr Chung as a shareholder and director of the company.  Mr Chung’s shares (30%) were transferred to Mr Yip.  Mr Yip and Mr Lau were the only directors of the company until June 2004.  Mr Yip’s case was that although he was entitled to 30% of the shares in the company, it was orally agreed between Mr Lau and him that he was entitled to 50% of the profits.

The Proceedings

6.  On 29 July 2004, Mr Yip commenced proceedings to wind up the company.  Eventually, the petition (HCMP 375/2005) continued only under section 168A of the Companies Ordinance, Cap. 32.  The reliefs he claimed included:

(i)  an order for his shares to be purchased either by Mr. Lau or the company;

(ii)  an order that the money which had allegedly been misappropriated or misapplied by Mr Lau be repaid to the company; and

(iii)  an order authorizing him to bring proceedings on behalf of the company against Mr Lau in respect of the latter’s breach of fiduciary duties. 

7.  In September 2004, an action (HCA 2183/2004) was commenced in the name of the company in which the following claims were made:

“(i)  a claim against Mr. Yip for the sum of $2,500,000, the total of 5 advancements allegedly made to Mr. Yip as a personal loan; (ii) a claim against both Mr. Yip and Sing Yip for the sum of $3,247,828, being the balance of various expenses disbursed on Sing Yip’s behalf in relation to 2 projects which had allegedly been subcontracted by the Company to Sing Yip, namely, the projects at Kam Chin Village and Hang Hau; and (iii) a claim against Mr. Yip and Sing Yip for damages, being remedial costs which the Company had allegedly incurred in relation to the said 2 projects.”

8.  From about the time Mr. Yip joined the company to about June 2004, the company had obtained a total of 5 projects.  In chronological order, they were the Ma On Shan Project, the King’s Park Project, the Kam Chin Village Project, the Hang Hau Project and the West Kowloon Project.

9.  Mr Kenneth K. H. Lee, counsel for the appellants, in his well-prepared skeleton arguments, identified the issues at trial as follows:

(1)  Mr Yip’s case that he was entitled to 50% of the company’s profits (“the 50:50 issue”).

(2)  It was the company’s case that in about April 2003 (when Mr. Lau was preoccupied by the Ma On Shan Project and King’s Park Project), Mr. Lau asked Mr. Yip to take up the Kam Chin Village Project through Sing Yip at 90% of the contract price (but Mr. Yip had to assume personal liability).  The Hang Hau project was also subcontracted to Sing Yip several months later.  This so-called back-to-back subcontract arrangement was denied by Mr. Yip (“the back-to-back subcontract issue”).

(4)  It was the company’s case that a total $2,500,000 was advanced as personal loans by the company to Mr. Yip by way of 5 cheques.  Mr. Yip did not dispute he had received such sums but explained that he was entitled to these sums (“the $2.5 million personal loan issue”).

(5)  It was the company’s case that under the back-to-back sub-contract, it had paid Sing Yip the sum of $3,547,828, namely, $1,797,059 in respect of Kam Chin Village Project and $1,732,180 + $18,589 (in relation to Hang Hau Project).  After deducting Mr. Yip’s repayment of $300,000 on 10 September 2003, this sum was reduced to $3,247,828.  Receipt of such sums was not disputed (“the Sing Yip loan issue”).

(6)  Towards the end of October 2003, Mr. Yip was detained on the Mainland.  As a result, the Kam Chin Village and Hang Hau sites were left unattended.  The company’s case was that, Sing Yip was in breach of the said back-to-back subcontracts (for which, the company says, Mr. Yip was also liable).  The company claimed against Sing Yip and Mr. Yip for 10% loss of profit under the back-to-back subcontracts as well as the company’s net expenses incurred in order to finish the work in.  They added up to $5,647,441.  Apart from denying the existence of the back-to-back subcontracts, the quantum was also challenged by Mr. Yip and Sing Yip (“the remedial costs issue”).

(7)  The other side of the remedial costs issue was Mr. Yip’s allegation that such expenses were “fabricated” and therefore were improper and constituted misappropriation of company’s funds by Mr. Lau.  Further, after perusal of the company’s bank statements, Mr. Yip raised question in relation to 144 “suspicious” cheques payments by the company and alleged further misappropriation.  Such allegations were denied by Mr. Lau (“the misapplication of funds issue”).

(8)  By a subcontracting agreement dated 18th March 2004, the West Kowloon Project was subcontracted to a Brother Engineering Co. (“Brother”) at a consideration of $200,000.  Mr. Yip contends that Mr. Lau had made a secret profit from the sub-contract (“the Brother Engineering issue”).

(9)  Mr. Yip complained that on 31 July 2004, an EGM was held when Mr. Yip was removed as a director of the company.  Mr. Lau on the other hand, contended that there were ample reasons justifying Mr. Yip’s dismissal.  Further, Mr. Yip complained that his subsequent request for the inspection of the company’s accounts was denied.  Whist accepting the initial refusal, Mr. Lau contended that the relevant accounts were produced shortly thereafter and as a result, no prejudice had been occasioned (“the exclusion from management issue”).

10.  The learned recorder made the following findings in his judgment:

(a)  On the 50:50 issue, he found in favour of Mr. Yip;

(b)  On the back-to-back subcontract issue, he found in favour of the company, but not in relation to the 10% profit term;

(c)  He also found that Mr. Yip was not personally liable;

(d)  On the Sing Yip loan issue, found in favour of the company, but only against Sing Yip, not Mr. Yip;

(e)  On the $2.5 million personal loan issue, found in favour of Mr. Yip;

(f)  On the remedial costs issue, he rejected the company’s claim for expenses in relation to a number of payments; he also found a number of cheques to have been misappropriated by Mr. Lau;

(g)  On the misapplication of funds issue, he found a number of cheques had been misappropriated by Mr. Lau;

(h)  On the Brother Engineering issue, he found that Mr. Lau was liable for improperly diverting business and had derived a secret profit;

(i)  On the exclusion from management issue, found that it constituted unfairly prejudicial conduct.

11.  Accordingly, the learned recorder made, inter alia, the following orders in HCMP 375/2005:

“(1)   The 2^nd Respondent (Mr Lau) do purchase the 3,000 ordinary shares of $1.00 each in the capital of the 1^st Respondent (the company) presently registered in the name of the Petitioner (Mr Yip) (‘the Petitioner’s Shares’) at a price to be fixed by such valuer (‘the Valuer’) being a certified public accountant, as may within 14 days hereof be agreed upon by the Petitioner and the 2^nd Respondent, or failing such agreement as may be appointed by the president for the time being of the Hong Kong Institute of Certified Public Accountants (‘HKICPA’) upon the application of either party with or without the consent of the other;

(2)  The Valuer is hereby directed to value the Petitioner’s Shares by reference to the assets, profitability and future prospects of the 1st Respondent as at 29 July 2004 (being the date of the Petition) and without discount for the fact that the Petitioner’s shareholding is a minority holding;

(3)  In valuing the Petitioner’s Shares, the Valuer is directed to take the following matters into account:

i.  the Petitioner was entitled to share 50% of the profits of the 1^st Respondent;

ii.  the 2^nd Respondent shall repay the 1^st Respondent a sum of $13,759,670 belonging to the 1^st Respondent;

iii.  the 2^nd Respondent shall repay the 1^st Respondent all sums which the 1^st Respondent would have received under the West Kowloon Contract but for the 2^nd Respondent’s wrongful diversion less any amount which the 2^nd Respondent is able to establish with proper documentation as expenses properly incurred in relation to that project;”

and in HCA 2183/2004,

“(1)   The 2^nd Defendant, Sing Yip Construction Engineering Ltd., do pay the sum of $3,247,828 to the Plaintiff, King Fung Construction Work Co. Ltd. together with interest …”

The Appeal

12.  Mr Lee recognised the heavy burden which lies upon an appellant who seeks to disturb findings of fact made by a trial judge.  The leading case on the subject is Ting Kwok Keung v Tam Dick Yuen and Others [2002] 5 HKCFAR 336, where, Bokhary PJ in a judgment with which the other members of Court of Final Appeal agreed, said unless the Court of Appeal is satisfied that the trial judge was plainly wrong, it should not interfere.  Bokhary PJ said:

“42.  Where the judgment turns on an issue of fact, the Court of Appeal must have regard to the nature of that issue of fact. And it must have regard to the advantages enjoyed by a trial judge who received the evidence on such an issue at first-hand, in other words, in whose presence the whole of the evidence unfolded in its living state. Such advantages can be, as Lord Shaw of Dunfermline put it in Clarke v. Edinburgh Tramways [1919] SC (HL) 35 at p.36, ‘sometimes broad and sometimes subtle’. The question for the Court of Appeal is whether, even though it does not enjoy the advantages enjoyed by the trial judge who received the evidence at first-hand, it is nevertheless satisfied that his conclusion on the facts is plainly wrong. The Court of Appeal should intervene if so satisfied. But if not so satisfied, the Court of Appeal should defer to the trial judge’s conclusion even if in some doubt as to its correctness.”  p. 350.

The 50:50 Issue

13.  Mr Yip’s case was that it was orally agreed between Mr Lau and him, that he was entitled to 50% of the profit, notwithstanding that he only had 30% of the shares in the company.  Mr Lee submitted that this question cried out for an explanation.  He submitted that if there were indeed such an oral agreement, why should Mr Yip be content to accept only 30% of the shares.  He submitted that Mr Yip had failed to give any reasonable explanation in cross-examination. 

14.  The learned recorder said:

“19.  On this question, 2 diametrically opposite versions were given by Mr. Yip and Mr. Lau.  According to Mr. Yip, on a number of occasions Mr. Lau promised him words to the effect ‘50/50, both as partners, no difference between the two of us’.  Mr. Yip emphasised the background of his already established connection with principal contractors, his accomplished status as a subcontractor and his good business record in the previous projects.  He asked rhetorically why in these circumstances would he accept a smaller share of the profit than Mr. Lau.

20.   On the other hand, Mr. Lau said he was given the impression that Mr. Yip was financially very strong and would be able to inject substantial funds into the Company on short notice.  He was thus prepared to offer 30% of the shareholding in the Company without even asking Mr. Yip to pay for it.  Furthermore, on behalf of Mr. Lau, Mr. Yau asked the Court to consider the fact that as events developed further, not only did Mr. Yip failed to inject any funds into the Company to meet the initial outlay of expenditure in the Ma On Shan project, he was in fact borrowing from the Company.  Such conduct would militate against there being any agreement as to the 50/50 profit-sharing arrangement.  It might be added in Mr. Lau’s favour the fact that he was the only signatory to the Company’s bank account.  Had there been the 50/50 profit-sharing arrangement, it might be argued that Mr. Yip would have insisted on being a co-signatory to the account.

21.  I prefer the account given by Mr. Yip to that by Mr. Lau.  As already noted, it was due to Mr. Lau’s desire to take advantage of Sing Yip’s good record and reputation that he had offered partnership with Mr. Yip (by way of shares in the Company).  I find it unlikely that Mr. Yip would have been content with a minority shareholding in the Company when he and Sing Yip had already established an accomplished position in the trade.  Given the relatively stronger bargaining position, it did not seem probable to me that Mr. Yip would agree to join Mr. Lau’s Company were it not for the promise that he would be entitled to equal sharing of the profits together with Mr. Lau.  These circumstances clearly favoured the version given by Mr. Yip and I do not consider it relevant whether Mr. Yip had eventually failed to inject funds into the Company.”

15.  The learned recorder went on to consider the fact that Mr Lau was the sole signatory of the company’s bank account and then concluded that he was satisfied that

“Mr Lau had indeed agreed with Mr Yip that both parties would be entitled to an equal share of the Company’s profits between them.”

16.  Mr Lee submitted that the learned recorder had been heavily influenced by Mr Yip’s rhetorical question and:

“… that such rhetorical question alone could not have dented the overwhelming case of Mr. Lau …”

He also submitted that:

“… it is not an inflexible rule that whenever a person who enjoys a higher status in an industry enters into partnership with a person having a lower status …, the former would necessarily demands a bigger (or at least an equal) share.”

17.  With respect, Mr Lee has misread the judgment.  The learned recorder had not said there was an inflexible rule nor had he been unduly influenced by the so-called rhetorical question.

18.  We are of the view that the finding by the learned recorder is unassailable.

The $2.5 Million Personal Loan Issue

19.  The fact that the 5 cheques were received by Mr Yip was not disputed.  He denied, however, that they were loans.  Mr Lee submitted that because Mr Yip had given different explanations at different times, he should have been disbelieved by the learned recorder.  At para. 63 of the judgment, the learned recorder said:

“63.  … The fact that Mr. Yip had given different explanations would certainly require the court to scrutinize his evidence very closely.”

20.  But apart from the conflicting evidence of Mr Lau and Mr Yip, the learned recorder also relied on the fact that in the company’s audited accounts prepared for the period ended 31 March 2003, which would have covered the first of the 5 cheques which was made on 30 January 2003, no reference to any director or shareholder’s borrowings was reflected in the accounts.  The audited accounts were prepared by the company’s then auditor Lau & Au Yeung CPA Limited.  They were dated 26 April 2004 and signed by Mr Lau as chairman of the company.  If Mr Lau was correct that the 5 cheques were advances made or loans by the company to Mr Yip, the first cheque (for $500,000) should have been, as the learned recorder pointed out, reflected in these accounts.

21.  Indeed, there was a second set of accounts covering the same period prepared by different auditors, namely T Y Ying & Company, Certified Public Accountants dated 23 July 2004, again signed by Mr Lau, where the alleged first loan was not reflected. 

22.  However, in the accounts of the company for the year ended 31 March 2004 which was also prepared by T Y Ying & Company dated 26 August 2004 and signed by Mr Lau, the balance sheet showed, “Loan to Director” for the year ended 31 March 2004 at $5,747,828 and a nil amount for 2003.

23.  The learned recorder said:

“70.  … To me, what these accounts showed is that before July 2004, neither Mr. Lau nor anyone on the Company’s behalf had treated the advancements as personal borrowings by Mr. Yip.  The change of instructions came about only some time between July and August 2004.  This change of instructions would obviously have to be considered in the light of the steps taken to remove Mr. Yip from his position as director, a question which will be discussed later in this Judgment.”

24.  The learned recorder also relied on the following:

“67.  Relevantly, when questioned whether he had made any demand for repayment, Mr. Lau replied affirmatively that he had done so in about July or August 2003.  As is now obvious, the demand must have been ignored and not complied with.  In those circumstances, one would have expected that at the time Mr. Yip was asked to acknowledge Sing Yip’s indebtedness on 10 September 2003, some similar acknowledgment would have been required from Mr. Yip as to his personal loans.  In response to questions on the absence of any documented acknowledgment on Mr. Yip’s personal loans, Mr. Lau merely explained, by reference to the counterfoils in relation to 2 of the 5 cheques, that he had considered them to be sufficient evidence of those loans.  I have to say I find the absence of any written acknowledgment surprising.

68.  Furthermore, as already noted earlier, the Company was still effecting transfers of interim payments to Sing Yip even after the ‘acknowledgment letter’.  I have previously expressed the view that such transfers do not alter my finding that Sing Yip was indebted to the Company to the extent of over $3.5 million as set out in the ‘acknowledgment letter’.  I have done so on the basis of clear documented evidence of an acknowledgment.”

25.  The learned recorder then concluded:

“71.  I have pondered over the question regarding these 5 sums.  As is clear from the matters discussed above, my decision either way will leave some aspects of the evidence unexplained or not satisfactorily resolved.  In the end, I have come to the view that the 5 payments were, on balance, made by Mr. Lau to Mr. Yip not as personal loans or advancements.  Nor were they payments specifically referable to any particular items of expenditure that Mr. Yip might have incurred.  I find, on balance, that they were payments by Mr. Lau, being someone in control of the Company’s account, as a gesture from time to time in recognition of the fact that Mr. Yip had made no drawings from the Company, had accommodated the Company in the use of Sing Yip’s premises, and as sums to Mr. Yip as a director and shareholder for miscellaneous non-accountable expenditure, including entertainment.

72.  Accordingly, the 5 payments having been made with the consent of the only 2 directors and shareholders of the Company are binding on the Company and therefore not recoverable from Mr. Yip.”

26.  Again, we do not believe that the conclusion by the learned recorder can be said to be wrong, much less plainly wrong.

27.  Mr Lee submitted that since the burden was on Mr Yip to prove that the $2.5 million was not a debt, the learned recorder should have found, having regard to the unsatisfactory state of the evidence given by Mr Yip on the issue, either in favour of Mr Lau or he should have concluded that Mr Yip had failed to discharge the burden of proof which laid upon Mr Yip.  He referred us to the following observation by Lord Brandon of Oakbrook in Rhesa Shipping S. A. v Edmunds [1985] 1 W.L.R. 948, at 955H:

“… the judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden.”

28.  But this is not such a case at all.  Mr Lee’s criticism of the learned recorder is misconceived.  The conclusions of the learned recorder were that notwithstanding the state of the evidence, on balance a finding can be made on the nature of the payments.  There was no need to resort to the third alternative.

The Back-to-Back Subcontract Issue

29.  Mr Yip denied that Sing Yip was the sub-contractor.  He was disbelieved by the learned recorder.  There is no cross appeal by Sing Yip.  With respect, the learned recorder was plainly right.  It is not necessary for us to say more than that the learned recorder was well aware that on this important issue, he had rejected Mr Yip’s evidence.

30.  The back-to-back subcontracts were also relevant to the company’s claim in respect of the remedial costs and Mr Yip’s complaint that not only had the company not incurred such remedial costs, the purported payments of such alleged remedial costs amounted to misappropriation by Mr Lau.  There was also the points about whether the back-to-back subcontracts were at 90% of the principal contract sum, as well as Mr Yip’s alleged personal liability in respect of the back-to-back subcontracts. 

31.  The learned recorder said:

“27.  One of the contentious issues in the case is the so-called ‘back-to-back subcontract arrangement’.  It is Mr. Lau’s case that on an occasion in April 2003 shortly after the Kam Chin Village contract was obtained, he told Mr. Yip at the King’s Park site office that the projects at hand (the King’s Park and Ma On Shan sites) were already occupying a lot of his (Mr. Lau’s) time.  He urged Mr. Yip to share some that responsibility by taking charge of the Kam Chin Village site.  He suggested that Sing Yip should take up the project as the Company’s subcontractor for the price of 90% of what the Company would receive.

28.  This alleged conversation was set out more specifically (in direct speech) in one of Mr. Lau’s witness statements which was filed only a day before the commencement of this hearing.  The essence of it was that he had told Mr. Yip that the Kam Chin Village site would be subcontracted to him (Mr. Yip).  Mr. Yip was to conduct the contract on his own account and Mr. Lau would not be concerned so long as 10% of the contract sum would be paid to the Company.  According to Mr. Lau, Mr. Yip had neither accepted the proposal nor declined it on that occasion. 

29.  It is Mr. Lau’s case that, when the first interim payment was received from the main contractor, Mr. Yip requested the sum to be transferred to Sing Yip because he wanted Sing Yip to be the sub-subcontractor.  Mr. Lau said he would only be prepared to issue the cheque to Sing Yip on condition that Mr. Yip would take personal responsibility for the sub-subcontract. 

30.  It is not disputed that as the Kam Chin Village works progressed, the first few interim payments received from the principal contractor were indeed transferred by the Company to Sing Yip.  Sing Yip had received a total of 5 such payments between June and September 2003, aggregating over $4.3 million.  During this period, the expenses for materials and wages for workers were paid by Sing Yip out of its own account.

31.  Not long after the commencement of the Kam Chin Village project, the Company obtained another subcontract from China Overseas in relation to the development above the Hang Hau Station.  The subcontract works at this site commenced sometime in about May 2003, although the subcontract was signed only a few months later in August.

32.  Mr. Lau asserted that a similar back-to-back subcontract arrangement was made with Sing Yip in respect of the Hang Hau project, but no specific details were given as to the manner in which the arrangement was agreed.  There is no dispute however of the fact that 3 interim payments between August and October 2003 totalling over $5.3 million were transferred from the Company to Sing Yip.  During this period, expenses incurred for the site were paid out of Sing Yip’s account.

33.  There seems also little dispute that from the time of the commencement of the works at Kam Chin Village and Hang Hau, Mr. Yip was the person who took charge in overseeing the works on site.  Indeed, the records of attendance at site meetings as well as correspondence in relation to the Kam Chin Village project showed Mr. Yip’s personal supervision of the project.  I am prepared to draw the same inference of involvement in respect of the Hang Hau project.”

10% Profit Term

32.  The learned recorder said in para. 52:

“52.  I wish to make it clear here that I do not accept Mr. Lau’s evidence that the reason for the so-called back-to-back subcontract arrangement was because he was too occupied with the Ma On Shan and King’s Park projects.  I also do not accept the version of the conversation he allegedly had with Mr. Yip at the King’s Park site office in about April 2003 (which now finds its way into the evidence in the rather belated witness statement filed only a day before the commencement of this trial).  Neither do I accept Mr. Lau’s evidence that Mr. Yip had agreed to take personal responsibility for the sub-contract in return for his agreeing to issue the cheque to Sing Yip to transfer the interim payments from the main contractor.”

33.  Mr Lee submitted that:

“… there was no good reason for the learned Recorder not to accept the whole of Mr Lau’s evidence concerning the back-to-back subcontract arrangement. … ”

Mr Lee relied on the following observation of Ribeiro PJ in Nina Kung v. Wong Din Shin [2005] 8 HKCFAR 387 at 442:

“… it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture.”

But that observation must be taken in its entirety.  Ribeiro PJ began that observation by saying:

“In questions of this sort, where direct proof is not available, …”

This is not such a case at all.

Remedial Costs Issue

34.  The company’s case is that because of Mr Yip’s absence after late October 2003, the company had resumed control of the two sites and had incurred substantial expenses in completing the works left unfinished by Sing Yip.  The expenditure so incurred exceeded the interim payments received from the respective principal contractors.  It will be recalled that the other side of the remedial costs issue is the misapplication of funds issue.  See para. 9 (6) & (7) above.  The learned recorder dealt with both issues at the same time. 

35.  The learned recorder in his judgment dealt in detail with these issues.  With respect, we are in such complete agreement with the learned recorder that we will only draw attention to some of the relevant paragraphs in the learned recorder’s judgment.  In support of the remedial costs issue, the company at trial had produced cheques allegedly made out to various parties, some of which were accompanied by vouchers to explain the purpose of the payments, together with two tables itemising the various cheque-payments.  As noted, these cheques and alleged payments formed part of Mr Yip’s complaint of misappropriation.

36.  In relation to Mr Lau’s evidence, he said:

“106.  As a general observation, it is noted that when questions were put to Mr. Lau in cross-examination, he said that he was not clear about the details of the sums set out in the respective tables of expenses.  According to him, the payments were dealt with by Leung Ping Hung (a sub-contractor) and Leung Ping Kong (the company’s accountant).  The same denial of personal knowledge was repeated in response to most questions put to him respecting the cheques and the documents produced in support of the expenses.  Mr. Lau’s evidence was that when he was asked to sign the cheques, the amount payable to the payees would already have been calculated and the cheques prepared. 

(1)  Cheque nos. 700616 to 700634

107.  First, a number of cheques were presented for payment on or shortly before 2, 3 and 4 June 2004.  It was Mr. Yip’s contention that those cheques were not genuinely made out for Company’s expenses. 

108.  There was a series of 19 cheques in consecutive numbers 700616 to 700634, all of them having been presented for payment on or within a few days of 2, 3 and 4 June 2004.  All of them were bearer cheques.  According to the bank statement, cash had been obtained for all these 19 cheques.  It would be noted that Leung Ping Hung was the named payee on 12 of them (700616 to 700624, and 700632 to 700634).  Lok Yan Yim was the named payee for 700625 to 700627, Lee Chun Kau for 700629 to 700631 and Chan Chi Keung for 700628.

109.  For the 12 cheques with Leung Ping Hung as payee, the accompanying vouchers suggested that the first series of 9 cheques (700616 to 700624) were paid for works in the Kam Chin Village site, and the other series of 3 cheques (700632 to 700634) for works in the Hang Hau site.  For the first 9 cheques, the accompanying vouchers further suggested that they were made out for works in respect of 6 consecutive months (700616 & 700617 for works in November 2003; 700618 & 700619 for works in December 2003; 700620 for January 2004; 700621 for February; 700622 for March; 700623 & 700624 for April).  For the other 3 cheques, the accompanying vouchers suggested that they were made out for works in Hang Hau in respect of February 2004, January 2004 and December 2003, in that sequence.  The consecutive numbering on these cheques strongly suggested that they were all made out on the same occasion.  Certainly, the months of work in succession on the accompanying vouchers, is entirely consistent with that suggestion.

110.  However, the series of cheques bore different dates on their face.  The dates in the first series varied between 10 March and 29 May 2004, and those in the second series between 19 February and 17 April 2004.  It is, however, obvious that the dates on the cheques were inserted on them arbitrarily.  Take for example, the cheque numbered 700622 dated 10 March 2004.  According to the accompanying voucher, the cheque was supposed to be payment for the workers’ wages for the month of March 2004.  If the cheque were indeed made out on 10 March, it would mean that it was made out at a time even before the March wages actually accrued and the exact number of man-days could be accurately ascertained.  How was it then possible to know in advance the exact amount of March wages to be paid?

111.  Mr. Leung Ping Hung’s evidence was that he was not the person who made out the cheque although it was he who wrote the voucher.  He suggested that the cheque might have been made out by Leung Ping Kong.  According to Leung Ping Kong’s 2^nd Supplemental Statement, generally when he wrote out a cheque for Mr. Lau’s signature, the date on the cheque would be the date on which he was instructed by Mr. Lau to make out that cheque.  It was obvious that neither Mr. Lau nor the two Mr. Leungs could explain coherently as to the circumstances of the making out of the cheque and its purpose.  The same applies to the cheques numbered 700623 dated 6 April, and 700624 dated 10 April 2004.  Both purported to represent payment to workers for wages in the month of April, but both bore dates before the end of the month. 

112.  Furthermore, as already noted, the first 2 cheques of the series (700616, 700617) were purportedly payment for November 2003 wages.  Both cheques however bore a date in May 2004.  In answer to questions why the reimbursement for November wages was only effected 6 months later, Leung Ping Hung said he did not know why but Mr. Lau told him that he (Mr. Lau) had no money.  He was not able to recall when Mr. Lau said so.  However, the monthly bank statements showed that the Company had a credit balance of over $2.1 million in November, over $2.8 million in December 2003, over $2.2 million in January 2004, and over $1.3 million in February.   

113.  The evidence referred to above cast serious doubts on the reliability and genuineness of the vouchers accompanying these 12 cheques made to Leung Ping Hung.  I am unable to accept them as credible evidence of the purpose for which the 12 cheques were made out.  My findings as to these 12 cheques will follow after I have dealt with the other questionable ones.”

37.  There were other cheques in relation to which the learned recorder said:

“114.  I turn now to the 3 cheques with Lok Yan Yim as the named payee (700625, 700626, 700627).  The vouchers for the first 2 of them purported to refer to payment of wages for the months of January and February 2004 respectively.  The signatures appearing as recipients on the vouchers did not in fact belong to Mr. Lok, but were admitted to have been signed by Mr. Leung Ping Hung.  Leung gave the explanation that Mr. Lok might be too busy to collect the cheques and might have telephoned Mr. Lau for the cheques to be brought to him.  It was Mr. Lau who instructed Mr. Leung to collect the cheques or the money to be handed to Mr. Lok.  He signed the vouchers in Mr. Lok’s name because Mr. Lau gave him approval to do so.  However, Mr. Leung was unable to tell when he had collected the 2 cheques in question, not even the month in which he had allegedly done so.  He was unable to tell whether the 2 cheques were collected on the same or separate occasions.  He was unable to tell whether he had sought instructions from Mr. Lau as to the signing of the vouchers on the same or different occasions. 

115.  Having seen how Mr. Leung’s admission relating to the signatures unfold and having heard his evidence at the trial, I have no hesitation to reject the whole of his explanation on this question.  One of the vouchers was supposed to relate to wages for January, and the other for February 2004.  The cheques purported to bear a March and an April date respectively, but were not immediately presented for payment until June.  The explanation that somehow Mr. Lok might be too busy to collect the January and February wages and had to leave Mr. Leung to collect them is anything but credible.  I have grave misgivings about the fact that the acknowledgments were signed in Mr. Lok’s name without any indication as to the true author of the signatures, as well as the fact that the admission concerning the signatures only emerged after Mr. Yip had mounted his challenge during the trial.  The 2 vouchers cannot be accepted as credible evidence as to the purpose of the 2 cheques to which they purported to relate, or the fact that the cheques had been received by Mr. Lok.”

38.  The learned recorder had this to say about other aspects of the company’s remedial costs claim:

“153.  I propose to turn to the specific aspects of the claim.

(1)  Sums misapplied

154.  In respect of the payments which I found to have been misapplied, those items will obviously have to be disallowed from the Company’s claim.

(2)  Payments in the month of August 2004

155.  As already noted above, Mr. Yip queried the amount of payments made in the month of August 2004 for both the Kam Chin Village and the Hang Hau sites.  He made a point that the expenditure now claimed to have been incurred was substantially greater than the figures put forward for sanction when the Company applied for a validation order. 

156.  Indeed, that is so.  Questions were directed in cross-examination to the fact that at the time of the application for validation order, the projected expenditure for the Hang Hau site for the month of August was only $720,000.  The Company’s claim now amounted to over $1.8 million for that month.

157.  In this regard, I have noticed that the date of Mr. Lau’s affirmation in support of the application was 31 August 2004.  By the time he made his affirmation, most if not all of the August cheques should already have been issued.  He should be able readily to ascertain the amount of the expenses required for the Hang Hau site for that month.

158.  I do not accept the explanation that the substantial discrepancy was due to the fact that the figure adopted at the time of the application was a mere projection.  In view of the substantial discrepancy, I do not think it right to simply accept the supporting evidence at face value.  Upon an examination of the supporting vouchers (where available), however, it is noted that a number of them were unsigned.  I feel unable to place reliance on these unsigned vouchers.  Accordingly, I would reject the claim for the following payments: $168,000 to Lee Chun Kau; $249,166.50 to Lee Chun Kau; $76,030 to Chan Kam; $50,000 to Lam Yuen Wai; another $50,000 to Lam Yuen Wai and $151,200 to Lam Wing Sum.  I would further reject 2 other payments purportedly made to Lam Wing Sum, of $150,460 and $187,200 respectively.  As already noted, no returns were filed in respect of Lam.  For sums of these amounts, I do not accept oversight to include them in the return as a credible explanation.  Save the above, however, I am prepared to uphold the claim for some of the smaller payments despite the absence of supporting vouchers.

159.  For the Kam Chin Village site, as already noted, Mr. Lau made no reference to any expenditure at all in his application.  This stands in stark contrast to the present claim that over $1 million had been incurred in the August month. 

160.  After a similar examination of the supporting vouchers, I have come to the view that I should reject the claim for the following payments: $50,000 to Lam Yuen Wai, $122,500 to Lok Yan Yim; $133,500 to Leung Ping Hung; $198,000 to Ho Hing; $140,000 to Lok Yan Yim; $123,788.80 to Lok Yan Yim; and $147,249.70 to Lee Chun Kau.

(3)  Payment to Hung Ying of $1.6 million

161.  An entry in the table of expenditure showed that the Company had paid $1.6 million to Hung Ying.  There was no breakdown of the items of work supposedly undertaken by Hung Ying.  Mr. Leung failed to give any satisfactory explanation and there was also complete absence of other objective evidence as to the work involved.  In the circumstances, I am unable to accept that the Company had established that expenditure to the tune of $1.6 million had been properly incurred.  I have no difficulty in rejecting this item of the Company’s claim.”

39.  The learned recorder then found against Mr Lau on the 10% profit term.  He said:

“54.  As to the points made by Mr. Yip, while I would have been prepared to accept that, had this been a transaction between unrelated parties, it would probably be unlikely for Sing Yip to accept a subcontract under someone who enjoyed a lesser status in the trade, yet the dealings between Mr. Yip and Mr. Lau were essentially between business partners and not unrelated parties.  I am not convinced that any inhibition Mr. Yip might feel about being engaged as a subcontractor under someone of a lesser reputation would apply quite so strongly to an arrangement of accepting a transfer of the sites from the Company.  To me, those considerations that Mr. Yip urged upon me are not sufficient to displace the clear evidence of the ‘acknowledge letter’ which stated in no uncertain terms that the sums itemized were ‘loaned’ (借支) by the Company to Sing Yip.  The inescapable conclusion is that Sing Yip was undertaking the works at the 2 sites on its own account.  In the circumstances, although I have rejected Mr. Lau’s evidence as to the manner in which the so-called back-to-back arrangement was entered into, I am satisfied on the basis of the ‘acknowledgment letter’ that at some stage after the subcontracts were secured, Mr. Yip had indeed agreed with Mr. Lau (who was acting for the Company for that purpose) to accept an arrangement of having the Kam Chin Village and the Hang Hau projects assigned from the Company to Sing Yip.  The arrangement agreed upon was a purely private arrangement between the Company and Sing Yip, and did not involve any formal assignment of the subcontracts as far as the main contractors were concerned.  Although there is insufficient evidence to enable me to make findings as to the precise terms of this arrangement, I am satisfied that the effect of the arrangement was that Sing Yip had undertaken to carry out the works at the sites on its own account in the place of the Company.”

The Brother Engineering (“the Brother”) Issue

40.  Between October 2003 and July 2004, while Mr Yip was detained in the mainland.  Mr Lau alleged that he decided to subcontract the West Kowloon Project to Brother.  The subcontract was worth over $31 million and commenced at the beginning of October 2003.  There is a written agreement between the company and Brother dated 28 March 2004.  According to the agreement, the subcontract was transferred for $200,000.  Brother was the sole proprietorship of Siu Ting Kon.  Mr Lau, however, was the authorized signatory to operate Brother’s bank account singly on his own.

41.  The $200,000 was never paid and apparently because Siu had passed away in June 2005, no action was taken to recover it.

42.  This is what the learned recorder said:

“Assignment of West Kowloon project to Brother Eng. Co.

162.  The Company was awarded another subcontract by China Overseas at a site at Hoi Fai Road at the West Kowloon area.  It was a substantial subcontract worth over $31 million.  The subcontract work commenced at the beginning of October 2003.

163.  It was common ground that sometime in about November 2003, Mr. Lau assigned this subcontract to Brother Eng. Co.  A written agreement between the Company and Brother Eng. dated 28 March 2004 was produced in evidence.  According to the terms of the agreement, the subcontract was transferred to Brother Eng. for $200,000.  Brother Eng. was to conduct the works on its own account and the Company would not seek payment of any other fees, including transfer fee or bonus.  

164.  According to the business registration certificate, Brother Eng. was a business under the sole proprietorship of Mr. Siu Ting Kon.  However, the business address of Brother Eng. was the same as that of the Company.  Moreover, Mr. Lau was an authorized signatory to operate Brother Eng’s bank account singly on his own.

165.  The transfer was effected without prior consultation with Mr. Yip.  The transfer price was less than 1% of the subcontract sum.  Mr. Lau’s explanation was that the Company was fully occupied in dealing with the aftermath as a result of Mr. Yip’s disappearance.  The resources of the Company would not allow it to cope with several sites at the same time.  The assignment would at least enable the Company to obtain $200,000.

166.  However, on further examination, it became apparent that the Company had not in fact received even that $200,000.  When Mr. Lau was cross-examined on this, he said he did not have any knowledge about it but if that were the case, Mr. Leung would have to chase up for it or he would have to make it up personally.  Mr. Leung Ping Kong on the other hand, said in his supplemental statement that because Mr. Siu had passed away in June 2005, it was not felt appropriate to press Mr. Siu’s widow for the payment.  It left unexplained why for all that time before June 2005 the sum $200,000 remained unpaid.

167.  In this connection, 3 other sums, respectively $1.5 million, $1 million and another $1 million had been transferred from the Company’s account to Brother Eng. on 30 March, 31 March and 1 April 2004.  Mr. Lau was cross-examined on these transfers, but was unable to give a clear explanation beyond surmising that these sums might have been transfers of interim payments which the Company had received from the principal contractor.  It was obvious that he was unable to give a satisfactory account for the nature of these payments or in respect of which interim payments the Company had allegedly received.

168.  Having regard to the evidence on this issue, I am left in no doubt that Mr. Lau did have an interest in Brother Eng. Co.  His explanation that he was a signatory to its bank account merely to prevent its mishandling defies common sense.  It also did not make commercial sense for a potentially profitable project to be assigned away at less than 1% of its contract price.  Although I have taken into account the need to deal with the problems arising from Mr. Yip’s departure, I do not accept that was the true reason for the transfer of this subcontract.  I believe, and I do find, that the reason for the transfer was to enable Brother Eng., in whose business Mr. Lau had a real interest, to take the benefit of the West Kowloon subcontract.  That also explains why he had not seen fit to obtain payment of even the relatively meagre sum of $200,000 for the Company.

169.  It is my view that Mr. Lau was liable for improperly diverting business from the Company, and had derived a secret profit from such conduct.”

43.  With respect, we are in complete agreement with the learned recorder.  We reject Mr Lee’s submission that:

“… the learned Recorder should not have drawn the inference that Mr Lau had diverted the West Kowloon Project to Brother and had made secret profits by reason of his interest in Brother.”

Expulsion of Mr Yip

44.  Mr Yip was detained in the mainland between 22 October 2003 and 21 June 2004.  On 28 June 2004, at an extraordinary general meeting, it was resolved that Wong Kwong Hing would be appointed as an additional director because of Mr. Yip’s refusal to sign the audited accounts. 

45.  Mr Lee accepted that if the learned recorder’s finding of the misappropriation of funds by Mr Lau were substantiated.  That alone would be sufficient to enable Mr Yip to obtain relief under section 168A.  That being the case, the learned recorder’s finding on Mr Yip’s expulsion is not critical to the outcome of the section 168A petition.

46.  In any event, we agree with the learned recorder’s conclusion that the removal of Mr Yip as a director of the company was contrary to his legitimate expectation to participate in the management of the company, and that the relationship between the parties could fairly be regarded as a quasi-partnership.

47.  The learned recorder said:

“183.   … It was, however, submitted on behalf of Mr. Lau that Mr. Yip’s long period of absence from Hong Kong and the manner in which the Kam Chin Village and Hang Hau projects were handled by Sing Yip amply justify Mr. Yip’s removal.

184.  I disagree.  In my view, to override his legitimate expectation of participating in the Company’s management, the default would have to be of a nature whereby his continued presence on the Board would undermine good management of the Company.  In the circumstances of the present case, a distinction should be drawn between Sing Yip’s duty as a party to contract with the Company and Mr. Yip’s duty as a director.  Sing Yip’s default in the performance of its contractual duties would no doubt ground a claim for damages against Sing Yip.  But its default is not to be treated as a derogation of Mr. Yip’s duty pertaining to his directorship of the Company.  Furthermore, even if Sing Yip’s default were to be regarded as a default on the part of Mr. Yip in the supervision of Sing Yip’s performance, I do not consider the default to be of such a nature that Mr. Yip’s continued presence on the Board would be detrimental to the good management of the Company, so as to justify overriding his legitimate expectation of participation in the Company’s management.”

Valuation Date

48.  The learned recorder adopted the date of the petition as the date of valuation.  Mr Lee submitted, however, that the conduct of Mr Yip is relevant to the valuation date.  Date of valuation of shares is the subject of a separate decision of the learned recorder which was handed down on 18 October 2007.  Mr Yau, then counsel for Mr Lau and the company had accepted that the date for the purpose of valuing the shares should normally be the date of the petition.  The learned recorder said:

“3.   … Indeed, as Le Pichon J. (as she then was) said in Re Tai Lap Investment Co. Ltd. [1999] 1 HKLRD 384 at 399:

‘Prima facie, the petition date is a convenient date, that being the point in time when the petitioner crystallized his position in claiming to be entitled to cease association with or participation in the company.

4.  As Mr. Yau submitted, that the adoption of the petition date as the relevant date is not immutable.  As Kwan J. said in She Wai Hung v. Juliano Lim and others, unrep. HCMP 6472/2001 (27 February 2004), at paragraph 66:

‘The overriding requirement is that the valuation of shares should be fair on the facts of the particular case.’

5.  Mr. Yau argued that fairness in the present case required that the value of Mr. Yip’s shares should be determined as at an earlier date, that is, 31 October 2003.  The main reason advanced was that owing to a number of matters which Mr. Yau characterized as breach of fiduciary duties owing by Mr. Yip to the Company, Mr. Lau would have been justified in terminating the quasi-partnership with Mr. Yip at the end of October 2003.  In Mr. Lau’s word, he would have no hesitation to ‘say good-bye’ to Mr. Yip as a partner in business.”

49.  Basically, Mr Lee relied on the same arguments which had been rejected by the learned recorder. 

50.  Mr Lee submitted that the valuation date should be October 2003.  Mr Lee submitted that because of the back-to-back subcontracts, it would not be fair to allow Mr Yip to have the benefit of the profits from those two subcontracts, if any.  On the company’s case, of course, those two contracts were not profitable.  Be that as it may, it is difficult to see why the valuation date should be October 2003.  These sub-contracts began in April and May 2003. 

51.  Mr Lee referred to the case of Raymond v Cook and Ors 29 ACSR 252, a decision of the Court of Appeal in the Supreme Court of Queensland, where it was said at page 266:

“The respondent’s conduct in this respect both before and during the proceedings, and in using his claim to the antecedent debt as a factor in the attempt to obtain the appellant’s shares is conduct within both limbs of s 260 when regard is had to the broad definitions in ss 260(5) and 53.”

52.  The same is true under section 168A(2), as is clear from its language:

“If on any petition under subsection (1) the court is of opinion that the specified corporation’s affairs are being or have been conducted in a manner unfairly prejudicial … whether or not such conduct consists of an isolated act or a series of acts -

(a)   the court may, with a view to bringing to an end the matters complained of …” (Emphasis added)

53.  No doubt the conduct of the parties is relevant to the relief to be granted and in a suitable case to the date of valuation.  But here, we see no reason to disagree with the decision of the learned recorder.

54.  Mr Lee also referred us to the conduct of Mr Yip in DCCJ 1855 of 2004 as a ground for adopting October 2003 as valuation date.  The point was not raised in the court below and is fact sensitive.  Applying the principle in Flywin v Strong & Associates [2002] 2 HKLRD 485 it cannot be entertained at this stage. In any event, we fail to see any merit in the point.

Conclusion

55.  For the above reasons, the appeal was dismissed with costs to Mr Yip, to be taxed if not agreed.