SUM WING SUNG v. YU CHEUNG KIT AND OTHERS

HCA 1495/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1495 OF 2010

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DECISION

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1.  There are cross summonses before me taken out by the 1^st defendant and the plaintiff respectively to restrain each other in his/her discharge of duties as directors.

THE BACKGROUND

2.  The plaintiff and the 1^st defendant are husband and wife who have been married for about 46 years.  There are ongoing divorce proceedings taken out after commencement of the present action.

3.  The couple started with a sole proprietorship in label-printing registered in the name of the 1^st defendant.  D3 was incorporated to take over that business. D4-D8 were formed to meet business demands and investment holding.  The plaintiff and the 1^st defendant have been the sole shareholders and directors of those companies.  To tie in with the emigration plan of the plaintiff and the 1^st defendant, these companies had undergone a series of restructuring involving assets held on trust by D9 and D10.  

4.  In August 2009, the 1^st defendant purportedly caused shares in D9 to be transferred to her at nil consideration pursuant to a board resolution signed by the plaintiff and herself.  Purportedly as the sole shareholder of D9, the 1^st defendant resolved to nominate D2 as director and remove the plaintiff as director.

5.  In September 2010, the 1^st defendant purportedly convened and held a meeting which resolved to appoint D2 as a director of D10.

6.  The plaintiff dispute the validity of the transactions in respect of D9 and D10. 

7.  The central issue in the present case is whether the plaintiff or the 1^st defendant is the ultimate beneficial owner of D9 which, in turn, owns all the issued capital of D3-D8.  Once this is resolved, determination of other issues as to validity of the transactions regarding D9 and D10 will naturally follow. 

1^st DEFENDANT’S SUMMONS

8.  The 1^st defendant seeks to restrain the plaintiff and/or his servant including the CEO from directly or indirectly interfering with the 1^st defendant’s right as director of D3-D8.  She relies on the principle that a director who is improperly and without cause excluded by other directors from the board is entitled to an injunction from such exclusion: Pulbrook v. Richmond Consolidated Mining Company [1878] 9 Ch D 610, 613.

“Besides that, he is in the position of a shareholder, of a managing partner in the affairs of the company, and he has a right to remain managing partner, and to receive remuneration for his services. It appears to me that for the injury or wrong done to him by preventing him from attending board meetings by force, he has a right to sue. He has what is commonly called a right of action, and those decisions which say that, where a wrong is done to the company by the exclusion of a director from board meetings, the company may sue and must sue for that wrong, do not apply to the case of wrong done simply to an individual. There may be cases where, by preventing a director from exercising his functions in addition to its being a wrong done to the individual, a wrong is also done to the company, and there the company have a right to complain.”

9.  Her complaints arose as a result of the conduct of the plaintiff and Peter (the CEO of D3 and their son).

10.  Peter was appointed as CEO of D3 in January 2010.  His contract of employment provided, among others, that he should “fulfill and obey all lawful directions and orders of the Superior”, which would include the directors.  

11.  In May, the plaintiff issued a notice to the Finance Department of Hong Kong and Dongguan to the effect that all payment vouchers must be countersigned by Peter and Ken Wong (Chief Financial Officer) before they become valid.  By this, the plaintiff has seized control over the finance of D3. 

12.  In October, the plaintiff (acting through Peter) instructed D3’s staff (and that of its subsidiary in the Mainland) that notices issued by a director personally are all invalid and should not be followed.  This had the effect of asking the staff to ignore the 1^st defendant’s instructions as a director.  It also denied her access to company documents and exchange of emails between departments.  

13.  Further, during a meeting (碰頭會議) on 11 February 2011 held by the plaintiff in the absence of the 1^st defendant, the plaintiff informed the staff, erroneously, that:

(i)        there had been an injunction granted by the High Court on 8 October 2010 to restrain the 1^st defendant from acting as a director;

(ii)       it would be illegal for the 1^st defendant to issue instructions to staff under the injunction;

(iii)      the management of D3-D8 was under the protection of the injunction which conferred power of management on Peter.

14.  As a result, the staff had defied the instructions of the 1^st defendant, making management by her difficult.  That included the Chief Financial Officer who refused to clarify the financial report of the group which would form the basis of audit and submission to the IRD.

15.  In addition, the salaries of 2 staff members (who had been constantly ignoring the 1^st defendant’s instructions) had been increased retrospectively without the knowledge or consent of 1^st defendant.

16.  Further, the Hong Kong Account Department of the company group used to handle the accounts of 7 affiliate companies (not the subject of this litigation).  However, Peter instructed the Account Department not to deal with them but to pass them to Doreen (the daughter of the 1^st defendant and the Chief Administration Officer).  Doreen refused to handle them.  The burden fell on Ms Pang (the de facto secretary to the directors) who was unable to handle them.  The IRD had already levied penalty for delay in filing of accounts.

17.  As a result of the Plaintiff/ Peter’s style of management, the Senior Finance Manger resigned. The secretary Ms Pang refrained from sending the 1^st defendant’s written instructions and emails to the staff for fear of losing her job. 

18.  Further, since May 2010 when Peter purported to strip the 1^st defendant of her power and authority, the accumulated discrepancies between the imported raw materials and exported finished goods soared from 85,830 kg in June 2010 to 133,378 kg in January 2011.  This resulted in the Chinese customs putting a halt on the import of raw materials and export of goods until the discrepancies have been resolved.  It would also expose the company to customs duty but no one has attended to it.

19.  Moreover, one of the top 20 customers of the group has complained since January 2011 of poor quality of the goods and threatened to find a new supplier.  This may cause the company to lose a valued customer and reputation.

20.  On 14 March 2009, the plaintiff instructed the Finance Department to give all cash received by the company to him.  The plaintiff has since pocketed not less than RMB 4 million, being sale proceeds of Win Label.  There was no entry in the company accounts.  This was discovered by the 1^st defendant on 10 January 2011.   The plaintiff has filed a Form E regarding his financial position in the divorce proceedings.  He failed to mention these RMB 4 million.  On 11 March 2011, the 1^st defendant received an anonymous letter referring to the disclosure of these cash receipts in Form E in the divorce proceedings. Although the plaintiff and Peter denied authorizing the issue of such a letter, it must have been the plaintiff who had access to Form E wrote or caused to be written that letter.

21.  Two weeks before this hearing, the plaintiff has given an undertaking to Chung J to allow the 1^st defendant and her representative to have access to the books and accounts of D3-D8.  The 1^st defendant requested to have access to accounts for the year 2008.  In breach of that undertaking, the plaintiff, through his solicitors, stated that the act of the 1^st defendant’s acknowledging the audited accounts and signing thereon was sufficient to estop her from appointing a firm of accountants to carry out the purported inspection.  Whilst stating that the 1^st defendant was at liberty to inspect the accounts, her request to allow inspection by an accountant firm was declined.  Three days before the hearing the 1^st defendant demanded the plaintiff to confirm the date and time for inspection of the accounts within the following 2 days.  This demand was not met by the time of the hearing.

Analyses

22.  There is no dispute that there are serious questions to be tried as to beneficial ownership of the companies.  The issues, rather, are whether or not the conduct complained of justified the imposition of an injunction, whether damages were an adequate remedy and whether the injunction was wide in scope.

Conduct Showing Mismanagement and Risk of Dissipation of Assets

23.  The conduct complained of was based on contemporaneous documents which cannot seriously be disputed by the plaintiff.  I find that the conduct in paragraphs 11-14 (except the allegation regarding the CFO), 16-20 above do show that the plaintiff and Peter have been mismanaging D3 and/or denying the 1^st defendant’s exercise of rights as a director.

24.  Increase in salary of staff would appear to be within the discretion of the plaintiff and the CEO.  The conduct in paragraph 15 does not go so far as to show mismanagement as to warrant injunctive relief. 

25.  With regard to the complaints in paragraph 14 regarding the CFO, I note the tight time frame imposed by the 1^st defendant for the plaintiff/officers to respond. Peter has explained that the CFO was working in Dongguan when the 1^st defendant requested to meet him.  Peter had taken over the matter although at the time of the hearing, it did not appear to be resolved. 

26.  With regard to the complaint in paragraph 21, likewise, the 1^st defendant imposed a stringent time frame for the plaintiff to produce accounts for her inspection when urgency was not shown.  The plaintiff has explained that there was no intention to bar her from doing so but feared that if she were to send accountants to the company, she might require full assistance from the staff, thereby affecting the normal running of the company.  In any case, I am not satisfied that there has been such a breach of undertaking as to amount to contempt on the part of the plaintiff or Peter.  The parties should make sensible arrangements over the time for inspection to ensure minimum disturbance to the running of D3.

27.  I am satisfied however, that there is risk of dissipation of assets if the plaintiff were to continue ignoring the previous instructions of the 1^st defendant by pocketing cash receipts without reflecting them in the accounts.

Damages not an Adequate Remedy

28.  The 碰頭會議 was damaging to the rights of the 1^st defendant as a director.  Although the plaintiff and Peter had apologized in their affirmations for mistaking the 1^st defendant’s undertaking as an injunction imposed by the Court, they had not explained how that mistake had arisen.  Nor had they done anything to withdraw the erroneous remarks.  As a result of the above acts of interference by the plaintiff and Peter, the management by the 1^st defendant has become more difficult. 

29.  Further, the acts/default of the plaintiff/Peter might create civil liability for the companies (e.g. with regard to quality of products) and criminal liability (e.g. with regard to customs duty for stocking up too much raw materials).  It may also cause D3 to lose a valuable customer Avon.

30.  I find that D3-D8 has suffered loss which cannot be adequately compensated for by damages.

Balance of Convenience

31.  Apart from one instance of refusing to issue salary referred to in paragraph 36 below, there was no complaint of the management by the 1^st defendant as a director. The chief complaint against her was that she purported to transfer beneficial ownership of shares to herself and creation of confusion for the staff by issuing instructions as an individual director.

32.  The facts do disclose power play between the plaintiff and 1^st defendant’s camps.  Peter purported to alleviate the tension between the plaintiff and the 1^st defendant and reduce confusion to the staff arising from conflicting instructions given to them.  It ended up damaging the company and the defendants’ interests.  His one year term of governance was short compared to about 3 decades’ governance by the 1^st defendant.  On the plaintiff’s case, the plaintiff has been dealing with operation, financing, development and management of the label printing business of the group, whereas the 1^st defendant managed the group assets and she was conversant with the group structure.  Apart from the allegation of creating confusion, there was no complaint of the 1^st defendant’s conduct causing loss to the companies. The balance of convenience lies in maintaining the status quo of having the 1^st defendant continues with her management of the companies. 

The Objections of the Plaintiff

33.  Mr Kwok suggests that the grant of an injunction in favour of D1 would render the trial an academic exercise.  With respect, the trial is concerned with the beneficial ownership of the companies whereas the injunction is aimed at preserving the assets until final determination of the action.  There is no suggestion that the 1^st defendant has been guilty of dissipation of the assets which would render the defendant companies worthless after trial.  This submission fails.

34.  The other complaint is that the terms of the injunction are too wide.  In my view, it is noteworthy that the draft order does not purport to oust the plaintiff from management. The plaintiff and Peter can continue to manage the companies as a director/CEO will properly do.  All that the draft order purports to do is to ensure that the 1^st defendant’s rights as a director are preserved pending trial. Sub-paragraph (a) is to ensure that the plaintiff/Peter will not instruct the staff to ignore the instructions of the 1^st defendant.   Sub-paragraph (b) is to ensure that the plaintiff/Peter will not prevent the staff from acting in accordance with the instructions of the 1^st defendant. Sub-paragraph (c) is to prevent the plaintiff/Peter from misrepresenting that an injunction order had been given against the 1^st defendant and the effect of that order.  I do not consider the order to have been drafted in unreasonable terms and I grant an injunction on the 1^st defendant’s summons accordingly.

THE PLAINTIFF’S SUMMONS

35.  The plaintiff seeks to restrain the 1^st defendant from interfering with the day-to-day operations of the respective defendants in the following ways:

(i) Breaching terms of employment contracts between D3-D8 and their respective employees, including but not limited to delaying or refusing to make payment to the employees;

(ii) Breaching any binding contracts entered into between D3-D8 (and their respective subsidiaries) and their respective suppliers, service providers, customers and/or other third parties in their normal course of business;

(iii) Permitting D3-D8 from breaching any applicable laws, regulations, standards and/or practice guidelines in Hong Kong or elsewhere;

(iv) Permitting any of the insurances of D3-D8 to lapse; and

(v) Acting in a way likely to bring discredit on D3-D8 and/or their subsidiaries.

36.  With regard to sub-paragraph (i), the only evidence in support was that in February 2011, the 1^st defendant refused to pay RMB 20,000 on the basis that the voucher did not state the reason.   That was not conduct calling for an injunction, for a director has a duty to ensure proper spending of a company’s money and keeping of proper accounts.   In any case, at the hearing before Chung J two weeks ago, the 1^st defendant has given an undertaking “to sign jointly with the plaintiff to authorize payment of salary of staff of D3-D8 (excluding any increment of salary and bonus unauthorized by the board of directors since December 2010).”   There is therefore no justification for an injunction.

37.  With regard to sub-paragraphs (ii) to (v), there is no evidence to substantiate each head of these complaints.  Accordingly, the plaintiff has failed to prove that there is any need to grant an injunction. 

CONCLUSION

38.  There are serious questions to be tried.  The 1^st defendant has made out a case of being interfered with in her management of the companies as a director and that there is risk of dissipation of assets.  Damages will not be an adequate remedy.  The balance of convenience is in favour of the grant of an injunction and I therefore do so along the lines of the draft order presented by the 1^st defendant.

39.  The plaintiff has failed to show acts on the part of the 1^st defendant that would justify having the protection of an injunction on top of the 1^st defendant’s undertaking.  Accordingly, the plaintiff’s summons is dismissed.

40.  There will be an order nisi that costs of both summonses be to the 1^st defendant with certificate for Mr Chong.  There shall be summary assessment of costs on the papers on 13 April 2011 at 9:30 am.  No attendance is required.  The 1^st defendant shall file and serve her statement of costs by 7April 2011.  The plaintiff shall file and serve his grounds in opposition by 11 April 2011.

41.  I thank counsel for their able assistance.