XU LIU CHUN v. WU CHANG JIANG AND ANOTHER

HCMP 3166/2014

[2018] HKCFI [1575]

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3166 OF 2014

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JUDGMENT

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INTRODUCTION

1.  The 1^st Respondent, Jiang Yuan International Development Ltd (“the Company”), was incorporated in Hong Kong on 17 September 2007.  

2.  The Petitioner Mr Xu (“P”) and the 2^nd Respondent Mr Wu (“R”) are respectively registered as the 40% and 60% shareholders of the Company. It is, however, R’s case that P has all along been his nominee holding the shares on trust for him.

3.  This is P’s petition [1] seeking, inter alia, an order that R do purchase P’s shares in the Company, pursuant to sections 724 – 725 of the Companies Ordinance (Cap 622) (“the CO”) (“the Petition”).  There has already been an order [2] for split trial, so that the present trial deals only with the issue of liability.  The issue on quantum is to be dealt with at a separate trial, as appropriate. 

4.  The Petition is based on P’s following complaints against R:

(a) misappropriation of US$9,200,000 from the Company between 18 July 2012 and 19 November 2012 [3];

(b) misappropriation of US$4,400,000 from the Company on or around 23 September 2014 [4];

(c) refusing to swap duties with P in breach of a shareholders’ agreement reached in or around 2007 [5];

(d) excluding P from the management of the Company, in breach of the shareholders’ agreement [6] ; and

(e) denying P access to the financial information of the Company in relation to, inter alia, its business in the Republic of Angola [7].

5.  At the commencement of the trial, it was fairly accepted by Mr Wu[8], counsel for R, that any one of the above grounds, if made out, would be sufficient for the purpose of the Petition.

THE MAJOR FACTUAL ISSUES

6.  For the present purpose, based on the respective cases of the parties, the major factual issues in this trial boil down to the following:

(i) whether P is a beneficial owner of the 40% shares of the Company registered in his name or whether he is just R’s nominee.  If it is the latter, then the Petition will fail;

(ii) if P is a beneficial owner of the shares, then whether there was a shareholder agreement between P and R as alleged;

(iii) if the answer to (ii) is in the affirmative, then whether either ground (c) or (d) is made out; and

(iv) if the answer to (ii) is in the negative, then whether any of the remaining grounds is made out.

THE APPLICABLE LEGAL PRINCIPLES

7.  It is provided in section 724(1) of the CO that:

“ The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that—

(a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the membersgenerally or of one or more members (including the member); ‌…”

8.  Furthermore, section 725(2)(a)(iv)(B) of the CO empowers the Court to make:

“ any other order that the Court thinks fit, whether—

(B) for the purchase of the shares of any member of the company by another member of the company”.

9.  The following legal principles, to which I understand that Mr Wu does not take issue[9], are in the main adapted from the written submissions of Ms Cheung[10], counsel for P, for which I am grateful.  .

Unfairness

10.  “Unfairly prejudicial” is deliberately imprecise language.  They are general words and should be applied flexibly to meet the circumstances of the particular case: Re Saul D Harrison & Sons plc [11].

11.  The meaning of “unfairness” is summarised in Hollington: Shareholders’ Rights [12] as follows:

(a) In determining whether the conduct complained of is “unfair”, the starting point is whether the parties have departed from what they have agreed amongst themselves—the bargain between shareholders.  Examples are breaches of the articles of association or any collateral agreement between the share­holders.

(b) The bargain between shareholders also includes the performance by the directors of their duties owed to the company, hence a breach of such duties may found a claim in unfair prejudice.

12.  The principle is best expounded by Hoffmann LJ (as he then was) in Re Saul D Harrison & Sons plc [13] :

“ In deciding what is fair or unfair for the purposes of s 459, it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.”

13.  Lord Hoffmann repeated the same point in O’Neill v Phillips [14] :

“ … one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct have actually agreed. Would it conflict with the promises which they appear to have exchanged?”

14.  To be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds: Grace v Biagioli [15].

Prejudice

15.  “Prejudice” includes both damage to the financial interests of the member such as where the value of the shareholding is diminished or jeopardized, as well as damage to other interests of members in their capacity as members, such as infringement of their rights under the constitution or damage to other interests which would be protected pursuant to equitable considerations: Law of Companies in Hong Kong [16].

16.  The prejudice must be to the petitioner in his capacity as a member but it need not be financial in character.  A disregard of the rights of a member as such, without any financial consequences, may amount to prejudice falling within the section: Joffe: Minority Shareholders [17], at §§6.77 – 6.80; Hollington, at §§7-68 – 7-78. 

Affairs of the company

17.  The words “affairs of the company” are extremely wide and should be construed liberally.  The phrase embraces all aspects of the company’s affairs and business.  It includes the company’s goodwill and assets, and encompasses both external corporate activity and internal management: Joffe §6.29; Law of Companies in Hong Kong, at §10.142.

Breach of director’s fiduciary duties

18.  A breach of the fiduciary duties owed by a director to the company may form the basis of an unfair prejudice claim.  As explained by Hoffmann LJ in Re Saul D Harrison [18] :

“ the powers which the shareholders have entrusted to the board are fiduciary powers, which must be exercised for the benefit of the company as a whole. If the board act for some ulterior purpose, they step outside the terms of the bargain between the shareholders and the company.”

See also Re Asia Television Ltd [19].

19.  Therefore, misappropriation of the company’s assets, which amounts to a breach of a director’s fiduciary duties, constitutes unfairly prejudicial conduct: see Re Elgindata (No 1) [20]; applied in Re Tai Lap Investment Co Ltd [21].

Breach of shareholders’ agreement / Exclusion from management

20.  A breach of a shareholders’ agreement involves a departure from the bargain between the shareholders and therefore may amount to unfairly prejudicial conduct: Re Mediavision Ltd [22]; Re Asia Television Ltd [23].

21.  The breach may take the form of excluding the petitioner from the management of the company, as Parker J said in Re Guidezone Ltd [2000] 2 BCLC 321 §175:

“ In the case of quasi-partnership company, exclusion of the minority from participation in the management of the company contrary to the agreement or understanding on the basis of which the company was formed provides a clear example of conduct by the majority which equity regards as contrary to good faith.”

    (Emphasis supplied)

I appreciate that whether a company is a “quasi-partnership” in a given case is a fact-sensitive issue.

22.  It is not necessary that the shareholders’ agreement should be independently enforceable as a matter of contract.  It would suffice if there were an understanding or promise, by words or conduct, which it would be unfair to allow a member to ignore as a matter of justice and equity: O’Neill v Phillips [24].

Refusal to provide financial documents

23.  Generally speaking, the management of a company is a matter for its directors and a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision.   However, if certain conditions are met, the court may, upon application, grant an order for a shareholder to inspect the records of a company. Under the old Companies Ordinance (Cap 32):

(a)  a 2.5% shareholder of a “specified corporation” may apply to court for an order to inspect any “records” of the company: section 152FA;

(b)  a “specified corporation” included a company formed under and registered under the old Companies Ordinance: section 2; and

(c)  “records” included book and paper, eg accounts, deeds, writings and documents: section 2.

The current position under Cap 622, which is similar to the old one, is set out in sections 739, 740 and 838 of that the CO.  The applicable legal principles for the granting of the order are set out in Veron International Ltd v RCG Holdings Ltd[25].

24.  Furthermore, a company has a statutory duty to prepare audited financial statements for each financial year: see sections 379, 380 and 405 of the CO; sections 122 and 141 of the old Companies Ordinance.

25.  A breach of the company’s statutory duties, such as persistent failures to prepare accounts, may be capable of amounting to unfairly prejudicial conduct.  However, the extent to which a breach of statute may constitute unfairly prejudicial conduct depends on the factual matrix and can be a matter of degree: Law of Companies in Hong Kong, §§10.175 – 10.176; Joffe, at §§6.215 – 6.220.  As Harman J said in Re a Company (No 00789 of 1987), ex p Shooter [26] :

“ This present case is of repeated failure, year over year over year, to hold annual general meetings or to lay accounts before members, so that members were wholly deprived of any opportunity to consider the affairs of the company, to vote on the election or re-election of directors, or in any other way to know what was going on. As it seems to me, that conduct, not the absence of filing but the conduct in depriving members of their right to know and consider the state of the company and its directorships, and to ask questions of its directors, is conduct which, inevitably, must be prejudicial to the interests of members.”

THE FACTUAL BACKGROUND

26.  Both P and R are mainland citizens. Their relationship has alengthy and protracted history.  A detailed and helpful “Agreed Chronology” is attached to the Written Opening of Ms Cheung.

27.  As is common in this type of cases, the relationship between the parties had initially been friendly and close.  After their relationship hadturned sour, however, there were cross-allegations of criminal wrongdoings and lawsuits between them in the mainland.   During the oral evidence, witnesses were cross-examined at some length about the mainland investigations and lawsuits.  However, those mainland investigations and lawsuits have not resulted in any positive or concrete findings which may have a direct bearing on the resolution of the factual disputes under consideration.  In my assessment, the relevancy of those mainland investigations and lawsuits lie mainly in what have been alleged or said by the parties which bear on the issue of credibility.  Besides, I note that R also seeks to explain why that he was unable to produce some relevant documents (which he said would support his case) by saying that those documents had been stolen by P in the mainland[27]. I bear those in mind when considering the weight to be attached to the evidence of the parties.  

28.  In order not to lengthen this judgment unnecessarily, I do not intend to recite all of the events listed in the “Agreed Chronology”.  It suffices to say that I have regard to all of them.  I would just briefly summarise of some ofthe events so that one may appreciate the nature of the relationship between the parties, how it came about that they did business together, the extent of P’s participation in the building projects in Angola, why the Company was set up and how the present dispute came about.

How R and P met

29.  R and P met in 1986 when both of them worked for the Ports and Waterway Administration of Fujian Province (福建省港航管理局) (“PWA”).  R (then aged 36) was a senior bureaucrat, whilst P (then aged 18) was just a chauffeur.   However, R (who had no child) had treated P fondly and he said that he had even treated P as his son.  Based on the evidence before me, I accept that after P left the chauffeur job at PWA in 1988, R had continued to look after P by introducing the latter to work in various companies.  I accept that in 2002 R also lent some money to enable P’s sister to start a small renovation business the running of which P was also involved.   In 2005, when R asked P to help him set up the Fuzhou Office, P left the renovation business behind almost immediately.

Changjie

30.  In February 2005, a few of R’s colleagues set up Fujian Changjie Road and Bridge Technology Consulting Company Limited (福州暢捷路橋技術諮詢有限公司) (“Changjie”).  In April 2005, R was approached by Changjie to help in developing its business.  R, in his capacity as an official of PWA, came across some business opportunities in Angola and in particular, a building project later was later known as “the Luanda–Lobito Highway Project”.  Eventually, in order to seize those business opportunities, R joined Changjie as its single largest shareholder holding 41.4% of its shares [28]. 

31.  On 26 June 2013, the then existing shareholders of Changjie transferred their shares to P and his sister so that P became its 99% shareholder whilst the remaining 1% was held by his sister.[29]  Under cross-examination, P agreed that at the time Changjie did not have any on-going business.

Ningde

32.  Changjie was desirous of undertaking the repair of Luanda-Lobito Highway Project in Angola, However, because of some specific requirements, it was unable to contract directly with the main contractor, China International Fund Limited (中國國際基金有限公司) (“CIFL”), but had to do it via another company—Fujian Ningde City Road and Bridge Corporation (福建寧德市路橋總公司) (“Ningde”).  On 1 November 2005, Ningde signed a contract [30] with CIFL as sub-contractor instead at the price of US$78,296,904.  Then on 2 December 2005, a Co-operation Agreement [31] was signed between Ningde and Changjie for them to split (in the ratio of 30:70) the net profit to be earned from the Luanda–Lobito Highway project.

Fuzhou Office

33.  In September 2005, a 福州辦事處 (“Fuzhou Office”) was set up to handle administrative matters in the PRC concerning the Luanda–Lobito Highway Project.  P was appointed as the person in charge of the Fuzhou Office.  However, P’s evidence is not entirely clear as to the actual status of the Fuzhou Office and the chain of command.  I note that the setting up of the Fuzhou Office predated the signing of the Co-operation Agreement between Ningde and Changjie.  Based on the evidencebefore me, in particular, R’s evidence which is supported by an organisational chart [32] produced by him, I accept that no matter what was his original intention for the setting up of the Fuzhou Office, it had later become one of the several departments serving the Luanda–Lobito Highway Project under the framework of the Co-operation Agreement between Ningde and Changjie. 

34.  Based on the evidence before me, I find that R was the single most important person who may be described as the “soul” of the Luanda–Lobito Highway Project.  This is based on the fact that he became the major shareholder of Changjie; that it was he who introduced the business opportunity in Angola first to Changjie and then also to Ningde; that he was appointed the Chairman of the Project Board [33] formed pursuant to the Co-operation Agreement between Changjie and Ningde; and also that he was authorised to operate the bank account of Ningde [34].

35.  On the other hand, I note that P held no shares in either Changjie or Ningde. Based on the evidence before me, I find that at the time P did not possess any experience in substantial construction projects, not to say projects overseas.  Apart from R, he did not appear to have much, if any, business connection or background, at least not in the construction or building business.  Lastly, P agreed in his oral evidence that up to 2005 he did not have much savings under his own name.  I find also that P became the person in charge of the Fuzhou Office and one of the five directors of the Project Board [35] simply because of R’s influence.  This, I find, to be another example of P being looked after by R.  I find that P was then a person who R could trust and it was natural for R to want to have P working for him in the project despite P’s lack of expertise or experience.  I note also that the Fuzhou Office was just one of the several departments serving the Luanda–Lobito Highway Project, there being other departments responsible for technical and financial matters and so forth.  I find it unlikely that the Fuzhou Office had played in a central or key role amongst other departments.  Moreover, in terms of hierarchy P’s name came after a number of other people from Ningde and Changjie in the list of leaders [36].  This is not to say that P had no decision-making role to play in the project at all.  It is just that, unlike the position of R, the role of P in the project was dependant on R and that there were other people who apparently played a more important role than P in the project. 

Fujian Jiang Yuan (“FJY”)

36.  In February 2006, a company called Fujian Jiang Yuan Investment Development Ltd (福建江源投資發展有限公司) (“FJY”) was formed in the mainland with R holding 60% of its shares, P holding the other 20% and the remaining 20% by one Wang Yonghui (PW2) (“Mr Wang”).   In March 2008, however, Wang quitted and his shares was then taken up by R without payment, so that R and P held respectively 80% and 20% of FJY’s shares [37]. 

37.  It came to pass that the main contractor, CIFL, of the Luanda–Lobito Project was terminated by the Angolan government which was desirous of contracting directly with the sub-contractor.  Therefore, on 19 November 2007, FJY signed a contract [38] with the Angola authority for the repair of the Luanda–Lobito Highway at the same price of US$78,296,904.

38.  Regarding FJY, in Mr Wang’s affirmation filed in support of the Petition and adopted as his evidence in-chief, he said that he had known P since 1990s.  Mr Wang said that in 2005 he was asked by P to participate in the project of Changjie and Ningde in Angola.  Mr Wang was told by P then that P and R intended to set up a company with a registeredcapital of RMB 30 million but they did not have the money and therefore they wanted him to help with financing.  Mr Wang informed P that the capital of RMB 30 million could be paid by installments in three years and the first installment would only require RMB 6 million.  Eventually, Mr Wang, on behalf of R and P, borrowed RMB 6 million (with interest to be paid) from his friend and that sum was split into three parts before it was injected into FJY as capital, namely: RMB 3.6 million (R), RMB 1.2 million (P) and RMB 1.2 million (Mr Wang).  After FJY was formed, Mr Wang became its 20% shareholder and Financial Controller, P became a 20% shareholder and R a 60% shareholder.  Mr Wang said that there was an agreement among the three of them that if he was to resign from the post of Financial Controller, his shares would be assigned to the new Financial Controller.  Mr Wang said that in 2006 the loan of RMB 6 million was repaid.  Mr Wang said that when he left FJY, his 20% share in FJY was transferred to R pending the appointment of the new Financial Controller.  Mr Wang said that the fact thatR held onto the 20% share was contrary to their initial agreement.  However, since Mr Wang had left FJY, it was no longer his business.   

39.  In cross-examination, Mr Wang agreed that it was P who asked him (Mr Wang) to join FJY as a shareholder and Financial Controller and that he did not know R before that.  He agreed that it was not a legal requirement in the Mainland that a company has to have a financial controller and that when he departed he had no idea whether a new financial controller would be engaged in his place.  Finally, he agreed that he had no agreement with R that the latter would transfer his (Mr Wang’s) 20% share to any future financial controller.

40.  As a general comment, it is clear to me and I find that Mr Wang had very limited, if any, directly communication with R.  Mr Wang’s knowledge as to any arrangement about FJY’s shares came only from P.  In my assessment, the weight that can be attached to Mr Wang’s evidence is so limited that it does not actually advance P’s case in any way. 

41.  Regarding the business of FJY, the undisputed evidence is that its initial capital of RMB 6 million was repaid in full in 2006.[39]  This, Mr Wang said in court, was done by simply returning the same money to his friend.  Mr Wang agreed that after the repayment, FJY would have no capital or liquidity for business.   I understand Mr Wang’s evidence to meanthat after FJY obtained the RMB 6 million as capital, the money had not been deployed for any business before its eventual return to the lender.   On the other hand, apart from the new contract for the Luanda–Lobito Highway Project signed on 19 November 2007, FJY did not appear to have any other business.  Therefore, the situation was that FJY had no source of income and no business expenses in the interim.  In the circumstances, I find it more likely than not that the loan of RMB 6 million was intended by R and P to be a “bridging loan”, the purpose of which was to dress FJY up as a company with substantial capital. 

42.  There is a dispute as to whether FJY, as P alleges, took up the Luanda–Lobito Project in its own right or, as R alleges, just acted as a signing agent for Changjie.  In my assessment, the determination of this matter is not strictly speaking essential for the resolution for the issues in this petition.   After all, FJY and the Company are different entities and the projects concerned were also different.  However, the relationship between Changjie and FJY is important as a background and it also bears upon issue about the so-called “Special Fee”.  As to this, see the discussion on “misappropriation” below.    

43.  I have already found that FYJ was, at the time of and shortly after its setting up, not a company of substance.  I have not ignored the agreed fact that the departure of Mr Wang from FJY, in March 2008 FJY’s paid-up capital was increased from RMB 6 million to RMB 30 million [40]. I note that the Agreed Chronology does not specify from where that RMB 30 million came and that there are no corresponding bank records to that effect[41].   In view of all the circumstances including how FJY’s initial capital of RMB 6 million came about and the fact that the new contract was only signed in a few months before, as a matter of inherent probabilities I have grave doubt that this very substantial amount of capital could have come from the personal resources of either P or R.   P in cross-examination agreed that he had first worked as a driver and then in several employments before he landed in the small family company with his sister doing decoration business.  He agreed that up to 2005 he did not have much personal savings.  He also agreed in cross-examination that he had never injected any capital to FJY towards the acquisition of its shares.  As regards R, he had been a civil servant in a provincial bureau in Fujian before he exploited the business opportunity in Angola.  Indeed, R agreed in cross-examination that the increased capital of FJY came from the profits made out of the Luanda–Lobito Highway Project.  The evidence before the court (see the discussion below), which I accept, is that the dividends were distributed in February 2011 and that P only got his share in March 2012. 

44.  Although the name of Changjie did not feature in the new contract, I find that it was still heavily involved in the project and that its shareholders still benefited from the project.  This is supported by the fact that the dividends for the project (US$6,088,552) were declared in February 2011 roughly in accordance with the shareholdings in Changjie [42].  As to this, I accept that the lists of distribution of dividends and bonuses produced by R [43] (which is partially supported by the payment to P [44]) reflected the distribution of the profits relating to the project.  P was paid US$273,984 and that was only some 13.2% of the total dividends and only some 4.5% of the total profit.  There were also dividends to the shareholders of Changjie, someof them even had a larger share than P.  Thus, the payment to P is not referable to his 20% shareholding in FJY.   Had FJY in fact taken over the execution of the contract instead of Changjie, then one would expect P (as its 20% shareholder) to have a larger share of profit than what he got.  Moreover, there would be no reason for the shareholders of Changjie to continue to have significant shares of dividends. 

45.  Besides, taking into account the background of the parties, the history about the Luanda–Lobito Highway Project, the financial position of FJY at the relevant time and having observed the parties giving evidence in court, I accept R’s case that the aforesaid payment to P was made at R’s insistence as a recognition of P’s contribution to the project [45].  I find that although FJY was the legal entity which entered into the new contract, in reality the work was performed by the personnel of Changjie as before.  Moreover, the shareholders of Changjie continued to share the revenue from the Luanda-Lobito Highway Project roughly in the same proportion as their respective shareholdings.  The use of FJY as the contracting party was a manoeuvre by Changjie with a view to do without Ningde and to avoid legal complications[46].  I also find that P had all along been fully aware of and agreed to this.  

46.  As regards the shareholdings in FJY, P’s case is that both R and he had intended that they should be the shareholders of FJY in the proportion of60:40.  However, since they did not have sufficient capital for the setting up of FJY, they had to seek help from Mr Wang.   On the other hand, R’s case is that even the 20% shares of P in FJY was held on trust for him until P paid for the share capital.  Again, I do not consider this aspect of their dispute to have a heavy bearing on the issues in the present petition.  However, in view of the time and quantity of material devoted to this topic, I will also set out my views on it insofar as it is pertinent to do so. 

47.  In my judgment, the circumstances of Mr Wang becoming FJY’s shareholder and Financial Controller and the fact that his shares were subsequently transferred to and kept by R (at a time when R and P were still close to each other) cast grave doubt on P’s assertion that it had been the common intention of both P and R that they should be the shareholders of FJY in the proportion of 60:40. I do not accept that there had not been such an agreement or common intention between R and P.

48.  As to whether P was a beneficial owner of his shares in FJY or just a nominee of R, the fact that P had not contributed a dime out of his own pocket towards the acquisition of his shares does not mean that P could not be a beneficial owner.  Otherwise, R would similarly have no beneficial interest, as the set up capital of FJY came wholly from the money borrowed through Mr Wang.

49.  In my judgment, given that P had the legal title of his shares in FJY, the burden of proof lies with R who asserts that P was just his nominee: Stack v Dowden [47] ; Lewin on Trust, 19^th ed, at 9-062.  

50.  In this regard, the evidence of Mr Wang, which was not challenged in cross-examination and which I accept, is that after the loan was borrowed, it was split into three: RMB 3.6 million of which was deposited into R’s bank account; RMB 1.2 million into P’s bank account; and the remaining RMB 1.2 into his own bank account.  The three parts of money were then used as the registered capital of FYJ.  I take this to mean that the RMB 6 million was a temporary loan to the three of them, rather than just R.  Moreover, I find that it is more likely than not that the money was simply returned shortly afterwards and that R had not repaid the loan with his personal funds.  I find that Mr Wang did not keep his 20% shares in FJY upon his resignation as “Financial Controller” because of his prior agreement with P.  I find that it had all along been the intention of P, R and Mr Wang that the latter have nothing further to do with FJY upon the repayment of the RMB 6 million loan. 

51.  In addition, I find that it is inherently probable that it was the common intention of the parties at the material time that P should be a minority beneficial owner of FJY even though he (and for that matter, R as well) did not personally contribute a dime towards the acquisition of its shares. This is in view of the close personal and work relationship between them at the time.  R accepted in cross-examination that he had treated P as his own son and had hoped that P would be his successor.  

52.  Based on the above, I reject R’s assertion that P was just his nominee as regards the shares of FJY.  I find, on balance, that the intention of the parties had always been that P should be the beneficial owner of 20% of FJY’s shares.

The Company

53.  As aforesaid, the Company was incorporated on 17 September 2007 in Hong Kong with R and P as its two shareholders, respectively holding 60% and 40% of its shares.  There is no dispute that the Company has no office and does not employ any staff here.  No audited accounts have ever been prepared for the Company since its incorporation.

54.  The registered share capital of the Company was originally US$100,000. As at 27 December 2007, its share capital was said to have increased and paid up to US$3 million [48]. There are, however, no bank documents showing any injection of capital in or around December 2007 by either P or R.  On the other hand, there is a bank record showing a remittance of US$3 million from R (in Angola) to the Company on 15 May 2008 [49]. I note also that the distribution of dividends and bonuses of the Luanda–Lobito Highway Project (which took place in 2011 and 2012) cannot be used to account for the increased capital. 

55.  On 29 February 2008, the Company signed two contracts with the Angolan authorities:

(i) the repair of the roads at Lubango–Benitaba and Benitaba–Lucira at the price of US$64,471,610.59 (“Lubango Contract”); and

(ii) the repair of the roads at Namibe–Tombwa at the price of US$29,550,943.13 (“Namibe Contract”).

There is no evidence that apart from the above two contracts, the Company has any other business.

56.  Having setting out the backgrounds facts and findings, I now proceed to consider the issues in the Petition.

(1)   Whether P a nominee

57.  First, I agree with Ms Cheung that, as P is the legal owner of the 40% shares of the Company, the burden lies with R who asserts that P is just his nominee: Primecredit Limited v Yeung Chun Pang Barry & Anor [50], applying Stack v Dowden, ante.

58.  Having considered the evidence and submissions from counsel, I am not persuaded that R has discharged the aforesaid duty.  My reasons are as follows: 

(a)  R’s remittance in May 2008 is inconsistent with his statement made in the documents filed with the Company Registry that the increased capital had already been paid up as at 27 December 2007.  Similarly, I am not satisfied that the remittance is referable to the acquisition of the Company’s shares by either R or P in September 2007;

(b)  the evidence of Mr Xie Yung, the successor of Mr Wang as the Financial Controller of FJY, that the share capital of the Company was injected in May 2008 and not December 2007, is contrary to the evidence of R and the Agreed Chronology.  This part of Mr Xie’s evidence is not accepted;

(c)  there are no documents showing any declaration of trust by P.  R’s belated oral evidence that there had been such a written agreement, which had not been mentioned in any of his affirmations, is not accepted; and

(d)  I find that it is more likely than not that R did not personally have US$3 million in or around December 2007, bearing in mind that he had been a civil servant in the mainland before as well as the circumstances surrounding the setting up of FJY.  I find that it is more likely than not that the Company’s paid-up capital came from the proceeds of the projects in Angola rather than R’s personal resources.

59.  In view of my aforesaid findings that the US$3 million capital of the Company came from the proceeds of the projects in Angola rather than R’s personal resources, the question of resulting trust does not arise.  As stated in Lewin on Trust, at §9-047:

“ a person who claims to be interested under a resulting trust on a purchase in the name of another must prove, not only that he provided the purchase money, but also that he did so in the character of purchaser.”

60.  Furthermore, in view of the close personal and work relationshipbetween R and P at the time, even assuming that P had not personally contributed anything towards the capital of the Company, I find it inherently probable that it was the common intention of the parties then that P should be the beneficial owner of 20% of its shares.

(2)   Shareholder Agreement

61.  This relates to grounds (c) and (d) of the Petition.  P’s case on this, as opened by Ms Cheung, is that in or around 2007, the parties reached an agreement or understanding that:

(a) P would be mainly in charge of the material and equipment sourcing and personnel recruitment in the mainland;

(b) R would be mainly in charge of the project management in the Republic of Angola;

(c) this division of work would last until 2010, after which the parties would swap their duties and locations; and

(d) R would consult or discuss with P on matters relating to the project management in the Republic of Angola.

P says that R had wrongfully breached the above agreement by refusing to swap work with him and wrongfully excluding him from management of the Company. 

62.  Having considered the evidence of the parties, it is clear that none of the above can be made out.  At the highest, P’s evidence in cross-examination is that in 2006 R told him many times that when he (R) turned 60, he (R) wanted him (P) to go outside to have some exposure and therefore he (R) intended to groom him (P) accordingly. However, P’s father became ill.  Therefore, R persuaded P to stay in the mainland and P agreed and was grateful to R.  There had not been any occasion that P asked to go to Angola but was rejected by R.  P said that he subsequently gave up on the idea of going to Angola.  P said that all along he did not make any request of going to Angola.  In short, P’s evidence does not support his pleaded case.

63.  Moreover, in view of P’s lack of formal training, expertise and experience in construction and the nature of the relationship between R and P (which, I find, is akin to that between a mentor and a mentee), it is in my view inherently improbable that there would be any agreement or understanding between them in or around 2007 that R would consult or discuss with P on matters relating to the project management in the Republic of Angola.  Thus, grounds (c) and (d) are not made out.

(3)   Misappropriations

(i)   US$9.2 million (ground (a))

64.  There is no dispute that a total of US$9.2 million was transferred out of the Company 18 July 2012 and 19 November 2012 and paid to two of R’s nominees.  The details are as follows:

(1)  US$2 million to Hong Kong Tian Mei Investment Limited (“Tian Mei”) on 18 July 2012;[51]

(2)  US$1 million to Tian Mei on 31 July 2012;[52]

(3)  US$1.6 million to Da Cheng Trading Company (“Da Cheng”) on 24 September 2012;[53]

(4)  US$2.6 million to Da Cheng on 26 September 2012;[54] and

(5)  US$2 million to Da Cheng on 19 November 2012.[55]

65.  P’s pleaded case is that in or around 2012, R suggested to him (and he agreed) that the Company should acquire real properties in the mainland, and for this sole purpose money would first be transferred from the Company to R personally.    

“However, after receiving the said sum of USD9,200,000 from the Company, [R] had not acquired any real properties in the Company’s name. Rather, he has used around RMB 27,000,000 from the said sum to acquire real properties registered in his own name or in the name of his nominees, and has retained the balance of the same sum.” [56]

Thus, it is alleged that the ways in which R subsequently used the money so withdrawn was in breach of the aforesaid agreement or understanding and without authority, thus constituting “misappropriation” of the Company’s money.  It is ambiguous as to whether P is alleged to have formed the intention to appropriate the Company’s money to his own use before or only after the transfers.  However, I note that there is an absence of any expressed allegations of fraud or dishonesty in P’s pleadings.

66.  R denies that he had misappropriated the Company’s money.  In short, his case is that the money did not belong to the Company.  He said that the Company had been a platform for remittances from Angola.  He said that all of the USD 9.2 million transferred to him consisted of two parts[57]:

(a)  his share of the dividends for the Luanda–Lobito Highway Project; and

(b)  a “特殊費用” (“Special Fee”) in respect of the Luanda–Lobito Highway Project (which amounts to 35.7% of the contract price) .

67.  R maintained that the withdrawal of the USD 9.2 million was done with P’s full knowledge and consent and that he had not told P that the purpose of the withdrawals was for purchasing real properties in China.  In answer to the cross-examination that R had used the Company’s money to purchase a “villa” for himself, R said that the property was not a “villa” and that it was purchased for use as the office of FJY.  As to why the property was eventually registered in his personal name, R said that it was because the property was paid by him, as FJY had insufficient fund. 

68.  I note that in R’s re-examination, he asserted for the first time that the Company had yet to receive any payments in respect of the Lubango Contract and the Namibe Contract.  That, R said, was owing to two unfulfilled condition precedents stipulated in the contracts: (1) the registration of the Company in Angola; and (2) the provision of security.  If this were true, then it would afford R a complete defence to any allegations of misappropriation of the Company’s money. Nevertheless, as Mr Wu fairly concedes, this defence has never been pleaded as part of R’s case or even mentioned in any of R’s affirmations.  Therefore, Mr Wu does not seek to rely on this part of R’s evidence.  Mr Wu also accepts that Ms Cheung is entitled to comment on R’s credibility in this regard. 

69.  I now turn to consider P’s case under this ground by beginning to deal with his allegation that R had used the Company’s money to purchase properties (including a “villa”) for his own.  I note first of all that there is no direct evidence linking the money withdrawn with the purchase money of any properties in the mainland.  Although there may be a proximity of time between the withdrawals and the purchase of the properties including the “villa”, all of which took place in or around 2012, a lot of other things also occurred around 2012 including the distribution of dividends from the Luanda-Lobito Highway Project.  Although there is no evidence as to when R got his share of US$2,520,661 from the Luanda–Lobito Highway Project, there is evidence (which I accept) that P did not begin to obtain his (US$273,984) until October 2012. Moreover, the purchase of the “villa” was not completed until much later in that balance of the purchase price was only paid in January and February 2014[58] and that does not tally with the dates of the alleged misappropriation. 

70.  Secondly, there is a material inconsistency in P’s statements as to whether the purchase money of the mainland properties belonged to the Company.   In this regard, P in his mainland lawsuit filed against R, he alleged that the purchase money belonged to FJY, rather than the Company[59]. 

71.  Thirdly, there is evidence showing that the “villa” was in fact a composite building and was acquired for FJY.   P exhibited documents relating to the purchase of two properties, namely House 5 and House 30, both of “Gui’an Xintiandi Yueliangdao Headquarters Commercial and Residential Base (Diyi Headquarters Economy)”[60]. The relevant “Letters of Offer of Purchase”, dated 28 April 2012 and signed by R, show that both of the houses consisted of a ground floor for residential use (Part B) and upper floors for commercial use (Part A).  Notably, the purchaser was stated to be FJY and substantial deposits (of RMB 300,000 each) were apparently paid[61] upon the signing of the offer letters.  Subsequently in January and February 2014, R paid the balance of the purchase price of House 5 and he then became its registered owner[62]. The purchase of House 30, however, was not proceeded with[63]. 

72.  Lastly, apart from House 5, there are documents showing that shops[64] (on Haixia Chuantong Wenhua Street) were also purchased initially in the name of FJY at around the same time and one of those was eventually registered in its name[65]. 

73.  In my assessment, the aforesaid sequence of events supports R’s oral evidence about the purchase.  In all the circumstances, I conclude that P is unable to prove that the purchase of the mainland properties had anything to do with the alleged misappropriation.    

74.  The issue remains whether the USD 9.2 million withdrawn belonged to the Company.  In this regard, the starting point has to be the presumption of ownership: Stack v Dowden, ante.  Since all the withdrawals came from the Company’s bank accounts, there is therefore a presumption in favour of the Company.  The burden is on R to prove his assertion to the requisite standard that the money consisted wholly of his dividends coming from the Luanda-Lobito Highway Project and the “Special Fee” related thereto. 

75.  Regarding the payment of R’s dividends, the oral evidence of Mr Xie in court was that R received his share in cash in Angola.  When it was put to R in cross-examination that his alleged share of dividends did not match any of the five installments in question, R replied that his shares could not be remitted from Angola in one go because of exchange restrictions there and that there were also restrictions of remitting money from Hong Kong to the mainland.

76.  I note that there was a document, signed by P’s cousin as his attorney, showing that P’s share from the Luanda-Lobito Highway Project was paid by installments (in US dollars) between October and November 2012[66].  That lends some circumstantial support to R’s evidence that the revenue of the said project was remitted from Angola by installments.

77.  As regards P’s evidence, he said in his first affirmation that [67] :

“ [FJY] and the Company are two companies. However, they are staffed by the same management and workmen. The proceeds from their respective project in the Republic of Angola would sometimes be transferred to the Company, and other times to [FJY].”

I take the above to be an admission by him that the funds of FJY and the Company would mix.  Since this admission is against P’s interest, if was not true, why it was made?   Therefore, I attach full weight to this admission in R’s favour.

78.  Besides, there is also P’s evidence in court is that the initial purpose of setting up the Company was to receive and make remittances and that remained one of its purposes[68].

79.  I take into account all the relevant evidence, my observation of the witnesses giving evidence and submissions from counsel.  Despite Ms Cheung’s forceful criticisms of R’s credibility[69], I am satisfied that R has proved that the funds in the Company’s bank accounts included his share of the profit from the Luanda-Lobito Highway Project. However, without of any clear evidence or supporting documents showing the details of the remittances of R’s money from Angola, in the absence of any segregation of the funds, I am unable to find how much money in the Company’s bank accounts actually belonged to R personally.

80.  As regards “Special Fee”, I bear in mind that R was unable to adduce any company resolutions from Changjie/Ningde or FJY authorizing him to receive any “Special Fee” as he asserts.  There are also no resolutions produced before the Court from either Changjie or Ningde showing that the “Special Fee”, if existed, could be as high as 35.7% of the contract price.  R asserts that the relevant resolutions had been stolen by P in the mainland in August 2014.  However, I find that R is unable to substantiate this assertion to the requisite standard.   As to this, I have also taken into account the fact that R had made no request for specific discovery of the alleged company resolutions against P.  The question for the Court is whether R’s evidence about the “Special Fee” is credible, given that no relevant resolutions have been produced.   

81.  In this regard, I note that in P’s cross-examination, he was asked whether he had heard about the term “特殊費用” when he was still the head of the Fuzhou Office.  P said that he had only heard of “特別費用” and that he first heard about it in 2005.  I note that “特殊費用” and “特別費用” bear similar meaning in Chinese and that P had used the two terms interchangeably in his affirmations [70].  I find that there is no difference between the two terms[71].  It is neither P’s case nor evidence that the “Special Fee”, if once existed, had ceased after FJY had come into picture.

82.  In the circumstances, I accept R’s evidence that there was in fact such a “Special Fee”, that P was aware of its existence from the very beginning of the Luanda-Lobito Highway Project and that it continued to exist after FJY had into the picture.  Moreover, in view of what P said in his affirmation about the Company’s role as a platform for receiving and making remittances, I find it more likely that not that the funds in the Company’s account would consist partly of the “Special Fee”. 

83.  Ms Cheung submits, however, that there is a discrepancy in R’s evidence, namely that R suggested in his affirmations that he had an absolute entitlement to the Special Fee, whilst his oral evidence in court was that the Special Fee was not his money but was entrusted to him for the purpose of the project.  It is submitted that R tailored his evidence in court, as it was improbable that R alone would be entitled to 35.7% of the contract price as his “Special Fee”, bearing in mind that Changjie’s cut of the profit was only 70% and that R only owned 41.4% of Changjie. 

84.  Having considered the evidence and observed R giving evidence, I do not agree that there is such a discrepancy.  What R said in his 1^st affirmation is that:

“ 寧德路橋公司及暢捷公司董事會也通過決議約定特別費用為有關合約金額的35.7% ，有關的特別費用由我作為董事長負責接收及全權管理” [72] (Emphasis supplied)

“ 寧德路橋公司及暢捷公司的股東均確認羅洛工程項目的合同總額款35.7% 將交予本人作為特別費用，用途由本人全權決定。” [73] (Emphasis supplied)

What Mr Xie said in his affirmation is that:

“ 有關的『特殊費用』具體使用由吳先生作為董事長親自處理及調配使用。”[74] (Emphasis supplied)

85.  With respect, the words underscored above do not imply that R had “ownership” of the “Special Fee”.  The emphasis is on R’s absolute discretion as to its usage.  This is consistent with R’s evidence in court that the “Special Fee” was not his, but that he was entitled to use it as his discretion and that he had to account for it eventually.

86.  The question remains whether the USD 9.2 million withdrawn consisted wholly of R’s dividends and the “Special Fee” as R alleges.  In this regard, I bear in mind that neither P nor R has in their respective evidence provided any detailed breakdowns concerning the source(s) of funds in the Company’s bank accounts. 

87.  P’s position is a broad assertion saying that the Company must have received some revenue out of the Lobango Contract and the Namibe Contract.  Ms Cheung also makes the point that there were provisions in those two contracts against the Company transferring the performance of the contracts to any third parties without the consent of the Angolan authorities and that there is no evidence that the Company had entered into any agency or sub-contracting arrangement with others regarding the two contracts.    

88.  P admitted in his oral evidence that he did not know which project the US$9.2 million (and the subsequent US$4.4 million for that matter) could be attributed to.  He was unable to give a precise date as to when the works pertaining to the two contracts in question commenced.  Upon being pressed, he said that it was in early 2008 or late 2007.  He said that he was asked to, and he did, send some 70 to 80 workers to Angola for the purpose of the Nambie and Lubango projects.   However, P agreed that since there were several projects going on in about the same period of time in Angola, he could not differentiate workers sent for one project from the others.   He also agreed that deployment of workers to different projects would be an on-site decision to which he was not involved.  Similarly, P could not differentiate wages paid in respect of one project from the others.  P admitted also that he does not know whether the two contracts of the Company have completed.  It is obvious that P was wearing different hats at the same time, simultaneously engaged in Changjie, FJY and the Company.  I find that P did not make any clear distinction of his different roles during his work and that he did not know much about what was happening down in Angola.  I find that any evidence that he may give about the revenue of the Company from the two contracts would be unreliable.

89.  As regards R, according to what he said in his affirmation, the “Special Fee” for the Luanda-Lobito Highway Project (calculated at 35.7% of the contract price) was budgeted at USD 27.95 million of which USD1.1 million had actually been received as at January 2006[75]. However, there is no evidence showing how much of the “Special Fee” had actually been received up to 2012 when the project came to an end, how much of it had been utilized and how much was remaining.   At §63 of R’s written closing submission, Mr Wu seeks to show that all the money alleged to have been misappropriated (the USD 9.2 million and the USD 4.4 million) could have come exclusively from the proceeds of the Luanda-Lobito Highway Project and he bases his submission is based on two documents, namely [C3/67/653] & [C3/68/659].  However, I note that those two documents did not make any reference to “Special Fee” and one cannot tell from those documents how much “Special Fee” had actually been received or used.

90.  As regards R’s belated evidence that the Company’s two contracts had never been performed and therefore there had been no payment under them, as aforesaid, Mr Wu for R does not rely on it and I attach no weight to it.  In assessing R’s credibility, I also take into account all the criticisms levelled at him and his witness (Mr Xie) in Ms Cheung’s written closing submissions .

91.  Having considered all the relevant evidence, I find on balance of probabilities that the funds in the Company’s bank accounts, to P’s knowledge, consisted (at least partly) of the “Special Fee” money as well as R’s own money. In addition, I find that the US$9.2 million withdrawn would include monies coming from those two sources.  However, in the absence of any relevant accounting documents of the Company and without any segregation of funds, I find that R is unable to satisfy me that the US$9.2 million consisted wholly of the “Special Fee” and his money but not also of the Company’s.  In this regard, I have not ignored the Company’s bank statements mentioned at paragraph 57.4 of Mr Wu’s written closing submission.  In particular, I note nearly all major substantial deposits made to the Company in 2012 were described as “收福建江源公司安哥拉匯款＂(received from FJY Angolan remittance）. However, that description does not imply who the beneficial owner of those remittances was.  I note also that it is not R’s case that the remittances belonged to FJY.  Although it seems that no regular payments of operational expenses are shown in the Company bank statements, that does not mean that it was incapable of generating any revenue. This very much depends on the mode of the Company’s operation.  Besides, there being evidence that FJY and the Company shared personnel in the mainland.   The state of evidence is such that I am not satisfied to the requisite standard that the Company “could not have owned” any part of the USD 9.2 million or any part of the USD 4.4 million as Mr Wu submits.  To this extent and by a narrow margin, I find that R has failed to discharge his burden of rebutting the presumption of ownership.

92.  Nevertheless, this is not the end of the matter.  For even assuming that some of the US$9.2 million consisted of the Company’s money, in my judgment the ground of “misappropriation” would not be made out unless the money was withdrawn without authority and/or in breach of R’s fiduciary duty owed to the Company.  It bears repetition to state that P’s case is not that the money was withdrawn without his knowledge or consent.  Here, the issue is whether or not P had consented to the withdrawals under consideration because of the representations from R which were or eventually turned out to be not true.  

93.  I readily accept that if there were fraud or dishonesty on the part of R, it would go a long way in P’s favour.  However, neither fraud nor dishonesty is explicitly pleaded.  For the purpose of this judgment, I am prepared to assume, without the benefit of submissions from counsel, that “misappropriation”, in a suitable factual situation, is capable of being made out without any allegation of fraud or dishonesty.  

94.  Having considered the evidence, I do not accept P’s case that R had been told him that USD 9.2 million would be used solely to purchase properties in the name of the Company.  I find that P’s evidence in this aspect is both incredible and improbable.  My reasons are as follows:

(a)  the aforesaid inconsistencies in P’s statements as to the source of the purchase money of the mainland properties, namely whether it was FJY’s money or the Company’s;

(b)  the documents made in the name of FJY for the purchases of real properties in the mainland which tends to support R’s case so that I prefer this part of R’s evidence rather than that of P;

(c)  the inherently improbability that R would have agreed with P to buy properties in the sole name of the Company, this is in view of P’s evidence that the money in the Company’s bank accounts would include FJY’s money and that the Company had been used as a remittance platform and also my findings that the USD 9.2 million consisted (at least partly) of FJY’s money and R’s own money; and

(d)  the inherently improbability that R would have unilaterally used the name of FJY to enter into purchases of valuable real properties which were worth tens of millions of RMB without letting P know beforehand, given that P and R were the only two registered shareholders of FJY.

95.  Based on the above, I accept (and it is not in dispute) that P had consented to and caused the withdrawals concerning the USD 9.2 million. However, I am satisfied on balance that R had not made any representations as P alleged.    

96.  I am alive to the fact that there is no formal board resolution authorizing the withdrawal of the USD 9.2 million which may include the Company’s own money.  However, since the Company has got only two shareholders who are also the only directors and because of my finding that the withdrawals were made with their full knowledge and consent, I am not satisfied that there was a “misappropriation” of the Company’s money.   For the sake of argument, even assuming that I were wrong in my finding that there was no misappropriation of the USD 9.2 million, given my factual finding that the withdrawals were made with P’s full knowledge and consent without any representations by R as alleged, I am not satisfied that the withdrawals are sufficient to constitute any “unfair prejudice” to P’s interest as a shareholder which would afford him a ground for petition.   

(ii)   US$4.4 million (ground (b))

97.  There is no dispute that on or around 23 September 2014, R without authorization of the Company or P’s consent, transferred US$4.4 million from the Company’s bank account to a company called Hong Kong Jiang Yuan International Investment Limited, which was a local company owned by him and his wife. 

98.  R’s case is that this transfer of US$4.4 million was prompted by his concern that P might embezzle the Company’s money.  It is also advanced on his behalf that this money represents part of the “Special Fee”. 

99.  In my judgment, R is unable to prove that this USD4.4 million consisted wholly of the “Special Fee” and his own money.  Moreover, this withdrawal (which was done without P’s knowledge or consent) has to be distinguished from the previous one concerning the USD 9.2 million.  Here, R’s concern about the risk of embezzlement, whether or not it could be substantiated, can be no excuse for his unilateral withdrawal from the Company without authorization and consent.  Simply put, no matter what R’s motive was, he was not allowed to take the matter into his own hands by acting beyond his power: Gower: Principles of Modern Company Law (10^th ed, 2016), at §§16-23 – 16-25.

100.  Therefore, I find that this ground of the Petition is made out.

(4)   Denial of access to financial information (ground (e))

101.  P’s pleaded case under this ground is comprised of two limbs:

“ 30. Despite repeated requests from [P], [R] has refused to provide [P] with the ledgers and accounting documents in relation to the Company’ business in the Republic of Angola.

31.  As a result of [R’s] persistent refusal to supply financial information of the Company, no audited accounts can be prepared for the Company since its incorporation.”

(Emphasis supplied)

102.  Regarding the first limb, there is some evidence before the Court that P had made request for the financial information of the Company through an employee Ms Chen Cui but to no avail. However, I accept Mr Wu’s submission that P’s evidence in this regard is both vague and no details were given as to exactly what documents had been requested and when the requests were made and what reasons, if any, R had given for turning down those requests[76].  Besides, P admitted in cross-examination that he had unobstructed access to the information about fund movements in the Company’s bank accounts, as he had control over those accounts.

103.  The aforesaid evidential problem aside, there is also the difficult hurdle for P as to whether his interest qua shareholder of the Company has been unfairly prejudiced by the alleged refusal.  In this regard, I accept Mr Wu’s submission that:

(a)  it is trite that in the absence of specific agreement, a member of a company has no right to inspect accounting records of the company or to receive any financial information about it other than that contained in the accounts; 

(b)  P’s complaint was that he was refused the “ledgers” and “accounting documents” in relation to the Company’ business in the Republic of Angola. This is plainly wider than his normal entitlement as a shareholder; and

(c)  a shareholder who wishes to inspect additional information can only apply under section 740 of Cap 622 (or formerly section 152FA of Cap 32). However, no such application has been made.  Besides, the remedy is discretionary.

104.  As regards the second limb, there is no dispute that the Company had not prepared or filed any audited accounts since its incorporation.  This limb stands on a different footing than the first one as the Company is under a statutory duty to prepare audited accounts and that shareholders are entitled to have access to those.

105.  I bear in mind that whether or not it can constitute an unfair prejudice to the interest of a shareholder qua shareholder is a fact sensitive question.  In the present case, taking into the account the history of the relationship between R and P, that the Company was formed on the basis of a personal relationship of mutual confidence between the parties, that P had a role to play in the management of the Company in that he looked after the administration of the Company’s operation in the mainland and also the restrictions on the transfer of the Company’s shares in its Articles of Association,[77] I find that the Company can be described as a “quasi-partnership”.  

106.  In the present case, I have found that P is a beneficial owner of 20% the shares of the Company rather than an employee who happened to have been given some shares.   Viewing in this light, R had consistently conducted the Company’s affairs in such a way as if it were his sole-proprietorship, with the result that P was kept in the dark as to the Company’s true financial situation.  It is no answer to this ground that P had access to the information about the movements in Company’s bank accounts, for they were, as I have found, a “mixed pot” of different monies some of those did not even belong to the Company.   Without any audited accounts, P was simply unable to ascertain the actual financial well-being of the Company.  I find that P had been consistently deprived of his right to know and consider the state of the company and that was prejudicial to his interests as a member.  It is most unlikely that the situation would improve in the future, now that the mutual trust between P and R has completely broken.

107.  I am satisfied that this ground is made out.   

CONCLUSION ON GROUNDS OF PETITION

108.  Based on the above, I find that P has made out ground (b) and the second limb of ground (e) of the Petition but not the others. 

REMEDY

109.  It is submitted on R’s behalf that in considering whether remedy should be granted, the court should take into account the following misconduct on the part of P:

(i)  his removing the company seal, company chop and business license and so forth away from FJY in March 2014; and

(ii)  his removing the documents belonging to Changjie, FJY and the Company on 26 August 2014

110.  The relevant principles are as stated in Ms Cheung’s written closing submission.  In Hollington, at §7-202, it is said:

“ the court is not engaged in a balancing exercise of weighing one side’s misconduct against the other, but the petitioner’s misconduct is relevant if it has an immediate and necessary relation to the unfairly prejudicial conduct of which complaint is made.”

In Snell’s Equity (33^rd ed), at §5-010, it is said:

“ the question is not whether any general moral culpability can be attributed to B, the party seeking relief, but is rather whether relief should be denied because there is a sufficiently close connection between B’s alleged misconduct and the relief sought. The maxim is therefore applicable only in relation to conduct of B which has ‘an immediate and necessary relation to the equity sued for’, and is not balanced by any mitigating factors.”

111.  Thus, the Court has to take into account the relevancy of P’s misconduct.  In this regard, I am of the view that P’s misconduct is not relevant as it had not caused R’s unilateral transfer of the US$4.2 million. R’s evidence is that he had already formed the idea of transferring this sum as early as March or April 2014.  Moreover, as aforesaid, R’s concern or disbelief of P does not justify his resorting to “self-help”.

112.  Having looked at the matter in the round and in view of the present complete breakdown of mutual trust between the parties, I am of the view that the appropriate remedy is to make the order that R buy P out of the Company. 

113.  It is common ground that the Court should choose a date of valuation which is fair on the facts of the particular case: Profinance Trust SA v Gladstone[78]. In the present case, I find that the date of the Petition would be an appropriate date for that purpose, as that date represents the time P decided to cease association with or participation in the Company.  I agree that P should not be credited for any success, or suffer the consequences of any mismanagement or loss, that occurred afterwards. 

114.  Furthermore, in view of my findings above, the valuation should take into account the unilateral withdrawal of the US$4.2 million by R when assessing the value of P’s shares. 

115.  Lastly, there should not be any minority discount as the Company is, in my finding, a quasi-partnership: R Hercules Holdings Ltd[79]. 

COSTS

116.  As there will be assessment on quantum, I make an order nisi that costs of this trial be reserved pending the decision on quantum.