CATDAVE INVESTMENTS LTD v. BARBICAN CAPITAL INVESTMENT LTD AND OTHERS

HCCW 444/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 444 OF 2006

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J U D G M E N T

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A. Introduction

1.  The Petitioner Catdave Investments Limited (“Catdave”) is a Liberian company beneficially owned by Mr Tse Kin Wah (“Mr Tse”).  Catdave holds 30% of the issued shares of the 1st Respondent, Barbican Capital Investments Limited (“Barbican”), a Hong Kong company.

2.  Patkie Investments Limited (“Patkie”), the 4th Respondent, is a Liberian company beneficially owned by the 2nd Respondent Mr Tsang Wing Kei Wilkie (“Mr Tsang”) and his wife, Madam Patricia Teresa Reis, who is the 3rd Respondent (“Mrs Tsang”).  Patkie holds 70% of Barbican’s issued shares.  (In this Judgment, unless otherwise specified, “Respondents” refer to the 2nd to 4th Respondents collectively.)

3.  By Petition presented on 18 August 2006, Catdave seeks to wind-up Barbican pursuant to s. 177(1)(f) of the Companies Ordinance (“Ordinance”), alternatively for a “buy-out” order under s. 168A of the Ordinance.

4.  For all practical purposes, this is a dispute between Mr Tse and Mr Tsang.  For simplicity, I will equate Mr Tse with the Petitioner, and Mr Tsang with the Respondents.

5.  Both Mr Tse and Mr Tsang gave evidence before me, although as a matter of strict formality Mr Tsang did so only as a witness called by Mrs Tsang and Patkie, Mr Tsang himself having been declared bankrupt in February 2007 and technically did not take part in the trial.

B. Undisputed background

6.  Mr Tse was a chartered surveyor by profession.  Between 1983 and 1987, he worked with the Lands Department of the Hong Kong government.  He joined a firm of surveyors (“L&B”) in September 1987 as an associate of the firm’s newly formed Property Consultancy or General Practice Division.  He was promoted to partnership on 1 April 1989 with a substantial increase in his remuneration package.

7.  Mr Tsang and Mr Tse first met each other in the course of a golf course project undertaken by a Japanese corporation (“JGP”).  In around 1989, JGP intended to purchase agricultural land of about 12 million square feet in DD100 in Fanling for development into a golf course.  Mr Tse himself deposed that in mid 1989, he was introduced to Mr Tsang by one of the partners in L&B.  Mr Tse described JGP as Mr Tsang’s client.  There is no dispute that Mr Tsang was looking for consultancy services relating to the proposed golf course development.

8.  The contemporaneous documents show that in early August 1989, Mr Tse on behalf of L&B offered to assist JGP in making the necessary application to the government for change of land use and related consultancy services.  Following a visit to Hong Kong by its managing director during which he met with Mr Tse, JGP agreed to engage L&B on 1 September 1989.

9.  On 31 October 1989, JGP entered into an Engagement Agreement with Everglory Development Limited (Everglory”), a company owned and controlled by Mr Tsang (or Mr and Mrs Tsang, it matters not).  Pursuant to this Engagement Agreement, Everglory would assist JGP to acquire agricultural land in DD100 for the golf course project, and would receive what is described as a “consultancy fee”, initially set at $25 per square foot less the actual purchase price of the land.  It is not disputed that by around 1992, Everglory had made very substantial profit of around $240 million from this exercise.

10.  By a letter dated 16 January 1989, and signed by Mr Tsang on behalf of Everglory on 2 February 1990, Everglory retained L&B as its consultant in the acquisition of land and obtaining vacant possession for the golf course project.

11.  In around mid 1990, Mr Tse decided to resign from L&B to emigrate to Canada.  He landed in Canada in September 1990.  It is not entirely clear when did Mr Tse return to Hong Kong.  According to Mr Tse’s affidavit evidence, he was still residing in Vancouver in January 1992.

12.  In around August 1991, Mr Tsang asked Mr Tse to join a company called L T Property Consultants Limited (“LTP”).  Mr Tsang originally acquired LTP from others.  The circumstances under which Mr Tse joined LTP are in dispute, although that dispute has no direct relevance to the central issues in this case.  There is, however, no dispute that Mr Tse was in control of LTP’s business after he joined that company.

C. Barbican and its assets

13.  Barbican was incorporated in 7 August 1990.  It was acquired through a firm of solicitors (“YTL”) on or shortly before 21 September 1990 when YTL’s nominee companies, YTL Nominees Ltd (“YTL Nominees”) and YTL Secretaries Ltd (“YTL Secretaries”), became Barbican’s first directors. 

14.  From the records kept at the Companies Registry, Mr Tse, Mr Tsang and Mrs Tsang became directors of Barbican on 25 November 1991.  Other than during a short period from 23 April to 20 August 1992, Mr Tse remained a director of Barbican until he resigned on 8 September 2003.  Mr and Mrs Tsang remained and still are directors of Barbican.

15.  It is not clear when Mr Tse first became a shareholder of Barbican.  What can be seen from the Companies Registry records is that:

(a)	YTL Nominees and YTL Secretaries held the two subscriber shares upon Barbican’s acquisition in September 1990, although it cannot be ascertained on whose behalf they held these shares.
(b)	As at 31 December 1991, being the date of the first annual return filed by Barbican, 9,998 shares had been allotted and issued to Mr Tsang, Mrs Tsang and Mr Tse, but there is no evidence as to exactly when these shares were allotted.  The shareholding of Barbican as at 31 December 1991 was as follows:
	YTL Nominees – 1 share
	YTL Secretaries – 1 share
	Mr Tsang - 3,499 shares
	Mrs Tsang - 3,500 shares
	Mr Tse - 2,999 shares.
(c)	On 27 January 1992, YTL Secretaries transferred its 1 share to Mr Tsang, so that Mr Tsang held 3,500 shares.  On the same day, Mr Tse transferred 1,499 shares registered in his name to YTL Nominees and 1,500 shares to YTL Secretaries.  YTL Nominees in turn executed a declaration of trust declaring that it held 1,500 shares (ie. 1,499 shares plus the 1 share it already held) on trust for Mr Tse, while YTL Secretaries executed a declaration of trust declaring that it held 1,500 shares on trust for Mrs Tse.
(d)	On 15 September 1992, the two nominee companies transferred the 3,000 shares they held on trust for Mr and Mrs Tse to Catdave.  On the same day, Mr and Mrs Tsang transferred their 7,000 shares to Patkie.  That shareholding remains to this day.

16.  Thus it is reasonably clear that as at 31 December 1991, Mr Tse already owned beneficially 30% of Barbican’s issued shares.  The question is when did he become such shareholder.

17.  Between 1990 and 1993, Barbican acquired the following 5 properties  (which I will call individually “Property #1”, “Property #2” and so on, and collectively “the Properties”) without any mortgage financing:

	Property	Date of Acquisition	Consideration
1.	Lots 1719-1720 in DD100 and Tsui Kang House Lots 2-5 and 32 in DD100	29.09.90	$350,000
2.	Remaining Portion of Lot 51 in DD100	19.06.91	$26,136
3.	1 equal undivided 3rd part or share in Lot 3684 in DD91	13.12.91	$580,000
4.	Remaining Portion of Lot 1428 in DD100	15.01.93	$400,752
5.	Lots 492, 497 & 506 in DD94	13.12.93	$1,742,400

18.  In relation to Property #3, Barbican bought this property subject to existing letting and tenancies.  By a sale and purchase agreement dated 26 April 2006, Barbican (acting through Mr Tsang) contracted to sell Property #3 with vacant possession for $840,000.  It is Mr Tse’s case that in breach of the alleged shareholders agreement he had not been told of the sale, and it was the discovery of this sale which triggered him to present this Petition.  I was informed that the sale has been completed since commencement of these proceedings with the net proceeds kept in accordance with an order of the court made in another action.

19.  Barbican remains the sole registered owner of the other Properties.

D. Parties’ case in summary

20.  The parties have filed an Agreed List of Issues.  It is not necessary for me to set out that List here.  Suffice to say that the main issues fall into the following broad categories.

D(1)  Setting up of Barbican

21.  It is Mr Tse’s case that Barbican was set up as a quasi-partnership formed on the trust and confidence between him on the one hand and Mr and Mrs Tsang on the other.  Mr Tse’s case is that Barbican was at all material times a property holding company set up with the intention to purchase agricultural land in the New Territories for future sale to developers.  Mr Tse said in evidence that it was not intended that Barbican would itself engage in development of the land so acquired.

22.  It is further claimed that there was at all material times an agreement or understanding between Mr Tse and Mr Tsang that the shareholders would be entitled to share in Barbican’s profits and income derived from its properties in accordance with their respective shareholding, and that each shareholder was entitled to equal access to the company’s accounts and financial information.

23.  Mr Tse claimed that pursuant to the above agreement or understanding, Barbican acquired the Properties set out above.

24.  Mr Tsang, on the other hand, claimed that at the beginning, Barbican was his and Mrs Tsang’s company.  He said that in the course of the golf course project mentioned earlier, he became impressed by the ability and experience of Mr Tse in developing properties in the rural area.  Upon Mr Tse’s return to Hong Kong from Canada in the middle of 1991, Mr Tse suggested that Tsang should employ him to assist in the golf course project.  Mr Tsang was agreeable to that suggestion and Mr Tse was invited to become a shareholder in LTP, which Mr Tsang had set up with another investor.  It is said that in order to give Mr Tse more incentive to work hard for LTP, he was allotted one third of the shares in LTP.  Eventually, LTP took over the consultancy in the golf course project and Mr Tse became solely in control of LTP’s operations.

25.  Mr Tsang claimed that he was so confident in Mr Tse that he decided to appoint Mr Tse a director and bank signatory in his other companies, one of these being Barbican.  It was in those circumstances, said Mr Tsang, that Mr Tse was appointed a director of Barbican on 25  November 1991.

26.  Mr Tsang claimed that after Mr Tse had been appointed a director of Barbican, Mr Tse suggested to him that he (Mr Tse) should have 30% interest in Barbican in order to give him more incentive as in the case of LTP.  Mr Tsang was agreeable to that suggestion and Mr Tse was allotted 30% shareholder of Barbican.

27.  As to the acquisition of Barbican, Mr Tsang claimed that it was in the course of acquiring land for the golf course project that Mr Tsang came across some land not suitable for the project but which he wished to purchase for himself.  He testified that he was going to purchase Property #1 and instructed his solicitors, YTL, to acquire a shelf company to hold that property.  Barbican was thus acquired through YTL in September 1990.

28.  Originally, in his affidavit filed in opposition to the Petition, Mr Tsang said that it was on 27 January 1992 that he caused YTL Nominees and YTL Secretaries to transfer 3,000 shares in Barbican to Mr Tse.  This is clearly wrong because on that day, it was in fact Mr Tse who transferred 3,000 shares to YTL Nominees and YTL Secretaries as described above.

29.  In any case, Mr Tsang claimed that it was the understanding between himself and Mr Tse that Mr Tse was to share in 30% of the profits of Barbican only upon sale of the properties held in Barbican’s name, and that Mr Tse did not have any other interest in those properties or income derived from them.

D(2)  Beneficial ownership of properties purchased in Barbican’s name

30.  Mr Tse accused Mr Tsang of misappropriation of Barbican’s assets, in that Mr Tsang had all along collected the rental income of Property #3 without accounting the same to Barbican.  Further, Mr Tse claimed that prior to seeing the sale and purchase agreement entered into by Mr Tsang on behalf of Barbican, he did not know that Property #3 had been rented out.  He also relied on the sale of Property #3 without prior consultation with him.

31.  As stated above, Mr Tsang claimed that he had acquired Barbican for the purpose of holding properties purchased with funds coming from him or his wife.  In his affidavit, he claimed that the funds for purchasing the Properties came from Everglory.  He said that since all the Properties were in fact purchased with his funds, he was the beneficial owner of the Properties. 

32.  As to the rent from Property #3, since he regarded the Properties as beneficially owned by him, he had collected the rent himself and had not accounted the same to Barbican.  As to the sale of that property, Mr Tsang contended that he did not have to consult Mr Tsang.

D(3)  Management of Barbican

33.  It is Mr Tse’s case that all along, Mr Tsang was in charge of the management of Barbican.  However, it is said that Mr Tsang, in beach of the shareholders agreement, refused to allow Mr Tse access to Barbican’s accounts and documents. Mr Tsang complained that he had been kept in the dark about Barbican’s accounts and affairs, including the sale of Property #3.

34.  Mr Tse also complained that Mr Tsang had neglected his duties as director in filing tax returns and convening annual general meetings.  So much so that in May 1998 Barbican was fined $3,000 for failing to file tax returns.  Since then the situation had not improved, and fearing that he might attract personal liability for Barbican’s default, Mr Tse resigned as a director on 8 September 2003.

35.  Mr Tsang, on the other hand, claimed that he had entrusted Mr Tse with the running of Barbican (and his other companies), and that all of Barbican’s documents were with Mr Tse.  The failure to file tax returns or hold general meetings, at least before 2003, was due to Mr Tse’s failure to discharge his duties. 

36.  In relation to Mr Tse’s departure, Mr Tsang’s version is that Mr Tse had committed wrongful acts detrimental to Barbican and was no longer able to conceal such activities, hence he left to pursue his own business.

37.  As to the absence of any audited accounts after Mr Tse’s departure, Mr Tsang’s explanation is that he had consulted accountants and was told that there had to be “opening balances” in order to prepare the accounts after 2003 but since all the information was with Mr Tse and he was not co-operating, it is not possible to prepare the accounts.

38.  As for failure to convene annual general meetings, Mr Tsang’s affidavit evidence was that since Mr Tse’s resignation, Barbican was “crippled” for lack of quorum on its board.  In relation to this point Mr Tsang was clearly mistaken: Mrs Tsang had been a director of Barbican at all material times and there was no procedural impediment to convening or holding any annual meeting, although there would be no accounts to be laid before the meeting.

D(4)  $4 million loan to Everglory

39.  Mr Tse also relied on a Loan Agreement dated 20 August 1993 pursuant to which Barbican lent to Everglory a sum of $4 million with interest at the rate of 1% above prime per annum, repayable in one lump sum anytime upon written demand.  Mr Tse accused Mr Tsang of failing to cause Everglory to repay that loan to Barbican, thereby in breach of his fiduciary duties to Barbican.  Everglory was dissolved on 8 May 2001.

40.  Mr Tsang did not offer any positive answer to this claim.  In his affidavit evidence, he said he had no recollection of this loan and raised queries as to whether it was in fact a genuine loan.

E. Witnesses and credibility generally

41.  Before considering each of the main issued in detail, I would like to make the following general observations about the evidence.

42.  As is usual in the case of a petition of this kind, the evidence in support of and in opposition to the petition consists of affidavits, supplemented by oral evidence of the deponents (mainly cross-examination on their affidavits) at the trial.

43.  Regrettably, the affidavit evidence from both sides is far from complete.  This may be partly due to both side’s contention that the other side had possession or control of Barbican’s documents but have failed to produce them.  As a result of this impasse, neither side has produced Barbican’s accounts or documents.  There are some sporadic documents and occasional bank statements, but these only show a “snapshot” of a particular date or short period.  Overall there is very little information about Barbican available to the court.

44.  Moreover, the gaps in the affidavit evidence are not always attributable to the lack of documents.  Both Mr Tsang and Mr Tse during their oral evidence liberally referred to events which, if they were true, clearly could have been mentioned in their affidavits.  A good example of this is in relation to the source of funds for acquisition of the Properties. Another good example is in relation to the $4 million loan to Everglory. I shall have to refer to these matters later on in this judgment.

45.  In relation to the credibility of Mr Tse and Mr Tsang, having observed them in giving evidence and having considered their evidence in the round, I regret to say that neither of them impressed me as a reliable witness.  I have the distinct impression that I have only been told a very small part of a much bigger dispute between them.  I am unable to accept most of their evidence on the main issues.

46.  The upshot of all this is that it becomes impossible to resolve many disputes of fact purely on the basis of the conflicting evidence of Mr Tse and Mr Tsang.  In the end, I consider that I should focus on the main issues and have regard principally to the undisputed or indisputable contemporaneous documents and inherent probabilities in deciding what probably had happened in so far as I can do so.

47.  I will also record that both sides made a number of factual allegations concerning many aspects of their business relationship, such as what were referred to as the Hang Tau project and the Ho Chung project.  Counsel submitted that these “background facts”, hotly disputed, were advanced on the basis of relevance to credibility and to show loss of trust and confidence.  But loss of trust and confidence is not disputed.  As to credibility, I refuse to make findings of fact on these peripheral matters when all that I have are largely conflicting assertions from two unreliable witnesses.

F. Barbican’s setting up and shareholders agreement

48.  This is clearly the most important issue in this case.  However, both Mr Tse and Mr Tsang did not say much in their affidavits and were asked very few questions on it.

49.  A piece of evidence which would most probably assist in resolving this issue is the statute book of Barbican.  It is clear from the pre-action correspondence that at some stage the company kit including the statutory book had been kept by the company secretary and auditor, Messrs S L Poon & Co.  It would therefore be reasonable to expect that the statute book had been properly kept and would reveal when Mr Tse was allotted his 30% shares.

50.  The secretary resigned on 16 September 2003, shortly after Mr Tse’s resignation.  The company kit was then returned with some other documents to Barbican’s registered address, which was also the registered address of LTP.  Hence Mr Tse had possession of the company kit from about 18 September 2003 onwards.

51.  Nothing happened until 21 April 2006, when Barbican’s solicitors asked Mr Tse to return Barbican’s books and company kit.  Mr Tse, through his solicitors, returned the company kit to Barbican’s solicitors on or about 17 May 2006.  So from that time onwards, the Respondents have been in possession of the company kit.

52.  Nevertheless, the Respondents have not disclosed the statute book.  Nor had Mr Tse sought discovery of this important document. Whatever may be the reason for this omission, the court is deprived of this potentially very relevant evidence which is undoubtedly available.

53.  Doing the best I can on the available evidence, I find that Mr Tsang originally acquired Barbican in September 1990 to hold Property #1.  Mr Tse was later invited to join this enterprise, probably around the time when he was appointed a director in November 1991.

54.  I have come to these findings for the following reasons:

(1)	As is clear from the available contemporaneous documents, when YTL’s nominee companies were used to hold shares on trust for Mr Tse and Mrs Tse in January 1992, formal declarations of trust would be executed.  This would be normal when two or more business partners beneficially owned the company.  If Mr Tse were indeed a 30% shareholder of Barbican from the start, and YTL had been so instructed as claimed by Mr Tse during his oral evidence, I would expect YTL to arrange for the issue of appropriate number of shares very shortly after Barbican’s acquisition and prepare formal declarations of trust in relation to Mr Tsang’s and Mr Tse’s shares, or at least 1 of the subscriber shares beneficially owned by Mr Tse.  There is no evidence of any such declaration of trust in or around September 1990.  Thus the initial set up of Barbican is more consistent with it being a “one-owner” company, with YTL holding the 2 subscriber shares on behalf of a single client, Mr Tsang.
(2)	Further, if Barbican had been a quasi-partnership from the start, I cannot see any valid reason why Mr Tse was not appointed a director from the beginning.  The fact that he, Mr Tsang and Mrs Tsang became directors in November 1991 points to Mr Tse joining the company at or around that time, and since Mr Tsang was in the majority, he and Mrs Tsang also became directors so as to maintain their majority on the board.
(3)	Thirdly, Property #1 and Property #2 had been acquired in Barbican’s name by November 1991 when Mr Tse became a director.  As shall be seen in Section G(1) below, Mr Tse has not been able to adduce credible evidence as to how he had contributed to the acquisition costs of these properties.

55.  Turning to the shareholders agreement, I am unable to accept Mr Tsang’s version.  The understanding alleged by him, ie, that Mr Tse, despite being a full 30% shareholder of Barbican, would only be entitled to share in the profits arising from the sale of its properties, is in my judgment inherently improbable.  To achieve that result, all that was required would be a simple agreement that Mr Tse would be entitled to 30% profits made on resale of properties as part of his remuneration package.  In my judgment, it does not make sense to make Mr Tse a 30% shareholder, but circumscribe his shareholder’s rights in that way.

56.  There is also the fact that Mr Tse had given a joint and several guarantee dated 13 March 1993 in relation to a $4 million loan granted to Barbican (unrelated to the $4 million loan from Barbican to Everglory).  There is some dispute about the circumstances surrounding the grant of that loan to Barbican which I do not consider necessary to resolve, suffice to say that I reject Mr Tsang’s explanation as it is inconsistent with the joint and several guarantee executed by Mr Tse.

57.  On the other hand, I also reject the shareholders agreement as alleged by Mr Tse.  The effect of the shareholders agreement contended by Mr Tse is that although only a 30% shareholder, he had the right to veto any disposition of property by Barbican.  Such a right is a fundamental alteration to the ordinary rights and obligations of shareholders in a company.  I am unable to accept it without cogent evidence, which is singularly lacking.

58.  What I have no doubt about is that when Mr Tse joined Barbican it was on the basis of mutual trust and confidence between him and Mr Tsang.  To that extent, it can be said that Barbican was, as from the time Mr Tse became its 30% shareholder, a quasi-partnership between them.  Subject to that, Barbican’s articles of association and the general law would govern their respective rights and obligations.

G. The Properties

G(1)  Beneficial ownership of the Properties

59.  Mr Tsang claimed to be the sole beneficial owner of the Properties because he had solely provided the necessary funds through Everglory.  There is no dispute that the burden is on Mr Tsang to make good this claim.

60.  In an ordinary case of a shareholder in a private company providing working capital to the company to acquire assets, the shareholder does not thereby become the beneficial owner of the assets acquired by the company.  He, as shareholder, provides the working capital by way of shareholder’s loan so that the company owns the asset and in turn owes him the amount of capital provided.  This is a fundamental principle of company law.

61.  Clearly that was what happened in this case.  Property #1 and Property #2 had been acquired before Mr Tse joined Barbican in November 1991 and were probably purchased with funds coming from Mr Tsang.  However, Mr Tsang did not thereby become the beneficial owner of those properties.  Indeed, Mr Tsang himself recognised this legal and factual position when he signed the audited financial statements of Barbican as at 31 August 1992.  According to the balance sheet as at that date, the fixed assets of Barbican consisted of Properties #1 to #3, with a total book value of $968,750.  That was financed by shareholders’ loans of just over $1 million.

62.  I have already referred to Mr Tse’s personal guarantee for the $4 million loan to Barbican.  If Mr Tsang beneficially owned all the Properties, I cannot see any commercial reason for Mr Tse agreeing to take on such liability.

63.  I therefore have no hesitation in rejecting Mr Tsang’s assertion of beneficial ownership of the Properties.  Barbican is and was at all material times the beneficial owner of each of the Properties.

64.  At the same time, I am unable to accept Mr Tse’s evidence concerning his contribution to the acquisition of the Properties.  In Mr Tse’s affidavit evidence in answer to Mr Tsang’s claim that Mr Tsang had provided all the funds of Barbican, Mr Tse referred to and provided documentary evidence of four transfers of money to Barbican from companies in which he and Mr Tsang had interests.

65.  However, these transfers did not coincide in timing with the acquisition of any of the Properties.  One of these incoming transfers was for $2,250, which Mr Tse accepted was most probably for payment of Barbican’s business registration.  In relation to two of the other three transfers, the sums transferred into Barbican’s account were paid out the following day.

66.  Also, I take note of the fact that Mr Tse was able to produce the audited accounts of Barbican for the year ended 31 August 1993, but have failed to adduce any evidence to show that he had contributed to the shareholders loan of $1 million odd.

67.  Mr Tse in his oral evidence mentioned for the first time that the funds for acquiring the Properties came from other companies in which he and Mr Tsang had interests.  If that were the case, I find it most surprising that Mr Tse did not even mention it in his affidavits.  I am unable to accept that evidence.

68.  In the circumstances, I am not satisfied that Mr Tse had himself directly or indirectly contributed to the acquisition of Property #1 and Property #2.  On the basis of the evidence before me, I find that Mr Tsang had provided the funds for the acquisition of Property #1 and Property #2, but by way of shareholder’s loans to Barbican. 

69.  As to Properties #3 to #5, in the absence of any evidence to show the source of funds, the “default mode”, so to speak, must be that the shareholders have contributed to the cost of acquisition in accordance with their shareholding. 

G(2)  Rent from Property #3

70.  Property #3 is a flat on the 2nd floor and the roof of a very old building in Shek Wu Hui, Sheung Shui.  As mentioned above, Barbican acquired this property in December 1991 with tenancies.  The rent receipts available suggest that the rent from this property was around $30,000 a year.

71.  Mr Tsang did not dispute that he had collected the rent himself.  I have already rejected his explanation that he was the beneficial owner of this Property (and others).

72.  Mr Tsang said in evidence that out of the rents received, he had to make payments to maintain the building.  That evidence is plausible given the state of the building as seen in the photographs placed before me. Nevertheless, since this is Barbican’s property, he must account for the net amount of rent collected by him over the years, deducting any amount that he can show to have been spent on maintaining the property.

73.  Turning to Mr Tse, I do not accept his claim that he only knew in 2006 that Property #3 had been rented out.  This claim is inconsistent with the documentary evidence (see Section I below).  Further, as I have already mentioned above, Barbican acquired this property with tenancies; this was clearly stated in the assignment.  Mr Tse is totally silent on why, despite that clear statement in the assignment, he did not know that the property was tenanted.

74.  Taking all the evidence into account, it seems to me much more probable that Mr Tse did know that Mr Tsang had been collecting the rent over the years, but the rent was very modest and he was not concerned about it.

G(3)  Sale of Property #3

75.  Since I have rejected Mr Tse’s case on the shareholders’ agreement, he as a shareholder had no right to be consulted in relation to any proposed sale of Property #3.

76.  Mr Tsang, as a director, would be obliged to inform the shareholders of the affairs of Barbican, including the sale of any of the Properties, in annual general meetings.  I shall come back to this in a later section in this judgment.

H. $4 million Loan to Everglory

H(1)  Was it a loan?

77.  I can deal with this issue quite quickly.  The documentary evidence in support of this loan is all one way.  There is a loan agreement dated 20 August 1993 signed by Mr Tsang on behalf of Everglory.  There is also undisputed evidence that Everglory received the money.

78.  When faced with this claim, Mr Tsang’s only response was that he could not recall this loan, and queried why Everglory, which according to him had far more funds than Barbican, would need to borrow from Barbican. 

79.  In his oral evidence Mr Tsang even suggested that he might have been given only the signature page of the loan agreement to sign.  But he could not offer any reason why Mr Tse would have done that in 1993 when they were still on good terms.  Nor did he explain why this doubt had not been raised in his affidavits.  In any case, Mr Tsang fell short of advancing a positive case that his signatures on the loan agreement were forgeries.

80.  In my judgment, there can be no escape from the conclusion that this was a genuine loan to Everglory made in 1993.

H(2)  Failure to repay?

81.  Mr Tse’s case is that Mr Tsang had failed to cause Everglory to repay this loan to Barbican, and now that Everglory had been dissolved Barbican has suffered a loss as a result. 

82.  In his oral evidence Mr Tse explained that he specifically wanted to have documentary record of this loan because Mr Tsang had a habit of taking funds from Barbican.  If that were the case, I find it most puzzling why Mr Tse had allowed the loan to remain outstanding for so long.

83.  Also, Everglory was dissolved in 2001, before the breakdown in relationship between Mr Tse and Mr Tsang in 2003.  Mr Tse claimed in his oral evidence that he did not know that Everglory was dissolved in 2001.  I find that assertion incredible.  It is his own evidence that he and Mr Tsang had agreed that profits from their other projects would be paid into Everglory, and Everglory would transfer the funds to other business projects when needed.  It is scarcely possible for Mr Tse not to have noticed that this main depository of their profits no longer existed.

84.  Although the loan had been outstanding for almost 13 years by the time of the petition, Mr Tse had not made any written demand to Mr Tsang concerning the repayment of this loan.  Mr Tse claimed that he had asked Mr Tsang orally to make repayment on many occasions.  I do not accept that evidence.  It is in my judgment incredible that being so concerned about this loan as Mr Tse has alleged, he would simply resort to oral reminders to Mr Tsang for so many years.  There is, in any event, no reason for him to rely only on oral reminders after the breakdown of their relationship in 2003.

85.  I also take into account the fact that when in July 2001 Mr Tse prepared Barbican’s management profit and loss account and balance sheet for the year ended 31 August 1998, he did not include this loan.  Although Mr Tse (on his case) did not have the books of Barbican, he clearly had enough information to prepare the management accounts, which he certified to be true and correct to the best of his knowledge and belief.  If Mr Tse had been so concerned about this loan as he has suggested in the witness box, and the loan had remained outstanding, such omission is most surprising.  When asked why he had failed to include this loan in the accounts he had prepared, Mr Tse first said that he had also omitted to include one of the Properties without answering the question, and later on said that he had forgotten about it.  I am unable to accept that explanation.

86.  All in all, while I have no doubt that the loan was indeed made to Everglory, I am not satisfied that it had not been repaid as alleged by Mr Tse.

I. Failure to file company documents and convene general meetings

87.  The documentary evidence on this issue is clear.  On 20 May 1998, Barbican was fined $3,000 for failing to file tax returns.  On 27 July 2001, Mr Tse on behalf of Barbican filed a tax return for the year ending 31 August 1998.  He enclosed with this tax return the management profit and loss account and balance sheet prepared by him as mentioned above.

88.  In the balance sheet, Mr Tse inserted in the space for the other director’s signature the words “The other director cannot be contacted”. Despite this qualification, there is no suggestion that the accounts prepared by him were inaccurate.  Indeed, as mentioned above, he signed the balance sheet to certify that it was true and correct.  This evidence suggests that in fact he had sufficient information to enable him to prepare this set of accounts.

89.  In the management profit and loss account, Mr Tse stated that Barbican had no income for the year.  This is consistent with what he himself stated in the covering letter to the Inland Revenue Department.  In that letter Mr Tse stated:

“	I would like to advise you that I do not intentionally to violate section 51(1) of the Inland Revenue Ordinance for not filing 1998/1999 profit tax return on time.  Since, the company has acquired Lands in 1992 and 1993 and it became dormant up till now.”

90.  Thereafter on 21 December 2001, 2 May 2002 and 2 May 2003, Mr Tse on behalf of Barbican filed tax returns stating no income in the accounting years 2000/2001, 2001/2002 and 2002/2003 respectively.

91.  On 2 July 2003, the IRD wrote to Barbican at its registered address (the same address as LTP) stating that according to the Property Tax Return of Property #3, that property had been let during the year 2002/03 so that Barbican could not be regarded as having no income.  The Inland Revenue Department also requested information confirming the rental income, as well as audited accounts and other documentary information.  Mr Tse faxed the letter to Mr Tsang on 9 July 2003, writing on the letter: “Wilkie, Pls deal urgently.  Thx. David”. Mr Tse did not exhibit any surprise that Property #3 had been rented out.

92.  Thereafter, on 24 September 2003, Mr Tse sent a fax to Mr Tsang.  Mr Tse referred to his resignation on 8 September 2003 and attached for Mr Tsang’s attention two demand notes for rates in respect of Property #1 and Property #4, IRD’s letter dated 2 July 2003 and a follow up letter dated 11 September 2003.

93.  There is no evidence that Mr Tsang did anything in relation to the tax authority’s enquiries.

94.  Further, there is no dispute that other than the audited accounts for the year ended 31 August 1992 and the management accounts prepared by Mr Tse in July 2001, no other accounts of Barbican has been prepared and no annual general meeting of Barbican has been convened since Mr Tse’s resignation.

95.  In my view, the evidence indicates that both Mr Tse and Mr Tsang took what one may justifiably describe as a “relaxed attitude” towards Barbican’s compliance with statutory duties over the years.  Moreover, after Mr Tse’s resignation in September 2003, there was a distinct lack of any sign of concern on his part that no annual general meetings had been convened.  One can easily see why that was the case: Barbican had been dormant for years and there was no material change.

96.  Mr William Wong, counsel for the Petitioner, naturally placed emphasis on Mr Tsang’s erroneous claim that Barbican was “crippled” after Mr Tse’s resignation.  Mr Wong went so far as to submit that Mr Tsang deliberately lied to mislead the court.  I do not accept that submission.  There can be no doubt that Mr Tsang’s explanation is a bad one, but in my view it is an innocent mistake.  The fact that Mrs Tsang has always been a director of Barbican is easily ascertainable from the company registry records.  It is difficult to imagine that Mr Tsang would be so naïve as to put forward this excuse dishonestly when he would easily be exposed.  I accept Mr Tsang’s explanation that he had genuinely forgotten about his wife’s directorship as she had never taken any active part in the affairs of Barbican or their other companies, and he had not checked the company search records of Barbican before he made his affidavit.  Afterall, it would appear that even his legal representatives failed to check the company search records when they prepared Mr Tsang’s affidavit and had not drawn Mr Tsang’s attention to such a blatant error.

J. Winding-up on just and equitable ground

97.  In the light of my findings, I proceed to consider what relief, if any, should be granted.

98.  The primary relief sought is a winding-up order under the just and equitable ground.  It is contended by Mr Wong that any of the grounds set out in the Petition, if proved, would give jurisdiction to make a winding-up order.

99.  In my judgment, given my findings above, Mr Tse has failed to satisfy me that it would be just and equitable to wind-up Barbican. 

100.  On Mr Tse’s own case, Barbican is and has always been a property holding company and, in his own words, had been dormant for years.  There was no shareholders agreement as alleged by Mr Tse, and he had not been excluded from its management.  He did not raise any complaint or voice any concern over the lack of annual general meetings prior to his resignation in September 2003.  The $4 million Everglory loan is at best a very stale claim.  He was content to allow Mr Tsang to collect the rent from Property #3, which was relatively modest and parts of it might have been spent on maintaining the premises.  In any case, I do not believe Mr Tse did not know that Mr Tsang had been collecting the rent over the years.

101.  What remains is the failure to file corporate and tax returns, and the failure to convene annual general meetings after Mr Tse’s resignation in September 2003.  Mr Wong understandably made much of these failures.  This is, to my mind, the most troubling feature in the case.  Nevertheless, one must not lose sight of the fact that there has not been any material change in Barbican’s financial position since the acquisition of the Properties in the early 1990s.  Mr Tse himself said in 2001 that Barbican had been dormant, and nothing has changed since.  There has been no change in shareholding and directorship since 2003 so the annual returns would not have shown anything new.  And since Barbican had no active business, the financial statements would not have shown any significant differences over the years.  Mr Tse could have invoked his right as 30% shareholder to requisition a general meeting, but he has not shown any eagerness to do so.

102.  Accordingly, on the facts of this case, the failure to file corporate and tax returns, although in breach of statutory duties, have not caused any prejudice to Mr Tse as a shareholder.

103.  Similarly, in the circumstances of this case, the failure to convene annual general meetings since 2003, although regrettable and in breach of statutory duty, does not cause Mr Tse any real prejudice as a shareholder.

104.  In any case, these breaches could be remedied in the future and Mr Tsang and Mrs Tsang must ensure that Barbican will comply with its statutory duties in all respects.

105.  In my judgment, such failures are not so serious as to warrant winding-up Barbican.

106.  In his final submissions, Mr Wong placed reliance on the potential benefits of having a liquidator to investigate into whether Mr Tsang had committed other misfeasance or misconduct.  He based his submission on the scant evidence before me that there had been movements of funds into and out of Barbican as shown in some of the microfilm bank statements produced by Mr Tsang, and Mr Tsang’s failure to explain them.

107.  I firmly reject that submission.  First, the contention does not sit well with Mr Tse’s own case that Barbican was only a property holding company.  Further, given that Mr Tse and Mr Tsang clearly had many other businesses between them, it was not surprising that funds might have been channeled through Barbican.  These were all done while Mr Tse was a director and he made no complaint in the Petition about monies coming in and out of the company.  Secondly, and more importantly, no allegation of misappropriation or dissipation of assets (other than the rent of Property  #3) has been pleaded in the Petition.  It is not possible to say whether, if there had been a positive allegation of the kind with proper particulars, Mr Tsang would have no answer to it or could not have adduced evidence to rebut or explain it.  Thirdly, I was informed that shortly before the trial, Mr Tse made an application to amend the Petition to introduce a claim of dissipation of certain shares previously owned by Barbican.  Kwan J refused that application.  I consider that it would be wrong to order a winding-up to allow investigations into affairs which Mr Tse was not permitted to raise in the Petition itself.

108.  For these reasons, it is in my judgment neither fair nor just to make a winding-up order on the facts of this case.

K. Buy-out

109.  Both sides agree that the mutual trust and confidence previously existing between them have been lost.  However, that fact alone is not enough to allow the court to order the Respondents to buy-out the Petitioner’s shares at an undiscounted value.  The court must be satisfied that the affairs of the company are being or had been conducted unfairly and prejudicial to the interest of its shareholders before the jurisdiction to make such an order is triggered.  As Lord Hoffmann famously said in O’Neill v Philips [1999] 1 WLR 1092 at 1104C-1105B, s. 459 of the Companies Act 1985 (equivalent to s. 168A of the Ordinance) does not provide a statutory scheme for a “no-fault divorce” in quasi-partnerships.

110.  I also bear in mind that even though the conduct complained of may not render it just and equitable to wind-up the company, such conduct may still be unfairly prejudicial to the interests of the shareholders within the meaning of s. 168A.  Nevertheless, in the circumstances of this case, I am not satisfied that Mr Tse has established that Mr Tsang had conducted the affairs of Barbican in a manner unfairly prejudicial to Mr  Tse’s interests as a shareholder.

L. Result

111.  Accordingly, this Petition must be dismissed.  In doing so, I fully recognise that there may well be problems and probably conflicts between Mr Tsang and Mr Tse in the future.  It is very tempting to make an order to discontinue the relationship once and for all.  But it is not the function of the court to solve any potential future problems for the parties. They will have to find their own way to resolve their differences.

112.  As to costs, as I have largely rejected both side’s case, I think it would be fair that the parties should bear their own costs.  I therefore make an order nisi that there be no order as to costs.

113.  Finally, there is the question of the costs of legal representation on behalf of Barbican.  At the hearing of this trial, Barbican was represented by counsel and solicitors.  That was unusual because in shareholders disputes normally the company would not be separately represented.  Mr Louie Chan, counsel instructed to appear on behalf of Barbican, told me that he was instructed to keep a watching brief only.  Mr Chan informed me that the board, ie, Mr and Mrs Tsang, gave instructions to his solicitors.  In order not to waste time, I allowed Mr Chan to remain.  In the end Mr Chan did not take any active part in the hearing.  Hence, it is clear that Barbican should not have to bear any part of the costs of Mr Chan and his instructing solicitors.  It is up to his solicitors to seek reimbursement of those costs from those who gave instructions to them.