SEG INVESTMENT LTD v. SEG INTERNATIONAL SECURITIES (HK) LTD AND OTHERS

HCMP 4211/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4211 OF 2003

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J U D G M E N T

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Introduction

1.  This is a shareholders’ dispute in which the minority shareholder who had control of the board of directors of the 1^st Defendant (“the Board”) sought to put an end to the 1^st Defendant one day prior to a shareholders’ meeting when she knew she would be in imminent danger of losing her control over the Board, by procuring the Board to pass a directors’ resolution (“the Resolution”) to wind up the 1^st Defendant under section 228A of the Companies Ordinance, Cap 32. 

The parties

2.  The 1^st Defendant is a body corporate which carries on the business of securities brokerage.  It is a licensed corporation under Part V of the Securities and Futures Ordinance, Cap 571 of the Laws of Hong Kong.  Originally, the 2^nd Defendant and his wife, Ms Hsieh Ming Chu (“Ms Hsieh”) were the sole shareholders of the 1^st Defendant holding respectively 60% and 40% of its issued share capital.  In 1994, the 2^nd Defendant sold his entire shareholding to the Plaintiff.  Despite the sale, the 2^nd Defendant remained as a director of the 1^st Defendant and was in charge of its business operation.  In 1995, in order to comply with the share capital requirement imposed by the Securities and Futures Commission (“the SFC”), the Plaintiff injected additional capital into the 1^st Defendant.  Since then, the Plaintiff’s and Ms Hsieh’s respective shareholdings in the 1^st Defendant are 74.45% and 25.55%.  The additional capital was financed by a loan of $4 million from the Bank of China to SEG International Finance (H.K.) Limited (“SEG Finance”) guaranteed by Mr Wong Kong Yui Michel (“Mr Wong”).  Presumably SEG Finance is a subsidiary of the Plaintiff or of its parent company.

3.  The Plaintiff is a wholly own subsidiary of Hainan SEG International Trust & Investment Company in Hainan Province (“SEG Hainan”).  SEG Hainan went into liquidation on 6 November 2001.  A liquidation committee was appointed by the People’s Bank of China to take over the management of SEG Hainan including its interest in the 1^st Defendant through the Plaintiff.  Mr Wu Chen Feng (“Mr Wu”) and Mr Chum (“Mr Chum”) were the personnel in SEG Hainan or the People’s Bank of China responsible for the management of the Plaintiff and with whom the 2^nd Defendant liaised in connection with the affairs of the 1^st Defendant.  Prior to that, there had been seven to eight changes in the personnel in SEG Hainan who were responsible for the affairs of the Plaintiff.  On 17 June 2003, Ms Cheng Xiao Ling (“Ms Cheng”) came to Hong Kong to take over the responsibility of the Plaintiff with respect to the affairs in the 1^st Defendant.

4.  The 1^st Defendant’s Board consists of five directors.  Two were appointed by the Plaintiff, namely: a local director, Mr Wong and a mainland Chinese director, Mr Li Jian Min (“Mr Li”).  As Mr Li is resident in China, he never attended any meetings of the Board.  Mr Wong and Mr Li represented the interests of the Plaintiff and acted according to the instructions of the Plaintiff or the appropriate personnel in SEG Hainan who had responsibility for the Plaintiff.  The other three directors are the 2^nd, 3^rd and 4^th Defendants.  The 3^rd Defendant is the daughter of the Ms Hsieh and the 2^nd Defendant.  The 4^th Defendant was the accountant of the 1^st Defendant.  They represented the interest of Ms Hsieh.  Thus, Ms Hsieh had de facto control of the Board through the 2^nd, 3^rd and 4^th Defendants who in turn were in control of the operation of the 1^st Defendant before as well as after the Plaintiff acquired its shares.  Apart from Mr Wong, the Plaintiff’s account clerk, Ms Shum Sau Ling (“Ms Shum”) also worked in the 1^st Defendant’s accounts department.

5.  Since 2002, the Plaintiff and the 2^nd Defendant had been negotiating the sale of their shares to a third party.  On 17 June 2003, Ms Cheng came to Hong Kong with the authority to liaise in the sale of the Plaintiff’s shares to the 2^nd Defendant’s friends and son (“the Champion Group”) and the change of name of the 1^st Defendant in connection with the proposed sale.  She viewed the sale proposal with suspicion and was not well received by the Defendants.  The sale did not materialise.  At a Board meeting on 15 August 2003, the Plaintiff proposed to appoint additional directors from the Plaintiff’s side to the Board.  It was agreed that the appointment be considered in an extraordinary general meeting to be convened.  Subsequently, a meeting was convened to be held in Hainan on 29 August 2003.  On 26 August 2003, the 2^nd Defendant called for an urgent Board meeting to be held on 28 August 2003.  At the meeting, the 2^nd, 3^rd and 4^th Defendants resolved to wind up the 1^st Defendant and appointed a provisional liquidator.  Mr Wong did not attend that Board meeting.

The issues

6.  By these proceedings, the Plaintiff seeks:

(1)	a declaration that the Resolution is null, void and invalid;
(2)	a declaration that the purported appointment of provisional liquidator is null, void and invalid; and
(3)	an order that the purported winding up of the 1st Defendant is null, void and invalid.

7.  The issues raised in these proceedings are:

(1)	whether the meeting of the Board on 28 August 2003 had been properly convened with adequate notice to all the directors who were entitled to receive notice of the meeting;
(2)	whether the directors attending were entitled to vote at the meeting; and
(3)	whether the conditions under section 228A for the winding up of a company were satisfied.

the law

Notice of directors meeting

8.  The starting point to look for the rules and regulations governing proceedings of directors is the articles of association of the company and Table A of the Companies Ordinance.  Like most articles of association, Article 1 of the 1^st Defendant’s articles of association (“the Articles”) expressly adopted Table A “save in so far as they are hereby expressly excluded or modified.”  Article 11 of the Articles and Article 100 of Table A are relevant.  These two articles provide as follow:

“Article 11 of the Articles:

 The directors may meet together for the dispatch of business, adjourn and otherwise regulate their Meetings as they think fit and determine the quorum necessary for the transaction of business.  Until otherwise determined, two Directors shall constitute a quorum.”

“Article 100 of Table A:

The directors may meet together for the despatch of business, adjourn, and otherwise regulate their meetings, as they think fit.  Questions arising at any meeting shall be decided by a majority of votes.  In case of an equality of votes, the chairman shall have a second or casting vote.  A director may, and the secretary on the requisition of a director shall, at any time summon a meeting of the directors.  It shall not be necessary to give notice of a meeting of directors to any director for the time being absent from Hong Kong.”

9.  Initially, Mr William Wong, counsel for the Plaintiff, argued that Article 100 of Table A had been excluded by Article 11 of the Articles and as one of the directors resident in China, Mr Li, had not been given notice of the meeting the Resolution passed at the meeting was invalid.  Subsequently he abandoned that argument.  His argument was premised on the fact that the majority shareholder is a mainland party, hence Article 100 of Table A must be impliedly excluded to give business efficacy to the Articles.  That argument must fail for two reasons.  Firstly, by virtue of Article 1 of the Articles, Table A is adopted unless expressly excluded or modified.  Article 11 is written in unequivocal terms and nothing needs to be added to give meaning to that article.  There is no room for implication under the principle of business efficacy.  Secondly, as a matter of interpretation of document, the meaning of a document is to be found by asking what meaning the document conveys to a reasonable reader with knowledge of the factual matrix at the time of making of the document.  The factual matrix was that at the time of incorporation of the 1^st Defendant when its shares were held by the 2^nd Defendant and his wife, Ms Hsieh, who were and are resident in Hong Kong and not that at the time the Plaintiff acquired the shares from the 2^nd Defendant.  This destroys the entire basis of Mr William Wong’s argument. 

10.  The Articles and Table A are silent as to the formal requirements of an adequate notice, such as the length of the notice, the information as to the nature of the business to be transacted and whether such notice must be in writing.  Unlike shareholders, directors are agents of the company who have to deal with the day to day affairs of the company as and when they arise.  They may have to make urgent decisions which are within their authority to make.  A company cannot function if there are stringent rules as to the formal requirements of notice of any directors meeting.  Thus unless the articles of association requires otherwise, notice of a board meeting may be given orally: see Browne v La Trinidad (1887) 37 Ch D 1.  The notice may be a very short one, but it must be given a reasonable time before the meeting to enable the director to whom the notice is given to attend: see Broadview Commodities Pte Ltd v Broadview Finance Ltd [1983] HKLR 384, [1983]2 HKC 578 and Browne v La Trinidad (1887) 37 Ch D 1.  Unless the articles of association provides otherwise, there is no need to state the business to be transacted at the meeting: see La Compagnie de Mayville v Whitley [1896] 1 Ch 788.

11.  However, the absence of any provision in the articles of association as to the formal requirements of a notice does not mean the majority directors may conduct the proceedings capriciously or arbitrarily.  Directors are agents of the company, they act in the interest of the company and less in the interest of those whom they represent or those who appointed them.  The purpose of a notice is to enable directors to attend the meeting so that the company may have the benefit of receiving the collective wisdom and contribution of all directors before deciding its action.  The overriding principle is that such notice must be reasonable in all the circumstances. 

12.  So far as the length of the notice is concerned, short as it may be, it must be such as would allow the recipient adequate time to present himself at the meeting, otherwise the purpose of the notice is defeated.  However, this is not an inflexible rule.  What is reasonable depends on all the circumstances.  If there are pressing decisions which cannot be delayed until all directors are available, the board would have to hold a meeting at such short notice as would enable as many directors as possible to attend without risking the consequence any failure to take prompt action may cause.

13.  The general rule that it is not necessary to state in the notice the nature of the business to be transacted at the meeting is also not an inflexible rule.  It is also subject to the overriding consideration of reasonableness in all the circumstances.  It is not a rule without qualification.  If it were, some directors at a meeting may, upon finding it opportune to do so, pass any resolution which they know would not be passed had other directors been present at the meeting.  That could not be right.  The result would be a state of anarchy.  In my view, that rule only applies where the business to be transacted are the ordinary business of the company.  If there are important or extraordinary business which is proposed to be transacted at the meeting, some notice of the nature of the business to be transacted must be given.  As I said in The Grande Properties Management Limited and Sun Wah Ornament Manufactory Limited HCA 4741/2001, it is a cardinal principle in the law of meetings that notice of meeting must be sufficiently detailed to enable a member who knows nothing of the matter to decide whether he needs to attend the meeting, or whether he can safely let the resolution be passed without further inquiry.  Adapting that principle to a board meeting, the principle is that the more important is the business to be transacted, the greater is the need to state the nature of the business to be transacted in the notice.

14.  If the business to be transacted is one which would put the life of the company at stake, at least some details of the nature of the business must be stated in the notice.  A decision to wind up a company is an extremely important decision.  It is possibly the last decision a director would have to make for the company.  It has the effect of putting an end to the company’s existence.  It has the same effect as a special resolution which has to be passed by a majority of not less than three-fourths of the members who are entitled to vote and do vote in person or by proxy at a general meeting of which not less than twenty-one days’ notice specifying the intention to propose the resolution as a special resolution has been duly given.  If the law provides such safeguards in the case of a members voluntary winding up under section 228 so that the members shall be given twenty-one days’ written notice specifying the intention to propose the resolution as a special resolution, it cannot be the law that such safeguards should be dispensed with wholly where the directors are called upon to make a decision of such import.   Furthermore, putting it very crudely, before putting an end to itself and without itself making that decision, the company is entitled to receive the benefit of the collective wisdom of its directors.  The company will be deprived of that benefit, if its directors are not informed of the nature of the decision they are called upon to make on behalf of the company and decide whether to attend the meeting. I am therefore of the view that at least where it is proposed to pass a resolution at a directors meeting to wind up the company pursuant to section 228A, notice of the proposal to wind up the company must be given, otherwise the notice of the meeting is inadequate.

The conditions for winding up under section 228A

15.  Section 228A of the Companies Ordinance provides:

  “(1)   The directors of a company or, in the case of a company having more than 2 directors, the majority of the directors, may, if they have formed the opinion that the company cannot by reason of its liabilities continue its business, resolve at a meeting of the directors and deliver to the Registrar a statutory declaration by one of the directors verifying written statements signed by the directors recording the resolution that-

(a)	the company cannot by reason of its liabilities continue its business; and
(b)	subject to subsection (1B), they consider it necessary that the company be wound up and that the winding up should be commenced under this section because it is not reasonably practicable for the winding up to be commenced under another section of this Ordinance; and
(c)	meetings of the company and of its creditors will be summoned for a date not later than 28 days after the delivery of the declaration to the Registrar.

(1A)  A statutory declaration made under subsection (1) shall have no effect for the purposes of this Ordinance unless it is delivered to the Registrar for registration within 7 days after the date on which it was made.

(1B)  The resolution referred to in subsection (1) shall specify the reasons in support of the consideration mentioned in paragraph (b) of that subsection.

16.  This section may be invoked if the directors formed the opinion that the company cannot by reason of its liabilities continue its business.  Then the directors may call for a board meeting.  The company may be wound up, if at the meeting it is resolved that (a) the company cannot by reason of its liability continue its business; (b) the directors consider it necessary that the company be wound up but it is not reasonably practicable for the winding up to be commenced under another section of the Companies Ordinance and (c) meetings of the company and of its creditors will be summoned for a date not later than 28 days after the delivery of a statutory declaration by one of the directors verifying the above resolutions to the Registrar of Companies.  The winding up shall commence at the time of the delivery of the statutory declaration without any order of the court: section 228A(3)(a).  There is no provision which would enable a shareholder to challenge the directors’ decision at the meeting of the company so summoned or at any other stage, except by legal proceedings of this kind.  The only sanction available under the Companies Ordinance is by way of prosecution of the director who made the declaration for making the declaration without reasonable grounds: section 228A(2).

17.  The circumstances in which such procedure may be invoked are (a) the directors must be of the opinion that the company cannot by reason of its liabilities continue its business; (b) the directors consider it necessary that the company be wound up and (c) the directors consider it not reasonably practicable for the winding up to be commenced under another section of the Companies Ordinance.  So far as the first and second conditions are concerned, the test is subjective.  It is the opinion of the directors that counts.  As for the third condition, the test includes both a subjective and an objective element.  The directors must be of the opinion based on reasonable grounds that any other modes of winding up is not practicable.  As with any subjective opinion or intention, it may be tested against objective facts.  If on an objective view, the opinion of the director is so bizarre that no reasonable person would have formed, it casts doubts if the opinion is genuinely held.

18.  The words “reasonably practicable” were considered by Rogers J (as he then was) in Bozell Asia (Holding) Ltd and CAL International Ltd & Another [1997] HKLRD 1.   He held that these words mean impractical if not impossible.  He said at page 10:  

  “In the present circumstances I consider that there is no doubt that the view could properly have been formed by the directors that the Company should be wound up. However, I consider that there are perhaps reasons for doubting the accuracy of the conclusion that there were good and sufficient reasons for the use of Section 228A rather than one or other of the provisions for winding up including Section 177 and Section 228. From its reference to good and sufficient reasons, Section 228A appears to envisage circumstances which make it impractical if not impossible to use one of the other provisions. I bear in mind that Section 228A is directed to powers and obligations of directors, whereas Section 177 is, of course, a provision which applies to creditors' rights to seek a winding up and Section 228 relates to powers of the company in general meeting. For practical purposes in the present case the distinction between the entities may be immaterial. In the present circumstances I doubt that there was sufficient reason which required the use of Section 228A rather than Section 177 (or perhaps 228). Given the provisions of the shareholders' agreement and the requirement for some consensus in relation to a voluntary winding up it seems to me that some urgency ought to be shown before it could be said that there are good and sufficient reasons to use the shorter and simpler route in circumstances where there could be expected to be disagreement.”

19.  I respectfully adopt those views.  This mode of winding up may only be invoked if other modes of winding up under any other provisions of the Companies Ordinance is impracticable if not impossible.  In addition, I would say this.  Section 228A is a draconian section.  It empowers the directors of a company to wind up the company without giving its shareholders or creditors the chance to be heard and the usual safeguards of winding up under any other provisions of the Companies Ordinance.  It is a form of members voluntary winding up, but the members are deprived of their right to determine the future of their company and the safeguards to have the decision to wind up approved by a three-fourth majority of the shareholders at an extraordinary general meeting of the company in a winding up under section 228.  Wherever possible, the decision to wind up should be left to the company in general meeting convened specially for the purpose of deciding that important matter.  Furthermore, it cannot be overlooked that directors are agents of the company only.  It is not up to the agents to decide to put an end to the existence of the principal to whom the agents owe their authority.  I am, therefore, of the opinion that the special procedure for winding up under section 228A is not an alternative procedure to winding up.  It is not to be invoked at will or arbitrarily.  It is not a choice of convenience.  It is an escape when any other modes of winding up under the Companies Ordinance is impracticable if not impossible. 

20.  It may not be difficult to think of circumstances of impossibility.  A deadlock, for example, is an impossibility.  If is impossible to hold a general meeting because of lack of quorum or for any other cause or to pass a special resolution to wind up the company because the parties are at deadlock, it would be an appropriate case for the directors to invoke section 228A to put an end to the company which cannot continue its business by reason of its liabilities.  What is impracticable is incapable of definition.  But in my view, it seems there must be an element of urgency, the circumstances must be so urgent that the decision cannot wait for a general meeting to be convened so that a special resolution to wind up the company may be passed or at least for the matter to be ventilated.  For example, the company will suffer irreparable damage if the commencement of winding up is delayed.  If it is not a case of impossibility, the situation must be so urgent that the company cannot wait even for twenty-one days for a meeting to be convened so that the company itself can make this important decision by way of a special resolution.

21.  The burden of proof is on the directors to justify invoking the section.  It is mandatory for a winding up under Section 228A(1) that one of the directors shall deliver to the Registrar of Companies a statutory declaration verifying the written statements signed by the directors recording the resolution.  Section 228A(1B) requires that the resolution shall specify the reasons in support of the directors’ opinion that they consider it necessary that the company be wound up and the winding up be commenced under section 228A because it is not reasonably practical for it to be commenced under another section of the Ordinance.  The reasons stated therein are the reasons on which the directors’ opinion is based.  Thus, on a challenge of the validity of the winding up under this section or the validity of the resolution, if the directors fail to prove those reasons, the inference could be drawn that their opinion was not genuinely held.

22.  In Bozell Asia (Holding) Ltd and CAL International Ltd & Another [1997] HKLRD 1, while acknowledging that there are no provisions under the Companies Ordinance which enable the application of the section to be challenged, Rogers J held that the court has power to stay a winding up if it should be shown that the section has been abused or misused.  I think the present case presents an occasion where I can take a step further to hold that the court has inherent jurisdiction to declare a resolution purportedly passed for the purpose of section 228A void and of no effect if the resolution has been vitiated by fraud, misrepresentation, duress or if the directors who passed the resolution did not genuinely hold the opinion that the resolution should be passed.  In such circumstances, the directors were practising a fraud on the company and were in breach of their fiduciary duty.  The company should be restored to the same position as if no resolution had been passed.  Therefore, such winding up, if commenced, are void ab initio as the resolution should never have been passed.  However, in the absence of such vitiating factors, if the directors were genuinely of the opinion that the company should be wound up, even though that was a wrong decision, the company is bound by the act of its directors.  The resolution is valid.

the facts

23.  Having set out the law, I now turn to the facts. The parties raised a lot of factual issues, most of which are irrelevant or unnecessary for the purpose of these proceedings or incapable of being determined in proceedings of this nature.  Most of the evidence are incontrovertible as having been documented.  Most of the Board meetings were held in the presence of Mr Wong who is the representative of the Plaintiff and he also signed the minutes of the meetings.  I shall set out the general background and then the immediate events leading to the passing of the Resolution.  Before that, I shall state my views on the credibility of the witnesses.  But, in view of the above, the issue of credibility only assumed significance in respect of the events since 20 August 2003 and specifically in respect of the content of the notice of the Board meeting on 28 August 2003 given by the 2^nd Defendant to Mr Wong.

Credibility of the witnesses

24.  Two witnesses were called by the Plaintiff, Mr Wong and Ms Cheng, while the 2^nd and 4^th Defendants also gave evidence.  Mr Wong had a long working relationship with the Defendants.  He appeared to be sympathetic with the Defendants.  He agreed with most of the suggestions put to him by the Defendants in cross-examination, save as regards the derogatory remarks which he allegedly made against Ms Cheng and as regards the notice of the Board meeting held on 28 August 2003.  I believe he made those remarks, but this finding is of no relevance.  It is understandable that he did not wish to appear impudent to Ms Cheng who is the representative of the parent company of his employer and who was sitting in court listening to his evidence.  I do not consider his denial seriously damaged his credibility. Mr Wong has a personal interest in this action.  He is the guarantor of a $4 million loan to SEG Finance and it is most likely that he will be called upon to repay this loan should the 1^st Defendant be placed in liquidation.  This might put him in bankruptcy.  He would probably be better off if he sided with the Plaintiff.  He also attempted to procure the signatures of the Defendants on a resolution purporting to be made on 20 August 2003 which in fact had not been made.  He appeared to be evasive in respect of that incident.  He was shown to have been dishonest in misrepresenting to the provisional liquidator that the sum of $30,000 he received from the 1^st Defendant was director’s fees when it was shown that the payments were advances made to him in April, May and June 2003 when he was not paid any salary and for which he signed loan receipts.  He also misrepresented to the SFC that the Plaintiff was not in any way related to SEG Hainan when in fact it was the Plaintiff’s parent company.  However, having regard to all these and having warned myself of the need for caution in acting on his evidence, upon a full analysis of the evidence, I consider his evidence on the crucial issue about the notice of the Board meeting on 28 August 2003 credible.  I accept most of his evidence.

25.  Ms Cheng also agreed with a lot of the suggestions put to her by the 2^nd Defendant, though she viewed the balance sheets and the proposed sale of the Plaintiff’s shares in the 1^st Defendant with suspicion.  She failed to appreciate the true financial position of the 1^st Defendant and demonstrated an ignorance of the companies laws and practice in Hong Kong.  She harboured a serious misunderstanding about the 1^st Defendant’s suspension of its trading in the Hong Kong Exchange as a result of which she over-reacted by making enquiries with the SFC.  But these do not damage her credibility.  She caused Mr Wu, Mr Wen Pei Dong (“Mr Wen”) and herself to be registered with the Companies Registry as directors of the 1^st Defendant on 20 August 2003 with the knowledge that the resolution of the Board purporting to make the appointment had not been properly passed and that their appointment still awaited approval from the shareholders meeting to be held on 29 August 2003.  This impacted on her honesty and showed the attitude of the Plaintiff generally.  But that has no bearing on the material facts on which the present application depend.  Save the above, I consider Ms Cheng on the whole a credible witness.  But her evidence is of no assistance to the Plaintiff.

26.  The 2^nd Defendant’s evidence is largely supported by contemporaneous documents in respect of events up to 20 August 2003.  Save for matters relating to the proposed sale of the shares in the 1^st Defendant to the Champion Group and the capital injection made by that group to the 1^st Defendant, I accept his evidence in respect of events up to 20 August 2003.  Thereafter, I have grave reservation on his credibility and on his motive in calling for the Board meeting on 28 August 2003.  I reject his evidence about the notice of the Board meeting on 28 August 2003 as his evidence is inconsistent with the contemporaneous document and is very suspicious in the light of the contemporaneous events.  He was extremely evasive in his evidence regarding the capital injection by the Champion Group.  He was actively involved in the negotiation of the sale and capital injection but was unable to explain how the capital injection was treated in the accounts of the 1^st Defendant.  I do not accept that part of his evidence. 

27.  The 4^th Defendant’s evidence was mainly about his treatment of the 1^st Defendant’s accounts.  His explanation about his treatment of shareholder’s loans in the accounts is dubious.  The account he prepared was misleading.  His evidence that Ms Hsieh obtained the capital injection from the Champion Group to enable the 1^st Defendant to meet the Financial Resources Rules (“the FRR”) requirement is not supported by documentary evidence or ledgers or pay-in slips.  He changed his evidence in respect of a loan of $2,000,000 by Ms Hsieh to the 1^st Defendant by conveniently saying it was made in his name and that of the sister of the 2^nd Defendant.  His involvement with these loans is intricate and dubious.  I do not believe in his evidence.  He is a puppet of the 2^nd Defendant and Ms Hsieh. 

The general background

28.  I shall first set out the general background and then consider the specific events leading to the passing of the Resolution.  

29.  It appears that since 2002, the 1^st Defendant developed financial or at least liquidity problem.  It was not disputed that as early as October 2002, the 2^nd Defendant had proposed to Mr Wang Hoi Ting and Mr Yam Chun Kit of the Plaintiff or of SEG Hainan who were then responsible for the affairs of the Plaintiff to sell the Plaintiff’s shares in the 1^st Defendant.  It was agreed at the meeting of December 2002, inter alia, that Ms Hsieh or her nominee was to be responsible for negotiation with potential buyers, that the Plaintiff would not obstruct the daily operation of the 1^st Defendant or interfere with the negotiations and Ms Shum would be the Plaintiff’s representation in supervising the 1^st Defendant.  The minute of this meeting was signed by Mr Wu, Mr Wong and Ms Shum of the Plaintiff.  There were further meetings in December 2002 and March 2003 between Mr Wu, Mr Wong and Ms Shum of the Plaintiff and the 2^nd Defendant.

30.  It appeared that in the meantime the financial position of the 1^st Defendant was aggravated by the Kwan Loy incident.  Two of the 1^st Defendant’s clients bought substantial quantities of shares in Kwan Loy (stock number 396), the trading of which was subsequently suspended.  The two clients were unable to pay while the shares could not be sold.  The 1^st Defendant became liable to vendors of these shares to the tune of $2 million.  It is noted in the minute of a Board meeting on 2 June 2003 that the 2^nd Defendant informed Mr Wong and Ms Shum that as a result of the Kwan Loy incident, the 1^st Defendant failed to comply with the FRR as regards liquid capital requirement.  The Kwan Loy incident and its impact on the financial position of the Plaintiff is beyond dispute.

31.  On 2 May 2003, the 2^nd Defendant proposed a sale of the Plaintiff’s and Ms Hsieh’s shares to the Champion Group comprising of the 2^nd Defendant’s friends and relative who in fact is his son.  The 2^nd Defendant applied to the Hong Kong Exchange and Clearing Limited for the change of the name of the 1^st Defendant.  The application was approved on 27 May 2003.  I shall deal with this proposed sale separately.  Suffice it is in the present context to say the sale of the Plaintiff’s shares in the 1^st Defendant had been on the agenda at the material time.

32.  It was at this stage that Ms Cheng entered the scene.  She was specifically authorised to be responsible for the liaison in connection with the change of name of the 1^st Defendant and the sale of the Plaintiff’s shares.  She was given the three balance sheets of the 1^st Defendant as at 31 May 2003 each showing a different net asset value of $14,749,122, $16,611,864 and $15,311,864.  Apparently, she viewed everything with suspicion and appeared to be inquisitive.  Ms Cheng found the proposed sale unacceptable to the Plaintiff because in effect the Plaintiff would only receive $800,000 in a year for selling its shares.  She also felt suspicious about the sale as the proposed purchasers are friends and the son of the 2^nd Defendant.  It is neither necessary nor possible for me to consider the propriety of the proposed sale and whether the price offered represented the true market value.  It is sufficient for the purpose of these proceedings to set out the proposed sale between the 2^nd Defendant and the Plaintiff as part of the background. 

33.  Ms Cheng was not well received by the Defendants and probably not well received by Mr Wong who represented the Plaintiff’s interest.  Mr Wong passed disparaging remarks about Ms Cheng in his conversations with the 2^nd to 4^th Defendants.  The 2^nd Defendant and Ms Hsieh made complaints against Ms Cheng to Mr Wu who is her senior officer.  There was a clear breakdown of working relationship and trust between the Plaintiff and the 2^nd Defendant. 

34.  The 2^nd Defendant thought Ms Cheng was suspicious and ignorant about securities trading and upset the good working relationship between the Plaintiff and the 1^st Defendant.  Accordingly on 18 June 2003, i.e. the next day following Ms Cheng’s arrival, Ms Hsieh sent a fax to the Plaintiff reminding the Plaintiff of its undertaking to provide $10 million overdraft facilities, its undertaking to inject additional funds into the 1^st Defendant and requested the Plaintiff not to change their representatives or liaison personnel too frequently.  On 20 June 2003, the 2^nd Defendant followed up with another fax to the Plaintiff attempting to clarify the Plaintiff’s misunderstanding about the proposal to change the name of the 1^st Defendant and reminded the Plaintiff that the loan of $4 million from the Bank of China to SEG Finance was made for the purpose of financing the Plaintiff’s increased shareholding in the 1^st Defendant.  He reminded the Plaintiff the urgent need to provide funds to enable the 1^st Defendant to meet the FRR requirement, to deal with the loan from the Bank of China and to clarify its intention about the sale of its shares.

35.  No reply was received from the Plaintiff.  On 23 June 2003, Ms Hsieh sent another fax to the Plaintiff suggesting that Ms Cheng’s arrival had affected their working relationship and requested a meeting on 25 or 26 June 2003 to discuss the proposals of both sides including cessation of business of the 1^st Defendant.  No meeting was held but Ms Hsieh had a telephone conversation with Mr Wu on 26 June 2003.  On 27 June 2003, Ms Hsieh sent another fax to the Plaintiff proposing three options for resolving the problem facing the 1^st Defendant, including two sale proposals and the third option of cessation of business.  In his evidence, the 2^nd Defendant said the third option was winding up, but this is not what was recorded in the fax. 

36.  On 30 June 2003, the 2^nd Defendant went with Mr Wong to Hainan to have a meeting with Mr Wu.  After the meeting, the 2^nd Defendant sent a fax to the Plaintiff summarising the main points of the discussion at the meeting.  According to the fax, Mr Wu had requested (i) evidence that the $4 million loan from the Bank of China was indeed used to finance the Plaintiff’s acquisition of the shares in the 1^st Defendant; (ii) information on the amount of funds withdrawn by the Plaintiff and Ms Hsieh and the purpose of the withdrawal and (iii) the discrepancies between the net asset as reported in the books of $14,749,124 and the actual value of $1,100,000 and information about the value of the licence.  Then the 2^nd Defendant repeated the difficulties he had in operating the 1^st Defendant and the Plaintiff’s misunderstanding.  Lastly, he repeated the proposal to the Plaintiff to sell its shares in the 1^st Defendant for $2,684,063.  It is not entirely clear what was the precise consideration offered to the Plaintiff.  At least a sum of $684,063 was by way of set off.  A sum of $1,000,000 would be received by the Plaintiff, but it also appeared that this sum was to be paid to settle part of the loan owing by SEG Finance to the Bank of China, leaving the outstanding loan of $3 million to be resolved by further consultation.  It is convenient to note here that Ms Cheng’s evidence that the effect of the sale is that the Plaintiff would receive nothing or $800,000 after a year is roughly correct.  The other option was to cease business.  Again, the 2^nd Defendant said he meant winding up the 1^st Defendant, but this is not supported by the language used in his fax.  Understandably, the proposed sale was not acceptable to Ms Cheng or the Plaintiff.

 Suspension of trading of the 1^st Defendant and Ms Cheng’s enquiry with the SFC

37.  Apparently, no financing was forthcoming from the meeting with Mr Wu on 30 June 2003.  The Plaintiff’s attitude towards the proposed sale seemed to have changed.  Instead of working on the sale, the Plaintiff queried the financial position of the 1^st Defendant. 

38.  On 8 July 2003, the 2^nd Defendant had a meeting with officers of the Hong Kong Exchange to discuss the liquidity problem of the 1^st Defendant.  On 21 July 2003, at a Board meeting attended by Mr Wong and the 2^nd and 4^th Defendant, the Board resolved it could not meet the FRR requirement and had to report the situation to the SFC.  It also noted in the minute that the 2^nd and 4^th Defendant mentioned for the first time that Ms Hsieh had persuaded the Champion Group to inject funds into the 1^st Defendant to meet the FRR requirement and that these funds must be returned if the 1^st Defendant suspended trading.  It should be noted that apart from this minute, the capital injection was not documented.  I shall deal with this aspect of the Defendants’ case separately.  Suffice it is to say in the present context, I am not satisfied that there was such capital injection into the 1^st Defendant.

39.  Returning to the present issue, at a Board meeting on 24 July 2003 attended by Mr Wong, Ms Shum, the 2^nd and 4^th Defendant, the Board resolved to inform the SFC that the 1^st Defendant would suspend trading from 1 August 2003 until 30 August 2003.  On the same day, the 2^nd Defendant wrote to the Hong Kong Exchange and Clearing Limited and SFC informing them of the suspension for the purpose of carrying out a reorganisation of the 1^st Defendant.

40.  According to Ms Cheng, she was informed by Mr Wu that the SFC ordered the 1^st Defendant to suspend trading in the Hong Kong Exchange.  Mr Wu sent her a fax copy of a letter from the SFC acknowledging the 1^st Defendant’s letter dated 24 July 2003 informing the Hong Kong Stock Exchange of its intention to suspend trading.  Obviously, both Mr Wu and Ms Cheng had become nervous and misunderstood the letter.  There was also a break of communication between Ms Cheng and Mr Wong.  Without making any enquiries from Mr Wong, or Ms Shum or any of the Defendants, Ms Cheng went to make enquiries with the SFC on 20 August 2003.  She was then informed it was a voluntary suspension.

41.  On 21 August 2003, two staff of the SFC carried out some investigation in the 1^st Defendant’s office.  They discovered that Ms Hsieh had withdrawn $2,100,000 from the account of the 1^st Defendant and that the 1^st Defendant failed to meet the FRR requirement as to liquid capital which only stood at $0.8 million. 

Further negotiations for sale of the Plaintiff’s shares in the 1^st Defendant

42.  I now turn to the further negotiations in respect of the sale of the Plaintiff’s shares in the 1^st Defendant.  It should be recalled that the 2^nd Defendant had negotiated for a sale of the Plaintiff’s and Ms Hsieh’s shares to his friends and his son.  As can be seen from the 2^nd Defendant’s fax dated 2 July 2003, the Plaintiff would receive little from the sale because of its indebtedness to the 1^st Defendant.  Without commenting whether the offer represented a fair market price, it is suffice to say Ms Cheng considered the sale not acceptable.  However, the 2^nd Defendant had been pressing for the sale of the Plaintiff’s shares in the 1^st Defendant.  He went to the stage of seeking approval from the Hong Kong Exchange and Clearing Limited for the change of the 1^st Defendant’s name to Champion International Securities (H.K.) Limited in anticipation that the sale will materialise.  He made complaints against Ms Cheng and went to Hainan to see Mr Wu to press for the sale on 30 June 2003.  At that time, Mr Wu entertained some doubts about the genuineness of the 1^st Defendant’s account and raised some queries with the 2^nd Defendant about the discrepancies in the accounts and about the loans made to the Plaintiff and Ms Hsieh.

43.  On 1 August 2003, at a Board meeting attended by Mr Wong, Ms Shum, the 2^nd and 4^th Defendant, the Board resolved that the shareholders should decide on the following options:

(i)	Ms Hsieh to sell all her shareholding to the    Plaintiff;
(ii)	the Plaintiff to sell all its shareholding to Ms Hsieh;
(iii)	the shareholders to sell their shareholdings to a third party; and
(iv)	cessation of business (not winding up).

In addition, Mr Wong raised the question of change of directors.  The 4^th Defendant advised that according to section 125 of the Securities and Futures Commission Ordinance, the proper procedure was to seek approval from the Hong Kong Exchange and Clearing Limited for the new appointment and after approval has been obtained to file the particulars of the appointees with the Companies Registry.

44.  At a Board meeting held on 11 August 2003, Mr Wong informed the Board that the Plaintiff’s decision was to sell all its shares for $7,000,000 or to buy all of Ms Hsieh’s shares.  The 2^nd Defendant replied that Ms Hsieh had no means to buy the Plaintiff’s shares but would be willing to sell her shares to the Plaintiff at a price to be agreed and invited the Plaintiff to make offer.  In the minute, it was recorded: 

“黃剛裔代表賽格投資答覆如下：

(1) 賽格投資之74.45%股份全部讓出要求價HK$700萬。

(2) 買入謝明珠之股份25.55%以謝方提出給賽格投資方之比例計算。

譚湛佳代謝明珠答覆謝明珠方無能力買入，但樂意賣出，價格可以商量，由賽格方出價。”

My reading of the minute is that the Plaintiff offered to buy Ms Hsieh’s share at a pro-rata price based on Ms Hsieh’s shareholding as that which the prospective purchasers had offered to buy the Plaintiff’s shares in the 2^nd Defendant’s fax of 2 July 2003, i.e. a third of $2,684,063.  However, the parties cross-examined each other on the basis that the price offered by the Plaintiff was a pro rata price based on the price which the Plaintiff offered to sell, i.e. about $2,400,000.  I think that could not be right.  Were that correct, Ms Hsieh would have readily agreed and would not have invited the Plaintiff to make offer.  If my reading is correct, the parties were in a deadlock and in fact they were.  Whatever was the true interpretation of the minute or was discussed at the meeting, the sale was not progressing.  The sale price demanded by the Plaintiff for the sale of its shares was far beyond that which the 2^nd Defendant had secured from his friends and son while the price it offered to buy Ms Hsieh’s shares was not acceptable to Ms Hsieh who invited a further offer from the Plaintiff, but no offer was made.

The Board meeting in Shenzhen on 15 August 2003

45.  Two days later, the Plaintiff issued a notice for a Board meeting to be held on 15 August 2003 in Shenzhen.  No specific agenda was given other than to deal with the company’s affairs.  The 2^nd, 3^rd and 4^th Defendant attended the meeting representing Ms Hsieh’s interest.  The Plaintiff was represented by Mr Wu, Mr Wong, Ms Shum, Ms Cheng and two others who had hitherto not featured in the affairs of the Plaintiff, namely Mr Wen and Mr Yau Hak.  The Plaintiff’s solicitor was also present.  The Plaintiff’s side announced it was a shareholders meeting.  Thereupon the 2^nd Defendant responded that he had no authority to represent Ms Hsieh and reiterated that the meeting was convened as a Board meeting.  The Plaintiff’s solicitor agreed with the 2^nd Defendant’s view.  The meeting was then held as a Board meeting.  The 2^nd Defendant said as a result the non-Board members were turned out from the meeting, save Mr Wu who attended as the representative of Mr Li.  Ms Cheng disagreed and said that she attended the meeting save for a short spell.  I accept the 2^nd Defendant’s evidence.  However, nothing turns on this finding.

46.  At the meeting, the Plaintiff proposed appointing Mr Wu, Mr Wen and Ms Cheng to the Board to replace Mr Li.  The 2^nd Defendant said he had no objection in principle but suggested to hold an extraordinary general meeting to consider such appointment and to discuss the present problems of the 1^st Defendant.  It was agreed that such an extraordinary general meeting be convened.  The 2^nd Defendant also made the point that he attended the meeting to discuss the sale of Ms Hsieh’s shares to the Plaintiff, but the matter was not discussed further.  Proposed resolutions contained in a document (“the Document”) were discussed.  I shall revert to the Document later in a different context.

47.  In view of the antecedent events, I have no doubt that the 2^nd Defendant had been expecting a discussion about the sale of the Plaintiff’s shares.  However, as things turned out, it appears the Plaintiff was not interested in the sale but instead wished to take over control of the Board with an increase in the number of directors to be appointed by the Plaintiff.

Convening the extraordinary general meeting on 29 August 2003

48.  Pursuant to the resolution made at the Board meeting on 15 August 2003, Mr Wong issued a notice to the Defendants on 16 August 2003 to convene an extraordinary general meeting to discuss change of directors and requested Ms Hsieh to authorise her representative to attend.  No date and place were mentioned in the notice.  On 18 August 2003, Ms Hsieh replied requesting the Plaintiff to give proper notice of the date and place of the meeting in accordance with the articles of association of the 1^st Defendant.

49.  On 19 August 2003, Mr Wong issued a notice to Ms Hsieh to hold an extraordinary general meeting on 20 August 2003 at the office of the 1^st Defendant to discuss change of directors, Ms Hsieh replied through the 3^rd Defendant that she would attend the meeting herself and suggested the meeting to be convened on or before 30 August 2003.

50.  On 21 August 2003, Mr Wong replied requesting to hold the meeting on 28 August 2003 at 10 am in the office of the 1^st Defendant.  In this letter, he gave notice that the meeting was to discuss about increasing the number of directors (not change of directors), the problems of the 1^st Defendant and the control of its accounts.  On 25 August 2003, Ms Hsieh wrote that she had an important matter to attend to on 28 August 2003 and suggested to have the meeting on 29 August 2003 in Hainan instead.  The Plaintiff agreed.

51.  It was only too apparent to the Defendants that Ms Hsieh would certainly be outvoted at the extraordinary shareholders meeting on 29 August 2003 because of the Plaintiff’s majority shareholding.  It was also apparent to the Defendants as a result of the meeting on 15 August 2003 that what would happen at the meeting on 29 August 2003 would be the appointment of Mr Wu, Ms Cheng and Mr Wen to the Board and the removal of the 3^rd Defendant from the Board which had been rehearsed at the Board meeting on 15 August 2003.  It is therefore an absolute certainty that Ms Hsieh would lose her control over the Board after the extraordinary general meeting on 29 August 2003.

The Plaintiff’s attempt to register Mr Wu, Ms Cheng and Mr Wen as directors of the 1^st Defendant

52.  I now return to the Document discussed at the Board meeting in Shenzhen on 15 August 2003.  The Document was a type-written document containing resolutions which were intended to be passed at that meeting.  It contained a preamble and four pre-typed resolutions:

(1)	that the 3rd Defendant resigned as director;
(2)	that Mr Wu, Ms Cheng and Mr Wen be  appointed as  directors effective from 20 August 2003;
(3)	that the 4th Defendant resigned as secretary and
(4)	that Ms Cheng be appointed as secretary effective from a date which was left blank.

Items (1) and (3) were deleted and against the deletions were appended the signatures of Mr Wu, Wong, the 2^nd and 4^th Defendants.  Below the resolutions was a space for signature with names of the intended signatories.  Those names were Mr Li, Mr Wong, the 2^nd to 4^th Defendants, Mr Wu, Ms Cheng and Mr Wen.  These were the names of those who were supposed to have attended the meeting but for the objection raised by the 2^nd Defendant that the meeting was a Board meeting.  The Document did not bear a date.  According to the 2^nd Defendant though he and the 4^th Defendants signed against the deletions, until he left no one had signed at the bottom of the document.

53.  In view of the course the meeting took, it is obvious that not all of these resolutions as typed out were agreed.  As the 2^nd, 3^rd and 4^th Defendant did not sign at the bottom of the document, the inference is that they had not agreed to the appointment of Mr Wu, Ms Cheng and Mr Wen as directors and Ms Cheng as secretary.  As recorded in the agreed minute, the 2^nd, 3^rd and 4^th Defendants agreed in principle to the appointments subject to the approval by the shareholders in the extraordinary general meeting.  Accordingly, I have no difficulties to accept the 2^nd Defendant’s evidence that at the end of the meeting, no one signed on the Document as no concluded agreement on the appointment was reached.  Presumably, the 2^nd and 4^th Defendants signed against the deletions to acknowledge their agreement to the deletion, i.e. that the 3^rd Defendant and the 4^th Defendant shall retain their appointments respectively as director and secretary of the 1^st Defendant. 

54.  Then, on 20 August 2003, according to the 2^nd Defendant, Mr Wong brought the 2^nd, 3^rd and 4^th Defendants a letter dated 20 August 2003 annexed to which was the Document duly signed by Mr Li, Mr Wong, Mr Wu, Ms Cheng and Mr Wen.  The letter reads:

“I put on record that a meeting was held between the directors (with only Mr Li Jian Min being absent) on 15 August 2003 in which motion was moved in respect of the appointment of Wu Chen Feng, Cheng Xiao Ling and Wen Pei Dong as additional directors of the company, and the appointment of Cheng Xiao Ling as the Company Secretary in place of the existing Company Secretary.

 I hereby propose again resolutions of directors to be passed in respect of the said motions.  The directors entitled to vote on this motion are Tam Cham Kai, Li Jian Min and myself.  I enclose copy of the resolutions which have been approved by Li Jian Min and myself.

 Please sign on the copy resolutions and return the same to me within today if you agree to the same.”

The 2^nd Defendant said that Mr Wong asked them to sign on the letter and the Document to signify their agreement to the resolutions contained in the Document.  They disagreed.  Then Mr Wong urged them to sign on the letter as acknowledgement of receipt of the letter but not as their agreement to its content.  Accordingly, the 2^nd and 4^th Defendants put their initials on the letter.  The 3^rd Defendant who did not give evidence suggested to Mr Wong in cross-examination that she objected to the content of the letter and hence she appended the words “received this notice” after signing her name.  This is supported by the letter produced by Ms Cheng in her affirmation.  None of the Defendants signed on the Document.  Mr Wong recalled having brought the letter to the Defendants but was equivocal as to the surrounding circumstances and whether the Document was attached to the letter.  It is only too obvious from the last paragraph of the letter quoted above that the Document was attached to the letter.  It is also obvious from the words written by the 3^rd Defendant that the 2^nd, 3^rd and 4^th Defendants put their initials on the letter as acknowledgement of receipt of the letter and not as their assent to its contents.  I accept the evidence of the 2^nd Defendant and the case of the 3^rd Defendant as put in cross-examination. 

55.  At the time, Mr Wong and the 2^nd to 4^th Defendants were the only directors of the 1^st Defendant (putting aside for the time being whether the 3^rd and 4^th Defendants had the right to vote in Board meetings).  Even treating this incident as a paper Board meeting, the resolutions were not passed as the three Defendants had outvoted Mr Wong.  The position is the same even if the 3^rd and 4^th Defendants did not have the right to vote.  Accordingly, I find that the Plaintiff failed to secure the passing of the resolution of 20 August 2003 appointing Mr Wu, Ms Cheng and Mr Wen as directors of the 1^st Defendant. 

56.  Subsequently, Ms Cheng caused herself, Mr Wu and Mr Wen to be registered with the Companies Registry as directors of the 1^st Defendant.  It is not clear what documents she caused to be presented to the Companies Registry, but in her affirmation, at least, she relied on the letter of 20 August 2003 and claimed to have been properly appointed as a director of the 1^st Defendant on that day.  This adversely impacted on her credibility as she must have known that the 2^nd to 3^rd Defendants’ signatures on the letter were not made as assent to the appointment of Mr Wu, Mr Wen and herself to the Board and that they did not sign the Document. I do not find Ms Cheng a credible witness, but her evidence has no significance in these proceedings.  I have borne similar considerations in mind when assessing Mr Wong’s credibility.  However, Mr Wong did not make similar positive assertions in his evidence and there is nothing to suggest that he was a party to the way in which the letter was used by Ms Cheng.  Furthermore, the controversial part of Mr Wong’s evidence is supported by contemporaneous documents in his favour.  I therefore do not consider Mr Wong’s credibility seriously dented by this incident.

Ms Cheng’s attempt to change the authorized signatures of the 1^st Defendant’s bank accounts

57.  At about the same time in August 2003, Ms Cheng attempted to change the authorised signatures of the 1^st Defendant’s bank account with DBS Bank (HK) Ltd and the Hong Kong and Shanghai Banking Corporation.  It is not clear what documents Ms Cheng presented to the bank to procure the change, but both attempts failed. 

 The capital injection by the Champion Group and Ms Hsieh’s loans to the 1^st Defendant

58.  An issue in dispute is the propriety of Ms Hsieh’s withdrawal of $2,100,000 from the 1^st Defendant’s bank account in August 2003 and whether the Champion Group had injected capital into the 1^st Defendant. 

59.  The Defendants’ case is that they and Ms Hsieh were trying their best to keep the 1^st Defendant afloat while the Plaintiff was unable to meet its promise to provide additional funding or banking facility.  Hence Ms Hsieh obtained capital injection from the 2^nd Defendant’s friends and his son, i.e. the Champion Group, who were desirous of buying the Plaintiff’s and her shares in the 1^st Defendant.  It was a term of the capital injection that the funds would be used to keep the 1^st Defendant in business and to maintain the FRR requirement and would be treated as their purchase money for Ms Hsieh’s shares, but the funds would have to be repaid if the sale could not materialise or if the 1^st Defendant suspended trading.  Thus, it is the Defendants’ case that when the 1^st Defendant suspended trading, Ms Hsieh withdrew $2,100,000 to repay the Champion Group.

60.  Apart from a very brief and vague mention about a loan from the investors in the Board meeting on 21 July 2003, this capital injection was not documented.  It was not supported by any pay-in slips, or written agreement for sale of Ms Hsieh’s shares or any written document as to the terms of the capital injection including in particular the term as regards the circumstances under which the funds should be returned.  The capital injection was not shown in the books of the 1^st Defendant.  The 4^th Defendant explained that the capital injection was treated in the books of the 1^st Defendant as capital injection by Ms Hsieh and not as loans from the potential purchasers because that would not assist the 1^st Defendant in complying with the FRR requirement since loans would have to be reflected as a liability.  He said that the capital injection was reflected by a reduction in the amount of loan Ms Hsieh owed to the 1^st Defendant.  I am hardly impressed by his evidence.  While it is possible that in order to meet the FRR requirement the 4^th Defendant might have resorted to obscured accounting practice, the increase in Ms Hsieh’s outstanding loan cannot be explained on the basis of his evidence. The balance sheet as at 31 May 2003 showed that Ms Hsieh’s loan from the 1^st Defendant stood at $1,137,817.53, which was increased to $4,141,517.53 as at 28 August 2003.  The loan was increased by $3,003,700.  The Kwan Loy incident was first mentioned in the Board minute of 2 June 2003.  If the capital injection had been made prior to 31 May 2003, then with the withdrawal of $2,100,000 to repay the funds, the outstanding balance of Ms Hsieh’s loan would be increased by $2,100,000 to $3,237,817.53.  If the capital injection was made after 31 May 2003, the withdrawal of $2,100,000 would have no effect on Ms Hsieh’s loan balance.  The capital injection would have first wiped out all of Ms Hsieh’s outstanding loan and resulted in a loan by Ms Hsieh to the 1^st Defendant in the amount of about $1,000,000.  The withdrawal of $2,100,000 in August 2003 would then restore Mr Hsieh’s loan to its original balance.  The 4^th Defendant’s explanation simply could not fit into the balance sheets.  Furthermore, Ms Cheng arrived at the 1^st Defendant’s office on 17 June 2003.  Since then, the 2^nd Defendant and Ms Hsieh had been communicating with Mr Wu through fax, telephone and visit.  Yet, the capital injection from the Champion Group was never mentioned in any of those communications or Board minutes until the Board meeting of 21 July 2003.  Not only is the alleged capital injection not documented, it is not consistent with the balance sheets and the contemporaneous minutes of the Board.  On the contrary, the increase in Ms Hsieh’s outstanding loan in the circumstances shows that she was siphoning money out of the 1^st Defendant.  I do not believe in the 2^nd and 4^th Defendants’ evidence.

61.  In addition to this capital injection of $2,100,000, the 2^nd and 4^th Defendants claimed there was another capital injection of $2,000,000 in the form of a loan from Ms Hsieh to the 1^st Defendant.  Again, this loan was not documented.  There was no pay-in slip, or ledger entry or written loan document in support.  The 4^th Defendant insisted under cross-examination that this loan was documented by referring to the statement of affairs delivered by the 2^nd Defendant to the Companies Registry in connection with the winding up.  However, the statement of affairs only showed a claim of $1,500,000 by Ms Tam Shun Ho who is the 2^nd Defendant’s sister and another claim of $500,000 by himself.  The 4^th Defendant said these two loans were from Ms Hsieh but made out in their names.  He was obviously changing his evidence and conveniently relied on the two claims as documentary evidence in support of the alleged loan by Ms Hsieh.  He could offer no satisfactory explanation why the loans were made in the names of other people.  Apart from this, the two loans were not documented.  I reject his evidence about these two loans.

62.  The handling of the account by the 4^th Defendant was extremely suspicious.  I reject the 2^nd and 4^th Defendants’ evidence about the capital injection from the Champion Group and about Ms Hsieh’s loans to the 1^st Defendant in the names of the 2^nd Defendant’s sister and the 4^th Defendant.  These loans were treated interchangeably by the 4^th Defendant in the books.  One wonders why the loans by Ms Hsieh to the 1^st Defendant were not used to set off the loan she owed the 1^st Defendant.  If this sum of $2,000,000 was set off against the loan Ms Hsieh owed the 1^st Defendant, the 1^st Defendant would have a surplus of funds.  I do not believe in the 2^nd and 4^th Defendant’s evidence in respect of these capital injection or loans from Ms Hsieh.  But this finding is not strictly necessary for my decision.

The financial position of the 1^st Defendant

63.  A material factual dispute between the parties is about the financial position of the 1^st Defendant.  The Defendants’ case is that the 1^st Defendant was suffering losses, unable to pay its debts and did not have enough liquid capital to comply with the FRR requirement for it to be allowed to trade in the Hong Kong Exchange.  The Plaintiff’s case is that according to the balance sheets of the 1^st Defendant as at 31 May 2003 and 28 August 2003 prepared by the 4^th Defendant, the 1^st Defendant had net assets of $14 million to $16 million and according to the profit and loss account prepared by the 4^th Defendant, the 1^st Defendant made a profit of $1.6 million for the five months from April to August 2003.

64.  Firstly, I am going to consider the 1^st Defendant’s profit and loss account for the five months from 1 April 2003 to 28 August 2003.  The parties took a different interpretation of this account which showed a profit of $1,608,619.80.  Mr Wong took a simplistic view that the 1^st Defendant was operating at a substantial profit.  The 2^nd and 4^th Defendant argued otherwise.  They explained that the profit was generated from a very substantial receipt of $2,491,385.82 as sundry recovering income which was of a non-recurrent nature and not an ordinary trading income.  They argued that if that receipt was discounted, the 1^st Defendant would have suffered a loss of $882,766.02 or $176,553.20 per month.  I think that, too, is an over simplistic view and even misleading view of the situation.  One must look at the account as a whole and not just parts of it.  As I understand the Defendants’ case, the sundry recovering income was long overdue income which ought not to have been taken into account when calculating the profit and loss for the five months in question.  Nevertheless, these sundry recovering income were trading receipts and usually should be taken into account in calculating the profit and loss of the business.  It is not known how much of these sundry recovering income should have been excluded for the five months in question.  But by comparing the cash client account of the balance sheet for the two periods ending on 31 May 2003 and 28 August 2003, one can have a rough picture.  The amount receivable under the cash client account as at 31 May 2003 was reduced from $3,761,480.85 to $2,318,870.72 by 28 August 2003.  A fair inference is that the difference of $1,442,610.13 represented the amount which should have been recovered much earlier and should not have been treated as ordinary trading receipts during the five months.  Discounting this amount from the income of these five months, the 1^st Defendant still made a profit of $166,009.67 or $33,201.93 a month.  If provision is made for long service or severance payment in the amount of $187,630.30, the 1^st Defendant would suffer a loss of $21,620.63, which spread over a period of five months would be just about $4,000 a month.  But provision for long service or severance payment is not an immediate liability to pay.  Thus, the 1^st Defendant was not operating at a loss.

65.  Next, I turn to examine the working capital of the 1^st Defendant.  I shall first refer to the balance sheet as at 31 May 2003 presented to the SFC which did not take into account the value of the 1^st Defendant’s licence for the purpose of assessing the 1^st Defendant’s financial position.  It is not in dispute that both the Plaintiff and Ms Hsieh borrowed substantial sums from the 1^st Defendant.  Ms Hsieh, the Plaintiff and its subsidiary SEG Finance owed the 1^st Defendant $1,137,817.53, $4,766,937.48 and $4,407,085.38 respectively, totalling $10,311,840.39.  It is also not in dispute that the Kwan Loy incident has resulted in a debt of over $2 million as at 31 May 2003 which was later determined to be $2,279,315 according to the balance sheet as at 28 August 2003.  This amount is in reality a bad debt though not formally treated as such in the books.  Thus, the shareholders’ loans and bad debt from the Kwan Loy incident totalled $12,591,155.39.  Against the net asset of $14,749,122.81, this left the 1^st Defendant with a working capital of $2,157,967.42 which was in the form of account receivable from clients and cash in bank.  This fell short of the FRR requirement for liquid capital. 

66.  The financial position of the 1^st Defendant as at 28 August 2003 was just as fragile.  The statement of affairs delivered by the 2^nd Defendant to the Companies Registry or the balance sheet as at 28 August 2003 prepared by the 4^th Defendant showed a net asset of $16,293,109.83.  The loans to Ms Hsieh, the Plaintiff and SEG Finance have increased to $4,141,517.53, $6,626,830.48 and $4,686,837.53 respectively, totalling $15,455,185.54.  Thus, discounting the amount of $2,279,315 receivable from the two clients in respect of the Kwan Loy incident which had no prospect of recovery, the 1^st Defendant was left with a deficit of $1,441,390.71.  But, had Ms Hsieh not withdrawn $2,100,000 from the 1^st Defendant’s account in August 2003, the 1^st Defendant would have a working capital of $658,609.29.  If I am to exclude Ms Hsieh’s loan of $2,000,000 to the 1^st Defendant in the names of the 2^nd Defendant’s sister and the 4^th Defendant as fictitious, the 1^st Defendant would have a working capital of $2,658,609.29, which showed a slight improvement over the position as at 31 May 2003, though the 1^st Defendant still fell short of the FRR requirement, by a small margin.

67.  Mr William Wong argued on the basis of the net asset worth of the 1^st Defendant as shown in the balance sheets that the 1^st Defendant was not in financial difficulties nor was it unable to pay its debts.  He argued that there was nothing to show that the loans to the Plaintiff or to Ms Hsieh and the account receivable from the two clients who bought shares in Kwan Loy were irrecoverable.  He said if they were irrecoverable, they should have been treated as bad debts or provisions should have been made in the balance sheet.  He also criticised the balance sheet as misleading.  I cannot agree with those arguments.  I think such argument is academic and unrealistic.  The balance sheets are misleading to an outsider but not to the Plaintiff or Ms Cheng who had knowledge of the shareholders’ loans including the very substantial loans to the Plaintiff and its subsidiary, SEG Finance, and about the problems created by the Kwan Loy incident which are not disputed by the Plaintiff.  The Plaintiff cannot refuse to take cognizance of the fact that a very substantial part of the 1^st Defendant’s asset ($15,455,185.54) was in the form of loans to shareholders, neither of whom was willing to repay and that account receivable from the two clients who had bought Kwan Loy have in reality turned into bad debts, though not yet treated as such in the balance sheets.

68.  Despite I have found that the capital injection from the Champion Group and Ms Hsieh’s loans in the names of the 2^nd Defendant’s sister and the 4^th Defendant were fictitious and despite my doubts about the propriety of Ms Hsieh’s withdrawal of $2,100,000 from the 1^st Defendant’s bank account, I shall assume the de facto financial position of the 1^st Defendant to be that as represented by the balance sheet as at 28 August 2003.  That was the position the 2^nd to 4^th Defendants were confronting: Ms Hsieh had withdrawn $2,100,000 and the 2^nd Defendant’s sister and the 4^th Defendant were asking to be repaid a purported loan of $2,000,000.

69.  Summing up the financial position of the 1^st Defendant as at 28 August 2003, I have no doubt that the 1^st Defendant was in financial difficulties.  This may be a self-induced situation created with the connivance of the 2^nd and 4^th Defendants.  It is not entirely clear what were the causes of the financial problem.  Given the nature of these proceedings, it is not possible to investigate into the cause of the financial problem nor is it necessary for the purpose of these proceedings to do so.  It is suffice to set out as part of the background that the 1^st Defendant was in financial difficulties, it was depleted of working capital, though it was functional and operative with a marginal profit.

70.  I now turn to the crucial decisions which I have to make in respect of these proceedings.

Notice of the Board meeting on 28 August 2003

71.  It is common ground that on 26 August 2003 the 2^nd Defendant informed Mr Wong over the telephone to attend a meeting of the Board at 10:30 am on 28 August 2003.  The 2^nd Defendant’s evidence was that over the telephone he told Mr Wong that a lot of problems had occurred recently such as Ms Cheng’s enquiry with the SFC and attempts to change the authorised signature of the 1^st Defendant’s bank accounts and that one of the purposes of the meeting was to discuss about winding up of the 1^st Defendant.  However, according to Mr Wong, the 2^nd Defendant merely told him that there was a series of recently arisen incidents (接連突發事件) relating to the 1^st Defendant which needed to be discussed.  Mr Wong emphatically denied that the 2^nd Defendant made any mention about winding up the 1^st Defendant.  He agreed that the 2^nd Defendant mentioned about Ms Cheng’s intervention with the SFC and the banks, but those matters had already been discussed earlier in the office.  It is also common ground that Mr Wong requested for a written notice of the meeting and a written notice was received on 27 August 2003.  The notice reads:

“鑑於賽格國際證券(香港)有限公司接連有突發事件，請於2003年8月28日上午10時30分在香港中環永樂街5號永安祥大廈10樓出席董事特別大會，商量對策。”

72.  The content of the notice is consistent with Mr Wong’s evidence.  If the 2^nd Defendant had told Mr Wong specifically that one of the purposes of the meeting was to discuss about the winding up of the 1^st Defendant and as Mr Wong asked for a written notice of the matters to be discussed at the meeting, it would have been very convenient and natural for the 2^nd Defendant to state that the purpose was to discuss about the winding up of the 1^st Defendant in the notice rather than to use such imprecise and verbose expression as “a series of recently arisen incidents (接連突發事件)” and “to discuss the action to be taken (商量對策)”. 

73.  It should be recalled that just a day before the 2^nd Defendant spoke with Mr Wong about the Board meeting, Ms Hsieh requested for a postponement of the date of the extraordinary general meeting to the following day as she had an important matter to attend to on 28 August 2003. When cross-examined about what that important matter was, the 2^nd Defendant said he had no idea and said that Ms Hsieh might have to play mah-jong.  It is incredible that being her husband, the 2^nd Defendant did not know what important matter Ms Hsieh had to attend to on 28 August 2003, if indeed she had to attend to something important.  If there was any truth in what Ms Hsieh said, that matter must be a more important one than the shareholders meeting to discuss, among other things, the problem of the 1^st Defendant and the sale of its shares which she and the 2^nd Defendant were so concerned.  The 2^nd Defendant was being evasive.

74.  When the evidence of Mr Wong and the 2^nd Defendant is viewed in its proper setting, I have no doubt that Mr Wong was telling the truth and I reject the 2^nd Defendant’s evidence.  In coming to this conclusion, I have borne in mind the danger of accepting Mr Wong’s evidence as he has a personal interest in the outcome of this application and that he had been shown to be dishonest in other aspects of his evidence.  I find that though the 2^nd Defendant had given Mr Wong notice of the Board meeting on 28 August 2003, he did not inform Mr Wong that one of the matters to be discussed at the meeting was about the winding up of the 1^st Defendant.  

75.  According to Mr Wong, had he known that the meeting was to discuss about winding up the 1^st Defendant, he would have attended the meeting.  As he was not so advised, he reported to Ms Cheng.  Ms Cheng instructed him that as arrangements had been made for an extraordinary general meeting to be held in Hainan at the request of Ms Hsieh and all the important personnel would be there at that meeting, there was no need for Mr Wong to attend the Board meeting on 28 August 2003.  Ms Cheng was in Hainan at the time.  She also sent a reply by fax to the 2^nd Defendant saying that she could not attend due to the short notice and suggested to have the meeting on 29 August 2003 together with the extraordinary general meeting.  Though the presence of Mr Wong at the meeting would not have made any difference and the Resolution would have been passed just the same, the meeting was irregular.  The 1^st Defendant was deprived of the benefit of the collective wisdom of its directors including Mr Wong.

76.  As a matter of law, notice of directors meeting may be a very short one but it must be given a reasonable time before the board meeting to enable the director to whom the notice is given to attend.  There is no need to state the business to be transacted at the meeting if the business is the usual business to be transacted at a directors meeting.  But if the business to be transacted is very important such as the winding up of the company, the notice is not adequate unless the purpose is stated in the notice.  Applying these legal principles to the facts of the present case, I have no difficulties to find that the notice given was inadequate and the Resolution passed at that meeting was void and of no effect.

The Board meeting on 28 August 2003

77.  The 2^nd Defendant said the Board meeting was held at 10:30 am on 28 August 2003 and the Resolution to wind up the 1^st Defendant was passed.  He delivered the minute recording the Resolution and a statutory declaration as required by section 228A(1) to the Companies Registry on the same day.  He also prepared a supplemental minute, which has not been delivered to the Companies Registry.  The small print at the bottom left hand corner of the supplemental minute showed that it was prepared on 2 September 2003.

78.  Surprisingly, both the minute and supplemental minute of the meeting stated that the meeting was held at 10:00 am instead of 10:30 am.  Mr William Wong submitted that the minute filed with the Companies Registry was the minute of a meeting held at 10:00 am but was not of a meeting which Mr Wong had been given notice of.  Hence, no notice had been given in respect of this 10:00 am meeting which was therefore an irregular meeting.  Alternatively, he submitted there never was any meeting held at 10:30 am, the minute delivered was in respect of a fictitious meeting which had never been held.  He referred to the small print at the bottom left hand corner of the minute and the statutory declaration showing the file reference number of the 2^nd Defendant’s then solicitor and the time of 9:59 am on 28 August 2003.  He submitted that it was amusing that the minutes were all typed up before the meeting.  I do not think this assists his submission that no meeting had been held.  It is obvious that the 2^nd to 4^th Defendant had made up their minds to wind up the 1^st Defendant.  They knew Mr Wong would not attend the meeting and, even if he would, he would be outvoted and the Resolution would be passed.  In the circumstances, it would be convenient to have the resolutions to be passed prepared in advance of the meeting so that the follow up procedures could be proceeded with expedition.

79.  The 2^nd Defendant explained that the error about the time was a typographical error which escaped his attention.  He insisted that the meeting was held at 10:30 am and the documents were faxed to him at 9:59 am by his then solicitors, Messrs Fred Kan & Co.  Under cross-examination, he tried to impress on his evidence by saying that the meeting was held in the presence of a solicitor from Messrs Fred Kan & Co.  I do not find that credible.  If his solicitor had attended the meeting, it is incredible that his solicitor would not have discovered the mistake about the time of the meeting as recorded in the minute and it is inexplicable why the solicitor did not bring with him the documents and made it necessary for the documents to be faxed to the 1^st Defendant’s office.  Furthermore, the 2^nd Defendant should be aware of the mistake as it had been specifically referred to in Ms Cheng’s third affirmation filed on 19 April 2004.  The 2^nd Defendant was legally represented at that stage.  He did not respond to Ms Cheng’s affirmation.  He did not file any affirmation in reply or arrange for his solicitor to give evidence in court.  Had his solicitor been present at the meeting and made the typographical error, his solicitor would have felt obliged to make an affirmation in reply deposing to his presence at the meeting and the typographical error. 

80.  Though I do not accept the 2^nd Defendant’s evidence that the meeting was attended by his solicitor, on the state of the evidence, there is nothing for me to hold that the Board meeting had not been held at 10:30 am.  The truth is probably that knowing that Mr Wong would not attend, the 2^nd, 3^rd and 4^th Defendants signed the prepared minute and overlooked the error about the time. That the Resolution was passed without discussion did not prevent it from being a valid resolution if it is otherwise regularly passed.  However, for reason as given above, the meeting was void for want of adequate notice and the Resolution passed therein was a nullity.

the 3^rd and 4^th Defendants’ right to vote

81.  An issue which touched on the validity of the Resolution passed on 28 August 2003 is whether the 3^rd and 4^th Defendant had right to vote in Board meetings.  Back in mid 2000, the 1^st Defendant was found to have engaged an unauthorised account executive, as a result of which the 2^nd Defendant who was then the sole dealing director was subject to reprimand.  In that connection, the Board appointed the 3^rd and 4^th Defendants as dealing directors by resolutions dated 11 and 2 August 2000 respectively.  The term of their appointment was that they had no right to vote in Board meetings.

82.  The Defendants’ case is that the SFC queried the validity of such appointments without voting right at board meetings.  Accordingly, at a meeting of the Board on 9 September 2000, a resolution was passed that the 4^th Defendant be vested with normal voting right in any meeting of the Board, but no similar resolution was passed in respect of the 3^rd Defendant.  The resolution was recorded in the Board minutes, at the bottom of which was written the following statement to which the 2^nd and 4^th Defendants appended their signatures:

“9/9/00             劉長文在會議中承諾沒有任何投票權”

83.  Mr William Wong contended that the above statement confirmed that the 4^th Defendant did not have voting right.  On the other hand, the 4^th Defendant explained that the statement recorded that he abstained from voting to that particular resolution as it was in respect of a matter in which he was interested.  I do not read the statement that way nor do I agree with Mr William Wong’s contention.  The factual background was that when the 4^th Defendant was appointed as director, it was intended that he should not have voting right presumably to maintain the balance between the Plaintiff’s and Ms Hsieh’s control over the Board and the 1^st Defendant.  Hence the purpose of the resolution of 9 September 2000 was to circumvent the objection raised by the SFC.  The meaning which the above statement conveys to a reasonable reader having knowledge of the factual background must be that the 4^th Defendant undertook not to exercise his right to vote at any meetings of the Board.  The position, therefore, is that the 4^th Defendant had the right to vote but he undertook not to exercise his right.  His vote must be valid, though he acted in breach of his undertaking.

84.  There was no similar resolution passed in respect of the 3^rd Defendant.  The 2^nd Defendant said he had verbally talked to Mr Wong about the same and Mr Wong agreed to lift the restriction on the 3^rd Defendant’s right to vote.  However, Mr Wong denied to have made the agreement.  He admitted having been informed about the matter but he replied that he had to seek instruction from the Plaintiff.  I accept Mr Wong’s evidence.  It is unlikely that Mr Wong would have agreed to lift the restriction on the 3^rd Defendant’s right to vote without first consulting the Plaintiff as that would seriously upset the balance the Plaintiff had over the control of the Board.  Had there been an agreement, a written minute would have been prepared as in the case of the 4^th Defendant.  The matter might have been overlooked, but there was no resolution passed, oral or otherwise.  Accordingly, I find that the 3^rd Defendant had no right to vote at meetings of the Board.  I think a director with no right to vote would count for the purpose of a quorum, otherwise his appointment would be wholly defunct.  He is nevertheless free to express his views and contribute to the meeting.  He is to be treated as if he subsequently abstains from voting,

85.  The 2^nd to 4^th Defendants attended the Board meeting on 28 August 2003 and voted for the Resolution.  Even excluding the 3^rd Defendant, there were at least two voting directors to form a quorum.  Two of them had the right to vote, though one had undertaken not to exercise that right.  Even discounting the vote of the 3^rd Defendant as being invalid, there were nevertheless two valid votes.  The Resolution would be valid, if it was otherwise passed regularly.  

validity of the resolution

86.  I now consider the questions whether the 2^nd to 4^th Defendants were genuinely of the opinion, firstly, that the 1^st Defendant cannot by reason of its liability continue its business; secondly, that it was necessary to wind up the 1^st Defendant and thirdly, if it was, that winding up under another provision of the Companies Ordinance is not reasonably practicable in all the circumstances.  The burden of proof is on the directors who sought to rely on the resolution under section 228A to wind up the company.  If any of these questions are answered in the negative, the directors have failed to discharge the burden of proof.

Question 1: Whether the 1^st Defendant cannot continue its business by reason of its liabilities

87.  The Defendants’ case is that according to the balance sheet as at 28 August 2003 and the statutory declaration delivered to the Companies Registry, the 1^st Defendant fell short of $1,441,390 to meet its debts and could not continue its business.  For reasons as I have given, I reject the 2^nd and 4^th Defendants’ evidence about the capital injection by the Champion Group and about Ms Hsieh’s loans to the 1^st Defendant in the names of the 2^nd Defendant’s sister and the 4^th Defendant.  I am not satisfied that the capital injection and the loans were genuine.  According to the balance sheet as at 28 August 2003 prepared by the 4^th Defendant, the 1^st Defendant fell short of $1,441,390 to meet its debts.  The total of all the debts was $2,122,644.75 including the alleged loans of $1,500,000 and $500,000 from Ms Hsieh in the names of the 2^nd Defendant’s sister and the 4^th Defendant respectively.  Discounting these two debts which I am not satisfied were genuine, the 1^st Defendant has enough assets to pay its debts.  The Defendants have failed to establish the factual basis of their opinion.  The 2^nd Defendant was instrumental to the making of the alleged loans, the 4^th Defendant was a party to one of these loans and was the accountant who handled the payment of the two loans into the 1^st Defendant.  On my finding that these were not genuine loans, the 2^nd and 4^th Defendants must have knowledge that the loan transactions were not genuine.  The 3^rd Defendant, being a director and daughter of the 2^nd Defendant and Ms Hsieh must likewise know that the loans were fictitious.  The 2^nd to 4^th Defendants could not have genuinely held the opinion that the 1^st Defendant could not by reason of its genuine liabilities continue its business.

88.  Another reason advanced by the 2^nd to 4^th Defendants is that the 1^st Defendant could not operate as it fell short of the FRR requirement.  I have said I shall assume the financial position of the 1^st Defendant to be that as represented by the balance sheet as at 28 August 2003, which was the position the 2^nd to 4^th Defendants were confronting. The 1^st Defendant was depleted of capital.  Its financial position was further aggravated by Ms Hsieh’s withdrawal of $2,100,000.  This may be self-induced.  But without looking into the cause for this state of affairs, the de facto situation was that 1^st Defendant was financially crippled.  Its liquid capital fell short of FRR requirement.  It cannot operate.  However, the FRR requirement is a statutory condition which has to be fulfilled before a company may carry on business of securities brokerage.  It is not a liability within the meaning of section 228A(1) of the Companies Ordinance.  Thus, even if the 1^st Defendant could not operate because it failed to meet the FRR requirement, it is not a case where the 1^st Defendant could not meet its liability.  The answer to the first question must be in the negative.

Question 2:  Whether winding up was necessary

89.  The next question is whether the 2^nd to 4^th Defendants considered it necessary to wind up the 1^st Defendant.  Though the 1^st Defendant could not continue its business for it could not meet the FRR requirement as to liquid capital, whether it should be wound up raises a wholly different issue.  The business is not one which could not be resuscitated.   According to my analysis of the profit and loss account as at 28 August 2003, the business was not running at a loss.  If the liquid capital could be increased through genuine capital injection or by the Plaintiff or Ms Hsieh repaying part of their loans, the 1^st Defendant could resume operation.  Though the parties were in a deadlock as regards the proposed sale to the Champion Group, the 2^nd to 4^th Defendant had never intimidated to the Plaintiff that the 1^st Defendant had to be wound up if no financing was forthcoming or if it should refuse to repay its loans.  On the contrary, the Plaintiff has convened a meeting to be held on the following day to discuss, among other things, the problems facing the 1^st Defendant. Suspension or cessation is not the same as a winding up.  The former is reversible.  The latter is not.  While the 1^st Defendant’s continued existence without doing any trading would create additional liabilities, there is no reason why the decision to wind up could not be deferred until after the extraordinary general meeting when it was shown that resuscitating the business is out of question.  Thus, without even awaiting for the possibilities which might be expounded in the general meeting to be held on the following day, it cast serious doubts whether the opinion that it was necessary to wind up the 1^st Defendant was genuinely held. 

90.  The 2^nd to 4^th Defendants sought to justify the urgent decision to wind up the 1^st Defendant because of a series of incidents which arose recently.  These incidents were Ms Cheng’s enquiries with the SFC and her attempts to change the authorised signature of the 1^st Defendant’s bank accounts.  They alleged that as a result of Ms Cheng’s enquiries the SFC sent two officers came to investigate into the affairs of the 1^st Defendant and the 1^st Defendant was required to settle all outstanding transactions with its clients which aggravated the liquidity problem.  The 2^nd Defendant said because of the enquiries by the SFC, it was not able to cover up the bad debts of $2,279,315 arising from the Kwan Loy incident as account receivable and the 1^st Defendant fell short of $1,441,390 to meet its debts.  I think the 2^nd Defendant was conveniently putting the blame on Ms Cheng.  The 1^st Defendant fell short of $1,441,390 to meet its debts or the FRR requirement because Ms Hsieh withdrew $2,100,000 from the bank account of the 1^st Defendant.  Furthermore, I do not consider the withdrawal proper as I am not satisfied that the capital injection by the Champion Group or her loan of $2,000,000 to the 1^st Defendant were genuine.  In any event, Ms Cheng’s enquiries, even if inappropriate, did not give rise to such urgency that the decision to wind up could not wait for one more day.

91.  The 2^nd Defendant alleged that Ms Cheng’s attempts to change the authorised signatures of the 1^st Defendant’s bank account adversely affected the banks’ trust in the 1^st Defendant and the banks tightened their overdraft and other banking facilities granted to the 1^st Defendant.  If any damage had been caused by Ms Cheng’s act, it had been done.  It might affect the future operation of the 1^st Defendant.  An urgent winding up would not undo the damage or prevent further damage.

92.  The 2^nd to 4^th Defendants alleged that the Plaintiff had ignored their numerous requests for funding and they lost confidence in the Plaintiff and in the shareholders meeting to be held on 29 August 2003.  They were worried what other damaging acts the Plaintiff would do and thought the earlier winding up commenced, the better it was for the 1^st Defendant.  They could offer no idea of the possible damaging acts Ms Cheng or the Plaintiff could do in that one day.  I do not consider any of these reasons advanced as valid or genuine reasons for the urgent decision to wind up the 1^st Defendant.

93.  Putting everything in its proper context, the 2^nd Defendant and Ms Hsieh had been pressing for the sale of the Plaintiff’s shares to his friends and his son.  He has gone to the stage of securing approval for the change of name from the Hong Kong Exchange and Clearing Limited.  On the face, the price for the Plaintiff’s shares in the 1^st Defendant was a give-away.  Then Mr Wu and Ms Cheng had second thoughts about the sale.  Not only that the sale did not progress, Mr Wu started to query the loans to the Plaintiff and Ms Hsieh, the balance sheet and whether the $4,000,000 loan from Bank of China to SEG Finance was in fact received by the 1^st Defendant.  The proposed sale entered into a deadlock. The 2^nd Defendant requested for financing which the Plaintiff ignored.  Then the 2^nd Defendant brought about a voluntary suspension of the 1^st Defendant’s trading and permitted Ms Hsieh to withdraw $2,100,000 from the 1^st Defendant’s bank account.  When the withdrawal came to the notice of the Plaintiff, it sought to appoint additional directors and take control over the Board.  Then when the shareholders meeting was convened to be held on 28 August 2003 in Hong Kong, Ms Hsieh suggested on 25 August 2003 to defer the meeting to 29 August 2003 in Hainan under the excuse that she had another important matter to attend to.  On 26 August 2003, the 2^nd Defendant gave notice of the Board meeting on 28 August 2003.  In the circumstances, it is plainly obvious that the Defendants’ motive of the winding up was to pre-empt the extraordinary general meeting and prevent the Plaintiff from taking over the control of the Board and the 1^st Defendant.  I am not satisfied that the 2^nd to 4^th Defendants were of the genuine opinion that it was necessary to wind up the 1^st Defendant or that there was an urgent need to do so.

Question 3:  Whether winding up under another section of the Companies Ordinance is not reasonably practicable

94.  Finally, the last question is whether the 2^nd to 4^th Defendants considered it was impracticable if not impossible for the winding up to be commenced under another section of the Companies Ordinance.  The burden of proof rests on the directors who sought to rely on the resolution to wind up the company under section 228A.  The reasons tendered by the 2^nd Defendant in his statutory declaration delivered to the Companies Registry in support of a winding up under section 228A as to why it would not be reasonably practicable for the winding up to be commenced under another section of the Companies Ordinance are:

(i)	the Company was unable to pay its debts and has ceased its operation due to lack of financial resources;
(ii)	no further assistance or financial support can be expected from any of the shareholders of the Company; and
(iii)	the majority of the shareholders of the Company refused to commence the requisite procedures to wind up the Company.

These reasons were also relied upon by the 3^rd and 4^th Defendants.  If they fail to prove any of these reasons, they fail to discharge the burden of proof.

95.  The first reason relied upon by the 2^nd to 4^th Defendants has in fact been considered in my first question.   I have dismissed that reason as not being a genuinely held opinion.  They knew they had no factual basis for their opinion.  The only reasonable inference is that their opinion was not genuinely held.    In respect of the second reason, the 2^nd Defendant said it was his belief that further assistance or financial support cannot be expected from Ms Hsieh or the Plaintiff.  On the facts, the Plaintiff has turned a deaf ear to the 2^nd Defendant’s call for financial assistance.  I consider, though with grave reservation, it was open to the 2^nd to 4^th Defendants to come to the belief that no further assistance or financial support could be expected from the Plaintiff or from Ms Hsieh.  As for the third reason, the 2^nd Defendant admitted that he had never requested the Plaintiff, who was the majority shareholder, to commence winding up under another provision of the Companies Ordinance and the Plaintiff had never refused to do so.  He admitted that it was his surmise only.  This completely destroyed any basis of his opinion that it was not practicable for the winding up to be commenced under another section of the Companies Ordinance.  On this ground alone, the Plaintiff is entitled to succeed.

96.  Though I find that it was open to the 2^nd to 4^th Defendants to hold the opinion as stated in the second reason, considering all the three reasons together, I am quite unable to find that the 2^nd to 4^th Defendants satisfied the reasonably practicable test under section 228A.  Furthermore, the failure to advance any credible reason why the decision to wind up could not be deferred for just one day also weighs heavily against the good faith of the Defendants. On 25 August 2003, Ms Hsieh requested to defer the extraordinary general meeting from 28 August 2003 to 29 August 2003 under the pretext that she had an important matter to attend to, while on the following day the 2^nd Defendant arranged to hold the Board meeting on 28 August 2003.  The 2^nd Defendant could not say what that important matter was but equivocally suggested that Ms Hsieh might have to play mah-jong.  Ms Hsieh was not called to offer any explanation.  The reality is simply that on the following day the 2^nd to 4^th Defendants would have no control over the Board and there would be no prospect that the Resolution could be passed.  The only reasonable inference must be that these are concerted events planned to pre-empt the extraordinary general meeting.  The Resolution was passed in bad faith.  The 2^nd to 4^th Defendant were not genuinely of the opinion that the winding up was necessary nor that it was not reasonably practicable for the winding up to be commenced under another provision of the Companies Ordinance.  The answer to my last question must also be in the negative. 

97.  Even without relying on my finding that the capital injection and Ms Hsieh’s loans to the 1^st Defendant were fictitious, the 2^nd to 4^th Defendants’ failure to prove the third reason alone is sufficient for me to hold that they did not genuinely hold the opinion that it was not reasonably practicable for the winding up to be commenced under another section of the Companies Ordinance.

conclusion

98.  In conclusion, I find that the Board meeting held on 28 August 2003 was irregular for want of adequate notice to one of the directors who was entitled to receive notice, namely Mr Wong, as to the nature of the business to be transacted at the meeting.  The 2^nd to 4^th Defendants failed to prove that they were of the genuine opinion that it would not be reasonably practicable for the winding up of the 1^st Defendant to be commenced under another section of the Companies Ordinance when they passed the Resolution.  Any of the above reasons is sufficient for me to hold that the Resolution was null, void and invalid.  Accordingly, I grant the declarations and order sought.  I also make a costs order nisi that the 2^nd to 4^th Defendants shall pay the Plaintiff’s costs and that there be no order as to costs as between the Plaintiff and the 1^st Defendant.