DENNIS KWOK HON MING v. POON SUI CHEONG ALBERT AND OTHERS

FAMV No. 497 of 2021

[2022] HKCFA 2

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 497 OF 2021 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM

CACV NO. 9 OF 2017)

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REASONS FOR DETERMINATION

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Mr Justice Ribeiro PJ:

1.  Deputy High Court Judge R Ismail SC[1] made an order under section 168A of the old Companies Ordinance[2] in favour of the petitioner against the relevant respondents[3] who were the majority shareholders (“the majority shareholders”) of three companies (“the Companies”),[4] requiring them to purchase his shares in those companies on the ground that the majority shareholders had conducted the affairs of the Companies in a manner unfairly prejudicial to the petitioner’s interests as a member.  The Court of Appeal[5] reversed the Judge’s decision. 

2.  At the hearing, we dismissed the petitioner’s application for leave to appeal for reasons which we now provide.

A.     Background

3.  The petitioner, together with R5, identified certain plots of land on Lantau totalling about 900,000 sf which could be acquired for HK$7 million.  They put together a group of investors comprising themselves and the majority shareholders and acquired those plots through the Companies in each of which they held shares in varying percentages.  The purchase was funded as to 99% by shareholders’ loans in proportion to their respective shareholdings.

4.  The parties entered into an undated shareholders’ agreement (“SHA”) in about January 1992 which had the following main features:

(a)     It stated as objectives of the project, in the short term, the shareholders’ recuperation of their initial investments with interest through the sale of parcels of the land described as “Non-Core Land”; and in the long term “to realize the appreciation in land value on Lantau” (Clause 3).

(b)     It appointed the petitioner and R5 (as well as R2, one of the majority shareholders) as managers responsible for, among other things, “evaluating development projects for the shareholders’ approval.” (Clause 4)

(c)     Clause 4 also provided:

“The Managers will receive no remuneration for their work except for reimbursement of expenses. However, when the cumulative cash receipts from sale of land/assets have reached the original investment of HK$7.0 million, the Managers are entitled to receive a bonus of 15% (to be shared equally by the 3 Managers) on perpetual basis of any future cash receipt (or payment in kind for the land sale) from sale of land/assets.”

One of the contentious issues below concerned the reference to “perpetual basis”.

(d)     Clause 6 stipulated that the managers were to use their “best effort to dispose of the ‘Non-Core Land’ as soon as possible, with the aim of allowing the shareholders to recuperate their investment and interest thereon in full.”  It went on to provide:

“In selling any land parcels, when an ‘outside buyer’ submits an offer, the shareholders will have to approve of the sale first. The shareholders also have the first option to match the purchase offer within 7 days. If no shareholders match the offer within the period, the land will be sold to this outside buyer.” (Clause 6(2))

A contentious issue below was whether this obliged the shareholders to approve certain proposed sales.

5.  The petitioner was keen on recovering his shareholder’s loan with interest as soon as possible, in part no doubt, because his work was unremunerated and he would receive no compensation until he qualified for a share of the 15% bonus payable under Clause 4.  His view was that the majority shareholders were obliged by Clause 6 to dispose of the Non-Core Land as soon as possible and were obliged to accept outside bidders’ offers which met certain conditions specified by the SHA. 

6.  However, the majority shareholders took a different view believing that its value would appreciate.[6]  They turned down several offers to purchase parcels of the Non-Core Land, fuelling disagreement with the petitioner and R5.  As it turns out, the long-term appreciation was dramatic.  The land purchased in 1992 for $7 million was valued at HK$163,643,000 in 2016.[7]

7.  The differences between the parties came to the fore when the Government decided to resume two plots of land in Mui Wo and proposed compensation in a sum which an estate agent opined was reasonable.  The petitioner and R5 wanted to accept but R3 stated that this was for the shareholders to decide.[8]  R1 and R2 favoured trying to negotiate up the Government’s offer.[9]  After some difficulty arranging a date (with some ambiguity as to whether it was to be a board or a shareholders’ meeting[10]) a meeting was convened on 26 December 2007 and attended only by the petitioner and R5.  They took it to be a board meeting and voted to accept the offer made by the Government, authorising the petitioner to execute the agreements.  On 28 January 2008, the Government paid HK$1,270,863 to the relevant company, Top Master.[11]

8.  What followed next assumed central importance: On 1 February 2008, the petitioner withdrew HK$1,260,050 from Top Master’s account and deposited it in his own account.[12] The majority shareholders did not know that he had done this, but by this stage, they (especially R3 and R4) had become highly dissatisfied with the managers.  On 13 March 2008 in his e-mail to all the shareholders, R3:

“... queried P’s authority to proceed with acceptance of resumption monies without even informing the other shareholders and directors, and asked about the location of the monies. R3 stated that he believed none of the other shareholders and directors could attend the board meeting, asserting that P had no authority to make any binding decisions on behalf of the Companies.”[13]

9.  On 14 March 2008, R1 and R3 pressed for a written response from the manager.[14] And on 27 March 2008, the petitioner re-deposited HK$1,260,464.83 into Top Master’s account.[15]  On 3 April 2008, he sent the shareholders minutes of the board meeting of 26 December 2007 but did not mention that he had (as the Judge put it) “temporarily withdrawn the monies from [the company’s] account to his own account then redeposited the monies”.[16]  The Judge found that the most likely reason (given by the petitioner in evidence) for his having so dealt with the funds was that:

“... he did not trust the Majority Shareholders who he thought were already developing a ‘freezing out’ strategy, to abolish the Managers and the bonus, and he wanted to ensure the money could go to the pockets of the shareholders rather than funding R3’s development plans.”[17]

10.  P accepted in cross-examination:

“... that he had deliberately not sent the minutes to the other shareholders until after the payment had been received from the Government, stating he considered he was acting within his powers and he wanted to get the money safely in the bank and was concerned the other shareholders would try to prevent that.”[18]

11.  The relationship had clearly broken down and on 9 May 2008, the Companies held EGMs removing the petitioner and R5 as managers.[19]  After a long impasse, the petitioner issued the section 168A petitions on 20 June 2013.

B.     The Judge’s decision

12.  The Judge found that the conduct of the majority shareholders was unfairly prejudicial to the petitioner’s interests as a member, such conduct consisting of two main breaches of the SHA. 

13.  In the first place, she construed SHA Clause 6 as placing an obligation on the majority shareholders, if an outside buyer were to make an offer above a stated minimum, to approve the sale unless a shareholder matched that offer within 7 days.[20]

14.  Secondly, she construed SHA Clause 4 as “entrenching” the managers and precluding any power of removal, whether or not for cause, in the light of the managers’ right to receive a bonus in perpetuity.[21]

15.  Her Ladyship therefore granted the buy-out relief sought.

C.     The decision of the Court of Appeal

16.  Barma JA, writing for the Court of Appeal, held that the Judge had misconstrued Clause 6(2) of the SHA in holding that it obliged the majority shareholders to approve the proposed sales.  As this allegation is no longer relied on, we need not dwell upon it, save to say that we agree with his Lordship’s reasoning in reaching that conclusion.[22]

17.  Barma JA also held that the Judge was wrong to decide that the SHA precluded the majority shareholders from removing the petitioner. He held that Clause 4 did not constitute a promise to bring about a situation in which the managers could start earning remuneration and that the reference to “perpetual basis” did not mean that the managers’ position was “entrenched”.  His Lordship decided that it was obviously to be implied in the SHA that the petitioner could be removed for misconduct, particularly where it had the effect of undermining the trust and confidence reposed in the manager concerned. [23]

18.  He went on to hold that the existence of good cause for the petitioner’s removal had been established:

“... While the failure to advise the other shareholders promptly of the fact that a board meeting of Top Master had been held on 26 December 2007 at which it had been resolved to accept the Government’s offer of compensation might not seem to be a particularly serious matter, the same cannot be said of the diversion of Top Master’s funds to a personal account of the petitioner. Such an action, undertaken without the knowledge or consent of the other shareholders, was clearly a serious breach of duty on the part of the petitioner. The reasons put forward for it (whether in relation to the allegedly more favourable rate of interest obtainable, or for ease of obtaining cashier orders, or fears of being held up by the other shareholders) cannot be regarded as justifications for the course taken. More significantly, it is notable that despite being asked about the whereabouts of the resumption compensation proceeds, the petitioner did not at any time before his removal inform the shareholders that the monies had been transferred to his personal account where they remained for some two months before being transferred back to Top Master when questions were being asked. Such conduct would clearly, in my view, give rise to a justifiable loss of confidence in the petitioner on the part of the other shareholders. As such, I have no doubt that it was misconduct which was serious enough to justify removal of the petitioner from his position as a manager.”[24]

D.     The leave application

19.  In seeking leave to appeal, the petitioner puts forward the following questions as having the necessary general importance:

Question 1: When the issue is whether a party has engaged in unfairly prejudicial conduct and the ground of complaint is exclusion from management, is the party entitled to rely on a ground for exclusion which was not known to him at the relevant time (but only ex post facto)?

Question 2: If a contract provides for the appointment of a person to a particular post in perpetuity (i.e., the appointment has no expiry and there is no power to terminate), does this mean that:-

(a)      such a contract would necessarily be subject to an implied term of termination for cause (as held by the CA)?

(b)      if so, what exactly is the content of the term to be implied (e.g., what exactly does cause mean - is negligence sufficient or is dishonesty required)? (Emphasis in the original)

Question 3: To what extent can (or should) the CA interfere with the primary findings of fact made by the Tria1 Judge? Specifically, the proposed appellant invites the CFA to give definitive guidance as to the parameters in which an appellate court should substitute its own findings in the absence of hearing evidence and in place of ordering a re-trial.

Question 4: Is the Court entitled to depart from the ordinary and natural meaning of words in construing a contractual term? Specifically, where a contractual provision provides for that a party “will have to” perform an act, whether it is open to the CA to hold that this was merely a pre-condition, rather than imposing an obligation? 

20.  We shall deal first with Questions 2, 3 and 4 which must be rejected for the following reasons. 

21.  Question 2 rests on a false premise.  The SHA does not, as the petitioner suggests, “[provide] for the appointment of a person to a particular post in perpetuity (i.e., the appointment has no expiry and there is no power to terminate)”.  As we have seen, Clause 4 refers to payment of a bonus “on perpetual basis” which read in context, as Barma JA held, did not involve a promise that the petitioner would be “entrenched” as manager by ensuring that he would be placed in a position to earn a bonus. Thus, Question 2 which incorrectly postulates an express term excluding any power to terminate, does not arise.  In any event, the principles governing the implication of terms are contract-specific and well-established.  No one has suggested that any term is “necessarily” to be implied by law in the present case. 

22.  As explained by Mr Kwan Ping Kan who appeared for the petitioner, it was intended by Question 3 to contend that in holding that the petitioner’s conduct constituted misconduct, the Court of Appeal had erroneously interfered with a finding of primary fact.  That is not reasonably arguable.  The Court of Appeal was making an evaluative judgment that this was a “case of misconduct which would have the effect of undermining the trust and confidence reposed in” the petitioner.[25]  Thus, Question 3 as framed also does not arise.  Moreover, the principles as to when an appellate court may interfere with primary findings are well-established and do not require revisiting.

23.  Question 4 seeks to challenge the construction adopted by the Court of Appeal which was obviously case-specific.  The question, asked in general or abstract terms, is inapt.

E.     The issues raised in Question 1

24.  As we have seen, Barma JA held that the petitioner’s position as manager was not entrenched and that the SHA impliedly permitted his removal for good cause.  Question 1 does not take issue with this.  We have already rejected the petitioner’s attempt (on the misconceived ground advanced in Question 3) to challenge the Court of Appeal’s holding that the petitioner’s diversion of Top Master’s funds to his personal account constituted relevant misconduct.[26]

25.  Thus the sole issue raised by Question 1 requiring consideration is whether such misconduct can be relied on to avoid a finding of unfair prejudice when it was not known to the majority shareholders at the time when they decided to remove the petitioner.

26.  Barma JA dealt with this point stating:

“Although the shareholders were not aware of this misconduct on the petitioner’s part prior to his removal, this makes no difference, as they are entitled to rely retrospectively on a valid ground for termination even though they were unaware of it at the time (see e.g. Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339, Chitty on Contracts (32^nd ed) para 24-014). Indeed, having regard to the fact that the petitioner did not disclose what he had done, despite having several opportunities to do so, it is scarcely surprising that the shareholders were not aware of it.”[27]

27.  Mr Kwan sought to argue that the contractual principle in the Ansell case is inapplicable because unfair prejudice proceedings require a “conscience-based approach, which is founded in the parties’ respective knowledge”.[28] He cited in support Judge v Bahd,[29] in which Mr Mark Cawson QC (sitting as a Deputy Judge of the English High Court) held that matters put forward by way of ex post facto justification for excluding the petitioner from management could not be relied on if they “did not actually operate on [the respondent’s] mind at the relevant time”.  On that basis, Mr Kwan submitted that the majority shareholders could not rely on misconduct of which they were unaware as negating unfairly prejudicial conduct on their part and that the petitioner ought accordingly to succeed under section 168A.

28.  Mr Victor Joffe[30], for the majority shareholders, argued that the petitioner’s case on unfair prejudice could only rest on his establishing that the majority shareholders were in breach of the SHA.  If, as a matter of contract law they were entitled to remove the petitioner – including by application of the Ansell principle – there was no breach and thus no basis for a finding of unfair prejudice.  He acknowledged that equitable principles may constrain certain conduct in quasi-partnership cases but, Mr Joffe submitted, since the Judge and the Court of Appeal had found that no quasi-partnership existed in the present case, there was no room for the invocation of equitable principles as somehow imposing a requirement of knowledge and excluding the well-established contractual principle.  Counsel submitted that the Judge v Bahd decision was contrary to principle and to many other authorities.

F.     Not reasonably arguable

29.  The approach to deciding whether there has been conduct unfairly prejudicial to the interests of a member of a company under section 168A is well established and was authoritatively summarised by Lord Hoffmann in O’Neill v Phillips.[31] For present purposes, it suffices to note that a member will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted.[32]  There may be certain cases where equitable considerations make it unfair for those conducting the affairs of the company to rely on their strict legal powers.  This may arise, for instance, where the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed and so would be regarded in equity as unconscionable.[33]  It is, in other words, necessary to establish some such basis for an allegation of unfair prejudice.

30.  The Courts below held that this was not a quasi-partnership.  The petitioner’s case therefore rested entirely on his allegation that by removing him as manager, the majority shareholders were in breach of the SHA which underpinned their corporate relationship, constituting conduct unfairly prejudicial to his interests as a member.  The Court of Appeal held however that that purported breach was based on a misconstruction of Clause 4 as an “entrenching” provision and was unsustainable.  If left in this situation, the petitioner would simply have no case. It was accepted below that the majority shareholders were entitled to remove the petitioner as director[34] and, on the Court of Appeal’s construction of the SHA, his removal as manager did not involve any breach.  No additional equitable considerations were relied on to qualify his removal as contrary to good faith.  There would thus be nothing the petitioner could point to as constituting unfair prejudice.

31.  His attempt to rescue the position involves the argument that there was after all a breach of the SHA: Granted that the Court of Appeal had rejected the Judge’s construction of Clause 4, the petitioner could only lawfully be removed as manager for misconduct.  Crucially, so the argument runs, in the section 168A context where equitable considerations apply, that misconduct must have been known to the majority shareholders when they took the step of removing him.  Since they were not aware of his dealings with Top Master’s funds, they had no valid grounds for relying on misconduct as the basis for his removal and so were in breach of the SHA.  As noted above, reliance was placed on Judge v Bahd[35]in support.

32.  The aforesaid proposition is contrary to principle and inconsistent with the great preponderance of the authorities. 

33.  Section 168A(1)[36] is directed at the possible existence of conduct unfairly prejudicial to a member’s interests.  This involves the court applying an objective standard of fairness to the available evidence.[37] There is nothing in the section’s wording to suggest that the persons concerned must be subjectively aware of the factors bearing on the existence or otherwise of unfair prejudice.  Thus, it has repeatedly been held[38] that the court may hold that the conduct complained of is objectively unfairly prejudicial without having to be satisfied that its alleged perpetrator intended or was conscious of it being so.  The perpetrator might subjectively have believed that he or she was behaving with impeccable fairness but might nevertheless be found objectively to have engaged in conduct unfairly prejudicial to the interests of the petitioner.  Unsurprisingly, the petitioner’s conduct may equally be highly relevant to the court’s assessment of fairness.  Thus, Nourse J remarked that “it may render the conduct on the other side, even if it is prejudicial, not unfair”.[39]

34.  Decisions disagreeing with Judge v Bahd include the earlier judgment of Warren J in Amin v Amin,[40] where his Lordship accepted that “in determining whether the conduct complained of was unfair, the conduct of both petitioner and respondent, whether or not known about at the time, will be relevant considerations”, being an approach supported by the wording of relevant section and the objective approach to determination of whether there is unfairness.  That case was apparently not cited in Judge v Bahd.

35.  Subsequently, in Waldron v Waldron,[41] HH Judge Eyre QC held that in principle, the objective exercise requires the court to consider all the circumstances known to it:

“The objective nature of this exercise indicates that the court should undertake it in the light of all the circumstances known to the court. Fairness or unfairness is to be determined in the light of those circumstances seen as a whole. Just as a genuine belief by a party that he or she was acting properly in excluding another party is not determinative of the question and does not prevent a finding of unfairness so an exclusion is not to be regarded as having been unfair if circumstances existed warranting the exclusion. This is so even if those circumstances were not known at the time of the exclusion or were not the reason for it.”[42]

36.  His Honour also made the important point (to which I shall return) that “if a petitioner’s conduct were held not to be relevant to the fairness of an exclusion which it had not caused it would still be highly relevant to the question of the appropriate relief.”[43]

37.  In Re Dinglis Properties Ltd,[44] Mr Adam Johnson QC (sitting as a Deputy Judge of the English High Court) preferred the approaches of Warren J and HH Judge Eyre QC to that of Mr Mark Cawson QC, stating:

“... I am inclined to agree with the idea that the proper approach is a broad, objective one, and that in assessing the fairness or otherwise of the petitioner’s exclusion, there is no bar to taking account of matters which were in existence at the time, but not actually known to the respondent.”

38.  Finally, telling powerfully against the petitioner’s submission is the nature of the court’s jurisdiction regarding relief.[45] It is clear that the Ordinance gives the court a broad discretion as to the nature of the relief it should order where unfair prejudice has been established.  In the decision of the Privy Council in Ming Siu Hung v J F Ming Inc,[46] Lord Briggs made it clear that “nothing is off-limits” when considering relief:

“First, at the remedy stage, the court is entitled to have regard to any aspect of the facts as found about the history of the company and the relationship between its shareholders inter se, and between them and the directors, including those occurring after the issue of the claim and those which may fairly be found by the court even though not necessarily pleaded. In short, nothing is off-limits, subject only to the twin tests of relevance and weight, in relation to the choices to be made in the exercise of the discretion. Secondly, the court necessarily looks not only to the past but to what the court finds is likely to happen in the future.”[47]

39.  His Lordship cited with approval, Patten J’s judgment in Grace v Biagioli,[48] stating:

“The prospective nature of the jurisdiction is reflected in the fact that the court must assess the appropriateness of any particular remedy as at the date of the hearing and not at the date of presentation of the petition; and may even take into account conduct which has occurred between those two dates. The court is entitled to look at the reality and practicalities of the overall situation, past, present and future.”[49]

40.  It is wholly implausible that the court should adopt such an all-encompassing, “nothing is off-limits” approach when deciding what relief fairness requires while assessing whether there was conduct unfairly prejudicial to the interests of the petitioner in a blinkered fashion, excluding from its consideration matters that are relevant but were unknown to those having conduct of the company’s affairs.  The court applies an objective standard of fairness in both inquiries and is entitled to take into account all relevant factors of which it is aware. 

41.  Moreover, in a case like the present, the petitioner’s appeal to equitable considerations as a basis for precluding the court’s consideration of matters unknown to the majority as a ground for his exclusion from management rings hollow since that unawareness was the result of his concealment and failure to respond to questions as to the whereabouts of the funds.

42.  For all the abovementioned reasons, we did not consider the point sought to be advanced under Question 1 to be reasonably arguable and accordingly refused leave to appeal.[50]