DING WING TAI v. YAU LEE PRECISION INDUSTRIAL CO LTD AND OTHERS

1988. No. A7222

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. In this action, the plaintiff claims against all three defendants for various relief, with the 1st defendant having to be joined as a necessary party. The allegations, principally against the 2nd and the 3rd defendants, are clear enough although the assertions contained in the General Endorsement on the Writ would appear to require some refinements.

2. From the historical background against which the dispute between the parties arose and which I shall soon go into, it can be seen that the 2nd defendant has always been and still is a shareholder/director of the 3rd defendant company.

3. One of the allegations against the 2nd and the 3rd defendants is damages for conspiracy, but I think Mr Poon, Counsel for the plaintiff, would be the first to concede that there are authorities for the proposition that the crime of conspiracy does not exist between a limited company and one of its directors. R. v. McDonnell, [1966] 1Q.B. 233. The alleged conspiracy is one between the 3rd defendant company and its director, the 2nd defendant. However, the spirit and purport of the assertions in the General Endorsement are sufficiently clear. It would certainly be futile at this interlocutory stage, to descend into the specifics of these general assertions.

4. The plaintiff, one Mr Fong and the 2nd defendant were apparently friends until the recent events. They each ran their own business establishments. In July 1981, the 1st defendant company was incorporated. According to the plaintiff, the incorporation of the 1st defendant company was for the purpose of jointly carrying on the business of injection moulding of electronic plastic parts on a larger scale. The plaintiff, Mr Lo and Mr Fong became shareholders and directors of the 1st defendant company. The idea was to provide the consumers with a higher capacity of injection moulding.

5. The plaintiff states on affirmation that the agreement between them, the plaintiff, Mr Lo and Mr Fong, was for all the contracts requiring a higher than 45 oz. injection moulding capacity facilities to be channelled to the 1st defendant company and for contracts requiring less than 45 oz. injection moulding capacity to be dealt with by the 1st defendant company, Mr Fong's firm by the name of Yau Wing Industrial Company Ltd. or the 3rd defendant company, depending on which company the customers themselves directly approached.

6. Counsel for the plaintiff outlined six categories of misconduct and breaches of fiduciary duty on the part of the 2nd defendant, Mr Lo. Suffice it to say : these allegations are that the 3rd defendant through the 2nd defendant diverted customers of the 1st defendant to the 3rd defendant who would ultimately sub-contract the work back to the 1st defendant, that the 3rd defendant procured orders from the 1st defendant at a lower-than-cost price through the 2nd defendant, that certain post-dated cheques paid by customers to the 1st defendant were caused to be discounted on a charge paid to the 3rd defendant who would use the proceeds on such discounting temporarily, that raw material supplied to the 1st defendant by the 3rd defendant instead of the usual suppliers were charged a commission of 5 cents per 1b., and that the design for plastic containers was usurped for the benefit of the 3rd defendant. Among these various accusations against the 2nd and the 3rd defendants, it is said that most of the contracts worth $8.1 M. procured by Mr Fong for the benefit of the 1st defendant were passed on to the 3rd defendant in breach of the 2nd defendant's fiduciary duties as a director. Mr Poon, Counsel for the plaintiff, explained that on his instructions, of the $8.1 M. worth of contracts, $7.7M. worth had been channelled to the 3rd defendant with charges at 10% thus resulting in a loss to the 1st defendant in the region of $770,000.

7. This is all, of course, past history except for the contracts not yet executed. These matters were canvassed, I believe, with a view to reflecting the conduct, or I should say alleged misconduct, of the 2nd defendant together with the 3rd defendant company. That forms the basis of the alleged conspiracy between the 3rd defendant company and its director.

8. The plaintiff did not know the stance of Mr Fong then; hence no direct accusation was initially made against him.

9. On the 7th November, the plaintiff filed the instant summons against the 2nd and the 3rd defendants. The plaintiff claims against the 2nd defendant a Mareva Injunction for the assets of the 1st defendant, including its machineries. He seeks an injunction retraining the 2nd defendant from winding up the 1st defendant company without its authority. This claim has since been abandoned once the attitude of Mr Fong is known. Mr Fong seems to have taken side with the 2nd defendant, and as a majority in the 1st defendant company, authority for any proposed winding-up can readily be secured.

10. The 2nd defendant is sought to be further restrained from procuring breaches of contracts between the 1st defendant and its customers and from disclosing, divulging or using confidential/proprietary information or other trade secrets acquired by the 2nd defendant in his capacity of director of the 1st defendant.

11. As against the 3rd defendant, the plaintiff claims that it be prevented from carrying on or participating in trade in competition with the 1st defendant, soliciting any of the 1st defendant's customers and/or procuring breaches of contracts between the 1st defendant and its customers.

12. It is common ground that the 1st company is now in a poor shape. It is also common ground that in or about August the plaintiff, Mr Fong, and the 2nd defendant agreed in principle to sell its assets, in particular the machineries because of the loss sustained by the 1st defendant company. The plaintiff's allegation is that no sooner had he found a buyer for about 1/3 of the 1st defendant's machineries, the 2nd defendant intervened with the excuse that the machineries would be required by the 1st defendant company which had no intention to have them sold.

13. Disagreement between the 2nd defendant and the plaintiff had set in earlier than August. In fact, according to the plaintiff, he was ousted from the management and the operation of the 1st defendant company some time before. In late October, the plaintiff was requested by the accountant of the 1st defendant company, Miss Lai, to remove the moulds of his own defunct company, which had been stored at the premises of the 1st defendant. The reason allegedly given by Miss Lai was "so that the 2nd defendant could readily dismantle and remove the 1st defendant's machineries to Shenzhen". Miss Lai supplied no further information of the imminent move. Thereupon the plaintiff consulted his legal advisers. On the morning of the 7th November, in the course of his conversation with Miss Lai over the telephone, the plaintiff was told that the electricity supply to the machineries was being   disconnected. At about noon, the plaintiff received information that workers were beginning to dismantle the 1st defendant's machineries with lorries waiting outside the premises.

14. Apparently, the plaintiff's legal advisers wasted no time and on the 7th November, the writ of summons and the instant inter partes summons were caused to be filed. On the 9th November, the plaintiff appeared ex parte before Barnes J. and obtained a Mareva. Injunction from the learned judge against the 2nd defendant, with specfic reference to the machineries of the 1st defendant. The plaintiff also managed to secure a further injunction order from the learned judge, restraining the 2nd defendant from taking any steps to wind up the 1st defendant or doing any acts, prepartory thereto.

15. The 2nd defendant was also enjoined by the ex parte order of Barnes J. to "forthwith return to the premises of the 1st defendant at Ground Floor, 19 Hung To Road, Kwun Tong, Kowloon, Hong Kong all of the 1st defendant's assets including" two machines which are now said to be in Shenzhen.

16. The plaintiff is now before me for presumably a continuation of the ex parte order granted by Barnes J. and the granting of the remainder of the relief sought in the summons.

17. The 2nd defendant's explanation is brief. According to him, the 1st defendant company was formed in July 1981 to rescue the plaintiff's company by the name of Precision Company Limited. that decision was taken by him & Mr Fong who was then running his own establishment under the name of Yau Wing Industrial Company Limited; he was in control of his Lee Cheong Plastic Manufacturing Limited, the 3rd defendant. The 2nd defendant claims that it had always been the intention of Mr Fong and himself that the rescue operation was to take place in Shenzhen. It has not been explained as to why there should be a lapse of some seven years, from 1981 to at least August 1988, during which the 1st defendant company had been left to function in Hong Kong. The background as given by the 2nd defendant seems, in essence, to be that the ultimate goal is a rescue package of the plaintiff's Precision Company Limited in Shenzhen through the medium of a Shenzhen company but that in the interim the 1st defendant in Hong Kong was to be the care-taker company. The alleged rescue operation was to have the machineries and presumably also the connections taken over by that Shenzhen company with its equity shared by the plaintiff, Mr Fong and the 2nd defendant or their respective commercial enterprises in such proportion as the parties would agree among themselves. In the event of the plaintiff being unwilling or unable to take up any share in the Shenzhen company, his interest in the Chinese commercial establishment was to be purchased by the 2nd defendant and Mr Fong. It is said that there had been discussions for implementing the goal of such a rescue operation with the plaintiff since August 1988, who was therefore aware of the move to Shenzhen but raised "no opposition", hence Mr Fong and the 2nd defendant treated the plaintiff as having consented to it.

18. On that understanding, two of the 1st defendant's machineries have now been moved to Shenzhen.

19. The plaintiff denies all this. What the 2nd defendant said in paragraph 27 of his affirmation filed on the 29th November is : As to the meetings for the purposes of finalising the alleged rescue operation "both Fong and myself, 2nd defendant, greatly supported the idea and the plaintiff had no objection to it as the plaintiff admitted in his affirmation. We have no formal directors meetings and no written minutes of the decision to move the operation of Yau Lee (i.e. the 1st defendant company) were recorded. However, I wish to point out that throughout the discussion, the plaintiff did not oppose the idea and both Fong and myself took it that the plaintiff tacitly agreed to the idea".

20. Therefore we have two assertions, one from the plaintiff and one from the 2nd defendant who is now apparently, supported by Mr Fong, diametrically opposed one against the other. The plaintiff makes accusations principally against the 2nd defendant for mismanagement management of the company, improper conduct unjustifiably enriching himself and the 3rd defendant at the expense of the 1st defendant and various other acts of breaches of fiduciary duties as a director of the 1st defendant. The plaintiff maintains that the 2nd defendant has had no authority from the 1st defendant nor blessings from himself for the removal of the two pieces of machinery from the premises of the 1st defendant to China.

21. The 2nd defendant has given reasons for the machineries to be so removed. The 2nd defendant has also given reasons as to why the 1st defendant can no longer operate in Hong Kong. In fact, rental for the 1st defendant's premises in the sum of $50,000 per month has been left unpaid for the last two months.

22. It is common ground that the financial health of the 1st defendant company leaves much to be desired so much so that Counsel for the plaintiff has expressed concern as to the entitlement of the plaintiff to petition for a court winding up by reason of the latest Court of Appeal decision that the petitioner should show a prima facie surplus for distribution. Mr Poon, however, made it quite clear that if the plaintiff's action against the defendants should succeed, there would be every likelihood for more than enough to be retrieved to meet the demands of the 1st defendant's creditors.

23. This is hardly the stage of the proceedings, at which factual disputes are to be resolved. It is not disputed that there are serious questions to be tried. For the reasons I am about to give, broadly speaking, in layman's language, what falls to be decided is the question of what is best to be done in practical and realistic terms for preserving the assets in line with the Cyanamid principles. American Cyanamid Co. v. Ethicon Ltd., [1975] 2 W.L.R. 316.

24. I was at one time somewhat disturbed by the unbending attitude of the plaintiff in pursuing the mandatory order enjoining the 2nd defendant to return the machineries from China. Rental of the 1st defendant's premises for the last two months has been in arrear. There is some faint suggestion that workers of the 1st defendant company have not been dispersed. However, there is no evidence on affirmation before me as to how many former workers of the 1st defendant company have demonstrated their loyalty, willing to sit and wait for the return of the machinery and the resumption of operation. There is also no evidence as to how many of these workers have been kept on the pay-roll pending the decision on the plaintiff's inter partes summons application. Electricity to the 1st defendant's machineries has been disconnected.

25. The 2nd defendant and Mr Fong are the majority shareholders of the 1st defendant company. The 2nd defendant and Mr Fong are now the only shareholders and directors of the 3rd defendant company. There was a small shareholder not very long before in the 3rd defendant company, but his interest has now been assumed by the 2nd defendant.

26. The 3rd defendant has been giving commercial and other assistance to the 1st defendant. At least the 3rd defendant served as the commercial front for the 1st defendant for a considerable long time. It is not expected that with the attitute of the 2nd defendant, now Mr Fong, hence also the 3rd defendant on the one hand and that of the 1st defendant on the other, the parties would henceforth sensibly work together. The 2nd defendant has listed some difficulties for a possible resumption of business by the 1st defendant. If I were to order the return of the machineries now in China, the same together with the remainder in Hong Kong would not likely be put to profitable use.

27. Mr Poon, Counsel for the plaintiff, had little to add to this sorry tale of the 1st defendant. The main motive of the plaintiff was to ensure, for the purposes of his action, that assets of the 1st defendant company would be preserved for the benefit of creditors and hopefully for himself with any excess over. There is little hope for the operation of the 1st defendant to be revived. No evidence is given that any preparatory steps are on foot or have been taken with a view to a planned resumption of activities by the 1st defendant company. In any case, the 3rd defendant company can hardly be relied upon to play its usual role in any future commercial activities of the 1st defendant company. The 2nd defendant and Mr Fong being the majority shareholders of the 1st defendant company cannot be expected to cooperate. No offer of co-operation has come through Counsel on behalf of the 2nd defendant and this court has heard no like indication from Mr Fong. On the other hand, the machineries now in China are proposed to be put to profitable use, so claims the 2nd defendant.

28. Anxiety has been aired as to the bona fide of the 2nd defendant, feasibility of his planned operation, possible damage to the machines in China, parting with possession of them to some entity in Shenzhen, and as to the proper assessment and safe-keeping of any profits made.

29. In the course of his submission, Counsel for the plaintiff listed certain proposals principally for the assistance of this court as well as for the consideration of Mr Fong and the 2nd defendant. Those proposals are designed to provide safeguards againt any improper manipulation and concealment of profit, including unauthorised and unsupervised use of the 1st defendants machineries. Counsel for the plaintiff categorically stated that these are mere indicators and that all would be open to negotiation. The aim is to provide assurances that the defendant is bona fide, that the 1st defendant's machineries will be properly used and maintained and profits arising out of the Shenzhen operation will be fairly preserved and protected.

30. There was no or no positive response from the 2nd or the 3rd defendant. Without any reasonable safeguard, particularly in the absence of a concluded agreement as to how the Shenzhen company is to be formed, shared and run, the Shenzhen operation simply cannot be an acceptable proposition to the plaintiff. Moreover, no details are volunteered as to how the machineries are to be managed, used and serviced, and the plaintiff is not being reasonably briefed as to the feasibility of this Shenzhen enterprise. These machines left Hong Kong virtually on the eve of the plaintiff's application for a Mareva Injunction. Total disregard of the plaintiff's plea for assurances in the light of a rather strained assertion of a much delayed final phrase of a rescue operation is wholly unrealistic.

31. The 2nd defendant and Mr Fong have apparently been unsuccessful in acquiring the plaintiff's share in the machineries. Otherwise, with Mr Fong and the 2nd defendant as the only directors/shareholders in the 1st defendant company, there would have been no necessity for these proceedings and inter partes summons before me today. In the absence of any concluded agreement between the plaintiff, 2nd defendant and Mr Fong, even on the allegations of the 2nd and the 3rd defendants, the machineries remain the property of the 1st defendant which has passed no resolution or made other arrangement as a body corporate to part with or dispose of these of its assets.

32. Without even showing some willingness to negotiate terms for guaranteeing or preserving the value of machines, the plaintiff would not be protected by any device falling short of their return. The 2nd and 3rd defendants have provided no evidence of the prospects of success in the alleged vague rescue operation, and I am left in doubt as to whether even these defendants would themselves truly stand to gain. Information is scanty.

33. With the assets in terms of the two machineries brought back to Hong Kong and the rest prevented from leaving this jurisdiction, it cannot be claimed that real prejudice would be caused to these defendants who have no formal authority to risk depleting any more of the assets of the 1st defendant and who have disclosed little for a reasonable prospect of success in China. I am not satisfied that these defendants would not be adequately compensated by the plaintiff's undertaking as against such uncertain business undertaking or gain proposed to be pursued on an assumed tacit agreement.

34. The matters of anxiety given by the plaintiff through his Counsel are real, particularly when there is little in the circumstances to verify the bona fide of the 2nd and the 3rd defendants.

35. In the circumstances, it would be, to say the least, very uncomfortable for this court to refuse some of the orders sought by the plaintiff. It should not be forgotten that superimposed on all these anxieties, we have the plaintiff's present factual disputes with the 2nd defendant whose conduct has been shown to be less than satisfactory in the past by documents which this court has been taken through in the course of Mr Poon's submissions.

36. The plaintiff has made out a proper case for injunction. Mr Poon has sought leave to amend the inter partes summons with a further refinement for which no formal leave has been granted. I would treat the existing amended portion of the inter partes summons as if it had been applied for and granted with the ultimate refinement introduced by Mr Poon. What was sought to be added is another paragraph (1A) to the summons in the following terms : "1(A) The 2nd defendant do forthwith return to the premises of the 1st defendant or at such premises as a court may direct all of the 1st defendant's assets or machineries which were removed by the 2nd defendant, including but not limited to the two sets of machinery numbered 8 & 16 in the Schedule annexed hereto" AND paragraph (e) to the existing paragraph (1) of the summons in the following terms : "(e) otherwise acting in breach of his fiduciary duty owed to the 1st defendant as a director thereof."

37. What has been granted by Barnes J. in para. 1 of his order should therefore be continued, with substitution of the words "after the hearing of the inter parties (sic) summons returnable herein on 29th November, 1988" by the words "the hearing of this action". Obviously sub-paragraph (b) of paragraph (1) of the order cannot now be maintained in the light of his abandonment of paragraph 1(b) of his inter partes summons. Mr Poon explained that that paragraph was sought to be obtained at a stage at which the attitude of Mr Fong remained unknown. Paragraph (2) of the order of Barnes J. should therefore be also continued. There is no evidence that other machineries have been removed. On that understanding, paragraph (2) be continued in the following terms : "the 2nd defendant do, within (subject to what Counsel have to say) 21 days from today, return to the premises of the 1st defendant at Ground Floor, 19 Hung To Road, Kwun Tong, Kowloon, Hong Kong or such other premises of the 1st defendant in Hong Kong the two machines which have been removed by the 2nd defendant, namely machines numbered 8 & 16 in the Schedule attached to the inter partes summons, liberty to apply."

38. Paragraph (1)(c) of the inter partes summons would appear to be otiose. The 1st defendant is no longer functioning. There is no evidence that there are any contracts or outstanding contracts of the 1st defendant company. Past conduct of the 2nd and the 3rd defendants could not be relevant and there is no evidence of feared or specific acts of misconduct. Besides, as majority shareholders Mr Fong and the 2nd defendant control the 1st defendant company.

39. Paragraph (1)(d) is likewise impractical with the 1st plaintiff not operational. The 3rd defendant has always been the business front of the 1st defendant. The agreement was that anything over 30 oz. interjection mould capacity should be channelled to the 1st defendant company for execution, in that respect 45 oz. for Yau Wing. With the 1st defendant not in operation, it would be oppressive and unreasonable to prevent the 2nd defendant or the 3rd defendant, during this dispute, from taking on any contracts requiring a higher injection mould capacity. These opportunities cannot wait. The 1st defendant will not likely be in a position to reap any profit from such contracts. Any profit to be made by the 2nd defendant allegedly in breach of his fiduciary duties could be got at and made accounted for ultimately in these proceedings.

40. As for paragraph (1A) which is, in essence, paragraph (2) of Barnes J.'s order, I need say no more. As for paragraph (2)(a) of the summons, for the same reasons I have given, it would be unreasonable and senseless to retrain the activities of the 3rd defendant. If the 3rd defendant has misconducted itself in conspiracy with or in breach of any fiduciary duty in conjunction with the 2nd defendant or otherwise, such activities could be looked into and the 3rd defendant could be made accountable at the trial of this action. Paragraph (2)(b) of the summons is impractical and unnecesary for the same reasons. The same applies to paragraph (2)(a) of the summons.

41. The new Paragraph (1)(e) to paragraph (1) of the summons is a prayer to wrap up the other paragraphs (a), (b), (c) and (d). Likewise I do not find that to be necessary in the circumstances. I have declined to accede to the plaintiff's request for prayers under sub-paragraphs (b), (c) and (d). There would not appear to be therefore, any real need for sub-paragraph (e). I would not make an order in terms of paragraph (1)(e) against the 2nd defendant.

42. As for costs, the plaintiff has succeeded on the substantive prayer in his inter partes summons. He has not succeeded in his prayer for a number of sub-paragraphs. Subject to what counsel have to say, a fair order for costs for the purposes of the application before me should be two-third of the costs of the summons and the hearing to the plaintiff in any event and one-third of the hearing costs to the plaintiff in the cause. Paragraph (2) of Barnes J. 's order should therefore be amended to read as follows :

 

"The 2nd defendant do, within 21 days upon notice in writing served by the plaintiff on the 2nd defendant undertaking to provide accommodation for the returned machineries, return to the premises of the 1st defendant at Ground Floor, 19 Hung To Road, Kwun Tong, Kowloon, Hong Kong or such other premises of the 1st defendant or such other premises provided by the plaintiff for the storage of any machines of the 1st defendant free of charge until trial, the 1st defendant's assets, namely the two machines now in Shenzhen, China, listed in the Schedule to the inter partes summons of the plaintiff as Nos. 8 and 16; liberty to apply."

(Further submissions on costs)

43. I have heard further submissions on the question of costs in respect to at the 3rd defendant. I am grateful to Mr Eddis for drawing my attention to the fact that in fact the 3rd defendant company has won the day. No relief sought against the 3rd defendant by the plaintiff is successful. On behalf of the plaintiff, Mr Poon complained that he was caught by surprise by the late affidavit filed by the 2nd defendant some time yesterday morning. Only after reading the affidavit and having decided not to pursue his application for an adjournment, did he elect, for the purposes of the present proceedings, to assume that the 1st defendant is no longer in operation. The plaintiff has had little knowledge of management. If he had shown more interest in it, he could have made enquiries as to the situation. He can provide no evidence of any real prospects of resumption. It is not challenged that rental for the premises in question has been in arear for two months. With the benefit of the affidavit, at least the plaintiff should be in a position to make an early concession in respect to the 3rd defendant sometimes yesterday morning or late yesterday afternoon. The 3rd defendant has instructed counsel and junior counsel and has been compelled to defend the inter partes summons of the plaintiff throughout. It may be a valid point for the taxing master that no or very little further time has been wasted on arguments against the 3rd defendant or that little or no additional time was needed in making submissions to resist the plaintiff's claim against the 3rd defendant company in the inter partes summons. These are matters to be determined by the taxing master in time to come. The party who is successful in the proceedings, as a rule, would be awarded costs. The general practice of costs to follow the event should not be departed from for the matters raised by Mr Poon, counsel for the plaintiff. I would, in the circumstances, qualify the order nisi I have suggested to the extent that the 3rd defendant is to have costs against the plaintiff on and for the inter partes summons.

(Further submissions on Counsel Certificate)

44. The case is not without complexity. My decision follows a realistic approach. Legal argument was not extensive at all in the sense that most of the principles advanced by Mr Poon were not resisted by Mr Eddis. At the conclusion of this application, Mr Poon did not apply for the case to be certified fit for two counsel. Mr Eddis sought costs on behalf of the 3rd defendant company and he was awarded costs accordingly. Mr Eddis intimated that his junior would, in due course, make an application. As far as the 3rd defendant is concerned, there is no inhibitory factor in the application before me to suggest that the case does not justify the assistance of Mr Tang as junior. I would accede to the invitation of Mr Tang for allowing two counsel for the 3rd defendant company.

45. Returning to Mr Poon, counsel claims that the plaintiff is likewise entitled to two counsel for the case against the 2nd defendant. The facts are certainly complex and cross references have to be constantly made. It certainly would be more comfortable for counsel to be assisted by another counsel. But the question to be answered is whether the merits of the case justify the attendance of two counsel. There are allegations of conspiracy. It is difficult for any court seized with a case with documents of this size to disagree with the suggestion that two counsel are merited. I have had some misgivings by reason of the absence of any prior application. However, on reflection, it cannot be said that the matter before me can be as well prosecuted and presented without the assistance of junior counsel. By and large, the conclusion I have come to is that the plaintiff should also be entitled to the certificate of two counsel for his case against the 2nd defendant, and I so order.