CHU CHUNG MING AND ANOTHER v. LAM WAI DAN AND OTHERS

HCCW 377/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 377 OF 2011

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J U D G M E N T

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A. Introduction

1. The parties to this action are family members. The 1^st Petitioner (“Chu”) and the 2^nd Petitioner (“Kit Hang”) are husband and wife. The 1^st Respondent (“Wai Dan”) and the 2^nd Respondent (“Chan”) are also husband and wife. Kit Hang is the younger sister of Wai Dan.

2. The 3^rd Respondent (“Company”) was incorporated under the laws of Hong Kong in September 1995. It has 4 issued shares. Each of the parties holds one share. Each of them is its director. According to its financial statements, the Company’s principal activity is property holding.

3. It is unfortunate that the Petitioners and the Respondents have fallen out with each other. As is common in this type of cases, they blame each other for the breakdown of their relationship. Having heard their oral testimony and observing their demeanor in court, as well as looking at the facts objectively, this court has no doubt that the parties are unable to carry on business together. Given the 50/50 split both at the shareholders and at the Board level, the Company has been in a state of “stalemate” for some time and will remain so in the foreseeable future – for one, they could not even jointly approve the audited accounts for the year ended 31 March 2010 and after. Fortunately for them, the Company’s principal activity is property holding and does not require much day-to-day management and decision making by its directors.

4. On 15 November 2011, the Petitioners presented the Petition seeking an order for the Company to be wound up; alternatively, a buy‑out order under section 168A of the Companies Ordinance (“CO”).

B.  Background

5. In the 1980s, Chu and Wai Dan started a partnership business as construction subcontractor. This partnership business was carried on in the name of “Sun Shing Construction Co”. They gradually expanded their business into different aspects of the construction industry including inter alia operating a fleet of vehicles and construction site mobile machines for rent to developers in Hong Kong.

6. In June 1994, Chu and Wai Dan incorporated the partnership business. The company is called Sun Shing Machinery & Construction Company Limited (“Sun Shing Ltd”). Chu and Wai Dan were its only shareholders and directors. Since then, the business further diversified and expanded, other family members i.e. their spouses and younger brothers became involved and several other companies (“Associated Companies”) were set up to carry on the expanded businesses. One of the Associated Companies is called Construction Machinery Technical Training Limited (“CMTTL”) which operates a training center for construction workers (“Training Center”).

7. In September 1995, on the advice of some accountant friends, Chu and Wai Dan set up the Company as the so-called “property arm” of their businesses. The idea was to use the Company to hold properties so as to minimize any financial impact should the business of Sun Shing Ltd. encounter unexpected difficulties. 

8. Over the years, the Company has acquired three plots of land which feature in the evidence ie Lot No. 2270A, Lot No. 2272 and Lot No. 2273 in Demarcation District No.118 in Yuen Long, New Territories (“Lot 2270A”,“Lot 2272”and “Lot 2273” respectively). The aggregate area of the three Lots is approximately 51,800 square feet. The Company has erected two 2-storeyed buildings on Lot 2270A (“Buildings”). The office of the Company (“Office”) as well as the offices of Sun Shing Ltd. and the Associated Companies were at all material times located on the 1^st Floor of one of the Buildings (“Office Building”) while CMTTL operated the Training Center on the Ground Floor. The common address of the offices is known as 1/F, No. 136 Sung Shan New Village, Yuen Long, New Territories, Hong Kong.

9. At all material times, the three Lots were licenced by the Company to Sun Shing Ltd. at a nominal rent of HK$10,000 (“Nominal Rent”). Sun Shing Ltd. used part of the land to park its fleet of vehicles for construction works and as a warehouse. For land not needed for self‑use, Sun Shing Ltd. would sub-licence it out to third parties and keep the licence fees.

10. The Company also owns Shop 12 on G/F, Yee Hong Building, No. 2 on Chun Lane, Yuen Long, N.T (“Shop 12”). It is rented out for income.

11. According to Chu’s testimony at the hearing, the relationship between the Petitioners and the Respondents deteriorated rapidly in April 2009 shortly after the funeral of Wai Dan and Kit Hang’s father, so much so that Chu and Wai Dan began discussion on how to split up the assets of all their companies and go their separate ways. Details of their discussion are irrelevant for the present purpose – suffice it to say that no agreement was reached between the parties. In October 2009, Chu commenced winding up proceedings in HCCW 605 of 2009 with Wai Dan and Sun Shing Ltd. as the 1^st and 2^nd respondents.  Eventually, in 2011, they settled the proceedings on terms for Wai Dan to buy out Chu’s share in Sun Shing Ltd.  A Consent Order to that effect was granted in March 2011. Since then, the respondents have become the sole shareholders and directors of Sun Shing Ltd.

12. As stated earlier, on 15 November 2011, the Petitioners presented the present Petition.

C.   Preliminary Observations

13. Before I proceed to examine the Petitioners’ complaints in detail, I would make a number of preliminary observations.

14. First, in order to provide a basis for the court to exercise its discretion under section 168A, it is necessary for the Petitioners to demonstrate that the Respondents have conducted the affairs of the Company in a manner which is objectively unfair to the Petitioners and in a way that is prejudicial to them or to the shareholders generally.  Unfairness and prejudice are distinct concepts and both must be established in order to obtain relief under that section: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors unrep.; HCCW 49, 49B, 50-52 of 2006 & HCCW 130‑133 of 2007; 21 December 2007; Barma J (as he then was) at [83]; Re Yung Kee Holdings Ltd. [2014] 2 HKLRD 313 at [105].

15. Second, having regard to the history of the business cooperation between Chu and Wai Dan as equal partners since the early 1980s and the close family relationship between the parties, given the equal shareholding and directorship between the two in Sun Shing Ltd. since 1994 and the similarly equal shareholding and directorship between the two couples in the Company since 1995, it is futile for the Respondents to deny that the Company is a quasi-partnership based upon mutual trust and confidence and with a common understanding that some viz Chu and Wai Dan, if not all, shareholders/directors are entitled to participate in the management of the Company. In this regard, it is telling that during his cross‑examination on Day 3 of the trial, Wai Dan frankly accepted that he regarded Chu as his partner in the Company, and hence his numerous attempts to consult Chu on the fire prevention works referred to below.

16. The applicable statement of the law was expounded by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379E-G as follows:

“It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”  (emphasis added)

17. It follows from the foregoing that the court can wind up the Company on the just and equitable ground on the basis of a complete breakdown in trust and confidence between the parties or on the basis of a deadlock between the parties which is incapable of being resolved so that they cannot carry on managing the Company jointly: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors supra at [85].

18. Third, although, according to the last audited financial statements approved by the parties i.e. those for the year ended 31 March 2009, the Company’s current liabilities far exceeded its cash in bank and other current assets, it is not seriously in dispute that the value of the Company’s fixed assets ie the three Lots and Shop 12 referred to in paragraphs 8 and 10 above was understated in the statements and that the properties, if sold in the open market, will be more than enough to settle the Company’s liabilities. According to a valuation report dated 18 April 2011 (“Valuation Report”), as at 31 March 2011, the market value of Lot 2270A as agricultural land was HK$5.7 million while with the benefit of short term waiver for the Training Center with ancillary facilities would be over HK$14.2 million. The market value of Shop 12 was HK$6.4 million.

19. Both sides indicated to this court at the hearing that their preference was for a buy-out order under section 168A rather than winding up the Company. Further, each side indicated to this court that they preferred to buy out the other, albeit it is fair to say that Chu was open‑minded about selling to the Respondents – when asked by this court towards the end of his testimony, he said if the other side offered a reasonable price, he could sell his shares to them.

20. In view of the foregoing, and bearing in mind that a winding up order is a remedy of last resort, I shall concentrate on whether a case under section 168A is made out before proceeding to deal with the alternative of winding up the Company.

D.   The Petitioners’ Complaints

21. Based on the Amended Petition and Amended Points of Claim, the Petitioners’ complaints of unfair prejudice can be summarized as follows:

(1)  Physical assault of Kit Hang by Chan on 7 July 2009 in the Office Building while Kit Hang was trying to bring some documents for Chu’s perusal (“7 July Incident”).

(2)  Exclusion of the Petitioners from the Company’s management (“Exclusion”). This complaint consists of a number of elements, including in particular Wai Dan’s failure to give the Petitioners ready access to Company documents and his refusal to allow Chu to enter the Office Building to inspect them on 30 September 2011 (“30 September Incident”).

(3)  Procuring the Company to engage contractors to carry out fire prevention works on its land at the exaggerated costs of HK$1.9 million without obtaining the Petitioners’ prior approval (“Fire Prevention Works”).

(4)  The Respondents’ refusal after March 2011 to alter the previous arrangement whereby the Company charged Sun Shing Ltd. only the Nominal Rent for the use of the three Lots (“Nominal Rent Issue”). The complaint is that, since Sun Shing Ltd. is wholly-owned by the Respondents, any special concession previously given by the Company to Sun Shing Ltd. would only benefit the Respondents and is unfair to the Petitioners.

E.   7 July Incident

22. The 7 July Incident is rather briefly described in Chu’s evidence in this way.

23. On 7 July 2009, while Chu was on the Ground Floor of the Office Building, Kit Hang ran down from the First Floor with two document files, cried for help and said she was attacked by Chan while on the 1^st Floor. Chu asked his son to call the police. Kit Hang looked terrified and cried.

24. After the police investigation, Chan was charged with and pleaded guilty to one count of common assault.  She was convicted accordingly and was discharged on condition of a sum of $2,000 for 12 months – “not to commit or attempt to commit any offence involving violence or threat of violence”.

25. Since that incident, Kit Hang has not gone back to the Office to avoid confrontation with the Respondents and out of concern for personal safety. Chu at first insisted in going back to the Office to sign cheques and generally look after the business. But he also stopped going back to the Office since September 2009 allegedly for the same reason. In October 2009, he instituted winding up proceedings HCCW 605 of 2009.

26. This episode of physical violence is not in dispute. Nor is the criminal conviction. In my view, it is more probable than not that this episode is a manifestation of the breakdown of relationship between the parties, although it cannot be denied that it would likely also contribute to the further deterioration of their relationship.

27. Nonetheless, this episode cannot be regarded as conduct relating to the affairs of the Company for a number of reasons. First, although the episode took place within the Office Building and notwithstanding the plea at paragraph 56(e) of the Amended Points of Claim, there is no direct evidence that it was prompted by any desire to deter the Petitioners from going back to the Office or participating in the Company’s affairs. Kit Hang herself did not give evidence at the hearing. Nor did Chan. Second, on the evidence, the two documents files carried by Kit Hang were not the Company’s files, but files relating to one of the Associated Companies. It is difficult to draw any inference as to what prompted the episode either. For all I know, it could have been a personal matter between Kit Hang and Chan. Or it could have related to the affairs of that Associated Company. Third, apart from a bare assertion by Chu that Kit Hang and himself stopped going to the Office for fear of personal safety, it is difficult for this court to accept the 7 July Incident had that effect - there was no direct evidence that Kit Hang suffered any injuries, and the episode certainly did not deter Chu from going to the Office until September 2009. Nor did it deter him from trying to get into the Office Building on 30 September 2011. It seems to this court a more plausible explanation for the Petitioners’ behaviour was that by then the parties did not see each other eye to eye and Chu was contemplating litigation which he did commence in October 2009. I would reject Chu’s assertion as unbelievable.

28. In these circumstances, I shall ignore the 7 July Incident for the purpose of section 168A.

F.   Exclusion

29. While the Petitioners’ legal advisers have lumped almost all their complaints under this Head, properly analysed, it can be broken down into the following two main components:

(1)   the Respondents’ refusal to alter the bank mandate of the Company regarding signing of cheques despite the Petitioners’ request at a Board meeting in August 2010.

(2)   The Respondents’ refusal to allow the Petitioners full access to the books and records of the Company, principally documents relating to the carrying out of Fire Prevention Works on the Lots, including the 30 September Incident.

F.1.  Bank Mandate

30. This complaint can be dealt with briefly.

31. On the evidence, the Company only has one bank account with DBS Bank and its mandate is that any two directors can sign cheques. Before the breakdown in relationship, the practice has been for Chu and Wai Dan to sign cheques. It was only at the Board meeting on 20 August 2010, a year after the Petitioners had stopped going to the Office in July and September 2009 respectively, that the Petitioners first raised the issue that “All cheques of the Company shall be signed by 3 directors”. No agreement was reached and hence no resolution was passed at that meeting to change the bank mandate. The Respondents only agreed to consider the suggestion. Then nothing happened until almost another year has passed.

32. On 20 July 2011, the Petitioners’ solicitors, Messrs Jimmie K.S. Wong & Partners, wrote to the Respondents’ solicitors, Messrs Henry Wan & Yeung, bringing up the issue again. That letter refers to the Board meeting on 20 August 2010. It reads inter alia:

“We refer to the Directors’ Meeting of the Company held on 20^th August 2010.

…

Our clients also want to ensure that they will be involved in approving cheques of the Company. A proposal was made that all cheques of the Company are to be signed by three directors.

Another alternative is to have two lists of authorized signatories: one comprising our clients and the other yours. Cheques are to be signed by two signatories, one from each list.”

33. The reply from the Respondents’ solicitors was dated 29 August 2011. It said the Respondents were satisfied with the existing arrangement and that it should continue. In other words, they refused to revise the bank mandate.

34. The Petitioners’ case was that the Respondents wanted to operate the bank account without their participation and hence the refusal to alter the mandate.

35. Wai Dan’s explanation for not taking steps to alter the bank mandate was that he thought, mistakenly, the bank mandate was the same as the past practice ie cheques should be signed by Chu and Wai Dan and there was no point in altering the mandate. Consistent with that mistaken belief, he opened an account in his name with Wing Hang Bank in December 2010, as nominee of the Company, to deposit the Company’s rental income from Shop 12 and pay its expenses. This arrangement was disclosed in the reply dated 29 August 2011 from the Respondents’ solicitors.

36. I do not accept Wai Dan’s explanation. Common sense dictates that Chu would not have requested to alter the bank mandate if he believed the Respondents were not able to operate the bank account themselves. Wan Dan should also know that. If he did not, it would have been a simple matter for him to check with the bank to find out what the prevailing mandate was. There was no evidence that he did so after the Petitioners’ request. By the time of the Board meeting on 20 August 2010, the parties were already engaged in litigation in HCCW 605 of 2009. It is reasonable to draw the inference that Wai Dan knew full well what the bank mandate was but did not wish or bother to accede to Chu’s request. Hence, his inaction and continued request to the Petitioners to give him a sound reason for altering the mandate for his consideration. Given that the Petitioners had already made it clear why they wish to alter the bank mandate, it is unclear to this court what further reason was required by Chu.

37. Be that as it may, in my view, this complaint is unfounded. It was the Petitioners’ own choice not to go back to the Office after July/September 2009 to monitor the Company’s business and sign cheques. The bank mandate was the same before or after 20 August 2010 – there was no unilateral alteration of the mandate so that the Petitioners were no longer the Company’s authorized signatories. For this reason, I do not find the Respondents’ failure to alter the bank mandate amounts to exclusion of the Petitioners from participating in the affairs of the Company – no director can claim a right to sign cheques for the Company, even though he is authorized to do so.

38. I further find the complaint rather contrived. The Petitioners’ lack of concern about the signing of cheques until August 2010 and the absence of follow-up action by them after the August 2010 Board meeting for another year fortify this court’s view. According to the last approved financial statements of the Company ie for the year ended 31 March 2009, the Company had a rather modest rental income of HK$210,000 and similarly modest operating expenses of HK$437,727. There is no evidence that the Petitioners were sufficiently concerned about movements in the bank account to even ask for copies of bank statements from the Respondents. If they were genuinely worried that the Respondents might help themselves to the monies in the bank account, that was what they would have done. They did ask for access to the Company’s documents and records generally but their focus at the time was documents pertaining to the Fire Prevention Works, rather than bank records, and only shortly prior to the Petition. Their demand in contemporaneous correspondence has always been to alter the bank mandate. Importantly, there is no evidence or even suggestion that the Respondents have misappropriated funds of the Company such that it was necessary to alter the bank mandate to protect the Company’s interest. 

39. All in all, I do not find this failure on the part of the Respondents unfair or prejudicial to the Petitioners for the purpose of section 168A.

F.2  Access to the documents and records of the Company & 30 September Incident

40. With regard to this sub-Head of complaint, the contemporaneous correspondence reveals the following.

41. By letter dated 20 July 2011 (“20 July Letter”), the Petitioners through their solicitors asked for inter alia (i) information on who gave permission for the Fire Prevention Works to be carried out, the identity of the contractor(s) and the costs of such works and (ii) full details of all contracts entered into by the Respondents in the name of the Company without the Petitioners’ approval.

42. The Respondents replied through solicitors by letter dated 29 August 2011. The letter simply gave the names of the two contractors in question and a very brief description of the works they had contracted to do. There was no mention of contract price, when they were payable or whether any invoice had been paid. No documents were enclosed.

43. The Respondents further denied the two contracts for Fire Prevention Works were entered into without the Petitioners’ knowledge or approval, without stating when and how the Petitioners’ approval had been obtained. This denial is intriguing as it is totally inconsistent with the Respondents’ case that they have made numerous attempts to contact Chu to discuss matters relating to Fire Prevention Works but in vain.  To the credit of their counsel, at paragraph 48 of the Respondents’ Closing Submissions, it is accepted that the Fire Prevention Works Contracts have not been approved by the Petitioners, albeit that was entirely due to their neglect of the Company’s affairs.

44. By then, the following documents should have been received by Wai Dan:

A.	Kam Tin Fire Engineering Co Ltd. (“Kam Tin”)	Quotation in the sum of HK$1.2 million	3 March 2011
		Invoices	7 July 2011 8 August 2011
B.	Golden First Investment Co Ltd. (“Golden First”)	Quotation in the sum of HK$700,000	25 February 2011
		Invoices	8 April 2011 6 May 2011 3 June 2011 5 July 2011

45. A number of invoices from the two contractors should also have been received by Wai Dan shortly afterwards in September and October 2011.

46. By letter dated 12 October 2011 (“12 October Letter”), the Petitioners through their solicitors complained that the contracts for Fire Prevention Works were entered into without their approval and the lack of information on the contract price or the amounts paid to the contractors. The Petitioners also complained about the 30 September Incident. According to the letter, Chu tried to get inside the Office Building in order to inspect the documents relating to the Fire Prevention Works. He made the purpose of his visit known to Wai Dan but was nevertheless stopped by him.  Wai Dan said to Chu he should make a written request for inspection of Company documents through solicitors and asked him to leave.

47. The Respondents’ solicitors replied by letter dated 20 October 2011 (“20 October Letter”). In that letter, they disclosed the contract sums payable to the two contractors ie HK$1.2 million and HK$700,000 respectively and that they had already been paid. No supporting documents were disclosed. Further, it was admitted in the letter that on 30 September 2011, Chu did ask for documents relating to the Fire Prevention Works, Wai Dan did tell him to make a written request thorough solicitors and “invite” him to leave the premises. The alleged reasons given in the letter for denying Chu access was that the land had been licenced to Sun Shing Ltd., no prior notice had been given to Sun Shing Ltd. or Wai Dan of this visit, Chu was carrying a video camera attempting to record the operation of Sun Shing Ltd. thereby invading its “privacy” and its commercial secret, and the “intimidating” attitude of Chu. The only reason given for telling Chu to make a request through solicitors correspondence was that it was the Petitioners who had insisted on communicating with the Respondents through solicitors ever since 2010.

48. On 4 November 2011 (“4 November Letter”), the Petitioners through their solicitors again complained that they were denied access to the Office Building to inspect the books and records of the Company. Given that the Company’s registered office was situated on the 1^st Floor of the building, it was unreasonable for Wai Dan to refuse Chu entry into it. They also complained the provision of information by the Respondents with regard to the Fire Prevention Works in a piecemeal fashion. Lastly, they demanded immediate access to all books and records of the Company or else the Respondents should move the books and records to the office of the Company auditors so as to facilitate their inspection.

49. On 18 November 2011 (“18 November Letter”), three days after the Petition, the Respondents’ solicitors replied claiming that the Company’s books and records had already been transferred to the office of the Company auditors and asked the Petitioners to contact the auditors directly for inspection.

50. On Day 3 of the trial, Wai Dan was cross-examined on the reason why he did not provide the quotations and invoices to the Petitioners. He first said he could not find Chu after numerous attempts. He then explained he was busy taking care of his business and might have forgotten to send them to the Petitioners or their solicitors. When further cross‑examined on the reason why he did not allow Chu to inspect the Fire Prevention Works documents on 30 September 2011, Wai Dan admitted that Chu came to the Office Building and asked to inspect them. He gave three reasons for denying Chu access to the building or the documents. First, Chu came with a man and he felt he was not very friendly. Second, at that time, Ngai Sau Wah (“Ngai”) (wife of Lam Wai Tat) was embroiled in litigation with Chu. Since Ngai was working on the 1^st Floor, there might be trouble if he allowed Chu to go upstairs to inspect the documents. Third, he said he had told Chu to ask for inspection through lawyers and he would co-operate.

51. In my view, all the explanations given in the 20 October Letter and by Wai Dan in court were lame excuses.

52. The Petitioners first made a request for information on the Fire Prevention Works through solicitors by the 20 July Letter. Every piece of communication which followed was also by correspondence between solicitors. It seems to this court utterly pointless, other than as a delaying tactic, for Wai Dan to require Chu to make an appointment for inspection through lawyers – all he had to do was to send copies of the documents to (i) the Petitioners’ solicitors or (ii) his own solicitors and tell Chu to inspect them at a mutually convenient time, period.

53. Wai Dan was under legal advice and replied through his solicitors. It is inconceivable that Wai Dan could have given instructions to his solicitors for the preparation of a proper reply without the quotations and invoices in hand. Given that there were only two quotations and only a few invoices, it could not have been too difficult for Wai Dan to locate them personally or by a staff if he had wished to, however busy he might be at the time. In any event, the fact that he was busy was no excuse for denying Chu’s right as a director to inspect Company documents. 

54. Regarding what happened on 30 September 2011, the explanations given were equally lame, if not more.

(1)  First, the registered office of Company (as well as the Associated Companies) had always been and was on the 1^st Floor of the Office Building, notwithstanding the licence granted by the Company to Sun Shing Ltd. The lack of prior notice by Chu was no excuse for Wai Dan to stop a Company director to go to its registered office for a legitimate purpose. The law does not require a company director to give prior notice to all his fellow directors before going to the company’s office.

(2)   Second, the Training Center was on the Ground Floor. Wai Dan could at least have let Chu enter the Office Building and wait on the Ground Floor if he were genuinely concerned about Chu going after Sun Shing Ltd.’s commercial secrets or stirring up trouble even if Ngai was indeed upstairs. Since Chu was one of CMTTL’s shareholders and directors, he was entitled to stay on the premises occupied by CMTTL. While the land had been licenced by the Company to Sun Shing Ltd., CMTTL has been occupying the Ground Floor with the permission of Sun Shing Ltd. for years, and on the evidence, still was on 30 September 2011.

(3)   Third, Wai Dan could easily have brought the requested documents, personally or through a staff, down to the Ground Floor for Chu’s inspection. For no legitimate reason, he did not do so either.

(4)   Fourth, the so-called “intimidating” attitude of Chu is no excuse for denying Chu’s right of inspection as director. If Wai Dan were genuinely concerned about his personal safety, the thing to do was to call the police.

55. While the Respondents claimed in the 18 November Letter that all Company accounts and documents had been sent to the auditors and the Petitioners were free to make an appointment with the auditors for inspection, it would appear that the auditors had only been given the accounting records from 1 April 2009 to 31 March 2010 for the purpose of audit. Documents relating to Fire Prevention Works were unrelated to the financial year ended 31 March 2010 and were not available for inspection.

56. In his affirmation dated 9 July 2012, Wai Dan explained that there was a “misunderstanding” which resulted in the documents for the Fire Prevention Works being returned by the auditors to him (since they did not concern the financial year ended 31 March 2010) and hence not available to the Petitioners when they went to the auditors’ office. On the evidence, Wai Dan did nothing to rectify the situation after discovering this alleged “misunderstanding”. Indeed, the quotations and invoices relating to the Fire Prevention Works were only disclosed to the Petitioners as exhibits in Wai Dan’s affirmations in these proceedings in a piecemeal fashion ie in his affirmations dated 9 July & 23 August 2012 and 30 May 2014.

57. In my view, this complaint by the Petitioners is valid.

58. In Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, Kwan J (as she then was) summarised the law regarding inspection of documents by directors at [29] as follows:

“(1) The right of a company director to inspect the company’s documents is well established at common law …

(2) The right of inspection flows from the director’s duties to the company and a director does not have to explain why the inspection is sought or demonstrate any particular ground or ‘need to know’ as a basis … Thus, the inaction on the part of the director after grounds for suspicion concerning the company’s affairs have arisen is irrelevant; likewise, the intention of the director to discover misfeasance with the view to seeking relief, or that the desire to find evidence is motivated by vindictiveness …

(3) It is only where it can be proved that the director intends to abuse the confidence in relation to the company’s affairs and to injure the company in a material way that the director’s right of inspection can be interfered with, and such interference can only be effected in circumstances where a restriction on a director’s right can be imposed because of misuse of confidential information leading to damage …

(4)  In view of the proposition in (3), the exercise of a director’s right of inspection is, ‘generally speaking, not a matter of discretion with the Court’ ...”

59. In Tom Ming Chou v Pan Ping-hu Antony & Ors unrep.; HCCW 375/2008; 28 October 2009; at [20], Kwan JA said:

“The right of a director to inspect documents belonging to the company under section 121 and at common law is not in dispute. This right of inspection is essential to the performance of the duties of a director and the court would not interfere with this right unless it could be clearly established that the director intended to abuse the confidence in relation to the company’s affairs and to injure the company in a material way (Re Boldwin Construction Company Limited & Another [2001] 3 HKLRD 430), or that the director intended to use the right to inspect not for the purposes for which the right was conferred but for some other improper purpose (Oxford Legal Group Limited v. Sibbasbridge Services plc and another [2008] 2 BCLC 381; Nicholas Timothy Cornforth Hill v. Alvarez & Marsal Asia Limited [2009] 4 HKLRD 727, paras. 23 and 30).”

60. It is of course true that for relief to be granted under section 168A, the prejudice must be suffered by the Petitioner as a member, albeit this requirement should not be too narrowly or technically construed:  O’Neill v Phillips [1999] 1 WLR 1092 at 1105G‑H ( per Lord Hoffmann). 

61. The right of inspection of a petitioner stems from his position as a director and not as a shareholder. However, if a purpose of the inspection is for him to see if and how his interest as a shareholder has or may have been prejudiced by the respondent, and if the effect of the improper denial of inspection is to prejudice him in connection with his shareholding, then the improper denial of inspection can constitute unfair prejudice for the purpose of section 168A: Tin Chi Ping v Chow Wai Fan & Ors unrep.; HCCW661 of 2006; 14 March 2014; Deputy High Court Judge S Wong SC at [106].

62. In the circumstances of this case, for the Respondents to deny the Petitioners access to Company documents without proper justification and in breach of their legal right is conduct both unfair and prejudicial to them in connection with their shareholding.

G.   Fire Prevention Works

63. As I said earlier, the complaint here is that the Respondents have procured the Company to engage contractors to carry out Fire Prevention Works on its land at the exaggerated costs of HK$1.9 million without the Petitioners’ prior approval. There are thus two components in this complaint: (1) failure on the part of the Respondents to obtain prior approval of the Petitioners; (2) the costs of the works in the total sum of HK$1.9 million were excessive.

G.1  No approval

64. It should be obvious from the discussion in section F.2 above that after Wai Dan had received the quotations from Golden First and Kam Tin in February and March 2011, he made no attempt to seek the approval of the Petitioners before proceeding to confirm the quotations and give the go‑ahead to the contractors on behalf of the Company – he made all sort of excuses for not releasing information about the Fire Prevention Works to the Petitioners even when repeatedly asked since July that year. The Respondents’ case is that it was the Petitioners who had chosen to neglect the Company’s affairs since July/September 2009 when they stopped going back to the Office, and that a petitioner’s disinterest in the company’s affairs may lead to a finding that the other party’s failure to consult him is not unfair: paragraphs 1(1) and 47‑48 of the Respondents’ Closing Submissions.

65. In my view, it is quite unnecessary to decide whether or not the Petitioners have shown sufficient disinterest in the Company’s affairs so as to justify Wai Dan’s omission to consult them about the Golden First and Kam Tin quotations in early 2011 and render such omission “not unfair”. On the undisputed objective facts, the carrying out of the Fire Prevention Works in 2011 was not prejudicial to the interest of the Petitioners. Quite on the contrary, it was beneficial to their interest as it has enhanced the value of the Lots. The reasons are these.

66. The three Lots are agriculture land. Since about 2000, planning permission has been granted by the Town Planning Board (“Board”) to use the Lots as a temporary forklift training center, the last of such permission, prior to the breakdown in relationship between the parties, was given by the Board in a letter dated 21 November 2008. The permission was subject to conditions and was valid until 7 November 2011. For the present purpose, the two relevant conditions were (i) the submission of fire services installation proposal to the satisfaction of the Fire Services Department or the Board by 7 May 2009; and (ii) the implementation of the fire services installation by 7 August 2009.

67. On the undisputed evidence, numerous applications for extension of time to comply with conditions (i) and/or (ii) were made between March 2009 and May 2011 as follows: 

Date of application for extension	Date of approval of extension
24 March 2009	5 May 2009
23 June 2009	4 August 2009
17 September 2009	10 November 2009
16 December 2009	7 January 2010
25 March 2010	5 May 2010
18 June 2010	2 August 2010
22 September 2010	10 November 2010
24 November 2010	7 January 2011
20 January 2011	2 March 2011
22 March 2011	9 May 2011
24 May 2011	13 July 2011

68. The Fire Prevention Works were completed and accepted by the Planning Department on 28 September 2011.  But for the compliance with the conditions, it would be wholly uncertain whether the Board/ Planning Department would continue to grant planning permission to use the Lots as a temporary forklift training center.

69. According to the Valuation Report, the market value of Lot 2270A alone as agricultural land was HK$5.7 million while with the benefit of short term waiver for use as the Training Center with ancillary facilities would be over HK$14 million. Thus, it is reasonably clear that the carrying out of the Fire Prevention Works had the effect of enhancing the value of the Lots. The question is whether the costs of HK$1.9 million were excessive.

G.2  Excessive Costs

70. The evidential basis of the Petitioners’ allegation that HK$1.9 million were excessive is no more than this.

71. First, prior to 7 July 2009, Chu had made inquiries with Wong Yuk Tin (“Mr Wong”) of Kam Tin, the Respondents’ second witness, and was advised that the Fire Prevention Works should at most cost HK$800,000.

72. Second, in February 2014, Chu had made inquiries with another contractor viz Sum Kee. Sum Kee was provided with a photo of the water tank and, on that basis, issued a quotation for building an underground water tank said to be of identical size, shape and volume (30,000 litres) as that built on Lot 2270A in 2011. According to the quotation, the costs of building the water tank added up to only HK$85,000. On the other hand, the sum charged by Golden First for the water tank and related works amounted to HK$480,000.

73. I am not satisfied on the evidence that the costs of the Fire Prevention Works undertaken in 2011 were excessive.

74. As far as the first piece of evidence is concerned, it was firmly denied by Mr Wong, the sole shareholder and director of Kam Tin.  I have carefully considered his testimony and observed his demeanor in court. He answered questions calmly and his response to questions was mostly direct. His credibility was not at all shaken by cross-examination.  I accept his testimony. In any event, what was said by one contractor in 2009 cannot safely be relied upon to challenge the reasonableness of Kam Tin’s detailed written quotation in March 2011.

75. As far as the second piece of evidence is concerned, it is noteworthy that the Petitioners had not seen fit to call the responsible officer of Sum Kee to testify. All that the court was presented with was a one‑page quotation without any further explanation. On the other hand, Mr Wong said in his affirmation that the quotation from Sum Kee was wholly unrealistic. This was because the water tank built by Golden First was largely underground, which meant that they had to dig a gigantic hole to fit it. According to his estimate, the costs of removing the soil dug out would cost about HK$100,000 ie more than Sum Kee’s quotation.  In these circumstances, this court is inclined to prefer the evidence of Mr Wong and reject the suggestion that the sum charged by Golden First was excessive.

H.   Nominal Rent Issue

76. On the undisputed evidence, all along the parties were agreeable to and did agree that the Company would licence the Lots to Sun Shing Ltd. at a monthly fee of HK$10,000. It is also not in dispute that the HK$10,000 licence fee was way below market value. According to the Joint Statement of Experts, the Petitioners’ expert valued the market rental at HK$130,000 as at 1 March 2011 while the Respondents’ expert valued it at HK$48,600. As at 15 November 2011, the figures were HK$135,000 and HK$49,900 respectively. In this respect, Sun Shing Ltd. enjoyed a clear financial advantage at the expense of the Company. Put it in another way, the gain of Sun Shing Ltd. is the loss of the Company.

77. It should be obvious that before the breakdown in relationship between the parties and while Sun Shing Ltd. was owned by Chu and Wai Dan equally, neither party had any reason to quarrel with that arrangement. It should be equally obvious that after March 2011 when Sun Shing Ltd. became wholly-owned by the Respondents, the arrangement would not be acceptable to the Petitioners.

78. According to the contemporaneous documents, the Petitioners first raised this Nominal Rent Issue in the 12 October Letter.  At page 3 of the letter, the Petitioners stated that “they are desirous that the Company should maximize its income from renting/licencing out its land” and that the Company “should endeavor to let or licence out its land at market rate”.

79. In the 20 October Letter in reply, the Respondents expressed their willingness to reconcile with the Petitioners so as to smoothen the operation of the Company. They also proposed to convene a Board meeting in mid‑November with a view to managing the Company jointly.  Nothing was said about the Nominal Rent.

80. The Petitioners responded by the 4 November Letter. They indicated their availability to attend a Board meeting between 28 November and 2December 2011, but required inter alia immediate access to the Company’s books and records.

81. The Respondents did not reply to that letter until 18 November 2011. Meanwhile, on 15 November 2011, the Petitioners instituted the present proceedings.

82. In my judgment, there was no excuse for the Respondents not to respond constructively to the Petitioners’ request for access to the Company’s books and records and address the Nominal Rent Issue forthwith. As I said earlier, it should be obvious to anyone, including the Respondents, that after Sun Shing Ltd. had become wholly-owned by the Respondents, the arrangement of charging Nominal Rent for the Lots would not be acceptable to the Petitioners and must be reviewed. Instead of taking a pro-active step to resolve this issue, they just continued to allow the Company to charge the Nominal Rent. When the Petitioners raised the issue in October, the Respondents simply stalled.

83. In the circumstances of this case, I am satisfied that the Respondents’ conduct was both unfair and prejudicial to the Petitioners’ interest as members of the Company.

I.    Relief under section 168A

84. Given my findings that the Respondents have conducted the affairs of the Company in a manner unfairly prejudicial to the Petitioners as aforesaid, I shall proceed to consider the appropriate relief which should be granted. In this regard, it is well-established that the court has a wide discretion under section 168A to grant any relief with a view to bringing to an end the matter complained of: Tin Chi Ping v Chow Wai Fan & Ors supra at [117].

85. In Re a Company (No.006834 of 1988) ex parte Kremer[1989] BCLC 365 at 368, Hoffmann J (as he then was) said this:

“This is an ordinary case of breakdown in confidence between the parties. In such circumstances, fairness requires that the minority shareholder should not have to maintain his investment in a company managed by the majority with whom he has fallen out. But the unfairness disappears if the minority shareholder is offered a fair price for his shares.”

86. In my view, the same can be said of this case. Although the parties are equal shareholders, at least since September 2009, the Company has been managed by the Respondents. It is not seriously in dispute that it was Wai Dan who dealt with (i) the Planning Department and Fire Services Department in relation to the use of the Lots as a temporary forklift training center and (ii) the indigenous villagers in relation to any matters concerning the Lots. Prima facie, the appropriate relief should be an order for the Respondents to buy out the Petitioners.

87. As Harris J said in Lehman & Co. Management Ltd. v Effiscient Ltd. & Lehmanbrown Ltd.; unrep.; HCCW 377 & 383 of 2010; 15 November 2011; at [40]:

“In exercising its discretion to order a buyout of shares, the court will have regard to which party is actively engaged in the management of the business of the company. This is particularly so where the petitioner is a majority shareholder who is willing and able to buy out the respondent at a fair price: Re a Company (No.006834 of 1988) ex parte Kremer[1989] BCLC 365, at 367‑368; Ronald Li-Kai Chu v Deacon Te-Ken Chiu [1991] 2 HKLRD 572. The parties in the present case have equal shareholdings. However, in my view the principle will generally apply to the case of a significant shareholder who has been managing the business of the company.”

88. In that case, Harris J ordered the petitioner to sell its one share in the company to the 1^st respondent.  This Order was not disturbed on appeal.

89. My view that the appropriate relief should be an order for the Respondents to buy out the Petitioners is fortified by the following factors:

(1)  While Chu indicated in court he was open-minded about selling to the Respondents, buying out the Petitioners’ shares was the only preference of Wai Dan. At the hearing, Wai Dan had expressed his concern that if the Petitioners were to become the sole shareholders of and control the Company, they might not allow him to continue his business on the Lots or the parties would not be able to agree on the market rent to be charged by the Company. Given the hostilities between the parties, Wai Dan’s concern is far from fanciful.

(2)  Even if the Petitioners were willing to sit down and negotiate with the Respondents a proper market rent to be charged by the Company for the use of the Lots, one can foresee that such negotiations will be fraught with difficulties and will likely cause further friction among the parties. If at all possible, this court should mould the relief to be granted in this case which reduces rather than increases the possibility of further conflicts.

90. In my judgment, the most appropriate relief that this court should grant in the present case is an order that the Respondents do purchase and the Petitioners do sell all their shares in the Company at a fair market price. 

J.   Just and Equitable winding up

91. For completeness, in the event I am wrong in concluding that relief should be granted under section 168A, in the exercise of my discretion, I will be inclined to make an order that the Company be wound up on the ground that (i) the Company is a quasi-partnership and there is a complete breakdown in mutual trust and confidence between the parties such that in the foreseeable future they will not be able to manage the Company jointly; (ii) there is deadlock both at the Board and at the shareholders’ levels which is incapable of being resolved: Beatrice Tsang & Anr v Yeung Man Loong Maxly & Ors supra at [85].  

K.   Disposition 

92. There shall be an order that the Respondents do purchase and the Petitioners do sell all their shares in the Company at a fair market price.

93. In the absence of agreement on the fair market price and costs of the proceedings within 28 days from the date hereof, the parties are directed to restore the hearing before this court, with half a day reserved, for

(1)  all outstanding matters which have not been dealt with in their written submissions including inter alia the date of valuation, whether interest should be awarded on the value of the Petitioners’ shares and if so at what rate and who should pay for the costs of valuation: Tin Chi Ping v Chow Wai Fan & Ors [ 2014] 4 HKLRD 416;

(2)  directions to be given to facilitate the purchase of the Petitioners’ shares including inter alia the appointment of a suitable valuation expert and consequential directions;

(3)  submissions on costs.

94. The parties are further directed to file and exchange their written submissions together with a draft order which they invite the court to make 7 working days before the restored hearing.

95. In the absence of agreement on costs of the proceedings only, the parties are directed to restore the hearing before this court, with half an hour reserved, for submissions on costs. The parties are further directed to file and exchange their written submissions 3 working days before the restored hearing.