TSE YUN LAM ARIES (formerly known as TSE CHEE LAM ARIES) v. HAINE INTERNATIONAL INVESTMENT CONSULTANTS LTD AND OTHERS

HCMP 1747/2020 and HCCW 6/2024

[2024] HKCFI 2070

HCMP 1747/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1747 OF 2020

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AND

HCCW 6/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 6 OF 2024

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_______________

(heard together)

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J U D G M E N T

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1.  There are before the court 2 petitions presented by the petitioner, Ms Tse Yun Lam Aries (謝宛霖) (“Petitioner”), a minority shareholder of South Asia Group (H.K.) Limited (南亞集團 (香港) 有限公司) (“Company”):

(1)  The first petition in HCMP 1747/2020 was presented on 16 October 2020 (“UP Petition”) under s.724 of the Companies Ordinance (Cap. 622) (“CO”) whereby the Petitioner seeks relief to set aside the 2 allotments made by the Company in 2019 and a buy-out order against the 1^st to 4^th respondents (collectively “Jinheng Parties”).

(2)  The second petition in HCCW6/2024 was presented on 4 January 2024[1] (“WU Petition”) under s.177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) to seek a winding-up order against the Company.     

2.  The Petitioner and the 1^st to 5^th respondents are all the shareholders of the Company.  Prior to the 2 allotments complained of in the UP Petition, the Company had issued 5,000,000 shares of HK$1 each, which were held by:

(1)  The Petitioner as to 750,000 shares (equivalent to 15%), which have been held by her since 22 June 2012;

(2)  The 1^st to 3rd respondents, Haine International Investment Consultants Limited (海納國際投資顧問有限公司) (“R1”), 廈門力智合管理咨詢有限公司 (“R2”) and 廣州萬幣投資有限公司 (“R3”), as to 850,000 each (equivalent to 17%) as nominees of the 4^th respondent, 廣東金恆資產管理有限公司 (“Jinheng”).  The 51% shareholding was acquired by R1-R3 in the circumstances described in Section A3 below; and 

(3)  The 5^th respondent, Mr Wu Jiancheng (吳建成) (“Wu”), as to 1,700,000 shares (equivalent to 34%).  Wu is joined as a nominal respondent, and the Petitioner makes no allegation against him.

3.  In the UP Petition, the Petitioner complains that the affairs of the Company have been conducted in an unfairly prejudicial manner in that Jinheng Parties:

(1)  improperly procured the board to approve on 28 March 2019 a rights issue which involved the Company allotting 50 million shares at HK$1 per share by 12 April 2019 (“1^st Allotment”);

(2)  improperly procured the board to approve on 17 April 2019 a further rights issue which involved the Company allotting 30 million shares at HK$1 per share by 2 May 2019 (“2^nd Allotment”); and

(3)  compounding the prejudicial effects of the 1^st and 2^nd Allotments by failing to convene any Annual General Meeting (“AGM”) and lay audited financial statements (“AFS”) at such AGM, and to prepare AFS giving a true and fair view of the Company, in breach of statutory obligations under the CO.

4.  In the WU Petition, the Petitioner relies on the same complaints and seeks as her primary relief, winding up of the Company on the just and equitable grounds, in view of the fact that (1) Jinheng Parties and the Company (under their control) failed to comply with the court’s order made on 27 October 2023 requiring them to produce the accounting documents of Xiangshan and documents relating to the investment and operation of the “Project” (as defined in §12(1) below) sought by the Petitioner’s expert on valuation; and (2) the concern that Jinheng Parties may not have the financial means to comply with any buy-out order to be made by the court. 

5.  Shortly before commencement of the trial, R1-R3 applied by summonses filed on 26-27 June 2024 for leave to file notices of intention to appear in and oppose the WU Petition out of time[2]. No explanation has been given for the delay and inaction on the part of R1-R3.

6.  Mr Edward KH Ng, counsel for R1-R3, submits the winding-up order sought by the Petitioner would cause substantial harm to R1-R3.  On the other hand, no prejudice would be suffered by the Petitioner as R1-R3 do not seek to raise any new substantive matter.  While I agree with Mr Danny Tang, counsel for the Petitioner, that R1-R3 have failed to show any good reason to justify their delay in filing the notices, it seems to me that it would be appropriate to allow R1-R3 to file their notices out of time so that they can be heard on the WU Petition, having regard to the following matters:

(1)  The WU Petition was only presented in January 2024 and the complaints raised are identical to those raised in the UP Petition;

(2)  R1-R3 are majority shareholders of the Company and are entitled to be heard on the issue as to whether the Company should be wound up, which would affect their interests as shareholders; and

(3)  R1-R3 only seek to oppose the WU Petition in reliance on the same matters pleaded in the Re-Amended Defence filed on 15 July 2022 in the UP Petition (“Defence”) and do not seek to rely on any new matter, such that no prejudice would be caused to the Petitioner.    

7.  The legal representatives have submitted comprehensive Agreed Facts, Agreed List of Issues, Agreed Dramatis and Agreed Chronology covering most of the background facts which are not in dispute or are indisputable.  The documents are most helpful to the court. 

8.  The parties have included a number of Decisions and Judgment of other proceedings in the trial bundles:

(1)  Jinheng Parties disclosed a judgment of Fujian Province Xiamen City Siming District People’s Court (福建省廈門市思明區人民法院) (2016) 閩0203刑初68號 dated 29 November 2017 (“Sentencing Judgment”).  The Sentencing Judgment sets out the facts and findings of the Xiamen Court on various facts and matters relating to Xiangshan which are not entirely consistent with the documents and the evidence of Jinheng Parties and the discrepancies have never been explored during the trial.  When the issue is raised by this Court, Mr Tang (rightly) submits that the Sentencing Judgment and the findings therein are not admissible as evidence as neither the Petitioner nor Jinheng Parties were parties to the criminal proceedings, and the Petitioner does not seek to rely on any matters stated in such Judgment[3]. Mr Ng submits that the Sentencing Judgment is inadmissible and even goes so far as to object to its inclusion in the bundles (notwithstanding that it was disclosed by Jinheng Parties).  As it is common ground that the Sentencing Judgment is inadmissible, no further reference will be made to it in this Judgment.

(2)  The Decision of Mimmie Chan J in HCA 2012/2018 (“HCA”) dated 15 February 2019, [2019] HKCFI 379 (“HCA Decision”).  HCA was commenced on 27 August 2018 by Chen against Jingu, Silver Grant, Jinheng Parties, the Company and the Registrar of Companies.  Mr Tang submits that as Jinheng Parties are parties to HCA, they are bound by the HCA Decision and findings of the court.  Although the Petitioner is not a party to HCA and does not have any personal knowledge of the matter, the parties have made a number of references to the HCA Decision in the Agreed Facts, such facts are admissible as evidence in these proceedings.  Mr Ng accepts that the HCA Decision and the findings therein are admissible against Jinheng Parties. 

9.  One week before the commencement of the trial, on 28 June 2024, Jinheng Parties belatedly disclosed the following new documents relating to the “Service Contract” (as defined in §37(2)(b) below) (collectively “New Documents”)[4]:

(1)  the purported written board resolution of the Company dated 24 March 2019 signed by 5 Jinheng-nominated directors (“Purported 24/3/2019 Resolution”);

(2)  the purported written board resolution dated 7 May 2019 signed by the same 5 directors (“Purported 7/5/2019 Resolution”); and

(3)  the purported receipts dated 25 April 2019 and 8 May 2019 wherein Taoaijia referred to the Service Contract and confirmed having received RMB21,825,620 and RMB16,174,380 respectively from the Company (“Purported Receipts”).

A. Background Facts

A1.    Company & Xiangshan

10.  The Company was incorporated in Hong Kong on 21 July 2005.  It is an investment holding company, holding 100% equity in 香山國際遊艇俱樂部 (廈門)有限公司 (“Xiangshan”), a company established in Xiamen city in the Mainland.

11.  The Company and Xiangshan were founded by Ms Chen Lingxia (陳玲霞) (“Chen”) together with her husband, Mr Fang Dongluo (方東洛) (“Fang”), in that:

(1)  Chen was a director of the Company until she was removed on 21 March 2019;

(2)  At the time of incorporation of the Company, Chen and Fang held 80% and 20% of its issued shares respectively;

(3)  Chen was a director, chairman and the legal representative of Xiangshan until she was removed from the positions pursuant to the decision/resolution of the sole shareholder (the Company) made on 25 March 2019; and

(4)  Fang was the general manager of Xiangshan until he was removed from the position on 6 July 2018.

12.  Xiangshan is the most, if not the only, valuable asset of the Company in that:

(1)  It holds the sea use rights and land use rights in a plot in Xiamen together with the real estate developed thereon by the name of 香山遊艇俱樂部項目 (“Project”). 

(2)  Although Xiangshan had obtained approval to develop the Project in 2 phases, by October 2012, only 85% of phase 1 of the Project was completed.  The Project, as completed, comprises a 5-star hotel (酒店), an office (商務辦公), a VIP complex villa (VIP 綜合用房), a business centre (商務中心), sales/training centres (遊艇展銷中心/訓練中心), a yacht club complex (遊艇俱樂部), a commercial 1-8 clubhouse (商業1至8號會所), and a marina or a berth for yacht (遊艇碼頭).[5]

(3)  According to the valuation reports prepared by 廈門均達土地房地產評估諮詢有限公司 (“JunDa”), as at 3 October 2012, the open market value of the land use rights together with the development thereon was RMB7,915.8 million, while the open market value of the sea use rights was RMB2,389.3 million.

A2.    Financing arrangements of Xiangshan

13.  中國金谷國際信託有限責任公司 (“Jingu”) advanced a loan in the amount of RMB700 million to Xiangshan (“Loan”), which was secured by an assignment agreement whereby Xiangshan agreed to assign all the earnings of Xiangshan to Jingu (“Assignment Agreement”).  By a Strategy Cooperation Agreement dated 15 January 2010 made between the Company, Xiangshan and Jingu, as amended by a supplemental agreement dated December 2010 (together “SCAs”), Chen agreed to pledge 2,550,000 shares in the Company (equivalent to 51% shareholding) (“Pledged Shares”) as security for the obligations under the Assignment Agreement.  The Pledged Shares were transferred to 銀建國際資產投資有限公司 (“Silver Grant”), a Hong Kong company, which holds the same as nominee of Jingu[6].

14.  In 2015, Jingu took enforcement actions over the Pledged Shares:

(1)  Jingu alleged that Xiangshan had acted in breach of the agreements and sought to enforce its rights under the SCAs by applying to Beijing Notary Public for a certificate of enforcement/execution (“Certificate”), which was granted on 26 May 2015. 

(2)  Upon Jingu’s application, on 10 June 2015, the Fujian Province Higher People’s Court (“Fujian Court”) held that the property of Xiangshan and Chen should be seized, frozen and sold. 

(3)  Chen applied to Fujian Court to set aside the Certificate, which was dismissed in December 2015. 

(4)  Upon Chen’s appeals, on 28 October 2016, the Supreme People’s Court ordered a re-trial on the ground that the Fujian Court should (inter alia) verify the matters referred to in the notarized documents and the subject liabilities of the guarantor. 

(5)  At the time of the HCA Decision (15 February 2019), the re-trial were still pending[7].

15.  In November 2017, Chen was found by the Xiamen Court to be guilty of unlawfully soliciting public funds which, she claimed, was the result of Jingu’s failure to meet its obligations under the loan arrangements with Xiangshan, and a large part of the funds raised by her had already been repaid.  Chen was sentenced to 3 years imprisonment (suspended for 3 years), fined RMB250,000 and ordered to pay compensation of RMB82,072,000[8].   

A3.    Jinheng Parties

16.  In late 2017, Jingu sold all the rights associated with the Loan including the Pledged Shares to Jinheng by way of auction on Taobao (an online auction platform) for RMB2,389,882,297.52:

(1)  By a Debt Assignment Agreement dated 29 November 2017 (“DAA”), Jingu assigned all its rights associated with the Loan and the Pledged Shares to Jinheng for RMB2,389,882,297.52. 

(2)  In the DAA, the total amount owed by Xiangshan was stated to be RMB2,702,633,995.02, of which RMB1,073,250,000 was outstanding principal and RMB1,629,383,995.02 was interest and penalty.[9]

17.  On 1 March 2018, Xiangshan received written notification from the regulatory authority of Xiamen that both Chen and Fang were prohibited under the PRC Company Law from acting as a director, supervisor or senior manager of any company as a result of their conviction for soliciting public deposits (“Notification”).  Xiangshan was required to undertake the necessary procedure within 30 days to effect the changes in its registered particulars.  Chen acknowledged receipt of the Notification on the same day[10].

18.  On 25 June 2018, Silver Grant transferred the Pledged Shares to R1-R3 as to 850,000 shares each[11] whereupon the shareholdings in the Company became:

Shareholder	Number of shares	Shareholding
Petitioner	750,000	15%
Wu	1,700,000	34%
R1	850,000	17%
R2	850,000	17%
R3	850,000	17%

19.  On 25 June 2018, the 5 directors nominated by Jingu were replaced by the 5 directors nominated by Jinheng[12].

20.  At the board meeting of the Company held on 6 July 2018, it was resolved by a majority (with Chen’s representative opposing), inter alia[13]:

(1)  to change the company secretary and registered office of the Company with immediate effect;

(2)  to remove Chen from her position as director, chairman and legal representative of Xiangshan, and to appoint Chen Tao (陳濤) (“Chen Tao”) as director, chairman and legal representative of Xiangshan;

(3)  to remove吳全水 and 吳德和 as  directors of Xiangshan and to terminate Fang’s position as general manager of Xiangshan;

(4)  to appoint Chen Tao, Lai Richeng (賴日成) (“Lai”) and 賴晨輝as directors of Xiangshan, who shall replace the management and operation structure of Xiangshan including replacing the general manager, chief engineer, chief accountant and auditors etc; and

(5)  to adopt new corporate seal, financial seal and contract seal and to authorize a Mainland lawyer to handle all matters relating to the replacement of seals until the seals are ready and the change in registration completed.

21.  On 9 August 2018, 5 new Jinheng-nominated directors were appointed to replace the 5 Jinheng-nominated directors appointed on 25 June 2018.[14]

22.  The directors of the Company and their respective period of appointment are as follows[15]:

Name	Period of Appointment
Chen	14/12/2006 - 21/3/2019
Wu	5/3/2009 - 14/9/2018
Chen Tao	9/8/2018 - 10/9/2020
Lai (sole director of R1)	9/8/2018 - 10/9/2020
Li Muping (李木平)	9/8/2018 - 15/5/2019
Li Zhen (李珍)	9/8/2018 - 15/5/2019
Mao Xiaolu (毛曉露)	9/8/2018 - 15/5/2019
Hong Yibin (洪奕檳)	15/5/2019 -
Liu Shaohong (劉少鴻)	10/9/2020 - 7/7/2023
Cai Shaowei (蔡少偉)	10/9/2020 -

A4.    31/8/2018 EGM

23.  On 14 August 2018, a board meeting was held to discuss and decide whether the Company should increase capital and issue new shares:[16]

(1)  At the meeting, representative for Chen questioned the status of the 5 Jinheng-nominated directors and the basis for increasing capital or issuing shares without any independent valuation on the value of the Company’s assets.

(2)  After the meeting, representative of Jinheng-nominated directors provided (a) a notice of extraordinary general meeting to be held on 31 August 2018 (“31/8/2018 EGM”) to discuss raising HK$5 million together with the “Breakdown” (as defined in §25 below); and (b) a notice of general meeting to be held on 14 September 2018 together with the Sentencing Judgment.   

24.  In the notice dated 14 August 2018 (signed by Lai on behalf of the board) for convening the 31/8/2018 EGM (“2018 Notice”), it was stated that:

(1)  the new management did not have any books and records of the Company or Xiangshan but they had actively taken steps to reconstruct the financial statements and audit of the Company and Xiangshan and had paid substantial funds for such purpose.  The shareholders were requested to provide funds in the amount listed in the “Breakdown”; and

(2)  the shareholders’ opinion was sought regarding provision of operational funds to ensure that the Company could continue to operate, and to discuss ways to raise capital to finance the Company’s operations.

25.  The 2018 Notice enclosed a “Working Capital Details” (營運資金明細) (“Breakdown”) claiming that the Company required HK$5 million working capital, comprising:

(1)  estimated costs of hiring accountant: HK$1,000,000;

(2)  estimated costs for valuer to value the Company’s assets: HK$500,000;

(3)  estimated costs for valuer to value the Company’s liabilities: HK$500,000;

(4)  hiring lawyers to provide service to its 7 directors: HK$1,400,000;

(5)  hiring company secretary: HK$300,000;

(6)  registration fee, expenses and miscellaneous items: HK$300,000;

(7)  travelling and accommodation expenses of directors: HK$400,000; and

(8)  cash reserve: HK$600,000.

26.  By letter dated 30 August 2018 to Lam Lee & Lai (“LLL”), then solicitors for the Company, the Petitioner through her solicitors, T.H. Koo & Associates (“THK”), expressed concerns about the capital raising proposal, including inter alia:

(1)  The board should provide full details on why the proposed amount was needed, how it was arrived at, and how the allotment price was to be determined.

(2)  The Breakdown lacked particulars and appeared excessive, particularly with regards to the audit, valuation and legal fees.

27.  Shortly before the 31/8/2018 EGM was held in the afternoon, the “Interim Injunctions” were granted against Jinheng Parties and the Company in HCA (see Section A5 below).

28.  At the 31/8/2018 EGM:

(1)  R1-R3 provided a written statement informing the shareholders about (a) the HCA; (b) according to the estimation by LLL and other solicitors, the Company would need HK$3-5 million up to the conclusion of the HCA; (c) HK$2.5 million would be needed for the Company to hire accountants and appraisers to prepare the previous audited accounts for the Company;[17] and (d) the “Interim Injunctions” which prohibited R1-R3 from transferring or diluting their shareholding in the Company;

(2)  The Petitioner’s representative requested to adjourn the discussion of and voting on the proposed resolutions; and

(3)  It was resolved by R1-R3 (as majority) that the board would (a) raise HK$5 million as operating capital of Xiangshan; (b) not allow R1-R3’s shares to be diluted; (c) discuss with the Petitioner on the proposed shareholder’s loan; and (d) handle HCA with a view to protecting the Company’s interests and minimizing any harm to shareholders[18].

29.  By letter dated 22 March 2019 to LLL, the Petitioner through THK challenged the validity of the resolution passed at the 31/8/2018 EGM regarding raising HK$5 million capital.

A5.    Dispute over Pledged Shares

30.  On 27 August 2018, Chen commenced HCA and applied for interim injunctions against the defendants on the basis that she remained the beneficial owner of the Pledged Shares by reason of the following matters[19]:

(1)  The Pledged Shares had been transferred to Silver Grant by way of security;

(2)  Although Xiangshan had been in default under the Assignment Agreement, and Chen (as guarantor) had been in default of payment, Chen was ready, willing and able to pay the outstanding debt owed to Jingu which, she said, was in the amount of RMB1,726,348,867;

(3)  Under PRC law, which is the governing law of the relevant agreements, the sale of the Pledged Shares was illegal and void as it circumvented the necessary execution and enforcement procedures of the Mainland court.  The status and validity of the Certificate awaited determination of the Fujian Court; and

(4)  As Jinheng had notice of Chen’s claim in the “non-execution” application in the Fujian Court, it was not a bona fide purchaser without notice, and therefore, should take subject to Chen’s beneficial interests in the Pledged Shares.     

31.  On 31 August 2018, Mimmie Chan J granted interim injunctions (collectively “Interim Injunctions”) to restrain:

(1)  Jinheng Parties from  (a) taking any steps to dispose of, deal with, transfer, charge, encumber or diminish value of the Pledged Shares; and (b) exercising any power or right attached to the Pledged Shares to increase share capital of the Company, remove Chen from board or take steps to effect change of legal representatives of Xiangshan (together “Exercise of Rights Injunction”); and

(2)  the Company, by its officers and agents, from (a) convening or holding any general meeting for the purposes only of resolving on the issue and allotment of new shares or diluting the holding of the Pledged Shares; and (b) removing Chen from the board and/or taking any further step to effect change of Xiangshan’s legal representative and directors (“Company Injunction”)[20]. 

32.  As a result of the Interim Injunctions, Jinheng Parties were not able to re-constitute the board of the Company and of Xiangshan pursuant to the resolutions passed at the board meetings of the Company held in July and August 2018.

33.  At the EGM held on 14 September 2018, resolution was passed by R1-R3 (as majority) to remove Wu was director of the Company.[21]

34.  Jingu and Jinheng Parties applied for a discharge of the Interim Injunctions, which was heard by Mimmie Chan J on 25-26 October 2018.  In the HCA Decision handed down on 15 February 2019, the Judge held that:

(1)  there are serious questions to be tried as to (a) the nature of Jingu’s rights to the Pledged Shares under the SCAs; (b) whether the enforcement / execution action taken by Jingu otherwise than under an order of the Mainland court is permissible; (c) whether the sale of the Pledged Shares through auction was valid under PRC law; (d) whether the sale was capable of conferring on Jinheng any interest in and claims to the Pledged Shares; (e) whether Jinheng had acquired the Pledged Shares without notice of Chen’s claims and disputes; and (f) whether Jinheng can indeed be said to be a bona fide purchaser which is truly unrelated to Jingu/Silver Grant[22];

(2)  the Interim Injunctions would preserve the status quo and preserve the subject matters of the dispute[23];

(3)  there was no order prohibiting the Company from raising capital, or seeking such funds or making such payments as it may require for the purposes of continuing the operations or for the survival of the Company/Xiangshan[24];

(4)  Chen has valid causes of action against Jingu, Jinheng and their respective nominees.  The Company was joined as a defendant simply to ensure that it is bound by any order which the court may make as to the shareholding, and the validity of the transfer of shares[25];

(5)  Chen had knowingly misled the court into granting the Interim Injunctions by deliberately withheld the existence of the Notification, which required Xiangshan to remove her and Fang from their positions.  The Interim Injunctions were discharged for Chen’s material non-disclosure[26];

(6)  Balance of convenience was in favour of the grant of an injunction to restrain Jinheng Parties taking any steps to dispose of, deal with, transfer, charge, encumber or diminish the value of the Pledged Shares (“Disposal Injunction”)[27];

(7)  The Disposal Injunction does not restrain Jinheng Parties from voting, requisitioning meetings and/or proposing resolutions to increase the share capital of the Company or to raise funds for the Company[28]; and

(8)  The costs of and occasioned by the grant of the Interim Injunctions are to be borne by Chen and paid to the defendants, with certificate for 2 counsel[29].    

35.  By notice dated 19 February 2019, an EGM was convened to be held on 21 March 2019 for the purpose of removing Chen as director of the Company. A resolution was passed at the EGM held on 21 March 2019 to remove Chen as director.  Thereafter, all directors were Jinheng-nominated directors.

A6.    1^st Allotment

36.  Shortly after the discharge of the Interim Injunctions, the directors of the Company re-considered the issue of increasing capital.[30]

37.  In the written resolution stated to have been passed unanimously by the 5 Jinheng-nominated directors on 28 March 2019 (“28/3/2019 Resolution”), it was stated that:

(1)  The shareholders of the Company would be required to subscribe a total of 50,000,000 shares at HK$1 per share in proportion to their shareholdings by 4pm on 12 April 2019 (i.e. the 1^st Allotment).

(2)  The need to raise HK$50,000,000 arose from the following circumstances:

(a)  According to the accounts prepared by the auditors, Sino Corp CPA Limited (“Sino”), from 25 June 2018 to 28 February 2019, the Company had accumulated account payable in the amount of HK$5,567,628 (“Payable”).

(b)  Pursuant to the property service contract signed between the Company, Jinheng and 廈門濤愛家務業服務有限公司 (“Taoaijia”), Taoaijia was engaged to provide property management and on-site protection service to Xiangshan (“Service Contract”). According to the accounts made up to 28 February 2019 and the current monthly expenses schedule, the Company urgently required RMB38 million to maintain the on-site protection and management of the Project which had been entrusted to Taoaijia.

(c)  The Company incurred legal costs of over HK$2 million in HCA and the case was continuing. 

38.  On 1 April 2019, the Petitioner received a provisional notice of allotment of shares from the Company dated 28 March 2019 (“1^st Notice of Allotment”).[31]  It offered each of R1-R3 to subscribe 8,500,000 shares for HK$8,500,000; the Petitioner to subscribe 7,500,000 shares for HK$7,500,000; and Wu to subscribe 17,000,000 shares for HK$17,000,000.

39.  By letter dated 2 April 2019 to LLL, THK reiterated the Petitioner’s stance on any capital raising proposal and requested the Company to provide the following documents by 4 April 2019:

(1)  the accounts prepared by Sino from 25 June 2018 to 28 February 2019;

(2)  the Service Contract and the accounts made up to 28 February 2019;

(3)  the Court order in HCA; and

(4)  the invoices/feenotes issued in respect of the alleged legal expenses of over HK$2 million.

40.  On 9 April 2019, the Company (through LLL) provided to the Petitioner:

(1)  the unaudited financial statements dated 8 April 2019 prepared by Sino for the period from 1 July 2018 to 31 December 2018 (“2018 Unaudited FS”);

(2)  the unaudited financial statements dated 8 April 2019  prepared by Sino for the period from 1 January 2019 to 28 February 2019 (“2019 Unaudited FS”);

(3)  the Service Contract;

(4)  the Order dated 15 February 2019 in HCA; and

(5)  3 receipts for the legal expenses in relation to the said litigation case. 

41.  In response, THK in its letter dated 10 April 2019 to LLL, raised the following points:[32]

(1)  It would be a breach of fiduciary duty to proceed with the 1^st Allotment whilst information provided to the shareholders was inadequate. 

(2)  The directors were required to take into account all relevant considerations, including whether shareholders’ loans would be more appropriate in raising capital, whether it would be fair to the minority shareholders to be forced to decide whether to subscribe when information was lacking.  The directors were also duty bound to give serious consideration to all relevant consideration in determining the amounts to be raised and the price of the new shares.   

(3)  Procuring the 1^st Allotment would amount to unfairly prejudicial conduct on the part of Jinheng Parties.   

(4)  The questions raised in THK’s letter dated 30 August 2018 remained unanswered.   

(5)  The 2018 and 2019 Unaudited FS were no answer because:

(a)  There was no information about the value of Xiangshan, and the expenses to be incurred to maintain its value.  It was unclear how the board could have properly considered how much funds were required, and how the allotment price was determined. 

(b)  They bore the date of 8 April 2019, after the board’s  28/3/2019 Resolution. 

(c)  The main expenses shown were “Legal and Professional Fees” of HK$4,592,686 and HK$705,476 respectively.  It was unclear whether they were only legal fees or whether they included other professional fees paid by the Company.  The receipts supplied only added up to HK$2,473,612.80, and showed that they were paid on account.  The amount of costs incurred was surprising given the nature of the dispute in HCA. 

(6)  As to the Service Contract:

(a)  It was made between Jincheng and Taoaijia, and the Company was not a party. 

(b)  Clause 4(1) mentioned a fixed fee of RMB2.7 million per month for management of the yacht club to be borne by Jinheng.  It was unclear how the board could have arrived at RMB38 million figure in the 28/3/2019 Resolution.

(7)  The Petitioner requested the subscription be adjourned until after the minority shareholders were given sufficient information and time to consider their position.

42.  In its letter dated 11 April 2019, LLL stated that the 28/3/2019 Resolution had been duly passed according to the CO and the Company’s Articles of Association; the 1^st Allotment are valid and the deadline for the subscription of new shares would not be postponed.

43.  By THK’s letter dated 11 April 2019 to LLL, the Petitioner indicated that she would subscribe 7,500,000 shares offered to her “without prejudice to any of her rights and remedies against the board, more particularly, the right to challenge the bona fides and necessity of the [1^st Allotment] and the oppressive conduct of the board (under the control of [R1-R3])”, and paid HK$7,500,000 as subscription price. [33]

44.  On 12 April 2019, the board resolved to allot 8,500,000 shares to each of R1-R3, and 7,500,000 shares to the Petitioner.  Wu did not subscribe any new shares.[34]  After the 1^st Allotment, the shareholding became as follows: 

Shareholder	Number of shares	Shareholding
Petitioner	8,250,000	21.711%
Wu	1,700,000	4.474%
R1	9,350,000	24.605%
R2	9,350,000	24.605%
R3	9,350,000	24.605%

A7.    2^nd Allotment

45.  By a written resolution dated 17 April 2019 (“17/4/2019 Resolution”), the Jinheng-nominated directors resolved unanimously to increase capital by HK$30 million by requiring shareholders to subscribe a total of 30,000,000 shares at HK$1 per share in proportion to their shareholdings by 5pm on 2 May 2019 (i.e. the 2^nd Allotment).[35]  In the 17/4/2019 Resolution, it was stated that the need to raise HK$30 million had arisen from the following circumstances:

(1)  Under the 1^st Allotment, the Company only raised HK$33 million as Wu did not subscribe any shares.  There was a deficiency of HK$17 million. 

(2)  On 8 April 2019, the Company received a Writ in HCA 492/2019[36] (“2^nd HCA”) in which the Company was named as the 3^rd defendant.  Around HK$3 million was required for legal expenses. 

(3)  Xiangshan required working capital for maintenance and operation of the yacht club, and the Company needed HK$10 million as contingency fund (“備用金”) (“Contingency Fund”).

46.  On 17 April 2019, the Petitioner received a provisional notice of allotment of shares from the Company (“2^nd Notice of Allotment”)[37] in which it offered each of R1-R3 to subscribe 7,381,578 shares at HK$7,381,579; the Petitioner to subscribe 6,513,157 shares at HK$6,513,158; and Wu to subscribe 1,342,105 shares at HK$1,342,105.

47.  By letter dated 26 April 2019 to LLL Secretarial Services Limited (“LLL Secretarial”), the company secretary, THK raised the following points:[38]

(1)  A writ search on HCA 429/2019 revealed that the Company was not a party. In any event, there was no explanation or breakdown as to the HK$3 million allegedly required for the action. 

(2)  There was no reason for the board to demand a further HK$10 million as capital reserve for Xiangshan as HK$33 million had already been raised under the 1^st Allotment.

(3)  There was no information as to how the subscription price was arrived at.

(4)  The board had ignored the Petitioner’s reasonable and legitimate requests in THK’s letter of 10 April 2019 for information / documents regarding the need to raise capital. 

(5)  Based on the close proximity of the 2 rights issue at a price less than their value and the board’s persistent refusal to respond to the Petitioner’s request for information, it can only be concluded that the board, under the control of Jinheng Parties, had abused their power of allotment for the purpose of diluting the shareholding of the minority shareholders with a view to squeezing them out eventually. 

(6)  The Petitioner requested the subscription be adjourned until after the minority shareholders were given sufficient information and time to consider their position.

48.  By letter dated 29 April 2019 to THK, LLL Secretarial corrected the number of the 2^nd HCA and enclosed a copy of the writ in the 2^nd HCA.

49.  By letter dated 30 April 2019 to LLL Secretarial, the Petitioner indicated that she would subscribe 1,254,800 shares offered to her under protest and without prejudice to her right to challenge the validity of the 2^nd Allotment.  HK$1,254,800 was duly paid, after which the Petitioner managed to maintain her 15% shareholding in the Company.

50.  On 7 May 2019, the board resolved to allot 7,381,578 shares to each of R1-R3, and 1,254,800 shares to the Petitioner.  Wu did not subscribe for any new shares.[39]

51.  After the 2^nd Allotment, from 7 May 2019, the shareholding in the Company became as follows:

Shareholder	Number of shares	Shareholding
Petitioner	9,504,800	15.48%
Wu	1,700,000	2.77%
R1	16,731,578	27.25%
R2	16,731,578	27.25%
R3	16,731,578	27.25%

A8.    Financial reporting of the Company

52.  Since its incorporation, the Company has not convened any AGMs or provided any AFS to the shareholders.  The situation remained the same after the involvement of Jinheng Parties in June 2018.  The board did not convene any AGM or lay any AFS before the shareholders at any general meeting[40].

53.  It was only until 25 November 2021 that the Company provided the AFS for the years ended 31 December 2019 and 2020 to the Petitioner (“2019 AFS” and “2020 AFS”).  In respect of the 2019 AFS and 2020 AFS:[41]

(1)  They were both dated 9 August 2021 but did not include any consolidated accounts.   

(2)  The auditors (Sino) opined that the AFS did not give a true and fair view of the consolidated financial position of the Company and its subsidiary (“Group”) as a whole; and the Company failed to comply with HKFRS 10[42] and s.379(2) of the CO. 

(3)  The auditors reported under ss.407(2)-(3) of the CO that in respect of their adverse opinion on the consolidated financial statements, they were not able to determine whether adequate accounting records had been kept, and they had not obtained all information or explanation that were necessary and material for the purpose of the audit.

(4)  The value of the investment in Xiangshan was stated at HK$1, after deducting an “accumulated impairment” of HK$616,199,999 (“Impairment”) from the cost of investment of HK$616,200,000.[43]

(5)  According to the trial balances of the Company, as at 31 December 2019 and 2020, HK$6,598,995.80 was due from Mr Li Luo Ying (the sole shareholder of R1) (“Li”).[44]  In their Defence, Jinheng Parties admit the amount due but take issue with the contention that the amount should be recorded as a related party transaction primarily on the basis that Li was not a director of the Company and R1 held less than 30% shareholding in the Company[45]. 

B.    Procedural History

54.  On 5 July 2022, this Court gave directions on filing expert evidence on valuation of the Petitioner’s 15% shareholding in the Company (“P’s Shares”) on various alternative bases (“Valuation”), which included directions for the parties’ experts to seek all information and documents they reasonably consider necessary or appropriate for making the Valuation, and the request to be complied with by Jinheng Parties and the Company within 10 working days of the request (“Valuation Order”).[46]

55.  Pursuant to the Valuation Order, the Petitioner appointed Mr Lai Wing Lun, a managing director of Acclime Corporate Advisory (Hong Kong) Ltd,[47] as her expert (“P’s Expert”).  He produced an independent expert report dated 3 May 2024 (“Report”).

56.  Although Jinheng Parties appointed Mr Cosimo Borrelli of Kroll as their expert.  No expert report has been filed by Jinheng Parties. 

57.  On 19 September 2022, P’s Expert issued a list to Jinheng Parties requesting for 20 classes of documents.[48]

58.  In his letter dated 4 September 2023, P’s Expert stated that he would conduct the Valuation using 4 different approaches and produced a revised list in which he requested 16 classes of documents and explained the reasons for seeking such documents (“Revised List”).[49]  Except for class (15) which are vouchers and other supporting documents of the Company since the establishment of Xiangshan, all the documents sought are the financial or supporting documents of Xiangshan.

59.  None of the documents sought was provided by the Company or Jinheng Parties to P’s Expert. 

60.  By summons dated 5 September 2023, the Petitioner sought specific discovery of various classes of documents based on the Revised List.[50]  Broadly speaking, they fall within the following 4 categories:[51]

(1)  accounting documents relating to Xiangshan and the Company;

(2)  documents relating to the investment and operation of the Project;

(3)  documents, information and data considered by Jinheng Parties before their acquisition of the Loan; and

(4)  documents relating to the valuation of assets, properties, sea use and land use rights of the Project.

61.  At the hearing of the summons on 27 October 2023:

(1)  The solicitors for Jinheng Parties and the Company both stated that they had no instructions from their clients and they had issued summonses for ceasing to act;[52] and

(2)  this Court ordered Jinheng Parties and the Company to produce the documents sought by the Petitioner within 14 days (“Production Order”). 

62.  The Production Order has not been complied with by the Company or Jinheng Parties. 

63.  On 4 January 2024, the Petitioner presented the WU Petition seeking winding-up relief and Jinheng Parties were joined as respondents. 

64.  On 5 January2024, the WU Petition was served on the Company and R1 at their respective Hong Kong addresses.[53]  As R2-R4 are Mainland companies, leave to serve the WU Petition out of jurisdiction was required. 

65.  On 8 February 2024, THK received a letter from Madam Zhang Wanling (張婉鈴), a director of Jinheng who signed the statement of truth on behalf of Jinheng Parties, confirming receipt of the WU Petition.  However, R2-R4 did not appoint any solicitors in Hong Kong to accept service of the WU Petition.

66.  At the PTR on 7 May 2024 (Jinheng Parties’ representative was in court), directions were given for the Petitioner to remove Jinheng Parties and Wu as respondents; the time table for any shareholder to file notice of intention to appear and affirmation limited to the issue of winding up relief within 28 days; and the evidence filed in UP Petition to be admissible as evidence in WU Petition. 

67.  No notice of intention to appear or affirmation has been filed by Jinheng Parties within the time limit.

68.  On 12 June 2024, Hon & Co. filed a notice to act on behalf of the Jinheng Parties in UP Petition. 

69.  As stated in §5 above, it was only until 26 June 2024 that Jinheng Parties filed notice of intention to appear and the affirmation of Zhang Wanling in support of the application to file the notice and evidence out of time (“Zhang Aff”).  In Zhang Aff, she said that owing to the impact of COVID-19 pandemic, Jinheng Parties “could no longer afford the legal fees to participate in [UP Petition] due to lack of funds”[54]. 

70.  However, having relied on Zhang Aff and obtained leave to file notice of intention to appear in the WU Petition and heard Mr Tang’s reliance on §5 of Zhang Aff as evidence of lack of funds, Jinheng Parties informed the court that they would not tender Ms Zhang for cross-examination such that her affirmation is not admissible.  I do not think it is open to Jinheng Parties to retract Zhang Aff in this way.  In any event, upon this Court’s enquiry as to the financial position of Jinheng Parties, Mr Ng confirms that Jinheng Parties would not be able to comply with any buy-out order if the price exceeds HK$1 million.

C.    Assessment of Evidence

C1.    Applicable principles

71.  The approach of the court in fact finding and assessing the credibility of a witness has been summarised in Hui Cheung Fai & anor v Daiwa Development Ltd & ors, HCA 1734/2009, 8 April 2014, §§77-83:

“77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce). It is right to point out, however, that some of the documents in this case are alleged by the Son to be shams and those documents obviously cannot be used to assess the credibility of the parties.

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’ credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence.  The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).

81. The practical approach to assessing credibility of witnesses in a case such as the present may have best been summarised by the words of Robert Goff LJ, as he then was, in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:

‘Speaking from my experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.’

82. Whilst these words were spoken in the context of a fraud case, I believe they are applicable to any case where a witness’ credibility features prominently in the court’s determination.  They are particularly apposite in a case like the present where very serious allegations (akin to allegations of fraud) have been made by the Son against the defendants.

83. In approaching the evidence in this case, I have also borne in mind that the allegations made by the Son are very serious, and that the more serious the allegation sought to be proved is, the more cogent the evidence relied upon to support it must be: see Re H (Minors) [1996] AC 563 at 586D-587F (Lord Nicholls) and ADS v Brothers (2000) 3 HKCFAR 70 at 77J-78G (Lord Hoffmann NPJ).”

72.  I turn to consider the evidence given by the 2 witnesses at trial.

C2.    Petitioner

73.  Mr Tang submits that the case does not turn on the Petitioner’s evidence.  In any event, the Petitioner is a reliable witness. She gives evidence in a direct and straight forward manner and frankly accepts matters which may be against her, for eg., the fact that she has benefitted from the 1^st and 2^nd Allotments in that her shareholding was increased by 0.48%.

74.  On the other hand, Mr Ng submits that the Petitioner is not a reliable witness in that:

(1)  She claims to be unable to remember some key facts and does not have knowledge of other critical matters pertinent to the case;

(2)  She claims that she did not attend the 31/8/2018 EGM but only sent a representative to attend the same.  It is only after she is being shown the minutes which recorded her attendance that she agrees that she attended the meeting;

(3)  During cross-examination, she says that the rights issue of HK$5 million in August 2018 was not important as the resolution was not implemented, but in the Petition, she contends that an inference should be drawn from the attempt to raise HK$5 million capital by rights issue that the 1^st Allotment was not made by the board bona fide[55];

(4)  She is evasive in answering questions claiming that she does not have personal knowledge of the Company’s affairs as she entrusted her sister to handle the matters on her behalf.  However, when being asked whether her sister is willing to give evidence, she says she does not know; and

(5)  When being asked if she has requested the board to convene any general meeting, the Petitioner says that she has instructed her lawyer to make the request. When being pressed as to when she made the request, she says she is not sure.  It is only until she is asked by this Court as to whether according to her knowledge, she has made any request for convening general meeting that she finally gives a frank answer of “no”.   

75.  I agree with Mr Tang’s submissions.  The Petitioner’s case does not turn on her evidence as it is common ground that she has never been a director and has no involvement in the management of the Company.  I find that the Petitioner is an honest witness.  She gives direct answers to the questions put to her where possible.  She frankly admits that she did not pay much attention to the affairs of the Company and did not request the board to convene any general meeting or provide any AFS until after Jinheng Parties had come on board and requested the shareholders to inject capital into the Company in August 2018.  She even accepts Mr Ng’s suggestion that as a result of the 1^st and 2^nd Allotments, she made a gain in the form of increased shareholding. 

C3.    Jinheng Parties: Zhang

76.  Mr Tang submits that the viva voce evidence of Jinheng Parties is critical for the following reasons:

(1)  Where there is a complaint that the directors have breached their fiduciary duties in conducting the affairs of the company, once a prima facie challenge is established, the evidential burden falls on each of them to demonstrate the propriety of their actions or decisions (Re Hong Kong Agricultural Special Zone Ltd, HCA 2147/2013, 28 April 2017, §§27, 241; Bishopsgate Investment Management Ltd v Maxwell (No 2)[1994] 1 All ER 261, 265d-f, 269d-e).

(2)  When a prima facie case of unfair prejudice is made out, a director’s election not to give evidence has the effect of depriving the court of evidence relevant to the complaints.  Where, as here, the director elects not to adduce evidence, the court is entitled to draw from the facts which have been disclosed all reasonable inferences as to what are the facts which the director has chosen to withhold (Re Hong Kong Agricultural §§21-26).

(3)  Further, if the evidence raised a prima facie case, and where a director was in a good position to answer the allegations made against him but failed to give evidence, his silence could turn a prima facie case into a strong case against him (Re Styland Holdings (No 2) [2012] 2 HKLRD 325 §§17-18).

77.  The above principles are well-established and Mr Ng (rightly) does not take issue with the submissions. 

78.  In the present case, none of the directors involved in making the decisions on the impugned transactions come forth to give evidence, without any good explanation[56].  It follows that if the court finds that there is a prima case that the Jinheng-nominated directors acted in breach of their fiduciary duties in approving and implementing the 1^st and 2^nd Allotments and failing to convene any AGM and provide the AFS of the Company to the Petitioner, it is not necessary to consider whether the actions or decisions of the directors could be justified as no evidence has been given by the directors.   

79.  Although Jinheng Parties call Mr Zhang Yunfei (張雲飛) (“Zhang”) to give evidence, I do not consider his evidence to have any probative value, having regard to the facts and matters set out in §§80-82 below.  Consequently, I do not place any weight on Zhang’s evidence insofar as his evidence is not supported by or inconsistent with the contemporaneous document or facts which are not in dispute.    

80.  First, Zhang was Jinheng’s legal advisor.  He is not and has never been an employee of Jinheng or R1-R3[57]. He was not the decision maker.  Indeed, under cross-examination, he repeatedly emphasises that his role was only to advise the directors and the ultimate decisions were made by the directors although he refuses to identify who were Jinheng’s decision-makers or which directors of the Company with whom he had discussions in relation to the various matters alluded to in his oral evidence.  

81.  Second, as submitted by Mr Tang, it is clear from his oral evidence that Zhang does not have personal knowledge on a variety of crucial matters which are relevant to the propriety of the 1^st and 2^nd Allotments:

(1)  He has no personal knowledge about the investigation and discovery of the litany of management issues of the Company and Xiangshan[58] – those were learnt through the directors of the Company.[59]

(2)  As to the very important board meeting held on 14 August 2018 which resolved to convene 31/8/2018 EGM and approved the Breakdown:

(a)  He was not present at the meeting;

(b)  He could not remember if he has ever seen the Breakdown before;[60]

(c)  He has not seen the quotations from Vision CPA and 嘉林資本 (enclosed to the Breakdown) before;[61]

(d)  He does not know about the basis of the estimates for the 8 items in the Breakdown;[62] and

(e)  For Items 4, 6, 7 and 8, he does not know what they comprised and why they were required.[63]

(3)  As to the 31/8/2018 EGM:

(a)  Zhang was not present at the meeting;

(b)  He has not seen R1-R3’s written statement placed at the meeting before;[64] and

(c)  He does not know about the 2 new bases (i.e. HK$3-5 million required for the HCA, HK$2.5 million required for preparing accounts/valuations) put forward in R1-R3’s written statement which displaced or superseded the 8 items in the Breakdown.[65]

(4)  As to the 1^st Allotment, although he allegedly reviewed the 28/3/2019 Resolution in draft form before it was passed,[66] there were many aspects of the 1^st Allotment which he does not know about:

(a)  The 3 estimates put forward, which he accepts were calculated by the board;[67]

(b)  He was not involved in the preparation of the 2018 and 2019 Unaudited FS, and does not know how the Payable of HK$5,567,628 came about;[68] and

(c)  He claims that both he and the board acted on the advice of the Company’s lawyers in Hong Kong in causing the Company to take a substantive role in the HCA, but is not able to give evidence on the precise advice said to have been given by such lawyers.[69] 

(5)  As to the New Documents in relation to the Service Contract:

(a)  Zhang is unable to recall whether he has seen the Purported 24/3/2019 Resolution and the Purported 7/5/2019 Resolution.  He has not seen the Purported Receipts;[70] and

(b)  He cannot explain why the payment records of the RMB38 million allegedly paid to Taoaijia have not been disclosed.[71]

(6)  As to the 2^nd Allotment, although he allegedly reviewed the 17/4/2019 Resolution in draft form before it was passed, there were many aspects of the 2^nd Allotment which he does not know about:

(a)  Whether his understanding of how the HK$10 million Contingency Fund would be used was explained to the Petitioner; [72] and

(b)  Whether a quotation was obtained for the HK$3 million purportedly required for the 2^nd HCA, and why the Company should have a substantive role in the 2^nd HCA.[73]

(7)  Details regarding the subscription price and deadlines, including whether the Company’s board had asked the Petitioner and Wu to see if they could afford the share subscription, and why a period of 14-days was imposed in each instance.[74]

(8)  Whether any AGM has been held since 25 June 2018, and the reasons why no AGM has ever been held.[75]

(9)  As to the Company’s 2018-2020 AFS, he does not know:

(a)  what consolidation meant, and the fact that they were prepared on an unconsolidated basis;

(b)  what the administrative and operating expenses (being the main liabilities of the Company) consisted of;[76]

(c)  the basis for recording the costs of investment in Xiangshan at HK$616,200,000[77]and why the Impairment was made; [78] and

(d)  the basis for assessing the investment in Xiangshan at HK$1.[79]

(10)  The reasons why Jinheng Parties did not comply with the Production Order or provide any of the documents falling within the scope of the Production Order to the P’s Expert.[80]

(11)  The financial means of Jinheng Parties, including whether they have the funds to comply with any buy-out order which would be made by the court.[81]

82.  Third, in respect of matters of which Zhang has personal knowledge, his evidence is not reliable as he changes his answer when faced with a difficult question or that his answers are contradicted by contemporaneous documents or are inconsistent with his own evidence, as discussed further below.

D.    Discussion

D1.    Unpleaded points

83.  Mr Tang submits that Jinheng Parties should not be allowed to raise the following points, which have not been pleaded in the Defence and only advanced by Mr Ng in his Opening:

(1)  The Company needed to raise fund because Xiangshan had been subject to extensive litigations in the Mainland, and its assets had been frozen by the Mainland courts.  The Petitioner was privy to these matters.[82]

(2)  It was the Company, rather than Xiangshan, which was responsible for reimbursing Jinheng for the fees arising from the Service Contract because of the freezing order over Xiangshan’s assets.[83]

(3)  The subscription price of HK$1 per share was a bona fide estimate having regard to the Mainland litigations and the insolvency of Xiangshan.[84]

(4)  The Petitioner’s proposal to advance a shareholder loan to the Company was rejected because of the condition attached (i.e. the right to appoint one director), and such rejection was reasonable.[85]

(5)  The consolidation exemption in ss.359(2), 364 of the CO applied to the Company, such that there was no need for consolidation of the 2018-2020 AFS.[86]

(6)  At the 31/8/2018 EGM, it was explained to the Petitioner that funds were required to oppose the Company Injunction which prevented the Company from raising new capital.[87]

(7)  The HK$3 million said to have been required for the 2^nd HCA was based on a professional quotation.[88]

84.  I agree with Mr Tang.  The points advanced by Mr Ng are fact-sensitive.  Had those points been pleaded in the Defence, the Petitioner would have the opportunity to consider the points, seek discovery of the relevant documents and adduce evidence to deal with them.  It would be unfair to allow Jinheng Parties to raise or rely on these unpleaded points at trial. 

D2.    Issues for determination

85.  The parties have identified the following issues for determination at trial:

(1)  Whether the 1^st Allotment (including the proposal for a HK$5,000,000 Allotment resolved at the 31/8/2018 EGM which was not eventually carried out) amounted to unfairly prejudicial conduct on the part of Jinheng Parties[89] (1^st Allotment Issue);

(2)  Whether the 2^nd Allotment amounted to unfairly prejudicial conduct on the part of Jinheng Parties[90] (2^nd Allotment Issue);

(3)  Whether the failure to call any AGMs and to prepare AFS in breach of the statutory obligations under the CO amounted to unfairly prejudicial conduct on the part of Jinheng Parties[91] (No AGM Issue);

(4)  Whether the matters in sub-§§(1)-(3) above (whether individually or cumulatively) give rise to grounds for winding-up on just and equitable basis (Winding-up Issue);

(5)  What, if any, remedies should be granted in favour of the Petitioner?  In particular, if the Petitioner can demonstrate both unfairly prejudicial conducts and grounds for winding-up on just and equitable basis, should the court grant winding-up relief or a buy-out order[92] (Remedies Issue);

(6)  Whether the 1^st Allotment and 2^nd Allotment should be set aside and whether the subscription price paid by the Petitioner should be repaid by the Company to the Petitioner with interest[93] (Repayment Issue);

(7)  In the event that a buy-out order is to be made, what is the proper valuation of P’s Shares, taking into account: (a) the Valuation by P’s Expert; (b) any adjustments to be made by reason of the matters in sub-§§(1)-(3) above; and (c) What is the basis of valuation of P’s Shares? In particular, should there be a minority discount, should the Company be valued as a going concern, and what is the date of valuation[94] (Valuation Issue).

D3.    General principles on s.724 of CO

86.  The UP Petition is presented under s.724 of the CO.  Mr Ng submits that:

(1)  The burden is on the Petitioner to prove that the conduct complained of is both unfair and prejudicial to her interests as a shareholder of the Company (Hollington on Shareholders’ Rights, 10^th ed., §7-01). 

(2)  Whether the impugned conduct is unfairly prejudicial is to be assessed objectively, the test is whether a reasonable bystander, observing the consequences of the conduct, would regard it as having unfairly prejudiced the petitioner’s interests (Re Tai Lap Investment Co Ltd[1999] 1 HKLRD 384, 397F).

(3)  There is a distinction between breach of fiduciary duty and mere mismanagement (Ho Po Yeng v Ho Ming Chun, HCCW 100/2011, 15 March 2013, §§36-37).  Where the allegations of mismanagement by a petitioner in essence only amount to differences in commercial judgment between the petitioner and the controllers of the company, s.724 of the CO cannot be invoked.  Likewise, where management decisions have simply been poor, albeit leading to losses suffered by the company, such conduct can be prejudicial to members but it is not unfair since members acquire shares in a company knowing that their value will depend in some measure on the competence of the management and they assume a risk that the management may prove not to be of the highest quality (Company Law in Hong Kong - Practice and Procedure 2023, §8.095).

(4)  The threshold of relying on mismanagement as a ground to show unfairly prejudicial conduct is high.  For instance, in Re Elgindata Ltd [1991] BCLC 959, the petitioners relied on the complaint that the respondent was neglectful of and incompetent in the management of the company’s business to show that the affairs of the company were conducted in a manner unfairly prejudicial to them (at 983h).  The court held that although there was evidence of mismanagement and a lack of managerial purposefulness this did not constitute conduct that was unfairly prejudicial.

87.  The above principles are not in dispute. 

88.  At trial, Mr Ng does not maintain that the Jinheng-nominated directors acted independently of  Jinheng Parties[95].  Consistent with this, throughout his evidence, Zhang does not make any distinction between Jinheng, Jinheng Parties and the Jinheng-nominated directors, and repeatedly refer to them as Jinheng.  In any event, as submitted by Mr Tang, it is clearly not the case that the board was acting independently of or free from the influence of Jinheng Parties, evidenced by the following facts and matters:

(1)  When being asked whether he would expect the Jinheng-nominated directors to support Jinheng’s views, Zhang’s answer is that Jinheng, the Company and Xiangshan’s respective interests were all aligned.  Although he attempts to deny that this meant the board would support Jinheng’s views, he accepts that there was no instance where the board acted in a way with which Jinheng disagreed.[96]

(2)  Zhang is not able to explain how and why the Jinheng-nominated directors were appointed (e.g. with reference to their qualities or qualifications).[97]

(3)  In light of the board’s persistent breaches of their duties regarding the 3 complaints, the explanation could only be it was not acting independently and was preferring Jinheng Parties’ interest instead of the Company’s interest.

D4.    1^st Allotment Issue

D4.1    Applicable principles

89.  The applicable principles governing the propriety of the directors’ power to issue new shares have been set out in §§38-46 of Mr Tang’s Closing and are as follows:

(1)  The fiduciary power to issue new shares must be exercised for a proper purpose (Re Bank of East Asia Ltd [2015] 4 HKC 137 §14).

(2)  Where, as here, the propriety of a proposed fundraising is impugned, the court looks at the matter objectively in the way Lord Wilberforce described in Howard Smith Ltd v Ampol Petroleum Ltd[1974] AC 821, 832F-H, 835F-H. 

(3)  The following considerations, if present, will tend to show that the proposed fundraising is improper: 

(a)  There is no genuine need for funding (Re Sanju Environmental Protection (Hong Kong) Ltd v Wang Lishan[2021] HKCFI 1503 §§42(1); Re Promising Securities Co Ltd[2023] HKCFI 3367 §§136-137).

(b)  No consideration has been given as to why the proposed form of fundraising is preferable to other alternatives (Sanju§42(2); Promising Securities§138).

(c)  No consideration has been given as to whether the subscription price was a fair price (Promising Securities§§132, 141).

(d)  No information or analysis is provided to explain or justify why the shares would be issued at a substantial discount (Sanju§42(4)).

(e)  The subscription price is as a matter of fact at an undervalue (Promising Securities§142).

(f)  The justifications put forward at trial were ex post facto justifications which were not considered at the time the board resolved in favour of the allotment (Sanju§§42(6), 43).

(4)  Where the directors have exercised their powers for an improper purpose, the acts in question are voidable and liable to be set aside (Passport Special Opportunities Master Fund LP v Esun Holdings Ltd [2011] 4 HKC 62 §§52-53).

(5)  An allotment conducted in breach of fiduciary power is capable of amounting to unfair prejudice, even if the company is not a quasi-partnership (Promising Securities §§131-132; Tong Yuen Man v China Habit Ltd[2018] HKCFI 1703 §§193-196). 

90.  Further, although a rights issue raises capital from shareholders on an equal basis, it is still capable of amounting to unfair prejudice:

(1)  As a matter of law, even if all the members suffered the same prejudice by the conduct complained of, the conduct can still be unfairly prejudicial, since it is possible that the interests of only some may be unfairly prejudiced (Re Sam Weller & Sons Ltd [1990] BCLC 80, 84-85).

(2)  A rights issue inherently favours the majority, since the majority will control its terms and will be influenced by the fact that they are happy to invest in a venture which they control, whereas the minority would be less keen to invest further funds in a venture which they do not control (Hollington §5-36).

(3)  A rights issue has the obvious potential, in the hands of an unscrupulous majority, of putting pressure on the minority with the prospect of dilution (and necessarily diminution in the value) of their interest in the event of non-participation (Hollington §7-76).

(4)  The degree of dilution will be determined by the subscription price set for the rights issue.  Thus, the greater the discount to the real value of the shares, the greater the dilution of the minority’s shareholding if the minority is not able or willing to participate in the rights issue (Hollington §5-36).

(5)  Therefore, a rights issue can be unfairly prejudicial when the majority knows that the minority shareholders do not have the money to take up the rights and the offer is made at par when the shares are plainly worth a great deal more than par (Tseng Yueh Lee Irene v Metrobilt Enterprises Ltd [1994] 2 HKC 684, 689-690; see also Promising Securities§131(2)).

(6)  Further, where shares are issued at par for less than their true value, the onus lies on the directors to justify this exceptional course (Lowry v Consolidated African Selection Trust Ltd[1940] AC 648, 649; Hollington §§5-38, 7-76).

(7)  A mere attempt to dilute the shareholding of a petitioner can amount to unfairly prejudicial conduct (Re Astrotec Co Ltd,HCCW 282/2010, 31 January 2013 §121).

(8)  Likewise, an allotment which dilutes the petitioner’s shareholding could give rise a ground for just and equitable winding-up (Re Cargo Services Holdings Ltd, HCCW 1028/2002, 31 October 2003 §§93, 122, 131; Kokotovich Constructions v Wallington (1995) 17 ACSR 478, 494).  This is because such allotment may result in a justifiable lack of confidence in the conduct and management of the company’s affairs (Cargo Services §123).[98]

91.  Mr Ng does not dispute the above principles.  He submits that the court should also take into account the following factors:

(1)  In most of the cases in which issues of shares have been set aside, the directors were held to have acted for a personal motive, in particular to entrench their own positions (Howard Smith, 825H-826A) There is no such allegation here.

(2)  One important factor is whether the company objectively required further funding by way of capital at the time (Lu Jun v Yu Qi, CACV 37 & 76/2013, 7 February 2014, §73). Once it is shown that a company was in need of funds, it was a matter for its management and its commercial decision on whether those funds should be raised by way of placement or other methods.  The court should not interfere with bona fide management decisions and substitute its own opinion for that of the management (Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811, §73).  There can be no complaint if there is a genuine need for the injection of funds and the dilution is not designed to benefit the controller of the company (Giant Crystal Ltd v Energy International Investments Holdings Ltd, HCMP 1903/2015, 31 August 2015, §22).  For this purpose, the respondents only need to show that “there is some evidence that the Company was short of funds at the material time” (Tong Yuen Man & Anor v China Habit Ltd [2018] HKCFI 1703, §198).

(3)  The fact that the petitioner was able to obtain professional advice prior to making a decision to subscribe for the shares is a relevant factor in determining whether there was unfairness (Re Hing Ming Gondola (HK) Co Ltd, HCMP 418/2008 & HCA 84/2007, 30 June 2009, §93).

92.  In my view, the factors identified by Mr Ng do not take the matter any further.  If the objective evidence shows that the company was in need of fund and the dominant purpose of the directors exercising the power to issue new shares was to obtain funding for the company, so long as the shares were issued at a price which reflected the value of the shares at the time, there would be no basis for the petitioner to complain that the directors acted in breach of fiduciary duties or that their act is unfair, still less prejudicial to the interests of the shareholders. 

D4.2     Relevance of 31/8/2018 EGM

93.  Mr Tang submits that the starting point is the 31/8/2018 Resolution even though it was not implemented, since it contains items which overlap with those in the 28/3/2019 Resolution and as the initial proposed fundraising, it provides context to the 1^st and 2^nd Allotments.  The 31/8/2018 Resolution was itself unfairly prejudicial as the alleged need for HK$5 million was wholly without basis for the following reasons. 

94.  First, the Breakdown circulated on 14 August 2018 which purportedly explained the need for HK$5 million was clearly not genuine in that:

(1)  The Breakdown asserted, with no particulars or supporting quotation (save for Items 1-3), 8 items of expenses, 3 of which were incomprehensible on their face: (a) legal services to 7 directors (none of whom were  defendants in HCA) in the sum of HK$1.4 million in the absence of any quotation; (b) travelling and accommodation expenses of directors in the sum of HK$400,000 (when according to Zhang, the board was capable of having and did have virtual meetings)[99]; and (c) registration fee, expenses and miscellaneous items in the sum of HK$300,000.[100]

(2)  As to Items 1-3 (HK$2 million) being the fees required for the preparation of the Company’s and Xiangshan’s respective accounts from 4 July 2005 to 31 July 2018 (14 years) and the valuation of Xiangshan’s assets and liabilities:

(a)  The quotations from Vision CPA and 嘉林資本were provided on the basis that the accountants/valuers would have to review the books and records of the Company and Xiangshan.  However, it was the board’s and Jinheng Parties’ own position that such books and records were missing at the time.[101]  Zhang says during cross-examination that the repeated requests made to Chen and Fang were met with strong resistance.[102]  Accordingly, these quotations could not have been reliable or genuine.  Indeed, it is highly questionable why quotations were obtained on such unrealistic basis. 

(b)  Zhang attempts to explain this (despite claiming that obtaining quotations were matters in which he was not involved) on the ground that Steve Ng (“Ng”) of Ng & Shum (the solicitors for Jinheng-nominated directors) had assumed that the books and records could be retrieved from Chen/Fang in the foreseeable future.[103]  Ng does not testify. In any case, there is no basis for this assumption since on Zhang’s own evidence, Jinheng and the board have been seeking those records since January 2018 but to no avail.[104] 

(c)  Zhang confirms that no such accounts / valuations have been prepared to date.[105]  

(d)  By virtue of the highly improbable premise in the quotation, and the inaction in producing these accounts / valuations, the reasonable inference is that the board never had any genuine intention to obtain these accounts / valuations in the first place. 

(3)  Zhang has no knowledge of the basis of the estimates in the Breakdown (and the rationale for many of the items)  (§81(2) above).  No directors or lawyers allegedly involved (e.g. Ng) have come forward to provide an explanation.  The court is invited to find and/or draw the inference that there was no genuine fundraising need arising from the items in the Breakdown. 

95.  Second, by the 31/8/2018 EGM, Jinheng Parties replaced the 8 items with 2 items: (1) HK$3-5 million for HCA (allegedly proposed by Ambrose Lam (solicitor) though no written quotation had been provided), and (2) HK$2.5 million for engaging accountants and valuers to prepare the Company’s AFS (increased from HK$2 million in the Breakdown in the absence of reasons or a revised quotation).[106]

96.  The fair inference is that the other items in the Breakdown were abandoned because they were indefensible, and the 2 remaining items had to be inflated to meet the HK$5 million estimate.

97.  Third, the new item of legal costs for HCA is also without basis given that:  

(1)  HCA concerns an ownership dispute over Chen’s shares, and the Company was a nominal defendant.[107]  Directors of a company should not cause the company’s funds to be expended on disputes between shareholders (Re CG & L Investment Ltd v Wyatt Estates Ltd [1992] 1 HKC 78, 81-83).  The court looks at the substance of the dispute and asks if the company is a genuine protagonist against one of its members, or is the true nature of the dispute one in which it is the object over which its shareholders are themselves in dispute (Koza Ltd v Koza Altin Isletmeleri AS[2021] EWHC 786 (Ch) §§66-76).  The case here is a fortiori when there is an ownership dispute over the majority shareholding in the company.   

(2)  The only final relief sought against the Company was rectification of its register of members.  It was joined to be bound by the court’s finding on shareholding.[108]

(3)  Although Chen sought the Company Injunction which may be said to have affected the Company, it remains the case that the Company had no independent interest which justified its appearance.  The purpose of the Company Injunction was to give effect to the Exercise of Rights Injunction in that the latter (which was only directed against Jinheng Parties) might not be sufficient to prevent the board (controlled by Jinheng Parties) from resolving to implement what was prohibited by way of the Exercising of Rights Injunction (e.g. a rights issue).

(4)  Therefore, it was unsurprising that Jinheng and the Company took the same position on this issue.[109]  Mimmie Chan J did not even deal with the Exercise of Rights Injunction and the Company Injunction separately (since the discharge of the former must lead to the discharge of the latter).[110]  There was no need for 2 camps to run the same arguments.

(5)  In cross-examination, Zhang claims that the board and Jinheng Parties acted on the advice of lawyers separately engaged by the Company.[111]  However, there is no evidence of the advice (whether documentary or otherwise) and no lawyers and directors have come forward to explain what this alleged advice entailed.

(6)  The court is invited to find and/or draw the inference that (a) there was no such advice, or (b) such advice did not advance any proper justifications for the Company’s substantive involvement.

98.  Fourth, despite the fact that no particulars were provided for the 2 items in §95 above at the 31/8/2018 EGM, and the Petitioner’s request for an adjournment, R1-R3 proceeded to pass the 31/8/2018 Resolution.[112]  This was unreasonable in light of the following:

(1)  By the time the 31/8/2018 EGM, the Company Injunction was already granted, and any rights issue could not have proceeded.[113]  This made Jinheng Parties’ insistence on a rights issue, their failure to consider the Petitioner’s proposal on shareholders’ loan, and the board’s refusal to adjourn[114] even more indefensible. 

(2)  There was an impasse between the 31/8/2018 EGM and the discharge of the Company Injunction on 15 February 2019, despite the purported need for funds, and the fact that fundraising other than by way of rights issue was permissible.[115]  This suggests that there was no genuine need for funds in the first place. 

(3)  The Petitioner has established a prima facie case of impropriety vis-à-vis the 31/8/2018 Resolution.  Zhang has no knowledge of the alleged bases for fundraising (§81(2)-81(3) above).  None of the directors, lawyers or Jinheng Parties’ representatives (e.g. the person who wrote R1-R3’s written statement) involved come forward to explain.  The court is invited to find and/or draw the inference that there was no genuine fundraising need for HK$5 million.

99.  Other than repeating the contents of R1-R3’s written statement[116], Mr Ng is not able to advance any submissions in response to the points made by Mr Tang. 

100.  In my judgment, the evidence before the court shows that there was simply no basis or justification for the directors to resolve that the Company should raise HK$5 million by way of rights issue, let alone on an urgent basis for the reasons submitted by Mr Tang and the following additional reasons:

(1)  According to Jinheng Parties, they had not been provided with any books and records of the Company or of Xiangshan such that there was nothing for the accountant / valuer to review or to prepare any accounts for either company for 14 years;

(2)  In the 2018 Notice, the directors stated that the new management had been actively re-constructing the financial and audit positions of the Company and of Xiangshan including estimating their assets and liabilities, and the new management had allegedly already made substantial advances for such purpose (“新管理層已墊支巨款”).  However, neither the alleged re-constructed accounts nor the documents evidencing the alleged advances has been provided by Jinheng Parties to the Petitioner;  

(3)  It had never been explained why the directors required any legal services, let alone at the cost of HK$1.4 million; and

(4)  HCA was a dispute between Chen and Jinheng Parties, and the Company was only a nominal defendant. There was simply no justification for the directors to cause the Company to engage a separate legal team to oppose Chen’s application for interim injunction.  Plainly, the directors should have caused the Company to adopt a neutral stance and let Jinheng Parties to defend Chen’s claim using their own funds.  I do not accept Jinheng Parties’ bare assertion that the engagement of a separate legal team was based on the advice of the lawyers engaged by the Company in Hong Kong.  Had such advice been rendered and relied upon by the directors, they would have no difficulty in producing the advice or asked the lawyers to confirm such fact.  The only inference I can draw is that no such advice had been given to Jinheng Parties, and it was the directors’ own decision  to cause the Company to engage a separate legal team to oppose Chen’s application so as to enhance the position of Jinheng Parties. 

D4.3    1^st Allotment

101.  The Petitioner’s case is that the 1^st Allotment was carried out by Jinheng-nominated directors in breach of their fiduciary power, such conduct was unfairly prejudicial to the interests of the Petitioner and justify the court making a winding-up order against the Company on just and equitable ground.[117]

102.  Jinheng Parties deny the allegations and contend that the justifications for the 1^st Allotment and the circumstances giving rise to the need to raise HK$50 million capital were set out in the 28/3/2019 Resolution (see §37(2) above) which referred to (1) the Payable; (2) the Service Contract; and (3) the HK$2 million legal costs in HCA.[118]

103.  In my view, none of the 3 matters stated in the 28/3/2019 Resolution amounted to genuine or proper justifications for the need to raise HK$50 million, let alone within the time limit imposed by the Jinheng-nominated directors.   

104.  As regards the Payable said to have been incurred during the period from 25 June 2018 to 28 February 2019:

(1)  It was purportedly based on the accounts prepared by Sino.  However, the only accounts prepared by Sino were the 2018 and 2019 Unaudited FS.  Those accounts were only prepared on 8 April 2019, after the 28/3/2019 Resolution had been passed. 

(2)  It was incumbent upon the directors to explain how the Payable came about but they failed to provide any explanation. This was despite the fact that (a) the Company has always been an investment holding company and has not carried on any business in its own right; (b) the amount allegedly arose during the period when the Jinheng-nominated directors were in control of the Company; and (c) the specific request made by the Petitioner through THK’s letter dated 10 April 2019, to which there was no meaningful answer[119].    

(3)  Even if one were to go through the 2018 and 2019 Unaudited FS to find what constituted the Payable, the only items which might be relevant were the “amount due to directors” (HK$3,142,976) or “current liabilities” (HK$2,819,997)[120].  However, neither of the FS shed any light as to when and for what purposes such “current liabilities” and “amount due to directors” were incurred.

(4)  None of the Jinheng-nominated directors come forward to explain how the Payable came about.  Zhang has no knowledge of the matter. 

105.  In the absence of any explanation and supporting documents to show how the Payable came about, the only inference which can be drawn is that the Payable did not exist or there was no need for the Company to raise fund to pay such Payable.  It follows that the Payable did not provide any justification for the need to raise fund at the time the 28/3/2019 Resolution was passed by Jinheng-nominated directors.

106.  For completeness, Mr Tang makes a further point.  He submits that even if one were to treat the “legal and professional fees” of HK$5,298,162 recorded in the 2018 and 2019 Unaudited FS[121] as the main component of the Payable and that such fees were the legal costs incurred in HCA, such costs could not be treated as payable on the part of the Company given that (1) the amount had been grossly inflated vis-à-vis the receipts issued by Ambrose Lam & Co in the total amount of HK$2,473,612.80, all of which were described as “costs on account”[122]; and (2) there was no basis for the directors to cause the Company to incur such legal expenses.  I agree.

107.  As for the Service Contract, I do not think that it provided any justification for the need to raise HK$50 million, let alone urgently, for the following reasons:

(1)  There was no explanation whatsoever as to how RMB38 million came about or why the Company or Xiangshan urgently required to pay such amount to Taoaijia. 

(2)  The Service Contract was entered into between Jinheng and Taoaijia.  Neither the Company nor Xiangshan was a party.  Clause 4(1) provided that Jinheng would be responsible for paying a monthly fee of RMB2.7 million for managing the yacht club. 

(3)  When THK pointed out the above fact in its letter dated 10 April 2019, the Jinheng-nominated directors were not able to provide any explanation other than asserting that 28/3/2019 Resolution was duly passed.[123]

108.  Although after the commencement of the UP Petition, Jinheng Parties provide, for the first time, some ex post facto justifications for the need to raise HK$50 million urgently, such ex post facto justifications should be disregarded for the purpose of considering the propriety of the 1^st Allotment as there is no evidence to suggest that the Jinheng-nominated directors had in fact considered or provided such justifications for the 1^st Allotment (cf. Sanju §43).  In any event, none of the directors come forward to give evidence to justify the propriety of the 1^st Allotment.

109.  Even if, contrary to my view, Jinheng Parties should be allowed to raise the ex post facto justifications, I do not think that they are credible for the reasons explained below.  The ex post facto justifications include:

(1)  In Zhang WS (filed on 25 March 2022), he referred to his suggestion that Jinheng should sign and make payment under the Service Contract first and be reimbursed by the Company later (“Reimbursement Suggestion”).

(2)  In the Defence,[124] it was pleaded (by way of re-amendments on 15 July 2022) that on 24 March 2019, the board resolved that the Company shall bear responsibility for all payments due and payable to Taoaijia (“Purported 24/3/2019 Resolution”) (which Zhang confirms during XXN).[125]

(3)  Under cross-examination, Zhang comes up with a new explanation – he claims that the true bargain under the Service Contract was (a) Xiangshan would be responsible for the expenses payable under the Service Contract, and (b) Xiangshan would not make payments monthly as per clause 4(1) but would only pay when it had funds (“XS Agreement”).[126]

110.  As submitted by Mr Tang, the evolution of Zhang’s explanations is as follows:

(1)  Zhang begin by refusing to accept the obvious, i.e. the 28/3/2019 Resolution wrongly stated that Jinheng was a party to the Service Contract.  Instead, he claims that after the bilateral Service Contract was signed in 2017, a further tripartite contract was signed in 2018 after Jinheng had taken control of Xiangshan and paid off some of its debts.[127]

(2)  He then attempts to downplay the Reimbursement Suggestion as a mere suggestion made within Jinheng internally only and was not eventually adopted.[128]  This is a tacit admission that his evidence on the Service Contract is not reliable.

(3)  When being pressed further, he backtracks from the Reimbursement Suggestion by claiming that he does not know whether Jinheng has in fact been paying Taoaijia after December 2017 (when this was the very core of his Reimbursement Suggestion).[129]

(4)  When he is shown the Service Contract, despite the clear fact that the contractual parties were stated to be Jinheng and Taoaijia, and the clear wording in clause 4(1), he comes up with the XS Agreement, and insists that this was the true bargain which “everyone” knew about.[130]

(5)  The XS Agreement is seemingly advanced to explain the New Documents (or at least the Purported Receipts) which suggest that the Company has in April and May 2019 paid Taoaijia RMB38 million.  This would mean that Taoaijia has not been paid by Jinheng since December 2017, which is wholly inconsistent with his Reimbursement Suggestion.

111.  I do not think that any of ex post facto explanations proffered by Jinheng Parties, whether in 2022 or subsequently, are credible having regard to the following facts and matters:

(1)  They were only proffered more than 3 years after the 1^st Allotment and no explanation has been provided as to why they could not have been proffered upon the Petitioner’s inquiries in 2019. 

(2)  There are no contemporaneous documents recording either the Jinheng Suggestion or the XS Agreement. 

(3)  The XS Agreement and the Reimbursement Suggestion are mutually inconsistent.  If former was true, there would have been no need for Jinheng to pay on the Company’s behalf, then to seek reimbursement from the Company. 

(4)  The Reimbursement Suggestion is plainly false.  Under cross-examination, Zhang says that it was a mere suggestion and the same was not adopted by the directors (§110(2) above).  There is no evidence to show that Jinheng has paid any amount to Taoaijia.  To the contrary, the Purported Receipts belatedly produced by Jinheng Parties on their face stated that it was the Company which paid Taoaijia.

(5)  The XS Agreement cannot be true either – (a) it flies in the face of the express terms of the Service Contract; (b) it has never been mentioned until Zhang’s cross-examination; (c) it is not supported by any document; (d) no attempt has been made to call Taoaijia to give evidence in support of the XS Agreement; and (e) it makes no commercial sense.  There is no reason why Taoaijia would have agreed to a term allowing Xiangshan to pay only when it had funds or to sign a contract with Jinheng but had no intention to enforce the very same contract. 

112.  As regards the Purported 24/3/2019 Resolution, it bears all the hallmarks of a recent fabrication:

(1)  It was only disclosed by Jinheng Parties one week before the trial, and no explanation has been provided as to why such document, if existed, could not have been disclosed much earlier.

(2)  It purported to authorise the Company to sign the Service Contract but the Contract had already been signed back in December 2017.  It is inconsistent with the express terms of the Service Contract which provided that it was Jinheng which had the obligation to pay Taoaijia and such payment had to be made on a monthly basis.

(3)  Had the board resolved on 24 March 2019 that the Company should assume the obligation to pay RMB38 million to Taoaijia for the service rendered to Xiangshan during the period from 10 December 2017 to 28 February 2019, there was no reason why the Purported 24/3/2019 Resolution was not mentioned in the 28/3/2019 Resolution or any of the letters written in reply to the inquiries raised by THK.  More importantly, the amount owed (RMB38 million) would have been recorded in the 2019 Unaudited FS (made up to 28 February 2019) as a current liability given that according to Jinheng Parties, the amount was only paid after the 2019 Unaudited FS (dated 8 April 2019) had been completed, i.e., on 25 April 2019 and 8 May 2019. 

(4)  There is no contemporaneous payment record such as remittance advices or bank statements to show that RMB38 million was in fact paid by the Company to Taoaijia.

113.  For the reasons set out in §§109 - 112 above, I find that:

(1)  The New Documents are not genuine documents and the same were created shortly before the trial and backdated to the dates appearing on them. 

(2)  The Reimbursement Suggestion, XS Agreement and the Purported 24/3/2019 Resolution did not exist at the time the Jinheng-nominated directors approved the 1^st Allotment. 

(3)  The Company was not liable to pay any amount to Taoaijia under the Service Contract, and no valid resolution had been passed by the Company to undertake such liability before the Jinheng-nominated directors approved the 1^st Allotment. 

114.  Mr Tang submits that even if the Purported 24/3/2019 Resolution were genuine, it was not made in the Company’s best interest and could not have given rise to a genuine fundraising need for the following reasons:

(1)  There can be no dispute that the beneficiary of the property services was Xiangshan.  Hence, Xiangshan should bear these expenses.  Jinheng Parties and the board took the same approach when they treated the legal costs in HCA initially funded by Jinheng as the Company’s liability.

(2)  Xiangshan had enough current assets to pay the total expenses of RMB38 million (or RMB64.8 million) under the Service Contract.[131] There was no need for the Company to raise funds to finance Xiangshan’s expenses.

(3)  Even if there were a need for the Company to pay for Xiangshan’s expenses:

(a)  None of the management expenses were recorded in Xiangshan’s 2019, 2020, and 2021 FS which were only stated at RMB0, RMB49,920 and RMB0 respectively.[132]

(b)  Since the service was provided by Taoaijia to Xiangshan, any payment for such service should have been charged back to Xiangshan.  In the accounts of the Company, the payment should have been recorded as a receivable from Xiangshan whereas in the accounts of Xiangshan, the transaction should be recorded as expenses incurred and payable to the Company.[133] Alternatively, the Company should have advanced a shareholder’s loan to Xiangshan for the amount paid. 

(c)  It was clearly not in the Company’s best interests to undertake a liability of RMB38 million or RMB64.8 million without getting anything in return from Xiangshan. 

115.  In view of my finding that the Purported 24/3/2019 Resolution is not a genuine document and no such resolution was in fact passed by the board on 24 March 2019, it is not necessary to consider whether it was in the interests of the Company to have passed the Purported 24/3/2019 Resolution. 

116.  If, contrary to my view, the Purported 24/3/2019 Resolution is a genuine document and the board did pass such a resolution, I hold that the resolution was passed by the directors in breach of their fiduciary duties owed to the Company, having regard to the following facts and matters:

(1)  the submissions advanced by Mr Tang (as stated in §114 above), which are well-founded; and

(2)  on the face of the Purported 24/3/2019 Resolution, the Jinheng-nominated directors had failed to consider:

(a)  the fact that there was a conflict between the interests of Jinheng (which assumed the obligation to pay Taoaijia) and that of the Company, such that they could not have proceeded to consider or approve the resolution;

(b)  the Company is a separate legal entity from that of Xiangshan, particularly when the latter has according to Jinheng Parties, substantial liability in the form of the Loan owed to Jinheng; and

(c)  Xiangshan had its own revenue generating business and assets which could be realized if and when necessary for the purpose of paying its ordinary business expenses.   

117.  There was no basis to require the Company to raise HK$2 million as legal costs for HCA:

(1)  There was no justification for the Jinheng-nominated directors to cause the Company to take an active stance in HCA (see §97 above);

(2)  There is no document disclosed by Jinheng Parties which show that HK$2 million was in fact incurred by the Company in HCA;[134]

(3)  After the HCA Decision, there could not have been any justification for the Company’s further participation in the HCA.  There was no proper basis for the directors to claim that the HCA was still in progress[135]; and

(4)  Zhang claims that Jinheng paid HK$2 million on the Company’s behalf,[136] even though there is no document showing the same.  In any case, there could have been no need to raise funds to repay Jinheng given that the Judge had ordered Chen to pay the Company’s costs on indemnity basis, to be immediately taxed.[137]  When this is pointed out to him, Zhang first alleges that the lawyers’ advice was that further costs would have to be incurred to recover those costs from Chen, then change his evidence and alleges that Chen was in no position to repay those costs.[138]  None of Zhang’s conjectures have ever been mentioned by the directors, or indeed in any of the pleadings, witness statement or disclosed documents. 

118.  Other than referring to the unpleaded (and unproven) allegations that Xiangshan had been subject to extensive litigations and its assets had been frozen (see §83(1)-(2) above), Mr Ng is unable to advance any submissions in support of Jinheng Parties’ case that there was a genuine need to raise HK$50 million, still less urgently, at the time the decision on the 1^st Allotment was made by the Jinheng-nominated directors.  

119.  Even if, contrary to my view, there were a proper basis for the Jinheng-nominated directors to believe that there was a genuine need to raise funds:

(1)  Given the importance of the matter, Jinheng Parties should have considered the alternative options available, including (a) inviting the shareholders to advance loans to the Company, particularly when the Petitioner had already made such proposal to the board[139]; (b) borrowing loans from banks; and (c) examining Xiangshan’s financial position and applying its funds or assets to pay the service fee to Taoaijia.   

(2)  Yet, there is no evidence that the directors have ever considered any of the options available, notwithstanding the Petitioner’s specific inquiries.[140]

(3)  No directors have come forward to explain what alternatives were considered, and why they were inferior to a rights issue.

(4)  Although under cross-examination, Zhang says that the Petitioner’s proposal had been considered and rejected because of the condition attached, this was not mentioned in any documents or correspondence.  Even if true, it did not explain why Jinheng Parties could not accept the condition as there was no suggestion that the Petitioner was in any way unfit to be a director of the Company.

(5)  The only reasonable inference which can be drawn is that the Jinheng-nominated directors did not consider any alternative means of raising funds, and only wanted to push through the 1^st Allotment.

120.  Further, there is no evidence whatsoever to suggest that the Jinheng-nominated directors have ever considered whether the price of HK$1 per share truly reflected the value of the shares to be issued or whether the price was reasonable or fair.   

(1)  Although Mr Ng contends that the offer was made at the same price to all shareholders such that it was a fair price, such contention has not been pleaded.  Nor is there any evidence to suggest that the directors did in fact consider the question of price or came to that view. 

(2)  In any event, issuing new shares at HK$1 per share would have the dilutive and prejudicial effect on the shareholders if they chose not to subscribe for the shares.  This was particularly so when the Petitioner and Wu were required to pay substantial subscription price (HK$7.5 million and HK$17 million respectively) within 14 days.[141]  This is compounded by the fact that the supporting documents were only provided to the Petitioner on 9 April 2019,[142] more than a week after the 28/3/2019 Resolution had been passed. 

(3)  There was no reasonable basis for imposing an extremely tight deadline for subscription given that the Company had no creditor, as confirms by Zhang under cross-examination.  It is only when this Court tries to clarify the basis for imposing the 14-day deadline that he realises the implication of his earlier answer and changes his evidence to only creditors in Hong Kong (which he accepts is a speculation).[143]

(4)  Although Zhang attempts to justify the 14-day deadline as a decision based on the legal advice allegedly received, when pressed further, he accepts that there was (a) no record of the alleged legal advice, whether in the board minutes or correspondence; (b) no attempt has been made to call the lawyers to testify; and (c) there is no objective evidence in support of his assertion.[144]

(5)  The complete failure on the part of the Jinheng-nominated directors to consider the important issues of the price and the deadline for acceptance of the offer reinforce the fact that the directors merely wanted to push through the 1^st Allotment in complete disregard as to whether the decision was fair or  would affect the interests of the shareholders. 

121.  In any event, the price of HK$1 per share was clearly an undervalue, having regard to the following facts and matters:

(1)  According to Jinheng, it acquired the Loan and the Pledged Shares at RMB2,390 million.  Even assuming that 5% of the consideration was attributable to the Pledged Shares (i.e.  2,550,000 shares), the value of those shares would have been worth RMB151.5 million or RMB59.4 per share, much more than HK$1 per share.[145]

(2)  The Project was valued by JunDa to be worth RMB10,305 million in 2012 (see §12 above). 

(3)  Even according to Xiangshan’s own document,[146] its liability in 2021 was around RMB6 billion.  Assuming Xiangshan had the same amount of liabilities in 2019, and using the valuation in 2012, it would still have been worth RMB4 billion, and the Company’s shares would have been worth considerably more than HK$1 per share. 

122.  Lastly, there was a steadfast refusal on the part of the Jinheng-nominated directors to provide any meaningful answer to the inquiries raised by the Petitioner.  This coupled with the fact that none of the directors come forward to explain why the 1^st Allotment was carried out in the way they decided, in particular, in respect of the 3 matters said to justify the need to raise funds; the price and the extremely short deadline. 

123.  For completeness, I do not accept Mr Ng’s suggestion in his Closing[147] and during cross-examination of the Petitioner that the Petitioner has made a gain in the 1^st Allotment as her shareholding was increased from 15% to 21.711%. 

(1)  The suggestion has never been pleaded or mentioned in any WS or contemporaneous documents.  It is not a point which may be raised by Jinheng Parties. 

(2)  In any event, the suggestion ignores the fact that (a) the Petitioner subscribed for the new shares under protest; (b) she had to pay HK$7.5 million for the new shares, which she did not have to do had it not been for the 1^st Allotment; and (c) the Petitioner’s position all along has been to set aside the 1^st Allotment. 

(3)  Further, as submitted by Mr Tang, the act of the Jinheng-nominated directors was still prejudicial as it deprives the Company the opportunity to fix the rights issue or to negotiate a more suitable price following proper consideration (Re Sunrise Radio Ltd [2010] 1 BCLC 367 §113).

124.  Taking into account the facts and matters set out in §§103-123 above, the only reasonable inference which can be drawn is that the 1^st Allotment was implemented not for the purpose of raising fund required by the Company but for the improper purpose of diluting the shareholding of the Petitioner and Wu in the Company. 

125.  In so acting, the directors acted in breach of their fiduciary duties owed to the Company.  It follows that the 28/3/2019 Resolution and the 1^st Allotment are voidable and should be set aside.  Such conduct on the part of the Jinheng-nominated directors was both unfair and prejudicial to the Petitioner as she was forced to subscribe for new shares so as to maintain her shareholding when the Company did not have a genuine need to raise funds, and the 1^st Allotment was made by the directors for an improper purpose. 

D5.    2^nd Allotment Issue

126.  The Petitioner’s case is that the 2^nd Allotment was carried out by Jinheng-nominated directors in breach of fiduciary power, and such conduct was unfairly prejudicial and capable of justifying winding-up on the just and equitable ground.[148]

127.  On the other hand, Jinheng Parties’ case is that there was a genuine need for capital by virtue of the 3 matters stated in the 17/4/2019 Resolution namely: (1) HK$17 million discrepancy as Wu did not subscribe for any shares under the 1^st Allotment; (2) HK$3 million for the 2^nd HCA; and (3) HK$10 million for Contingency Fund (se §45 above).[149]

128.  For the reasons set out in §§129 - 138 below, I find that the 2^nd Allotment was made by the Jinheng-nominated directors in breach of fiduciary duties and the 2^nd Allotment was unfairly prejudicial to the interests of the Petitioner.

129.  First, the evidence before the court shows that there was no genuine need for the Company to raise capital of HK$30 million at the time of the 2^nd Allotment.  The Company had just raised HK$33 million under the 1^st Allotment, but the directors did not explain, let alone provide any supporting documents, to show that the amount raised had already been used and, if so, for what purposes.  Even after the Petitioner’s inquiries, the board still refused to provide any explanation to justify the alleged need for HK$30 million.

130.  As regards the HK$17 million discrepancy, it assumed that there was a genuine need to raise HK$50 million and the 1^st Allotment was valid, which they are not (as I so find).

131.  As for the HK$3 million for the 2^nd HCA:

(1)  It can be seen from the writ that the 2^nd HCA[150] concerned a dispute over the ownership of the shares held by Wu.  The Company was only a nominal defendant.  There was no justification  for the Company to raise HK$3 million for the purpose of defending the 2^nd HCA at all. 

(2)  No explanation has ever been provided by the directors as to why HK$3 million was required for the purpose of the 2^nd HCA. 

(3)  Under cross-examination, Zhang accepts that he did not know why the Company should have a substantive role in the 2^nd HCA or whether the directors had obtained any quotation for such purpose (see §81(6)(b) above).  This shows that the assertions in Zhang WS §47(3) are at best ex post facto justifications on his part, and should not be accorded with any weight. 

(4)  In any event, Zheng’s assertions that the solicitors, F. Zimmern & Co (“FZC”), required the Company to pay HK$3 million as costs on account and the Company incurred legal costs of HK$658,000 in the 2^nd HCA are flatly contradicted by the bills he relied on.  Amongst the bills he refers to, only the 3^rd and 4^th interim bills dated 6 January 2020 and 15 May 2020 concerned the 2^nd HCA.  They show that on 28 August 2019, only HK$237,500 was paid to FZC as costs on account; and the total amount billed was HK$218,934 , leaving a credit balance of HK$18,566. 

(5)  Mr Tang makes a further point.  He submits that there was no basis for Jinheng Parties’ redaction of the bills, as a company cannot assert privilege against a shareholder unless the documents were produced for the dominant purpose of litigation between the company and that shareholder (Dawson-Damer v Taylor Wessing LLP[2020] Ch 746 §§31-32).  The court should draw an adverse inference against Jinheng Parties that the redacted descriptions concern costs that were improperly incurred, and thus are concealed from this court and the Petitioner.  I agree.

132.  As to the HK$10 million Contingency Fund, again, the objective evidence shows that there was no need for the Company to raise fund for such purpose:

(1)  The financial position of Xiangshan, as discussed in §114(1)-(2) above, did not support the alleged need to provide the Contingency Fund;

(2)  Indeed, the very fact that the directors were unable to point to any specific use to which the HK$10 million would be deployed militates against their allegation that Xiangshan required such fund for its operations;

(3)  The alleged need for Contingency Fund for Xiangshan’s operations was not raised when the 1^st Allotment was proposed, and no explanation was provided as to why all of a sudden there was an immediate need to raise HK$10 million.  When this was pointed out in THK’s letter of 26 April 2019, the directors were unable to provide any response in LLL Secretarial’s letter of 29 April 2019.[151]

(4)  Although under cross-examination, Zhang ventures to speculate how the Contingency Fund would be deployed, there is no evidence in support of his speculation, which is not even mentioned in his WS.[152]

133.  In the absence of any evidence to show that the HK$33 million raised in the 1^st Allotment had been used up, and none of the 3 matters relied on by the directors justified the alleged need to raise fund, there was no proper basis for the Jinheng-nominated directors to come to the view that the Company needed to raise fund through the 2^nd Allotment. 

134.  Second, even if, contrary to my view, the directors had a valid basis to believe that the Company needed to raise fund, they were duty bound to consider the alternative means of raising fund. 

(1)  The analysis in §119(1)-119(5) above applies with equal force. 

(2)  This was particularly so when at that stage, the directors knew that (a) Wu did not participate in the 1^st Allotment as a result of which his shareholding was diluted; (b) the Petitioner participated in the 1^st Allotment under protest; and (c) the Petitioner through THK challenged the need to raise fund. 

(3)  Despite this knowledge, the directors still did not consider any alternative means of raising fund or the interests of the shareholders in being required to participate in another rights issue, and no explanation has been proffered to justify their decision.   

(4)  Nor did the directors consider why the subscription price should be fixed at HK$1 per share, despite the specific inquiry in THK’s letter of 26 April 2019.[153]  For the same reasons set out in §120 above, the price at HK$1 per share was clearly an undervalue.  Again, the directors have never provided any justification as to why the price of the rights issue should be fixed at HK$1 per share. 

135.  Taking into account the above facts and matters, the only reasonable inference which can be drawn is that the 2^nd Allotment was implemented not for the purpose of raising fund required by the Company, but for the improper purpose of diluting the shareholding of the Petitioner and Wu with a view to squeezing them out. 

136.  I do not accept Mr Ng’s contention that the Petitioner made a gain after participating in the 1^st and 2^nd Allotments in that her shareholding was increased from 15% to 15.48% for the same reasons set out in §123 above.   

137.  In deciding to implement the 2^nd Allotment, the directors acted in breach of their fiduciary duties owed to the Company.  It follows that the 17/4/2019 Resolution and the 2^nd Allotment are voidable and should be set aside.  Such conduct on the part of the Jinheng-nominated directors was both unfair and prejudicial to the Petitioner as she was forced to subscribe for new shares so as to maintain her shareholding when the Company did not have a genuine need to raise funds, and the 2^nd Allotment was made by the directors for an improper purpose. 

138.  Mr Ng makes another contention[154], that if the court finds that there was a breach of fiduciary duty, the wrongdoers had to be the Company’s “former management”. Their wrongdoings are listed in Zhang WS §10.  What the Jinheng-nominated directors did was merely to take bona fide steps to save the Company (and Xiangshan) from insolvency and mismanagement and to try to continue the operations of Xiangshan.  In particular, the 31/8/2018 Resolution and the 1^st and 2^nd Allotments were done in good faith.  The contention is wholly without basis:

(1)  It has not been pleaded in the Defence. 

(2)  Nor has it ever been put forward by the directors to justify the 1^st and 2^nd Allotments, whether at the time they passed the 28/3/2019 Resolution or 14/7/2019 Resolution or when the Petitioner challenged the propriety of the 1^st and 2^nd Allotments. 

(3)  There is simply no evidence in support of the bold assertion that the 1^st and 2^nd Allotments was to save the Company and Xiangshan from insolvency, which is contradicted by the Xiangshan’s FS which show that it was solvent and had positive net equity at all times.  If that were the view taken by the directors at the time, they would have said so. 

D6.    No AGM Issue

139.  The following principles are not in dispute.

140.  The CO imposes statutory obligations on the directors to hold AGM every year (s.610) and to lay the AFS of the company at such meeting.  These include the following provisions of the CO: 

(1)  S.379 provides that directors must prepare yearly financial statements that comply with s.380.   

(2)  S.380 provides that the AFS must give a true and fair view of the company’s financial position and comply with requirements under the CO and accounting standards.   

(3)  S.396 states that the company must appoint an auditor for a financial year.

(4)  S.429(1) provides that the directors must lay the AFS in the AGM. 

(5)  S.430(1) states that the company must send the AFS to every member 21 days before the AGM.

141.  A consistent failure to hold AGMs or to lay accounts before members wholly deprived shareholders of any opportunity to consider the affairs of the company, is capable of amounting to an unfairly prejudicial conduct (Re A Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384, 393).  Failure to hold general meeting or to submit accounts to the shareholders may be sufficient to found a just and equitable winding up (French: Applications to Wind Up Companies, 4^th ed, 2021, §8.317; Re Turnbull [2024] CSOH 37, §15).   

142.  The Petitioner’s case is that since Jinheng Parties took over the Company in August 2018:

(1)  No AGM has been called, in breach of s.610.[155]  Although Jinheng Parties were unwilling to accept this as part of the Agreed Facts §42.1, this cannot be controversial, and is in fact accepted in Zhang WS §49(1).

(2)  No AFS has been laid before any general meetings for the members’ consideration.[156]

(3)  Although after the WU Petition was presented, Jinheng Parties caused the 2019 & 2020 AFS to be prepared and provided to the Petitioner on 25 November 2021, those AFS were prepared in contravention of ss.379(2) and 381 (which require consolidated AFS to be prepared)[157] and ss.379(1) and 380 (true and fair view), as more particularly explained in §143 below.[158]

(4)  The trial balances as of 31 December 2019 and 2020 recorded HK$6,598,995.80 as due from Li,[159] who is the sole shareholder of R1.  Such loan ought to have been reported as a related party transaction instead of “other receivables”.[160]

143.  Mr Tang contends that the 2018, 2019 and 2020 AFS do not give a true and fair view of the financial state of the Company in that:  

(1)  There were no breakdown for the substantial amounts of administrative and operating expenses and current liabilities in each of the 3 years[161] which were the main cause for the Company’s negative net equity. 

(2)  The Company refused to provide any breakdown and supporting documentation despite requests from THK.[162]

(3)  Xiangshan was recorded as having a value of HK$1, after deducting the Impairment of HK$616,199,999.[163]

(4)  When THK asked for an explanation for these figures,[164] Jinheng Parties’ response was that the documents could be found in Item 48 of their list of documents; it also confirmed that the cost was derived from the registered capital of Xiangshan.

(5)  Item 48 consists of the corporate report of Xiangshan dated 2 July 2019 which show that based on Xiangshan’s 2018 report, it had total assets of approximately RMB36.251 billion and liabilities of RMB31.9284 billion.  These are consistent with the figures in Xiangshan Unaudited FS.

(6)  In the final page, there was a board resolution dated 9 August 2021 confirming the cost and Impairment figures in the AFS (§3).  The resolution does not record what considerations the board took into account in arriving at this Impairment.  There is no reference to any valuation obtained. 

(7)  The Impairment is incredible given that Xiangshan had an net equity of RMB432 million at the time (based on Xiangshan Unaudited FS for 2020 dated 18 May 2021 available at the time), consistent with the figures in the 2018 report.    The HK$1 attributed to Xiangshan’s shares was arbitrary and without basis, and could not have been an accurate reflection of their value  (See §121 above).

(8)  Zhang has no answer for the above.  None of the directors have come forward to put forward any explanations. 

(9)  These breaches are not only objectionable individually, but they also compound the prejudicial effect of the Allotments by depriving the Petitioner the opportunity to know how the capital raised had been expended, the value of Xiangshan and hence whether the subscription price of HK$1 was fair, and verify whether the alleged need for capital was genuine.[165]

144.  Jinheng Parties’ defence may be summarized as follows:

(1)  The Petitioner never raised any complaints about the matters in §§142-143 above.[166]

(2)  It was open to the Petitioner to apply to call an EGM.[167]

(3)  The Company’s 2019 and 2020 AFS were prepared on an unconsolidated basis, and wrote down the value of the Company’s investment in Xiangshan, because there was no access to Xiangshan’s financial documents[168].

(4)  Li was not related to the Company, and hence the amount due was not a related party transaction.[169]

145.  Mr Ng submits that having acquiesced in the matters, it is not open to the Petitioner to complain that the directors’ failure to comply with the statutory obligations was unfair or in disregard of their interests (Hollington §7-87; Yap Yong Huat & Anor v Yap Yoke Beng & 2 Ors [2016] 1 AMCR 303, §31).  As a 15% shareholder, it was open to the Petitioner to apply for an order under s.610(7) of the CO to convene a general meeting to be held.  As regards the failure to prepare consolidated AFS, this was attributed to the fact that Xiangshan’s accounts and FS were not available due to the mismanagement of the “previous management”. 

146.  As the Jinheng-nominated directors have not since their appointment taken any step to convene any AGM or prepared any consolidated AFS of the Company, contrary to the requirements of the statutory obligations identified in §140 above, prima facie, their conduct was in breach of the statutory obligations.  It was also unfair and prejudicial to the interests of the Petitioner as she was entitled to insist on her right to require the directors to hold AGM and lay the AFS prepared in accordance with the CO at such AGM, which is an important, if not the only, avenue available for her to know the financial position of the Company and to assess the performance of the management. 

147.  The burden is on the directors to displace the prima facie case by adducing evidence to justify their inaction, but none of them have come forward to provide any justification or to prove the matters pleaded in the Defence. For this reason alone, the Petitioner’s complaint must succeed. 

148.  Even if, contrary to my view, Jinheng Parties should be allowed to pursue their defence pleaded or the arguments raised by Mr Ng in the absence of any evidence from the directors, I do not think that any of the defence or arguments have any merit.

149.  First, the fact that no AGM was held from 2012 to 2018 and no AFS was provided by the former management and the Petitioner did not complain about is neither here nor there.  There is no evidence to suggest that the former management had undertaken any rights issue or fund raising exercises as the Jinheng-nominated directors did such as to call into question the financial position of the Company or of Xiangshan. 

150.  Second, even if the fact that the Petitioner’s failure to complain about the lack of AGM and AFS in the past is relevant or that it amounted to acquiescence, such acquiescence came to an end when the Petitioner began to complain about the lack of access to the Company’s financial information in THK’s letter of 30 August 2018[170]. 

151.  Third, since THK’s request, the Jinheng-nominated directors have repeatedly refused to provide the necessary information about the 1^st and 2^nd Allotments.  I am unable to see how it can be said against the Petitioner that she should have applied to the court to call a general meeting to be held when the directors had refused to provide even the information relevant to the 1^st and 2^nd Allotments.  In any event, after the Petitioner commenced the UP Petition and sought relief for a clean break, it would be a waste of time and costs for her to commence another proceeding in respect of the same complaint.

152.  Fourth, it is not open to Jinheng-nominated directors to shift the responsibility of their failure to convene AGM and to prepare proper AFS to the former management:

(1)  It was their duty to convene AGM and to prepare and lay AFS at such meeting.  If they considered that they were not able to discharge such duty, they could have resigned from the position or engaged professionals to assist them in performing such duty.

(2)  The suggestion that the directors did not have access to any books and records of Xiangshan is inconsistent with the fact that Xiangshan was able to prepare its FS every year and submitted the same to the tax authority in the Mainland. 

(3)  If and to the extent that there were certain books or records missing from Xiangshan’s financial records, the proper course would be for the auditors to qualify the Company’s AFS in respect of the items in question.  It does not provide any excuse for the directors not to prepare any consolidated AFS as required by the CO. 

153.  Fifth, there is no answer to any of the points made by Mr Tang about the deficiencies of the 2018-2020 AFS which I consider to be well-founded.  In particular, I am unable to see how the directors could have come to the view that Xiangshan only worth HK$1 as at 31 December 2019 when in the very same year, they caused the Company to inject substantial amounts of over HK$56.4 million into Xiangshan.   

154.  For the above reasons, I hold that the failure on the part of Jinheng-nominated directors in convening any AGM, preparing the Company’s AFS in compliance with the CO and laying such AFS at the AGM were unfair and prejudicial to the interests of the Petitioner as it deprived her the opportunity to know the financial position of the Company and to require the directors to account for their management. 

D7.    Winding-up Issue & Remedies Issue

155.  The principles are well-established.  As submitted by Mr Tang:

(1)  Winding up is a shareholders’ remedy of last resort.  But this does not mean that winding up is unavailable to members if they have other remedy.  The member retains a significant element of choice in the remedy to be sought, even though the court has the last word (Lau v Chu [2020] 1 WLR 4656 §20 (Lord Briggs)). 

(2)  The court carries out a three-stage analysis and ask: (a) Is the petitioner entitled to some relief?  (b) If so, would a winding up be just and equitable if there were no other remedy available?  (c) If so, has the petitioner unreasonably failed to pursue some other available remedy instead of seeking winding up? (Lau v Chu§20).

(3)  The legal burden of proof is on the petitioner at stages (a) and (b).  But it shifts to the respondent at stage (c) (Lau v Chu§21).  A judge may reasonably expect the respondent (especially if represented by an experienced legal team) to put forward one or more remedies which it is alleged were both available and sufficiently attractive as an alternative to make it unreasonable to continue to seek a winding up (Lau v Chu§52).

156.  In considering whether the petitioner has unreasonably failed to pursue some other available remedy such as buy-out, the court is guided by the following principles:

(1)  First, where the ability of the respondent to finance any buyout is seriously in doubt, it is not unreasonable for the petitioner to insist on seeking a winding up relief (Re T-Hero Industrial Company Limited [2019] HKCFI 1374 §§39-43; Re Yung Kee Holdings Limited, HCCW 154/2010, 21 July 2010, §§18-24, 29).  This includes where there was no evidence on the respondent’s financial ability to comply with a buyout order (Re Perfect Trade Limited, HCCW 1147/1999, 1 June 2001, §§59, 61) and where the respondent admitted that he did not have the financial means to buy out the petitioner’s shares, and had to borrow money to fund the purchase (Re Nu-West Natural Products Co Ltd, HCCW 293/2006, 3 August 2007, §71).

(2)  Second, the court might be reluctant to order a buy-out over winding up where it would be difficult for the valuer to value the shares of the company due to, inter alia, the uncertainties surrounding the financial position of the company (Re China International Business Development (Hong Kong) Ltd, HCCW 603/2001, 14 February 2005, §78). Thus, if a buy-out order would involve the court embarking on a laborious and expensive process requiring a degree of co-operation between the parties which had hitherto been lacking, it would be a factor in favour of winding up relief (Nu-West§73).

(3)  Third, where, as here, the company is a holding company which does not carry on any business of its own but owns an operating and profitable subsidiary, the court is more receptive to making a winding up order.  The fact that winding up the holding company may well be to the advantage of the petitioner as the liquidator of the company could sell the subsidiary as a going concern.  Thus, it cannot be said that the petitioner is unreasonable to seek winding-up (Re Tai-Ao Aluminium Group Ltd, CACV 391/2005, 22 June 2006, §§15-16).

157.  Mr Ng (rightly) does not dispute the above principles.  He submits that the court is not bound by the relief sought by the petitioner, and should first consider whether orders can be made for regulating the company’s affairs in the future so that there is no further oppression or unfair conduct and if that cannot be done, to see if there should be a buy- out by one fraction or the other (Re Neath Rugby Ltd (No 2) [2009] 2 BCLC 427, §§85-91; Hollington, §8-08).  The remedy must be proportionate to the unfair prejudice found.  It may be disproportionate to order a buy-out where the unfair prejudice is fairly modest (Hawkes v Cuddy (No 2) [2008] BCC 390).

158.  Mr Tang submits that the Petitioner seeks as her primary relief a winding up order against the Company for the following reasons:

(1)  The burden is on Jinheng Parties to show that the Petitioner has failed to pursue an alternative remedy (in this case buy-out) (Lau v Chu§§20-21).  It is for Jinheng Parties to prove their means to finance a buy-out.   

(2)  Mr Ng indicates in his Opening that Jinheng Parties will only be able to buy out the P’s Shares if the price is not over HK$1 million.[171]  He accepts that there is no explicable basis for this figure or evidence to show that Jinheng Parties could pay this figure.  This is right given that Jinheng Parties once claimed that they could not afford the legal fees and planned to contest this trial in person.[172]

(3)  Second, alternatively, buy-out is not an available alternative given the difficulties in conducting the Valuation as a result of the suppression of discovery.[173]

(4)  Third, a buy-out order will likely be an empty remedy given that:

(a)  Jinheng Parties are unlikely to comply with it, in light of their history of non-compliance with court orders; and

(b)  enforcement is difficult in that they have no assets within jurisdiction except their shares in the Company, which would be difficult to realise by way of a charging order because of the ownership dispute with Chen and the difficulty in valuation.[174]

(5)  Fourth, the Company is a holding company and the liquidator could sell Xiangshan as a going concern.[175]

159.  Other than reiterating that Jinheng Parties will not be able to comply with a buy order if the price is over HK$1 million, Mr Ng is not able to answer any of the points made by Mr Tang.  Nor does Mr Ng identify what other relief he contends is proportionate in light of the unfair prejudice complained of by the Petitioner.  It is idle to suggest that the court can make an order to regulate the affairs of the Company when Jinheng Parties have not offered any alternative relief for that purpose. 

160.  In my view, the matters complained of by the Petitioner in particular, the manner in which Jinheng Parties (through Jinheng-nominated directors) pushed through the 1^st and 2^nd Allotments for the improper purpose of diluting the shareholding of the Petitioner and Wu are serious, and are both unfair and prejudicial to the interests of the Petitioner. It is a clear case where the court should exercise its discretion under s.724 of the CO to order Jinheng Parties to purchase P’s Shares (on the basis that the 1^st and 2^nd Allotments are set aside and the subscription prices paid by the Petitioner be returned to the Petitioner, as discussed in §165 below) at their fair value. 

161.  However, it would be futile to make such a buy-out order against Jinheng Parties, having regard to the following facts and matters:

(1)  According to Xiangshan’s FS and the reports prepared while it was under the complete control of Jinheng Parties, Xiangshan has a net equity of at least RMB432 million (see §143(7) above).  Thus, even if the value of Xiangshan is to be assessed on net assets or break-up basis, as opposed to a going concern basis (which is normally the appropriate basis to assess the value of a company with ongoing operation), the enterprise value of Xiangshan would be at least RMB432 million.  The value of the Company, which holds 100% equity in Xiangshan, would also be at least RMB432 million, and the Petitioner’s 15% shareholding would be worth at least  RMB64.8 million (~ HK$71 million). 

(2)  The doubtful financial state of Jinheng Parties.  As described in Zhang Aff, Jinheng Parties could not even afford to pay the legal costs involved in defending these proceedings.  This is reinforced by Mr Ng’s confirmation that Jinheng Parties will not be able to comply with any buy-out order if the price exceeds HK$1 million.   

(3)  The absence of any AFS prepared in compliance with the requirements of the CO and the absence of any AFS in respect of Xiangshan means that it is impossible to assess the fair value of Xiangshan and the Company.  This is confirmed by P’s Expert, who has come up with the Valuation on 2 alternative bases, both of which are unsatisfactory in that (a) they are based on an out-dated valuation carried out by JunDa in 2012 which, in turn, was based on an assumption that the Project would be completed as planned when it has not in fact been completed; (b) the adjustments made by P’s Expert only reflect the increase in the price index of residential properties in the past 12 years but without taken into account any increase in the costs of completing the Project; (c) P’s Expert did not have access to any books and records of Xiangshan or that of the Company requested in the Revised List which are relevant and material to the Valuation; and (d) a number of assumptions adopted by P’s Expert which Jinheng Parties take issue with, and which P’s Expert agrees may not be appropriate or correct but were adopted in the Valuation as he had no other means to properly assess the value of the Company.   

162.  The only relief available is a winding up order against the Company.  As the Company is an investment holding company, the liquidators can take steps to ascertain the true financial position of the Company and of Xiangshan and to realise the Company’s assets including selling its 100% equity in Xiangshan and distribute the proceeds pari passu amongst the shareholders. 

D8.    Repayment Issue

163.  Mr Tang submits that regardless of whether there would be winding up or buy out, the 1^st Allotment and 2^nd Allotment should be declared void and set aside, and the Petitioner should be repaid the subscription monies of HK$8,754,800.  There will be no double recovery since P’s Shares are valued based on the pre-allotment position, as confirmed by P’s Expert.[176]

164.  Mr Ng submits that the relief sought is unfair to “other creditors” of the Company as the Petitioner “will move up from the order of payment (now as a creditor instead of merely a shareholder)”.  Further, if the Petitioner’s claim for unfair prejudice is successful, her claim against the Company will “fall away” [177].

165.  I am unable to agree with Mr Ng. 

(1)  It is not clear what “other creditors” Mr Ng is referring to or why the repayment of the subscription price will be unfair to such creditors. 

(2)  The 1^st and 2^nd Allotments were made by the Jinheng-nominated directors in breach of their fiduciary duties and are voidable.  They should be set aside and the parties’ position be restored to the state as if the 1^st and 2^nd Allotments have never been made.  It follows that the subscription prices paid by the Petitioner should be returned to her and the additional shares issued to her be cancelled.  The same applies to the shares issued to R1-R3.

(3)  As no buy-out order is made against Jinheng Parties, there is no basis to suggest that the Petitioner’s claim will “fall away” (whatever that means).

D9.    Valuation Issue

166.  As no buy-out order is made, it is not necessary to determine this issue.

E. Disposition

167.  For all the reasons set out above, I hold that:

(1)  the affairs of the Company have been conducted by Jinheng Parties in an unfairly prejudicial manner.  Such conduct is serious and warrant the court to grant relief under s.724 of the CO or make a winding up order against the Company on the  just and equitable ground; and

(2)  it is futile to make a buy-out order against Jinheng Parties. 

168.  I make the following order:

(1)  A declaration that the 1^st and 2^nd Allotments are voidable;

(2)  The 1^st and 2^ndAllotments be set aside;

(3)  The Company do repay HK$8,754,800 to the Petitioner forthwith, whereupon the 8,754,000 shares issued to the Petitioner be returned to the Company and be cancelled; and

(4)  The Company be wound up by the court.

169.  As for costs, I make a costs order nisi that the costs of and occasioned by the UP Petition and the WU Petition, including all costs reserved, be paid by Jinheng Parties to the Petitioner, the Company and the Official Receiver, to be taxed if not agreed.