KAM KWAN SING v. KAM KWAN LAI AND OTHERS

HCCW 154/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 154 OF 2010

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J U D G M E N T

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Introduction

1.  The Yung Kee restaurant in Wellington Street is well known to many people in Hong Kong.  The restaurant is large and occupies the first five floors of the Yung Kee Building.  The restaurant’s history goes back to the early 1930s when Kam Shui Fai (“Kam Senior”) started a cooked food stall named Yung Kee in Kwong Yuen West Street in Sheung Wan.  In 1942 Kam Senior moved to the ground floor of 32 Wing Lok Street and named his new restaurant Yung Kee Restaurant (“Restaurant”).  Wing Lok Street is immediately behind Wellington Street.  In 1964 the Restaurant moved to 32 Wellington Street, which Kam Senior had purchased in the previous year.  During the subsequent years he purchased the adjacent properties and by 1970 owned 32‑40 Wellington Street.  In the mid 1970s the Yung Kee Building was constructed and the Restaurant commenced business in its present location in 1977.  The Restaurant thrived and the value of the Building increased substantially over the following decades.  By the time Kam Senior died in December 2004 the business he had started, by which I mean the Restaurant, associated businesses and the properties owned indirectly by the Company, Yung Kee Holdings Limited, which is the subject of this Petition, had become very valuable.  The lowest valuation put on the Company in these proceedings is in excess of HK$1,300,000,000.

2.  The present Amended Petition is brought by the eldest son of Kam Senior, Kam Kwan Sing (“Petitioner”), against his Brother, Kam Kwan Lai (“Kwan Lai”) and companies through which Kwan Lai owns shares (in the case of Everway Holdings Limited (“Everway”) Kwan Lai says he owns, there being an issue about the beneficial ownership of this company) in the 5^th Respondent, Yung Kee Holdings Limited (“Company”) whose affairs the Petition concerns.  In addition Kwan Lai’s son, Carrel, has been joined as a party.  This is because the 1^st prayer of the Amended Petition seeks an account of the loss and damage suffered by the Company and the group of which it is the holding company as a result of Kwan Lai and Carrel’s alleged misconduct.  This claim was recast at the trial and no claim for relief was advanced against Carrel.  The Petitioner’s primary claim is that the affairs of the Company have been conducted in a manner unfairly prejudicial to him as a member and he seeks an order that Kwan Lai purchase his shares.  The Petitioner submits that the conduct of Kwan Lai and Carrel are matters that should be taken into account in assessing the value of the shares of the Company in the event that the court orders that the Petitioner’s shares be bought by Kwan Lai.  There are alternative claims for an order that the Petitioner purchase Kwan Lai’s shares or that the Company be wound up.

3.  An unfortunate feature of this case is that, I have been told, the Parties have agreed in principle that one of them should buy the other’s shares.  It appears that their attempts to mediate, which, for some not immediately apparent reason, was conducted by a fung shui master, proved unsuccessful because they could not agree a price.  As a result a trial has taken place, which has been heavily reported in the media, in which all the allegations of unfair prejudice have had to be explored.  Divisions within the Family, with the Brothers’ Mother apparently siding with the Petitioner, and other siblings apparently siding with Kwan Lai, have no doubt been exacerbated.  It seems unfortunate that if the Parties recognised that it was sensible for one of them to sell their shares they could not with their advisers agree an alternative procedure, such as an ad hoc arbitration, for determining their price, which might have resulted in the resolution of their differences in private and without their relationship being further damaged by the adversarial process, which a trial involves.  It is particularly unfortunate that the Parties and their advisers could not find a better way of resolving the Parties’ differences as I have, for reasons which I explain below, decided that the Petition should be dismissed.  At the time I originally drafted this introduction to the judgment this decision appeared to leave the Parties in business together in circumstances in which it was likely to be even more difficult for them to work amicably together than it was prior to the commencement of these proceedings.  However, this is no longer the case.  I was informed shortly prior to the judgment’s completion that sadly the Petitioner had died.  This makes the Parties’ failure to resolve their differences all the more regrettable.

4.  Before explaining the issues in these proceedings in more detail, I will set-out the relevant corporate history of the group of which the Company is the holding company.

Corporate Structure

5.  The Company was incorporated on 1 December 1994 under The International Business Companies Act of the laws of the British Virgin Islands (“BVI”), as an international business company limited by shares, with its registered office in Tortola.  The Company was established to act as an investment holding company, holding all the issued shares in Long Yau Ltd (“Long Yau”), an existing company which was originally a trust company formed by Kam Senior for the benefit of his Family members.  Long Yau is also incorporated in the BVI and is also an investment holding company.

6.  The authorised and issued capital of the Company is US$20, divided into 20 US$1 shares.  The Petitioner is the registered owner of 9 shares.  Kwan Lai is the registered owner of 7 shares.  Legco Inc, a BVI company controlled by Kwan Lai, is the registered owner of 2 shares. Everway, a company also incorporated in the BVI, is the registered owner of the remaining 2 shares.  There is a dispute about the beneficial ownership of Everway upto April 2010.  Rather unusually the dispute is not between 2 people claiming beneficial ownership, but between Kwan Lai and Kelly Kam (the younger sister of the Petitioner and Kwan Lai), who say Kwan Lai is the beneficial owner, and the Petitioner, who says that Kelly is the beneficial owner.  This dispute is relevant to the validity of a resolution of the Company in general meeting of 7 July 2009 purportedly appointing Carrel as a director of the Company.  However, as a consequence of Kelly’s position Kwan Lai has had in practice control over 55% of the Company’s issued shares and been able to cause the Company to resolve matters in general meeting that can be dealt with by ordinary resolution.

7.  On incorporation the Company had one director. This was a Madam Mak, the 4^th Wife of Kam Senior.  From 20 June 2000 to 7 April 2003 the directors were the Petitioner and his Wife, Kam Leung Sui Kwan.  From 8 April to 8 November 2006 the directors were the Petitioner and Capital Adex Ltd (“Capital Adex”), the shares in which were transferred to Kwan Lai on 2 November 2006.  From 9 November 2006 the Petitioner and Kwan Lai have been the directors.  There is a dispute as to whether or not Kwan Lai’s son Carrel was appointed a director by a written resolution dated 7 July 2009.

8.  The Company has 9 direct and indirect subsidiaries (together “Group”).  Two are operating companies.  Yung Kee Restaurant Group Ltd (“YKR Group”) runs the Restaurant and Life is not Limited runs the Kee Club, which is located on 6-7^th floors of the Yung Kee Building.  The relevant details of all members of the Group are set out in the following table:

9.  The principal relief sought by the Petitioner is an order under section 168A of the Companies Ordinance.  Section 168A applies to a “specified corporation”.  Specified corporation is defined in section 2(1) to mean “a company” or a “non-Hong Kong company”.  Section 2(1) defines a “non‑Hong Kong company” as having the meaning assigned to it by section 332.  Under section 332 “non-Hong Kong companies” are defined, so far as is relevant to this case, as “companies incorporated outside Hong Kong which …. establish a place of business in Hong Kong”.

10.  On 9 June 2011 Kwan Lai and Carrel issued a summons to strike out the Amended Petition on the grounds that (1) the Court has no jurisdiction under 168A to entertain the Amended Petition as the Company has no place of business in Hong Kong; and (2) as to the winding up relief sought, the Court has no jurisdiction, or would not be in a position to exercise a discretionary jurisdiction, by reason, inter alia, of lack of at least one of the 3 core requirements established in the authorities and insufficient nexus of the Company with Hong Kong.  The application came on before me, but was withdrawn following my indication that I thought the application should be dealt with at the trial of the Amended Petition at which time the Court would be fully appraised of all relevant matters.

11.  The question of jurisdiction is the first issue that I deal with in this judgment.  Before doing so it is helpful and necessary to set out in detail the development of the Group.  This is largely uncontentious and the following description is taken for the most part from the 1^st and 2^nd Respondents’ opening submissions.

Development of the Group

12.  In 1973 the Restaurant business and its assets were transferred to YK Restaurant, which at the time was the only company involved in the Restaurant business and associated business activities.  The decision as to who would hold shares in YK Restaurant was solely that of Kam Senior. The articles of YK Restaurant provided that he could not be removed as a director.  From 1974 to 1990 Kam Senior held 70% of the shares.  The remaining shares were held equally by the Petitioner, Kwan Lai and a relative Kam Kwan Wah, who played no part in the business and transferred his shares to Kam Senior in 1990.

13.  In 1982, Kam Shui Fai Investment Co Ltd was established to hold the Yung Kee Building, which was transferred in 1995 to LY Properties. YK Properties has been used to hold a Godown at the Ming Po Industrial Centre at Chai Wan.

14.  Long Yau was incorporated on 9 August 1990. Long Yau was set up to be trustee of a unit trust, the Long Yau Unit Trust (“Unit Trust”).  In 1990, the majority shareholding in each “Group” company including YK Restaurant was transferred to the Trust.  Various family members had interests in the Unit Trust, but the Unit Trust holders in their capacity as such played no part in the management of the companies. As to Long Yau itself:

(1) Its shareholders on incorporation were Holly Join Ltd (“Holly Join”) and Capital Adex, both of which were incorporated in the BVI.

(2) Its first directors were Kam Senior, Holly Join, Kwan Lai and Kwan Ki.  Subsequently:

(a) Kam Senior resigned on 5 June 2001;

(b) Holly Join resigned on 9 November 2006 and was replaced by the Petitioner;

(c) Kwan Ki passed away in December 2007.

(3) Thereafter the sole directors were the Petitioner and Kwan Lai, until Carrel was purportedly appointed in 2010.

15.  In 1991 Long Yau became the 80% shareholder of YK Restaurant, whilst 10% was held by each of Everway (until 2001, thereafter Holly Join) and Fidelio Fidelity Ltd.

16.  The Company was incorporated (after the creation of the Unit Trust) on 2 December 1994.  Upon its incorporation:

(1) Madam Mak became the sole shareholder in the Company.  She was unclear about the reason why, but it is clear that this was at Kam Senior’s direction and she was his nominee;

(2) The two shares in issue in Long Yau were transferred to the Company by Holly Join and Capital Adex;

(3) YK Restaurant became dormant and was succeeded as the restaurant operating company by YKR Group.  The shares in YKR Group were held as to 80% by Long Yau Ltd, 10% by Holly Join and 10% by Capital Adex.

17.  In mid 2006, about 18 months after Kam Senior’s death, Mrs Teresa Tong, the financial adviser to Kam Senior, distributed the Unit Trust in the following proportions:

(1) An Lui Ltd (beneficially owned by Madam Mak): 10%;

(2) Holly Join: 35%

(3) Capital Adex: 35%

(4) Legco (beneficially owned by Kwan Ki, but passed on his death in 2007 to Kwan Lai): 10%; and

(5) Everway (legally owned by Kelly, but she says given by her to Kwan Lai): 10%.

18.  On 2 November 2006, Holly Join and Capital Adex, which had until that point in time been wholly owned subsidiaries of the Company, were transferred to the Petitioner and Kwan Lai respectively.

19.  There was almost no corporate activity within the Company from its incorporation until November 2006. However, the Company’s Register of Stockholders shows that on 9 November 2006, the following shares in the Company were issued: The Petitioner (7); Kwan Lai (7); Legco (2); Everway (2); and Madam Mak (2).

20.  Although when still in existence the Unit Trust held the majority of shares in the “subsidiaries”, other companies held minority stakes.  In particular, Capital Adex and Holly Join held 10% each in Surewin; Fidelio Fidelity and Holly Join held 10% each in YK Restaurant; Fidelio Fidelity and Holly Join each held 20% in KSF, whilst Legco held 5%; Capital Adex and Holly Join held 20% each in Victorywise, whilst Legco held 5%; Capital Adex and Holly Join each held 20% of YKR Group and YK Properties.

21.  In April 2009, the Unit Trust was terminated:

(1) Long Yau became the majority shareholder of all companies in the Group including YKR Group.  The minority interests of the other group companies such as Holly Join, Capital Adex and Legco continued;

(2) The Company (as sole shareholder in Long Yau) became the ultimate holding company

22.  On 21 May 2009, Madam Mak transferred her interest in 10% of the shares in the Company to the Petitioner.  The shareholdings in the Group companies have not changed since this date.

Jurisdiction: section 168A

23.  In 1990 Hong Kong still had estate duty and it is not in dispute that Long Yau and the Unit Trust were established for estate planning purposes on the advice of Mrs Tong, who was a chartered accountant. She undertook the steps necessary to implement the estate planning scheme. There is no evidence as to precisely what Mrs Tong advised Kam Senior in 1990.  Estate duty was abolished in February 2006 and presumably after that time Mrs Tong decided that there was no point in maintaining the Unit Trust.  There is evidence in the form of transcripts of meetings in mid‑2006, at the time of the termination and distribution of the Unit trust, between individual members of the Family and Mrs Tong at which members of the Family are told by Mrs Tong what they are to receive.  Mrs Tong gave scanty explanation for why the Unit Trust was to be distributed in the manner described earlier and gave nothing in the way of an explanation of the precise legal and tax considerations, which had dictated the original Group structure.  The restructuring was not in fact completed until about April 2009 for reasons, which are unclear.  None of the witnesses were able to shed light on precisely why things had been done as they were.  What seems likely, however, is that in establishing a BVI company, Long Yau, to act as trustee of Kam Senior’s business interests in Hong Kong and arranging for its shareholders, Holly Join and Capital Adex, to be BVI companies, she was consciously distancing ultimate ownership of the Unit Trust assets from Hong Kong.  Consistent with this Long Yau, Holly Join and Capital Adex were not registered under Part XI of the Companies Ordinance.  I think it a reasonable inference, probably the only inference that can sensibly be drawn, that Mrs Tong intended that Long Yau did not establish a place of business in Hong Kong.  There is no evidence to suggest that this situation changed in 1994 when Holly Join and Capital Adex transferred their shares in Long Yau to the Company.  As at that time estate duty still existed in Hong Kong it is inherently unlikely that anything would have been done to connect Long Yau with Hong Kong.  I think it a reasonable assumption that if Mrs Tong had been asked at any time up to the abolition of estate duty whether Long Yau or the Company had established a place of business in Hong Kong she would have replied in the negative.  I think it reasonable to assume that Kam Senior would probably have said the same.  In paragraph 8 of his 2^nd affirmation, which was filed before the strike out application was issued, the Petitioner says that “It is not in dispute that the Company is an investment holding company and has not conducted any business in its own right”, evidence he confirmed in cross-examination to be true.  Indeed Mr Jat SC, who appeared for the Petitioner, accepted in his oral closing that until the restructuring was completed in about April 2009 the Company probably did not have a place of business in Hong Kong.  Presumably it was with similar considerations in mind that the 1^st and 2^nd Respondents issued their application to strike out the Amended Petition.

24.  In so far as the claim for relief under section 168A is concerned the issue is whether the Company is a “non-Hong Kong company”, which is defined in section 332 as a company “incorporated outside Hong Kong which ….. has established a place of business in Hong Kong”.  Clearly the Company was incorporated outside Hong Kong.  The material question is whether or not it “has established a place of business in Hong Kong”?  “Place of business” is defined in section 341 as “includes a share transfer or share registration office but does not include an office specified in the Twenty‑fourth Schedule”.  The Twenty‑fourth Schedule is not relevant.

25.  Prior to the amendment under the Companies (Amendment) Ordinance 2004 (effective from 14 December 2007), the definition of “place of business” under section 341 was as follows:

“ ‘place of business’ includes a share transfer or share registration office and any place used for the manufacture or warehousing of goods, but does not include a place not used by the company to transact any business which creates legal obligations.”

26.  The deletion of the words “but does not include a place not used by the company to transact any business which creates legal obligations” indicates that it is not necessary that the place of business is used to transact business which creates legal obligations.

27.  The present definition under section 341 (save for the reference to the Twenty‑fourth Schedule) is the same as the definition under section 415 of the Companies Act 1948, which defines “place of business” as “includes a share transfer or share registration office”.  Buckley on Companies Acts, 14^th ed (1981), page 862 comments on the meaning of “place of business” under section 415 of the 1948 Act in this way:

“It was held under the Act of 1908 [same as section 415] that where a foreign company, which had formerly carried on business in this country, but had long since ceased to do so, still continued to have an office in this country at which certain administrative business was transacted, such office was a place of business within the meaning of the above definition, in the absence, at all events, of evidence that it was actively carrying on business in any other country.”

28.  Sabatier v The Trading Company [1927] 1 Ch 495 at 503 and 507 is cited in the footnote.  The Petitioner places some emphasis on this passage and argues that it demonstrates that it is sufficient if the Company has a place in Hong Kong at which it carries on “administrative business”.  As a very broad proposition I would agree, but exactly what this means in practice requires further consideration and it is a subject that I return to later.

29.  In Singamas Management Services Ltd v Axis Intermodal (UK) Ltd [2011] 5 HKLRD 145, Sakhrani J held that “place of business” had a wide meaning, which, says the Petitioner, is the correct approach and consistent with the general principle enshrined in section 19 of the Interpretation and General Clauses Ordinance, Cap 1.  I note that Sakhrani J states in paragraph 33 that “it is important to bear in mind that “any place of business established by the company in Hong Kong” is not the same as any place where the company carries on business in Hong Kong.”  This echoes the following passage from Lord Advocate v Huron and Erie Loan and Savings Co [1911] SC 612 (1^st Div) in which the Lord President said at page 616:

“…… ‘carrying on business’ is one thing and ‘establishing a place of business’ another. If what the Legislature meant was that these requirements were to be imposed upon all foreign companies who carried on business with the United Kingdom, it would have been perfectly easy to say so. Therefore I am driven to the conclusion that when the Legislature selected the phrase ‘establishes a place of business’ it meant something other than carrying on business ……….. I therefore, in my judgment, merely look at the expression as it is used. That expression seems to me clearly to point to this, that the Company must have what I may call a local habitation of its own.”

30.  The fact that a company is required to have a place at which it carries on business suggests that its activities within the jurisdiction will be sufficiently substantial to require it to have a permanent establishment in Hong Kong.  There will be many companies incorporated outside Hong Kong that regularly transact business activities here, some involving the creation of legal obligations some not, and do so through visits by staff and have no need to open an office.  There will be companies that open representative offices here because they have a need to carry out significant amounts of promotional and administrative activities, but do not conclude revenue generating business transactions here.  This happens in the financial services industry.  There must be few companies who establish something which could sensibly be called “a place of business” unless they have business activities of some substance, which have to be undertaken sufficiently regularly to justify establishing a base in Hong Kong.  I think it reasonable to assume that this was understood by the legislature in adopting the wording that is to be found in section 332 and that the section should be interpreted with this in mind.

31.  Elsinct (Asia-Pacific) Ltd v Commercial Bank of Korea Ltd [1994] HKC 365 concerned the validity of the service of a writ on the defendant company at an address at which the plaintiff asserted it had established a place of business and, therefore, could be properly served despite not having registered under the Companies Ordinance.  The pre‑December 2007 wording of the section was relevant and thus a “place of business” did “not include a place not used by the company to transact any business which creates legal obligations”.  Much of the judgment concerned the significance and impact of the requirement that the place had to be one at which the defendant transacted business which created legal obligations.  The Petitioner argues that it provides general guidance to how the issue should be approached.  I quote from the Petitioner’s Closing Submissions:

(1) The best test is to ascertain whether the business is carried on “here” and at a defined place (at 370C-371A, citing English CA in The Hercules);

“The establishment of an office within the jurisdiction where activities connected with its subsidiary object and incidental to the main business are conducted would be sufficient to constitute the office a ‘place of business’ within that provision” (at 371A-B);

(2) “Business” under section 341 should be interpreted in the general sense to mean activities, and not confined to commercial transactions.  It includes business which creates legal obligations and business which does not (at 372E‑373A);

(3) In deciding whether a foreign company’s office in Hong Kong can be regarded as a place of business within section 341, the Court adopts a broad common sense approach, and considers the office’s main activities in light of the company’s paramount and subsidiary objects (at 373A‑D).

32.  I accept that these observations are not limited in their application to the wording of section 341 as it was at the time the case was decided.  What I derive from them is that when considering whether or not “business” is being carried out in Hong Kong it is necessary to have regard to the activities undertaken in Hong Kong in the broader context of the Company’s overall activities.  The relevant questions are likely to include: What exactly does the Company do in Hong Kong?  How is it relevant to the Company’s activities more generally?  Can the activities undertaken in Hong Kong be sensibly characterised as carrying on business activities of the Company?  However, as I have already noted, what I have to decide is whether the Company established a place of business in Hong Kong not whether it carries on a business here.  That requires a consideration of whether a place was actually established at which business was carried out.

33.  A place of business may take different forms.  I accept the Petitioner’s submission that it does not have to have any particular form and need not be its own physically discrete premises.  However some degree of regularity or permanence is required.  As explained by Oliver LJ in Re Oriel Ltd [1985] BCLC 343 at 347f-g:

“I think also that when the word ‘established’ is used adjectively, as it is in s106 [of Companies Act 1985], it connotes not only the setting up of a place of business at a specific location, but a degree of permanence or recognisability as being a location of the company's business … The concept, as it seems to me, is of some more or less permanent location, not necessarily owned or even leased by the company, but at least associated with the company and from which habitually or with some degree of regularity business is conducted.”

34.  Thus, submits the Petitioner, “it is sufficient to establish a place of business if it can be demonstrated that some activity is conducted from a fixed address in the jurisdiction, or if there is some specific location readily identifiable with the company by members of the public from which it could be deduced that some substantial business activity is being carried on, that would suffice.”  This submission identifies two different ways in which it can be demonstrated that a company has established a place of business.  I would qualify the first of these in the following respect.  There may be companies which from time to time have staff visiting Hong Kong for short periods and working out of the same hotel or the same business centre.  In my view this would not constitute establishing a place of business.  It would lack the necessary degree of regularity of activity and permanence of location suggested by the language of the section.

35.  The second way, namely, by demonstrating an address, which is readily identifiable by the public and from which they would deduce that a substantial business activity is being carried out, is probably in practice more onerous.  In fact I cannot see any sensible basis for suggesting that it applies in the present case as no member of the public would have any reason to think that there was a BVI holding company carrying on any activity in the Yung Kee Building at all.  Certainly no evidence has been adduced, which suggests that they would.

36.  The facts and their assessment by Oliver LJ in Re Oriel Ltd are instructive.  Oriel was incorporated in the Isle of Man for acquiring and operating garage sites in England.  It was controlled by a Mr and Mrs Plumpton, who lived in England at a residence called “Bridge House”.  Oriel acquired, three months after it was incorporated in 1978, three garage sites in England and charged them to the petrol company that had made loans to finance the purchases.  In the following year Oriel acquired 4 further sites in England.  From July 1979 trading in Oriel’s name began.  The charges were registered in the Isle of Man, but not England.  Subsequently, Oriel was wound up on the petition of the petrol company.  The liquidator argued that the charges were unenforceable for lack of registration.  Mervyn Davies J held that Oriel had established a place of business in England, the charges should, therefore, have been registered and accordingly were void.  Oliver LJ describes the activities of Oriel and the garages in detail from pages 347i to 349g of his judgment.  The judge found that there was no evidence of where any of the activities involved in the acquisition of the sites were undertaken and that up to August 1978 the only evidence of any business activity was that of Mr Plumpton operating a business and living in Bridge House.  The judge acknowledges that in so far as Mr and Mrs Plumpton formed any intentions about Oriel’s future they probably did so in whole or part at Bridge House.  He goes onto say this at page 350a to c in respect of the first three sites:

“I entirely accept that, as the judge pointed out, the mere fact that Bridge House constituted the Plumptons’ private residence does not prevent it from being an established place of business of the company, but it is quite a different thing to assert that the mere presence of the company’s directors at their residence followed by the entry of the company into a transaction elsewhere constitutes the residence an established place of business. In my judgment, there was no material from which the judge could properly draw the inference that the company had an established place of business in England (and, in particular, at Bridge House) ‘very soon after its incorporation on 5 April 1978’.”

37.  Different considerations applied to the remaining 4 charges.  The judge held that the next in time was also entered into at a time when the liquidators had not been able to demonstrate that a place of business had been established.  Oliver LJ said this at page 352 d:

“Accepting, of course, that a limited company’s thoughts, plans and ambitions can occur only in the minds of its directorate, that inescapable triumph of nature over legal theory cannot, as it seems to me, by itself convert the director’s matrimonial home into the company’s established place of business.”

38.  In other words the fact that the directors of a company meet from time to time at a particular location and deliberate upon its affairs does not of itself turn that location into a place at which a company has established a place of business.  Thus if a foreign holding company, carrying out a business internationally through subsidiaries some of which operate in Hong Kong, decides to hold some of its regular board meetings in Hong Kong that does not of itself mean that it has established a place of business here even if some of its subsidiaries clearly have done so.  This is directly relevant to the present case for reasons I will explain later.

39.  So far as the remaining 3 charges were concerned Oliver LJ accepted that there was sufficient, although not strong, evidence from which an inference could properly be drawn that Oriel had established a place of business at Bridge House at the time the charges were made.  The evidence related to a number of matters.  A petroleum licence for one site had been granted and addressed to Oriel at Bridge House.  Subsequent correspondence from the local authority relating to the other 2 sites was addressed to Oriel and one letter was addressed to Oriel at Bridge House. Further Mr Plumpton had corresponded with the petrol company on behalf of “Oriel Limited, Bridge House”.  This illustrates that there must be evidence of some concrete activities carried out at a particular location such as to justify inferring that a place of business has been established at that location.  It is not something to be assumed because, for example, the foreign company does not appear to have an office elsewhere and its directors meet from time to time in a particular location.

40.  In Re Oriel Ltd there was no evidence of how the company dealt with its internal affairs and the Court of Appeal reached the conclusion described above on the basis of evidence about its dealings with other parties involved with the acquisition of the sites, the operation of the petrol stations and the sums due to the petrol company who provided the finance for the acquisition of the sites.  The present case is different and as we will see when I turn to consider the evidence in detail, the Petitioner relies on the Company’s own internal affairs as demonstrating that it had established a place of business on the 5^th floor of the Yung Kee Building.  The 1^st and 2^nd Respondents argue that neither party has been able to find an authority in England or Hong Kong, or any other common law jurisdiction, in which a company’s acts of internal corporate governance or administration in the jurisdiction has been held to be sufficient to constitute establishing a place of business.  The Petitioner disputes this and points to Sakhrani J’s decision in Ho Tai Kwan v Global Innovative Systems Inc [2008] 1 HKLRD 399 as being one such case.  I disagree.  It is clear from the discussion in paragraphs 18 to 27 of that judgment that the Judge was giving considerable weight to external matters such as the filings of the company with the United States Securities and Exchange Commission, which gave the company’s address as being in Mongkok, and the information on its website and the representations it contained about the location of the company’s corporate headquarters.  The decision did not turn on the location of board meetings and internal corporate activities.  That having been said it is, perhaps, unsurprising that there are few relevant authorities in which a company’s internal affairs having featured significantly, as most concern claims by creditors who would not have access to this information.

41.  The Petitioner argues that in assessing whether a place of business has been established I should have regard to business reality rather than form and adopt the same approach as that adopted when determining what constitutes the “affairs of a company” for the purposes of section 168A, and treat the affairs of subsidiaries over which the Company has control as those of the parent for the purposes of assessing whether or not a place of business has been established.  I disagree.  This is not a construction suggested by anything in the language of section 332 and the Petitioner has found no authority to support such a sweeping interpretation. It seems to me that it would be a problematic approach to the interpretation of the section as it seems necessarily to suggest that all foreign companies that have wholly owned subsidiaries in Hong Kong are to be taken as having established a place of business here.  It seems to me highly doubtful that the legislature intended this.

42.  There will be foreign incorporated holding companies, which do not themselves transact business in Hong Kong, but do carry out significant activities here and establish a place of business in Hong Kong even if the premises from which they do so are owned or rented by subsidiaries. These will commonly be holding companies of large groups, some perhaps listed on The Stock Exchange of Hong Kong Limited.  The board of directors may meet in Hong Kong, consider papers reporting on the activities of various divisions of the group, consider group strategy, raising debt financing or, in the case of listed companies, accessing capital markets, form audit, remuneration and sub‑committees of the board and approve, in the case of listed companies, public announcements.  Such companies will normally be registered under Part XI of the Companies Ordinance and even if they are not for some reason, there will be little room for dispute that they have established a place of business in Hong Kong.  Despite the value of the Group’s assets and its turnover the Company clearly does not fall into this category. It is a considerably more problematic case.

43.  Before turning to consider the evidence in detail I will address a preliminary point raised by the Petitioner.  The summons to strike out the Petition on the grounds that the court does not have jurisdiction was issued on 9 June 2011 by the 1^st and 2^nd Respondents’ new solicitors, Minter Ellison.  Prior to that says the Petitioner it is clear that the 1^st and 2^nd Respondents had not raised the jurisdiction issue, on the contrary, in their application to strike out the prayer for a winding-up order issued on 6 June 2010 by their previous solicitors they tacitly accepted jurisdiction existed in respect of the section 168A claim, because their argument largely turned on the submission that there was no realistic prospect of the Court making a winding-up order because of the availability of relief under section 168A.

44.  I accept that it is clear that the 1^st and 2^nd Respondents’ first legal team does not appear to have been alive to the jurisdiction issue.  I incline to the view that the Petitioner’s legal team at the time were also not alive to the possibility that jurisdiction might be problematic.  I say this for the following reasons.  Paragraph 2 of the Amended Petition asserts that “Since its incorporation, [1 December 1994] the Company has been carrying on its business at 5/F Yung Kee Building, 32-40 Wellington Street Central, Hong Kong, which is its place of business established in Hong Kong.”  The truth of this assertion was confirmed in the Petitioner’s first affirmation.  The affirmation did not explain the basis upon which it was asserted.  As I have already noted Mr Jat SC in closing accepted that it was probable that the Company did not have a place of business in Hong Kong prior to April 2009.  If this is correct the assertion in paragraph 2 of the Amended Petition that the Company has had a place of business in Hong Kong since December 1994 is incorrect; as in my view it clearly is at least for the period ending April 2009.  In paragraph 8 of his 2^nd affirmation, which was filed before the strike‑out application was issued, the Petitioner says that “It is not in dispute that the Company is an investment holding company and has not conducted any business in its own right”, evidence he confirmed in cross-examination to be true.  This also is inconsistent with paragraph 2 of the Amended Petition.  The Petitioner, correctly points out that the 1^st and 2^nd Respondents did not expressly deny that the Company had established a place of business in Hong Kong in the evidence that they filed in reply.  However, Kwan Lai said this in paragraph 5 of his first affirmation, which addressed paragraph 2 of the Amended Petition: “Paragraph 2 of the Petition is not correct.  The Company has no business or assets other than holding the 100% interest in Long Yau Limited, a BVI company ….”.  This implies that the Company has not established place of business in Hong Kong.  I do not think it can sensibly be read as accepting that it does.

45.  In the Petitioner’s closing submissions it is argued that having sought to strike out the prayer for a winding up on the grounds that section 168A was available it is an abuse of process for the 1^st and 2^nd Respondents to seek now to dispute the Court’s jurisdiction to grant such relief.  I disagree.  It may be unsatisfactory that the issue of jurisdiction was not properly thought through earlier, but it does not seem to me that the earlier strike-out application bars the 1^st and 2^nd Respondents from seeking to persuade the Court that the Petitioner has failed to prove that the Company has established a place of business in Hong Kong and that accordingly section 168A has no application.

46.  As I have already noted the Petitioner accepts that it is probable that prior to April 2009 the Company had not established a place of business in Hong Kong.  However, he says the position changed after the termination of the Unit Trust at which time the Company became for the first time the effective holding company of the Group.  Prior to the termination of the Unit Trust, Long Yau had no beneficial interest in the Group and thus neither did its shareholder, the Company.  It is unsurprising in these circumstances, says the Petitioner, that prior to April 2009 the Company did little.  The suggestion appears to be that the Company had no reason to be involved in the Group’s affairs and that this changed when it became the ultimate beneficial owner of the Group.  The implication is that from that date the Company had a business to run, namely, that of the Group.  I do not accept this.  The fact is that the business of the Group was always under the same ultimate management: Kam Senior assisted by his Sons until Kam Senior’s death and thereafter by his Sons.  It seems to be artificial to suggest that a material change took place within the Group in terms of the conduct of its management in April 2009.

47.  The Petitioner says that from April 2009 the Company conducted its new business affairs from 5^th floor of Yung Kee Building.  Therefore, as at the date of issue of the Petition, which is the relevant date, it had established a place of business in Hong Kong.  This is evidenced, says the Petitioner, by the following matters.

48.  The Petitioner says that all executive decisions were made by the Board of the Company at meetings held at Yung Kee Building. There appear to have been no board or general meetings of the Company prior to April 2009.  All resolutions were paper resolutions.  According to a table in the first exhibit to the Carrel’s first affirmation, in July 2009 a written shareholders’ resolution was passed.  Between April 2009 and April 2010, 2 written resolutions of the board were passed.  In the same period there were 4 meetings of the board at which resolutions were passed.  There is no evidence of any other board meetings at which other business took place.

49.  The written resolution of the Company dated 7 July 2009 expressly states that it was proposed “[in] order to facilitate the management and administration of the Company”.  Kwan Lai was cross‑examined about this and accepted that the Company had business and affairs to manage.  He also accepted that it was part of the Company’s affairs to pass resolutions directing that Long Yau and YKR Group appoint Carrel as a director.  Apparently, after he had signed the written resolution in Hong Kong, Kwan Lai gave it to Proserve Limited (“Proserve”) a Hong Kong company providing corporate secretarial services, who sent the signed version of the written resolution to the shareholders at 5/F.

50.  Kwan Lai convened a board meeting that was held on 3 August 2009 to appoint himself as the authorised representative of the Company in its capacity as sole shareholder of Long Yau.  The meeting was held on 8/F of Yung Kee Building, because of space constraints on the 5^th floor.

51.  A board meeting held on 11 September 2009 at which the directors discussed appointing Madam Mak as a director.  The resolution was proposed by the Petitioner and rejected by Kwan Lai and Carrel. The meeting was also held on the 8^th floor of the Yung Kee Building according to the minutes.

52.  A board meeting was convened by Carrel and held on 30 November 2009 also at the 8^th floor to discuss “proper channels of obtaining copies of financial information/bank statements of the Company” and “new recruitments of administration, accounting and human resources staff of the Company”.

53.  The final board meeting prior to issue of the Petition was convened by Carrel and held on 29 April 2010 to consider appointment of solicitors “as corporate lawyer to deal with legal matters of the Company”.  This, like the other meetings, is recorded in the minutes as having taken place at the 8^th floor of the Yung Kee Building.

54.  The written resolutions of the Company were probably considered and signed at Yung Kee Building, where the Petitioner, Kwan Lai and Carrel have their own offices and from which they manage the operating companies.  Ms Sunday Tse, a senior administrator called by the 1^st and 2^nd Respondents, described the Yung Kee Building in her affirmation as: “the ‘headquarters’ of the Yung Kee Restaurant group. All of the principal functions and roles connected with the operations of the business operate from the premises.”  It is not in dispute that all the directors and staff working in the Group live in Hong Kong and worked predominantly at the Yung Kee Building, although the Group did have warehouses elsewhere.

55.  Unsurprisingly the majority of the Group’s books and records were kept in the Yung Kee Building.  The 5^th floor was the Company’s correspondence address with Proserve and both Proserve and Tricor, another corporate secretarial services provider, sent their fee notes to the Company at that address.

56.  The declaration and payment of dividends were considered and decided by the Petitioner, Kwan Lai and Carrel via emails at yungkee.com.hk and signed by them in Hong Kong.  The dividends were in fact paid to the Company’s shareholders by Long Yau as the Company did not have a bank account.  Long Yau of course was the immediate holding company of the operating companies and any dividend it declared was payable to the Company.

57.  I accept that these matters demonstrate that the Company carried out certain of its internal affairs in Hong Kong.  This does not necessarily indicate that it had established a place of business here.

58.  The Company’s sole asset is, deliberately, its shares in another BVI company, Long Yau.  As I have already mentioned the Company does not have a bank account in Hong Kong and the fees that it had to pay Proserve and Tricor for their services were paid by YKR Group.  It had no agreement, which allowed it to occupy any part of the Yung Kee Building.  It appears that a large proportion of such activities as its directors carried out as a board in the Building, were carried out on the 8^th floor not on the 5^th floor, which is where the Petitioner asserts the Company established a place of business.  It is difficult to see how it can sensibly be said that it established a more or less permanent location at the 5^th floor of the Yung Kee Building at which it habitually, or with at least some degree of regularity, conducted business affairs.  The 5^th floor seems to have been largely a correspondence address.  Board meetings seem to have been held on the 8^th floor, which had a more suitable meeting room.

59.  In paragraph 13 of his 10^th affirmation the Petitioner says that “the Company has always been playing a pivotal role in directing and managing the business and the affairs of the Group and all the Subsidiaries”.  It became clear in cross‑examination that his basis for saying this was simply that the Company held shares in Long Yau, which in turn held shares in companies which carried on business in Hong Kong.  He gave no evidence in cross‑examination of the directors of the Company undertaking any role in directing the activities of its subsidiaries.  There is no evidence of the directors undertaking, as directors of the Company as opposed to directors of its subsidiaries operating in Hong Kong, discussions about the business strategy of the Group.  The Company had no accounts and unsurprisingly there is no evidence of the directors discussing its financial situation.  The directors’ activities were directed to changing the membership of the board and the payment of dividends.  The former matter only arose because Kwan Lai wanted to obtain control of the Company at board level and the latter because it was necessary in order that the profit made by the operating companies could be distributed to their ultimate beneficial owners.  Such limited purposes did not necessitate establishing a place of business of any sort in Hong Kong.

60.  The Petitioner also suggested in his evidence that the Company should have been registered under Part XI and the failure to do so was an oversight by Kwan Lai who was responsible for the administrative affairs of the Group.  In my view this is disingenuous.  It is highly likely that because the Group structure was originally established with a view to avoid estate duty that Mrs Tong would not have caused the Company to be registered because to do so would have suggested a connection with Hong Kong that she would probably have thought it prudent to avoid.  The Petitioner pointed to nothing that had transpired after the Group had been restructured in April 2009 which suggests that Kwan Lai should have thought that there had been a material change in the way in which the Company operated and that it had become necessary for it to register under Part XI.  The Petitioner did not suggest any reason to think Mrs Tong had suggested this to Kwan Lai or any reason why the Kwan Lai independently should have thought of it.  I agree with the 1^st and 2^nd Respondent’s submission that the argument also smacks of hypocrisy given that, as it transpired, the Petitioner had failed to register his own wholly owned BVI company, Holly Join, which has conducted property transactions in Hong Kong and owns a trading subsidiary.

61.  Both Parties adduced expert evidence on BVI Law with a view to demonstrating the degree of connection between the Company and the BVI.  I did not find their evidence of much assistance in relation to this issue.  I would, however, deal with part of the evidence adduced by the Petitioner from Mr Marcus Leese, who is a partner in Ogier.  In paragraph 12 of his Report he says this:  “In short, YKHL [the Company] does have a nominal connection with the BVI, but to my understanding at all stages since its incorporation in 1994 the directors and shareholders of YKHL took the conscious decision that the connection should be the absolute minimum permitted by the BVI law and that to the greatest extent possible YKHL should operate in Hong Kong.”  Mr Leese then goes onto make a number of points about BVI law which are intended to demonstrate that the directors of the Company complied with the BVI corporate regime in a way consistent with their stated objectives.

62.  It is misleading, and in my view clearly so, to say that the Company “does have a nominal connection with the BVI”.  It is a BVI company, which owns shares in another BVI Company.  Its connection is very real.  In cross‑examination Mr Leese explained that his “understanding” of the directors and shareholders of the Company’s “decision” was based on his “discussions of the factual background with instructing solicitors.”  There is no evidential basis for making this assumption, which is clearly inconsistent with the failure to register under Part XI, an obvious fact that it appeared from cross‑examination that Mr Leese had not thought to ask his instructing solicitors about as he was giving evidence “from the perspective of BVI law”.  The only sensible assumption that could be made up until April 2009 is the opposite.  Whilst I accept that if this is what Mr Leese was told it was reasonable for him to formulate his views accordingly, I found his evidence generally to be no more than advocacy on behalf of the Petitioner and on occasions disingenuous in its attempts to down play the Company’s connection with the BVI.  It is quite clear that the Company left its BVI corporate affairs to Proserve, which liaised with the Company’s registered agent in the BVI who administered the Company’s corporate affairs.  The register of members was kept in the BVI, as required by BVI Law, and completed there.  Proserve kept a copy in Hong Kong.  The Company did not, therefore, operate a “share transfer or share registration office” at the Yung Kee Building.  In my view there is nothing in the way in which the Company at any time dealt with BVI corporate matters, which suggests that it saw itself as in substance a Hong Kong company carrying on business here and that its incorporation in the BVI was merely a historical accident.

63.  In my view the matters relied on by the Petitioner are not of themselves sufficient to support an inference that the board decided to establish a place of business here.  Neither do I think it can be inferred from these matters that the Company, although not as a result of a conscious decision by the board, as a matter of fact established a place of business sometime after April 2009 and before the Petition was issued.

64.  Such factors as the Petitioner points to as demonstrating the establishment of a place of business also have to be viewed in the broader context of the Company’s other activities in order to determine whether an inference that a place of business was established at the time the Petition was issued can be properly drawn.  I have already mentioned that the Company does not have a bank account.  The Company itself, as opposed to its ultimate beneficial owners in their capacity as directors of the subsidiaries which operate the Restaurant and its premises, is a passive investor in another BVI company, Long Yau.  Unsurprisingly it is easy for the 1^st and 2^nd Respondents to produce an extensive list of matters, which point to the absence of any business conducted by the Company in Hong Kong and the absence of a place here from which business has been conducted.  Some of them I have already referred to, but it is convenient if I quote the matters referred to by the 1^st and 2^nd Respondents in their closing submissions.

(1) The Company is incorporated in and has its registered office in the BVI;

(2) The Company is an investment holding company;

(3) The Company has only one asset, its 100% shareholding in Long Yau Ltd;

(4) Long Yau is itself another BVI company and was set up as a trust company. It is not registered under Part XI;

(5) The Company does not trade or run any business. The operating companies in the Group are subsidiaries or sub‑subsidiaries of Long Yau;

(6) The Company is not registered under Part XI, and, under cross‑examination, it became quite clear that the Petitioner had no idea of whether registration was required or not;

(7) Throughout its history none of the Company’s directors or shareholders, or the Company’s Hong Kong professional advisers (or advisers to the directors or shareholders) has ever advanced a view or advised that the Company should be registered under Part XI;

(8) Indeed, the current Group structure, as set up with the assistance of the family’s tax and trust planning advisers, is that the Company is the ultimate offshore holding company at the top of a corporate structure involving a number of subsidiary layers and corporate entities, some offshore and some Hong Kong incorporated;

(9) The Petitioner has explicitly acknowledged the true position, namely, that “the Company is an investment holding company and has not conducted any business in its own right” and that the Company’s position and the fate or health of the business operated by its subsidiaries, are discrete matters;

(10) The Company does not now and never has played any role or function in the business or operations of the two operating companies in the Group;

(11) The Company has no office and has not leased any premises in Hong Kong;

(12) The Company has no income other than dividends from Long Yau;

(13) The Company has no current or continuing liabilities (apart from fees to the BVI agent to ensure compliance with BVI statutory filing requirements) and no creditors;

(14) The Company has no employees.  The Petitioner’s suggestion that all the employees of the operating sub-subsidiaries are thereby “indirect employees” of the ultimate parent Company is but one example of his awareness of the jurisdiction point and consequent tailoring of his evidence to best support his position;

(15) The Company has no bank account;

(16) The Company has not had any financial dealings and does not maintain any form of financial records or accounts (audited or otherwise) and is not required to do so under BVI law;

(17) The Company has no dealings or legal arrangements with 3^rd parties, either directly or through an agent, and thus has not negotiated or entered into any contracts in Hong Kong nor solicited any business here;

(18) The Company’s corporate affairs are administered by a registered agent in the BVI as required under BVI law (communications with whom are conducted through a HK company secretarial service);

(19) The entire history of the Company and its registry filings in the BVI is of very limited scope and consistent with its status as a holding company;

(20) Dividends have not been paid by the Company.  Dividends have been paid directly by Long Yau to the shareholders in the Company; they do not pass through the Company.

65.  All of these matters point to the conclusion that the Company has not established a place of business in Hong Kong and, more generally, exists solely as an investor in another BVI company.  But for the decision of Kwan Lai to change the constitution of the board the only matter that would have taken place since 2009 is the declaration of a dividend.  I, therefore, have concluded that the Company has not established a place of business in Hong Kong and the Court does not have jurisdiction to determine the Petitioner’s application for relief under section 168.  This leaves for consideration whether or not the Court has jurisdiction to determine the Petition for a winding‑up order.

Jurisdiction: section 327(3)(c)

66.  As an alternative to relief under section 168A the Petitioner seeks a winding-up order under section 327(3)(c) of the Companies Ordinance that gives the Court a discretionary jurisdiction to wind up an unregistered company on the just and equitable ground.  Section 327(3)(c) and its English equivalent are rarely used.  Ian Fletcher explains why in paragraph 30‑027 of the 4^th edition of The Law of Insolvency:

“Section 221(5)(c) of the Act enables the English court to wind up a foreign company ‘if the court is of opinion that it is just and equitable that the company should be wound up.’ This potentially very wide discretion to wind up a foreign company is expressed in terms identical to those employed in s 122(1)(g) of the Act with regard to the winding up of companies registered in England and Wales or in Scotland, and it may be said that the principles which have been developed with regard to the application of s 122(1)(g) could, if appropriate, be invoked in cases falling under s 221(5)(c). However, in practice the latter subsection has seldom if ever been employed in isolation as a ground for the exercise by an English court of its jurisdiction to wind up a foreign company, but has tended to furnish an additional basis for doing so in conjunction with one of the other grounds expressed in para (a) or (b) of s 221(5).^[1] The apparently sparing use which has been made of s 221(5)(c) is perhaps explicable in view of the fact that, as has been explained, the very concept of an English court’s assuming jurisdiction to wind up a foreign company represents a direct exception to the general principle followed by English law in such matters, and is thus only to be undertaken when the court is satisfied that, in the circumstances, this is defensible in terms of justice and expediency. It is notable moreover that the introductory words of s 221(5) itself are permissive, rather than mandatory, and that by providing that an unregistered company may be wound up in the circumstances therein specified they clothe the English court with a discretionary jurisdiction which, it may be said, effectively ensures that in practice no winding-up order is made under s 221(5) unless the court is satisfied that it is just and equitable that this should be done.”

67.  A similar explanation appears in paragraph 12‑08 of the 6^th edition of Shareholders’ Rights by Robin Hollington QC:

“In contrast to its lack of jurisdiction under s 994 over foreign companies, an English court may have jurisdiction to wind up a foreign company on the petition of a shareholder on the just and equitable ground: s 221 of the Insolvency Act 1986. Its jurisdiction to wind up companies whose ‘centre of main interests’ is in another EU Member State (other than Denmark) is now, however, restricted by the EC Regulation on Insolvency Proceedings 1346/2000, which came into force on May 31, 2002. Its application is not limited to insolvent companies.

If the English court does have jurisdiction over a foreign company, and the provisions of the EU Regulation on Insolvency Proceedings do not apply, it is within the discretion of the court whether it should exercise its jurisdiction or leave it to the courts of another jurisdiction to do so.  Nearly all the authorities are concerned with creditors’ petitions to wind up on the insolvency ground: see, e.g. BNC v Cosmos Trading [2000] 1 BCLC 813 and cases cited therein.  These authorities show that, in the case of winding-up of insolvent companies sought by a creditor, it is for the petitioner to show either the presence of substantial assets within the jurisdiction or some other sufficient connection with the jurisdiction.  In the case of solvent companies sought to be wound up by an aggrieved shareholder, it would have to be a very exceptional case for the court to exercise its jurisdiction to wind it up.  For example, it might do so where the parties have concluded a shareholders’ agreement with an English choice‑of‑law and jurisdiction clause.  But there would be a strong presumption in favour of the local court, as appears from the Konamaneni case.”

68.  Section 327(1) and (3) are in the following terms:

“(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section.

….

(3) The circumstances in which an unregistered company may be wound up are as follows-

(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;

(b) if the company is unable to pay its debts;

(c) if the court is of opinion that it is just and equitable that the company should be wound up.”

69.  In Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116 at page 140a Morritt LJ, giving the judgment of the court, said this about the wording of the English equivalent to section 327, section 221(1) of the Insolvency Act 1986, and how the court should approach the exercise of the power which it confers:

“We emphasise the word ‘may’. Whether the power should be exercised in respect of a foreign company is a matter of discretion depending on the facts of the case. In a number of cases judicial guidance has been given as to when the discretion should and when it should not be exercised in relation to foreign companies. It is clear and common ground that the court should not exercise its jurisdiction in respect of a foreign company where there is no connection whatever between the foreign company and this jurisdiction, other than the decision of the petitioning creditor (which would be present in every case) to present a winding-up petition here.”

70.  The cases to which Morritt LJ refers are all cases in which a petitioner had presented a petition to wind up a foreign incorporated company on the grounds of insolvency.  There is little authority on the circumstances in which the jurisdiction should be issued on the just and equitable ground other than my recent decision in Re Gottinghen Trading Limited^[2]. This is consistent with the extracts from the text books, which I have quoted.  It is, however, clear from the authorities how the Court should approach this issue in the context of a creditor’s petition.  In Re Beauty China Holdings Ltd [2009] 6 HKC 351 at paragraph 23 Kwan J (as she then was) summarised the three core requirements for the Court to exercise its jurisdiction under section 327 to wind up an unregistered company as follows:

(1) sufficient connection with Hong Kong – but this does not necessarily have to consist in the presence of assets within the jurisdiction;

(2) reasonable possibility that the winding-up order would benefit those applying for it; and

(3) the Court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

71.  Re Beauty concerned a petition to wind up the company on the grounds of insolvency.  The origin of these requirements, which are adopted in other subsequent cases in Hong Kong, are to be found in the judgment of Knox J in Re Real Estate Development Co [1991] BCLC 210 at 217, which similarly arose from a petition to wind up on the grounds of insolvency.  Stocznia Gdanska SA v Latreefers Inc discusses in some detail what may generally be the most contentious requirement, namely, the presence or otherwise of sufficient connection with the jurisdiction in which the petition is presented to justify the court exercising its discretion to accept jurisdiction.

72.  Stocznia Gdanska SA v Latreefers Inc concerned a petition presented by a Polish shipyard to wind up on the grounds of insolvency a Liberian company, Latreefers Inc.  The English Court of Appeal upheld the judgment of Lloyd J winding up the company. Various questions arose for determination in the Appeal including the question of whether or not Lloyd J had been correct to exercise the power to make a winding-up order against an unregistered company on the evidence before him. Lloyd J had proceeded on the basis that the requirements for the court to exercise jurisdiction as they had evolved through a series of cases starting with Banque des Marchands de Moscou (Koupetschesky) (in liq) v Kindersley [1951] 2 All ER 549, were as summarized by Knox J in Re Real Estate Development Co, supra.

73.  The relevant issue on appeal concerned whether it is a necessary requirement for the existence of the jurisdiction to wind up an unregistered company that the company has an asset or assets within the jurisdiction sufficient to provide a reasonable possibility of benefit to the creditors as a whole or to the petitioning creditors alone.  Morritt LJ after a thorough consideration of the authorities in paragraphs 22 to 34 of the judgment concluded that the court “can and should apply only the three core requirements to which we have referred in determining whether Lloyd J was right to order the winding up of Latreefers”: paragraph 34.

74.  There are a number of other more general principles explained in Stocznia Gdanska SA v Latreefers Inc, which are relevant to a consideration of the circumstances in which the court should exercise its jurisdiction under section 327(3)(b) and (c).

(1) “… the most appropriate jurisdiction within which to wind up a company is that in which it is incorporated so that the jurisdiction for which s 221 provides is exorbitant”: para 22.

(2) “Whether the power should be exercised in respect of a foreign company is a matter of discretion depending on the facts of the case”: para 29.

75.  What constitutes “sufficient connection” (the first core requirement) will probably differ in the case of a petition presented on the ground of insolvency and one, as in the present case, presented on the just and equitable ground.  A creditor presenting a petition to wind up a company because a debt has not been paid is exercising a class right, namely, the right that any creditor, to whom at least a debt corresponding to the current level of minimum indebtedness is due and unpaid, has to present a petition for the winding up of the debtor company.  In general terms the purpose of presenting a petition is to put into operation the process of court supervised compulsory liquidation of the company’s assets for the payment of all creditors on a pari passu basis.  It is unsurprising, therefore, that when considering whether or not an unregistered company has sufficient connection with England or Hong Kong to justify the court exercising its jurisdiction under sections 221(1) and 327(1) respectively over insolvent companies, the focus has been on whether or not there are assets within the jurisdiction, which can be realized by a liquidator for the benefit of creditors.  There would generally be little point in winding up an insolvent unregistered company in Hong Kong unless there are assets here.

76.  The issues are materially different in the case of a shareholders’ dispute giving rise to a petition on the just and equitable ground in which the court is asked to determine a dispute between the parties over their conduct of the affairs of a solvent unregistered company.  There is also the practical difference that a winding-up petition based on non-payment of a debt is generally resolved at a short hearing.  The issue is normally whether or not the company has a bona fide debt on substantial grounds and the dispute is generally resolved by the court on affidavit evidence. Shareholders’ disputes are commonly considerably more factually complicated. They frequently involve a painstaking assessment of the conduct of the affairs of a company by its shareholders over lengthy periods of time as the present case does.

77.  As I have already noted, generally the most appropriate jurisdiction in which to decide whether any company should be wound up is the jurisdiction of its incorporation.  The jurisdiction conferred by section 327(1) and its English equivalents is, to use the language of Morritt LJ “exorbitant”: para 22 ibid.  In order for a Hong Kong court to be justified in exercising this jurisdiction a connection “sufficient to justify the court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality” must be shown: Re Real Estate Development Ltd 217d‑e supra.  The connection will generally need to be of a type relevant to the basis upon which the petition is brought and the degree of connection needs to be sufficiently strong to justify the court exercising its jurisdiction.

78.  In the case of petitions brought on the grounds of insolvency the connection will commonly be the presence of assets within the jurisdiction of an amount, which justifies a winding up in Hong Kong. In the case of a petition brought on the just and equitable ground and arising from a shareholders’ dispute the considerations will probably be different.  The presence of assets will be a relevant consideration, but probably not as significant as in the case of a creditor’s petition.  In the case of a shareholders’ dispute the relevant factors are likely to include the location at which the company primarily carries on business, the shareholders connection, if any, with Hong Kong and where the matters giving rise to the dispute occurred.  There may be cases in which the connection is strong.  A foreign company may be registered under Part XI of the Companies Ordinance and carry on business here.  Some or all of its shareholders and directors may be resident in Hong Kong.  The principal complaint may concern the exclusion from management of a company’s business in Hong Kong of a Hong Kong resident shareholder.  In such a case the court may take the view that the connection is sufficiently strong for it to accept jurisdiction.  However, such cases will be rare and I accept the 1^st and 2^nd Respondents’ submission that generally they are to be discouraged because, absent the need to protect local creditors’ interests, the intrusion of the Hong Kong Courts through the winding up remedy into disputes concerning the shareholders of a foreign company runs contrary to the fundamental principle whereby Hong Kong law regards the law of the place of incorporation as supplying the proper regime for determination of major questions as to the foreign company’s personality and status.

79.  I accept that the three core requirements, modified to reflect the fact that this is not a creditor’s petition, are the criteria to be used in deciding whether or not to exercise jurisdiction.  This being the case I do not understand it to be disputed that the 2^nd and 3^rd requirements are satisfied.  The Petitioner, Kwan Lai and Carrel are resident in Hong Kong.

80.  The Petitioner argues that the Company has very strong connections with Hong Kong.  This argument has an immediate, superficial appeal.  The Petitioner and Kwan Lai live here and the Group’s business involves operating a well known restaurant from a building in Wellington Street, which one of its companies owns.  However, the argument requires one to ignore the principle that a company is an independent legal person.  With limited exceptions the affairs of a holding company’s subsidiaries are not the affairs of the holding company.  In this case the Company does not own directly the operating subsidiaries.  It owns shares in another BVI company.  I have already decided that the Company has not established a place of business here. Indeed it does not seem to me that properly analysed it operates a business in Hong Kong at all.  As I have explained its directors did not deliberate upon and direct, as directors of the Company, the business of the operating subsidiaries.  In my view there is insufficient connection between the Company and Hong Kong to justify the Hong Kong Companies Court exercising its discretion and accepting jurisdiction over a dispute between the Company’s shareholders.  They are shareholders in a BVI company and they can take their dispute to the courts of the jurisdiction in which the Company is incorporated which provides remedies, which are for all practical purposes the same as those available here under sections 168A and 327(3)(c) of the Companies Ordinance, for the reasons explained by the 1^st and 2^nd Respondents’ expert on BVI law, Mr John Trehey in his affirmation.

Conclusion on jurisdiction

81.  It follows from my decisions in respect of jurisdiction under section 168A and section 327(3)(c), that I dismiss the Petition.  I would emphasise that this result is not a consequence of the 1^st and 2^nd Respondents taking a clever, technical point, although the submissions advanced on their behalf have been both skilful and comprehensive, it is a consequence of Kam Senior, on advice from a professional, consciously distancing the ultimate ownership of his assets from Hong Kong through the use of a complex corporate structure with a view to avoiding paying estate duty and contributing to the income of the Hong Kong Government. 

82.  If I had found in the Petitioner’s favour on the jurisdiction issues there were a substantial number of others issues for determination.  Given my decision to dismiss the Petition these do not have to be determined, but in case this matter goes further I think it is desirable that I indicate as succinctly as my obligation to provide a reasoned judgment allows, how I would have determined them if I had reached the alternative view on jurisdiction.

The remaining issues

83.  The matters, which remain for determination fall broadly under the following heads:

(1)     Whether or not the Company is a quasi-partnership?

(2)     Whether the Petitioner has been unfairly prejudiced by the conduct of the 1^st and 2^nd Respondents?

(3)     Assuming the answer to the first two issues is in the affirmative, what relief should be granted and, on the assumption that it will include an order that one Party buys the shares of the other, how should those shares be valued?

84.  I deal with each of these issues in turn.

Quasi-partnership

85.  In paragraphs 36 and 37 of the Amended Petition it is asserted that:

“36. Further, it was the mutual understanding between the Petitioner and Kwan Lai and certainly the expectation of the Petitioner that notwithstanding their respective roles in the Restaurant and the Group:-

36.1 The business and affairs of the Group would be jointly managed by the two of them, each has equal authority and power in directing and managing the business and affairs of the Group.

36.2 Each of them would be entitled to participate in the general management of the Group and be consulted on all major decisions concerning the affairs and business of the Group.

37.    Accordingly, the Restaurant and the Group have since at least 1979 been operating as a quasi-partnership, and the Petitioner and Kwan Lai have all along regarded themselves as partners.”

86.  The expression “quasi-partnership” is used to indicate, as I understand it, that it is the Petitioner’s case that the affairs of the Company had been conducted since 1979 in such a manner that the shareholders’ exercise of their legal rights are subject to equitable considerations and constraints and that conduct inconsistent with those considerations may entitle the Petitioner to relief under either section 168A or section 327(3)(c) of the Companies Ordinance.

87.  Kwan Lai and Carrel argue that given the circumstances, which I address below, in which the Company was formed and the Petitioner and Kwan Lai came to be shareholders in it, this is not a case of quasi-partnership and the exercise by Kwan Lai of his legal rights as majority shareholder are not subject to equitable considerations.

88.  A quasi-partnership is not an independent form of business association which can be recognised by its legal characteristics in the same way that a company or a partnership can be recognised. The term “quasi‑partnership” is nothing more than a convenient label used to describe those circumstances surrounding the conduct of a company’s affairs which are such as to give rise to equitable constraints on the behaviour of other members going beyond the strict legal rights and obligations arising under the Companies Ordinance or the articles of association. This was explained in Fisher v Cadman [2006] 1 BCLC 499, where Sales J held at paragraph 84:

“It is also clear that the term “quasi-partnership” is only intended as a useful shorthand label, which should not of itself govern the answer to be given to the underlying question, whether the circumstances surrounding the conduct of the affairs of a particular company are such as to give rise to equitable constraints upon the behaviour of other members going beyond the strict rights and obligations set out in the Companies Act and the articles of association… ”

89.  The elements required in order to enable the court to apply equitable constraints to the parties’ legal rights under the legislation and the company’s articles of association are those identified by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360: see O’Neill v Phillips [1999] 2 BCLC 14, 19. Lord Wilberforce held ([1973] AC 360, 379):

“The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not…entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it, It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations, considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

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

90.  Lord Wilberforce identifies the sort of factors which are important in establishing the basis for the application of equitable principles, particularly a personal relationship involving mutual trust and confidence, and an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business.  I shall for convenience refer to situations in which these factors, and possibly other relevant factors, are present giving rise to the application of equitable principles as a “quasi-partnership”.

91.  Kwan Lai accepts that the business conducted by “the Restaurant and the Group” (paragraph 37 of the Amended Petition) can fairly be said to have been developed and operated, as the Petitioner does say, as a family business and that the Petitioner and Kwan Lai trusted each other.  For convenience I shall refer to this as the “business”.  Kwan Lai, however, says that this of itself does not mean that the Company has been operated as a quasi‑partnership.  Kwan Lai criticises the Petitioner’s case in this regard as having been advanced without regard to the basic principles of quasi-partnership.  The criticism focuses on the four following matters.  First, that the Company was incorporated in 1994 long after the business was fully developed.  Secondly, until his death in December 2004 Kam Senior was the final decision maker and had unchallenged ultimate authority over the Company’s affairs.  Thirdly, the Petitioner and Kwan Lai did not become shareholders in the Company until mid 2006, when Mrs Tong caused the distribution of the Unit Trust in the manner described in paragraph 17 of this judgment with the result that the Petitioner and Kwan Lai came to hold 35% of the Company each.  Fourthly, it is not suggested by the Petitioner that Kwan Ki and Kelly were parties to the understandings concerning the management of the Company on which the Petitioner relies.  Kwan Lai argues that given these four matters a quasi‑partnership cannot have arisen and there is no basis for imposing equitable considerations on Kwan Lai’s exercise of his legal rights.

92.  The Petitioner’s case emphasises the history of the business and the fact that it was run by members of the Family with different areas of responsibility.  The Petitioner suggests that Family members, including him and the Kwan Lai, regarded the business as an integrated family operation.  I do not understand, as a general characterisation of the business, this to be in dispute.  The Petitioner argues, if I understand his case correctly, that the fact that the Company was not incorporated until after the business was well established (1994) and the Petitioner and Kwan Lai did not become shareholders until 2006 does not prevent a quasi-partnership relationship existing between them.  The court should look at the background to the Brothers becoming shareholders and recognise the reality of the situation, namely, that at the time they became shareholders they must have done so on the basis of the pre‑existing understandings between them that arose during the course of the development of the business and their involvement in it. 

93.  It is plain, submits the Petitioner, that Kam Senior’s intention was for the Petitioner and Kwan Lai to succeed him and to continue to run the family business with equal rights and power, and not for one of them to have power and control over the other.  It was also clear, submits the Petitioner, that this was also the understanding of other Family members.  In 1942, Kam Senior established the Restaurant and the Petitioner joined in 1964 at the age of 17.  He became Kam Senior’s “right-hand man”.  He started from the bottom – including buying food; working in the kitchen; and serving on the restaurant floor – learning every aspect of the business.  In around 1969, Kwan Lai returned to Hong Kong from his studies in Taiwan and joined the Restaurant business.  Like the Petitioner he started from the bottom, learning different aspects of the restaurant operation.  In 1973, the Petitioner became the General Manager and was responsible for the day-to-day operation of the Restaurant.  He remained General Manager until his death. The title signified, says the Petitioner, to the staff and customers that the Petitioner was in overall charge of the Restaurant business and he has been the “public face” of the Restaurant.

94.  Since the mid-1970s Kwan Lai has been responsible for the building, corporate and investment sides of the Family business.  He was put in charge of the construction of Yung Kee Building, which was completed in stages in 1979.  Thereafter, he looked after building construction and maintenance, and the “corporate side” of the Family business, including corporate administration of the Group companies and investments.  The Petitioner accepts that Kwan Lai’s contribution is important to the business; but the Petitioner characterised him as more of a “backstage” person.  He is not as well-known to the customers and the public as the Petitioner.  Kwan Lai accepted this in cross-examination:

“15 … Isn't it [sic] fact this, that because of his role in running the restaurant, dealing with customers and the media, that he was indeed generally known to be the second-generation owner who runs the restaurant?

A. The outsider would have this impression, I agree.

Q. And since he became the general manager of the restaurant, the customers and the public would regard him as the boss of the restaurant?

A. I agree.

Q. It's not because your brother “liked the spotlight” and “fancied himself to be the boss”; that was how he was perceived by your customers and the public.

A. That is how the public viewed him.

Q. And because of your areas of responsibility – the corporate side, the building side, significant no doubt, Mr Kam, don't misunderstand us -- you were more a backstage person, so the customers and the public might not know you as well as they know your brother?

A. I agree.”

95.  Kwan Lai accepted in cross-examination that he and his Brother trusted each other.  Their division of responsibilities proved to be very successful.  The Restaurant produced very considerable profits, which funded the acquisition of property and investments held by subsidiaries of the Group.  The Restaurant business was the powerhouse that produced the energy to move the Family business forward, and to grow by acquiring further assets and investments.  Kwan Lai accepted in his evidence that the substantive business was the Restaurant operation, presently held by YKR Group.

96.  The Petitioner submits that there can be little doubt that the Kam family members regarded the Restaurant business and the properties as an integral family business.  Kwan Lai did not accept this characterisation in cross‑examination.  He described these various activities as an integrated business under the Company.  The material point, however, is whether or not at the time the Petitioner and Kwan Lai became shareholders there had been a common understanding between the Petitioner and Kwan Lai (I address the position of the other shareholders later in this judgment) concerning the conduct of the Company’s affairs.  In my view, it can be readily inferred from the evidence that they did, unless it was the case, and Kwan Lai has not so argued, that despite appearances he doubted the Petitioner’s competence and intended to take over control of the Company it this proved possible. 

97.  It seems to me that it does not matter of itself whether or not Kam Senior was the ultimate decision maker up until the time of his death, or, as I understood the Petitioner to be prepared to accept, 2000 when he ceased to be a director of YKR Group.  What are important are the personal relationships and understandings, both express and implicit, that arose concerning the way in which the shareholders would conduct the affairs of the Company.  What is fair between shareholders, submits the Petitioner, has to be assessed in this context.  In O’Neill v Phillips, Lord Hoffmann when addressing the notion of fairness at 1098F observed that:

“Although fairness is a notion which can be applied to all kinds of activities its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (“it's not cricket”) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.”

Re Fildes Bros Ltd [1970] 1 WLR 592 concerns a “just and equitable” winding up petition.  The company was a family company founded by the father.  Its day-to-day business had for over a dozen years been run by the opposing contributory.  Since the death of their Father the petitioner and the opposing contributory were the only shareholders and directors and held an equal number of shares.  In considering the petitioner’s complaint that the opposing contributory was in complete control of the day-to-day running of the business and had refused to employ him in its business, Megarry J said at 596H-597D:

“… it seems to me that one must have regard not merely to what the articles say, but also to what the parties are shown to have agreed in any other manner. It cannot be just and equitable to allow one party to come to the court and require the court to make an order which disregards his contractual obligations. The same, I think, must apply to a settled and accepted course of conduct between the parties, whether or not cast into the mould of a contract.

In the present case the alleged agreement for profit sharing was for many years admittedly carried out by each brother running one company, with little interference or control by the other ... I do not think that it is open to Brian to complain of Ian continuing to do what was in accordance with the settled practice between them … I do not think that equity will listen to what the articles say and ignore a settled course of conduct: equity is not like that.”

99.  The position in the present case is the reverse, but the Petitioner says the principle is still applicable.  Having consented to a particular course of conduct for many years Kwan Lai could not fairly try and alter it after his Father’s death.  Whilst accepting that each case must be considered on its own facts the Petitioner referred me to a number of authorities, which illustrate family cases in which equitable considerations have arisen and led the court to find that they continued to apply to subsequent generations.  Brownlow v GH Marshall Ltd [2000] 2 BCLC 655is a recent example.  The caseconcerned a family company founded by the father, who originally held 1850 of 2000 shares, but only 650 by the time of his death. These he bequeathed to his widow, which after her death passed to their children. Three of four of the children ultimately became the only shareholders.  The Judge found at paragraph 10 that before the father’s passing:

“The second generation grew into greater and greater involvement in the employment and management in the company, and … it was always envisaged in the family that each member would participate in varying degrees in management and in the company’s success or failure.”

100.  Although rifts subsequently arose between the children, the Judge found at paragraph 34 that, nevertheless, there was:

“a family expectation, growing over the years, that each of the children of Mr and Mrs Marshall Snr would, so far as possible and so far as personal circumstances allowed, be brought into the management of the affairs of the company.”

101.  In Fisher v Cadman [2006] 1 BCLC 499 the company (CDL) was set up by the father. The two sons of the family (the respondents) worked for the business and were at all material times its directors. The sons also had shares in the company, as later did the daughter (the petitioner), although she did not participate in the business.  Until his death, the father was the majority shareholder and maintained a “firm grip” on the family company (paragraph 7), and the sons were subordinate to him (paragraph 19).  After the father’s death (and subsequently the mother’s), the shares in the company were effectively divided equally between the three children, although 21 of the 3000 issued shares were transferred to spouses and children of the respondents (paragraph 8).  The company was run with “considerable informality” while father was alive, which the Judge said was “unsurprising, in view of its nature as a small family company. Formal AGMs were not held”: paragraph 21.  The petitioner’s shares were given to her and she never took part in the business.  There were discussions concerning her possible involvement in the business but that was opposed by the sons and not pursued (paragraph 20).  Nevertheless, the Judge, after referring to the leading authorities including Re Westbourne Galleries, Re Bird Precision Bellows Ltd [1983] 1 Ch 419and O’Neill v Phillips, held at paragraph §89 that:

“the relationship between [the petitioner] and [her brothers] was one in which equitable considerations going beyond the simple terms of CDL’s articles of association applied as constraints upon the way in which [the brothers] could behave in relation to the company and [the petitioner]. It was a relationship to which the label ‘quasi‑partnership’, as used in the authorities, may be applied, albeit it did not share all the features typical of a true partnership-type relationship as identified in Ebrahimi v Westbourne Galleries and Re Bird Precision Bellows. There was no agreement that [the petitioner] should have a role in the management of the company. She did not herself provide capital for the Company, but was given or inherited her shareholding in it from her parents. But the company had started life as a clear quasi-partnership involving [father], [mother], [the sons], and it was effectively continued on the same basis after first [father]’s then [mother]’s deaths, as a small family company in which the family relationship would be important alongside the relationship defined in the articles of association. Its affairs were dealt with on a very informal basis throughout, indicating a common understanding on all sides that the articles of association did not represent the complete and exhaustive statement of how the relationship between the members and the members and management should be conducted.”

102.  In Re Honeycool Refrigeration & Engineering Co Ltd [2009] 1 HKLRD 447, an application to strike out, Kwan J (as she then was) at paragraph 24 held that where the petitioner alleged a quasi-partnership, it was sufficient to aver that the common understanding between the petitioner’s mother and the respondent would enure for the benefit of their successors, as the companies were operated like “family companies”.

103.  I accept, indeed I do not understand it to be disputed by Kwan Lai, that these cases illustrate that it is possible for a quasi‑partnership to arise between shareholders some of whom are not involved in management of a company’s business and for family members, who are shareholders to come to understandings, which can bind children to whom they leave their shares.  However, in broad terms Kwan Lai argues that in order to determine whether or not a quasi-partnership arose in the present case it is necessary to consider with precision the Petitioner’s case and assess whether or not the principles it asserts are applicable to the facts of the present Petition, which he submits it does not.  This takes us back to Kwan Lai’s four objections. 

104.  It is a necessary part of the Petitioner’s case that by mid 2006 when the Unit Trust was distributed and the Petitioner and Kwan Lai became, along with Madam Mak, Kwan Ki and Kelly, shareholders in the Company there was a common understanding as to the way in which the affairs of the Company were to be managed.  We are here concerned with concepts of fairness and equity.  What is relevant is what if the Parties were being candid they would, had they directed their minds to the question, have acknowledged between themselves was the basis upon which they all came to be shareholders and what their common understanding was as to how the affairs of the Company were to be conducted.  For the purposes of assessing what this would have been in any particular case any personal or secret agenda a shareholder might have had can be ignored as we are concerned with fairness. It does not, therefore, seem to me to follow that because the Company was incorporated sometime after the business became mature, or because Kam Senior had ultimate say over its affairs, which I accept, and so find, that he probably did, the Petitioner and Kwan Lai did not, when they came to receive shares in mid‑2006, do so in circumstances in which equitable considerations apply to the exercise of their strict legal rights.  I also cannot see any reason in principle why the passive nature of Kwan Ki and Kelly’s involvement in the affairs of the Company with the result that they never came to any understandings necessarily prevents equitable considerations applying as between the Petitioner and Kwan Lai.  As I have already explained, and is not in dispute, the term quasi-partnership is a short hand term used to describe the type of circumstances in which the court will apply equitable considerations to the exercise of legal rights.  It does not necessarily follow, as Kwan Lai’s submission implicitly assumes, that unless all shareholders have reached a common understanding a “quasi-partnership” cannot arise and equitable considerations are not brought into play.  I accept that if a particular shareholder has not come to an understanding that has been reached by other shareholders that he cannot be held to that understanding, but I do not see why, if it does not impact unlawfully on the interests of the passive shareholder, those shareholders who have reached an understanding should not be expected to behave in accordance with it.

105.  The present case becomes complicated because of the way in which the shareholdings have been dealt with since 2007.  Kwan Ki’s 10% interest in the Company passed to Kwan Lai following his Brother’s death in 2007.  In May 2009 Madam Mak transferred her shares to the Petitioner in order to balance Kwan Lai’s shareholding. Kelly says that she gave her shares to Kwan Lai and, in any event, treats him as their beneficial owner.  Kwan Lai submits that Kwan Ki and Kelly were never party to any understandings about how the Company was to be run.  If correct it follows that the voting rights attaching to those shares could be exercised anyway Kwan Ki and Kelly wish.  In these circumstances a quasi-partnership cannot have arisen.  I disagree.

106.  In my view if, despite the absence of any evidence of Kwan Ki and Kelly ever agreeing to the way in which the Company was to be managed, it can be inferred that they would, if they had been asked prior to their Father’s death, have acknowledged that the Family members all expected the Company to be run as it always had been and that, importantly, neither of the two senior siblings, namely, the Petitioner and Kwan Lai should take over control of the Company and dictate to the other how its affairs should be conducted, the absence of any express agreement by Kwan Ki and Kelly would not of itself be a bar to a quasi-partnership arising.  If the inference cannot properly be drawn the position would, in my view, be as follows.  If Kwan Ki and Kelly were not a party to the relevant understandings they were free to exercise their voting rights anyway they saw fit.  However, ultimately the affairs of a company are to be determined by the company in general meeting and generally a shareholder is entitled to vote his shares anyway he likes.  If Kwan Ki and Kelly caused a general meeting to be convened to vote on a resolution to resolve a commercial difference, the Petitioner and Kwan Lai were entitled to vote against it if they thought that, given the understanding between them, it was the proper thing to do. Therefore, the absence of agreement, actual or inferred, by two minority shareholders to an understanding between two majority shareholders does not create an impediment to holding the majority shareholders to their understanding.  As Lord Wilberforce said in the passage from his judgment in Ebrahimi v Westbourne Galleries Ltd, supra. equity enables “the court to subject the exercise of legal rights to equitable considerations, considerations, that is, of a personal character arising between one shareholder and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way”.  I do not see any impediment to this principle applying as between those of a company’s shareholders who have come to an understanding, which engages equitable considerations, even if there are other shareholders, who are not party to such an understanding.

107.  The factual position in the present case is as follows.  Kelly gave evidence that she did not think that the Petitioner had the right skills or approach to be in overall charge of the business and that this concerned her.  She also says that both she and Kwan Ki had concerns about the competence of the Petitioner’s children to take over the role of their Father.  The fact that Kwan Ki left his shares to Kwan Lai and Kelly says that as far as she is concerned the shares, which to her surprise she was left by Kam Senior, are Kwan Lai’s supports the veracity of this evidence.  Whether or not, if they had been asked, which they do not appear to have been, prior to Kam Senior’s death what their understanding of the arrangements for the current and future management of the business was to be they would have spoken their mind would probably have depended on the precise circumstances and who else was present.  In her evidence before me Kelly told me, and I accept it, that she and Kwan Ki discussed the business between themselves and expressed the views referred to earlier in this paragraph.  I do not think on the evidence before me that I can properly infer that Kelly and Kwan Ki accepted at the time they acquired shares that the management of the Company should necessarily continue as it had in the past and they appear to have been of the view that once the Petitioner ceased to be involved in its affairs control would be in the hands of Kwan Lai and his children. However for the reasons that I have explained earlier I do not think that this is necessarily fatal to the Petitioner’s quasi-partnership argument.

108.  I do accept that as between the Petitioner and Kwan Lai their conduct in relation to the business since 1969, when Kwan Lai became involved in it, was such as to engage equitable constraints on the exercise of their legal rights as shareholders. That does not mean to say that there had to be unanimity in relation to all matters before any aspect of the Company’s affairs could be changed, but they had to conduct themselves in a way consistent with their long established practices.  I discuss this further in paragraph 112 The material aspect of those practices is that the Petitioner would remain in charge of those parts of the business with which he had previously been dealing, namely, the operation and promotion of the Restaurant and would have an equal say in the Company’s affairs.

Unfair prejudice

109.  As tends to be the case with shareholders’ disputes the Petition has identified a large number of complaints concerning the Petitioner’s treatment by Kwan Lai and Carrel.  The Petitioner has divided them into 7 groups:

Changing the fundamental basis upon which the Group had been managed

(1) Taking control of the board of the Company by purportedly causing Carrel to be appointed a director.

(2) Causing the board of the Company to resolve that Kwan Lai act upon behalf of the Company in its capacity as registered shareholder of Long Yau.

(3) Causing Carrel to be appointed a director of Long Yau and YKR Group.

(4) Causing the board of Long Yau to appoint Carrel as authorised representative of Long Yau in its capacity as a shareholder of YKR Group.

(5) Causing YKR Group to convene an extraordinary general meeting for the purposes of appointing Carrel as an additional director.

(6) Various miscellaneous resolutions and acts designed to introduce a new management regime, which restricted the Petitioner’s rights of participation in the business and prejudiced his rights: see paragraph 91 to 97A.5 of the Amended Petition.

Misapplication of Group Assets

(7) Allowing Carrel and Yvonne to use the premises in Chai Wan for their own personal business without the Petitioner’s knowledge and consent.

Excessive Remuneration to Carrel and Yvonne

(8) Carrel and Yvonne have been paid monthly remuneration of $45,000 per month from 24 September 2009 and 1 May 2008 retrospectively, which given the historical level of salaries paid to Family members, including the Petitioner’s sons who worked full time, unlike Carrel and Yvonne, was clearly excessive.

Failure to pay Dividends

(9) As at 28 February 2010 the Group had total deposits of $882,632,987.03.  The Group did not have any need for this amount of cash, but Kwan Lai refused to agree to the payment of a dividend.

Denial of access to information

(10) Kwan Lai prevented the Petitioner having equal and unqualified access to financial information about the Group by requiring his prior permission to be obtained before he was given access to it.

Exclusion from management

(11) Usurping the Petitioner’s control over promotion, appointment and termination of staff working in the Restaurant.

Failure to investigate questionable transactions

(12) The questionable transaction in question was the discovery that Ms Tse an employee of the Group was a director and shareholder of KAFA Design and Decoration Limited a contractor frequently engaged by Kwan Lai to carry out decoration and renovation work for the Restaurant and Yung Kee Building and which had received substantial fees without, most of the time, alternative quotations being obtained.

110.  Towards the end of that part of the cross-examination of Kwan Lai concerning passing of the resolutions referred to above, I asked Kwan Lai a series of questions:

“HIS LORDSHIP: Mr Kam, at the time that we’re talking about, which, as you can see from the minutes of the board meeting, was August 2009, I assume that you understood that as a result of the proportion of the shares that you held in the holding company, you could insist that any shareholders’ resolution you thought should pass, would be passed?

A. I agree.

HIS LORDSHIP: And I also assume that you understood that if your son was appointed to the board of directors, that would enable you and him to have any resolution you thought should be passed, because you had a majority on the board?

A. Yes.

HIS LORDSHIP: Now, would it be fair to say that at this time – the middle of 2009 – you recognised that there were likely to be changes proposed by you to the management of – sorry, let me start again. I want to make sure I’m getting this clear.

There were likely to be changes proposed by you to the way in which the restaurant business and some of the other businesses operated by the subsidiaries of the group, which your brother might not agree with?

A. Correct.

HIS LORDSHIP: And that in proposing Carrel join the board, you had in mind that in the event that you and your brother disagreed over something and you couldn’t reach a compromise, you wanted to be able, if you thought it appropriate, to ensure that a board resolution approving what you thought was the sensible thing to do would be passed.

A. If the matter was sensible, I hope that it could be passed.

HIS LORDSHIP: There’s not really a right or a wrong answer to this question, Mr Kam. I’m just trying to get a feel for what you were thinking.

What I’m asking you boils down to this. Did you say to yourself, ‘In the event that I can’t agree something important with my brother, it would be better if, by having Carrel on the board, I can ensure that the resolution is passed if I think it’s sensible that, despite his objections, my proposal is implemented’?

A. Correct.”

111.  What he was candidly admitting was that he envisaged introducing changes to the business with which the Petitioner might not agree and he was setting things up to ensure that if this happened he could ensure that his views prevailed.  As I have already noted Kelly gave evidence that she did not think that the Petitioner was suited to controlling the business and she also gave evidence that Kwan Ki had complained to her about the Petitioner.  This all points to there being a feeling amongst some Family members, and in particular Kwan Lai, that in the future control of the business would have to change.  It appears that Kwan Lai was causing resolutions to be passed with this specifically in mind.  He clearly had in mind dictating to the Petitioner changes with which he disagreed and this he in due course did.  Was this unfair and inconsistent with their understandings?

112.  The Group and its business are highly profitable and one would expect it to require active management to continue, prosper and possibly expand.  Inevitably there might be differences of opinion between the Petitioner and Kwan Lai about how best to manage the business.  It does not seem to me that Kwan Lai was under an absolute bar by virtue of previous understandings and conventions from exercising his greater voting rights to introduce changes he thought were prudent.  As Lord Hoffman observes in O’Neill v Philips, supra, we are here concerned with notions of fairness and what is fair will depend very much on context.  For example, if the profits of the Restaurant had been showing a consistent reduction over a number of years and Kwan Lai thought that there was a specific reason for this, for example, the character of the Restaurant and its menu becoming dated, he could raise the subject for constructive debate and, if the Petitioner proved intransigent to changes proposed by Kwan Lai for reasons which viewed objectively were of doubtful commercial merit, in my view Kwan Lai would have been entitled to cause the necessary changes to be implemented.  This is because in my view Kwan Lai could not fairly have been taken to have agreed to his older Brother having a veto on any proposal, however sensible and reasonably presented, he might put to him.  Fairness requires both parties to act reasonably.

113.  This is not in my view the situation in the present case and Kwan Lai has not attempted to justify his actions on this basis.  It seems clear that Kwan Lai’s reconstitution of the boards of the Company and Long Yau was not a reaction to unreasonable behaviour by the Petitioner, it was a pre‑emptive strike.  It must have been appreciated by Kwan Lai that the Petitioner would be concerned about the addition of only his Son to the boards, but he seems to have done nothing to allay these likely concerns.  In fact the opposite happened.  If he had been behaving in a manner that was consistent with the way in which they had conducted matters in the past, and with due regard to the personal nature of the relationships involved, he would have ensured that the Petitioner was treated with respect, but instead he allowed the opposite to happen.  It is clear from the emails sent by Carrel to his Uncle and the transcripts of meetings Carrel attended after the resolutions had been passed to appoint him a director of the Company that Carrel was frequently gratuitously rude to the Petitioner.  In cross-examination Kwan Lai came close to admitting this:

“HIS LORDSHIP: Mr Kam, it’s pretty clear. I’m reading the documents as well, and it’s pretty clear that your son was dealing with your elder brother in an undiplomatic way. He could have made exactly the same points, if he had concerns about management and administration, in a courteous way. Why didn’t you speak to him and tell him to deal with your brother differently?

A. I’ve tried to speak to my son.  But look at the emails.  In each of them, my brother said that he did not acknowledge his position.  He was angry, so it is very difficult for me to control him.  It happened every time he tried to improve the company.

MR JAT: And his Lordship was asking, when you saw that sort of problem, you saw that they were not working well, why didn’t you come in and deal with the matters with your brother instead of allowing your son to continue to handle things that way?

A. I tried to tell him to let these things happen less frequently.”

114.  It does not seem to me to be necessary to go through all the Petitioner’s complaints in any detail.  It is clear from the way in which Kwan Lai took control of the Company and its principal subsidiary, interfered in the management of the Restaurant and Carrel’s behaviour that Kwan Lai had behaved in a manner which was inconsistent with the way in which he and the Petitioner had previously conducted the business and behaved towards one another.  In particular it is clear that Kwan Lai quite consciously took steps to control the Company and then exercised that control without proper regard to previous understandings.  I would, however, mention two discrete matters, which demonstrates that he was advancing his own and his immediate Family’s interests at the expense of the Petitioner.  Carrel and Yvonne have been paid monthly remuneration of $45,000 per month from 24 September 2009 and 1 May 2008 retrospectively. The matter was raised at a board meeting of YKR Group on 30 November 2009. Kwan Lai and Carrel proposed a director’s fee of $45,000 for Carrel.  After discussion the Petitioner proposed $32,500.  His reason for doing so was that Kwan Ki had only been paid $20,880.  His sons, who worked full time for the Group, were paid at the time less than $20,000 per month.  At the same meeting it was proposed that Yvonne should have her salary increased from $4,400 per month also to $45,000.  This was in return for Yvonne working half‑day on Saturday and at other times if necessary.  Her salary viewed objectively seems high for the small amount of work that she carried out.  More generally the way in which Kwan Lai proposed his Children be treated was a departure from the way in which Family members had been paid in the past.  It is understandable that Kwan Lai might have taken the view that given the substantial profits generated by the Group paying such low salaries was anachronistic and that the practice should be reviewed.  This is not how he approached the issue.  He did not suggest that given the level of profits generated by the Group it should consider paying Family members more realistic salaries.  He simply proposed that his Children be paid substantially more than was the Group’s previous practice.  This was inconsistent with the maintenance of the type of trust and confidence that had existed in the past and Kwan Lai should have appreciated that it would add to the impression that he was taking control of the Group and paying little regard to the Petitioner’s views.

115.  The Petitioner makes another complaint, which concerns the way in which Kwan Lai has allowed his Children to behave in relation to the affairs of the Group.  YK Properties owns industrial premises in Chaiwan, which since late 2008 had been rented to YKR Group.  In early 2009 it was used by the Restaurant for packing preserved sausages for sale at Chinese New Year, thereafter, it was unused pending the Petitioner and Kwan Lai deciding how it was to be used in future.  In about April 2009 the Petitioner says that he discovered that Carrel and Yvonne were using the premises for their own packing business, CT-Ease.  The Petitioner wrote a letter dated 23 April 2009 to Kwan Lai complaining about this and asking for it to be stopped.  Kwan Lai refused.  He said that he was in charge of the properties and that he had entered into an arrangement with Carrel and Yvonne the purport of which was that CT-Ease were managing the premises in return for free use of the space.  In the Amended Petition this complaint is formulated in terms of Kwan Lai being in breach of his duties as a director of YKR Group, however, there does not appear to be any evidence that Carrel and Yvonne’s use of the premises caused any actual loss to the YKR Group.  In my view the relevance of the complaint is not so much that there was self-dealing, which there does appear to have been, but rather that it demonstrates a lack of regard for the Petitioner’s reasonable expectation, in the light of previous practices, that his views and position within the Group should be respected and also what appears to have been a developing sense on Kwan Lai’s part that he could dictate matters to his older Brother.  I think the Petitioner was entitled to expect Kwan Lai to speak to him about the use of the godown and ask if he had any objection to Carrel and Yvonne using it.  As the premises were not being used for any other purpose, and there is evidence that Family members had used other parts of the premises in Chaiwan to store personal belongings, it may well have been that the Petitioner if approached tactfully would have agreed to an arrangement that did not cause any loss to the Group.

116.  The test for unfairly prejudicial conduct is an objective one.  As stated by Slade J in Re Bovey Hotel Ventures Ltd (unrep, 31 July 1981) cited in Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273 at 290 and applied by Le Pichon J (as she then was) in Re Tai Lap Investment Co Ltd [1999] 1 HKLRD 384, at 397G-H:

“The test, I think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced to the petitioner’s interests.”

Relief

117.  In my view Kwan Lai’s conduct and its consequences taken as a whole did unfairly prejudice the Petitioner’s interests.  In the Amended Petition the Petitioner has sought principally an order that Kwan Lai purchase his 9 shares in the Company.  By an amendment in May 2011 an alternative plea was added for an order that Kwan Lai sell his shares to the Petitioner.  The original Petition sought in the alternative a winding-up order, which remained in the Amended Petition, although this is not an alternative that the either party has advanced with any force.

118.  Section 168A is discretionary.  Subject to the requirement that the order is one which is “with a view to bringing an end to the matters complained of”, the Court has an unfettered discretion in deciding what, if any order, it should make.  Section 168A(2)(a) provides that:

“If on any petition under subsection (1) the court is of the opinion that the specified corporation’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or some part of the members (including the member who presented the petition), whether or not such conduct consists of an isolated act or a series of acts –

(a) the court may, with a view to bringing to an end the matters complained of –

….

(iv) make such other order as it thinks fit, whether for regulating the conduct of the specified corporation’s affairs in future, or for the purchase of the shares of any members of the specified corporation by other membersof the specified corporation or by the specified corporation….”

119.  The Petitioner submits that a share purchase order is appropriate in the present case.  It is, the Petitioner correctly submits, the most important and commonly granted remedy, as the order has the advantage of affecting a “clean break”: Robin Hollington QC, Shareholders’ Rights, 6^th ed, §8-18.  In addition to cases involving exclusion from management in quasi-partnership situations, a share purchase order is particularly appropriate, submits the Petitioner, where, as he alleges has happened in this case, the respondent has shown a propensity for using the company’s assets for his personal benefit and the benefit of his family and friends, as it would be unfair to the petitioner to be “locked in” as a minority in the company where there is no practicable way of regulating the conduct of the company’s affairs in future: Re Elgindata Ltd [1991] BCLC 959 at 1005f-i).

120.  On 8 February 2010 the Petitioner’s solicitors wrote an open letter to the 1^st and 2^nd Respondents’ solicitors in which he offered to sell his shares to Kwan Lai.  Consistent with this the original form of the Petition contained only a claim for an order that Kwan Lai buy the Petitioner’s shares.  My impression during most of the trial was that the Petitioner was proceeding on the basis that the primary relief that he sought was an order that his shares be purchased.  However, in his written closing submissions the position changed and it was argued that Kwan Lai should be ordered to sell his shares to the Petitioner.  Five reasons were advanced in support of this argument.  First, at the time the Petitioner presented the Petition (29 March 2010), Kelly was still the sole beneficial owner of Everway, and the one share in Everway was held by Kwan Lai upon trust for Kelly.  As such, Kelly (via Everway) remained a minority shareholder holding a 10% shareholding in the Company.  It was only on 12 April 2010 that Kelly revoked the Declaration of Trust and Kwan Lai became the owner of Everway and Kelly’s shares.  Thus, so the argument develops, at the date of presentation of the Petition, the Petitioner and Kwan Lai were equal shareholders each holding 45% in the Company.  The fact that Kelly subsequently decided to “gift” Everway to Kwan Lai is not a factor which should be taken into account in deciding whether it is appropriate for the Petitioner to purchase Kwan Lai’s shares because:

(1) It was admittedly a personal gift made by Kelly to Kwan Lai, which had no bearing whatsoever on Kwan Lai’s contribution to the Group.

(2) Kelly herself has not contributed in any way to the Group.  Her 10% shareholding, whether it was held by her or by Kwan Lai, is at best neutral and should not “tilt” the balance.

(3) The gift was only made afterthe Petitioner had sought relief under section 168A.  The only inference that can be drawn is that it was made with a view to assist Kwan Lai in opposing the Petition. No other plausible reason has been given by Kelly or Kwan Lai.

121.  I disagree with this analysis.  Kelly said that she gave her shares to Kwan Lai because she felt that she did not deserve them having herself contributed nothing to the business.  She also says that she thought that the Petitioner was not suited to running the business.  The import of her evidence was also that Kwan Ki had held a similar view.  The only sensible conclusion that can be reached in these circumstances is that Kelly prefers to have Kwan Lai run the business.  If she remained beneficial owner of the shares this clearly would have been her stance.  In these circumstances it seems to me wrong to discount the fact that Kwan Lai has the greater shareholding.  The reality appears to be that the majority of current and past shareholders (by which I mean Kelly and Kwan Ki) are, or were, of the view that Kwan Lai was better suited to overall responsibility for running the business than the Petitioner.

122.  Secondly, Kwan Lai himself has never put forward a positive case that he should purchase the Petitioner’s shares or why in the circumstances of this case, it is more appropriate for Kwan Lai to purchase the Petitioner’s shares.  This is, with respect, rather disingenuous. The impression that the Petitioner gave right up until trial was that he primarily sought an order that his shares be bought, which, assuming Kwan Lai had lost the Petition, Kwan Lai appears to have accepted was the appropriate remedy.  It is hardly surprising he did not feel the need to put forward a positive case that he should purchase the Petitioner’s shares rather than vice versa.

123.  Thirdly, the evidence shows that since the early 1970s, there has been a division of responsibility between the Petitioner and Kwan Lai, with Kwan Lai being in charge of the “corporate side” and building maintenance matters, while the Petitioner has been in charge of the day-to-day running and operation of the Restaurant and has since 1973 been its General Manager.  The profits generated by the Restaurant were used to acquire the other assets and investments presently owned by the Group.  Viewed objectively, the Petitioner has performed a far more active role in managing the “profit centre” of the Group.  This should be a weighty factor when assessing the relative involvement in management and the contributions made by the Petitioner and Kwan Lai to the Group.  I accept that there is some force in this argument.

124.  Fourthly, as Kwan Lai admits, “the substantive business of the Company and its Subsidiaries is the Restaurant operation, presently held by YKR Group”.  The Petitioner is, he asserts, in a unique position to contribute to the continued success of this substantive business given his long and successful involvement with it.  In particular, he is the only director who has the requisite knowledge and expertise in Chinese cuisine including designing new menus and award-winning dishes for the Restaurant and is the public “face” of the Restaurant.  In contrast, Kwan Lai’s role on the “corporate side” and building maintenance side although significant, is not indispensible to the continued success of the Group.  Kwan Lai admits he has no professional training in accounting or financial matters and required the assistance of professional firms.  So far as building maintenance is concerned, that too is a role that can be assumed by qualified professionals.  I accept that there is some force in this point.

125.  Fifthly, while there are cases to suggest that the Court would be more inclined to order the purchase of a petitioner’s shares, those cases, properly analysed, all involved a petitioner who held only a small shareholding and had little or no involvement in the management of the business. For example:

(1) Re a Company No. 006834 of 1988 (ex parte Kramer) (1985) 5 BCC 218, at 220, where Hoffmann J (as he then was) observed that “it must be very unusual for the court to order a majority shareholder actively concerned in the managementof the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority shareholder at a fair price.”  In that case, the respondent majority shareholder founded the company and had at all times been the person principally concerned in its management. The petitioner’s contribution to the company’s growth measured in both time and degree of responsibility had been relatively small.

(2) Re Ringtower Holdings Plc (1989) 5 BCC 82, Peter Gibson J held that it was inconceivable to make an order for the purchase of the shares of the majority where the petitioners together only held about 5% of the shares, the petitioners did not come to the court with clean hands and it was plain and obvious that the petitioners ought to go in view of the breakdown of relations, the smallness of their holdings, the opposition of the respondents including senior managers and the absence of the petitioners from the company for 18 months.

126.  These cases demonstrate is that it tends to be an oppressed minority who bring unfair prejudice petitions, which is what one would expect, and that, as one would also normally expect, the order that they seek and the court considers appropriate to grant, is for the purchase by the majority shareholder or shareholders of the petitioner’s shares.  I accept, however, that the fact that Kwan Lai is the majority shareholder is not necessarily a reason to order that the Petitioner sell his shares to him.

127.  Both the Petitioner and Kwan Lai accept that the other has contributed significantly since 1969 to the success of the business.  Unsurprisingly in these circumstances there are substantive arguments that can be advanced in favour of each buying the other out.  However, weighing the reasons that have been advanced I think that if an order were to be made it should be that Kwan Lai purchase the Petitioner’s shares.  The reasons for taking this view are that Kwan Lai is now the majority shareholder and does seem to have the confidence of Kelly and did have the confidence of Kwan Ki, who left him his shares.  Kwan Ki in particular was in a position to take an informed view as to what was in the business’ long term best interests.  I also think that the fact that the Petitioner left it until trial to change the emphasis in the relief that he sought and as a result Kwan Lai fairly objects that he has not run a positive case that, if unsuccessful, he should purchase the Petitioner’s shares, is relevant.  Not only does it make assessing fairly what in substance is the Petitioner’s new primary case on relief difficult, but it suggests that the Petitioner himself for most of the period of this litigation thought that the better solution to the present difficulties between him and Kwan Lai was that the Petitioner leave the Company and sell his shares to Kwan Lai.

128.  In conclusion, if I had not dismissed the Petition for want of jurisdiction I would have found that the Petitioner had been unfairly prejudiced by Kwan Lai’s conduct and ordered that Kwan Lai purchase the Petitioner’s shares in the Company.  I now turn to consider the last group of issues that were dealt with at the trial, which concerns valuation.

Valuation Issues

129.  The parties have agreed that the date of valuation should be the date of any order made by the court.  The issues, which remain are:

(1) Basis of valuation.

(2) Whether or not there should be a discount for a minority.

(3) Instances of unfairly prejudicial conduct for which specific allowances should be made.

130.  I was only invited to consider these issues as matters of methodology and principle.  I am not concerned with figures.

Basis of Valuation

131.  There are 2 different elements to the valuation of the Company, which need to be considered.  First, the properties owned by its subsidiaries.  Secondly, the market value of the Company as a going concern.  In respect of valuation of the properties the Petitioner and Kwan Lai’s experts were Mr Alnwick Chan of Knight Frank and Mr Eric Yeung of Savills respectively.  They called Mr Ian Robinson of Robinson Management Ltd and Mr John Utting of KPMG respectively to give evidence on the issues concerning valuation of the Company as a going concern.

132.  The following matters were agreed by the experts:

On Property Valuation

(1)The experts have agreed on:

(a) The saleable area of Yung Kee Building.

(b) The effective saleable areas of the common restaurant/retail comparables used in their valuation (there are other comparables chosen by the experts on which no agreement has been reached).

(c) Valuation of Wo On Building at HK$13,952,028.

(d) Saleable areas of MP Industrial Centre and the common comparables used.

(2) No agreement has been reached on the valuation assumptions (including choice of comparables), market value of Yung Kee Building and MP Industrial Centre.

On Company Valuation

(3) The experts used the same underlying financial figures for each Group company in their valuation and have agreed on:

(a) Using the asset approach in valuation of all Group companies other than YKR Group.

 (b) A control premium should be applied for valuation of YKR Group.

 (c) Other assets kept in safe deposit boxes, the value of the antiques, inventories such as shark fin, abalone and orange peel owned by Group companies have not been included in their valuation.

133.  No agreement was reached in respect of the following issues:

(1) Method for valuation of YKR Group.  Mr Robinson adopts the price to earnings (P/E) ratio approach and Mr Utting adopts a discounted cash flow (“DCF”) approach.

(2) Basis of maintainable earnings and cash flow for YKR Group.

(3) Level of surplus cash and marketable securities held by YKR Group.

(4) Level of discount for lack of marketability (“DLOM”) for valuation of YKR Group.

(5) Whether a DLOM should be applied to the cash, marketable securities and real properties held by the other companies in Group.

(6) Valuation of companies in a net liability position.

(7) Valuation of membership at Craigengower Cricket Club.

134.  There are 2 main reasons for the difference in the property valuation between him and Mr Yeung.  First, both experts agree on the definition of “market value” as the basis for valuing the properties, which is the “best price reasonably obtainable in the market by the seller and the most advantageous price reasonably obtainable by the buyer.  This estimate excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of special value”.  However, when assessing the value of the properties, Mr Yeung in fact assumes, inter alia, that “the existing tenants of the Properties including the restaurant and office areas in Yung Kee Building will continue in occupation at market rents, that the Properties will continue to be used by members of the Group as at present and will not be sold or redeveloped”, “the Properties occupied by each tenant are to be valued as a whole” and the Properties will be used on an “as-is” basis.  As a result of these assumptions, Mr Yeung only used comparable transactions for restaurants and disregarded all the other retail or commercial properties comparable transactions when, Mr Chan says, those users are likely to attract higher returns and thus higher value.

135.  Secondly, Mr Chan adopts the comparative method of valuation in assessing the value of the Properties, which is based on market evidence and analysis and is generally regarded, submits the Petitioner, as the best method of valuation and is preferred by the Lands Tribunal.  By contrast, Mr Yeung adopts both the comparative method and investment method in assessing the value of the Properties and then takes the average of the values derived from the 2 methods as the “reconciled market value”.  As the investment method consistently produces a lower value (except for Yung Kee Building 5/F–9/F), by taking the average of the 2 values produced, Mr Yeung’s valuations on the Properties are lower by about $32 million.

136.  As for the company valuation, there are 2 issues between the experts.  First, is the valuation method.  Mr Robinson adopts the price‑earnings basis for valuing YKR Group based on a P/E multiple derived from Tao Heung Holdings Ltd (“Tao Heung”), a listed company operating a chain of restaurants, and makes adjustments to account for the difference between YKR Group and Tao Heung to arrive at a P/E of 10.2.  Mr Utting adopts the DCF method.  The precise differences in methodology, assumptions and comparables adopted by Mr Robinson and Mr Utting are explained in their Joint Report.

137.  Secondly, Mr Utting applies a 5% discount for DLOM on all investment and property holding companies within the Group, including cash, marketable securities and real properties.  Mr Robinson considers this to be inappropriate and their net asset value (without any DLOM) reflects their fair market value. 

Property Valuation

138.  The valuers were directed to assess the market value of the Properties.  Both of them have taken this to mean:

“The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

139.  This is the definition given to the phrase “market value” in the Hong Kong Institute (“HKIS”) of Surveyors Valuation Standards on Properties, First Edition 2005, paragraph VS 3.1.2.

140.  The first dispute that I have to resolve in relation to the properties is this. Should an assessment of the market value of the Properties take into account, as does Mr Yeung, in his report that:

“3. That the existing tenants of the Properties including the restaurant and office areas in Yung Kee Building will continue in occupation at market rents, that the Properties will continue to be used by members of the Group as at present and will not be sold or redeveloped.

4. That the redevelopment potential of the Properties shall be ignored.

5. The 10/F of Yung Kee Building shall be valued on domestic use as permitted in the occupation permit.

7. That the Properties occupied by each tenant are to be valued as a whole and the use restricted to the permissible use set out under the Occupation Permit.

10. That the Properties are ready, fit and available for immediate occupation and use on an ‘as-is’ basis.”

141.  These were assumptions that Mr Yeung was instructed to make.  Mr Yeung stated in cross-examination that but for his instructions to do so he would not have made them.  This takes us immediately to the crux of the Petitioner’s objection to Mr Yeung’s valuation.  The Petitioner argues that the valuation of the properties should be carried out in accordance with the HKIS Valuation Standards on Properties, First Edition 2005.  The definition of market value is consistent, the Petitioner says, I accept correctly, with the definition of “fair value” in HKFRS 13 issued by the Hong Kong Institute of Certified Public Accountants, which is relevant because the value of the Properties is to be taken into account in the valuation of the Company.  The HKIS Standards tell a valuer not only what “market value” means, but provides interpretative commentaries, which provide, what is described in the Standards, as a “conceptual framework” for each element of the definition.  In paragraph 1.1, which deals with “estimated amount”, it states that “This estimate specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale, or any element of Special Value.”

142.  The Petitioner says that consistent with this the present use of the Properties should be ignored when valuing them.  The practical consequence of this is that the valuer should, says the Petitioner, value the Properties on the basis of vacant possession and the best rent that can be obtained for the premises.  The valuation of the Yung Kee Building should not, for example, be made on the assumption that it will not be redeveloped or that the Properties will continue to be used occupied by the existing tenants.  These assumptions in turn have an effect on the comparables that are used. 

143.  Kwan Lai’s response to this is most conveniently explained by quoting the relevant paragraphs from his Closing Submissions^[3]:

“Each of KKS and KKL intends, whatever the outcome of these proceedings, that the Restaurant shall continue to operate in the Yung Kee Building indefinitely. This was confirmed by KKS at [T/05/4] and, although it was not put to KKL in cross-examination, that is certainly is and always has been his position. The Court can plainly place reliance on both parties’ expressions of intent. For either party to discontinue the restaurant business at the Yung Kee Building would be disrespectful of Kam Senior’s legacy of which both sons are proud and which they would not wish to dishonour.

Given the parties’ common intention, the notion that (i) the business of YKR Group should be valued on the basis that the restaurant business will indefinitely continue and generate profits as it is at present (occupying the G/F to 4/F at the Yung Kee Building and associated properties) whilst (ii) the properties are valued on a VP basis (ie that the restaurant no longer continues to occupy the properties) is fundamentally illogical and contrary to common sense.

Nor is it remotely fair. No matter what the precise methodology, KKS as the selling party will receive a price for his shares a significant element of which reflects the present value of the future income streams which the business of YKR Group can be expected to generate. How then can it be fair that he also receives an enhanced price for his shares which values the properties on a basis which assumes that the very premises which are required for generation of that element will not be available for that purpose? ”

144.  Insofar as the Petitioner is suggesting that the HKIS and HKICPA Standards require a valuation of the Properties to ignore the type of assumptions Mr Yeung has made it seems to me that the suggestion is wrong.  I note that in the Commentaries to the HKIS Standards it appears to recognise, as I would expect, that a valuer may make special assumptions in his valuation: see paragraph 4 on page 24.  The important thing is that any special assumptions and the basis of his valuation are clearly set out in his instructions and valuation report: see paragraphs 1 and 4.  This has happened in the present case. The Petitioner himself quotes paragraph 27 of the HKFRS in his closing submissions, which expressly provides that “A fair value measurement of a non‑financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use”.  This would seem to expressly envisage the valuation taking into account how a company actually uses property when assessing fair value.

145.  It also seems to me that the court should be mindful of the fact that it is being asked to consider what a fair value of the Company is for the purposes of an order to be made under section 168A.  The standards to which I have referred do not, of course, specifically cater for the type of issues that arise under section 168A and they should not be treated as dictating what is a fair valuation of a company or any part of its assets.  In conclusion, I accept that the Properties should be valued on the basis of assumptions about use contained in Mr Yeung’s report.  This extends to assumption 5, namely, that the 10^th floor of the Yung Kee Building is valued on the basis that it is used for a purpose consistent with its occupation permit.  It does not seem to me appropriate that it is valued on the basis of use, which is inconsistent with its approved use even if its actual use has never been the subject of complaint.

146.  The second issue concerns whether or not only the comparative method should be used to value the Properties or whether the investment method should be used in addition.  The Petitioner submits that only the comparative method should be used. It submits this because it is generally accepted that this is the best method of valuing property: see Cruden, Land Compensation and Valuation Law in Hong Kong, 3^rd ed, 2009, at 595-596.  Kwan Lai argues that the difficulty with applying the comparative method is the difficulty in finding close comparables.  If they are available they provide an accurate and reliable method for determining valuations.  If they are not available then the valuer has to find the closest comparables that he can and make adjustments to them. The greater the adjustments the more room for error and disagreement.  This is illustrated by the fact that the 2 comparables chosen by Mr Chan in Appendix 8 of his report required adjustments of 74.2% and 74% respectively and he accepted in cross‑examination that these adjustments involved a series of judgments by the valuer and were not precise numerical calculations.

147.  It seems to me to follow that having decided, as I have, that the Properties should be valued on the basis of their actual use and the difficulty in finding suitable comparables, a check using an alternative method is advisable if such a method is available.  I did not understand the Petitioner to argue that if the court concluded that an alternative method should be used as a cross-check for the comparable method that there was anything objectionable to using the investment method.  In my view both methods should be used.

148.  There is a second part to this sub-issue.  If both the comparable method and the investment method are to be used should the comparable method and investment method values be averaged to produce the valuation?  Initially Mr Chan argued that they should not be, but during cross‑examination he accepted Mr Yeung’s averaging method.  I, therefore, find that both the comparable method and the investment method should be used and the results averaged to produce the valuation of the Properties.

Company Valuation

149.  There are 5 types of companies within the Group and Mr Robinson and Mr Utting agree on the primary basis of valuation of each of them:

(1) YKR Group, which is the only operating company making profits within the Group, both Mr Robison and Mr Utting agree that it should be valued as a going concern. Mr Robinson adopts the price‑earnings basis of valuing YKR Group based on a P/E multiple.  Mr Utting adopts the DCF method using the weighted average cost of capital at the discount rate of the Gordon Growth Model.

(2) The property holding companies, namely, LY Properties and YK Properties.  Their only businesses are to hold properties and receive rental income from other Group companies primarily YKR Group, as well as to hold cash and marketable securities.  Both experts agree that they should be valued using the asset approach.

(3) The investment holding companies, whose only businesses are to hold the shareholdings in other Group companies, cash deposits and other marketable securities.  They include Surewin, Victorywise, KSF and Long Yau.  The experts agree that they should be valued using the asset approach.

(4) Life is not Ltd, which is an operating company, but has been running at a loss and has a net deficit.  The experts agree that it should be valued using the asset approach and its value is nil.

(5) YK Restaurant, which has since December 1994 been dormant and has no liability.  The experts agree that it should be valued using the asset approach.  It only holds cash deposits in the amount of $253,893.

150.  Both experts agree that for the purpose of assessing the equity value of the Company, it is necessary to first ascertain the equity value of each subsidiary, and then multiply that value by the effective shareholding held by Long Yau in those Subsidiaries.  As Long Yau is 100% owned by the Company, its equity value is the same as the Company.

151.  Mr Robinson and Mr Utting use very similar definitions of “fair market value”[4] and no issue arises in relation to the meaning of the term.

152.  As I have already mentioned I have been asked to determine the method of valuation at the trial.  It was made quite clear by the parties that I was not to determine any part of the valuation of the Company or its subsidiaries or their assets.  It seems to me that the parties, in particular the Petitioner, have, in the way in which they presented their arguments in their very extensive closing written submissions, lost sight of this fact and have on occasions failed to distinguish between methodology and computations.  For example, in paragraph 359 of the Petitioner’s Closing Submissions it is stated that there are 4 issues between the experts.  The second and third then identified are respectively the estimated amount of future maintainable earnings and the amount of surplus assets owned by YKR Group.  These issues, as demonstrated by the Petitioner’s submissions in respect of them in paragraphs 369 and 370 of his Closing Submissions go beyond methodology and become matters of computation.  It seems to me that the matters that fall for determination at this stage in relation to the valuation of the Company are three:

(1) Whether YKR Group should be valued by calculating a future maintainable profit figure and applying an appropriate P/E ratio to it (Mr Robinson’s method) or primarily by using DCF and using benchmark multiples as a cross- check.

(2) Whether a DLOM should be applied to cash and marketable securities held by subsidiaries of the Group.

(3) Should there be a discount for minority interest.

153.  Once these issues have been determined the parties can (if the case does not end as a result of my determination on jurisdiction) ask their respective experts to revise their reports to take my determinations into account and then see what parts of the computations can be agreed.  Those that cannot be agreed can be determined later by the court if necessary.

Method of valuing YKR Group

154.  What is in issue at this stage in relation to the method of valuing the YKR Group is whether or not it is appropriate to use as P/E ratio or the DCF method. If it is the former I do not understand Mr Utting to object as a matter of methodology to Mr Robinson’s calculation of maintainable earnings although there is an issue, which I do not need to resolve at this stage, concerning its impact on the P/E ratio as Mr Robinson has calculated maintainable earnings in a way which includes a future increase in earnings and this element of increase is duplicated in the P/E ratio itself, says Mr Utting. 

155.  A P/E ratio is derived from publicly available information about the P/E ratios of listed companies; information which is available daily for all listed companies in Hong Kong.  Mr Robinson has looked for comparable companies whose P/E ratios can be used as a guide to what is appropriate for YKR Group.  Mr Robinson says that in his experience this is the most common way of valuing companies in Hong Kong.  The difficulty in applying this method to the present case is that YKR Group is unique.  It operated one very large, famous and highly profitable Michelin starred restaurant in Central.  Unsurprisingly there is no public company in Hong Kong that is directly comparable.  Mr Robinson was only able to find one company which he thought bears sufficient resemblance to YKR Group to be used for deriving a P/E ratio.  This is Tao Heung.  Tao Heung operates a chain of various types of Chinese restaurants.  However, it is apparent from Tao Heung’s annual report that it is a very different type and scale of business to that operated by YKR Group:

(1) Tao Heung operates restaurants and bakeries in Hong Kong and Mainland China;

(2) It operates restaurants under 14 different brands;

(3) It had a logistics centre which could service 200 restaurants;

(4) As of 31 December 2010 it operated 81 restaurants: 65 in Hong Kong and 14 in the Mainland;

(5) It also provides food catering services and produces, sells and distributes food products including frozen foods, invests in properties, and had a large number of promotion services;

(6) Its business is expanding rapidly in Hong Kong and Mainland China.

156.  Mr Robinson acknowledged that there were significant differences between YKR Group and Tao Heung and in an attempt to address them made significant adjustments to Tao Heung’s P/E ratio of 11.3 at 31 August 2011 producing an assumed P/E ratio for YKR Group of 10.2:

(1) DLOM of -17.5%;

(2) Specific company discount to take into account differences in size, growth and margins of -12.5%.

(3) Control premium of +25%.

157.  Mr Robinson accepted in cross-examination that the P/E ratio approach is entirely dependent on identifying one or more comparable companies; and where market-based multiples are used, the aim is to identify companies that are similar, in terms of risk profile and earnings growth prospects, to the company being valued; and that was more likely to be possible if the companies were similar in terms of a range of factors such as target customers, business activities, market positioning, size, geographical coverage and applicable tax rate.  He also accepted that a valuer would normally consider several listed companies, but he only used Tao Heung as the other listed companies he considered were insufficiently similar, and he admitted that to find one which was similar in product, stability and style was difficult.

158.  On the face of it, it seems that Tao Heung is so different in important respects to YKR Group (those identified above) that it provides an unreliable guide to what a fair value of the latter is.  Mr Robinson dealt with this point as follows in cross-examination:

“Q: Now, I’ve taken you through that in detail, Mr Robinson, but in summary, we have two completely different companies, don’t we. Tao Heung operates restaurants and bakeries in Hong Kong. It also operates in mainland China. Tao Heung operates restaurants under 14 different brands. It has a logistics centre which can service 200 restaurants. As of 31 December 2010, it had 65 restaurants in Hong Kong and 14 in mainland China. It provides food catering services, it produces, sells and distributes food products including frozen foods, invests in properties, and it has a large number of promotion services. These companies simply are not comparable, are they?

A: They are not exactly similar, that’s for sure. But I believe that with the adjustments that I have made, it is a good proxy for the starting point for my calculation.

Q: Well, you say they’re not exactly similar; they’re wholly dissimilar, aren’t they? Tao Heung is plainly a much bigger company. It’s at the head of a much bigger group, as we see from all those subsidiaries. It’s got a business which is expanding rapidly, not only in Hong Kong but also in mainland China, and it has a wide variety of different types of restaurant, not just one restaurant in Central selling roast goose. That’s the truth, isn’t it?

A:          I understand what you’re saying, but having looked at it carefully, and I looked at the company situation, it’s fairly constant in its growth, its share price, its relationship to the Hang Seng Index.  It’s a steady company, as is Yung Kee. It is growing in China.  It has prospects.  So has Yung Kee got prospects if it were utilised.  There’s many aspects that could be utilised.  The product and staffing is very similar.  I’ve eaten in both places.  I’ve eaten at two of their restaurants.  Quality is good.  I consider, and I looked at all these things – I understand what you’re saying.  But I believe that it is a good proxy for what I have adopted in the P/E and made suitable adjustments.”

159.  I find this wholly unconvincing.  YKR Group operates a single restaurant with unique characteristics.  Tao Heung is operating a very different kind of restaurant business.  It does not seem to me that Mr Robinson has advanced any sensible reason for thinking that a prudent businessman considering buying YKR Group would consider that Tao Heung’s P/E ratio provided much of a guide to what he might pay to acquire YKR Group.

160.  It seems to me perfectly sensible that a valuer faced with having to value YKR Group would look for alternative methods of valuation given that fact that once one discounts Tao Heung as a useful proxy one is left with no other comparables to use in arriving at a P/E ratio.  This is what Mr Utting did.  He described his experience of using the DCF in cross-examination as follows:

“Q: Let’s focus first on the valuation of YKRGL. I think you and Mr Robinson both agree that it should be assessed as a going concern because it carries on a very stable, cash‑generating and profitable business?

A: Yes.

Q: Would you agree that the common valuation methodology in valuing such a going concerned with (will?) be – I’ll just call that the P/E method, and also the discounted cashflow method that you and Mr Robinson use?

A: Those are both common methodologies.

Q: Now, is it correct that either method, the objective is the same? It’s basically just to determine an estimated amount which a notional buyer is willing to pay for this business, and which a seller is willing to accept for the sale of this business?

A: Yes.

Q: And that amount, as you said, will represent the fair market value of the business?

A: Yes.

Q: In terms of the P/E method, would you accept that that is in fact the most commonly used method for valuing a business in Hong Kong?

A: No, I wouldn’t accept that.

Q: But would you agree that the P/E method is a method that has consistently been used by investors in private equity funds when they assess the value of a particular business?

A: Not entirely, no. If I might give some context to that? In the course of my work, I get to see the reports I mentioned of lots of transactions in China and in Hong Kong. Most of those transactions are more than US$20 million or equivalent, and this would fall into that category. For transactions of that size, setting aside pure property-owning companies, which tend to be done based on a valuation, a property valuation, a surveyor’s valuation, rather than an accountant’s valuation, if you like, and setting aside those transactions which are asset‑based, maybe loss-making, those sorts of special circumstances which we can also carve out for this purpose, almost all of the remaining transactions try to use DCF as a primary method.

Q: Sorry, Mr Utting, I have to stop you here. I’m not talking about the DCF method. I’m talking about your DCF method using –

HIS LORDSHIP: Actually, I think your question was about the P/E ratios, wasn’t it?

A: Yes, I was going on to describe –

HIS LORDSHIP: And what Mr Utting is explaining to me is what he normally sees for transactions of this size.

MS CHAN: Yes.

A: In the context of transactions of this size, where the purchaser and the vendor probably do their own DCF-type valuations as a primary method, it is common to translate that into a P/E for the purpose of explaining it to the chairman of the company, or to compare it with other possible transactions. Because one of the limitations, if you like, of the DCF method is that it comes up with a number for this particular business, a value. And you can’t compare that with another business or another transaction, because they’re all valued at numbers.

If you want to get some relative assessment of value, it’s more useful to use a P/E because you can say, ‘Well, I did this one at 14 times and that one at four times.’ And that’s a concept that’s easy to understand.

HIS LORDSHIP: So when Mr Robinson was referring, as he did, I think, to purchasers understanding P/E ratios, liking P/E ratios – I don’t think you were in court last week so you wouldn’t have heard him – he’s right in the sense that a P/E ratio fairly readily makes sense to any moderately sophisticated businessman?

A: Absolutely.

HIS LORDSHIP: But the more mathematically complex process that the discounted cashflow method involves isn’t so immediately meaningful. Would that be –

A: Yes, I think that’s a fair comment. I think that amongst the, if you like, financial fraternity, DCF is very well accepted and understood in all of the aspects that I’m sure we’ll go through. But explaining it to the wider business fraternity or the public at large, P/E is simpler.

161.  It will be noted that Ms Chan SC acknowledged in her question to Mr Utting, quite properly, that DCF is a commonly used method of valuation. 

162.  Mr Chan SC did not suggest that any part of this evidence was wrong and I accept it. It seems to me that given the absence of any useful comparable for determining a P/E ratio the DCF method of valuing YKR Group with appropriate cross-checking by any other suitable bench mark a valuer considers helpful should be used.  I am not at this stage concerned with whether or not Mr Utting’s DCF computation is correct and I do not need to address the criticisms of it advanced at this stage by Ms Chan SC.

DLOM

163.  Mr Utting applies DLOM to the cash and marketable securities of those subsidiaries that hold them because he is valuing the shares and not the assets.  Mr Robinson disagrees and says that they should be included without DLOM.  During his cross-examination Mr Utting repeatedly explained that he was valuing shares in a company not the assets and that the assets were not as good as cash because a purchaser would have to pay money to turn the assets into cash.

164.  I accept that as a general principle what Mr Utting is saying is correct. However, I am here concerned with what is a fair valuation for the purposes of an order under section 168A and, as Mr Joffe, on behalf of Kwan Lai, submitted in relation to the application for Standards in relation to the valuation of Properties, the normally applicable principles may not have been formulated with regard to the peculiar circumstances of a valuation under section 168A. In my opinion where, as I am assuming for the purposes of this part of my judgment, the court is ordering that Kwan Lai purchase the Petitioner’s shares because he has treated him in an unfairly prejudicial way it is appropriate that cash and securities should be valued without DLOM.

Discount for minority interest

165.  It is common ground that, in the case of a buy-out order made in relation to a quasi-partnership company under section 168A, the usual order is that the petitioner’s shares be purchased without a discount for the fact that the interest is a minority interest.  Kwan Lai’s argues for reasons addressed above that the Petitioner has not established a quasi-partnership, and that in the absence of special circumstances (of which there are none, says Kwan Lai, in the present case) a successful petitioner’s minority holding will be valued on a discounted basis: Fowler v Gruber [2010] 1 BCLC 563 and Irvine v Irvine (No 2) [2007] 1 BCLC 445.  I accept the propositions, but not the conclusion that I am invited to reach.

166.  In my view, for the reasons that I have given earlier in this judgment, the relationship between the parties over time did give rise to what can fairly be characterised as a quasi-partnership in the sense that the term is used in the cases and for this reason the price should not be discounted for minority interest.  If I were wrong about that it seems to me that in any event in the circumstances of a case such as the present one in which a family member has been treated in a way, which is unfair and prejudicial and which has led him to conclude that he should leave a business, which he has spent most of his life building, that it is appropriate that his shares should be bought without a discount. Put another way, the facts of this case put it in the special circumstance category.

Allowances for unfairly prejudicial conduct

167.  Paragraph 1 of the Amended Petition sought an account of loss and damage suffered by the Company and the Group as a result of the misconduct of the Kwan Lai and Carrel.  However, in the Petitioner’s opening and closing submissions they deal with this differently:

“The Court will, in general, value the shares as if the unfairly prejudicial conduct has not taken place. This is achieved by valuing the shares as at a convenient date shortly before the unfairly prejudicial conduct began or to make specific allowance in the valuation for the unfairly prejudicial conduct: Hollington, Shareholders’ Rights, §8-62.

If the Court finds that R1 in causing the Group to pay excessive remuneration to his children (R2 and Yvonne) and using the Food‑processing Centre for CT-Ease’s purpose constitute unfairly prejudicial conduct, it is appropriate to make allowances in the valuation to reflect the benefits obtained by R1 (via his children and his company, CT‑Ease).”

168.  It does not follow that unfairly prejudicial conduct necessarily has an impact on the value of a company, although I accept that it commonly will.  For example, although I have decided that the way in which Kwan Lai dealt with the increase in Carrel’s remuneration was unfair this was not because viewed objectively I thought that the remuneration was excessive, it was the fact that it represented a change in the policy for dealing with salaries, which did not take into account adequately the position of the Petitioner and his sons and was handled in a manner inconsistent with past conventions and understandings. Had I made an order for the purchase of the Petitioner’s shares I would not, therefore, have ordered that an allowance be made for payments made to Carrel.

169.  The case of Yvonne is different.  It does not seem to me that there was justification in paying her $45,000 per month for working half day on Saturday on the Group’s accounts.  I would, therefore, have ordered that the valuation take this into account.

170.  So far as the use of the premises are concerned, I accept that it forms part of a pattern of behaviour which was unfairly prejudicial to the Petitioner, however, the evidence does not suggest that it had any adverse financial impact on the Company, I would not, therefore, have ordered that any allowance be made for this matter.

Just and equitable winding up

171.  The Amended Petition includes a claim for a winding-up order on the just and equitable ground as an alternative to relief under section 168A.  The Petitioner opened without any reference to this relief, which appeared to have been included, as is common, out of an abundance of caution rather than because it was thought to be a likely outcome. 

172.  Given my earlier findings in relation to the application under section 168A this claim falls away, but I would add this.  In the final part of the Petitioner’s closing submissions (page 175) it is mentioned for the first time, so far as I am aware, that the Petitioner would prefer a winding-up order if the court accepted Mr Utting’s evidence concerning DLOM.  As matters transpired my findings on DLOM on cash and securities and also in respect of minority interest have been in the Petitioner’s favour.  So far as DLOM on property holdings and YKR Group are concerned these were not matters which I had directed should be determined at this trial and would not properly be taken into account in determining what order to make.

Conclusion

173.  I hope that notwithstanding my decision to dismiss the Petition the estate of the late Petitioner and Kwan Lai are able to find an amicable solution to the differences that caused the unfortunate breakdown in the relationship between the two Brothers.  If, as appears likely, they agree that it is sensible that Kwan Lai acquires his later Brother’s shares from the estate I also hope that my decision on the methods by which the shares in the Company should be valued will assist the Parties in agreeing a price without the need for further recourse to the courts.

174.  I make a costs order nisi that the Petitioner pays the 1^st and 2^nd Respondents’ costs of the Petition.  If any party wishes to challenge the costs order they should give notice of their intention to do so to the court in writing by 5.00 pm on 13 November 2012.