POON YAT WAH v. HUI CHI LEUNG AND ANOTHER

HCMP 2640/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2640 OF 2012

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J U D G M E N T

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1.  Poon Yat-wah and Hui Chi-leung are the 51 per cent and 49 per cent shareholders and the only two directors of Nicewin Garment Limited, a company incorporated in Hong Kong which carries on the business of garment manufacture and supply.

2.  By this originating summons dated 20 November 2012, Poon seeks leave from this court to commence a statutory derivative action on behalf of the company against Hui as the intended 1^st defendant, three former senior staff members of the company as the intended 2^nd to 4^th defendants, and Turbo Best Limited as the intended 5th defendant.

3.  Hui and the company are the two defendants to this originating summons, the company being a nominal defendant.

4.  By way of background, on 15 May 2012, Hui had presented a petition for the winding up of the company on the just and equitable ground, alternatively, for relief under section 168A of the Companies Ordinance (Cap 32), including a buyout order against Poon.

5.  There are three matters in respect of which Poon says claims should be brought against the defendants by the company.  They may broadly be referred to as diversion of the company’s business to Turbo Best, presentation of the winding-up petition against the company and misappropriation of the company’s monies.  I shall deal with these in turn.

6.  As regards the first matter, Poon says Hui had acquired Turbo Best and set it up as a competing business and has, since June 2012, diverted the company’s business to Turbo Best with the assistance of the three staff members who are the intended 2nd to 4th defendants.  Poon contends that the company should sue Hui for, inter alia, breach of fiduciary duties and sue the other defendants for, inter alia, conspiracy to interfere with or to injure the company in its business, and dishonest assistance of breach of fiduciary duties. 

7.  There is no dispute that Hui took steps on 31 May 2012 to acquire Turbo Best and that its shares were transferred to Hui on 1 June 2012 and that, eventually, it did transact certain garment supply business.  However, Hui says that he had set up Turbo Best because, starting in late May 2012, Poon had refused to allow the company to take on certain orders from long-standing customers of the company, including Polo Ralph Lauren, G2000 and William E Connor.  Hui decided to set up Turbo Best to take the orders of the long-term clients which Poon had caused the company to reject or had not allowed the company to take up.

8.  Hui denies that there was any wrongdoing and any intention to make any secret profit.  Appearing on behalf of Hui, Mr Chong specifically acknowledges that the profits made by Turbo Best in relation to the company’s customers belong to and are held on trust for the company and that whenever the company asks for an account, Turbo Best will provide an account.

9.  It seems to me clear from the contemporaneous emails that Hui never sought to conceal the setting up of Turbo Best or the fact that he proposed to use it to take the orders of the customers if the company refused to take them.  It is also clear that he was urging Poon to agree to let the company take the orders in question but Poon refused to do so or ignored him.  For example, the email of Hui to Poon dated 1 June 2012 stated:

“However, I, unlike you, Mr Poon, have kept bearing in mind my moral duties as a boss as well as director’s duties towards Nicewin and the members of staff. I therefore give you formal notice in that :-

…

2. Polo Kids through me offered to give business to Nicewin. I sent numerous emails to you urging you to change your mind, urged you to allow Nicewin to take the business by stopping your wrongful refusal but you ignored me.

You kept ignoring me even after I had convinced Polo Kids to extend their deadline of accepting orders to 9am 31st May.

3. Upon Polo Kids’ request made to me to take care of their interest and hence the orders, I, after the deadline given to Nicewin and you have expired, have set up a company namely “Turbo Best Ltd” to take the business.

4. Unlike you, I give express notice as I am now doing to Nicewin and you Mr Poon instead of, keeping others in dark;

5. Though I do not regard my taking Polo Kids order after your refusal will be considered to be “competing with Nicewin” when there was no chance for Nicewin to get Polo Kids order after the deadline and extended deadline have expired, I have never forgotten my role as Nicewin boss and director and I shall put the account ledgers of Polo Kids and others, and in fact all the account ledgers income and expenses of Turbo Best into clear books, whereas I SHALL NOT TAKE ANY PROFIT IN TURBO BEST UNTIL THERE IS A CHANCE FOR THE COURT TO DECIDE THE PROFIT OF TURBO BEST or the dispute is finalised between you and me. That is a clear DECLARATION I make to the BoD of Nicewin;

…

7. You must remember Poon, it is NOT your Nicewin but OUR NICEWIN, before the Winding-up Petition is heard by the Court.

After that it may possibly become MY NICEWIN though it might be yours. Afterall, I must preserve my own assets, I must protect Nicewin;

8. From now on, IF YOU REFUSE TO take in any order or business, EITHER REFUSE BY EXPRESS REFUSAL OR MERELY KEEPING YOUR MOUTH SHUT AS YOU USUALLY DO RE EMAILS ... I shall take the business to TURBO BEST if I am requested by the customers to do so. I shall, of course, keep clear books and accounts and ledgers WITHOUT TAKING ANY PROFIT until there is a chance for the Court to make a ruling or the disputes between you and me resolved, whichever is earlier;

9. Whenever before there is a ruling of the Winding-up Petition you realise you are wrong, come back and take the business. I am pleased to try my best to fulfil my obligations as one of the bosses of Nicewin to procure to obtain the orders and business to Nicewin, of which may belong to me finally.

Dont worry, it may be yours, so please DO NOT HARM NICEWIN ANYMORE!!!  POON, WAKE UP!!!!”

10.  Mr Suen says that the emails are not clear enough indications that Turbo Best would hold the profits on trust for the company and that Hui did not accede to an open offer made by Poon in his solicitors’ letter dated 4 March 2013. 

11.  As regards Hui’s emails, they were not drafted by lawyers in legal language and even if there was any uncertainty, Poon never responded to them or sought clarification at the time in any way.  As for the open offer by Poon, it was an invitation by Poon to Hui to consent to judgment in terms of the draft statement of claim for, inter alia, damages for breach of fiduciary duties, breach of trust, breach of fidelity and good faith and damages for conspiracy.  I do not think that much can be read into Hui’s refusal to submit to judgment in those terms.

12.  In any event, the matter has, I think, been put beyond doubt by Mr Chong’s acknowledgement as stated above and also in his skeleton argument on behalf of Hui (who is the sole shareholder and director of Turbo Best) in which Mr Chong states as follows:

“17. ... D1 does not dispute that the intended 5^th Defendant was set up solely for the purpose of accepting the (rejected) orders from the said Ralph Lauren and that any profit to be derived from its manufacture works would be held upon trust for the company.

18. ... The profit to be derived from such manufacturing works would be held upon trust and benefit for the Company …

19. ... D1 had made himself clear that, consequential upon P refusing to accept orders from the said Ralph Lauren and having regard to the petition for winding up of the Company:-

(a) the manufacturing works to be undertaken by it would be carried out by the intended 5^th Defendant for the benefit of the Company;

(b) neither he nor the intended 5^th Defendant would take any benefit to be derived from such manufacturing works; and

(c) any profit to be derived from such manufacturing works would go to the pocket of the Company.”

13.  It is true that equity takes a prophylactic approach towards breach of fiduciary duty, as shown in cases such as Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (Note) and Boardman v Phipps [1967] 2 AC 46.  But there is no longer any issue (if there ever was) that Turbo Best holds the profits from the relevant business on trust for the company.  On this basis, there seems to me to be no serious question raised by the intended claim for breach of fiduciary duties that requires adjudication by the court. Moreover, in these circumstances, there is little purpose in requiring the company to expend large sums for pleading and pursuing a claim the result of which would be to establish a constructive trust, when Hui and Turbo Best have accepted there is an express trust.

14.  Furthermore, the setting up of Turbo Best has been done entirely openly.  It seems to me the questions of conspiracy and dishonest assistance by the intended 2nd to 4th defendants fall away.  In any event, given that damage is the gist of these claims, it is difficult to see how they are viable in relation to the diverted business, given that it was Poon who decided the orders from the clients in question should be turned down and that Turbo Best and Hui have acknowledged that the profits from such business are held for the company.

15.  In these circumstances, I am not satisfied there is now a serious question to be tried or that it will be in the interests of the company for leave to be granted to Poon to bring proceedings on its behalf in respect of this matter.

16.  I turn therefore to the second matter, presentation of the winding-up petition against the company (which is coupled with a petition for relief under section 168A of the Companies Ordinance).  If I understand him correctly, Mr Suen does not really push this ground and asks me to adjourn the application insofar as it concerns this matter.  As at present advised, I do not think that the application for leave to bring a statutory derivative action against Hui for presenting the petition has a proper basis.  The basis was put in the draft statement of claim on the ground of breach of fiduciary duties.  However, Hui presented the petition as a contributory, not as a director.  A director has no standing to present a petition to wind up the company.  Mr Suen has not been able to show me any authority to suggest that a contributory who happens also to be a director is constrained in the exercise of his right to apply for winding up by virtue of his duties as a director.  Nor can he point to any legal basis for saying that a petitioner may be exposed to a suit for breach of fiduciary duties qua director by having presented a petition as a contributory to wind up the company.

17.  Secondly, it seems to me the winding-up petition is quintessentially a shareholders’ dispute.  It is well established on the authorities that a company should not take part in and expend substantial funds on such a petition.  To suggest that Poon should pursue a statutory derivative action in the name and on behalf of the company, using the company’s financial resources, against Hui for his presentation and continuing conduct of the petition would be to circumvent this long-standing principle.  Mr Suen has not been able to point to any ground for doing so.

18.  In these circumstances, I am not prepared to grant leave to pursue a statutory derivative action to complain about the presentation of the petition.

19.  I come now to the third matter.  The case raised against Hui is that, between 24 December 2004 and 8 June 2012, he had withdrawn HK$4.162 million from the company.  It is said that even on the basis of the explanation put forward by his solicitors in their letter of 29 August 2012, only HK$3.698 million was money due to the staff in relation to the Indonesian operation and that HK$464,000 was unaccounted for.

20.  Moreover, Poon alleges that only HK$1.529 million was actually paid to the staff, leaving the sum of HK$2.633 million not accounted for.  However, the Indonesian staff records given to Hui by the company were incomplete.  They are apparently documents of the company prepared by the accounting staff under the supervision of Poon.  It is also not wholly clear how those documents are to be read and how Poon has derived the figures of HK$3.698 million and HK$1.529 million from those records.  In these circumstances, it seems to me that the appropriate course for me is, as Mr Suen suggests, to adjourn this part of the application sine die with liberty to restore.

(Submissions on costs)

21.  I will reserve costs.

(Godfrey Lam) Judge of the Court of First Instance High Court