CHENG ERIC TAK KWONG v. EMAGIST GROUP LTD AND OTHERS

HCCW 306/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) NO 306 OF 2012

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J U D G M E N T

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Introduction

1.  This is the hearing of the Respondents’ application under Order 18 rule 19 of the Rules of the High Court to strike out the petition to wind up Emagist Entertainment Limited (“Emagist HK” or “the Company”), the 3^rd Respondent herein, on just and equitable grounds under section 177(1)(f) of the Companies Ordinance or for an order        to buy-out the Petitioner’s shares in the Company by the 1^st and 2^nd Respondents as a relief for unfair prejudice to the minority under section 168A.  The petition is founded on allegations of mismanagement and misappropriation of the Company’s funds by the 2^nd Respondent.  The petition also alleges breach of director’s duty by the 2^nd Respondent and breakdown of relationship of trust and confidence, based on the same allegations of mismanagement and misappropriation.

2.  By an open letter dated 25 February 2013, the Petitioner’s former solicitors indicated to the Respondent’s solicitors that the Petitioner will not be pursuing the relief of winding up.  At the hearing, Ms Janine Cheung, counsel for the Petitioner confirms that that remains the Petitioner’s position and the Petitioner will accede to an order striking out the prayer for winding up in the Petition.  Thus, the parties’ dispute in the petition is narrowed down to unfair prejudice to the minority, valuation and buy‑out of the Petitioner’s shares in the Company and, pending the determination of the petition, directions for the proper management of the Company’s business  for the protection of its assets.

3.  The Respondents’ application to strike out the petition is on the grounds that the petition was made mala fides and an abuse of the process of the court.  Their arguments rest on two basic planks: first, that the petition was taken out with the express purpose of disabling the Company (the mala fides ground); and, second, that the Petitioner, having sold all his shares in the Company at the time of presentation of the petition, has no locus standi to present the petition as a member with respect to the remedy for buy‑out sought under section 168A (the locus standi ground). 

Background

4.  It is common ground that the 2^nd Respondent, the Petitioner and Simon Lo acquired a shelf company incorporated in Hong Kong and changed its name to “Emagist Entertainment Limited” in May 2009.  They were the sole shareholders and directors and were respectively allotted 100, 50 and 50 shares in the Company.  At around the same time, the 2^nd Respondent employed Ryan Ip, Alvin Law and Terry Man to develop an online role playing game called “Ninja Saga” for Facebook which was to be injected into a corporation to be incorporated, ie the Company. He promised to give them some equity in that corporation.  Ninja Saga turned out to be very profitable.  By the end of 2010, the Company accumulated a net profit after tax of over $17 million.  There are some disputes as to the respective roles of the 2^nd Respondent, the Petitioner and Simon Lo in the Company; whether the Petitioner and Simon Lo had provided consideration for their shares and for whom they hold the shares; the remuneration promised to be given to the Petitioner; and the equity promised to be given to Ryan Ip and others. But those disputes are not relevant for the purpose of the striking out application.

5.  In early 2011, the Petitioner introduced a potential Taiwanese investor, Cherubic Ventures Partners, Inc (“Cherubic”) to invest in the Company.  The negotiation was conducted mainly between the 2^nd Respondent, the Petitioner, and Matt Cheng on behalf of Cherubic.  On or around 18 May 2011, it was agreed to form a corporate structure with a Cayman Island company holding the Company and other subsidiaries to be incorporated and that Cherubic would invest US$1 million for 2.5% interest in that Cayman Island company to be incorporated. Subsequently on 1 June 2011, Emagist Group Limited (“Emagist Cayman”), the 1^st Respondent herein, was incorporated to fill that position.  Cherubic, Emagist Cayman and Funracing Investment Limited (“Funracing”), which is a company wholly owned by the 2^nd Respondent, entered into a tri‑parte share purchase agreement under which Emagist Cayman would allot 750 of its shares representing 2.5% of its issued capital to Cherubic for US$1 million to be paid to Funracing (“the 1^st Share Purchase Agreement”).  The Petitioner disputes that he had knowledge about this corporate structure.

6.  During the course of negotiation of the 1^st Share Purchase Agreement, there were some discussions between the 2^nd Respondent and the Petitioner as to who was to sell the 2.5% interest in Emagist Cayman to Cherubic.  There are some differences between the versions given by the Petitioner and the 2^nd Respondent, but they have no dispute as to the outcome of the discussions.  According to the Petitioner, he would sell 2.5% of his shareholding in Emagist Cayman to Cherubic for US$1 million; the 1^st Respondent and the Petitioner will each receive US$500,000; and the Petitioner will be paid a monthly salary of US$10,000 for 12 months by the Company or Emagist Cayman.  At the time of the agreement, Emagist Cayman was not yet incorporated and the Petitioner did not have any shares in Emagist Cayman to sell.

7.  Emagist Cayman was subsequently incorporated on 1 June 2011.  A total of 30,000 shares of US$1 each were allotted as follows:

Funracing	20,808	(69.3%)
Cherubic	750	(2.5%)
Petitioner	5,250	(17.5%)
Simon Lo	480	(1.6%)
Ryan Ip	897	(2.99%)
Terry Man	108	(0.36%)
Alvin Law	1,707	(5.69%)

The Petitioner accepts that he had been promised 20% of the shares in Emagist Cayman and as he had sold 2.5% to Cherubic, his allotment was appropriate.  But, instead of Cherubic buying the shares in Emagist Cayman from Funracing and Funracing replenishing the sold shares from the Petitioner, what actually happened was that the Petitioner’s shares in Emagist Cayman were sold to Cherubic direct.  But nothing actually turned on that convoluted sale. There are some disputes as to whether Ryan Ip and the others were allotted the amount of shares promised.  Those disputes may be relevant for the buy‑out order sought, but not relevant for the purpose of the present striking out application.

8.  The sale was completed and the Petitioner duly received his share of US$500,000; but he claims that he was not paid his salary of US$120,000.  Whether there was any breach of that agreement is also not relevant for the purpose of the present application.

9.  On or about 12 July 2012, the Petitioner asked the 2^nd Respondent to sign a receipt acknowledging that the US$500,000 he received from the 2^nd Respondent was for payment of his shares sold to Cherubic.  Instead, the 2^nd Respondent sent him a soft copy of the 1^st Share Purchase Agreement and asked him to modify, sign and return, which he did (“the 2^nd Share Purchase Agreement”).

10.  On 25 June 2011, 9,800 shares in Emagist HK were allotted to Emagist Cayman.  According to the Respondents, an issue which is in hot dispute, on 3 October 2011, the Petitioner, the 2^nd Respondent and Simon Lo transferred all their shares in the Company to Emagist Cayman making the Company a wholly owned subsidiary of Emagist Cayman.

11.  That was the position in June 2011.  Then, a series of events occurred since August 2012 which led to the Company commencing HCA 1659 of 2012.  I shall deal with those events in detail when I come to consider the Respondents’ argument under the first plank.  But it would be more convenient to deal with their argument under the second plank first.

Use of affirmations used in other proceedings

12.  Before considering the merit of this application, I shall first deal with Mr Sarony SC’s objection to the intended use by the Petitioner of the affirmations of his co‑defendant, Rayan Ip, in the injunction proceedings in another action namely, HCA 1659 of 2012.  In that action, the 3^rd Respondent, as plaintiff, sought and were granted a mandatory injunction requiring the Petitioner and others, including Ryan Ip, to return Ninja Saga and other properties belonging to the Company.  For the purpose of resisting the 3^rd Respondent’s application for injunction in that proceeding, Ryan Ip made an affirmation of 174 pages including exhibits.  The Petitioner seeks to use and rely on Ryan Ip’s affirmation filed in that proceeding for the purpose of resisting the Respondents’ application in this proceeding, without having Ryan Ip to make another affirmation.  In paragraph 87 of the Petitioner’s 3^rd affirmation, he sought to introduce Ryan Ip’s affirmation as follows:

“ I crave leave to refer to and rely on Ryan Ip’s very comprehensive affirmation dated 5^th October 2012 filed in HCA 1659/2012. I obtained the consent of Ryan Ip to produce his affirmation in these proceedings.”

13.  Ms Cheung submits that it is open to the Petitioner to adopt in this proceeding what Ryan Ip said in his affirmation in another proceeding.  She argues that the Petitioner is not relying on what he heard from Ryan Ip but has fairly listed out the evidence which he relies on.  The Petitioner knows it is his burden to call Ryan Ip, if the matter proceeds to trial, to prove the allegations in his affirmation.  Ms Cheung argues that this is not a case of the Petitioner relying on Ryan Ip’s evidence but not calling him at trial.  She submits that the objection is purely technical and it lies ill in the Respondents’ mouth to object to the use of Ryan Ip’s affirmation as they knew the allegations made by Ryan Ip, knew the case they have to meet and have prepared an affirmation to answer that case. She says that the Petitioner was being lazy in not getting Ryan Ip to make another affirmation but that caused no prejudice to the Respondents.

14.  Mr Sarony SC objects to the use of Ryan Ip’s affirmation on the ground that the evidence adduced in one case is not admissible in another.  In addition, he argues that the use of Ryan Ip’s affirmation does not conform to the rules of evidence.  In introducing Ryan Ip’s affirmation, the Petitioner did not say he adopted what was said in the affirmation, that he agreed with the evidence of Ryan Ip or that what Ryan Ip said is his evidence.  The Petitioner did not have first hand evidence to support the allegation made in Ryan Ip’s affirmation.

15.  Neither counsel can refer me to any authorities in support of their respective propositions.  I think the starting point to consider this issue is Order 41.  Affidavits to be used in a hearing have to comply with Order 41. Rule 1 sets out the form of affidavit and requires, among other things, that the cause or matter be stated and that the affidavit must be expressed in the first person.  Rule 5 requires that an affidavit may contain only such facts as the deponent is able of his own knowledge to prove, though an affidavit sworn for the purpose of being used in interlocutory proceedings may contain statements of information or belief with the sources and grounds thereof.  These rules are made for a purpose.  The purpose is to enable interlocutory and summary proceedings may be disposed of efficiently by affidavit evidence without the need for time and expenses in calling live witnesses.  For that end, affidavits must comply with the rules.  This is because affidavits complying with the rules carry with them the appropriate and necessary safeguards.  These safeguards include, among other things, that the affidavit shall be sufficient to state the matter or cause and the parties to which the affidavit relates, that the affidavit must be made on oath and may only contain such facts which the deponent is able of his own knowledge to prove.  A deponent will face certain sanction if he gave false evidence on oath.  The requirements under Order 41 are the basis on which affidavit evidence is permitted to be used.  They should not be lightly disregarded as being technical.

16.  By referring to or relying on somebody else’s affidavit in another proceeding, without requiring that deponent to make an affidavit, the assurance or safeguard under the Order will be lost.  The deponent did not make the affidavit for the purpose of another proceeding.  He will not subject to any sanction for giving false evidence.  On the other hand, the user could circumvent the restriction to depose only to facts which he is able of his own knowledge to prove.  He will be subject to no sanction, if the deponent of the affidavit was not telling the truth.

17.  As submitted by Mr Sarony SC, there is no reason why Ryan Ip was not called upon to give another affirmation.  The Petitioner has plenty of time since 22 October 2012, when he made his affirmation, to arrange for Ryan Ip to give another affirmation for the purpose of this proceeding.  He has been alerted of Mr Sarony SC’s objection.  Adverse inference may be drawn for his failure to produce a proper affirmation. Laziness is not a good reason for departing from the rules, still less should the court condone the laziness of a party by admitting an irregular affirmation or admitting part of his affirmation which contains assertions of facts which he cannot speak to out of his own knowledge or belief.  It is futile for counsel to argue that the assurance lies in the possibility that the Petitioner will fail if he cannot prove those facts at trial.  If the Petitioner cannot prove those facts now by affidavit evidence, the case should go no further on the basis of the facts alleged in that affirmation.  For these reasons, I disallow the use of Ryan Ip’s affirmation.

Locus standi ground

18.  The remedy of buy‑out under section 168A(1) is only available to members of the company but not to past members.  Past members may seek damages under section 168A(2) if the affairs of the company at the time when he was a member was conducted in a manner unfairly prejudicial to the interests of the then members generally or to some part of the then members including himself. The remedy of buy‑out under section 168A(1) is sought on the basis that the Petitioner was and still is a member of the Company.  No application has been made to amend the petition to include an alternative claim by a past member under section 168A(2). In fact, I am unable to see how the Petitioner can do so.  If an application to amend is made, it would be diametrically opposed to the Petitioner’s case that he had not transferred the shares in the Company. It is therefore fundamental for the Petitioner to prove that he was a member at the time of the unfairly prejudicial conduct complained of and was still a member at the time of presenting the petition.

19.  The Respondents’ case is that the Petitioner was a party to the discussions about the corporate structure to be formed when Cherubic joined in their business.  He well knew that under the new corporate structure the Company will become a wholly owned subsidiary of Emagist Cayman and as a result of the restructuring all the shares in the Company then held by the 2^nd Respondent, the Petitioner and Simon Lo will be transferred to Emagist Cayman in exchange for shares in the parent company.  The Petitioner, having so transferred his shares in the Company in exchange for the shares in Emagist Cayman, has no locus standi to present the petition and likewise the court cannot grant him the remedy he sought.

20.  The Petitioner denies that he had transferred his shares in the Company to Emagist Cayman.  His case is that he has no knowledge of the transfer.  He even alleges that the signatures on the bought and sold note and instrument of transfer which effected the transfer and which purported to be his were forged.  Ms Cheung submits that this dispute of fact is one which could not be resolved without a proper trial.

21.  It is the Petitioner’s own evidence that he introduced Cherubic to the 2^nd Respondent and he took part in the discussions about the corporate structure to be used as their new investment vehicle.  Both he and the 2^nd Respondent considered the corporate structure involving the use of a Cayman Island holding company proposed by the 2^nd Respondent’s friend, Victor, sensible and proposed to use it when discussing with Matt Cheng.  For that purpose, the Petitioner sent a draft structure incorporated in powerpoint format to the 2^nd Respondent to seek Victor’s verification.  Upon receipt of a favourable reply from Matt Cheng, the Petitioner sent a revised structure to Matt Cheng by email on 20 April 2011 showing the Company together with nine other Emagist companies in various other countries to be formed being directly held under a holding company, Emagist Cayman.  In paragraph 53 of his 3^rd affirmation, the Petitioner specifically said that this new structure was to “replace” Emagist HK.  In the light of what he said in his own evidence, it lies ill in his mouth to say that he had no knowledge of the corporate structure to be used; that the Company would as a result of the restructure become a wholly owned subsidiary of Emagist Cayman; and that his shares in the Company would be transferred to Emagist Cayman.

22.  The Petitioner denies he had knowledge about the transfer of his shares to Emagist Cayman.  By a email issued on 26 September 2011, the Company’s then company secretary, Tesla Tsang, sent three sets of share transfer documents, comprising of an instrument of transfer and a bought and sold note, to Georgia Lam, an accounting officer of the Company, asking him to arrange for them to be signed by the Petitioner, the 2^nd Respondent and Simon Lo.  The 2^nd Respondent signed the documents on his own behalf in respect of his 100 shares in the Company as transferor and on behalf of Emagist Caymen as transferee in respect of all the three sets of documents.  He could not recall whether the Petitioner’s signature was on the set of document when he signed.  But the following emails are relevant.

23.  At 1:22 pm on 28 September 2011, the 2^nd Respondent wrote to Jennifer Yu, an employee of the Company, and copied to Tesla Tsang:

“no worries, i hv already signed and waiting for simon’s signatures. Has he done it yet? Thx.”

At 1:23 pm on 28 September 2011, Jennifer Yu replied and copied to Tesla Tsang:

“Simon had signed last night.”

At 1:55 pm on 28 September 2011, Tesla Tsang wrote to the 2^nd Respondent:

“I waited for Simon to your office last night and have got his signature and the documents. Now, I have been still waiting for Kitty’s copies of audited financial statements. Once I have got the copies and will proceed the share transfer immediately.”

24.  This chain of emails shows that the signing exercise commenced on 26 September 2011 with Tesla Tsang giving the three sets of transfer documents, comprising of an instrument of transfer and a bought and sold note, to Georgia Lam to arrange for signatures.  By 1:22 pm on 28 September 2011, it seemed that the only signature outstanding was Simon Lo’s. Impliedly, the Petitioner had signed.  When it was confirmed that Simon Lo had also signed, Tesla Tsang said that the only outstanding documents were the audited financial statements and once she obtained those documents, she would proceed with the share transfer. Again, this is an implied confirmation that the Petitioner had signed the share transfer documents and that the documents were in Tesla Tsang’s possession.

25.  Then, at 6:41 pm on 3 October 2011, Tesla Tsang wrote to the 2^nd Respondent, the Petitioner and Simon Lo:

“Attached herewith is the stamped [bought] and sold note for the transfer of shares of Emagist Entertainment Limited to “Emagist Group Limited”.

  Please be noted that the trade date of the shares transferred is on 03 October 2011.

  From now on, Emagist Group Limited has become the sole shareholder of Emagist Entertainment Limited (EEL), in which is wholly owned the EEL with 10,000 shares.”

26.  The Petitioner spent pages in his affirmation denying knowledge of the transfer and that he signed the transfer documents.  He said he did not recall receiving or reading Tesla Tsang’s email dated 3 October 2011 and doubted its authenticity.  He said in the alternative that if there was that email, he might have overlooked it and he did not know who Tesla Tsang was.  He said furthermore that he was leaving for Finland that evening and could not have signed the transfer documents within those few hours between the date of the above email and his departure.  He exhibited copies of his passport as supporting evidence.  He said that the alleged signatures of his on the transfer documents were forged and he had reported the matter to the police.  Ms Cheung submits that there is a genuine dispute of fact which cannot be resolved except at trial.  Yet, when tested against the incontrovertible evidence, the Petitioner’s assertion falls into pieces.

27.  It is amply clear from the chain of emails on 28 September 2011 that the signing exercise commenced on 26 September 2011 with Tesla Tsang giving the three sets of transfer documents to Georgia Lam to arrange for signatures.  By 1:22 pm on 28 September 2011, it seemed that the only signature outstanding was Simon Lo’s.  Impliedly, the Petitioner had already signed by then.  When it was confirmed that Simon Lo had also signed, Tesla Tsang said that the only outstanding documents were the audited financial statements and once she obtained those documents, she would proceed with the share transfer.  Again, this is an implied confirmation that by that time the Petitioner had already signed the share transfer documents and the documents were in Tesla Tsang’s possession.  Tesla Tsang’s email of 3 October 2011 was a confirmation that the last leg of the exercise, ie the preparation of the audited financial statements, was also completed and the share transfers were to be effected as of 3 October 2011.  It is important to note that in the email, Tesla Tsang attached a pdf image of the stamped bought and sold note.  The bought and sold note could not have been stamped before they were duly signed.  This shows that the bought and sold note had already been signed by the Petitioner before Tesla Tsang sent the above email.  Tesla Tsang was not asking the Petitioner to sign the bought and sold note at 6:41 pm on 3 October 2011.  The Petitioner’s evidence about departing for Finland, never seeing Tesla Tsang’s email or having overlooked it, the forged signature and complaint to the police etc was given to mislead the court, divert the court’s attention from the evidence in its the proper context and at the same time to boost his credibility.  Based on this chain of emails alone, there is overwhelming evidence that the Petitioner had signed the instrument of transfer and the bought and sold note and had knowledge of the transfer of his shares in the Company to Emagist Cayman.

28.  It is curious that while Simon Lo was among the Petitioner’s camp and, in a similar position as the Petitioner, had previously held 50 shares in the Company, he made no complaint about the transfer of his shares in the Company to Emagist Cayman and was not a party to these proceedings.

29.  The Petitioner’s conduct that follows also confirmed his knowledge that the Company is a wholly owned subsidiary of Emagist Cayman.  On 14 April 2012, Yan Lau, Emagist HK’s new company secretary, sent him a corporate structure chart pursuant to their conversation.  The chart shows unequivocally that the Company is a 100% wholly owned subsidiary of Emagist Cayman.

30.  On 12 July 2012, the Petitioner asked the 2^nd Respondent to sign a receipt to acknowledge the Petitioner’s receipt of US$500,000 for his sale of 2.5% of his shares in Emagist Cayman: see paragraph 9 above.  At the suggestion of the 2^nd Respondent, he signed the 2^nd Share Purchase Agreement in respect of the sale of those shares by modifying the 1^st Share Purchase Agreement.  In both agreements, it is recorded that the Company was a wholly owned subsidiary of Emagist Cayman.

31.  The Petitioner emphasises the fact that according to the Company’s annual return dated 25 March 2011, he was still a shareholder of 50 of its shares and it was only in the amended annual return filed on 22 August 2012 that his shareholding was recorded as nil.  He argues that the inference is that the amended return was filed by the 2^nd Respondent to conceal the truth.  I think on the totality of the evidence such inference could not be drawn.  It is more likely than not that the un‑amended return contained an omission which was what the amended return sought to correct.

32.  I agree with Ms Cheung that the following basic principles are applicable to a striking out application.  First, the burden is on the applicant, ie the Respondents, to establish that it is plain and obvious that the petition is bound to fail and hence an abuse of the process of the court. Second, the court will assume the facts alleged by the Petitioner and his supporting affidavits are true and it is not permissible to try an action on affidavit where the facts and issues are in dispute.  But this principle is not to be rigidly or blindly applied.  As in the case of a party resisting an Order 14 application, the assertion must be believable in the light of so much of the evidence presented in court which is not in dispute: see Re Safe Rich Industries Ltd [1994] HKLY 183.  Failing to recognise this will enable a party to abuse the process of the court under the pretext of dispute of fact.  Third, if an application to strike out involves a prolonged and serious argument the judge should, as a general rule, decline to proceed with the argument unless he, not only harbours doubts about the soundness of the pleading but, in addition, is satisfied that striking out will obviate the necessity for a trial or will substantially reduce the burden of preparing for trial or the burden of the trial itself.

33.  In conformity with the mutual understanding relied on by the Petitioner, the 2^nd Respondent allotted him 20% of the shares in Emagist Cayman, of which 2.5% had been sold to the 2^nd Respondent to replenish the same amount of shares sold to Cherubic under the 1^st Share Purchase Agreement.  Cherubic paid US$1 million for 2.5% of the shares in Emagist Cayman.  On that basis, the Petitioner’s 20% shareholding would have worth US$40 million.  The Petitioner paid nothing for the allotment of these very valuable shares.  Yet, he says he is entitled to these shares and at the same time to retain his 50 shares in the Company, which according to his design is Emagist Cayman’s wholly owned subsidiary.  He says that in the face of the fact that he took part in the discussions about the corporate structure of the business with Matt Cheng, the acknowledgment by him that the Company is a wholly owned subsidiary of Emagist Cayman in the various emails and corporate structure charts he sent out to others, in the 2^nd Share Purchase Agreement of which he was a party, in the share transfer instrument and the bought and sold note which he denied were signed by him.  It is also puzzling that while the Petitioner admits that Emagist Cayman was incorporated to hold the Company, yet he maintains he was not aware that he had transferred all his shares in the Company to Emagist Cayman.  While it is inappropriate for the court to resolve dispute of fact in this kind of proceeding, the Petitioner’s assertion is so contradictory with the incontrovertible evidence that it cannot be true.  It would be artificial for the court to close its eyes to the obvious under the pretext of dispute of fact.  The Petitioner has no shareholding in the Company since June 2011.  There is no genuine dispute of fact.

34.  The Petitioner’s fall‑back position is that even if he had no shares in Emagist HK, the misconduct complained of started from at least February 2010 when he was a member and continued to the date of the petition.  That would give him locus standi to sue.  That may entitle him to make a claim for damages under section 168A(2) but not to a buy‑out of shares which he does not have. There is no application to amend the petition. 

35.  Ms Cheung submits, quoting Re Citybranch Group Limited (Rackind & others v Gross & others) [2005] 1 WLR 3505, that in looking into the affairs of a company, the court should have regard to the overall business realities of companies which may entail examination of the subsidiaries and parents of companies and their shareholders and directors.  If those affairs have been conducted in a manner unfairly prejudicial to the interests of members, whether they are current or past members, there is locus standi on the part of the aggrieved members to seek redress under section 168A. She also refers to In Re Dernacourt Investments Pty Limited (1990) 2 ACSR 553 at 556 in which Powell J held that the words “affairs of a company” are extremely wide and should be construed liberally with business realities to include conduct of a holding company or such of its directors who happen to be directors of the relevant subsidiary.  This principle would assist a shareholder of subsidiary company if the affairs of the holding company were conducted in a way which is unfairly prejudicial to the minority shareholders of the subsidiary or vice versa.  But, the Company is a wholly owned subsidiary of Emagist Cayman.  Emagist Cayman is entitled to conduct the affairs of its wholly owned subsidiary in whatever way it likes.  Such argument may be employed in a petition to wind up Emagist Cayman.  But on the pleaded facts of this petition, I fail to see how the affairs of a company, whether of Emagist HK or of Emagist Cayman, and however liberally construed, can assist a petitioner who has no locus standi to present a petition.  Ms Cheung is just beating a dead horse.

36.  I therefore come to the conclusion that the Petitioner has failed to show he has locus standi to present the petition and that he is not entitled to the buy‑out order sought.  On this ground alone, the petition for winding up and for relief may be struck out as scandalous, frivolous or vexatious and disclosing no reasonable cause of action for winding up and relief.  Furthermore, the Petitioner certainly knew he had transferred his shares in the Company to Emagist Cayman.  It is a clear abuse of the process of the court for someone to present a petition to wind up a company or to seek other remedies of a member, knowing that he is not a member of that company. On this ground, the petition for winding up and relief may be struck out as an abuse of the process of the court.

The mala fides ground

37.  The Respondents’ case under this ground is that the petition was taken out at the height of a series of actions by the Petitioner and others with the express purpose of disabling the Company as part of a plan in which the Petitioner played a significant role, to appropriate, unlawfully, the Company’s popular and highly profitable online role playing game Nina Saga on Facebook.  According to the 2^nd Respondent, in March 2012 the Petitioner demanded a salary of US$20,000 with back payment for 36 months.  He refused and the Petitioner became angry.  On 8 August 2012, he went on a business trip to Europe and was scheduled to return on 22 August 2012.  During his absence, the Petitioner launched a coup d'état against him.  Having been tipped off by an employee, the 2^nd Respondent returned to the office unannounced on 20 August 2012.  Hereunder is an account of what happened during his absence.  The account is not challenged by the Petitioner.

38.  The Respondents were able to recover from the Company’s computer three emails to some undisclosed recipients issued from the Petitioner’s email account with the Company on 4 August 2012, which was a blue‑print for the planned hijack of Ninja Saga.  The plan included freezing the Company’s bank account, migrating Ninja Saga out of the Company’s control and sending an audit request planned to be delivered to the 2^nd Respondent during his absence from Hong Kong.  The audit request was in the form of a solicitors’ letter dated 13 August 2012 sent to the 2^nd Respondent’s home address giving him 7 days on or before 20 August 2012 within which to comply while he was out of Hong Kong.

39.  In the first of those three emails issued at 8:14 pm, the Petitioner wrote:

“BOD

8/5 send meeting notice – Eric (3 separate email)

8/8 Peter will prepare audit request, etc.

8/9 Eric send audit request to Bon (HK) and Emagist (Cayman); Matt send audit request to Emagist (Cayman) – Emagist and Bon must provide audit report within X days (confirm with Peter), otherwise, we will request company dissolvent and freeze company bank account.

8/20 BOD meeting, need Matt, Peter, Simon, company secretary – Alvin and Ryan make sure Simon will be there. Meeting target 1) add signature to BOC and BEA bank accounts (need 2 signatures for all checks and payment rules), 2) sign Ninja Saga cooperation termination agreement

8/20 Eric, Simon (if agreed) will go to banks and execute.

40.  In the email issued at 9:26 pm, the Petitioner wrote:

“Nether Games

8/7 Alvin to form Nether Games International in UK and Nether Games HK Ltd (tbd)

8/8 or before, Ryan and Alvin game schedule and total budget

8/17 or before, Open bank account Alvin and Eric

8/10 or before, Confirm new office space Alvin and Ryan

8/17 or before, Confirm Internet, electricity, furniture, computer and software etc Alvin and Ryan

8/17 or before, arrange insurance, etc. Eric

8/20 alvin and Ryan to speak to Emagist team of new company, sign mutual employment termination agreement, and new employment agreements

8/20 Ryan ready company structure, bonus plan, etc.

8/21 Eric, Alvin, Matt to visit Raytoon to confirm games.

mm/dd Eric, Alvin, Ryan Funding requirement”

41.  In the email issued at 9:59 pm, the Petitioner wrote:

“Ninja Saga

8/7 Alvin to form ABC International (BVI) and ABC UK (tbd)

8/8 confirm with Peter and

8/17 or before, Open bank account Alvin and Eric

8/17 or before, prepare server for migration Alvin, Ryan

8/20 change Facebook account after BOD and switch server – Ryan

8/17 or before, ad company new account – Alvin”

42.  In these emails, obviously, “Bon” refers to the 2^nd Respondent; “Eric” refers to the Petitioner; “Alvin” refers to Alvin Law; “Ryan” refers to Ryan Ip; and “Raytoon” refers to a company set up by the 2^nd Respondent in the Peoples’ Republic of China.

43.  Then the events unfolded as enshrined in these emails.  On 10 August 2012, Nether Games (Hong Kong) Limited was incorporated with the Petitioner, Alvin Law and Ryan Ip as directors.  The three of them, Terry Man and another are its shareholders.

44.  Over the night of 19 to 20 August 2012, the suites of programmes comprising Ninja Saga were copied and removed from the Company’s controlled servers. This is not disputed.  Those programmes left on the Company’s controlled servers were deleted.  The operation of the Company came to a halt.

45.  On 20 August 2012, the 2^nd Respondent appeared at the Company impromptu.  The Petitioner turned up later with someone whom he introduced to the 2^nd Respondent as a solicitor.  But they mentioned nothing about the audit request.

46.  Later that morning, the Petitioner and Simon Lo attempted to replace the 2^nd Respondent as the sole signatory of the Company’s account with the Bank of East Asia and the Bank of China, but were unsuccessful.  Then they caused the accounts to be frozen.

47.  That afternoon, two employees of the Company showed messages on their mobile telephones to other colleagues asserting that there was a serious dispute between the partners and that all bank accounts of the Company were frozen and suggesting them to go to the nearby ball court at 7 pm to find out more.  That evening, Ryan Ip, Alvin Law and Simon Lo met up with nearly all the employees of the Company at MacDonald’s Restaurant near the ball court and took them to a briefing at the office of Nether Games.  They told the employees of the Company that the Company’s bank accounts were frozen and could not pay them salary and invited them to join Nether Games. Seventeen of the Company’s employees left the Company to join Nether Games.

48.  Then on the following day, the Petitioner presented the petition.

49.  The above facts are not disputed.  From the three emails recovered from the Petitioner’s email account and his setting up of Nether Games, the only reasonable inference is that the events on 20 August 2012, in particular the freezing of the bank accounts of the Company, and the petition were pre-meditated acts aimed at sabotaging the Company and to hijack its most valuable asset, Ninja Saga, for their or Nether Games’ personal gain.  Ryan Ip, Alvin Law and Terry Man might have a reason, albeit not a legitimate one, to do what they did as they were the creators of Ninja Saga who might feel they had not been adequately remunerated with the shares in the Company or Emagist Cayman.  But the Petitioner was in a different position.  He was a director of the Company. What he did was a serious breach of fiduciary duty of a director.  He had no shares in the Company.  It is an abuse of the process of the court for a non‑member to take out a petition against the Company seeking remedies available only to members.  The grounds of the petition are mismanagement and misappropriation of Company’s funds.  Yet, the Petitioner is unable to produce an affirmation from Ryan Ip to support those grounds.  In the circumstances, I have no difficulties to conclude that the petition was, apart from being an abuse of the process of the court, made mala fide.

Mismanagement and misappropriation of funds of the Company

50.  The Petitioner’s grounds for petition are mismanagement and misappropriation of funds of the Company.  As he is not a member of the Company, whether there was mismanagement and misappropriation of funds is irrelevant.  As I have disallowed his use of Ryan Ip’s affirmation filed in another proceeding, the Petitioner has no evidence in support of those grounds.

51.  The Company’s accounts have been audited throughout and the Petitioner, as a director, signed the accounts for the financial years ending 2009 and 2010.  The current auditors were unable to sign off the accounts for 2011 because of the sabotage actions of the Petitioner and his co‑defendants in HCA 1659/2012.  On the face, the books of the Company are open, nothing is concealed.  The Petitioner’s allegation in paragraph 20 of the petition regarding misappropriation of the revenue of not less than $1 million from Google advertisements is lacking in detail.  For the above reasons, I do not find it necessary to deal with these allegations.

Conclusion

52.  For the above reasons, I am satisfied that the Petitioner has no locus standi to present the petition and that the petition was made mala fide.  This petition has absolutely no chance of success.  Accordingly, the petition for winding up and for relief is struck out on the grounds that it discloses no reasonable cause of action; is scandalous, frivolous or vexatious; and is otherwise an abuse of the process of the court.  I make a costs order nisi that the Petitioner shall pay the Respondents’ costs of the application with certificate for two counsel and shall pay the costs of the action on an indemnity basis.  Such costs are to be taxed if not agreed.