LEUNG CHEUNG YUK YING v. LEUNG KWOK FUN AND OTHERS

HCCW 150/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 150 OF 2006

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J U D G M E N T

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1.  This is a petition presented by a contributory to wind up McGill Trading Company Limited (“the Company”) on the just and equitable ground, pursuant to section 177(1)(f) of the Companies Ordinance, Cap. 32. The petitioner, Madam Leung Cheung Yuk Ying, is the registered holder of 600 shares (30% of the issued shares) of the Company. She is the wife of the 1^st respondent, Leung Kwok Fun. The 2^nd respondent, Tammy Leung, is their daughter. The 1^st respondent is the registered holder of 1,390 shares and the 2^nd respondent is the registered holder of the remaining 10 shares.

2.  The 1^st respondent left the matrimonial home at The Dahfuldy, No. 21 Ho Man Tin Hill Road, Kowloon (“the Dahfuldy”) in the summer of 2004 to live with his female partner and his 11-year old son by the partner. He has brought proceedings to dissolve his marriage with the petitioner and the divorce proceedings are pending.

The Company

3.  The Company was incorporated on 27 October 1972 with an authorised share capital of $100,000.00, divided into 100 shares of $1,000.00 each. It was established principally to carry out the business of property investment, namely, the purchase and sale of properties and the letting out of properties for rental income.

4.  The petitioner and the 1st respondent provided the initial capital for the establishment and operation of the Company, out of the profits they made in property development in Macau. They each subscribed to one share and were the only permanent directors as provided in the articles of association. On 5 December 1975, 49 shares of the Company were allotted to each of them.

5.  The authorised share capital was later increased to $2 million and on 31 May 1977, there was an allotment of 1,900 shares in cash in the nominal amount of $1.9 million. The petitioner and the 1^st respondent were each allotted 550 shares. Their son, Samuel Leung Ka Yan, and 2^nd respondent were each allotted 400 shares. Samuel and the 2^nd respondent were minors at the time and they were students. Samuel was nine years old when he passed away in November 1978. He had executed an instrument of transfer and bought and sold notes to transfer all his shares to the 1^st respondent on 27 October 1978.

6.  The 2^nd respondent had likewise executed an instrument of transfer and bought and sold notes to transfer all her shares to the 1^st respondent. This came about on 29 August 1991.

7.  On 14 August 2000, the 1^st respondent transferred 10 of his 1,400 shares to the 2^nd respondent. This was because under the articles of association, the qualification of a director shall be the holding in his own right of at least 10 shares in the Company. According to the documents filed in the Companies Registry, the 2^nd respondent was appointed an additional director with effect from 28 July 2000. Notwithstanding this, the 2^nd respondent has never had an active role as a shareholder or director of the Company. The petitioner has disputed the validity of her appointment.

8.  In July 1995, the Company reached agreement with the Land Development Corporation to sell to the latter its properties at Nos. 540 to 542 Shanghai Street, Ground Floor with Main Roof, and the 1^st to 4^th Floors, Kowloon at the price of $41,020,000.00. The petitioner and the 1^st respondent entered into a deed dated 27 July 1995 by which they agreed that out of the price received from the Land Development Corporation, $40 million was to be distributed to them as dividends in equal shares.

9.  After this substantial transaction in 1995, the only property held by the Company is Flat A, 10^th Floor, and two car parking spaces Nos. 5 and 6 on Ground Floor, Canbury Court, No. 17 Ho Man Tin Hill Road (“Canbury Court”). It was purchased in 1987. The Company has no other business. The petitioner and the 1^st respondent have no intention to use the Company to make any other property investment.

10.  I find that when the Company was actively in business, when there were decisions to be made on property investment, the petitioner and the 1^st respondent would consult each other and then make a decision, as the only permanent directors of the Company. The 1^st respondent attended to the paper work and matters of compliance with legal procedural formalities. As they have been married for many years and the marital relationship was good when the Company was active, they operated the Company in an informal manner. They never had formal board meetings or shareholders meetings until their relationship broke up.

11.  I have no hesitation in finding that the Company was founded on the basis of mutual trust and confidence between the petitioner and the 1^st respondent, giving rise to the superimposition of equitable considerations as the relevant factors discussed in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 are found to exist in the circumstances here.

12.  For the purpose of this petition, it is not necessary to make any finding whether the 1^st respondent is the beneficial owner of all the 1,390 shares registered in his name. I merely mention it is the petitioner’s position that she and the 1^st respondent are the only beneficial owners of all the shares in the Company in equal shares. She is not pursuing the declaration in the petition that the transfer of shares by Samuel to the 1^st respondent be declared invalid. Regardless of whether the 1^st respondent owns all the shares registered in his name beneficially, or whether the position is as maintained by the petitioner, the assets held by each of them would be taken into consideration in the application for ancillary relief in the matrimonial proceedings, if it should be ordered that their marriage should be dissolved.

13.  Likewise, it is not necessary for the purpose of this petition to make any finding whether the petitioner had knowledge of and approved the earlier transfers of shares by the children to the 1^st respondent in 1978 and 1991.

The grounds for this petition

14.  The petitioner’s grounds for seeking to wind up the Company are simply this. There is no dispute that mutual trust and confidence between her and the 1^st respondent in running the Company has completely broken down, with the breaking up of their marital relations. The parties are at loggerheads. There is deadlock in the management and no basis on which the Company can continue to operate. She claims that she is unable to derive any benefit from the only property of the Company, namely, Canbury Court, which has been the home of the 1^st respondent and his new family for over a year. The substratum of the Company has gone, given that the 1^st respondent has occupied the only property of the Company to the exclusion of the petitioner and that the parties have no intention to engage in any further property investment through the Company.

15.  There are other allegations in the petition to found the basis for winding up on the just and equitable ground. They are of lesser importance in the particular circumstances. It is alleged that the 1^st respondent had misappropriated $343,356.00 from the Company; that the 1^st respondent had attempted to sell Canbury Court to his nephew at an undervalue; that the 1^st respondent had procured the appointment of the 2^nd respondent as a director for the ulterior purpose of outvoting the petitioner; and that the petitioner was denied full access to the books and records of the Company.

The occupation of Canbury Court

16.  Canbury Court was let to an outsider in the first few years after it was acquired by the Company. It was left vacant from January 1991 to April 2001. From April 2001 to March 2004, it was let to Benix Limited (“Benix”), a company owned by the petitioner and the 1^st respondent, at a monthly rental of $25,000.00. It was again left vacant from April 2004 to December 2005. The 1^st respondent has resided in this property with his new family since January 2006 to present.

17.  Other than the initial period when the property was let to an outsider, and until the 1^st respondent moved into the property with his new family, for ten odd years the petitioner and the 1^st respondent have used the property for their enjoyment and other pursuits, such as playing mahjong, singing karaoke, and browsing the internet for trading in securities.

18.  After the 1^st respondent left the matrimonial home in the Dahfuldy, he lived in a property in Boundary Street which he purchased in January 2005. In November 2005, he moved out of the Boundary Street property for renovation works to be carried out to that property. He then moved into Canbury Court. Although the works in the Boundary Street property were completed in about May 2006, he did not move out of Canbury Court. He also carried out large-scale renovations to Canbury Court before and after he moved in. The locks to Canbury Court were changed, so the petitioner can no longer gain entry to this property ever since the 1^st respondent has resided in it. The 1^st respondent accepted that he does not expect the petitioner to use the property jointly with him after he and his new family have made it their home. He said he has no intention to move until the property is sold. He would wait for the court’s decision in this petition, and if the court should order the Company to be wound up, he would move out.

19.  The 1^st respondent said under cross-examination he has been paying rent at $22,000.00 a month since residing in Canbury Court and that the amount was in accordance with the market rent assessed by a valuer. No surveyor’s report was produced in evidence. There was no actual payment either, the 1^st respondent claimed he was not able to deposit money into the bank account of the Company which was frozen after this petition was presented on 22 March 2006. So he caused entries to be made in the accounts of the Company showing the amount of rent to be paid by him to the Company. He claimed this is in accordance with “usual practice”. No accounts of the Company showing such entries have been produced.

20.  Moreover, according to a table compiled by the company secretary, which the 1^st respondent has confirmed in his affirmation to be accurate, it showed that the 1^st respondent had paid no rent at all during January to June 2006 when he was named as a tenant of the property. The table was apparently compiled from the records of the Company, giving the names of the tenants of Canbury Court from December 1987 to June 2006, the amount of rental, the parties responsible for paying management fee and rates. During January to June 2006, the management fee was paid by Benix. The 1^st respondent claimed this was done by autopay from Benix’s account, there is no evidence he had reimbursed Benix for the management fee. Rates for the first quarter in 2006 were paid by the Company. The 1^st respondent only paid the rates for the second quarter in 2006, after the Company’s bank account was frozen on the presentation of the petition.

21.  I am very sceptical if the 1^st respondent had indeed paid any or any proper rent and the management fees for his occupation of Canbury Court. In any event, the petitioner has never agreed to his occupation of the property to her exclusion, knowing that he is living there with his new family. She has through her solicitors raised her objection to this in the clearest possible terms in the letter dated 19 January 2006. The 1^st respondent replied by his solicitors on 17 February 2006 that he was merely making use of the property on a “temporary” basis. I would hardly regard his occupation as temporary. It is wholly unreal for the 1^st respondent to maintain in his evidence that the petitioner has not objected to his continued occupation of the property. 

22.  Furthermore, it would simply not be right for the 1^st respondent to decide that it would be more advantageous to the Company to let Canbury Court to him instead of to an outsider. This is contrary to the rule in equity against self-dealing. He has placed himself in a position in which his duty to the Company conflicts with his personal interest (Movitex Ltd. v. Bulfield [1988] BCLC 104 at 120f to g).

23.  I hold that on account of the 1^st respondent’s continuing occupation of the only property of the Company to the exclusion of the petitioner despite her objection, there is sufficient basis to wind up the Company on the just and equitable ground.

The attempt to sell Canbury Court

24.  There was an attempt to sell Canbury Court before the 1^st respondent renovated the property and made it his new home. In March 2005, the 1^st respondent informed the petitioner he wished to sell the property to his nephew at $7.4 million. He said it would be advantageous to the Company as the sale would not go through an estate agent and there would be saving on agent’s commission. He engaged a surveyor who provided a valuation report dated 22 April 2005 that the open market value as at 14 April 2005 was $7.4 million. No comparables were given in that report.

25.  The petitioner objected to the sale and wrote to the 1^st respondent on 15 March 2005 and 30 May 2005. She maintained that the offer from the 1^st respondent’s nephew was below the market value and quoted the information she had received from Midland Realty of recent transactions in the building. In her second letter, she enclosed an offer letter dated 20 April 2005 from a client of Midland Realty offering to purchase Canbury Court at $8 million with detailed payment terms and requested to adjourn the extraordinary general meeting called by the 1^st respondent to consider the proposed sale to his nephew. There is no dispute that another property in the same building on the 6^th Floor with only one uncovered car parking space was sold in May 2005 for $7.8 million. The Company’s property is on the 10^th Floor and it holds two covered car parking spaces on the Ground Floor.

26.  The 1^st respondent nevertheless went ahead to call the extraordinary general meeting on 17 June 2005, to consider a resolution to sell Canbury Court to his nephew at $7.4 million. The petitioner’s solicitor informed those present that if the Company should hold the meeting, the petitioner would apply for an injunction from the court. As a result, the 1^st and 2^nd respondents did not proceed with the meeting.

27.  Under cross-examination, the 1^st respondent was not able to give any intelligible reason why on 17 June 2005 he should wish to sell the property to his nephew at $7.4 million. He was driven to accept that the Company’s property should be worth more than that price. I reject his evidence that he was not aware of the concluded transaction at $7.8 million, it was specifically mentioned in the petitioner’s letter dated 30 May 2005.

28.  The 1^st respondent alleged that he made a final attempt to salvage the proposed sale to his nephew, and later proposed to the petitioner he would pay the Company the difference of $600,000.00 if she would agree to sell to his nephew at $7.4 million. As the petitioner did not respond to this proposal, the attempt to sell to his nephew was aborted. The petitioner denied that the 1^st respondent had ever suggested to make up the difference of $600,000.00.

29.  I do not accept the 1^st respondent’s evidence that he had ever offered to the petitioner he would pay $600,000.00 so that the proposed sale to his nephew could go through. His evidence on this was evasive and contradictory. He had known of the offer from the client of Midland Realty before the meeting. He knew that the petitioner would agree to sell at $8 million. As a shrewd and wily businessman, and if he was really prepared to make up the price difference, I do not believe he would not have made that proposal before or at the meeting. Alternatively, he could simply have given $600,000.00 to his nephew so the latter could increase his offer to the Company. I think it is telling he did not make any such proposal in a letter he wrote to the petitioner on 28 June 2005, in an attempt to persuade her to agree to the matters raised at the meeting on 17 June 2005.

30.  I find that the 1^st respondent had attempted to push through a sale of Canbury Court to his nephew at a price below the market value. He eventually desisted when he was threatened with an injunction application. This wrongful act would also provide a basis to wind up the Company on the just and equitable ground.

Other allegations

31.  It was only after the 1^st respondent left the petitioner that she began to make inquiries into the affairs of the Company. She claimed she had reposed trust and confidence in her husband before that and to maintain good marital relations, she had not before then insisted on the exercise of her rights as a shareholder and permanent director. The 1^st respondent countered that the petitioner’s allegations are without basis and they arose merely because she was aggrieved over the failure of their marriage.

32.  I will first deal with the allegation that the 1^st respondent has misappropriated $343,356.00 from the Company. This complaint was first raised in a letter of the petitioner’s solicitors to the 1^st respondent’s solicitors dated 9 December 2005, after the petitioner had received the audited financial statements of the Company for the year ended 31 December 2004. The 1^st respondent was asked to explain the outstanding sum in that amount recorded as due from him under the current assets of the Company and to give details of the movement of his current account with the Company from January 2004 to December 2005. In the reply of his solicitors dated 17 February 2006, it was stated that the 1^st respondent had paid sums on behalf of the Company and these sums should be taken into account before calculating the net sum due from him to the Company. The petitioner’s solicitors countered with an allegation of misappropriation of $343,356.00 from the Company’s account without the petitioner’s consent in their reply dated 10 March 2006 and demanded repayment of the full sum within three days. Further correspondence was exchanged. The long and short of this was that on 21 March 2006, the 1^st respondent repaid the full sum to the Company, whilst reserving his right to seek reimbursement from the Company of all monies he had paid on its behalf and without admitting any fault on his part. The petitioner had no knowledge of the repayment when she presented the petition on 22 March 2006.

33.  The petitioner knew the 1^st respondent has maintained a current account with the Company. She signed the financial statements for the financial years of 1995, 1996 and 1998. She admitted in cross-examination she knew from the balance sheet that in some years, sums were due from the 1^st respondent in his current account with the Company. In 1994 it was $5,231,250.00; in 1995 it was $277,498.00; in 1996, 1997 and 1998 it was nil. She did not sign the accounts thereafter and so did not know the state of his current account for subsequent years. I find that there was a practice that the 1^st respondent had withdrawn money from the Company and the petitioner had known of this and acquiesced in it when their marital relationship was good. She did not insist on the 1^st respondent obtaining her prior approval until there was a breakdown in their relations.

34.  I hold that the allegation of misappropriation of funds by the 1^st respondent would not have been sufficient to support a case of winding up on the just and equitable ground. There was acquiescence to the practice of withdrawing money from the Company for a substantial period. Upon the petitioner raising her objection to this, after the exchange of correspondence for several months, the amount was repaid in full.

35.  Likewise, I reject the 1^st respondent’s contention that the petitioner had misappropriated the funds of the Company in that she had collected rent from the tenant of the car parking spaces in Canbury Court and did not account to the Company. I accept the petitioner’s evidence she had used the rent collected to pay part of the wages of the domestic helpers at the matrimonial home and of the driver from November 1997 to October 2005, for the mutual benefit of herself and the 1^st respondent. I reject the 1^st respondent’s assertion mentioned for the first time in his cross-examination that he had paid the salaries of the domestic helpers and the driver. I find that the 1^st respondent had known about the practice of using the rent to pay part of the wages all along, he had raised no objection and had acquiesced in it until the petitioner asked questions about the outstanding sum in his current account.

36.  As for the 1^st respondent’s appointment of the 2^nd respondent as an additional director of the Company in July or August 2000, it is the evidence of the petitioner and the 2^nd respondent that no board meeting was held on 28 July 2000 to pass resolutions to appoint the 2^nd respondent as a director with immediate effect and to approve the transfer of ten qualification shares to the 2^nd respondent, as the minutes signed by the 1^st respondent had purported to show. The 1^st respondent claimed he could not recall who was present at the meeting; he accepted nevertheless that the petitioner was not present. In March and April 2005, the petitioner made inquiries on this with the accountant firm responsible for filing returns for the Company. She then raised objections to the appointment in her letters to the 1^st respondent and to the Company dated 26 May 2005 and 1 June 2005.

37.  The 1^st respondent stated in his letter to the petitioner dated 23 April 2005 that he appointed the 2^nd respondent as an additional director with the knowledge of the petitioner and she had raised no objection at the time. He went further in his affirmation and asserted that the petitioner had positively agreed to his suggestion to appoint the 2^nd respondent. He claimed that this was necessary because the petitioner was not interested in running the Company after the sale of the Company’s properties to the Land Development Corporation in 1995, so he appointed the 2^nd respondent as an additional director to sign routine documents to comply with statutory requirements and to make up the quorum for board meetings without having to trouble the petitioner. 

38.  In cross-examination, the 1^st respondent contradicted himself and said he had told the petitioner his intention to convene a meeting to appoint the 2^nd respondent as a director but the petitioner objected to this and refused to attend the meeting. He then caused documents to be filed for the 2^nd respondent’s appointment despite the petitioner’s objection. He attempted to withdraw this evidence in his re-examination, on the pretext that he was mixed up.

39.  The petitioner alleged there was no legitimate reason to appoint the 2^nd respondent as a director other than to outvote her at board level. As mentioned earlier, the 2^nd respondent has never played an active role in the Company. There was no board meeting in which she had cast a vote with the 1^st respondent causing the petitioner to be outvoted. It is common ground that the 2^nd respondent did not have a harmonious relationship with the petitioner. She had moved out of the family home in 1991 and lived in a property purchased with funds provided by the 1^st respondent.

40.  I do not accept the 1^st respondent’s evidence on this issue. I find that he had caused the 2^nd respondent to be appointed an additional director despite the petitioner’s objection. The necessary documents were filed with the Companies Registry without the petitioner’s knowledge and consent. I have reservations about his explanation that the purpose of appointing the 2^nd respondent was merely for the purpose of attending to routine compliance matters. Although there was no instance in which the 2^nd respondent had used her vote on the board as the Company was largely inactive since 1995, the 2^nd respondent admitted frankly that if she was called on to vote at the meeting in June 2005 to approve the sale of Canbury Court at $7.4 million, she would have voted in favour of the resolution with the 1^st respondent.

41.  I find that the allegation of improper appointment of an additional director is made out, and this would also justify winding up the Company on the just and equitable ground.

42.  The last allegation in the petition is denial of full access to books and records of the Company at its registered office. This may be dealt with shortly. The petitioner had requested for accounts, minutes and documents in letters written by her and her solicitors to the 1^st respondent, the auditors, and the Company dated 11 August 2005, 15 September 2005, 8 November 2005 and 10 March 2006.

43.  The 1^st respondent claimed that the books and records are always available for inspection by all directors. The fact remains no minutes were provided to the petitioner despite her request on 8 November 2005. There was no written reply to the earlier letters on 11 August 2005 and 15 September 2005. To put it no higher, the petitioner has had difficulty in obtaining access to the books and other documents she wished to inspect. This matter could be considered in conjunction with the other allegations in considering whether a case for winding up is made out.

The 1^st respondent’s stance

44.  The 1^st respondent says he does not resist a winding-up order and he has left the matter to the court. His averred position is completely at odds with what he actually did. He has actively contested the petition, and I gather this is mainly for two reasons. Firstly, he says the petitioner’s allegations against him are unfounded, and that the petitioner has not made out a case for winding up on the just and equitable ground. He contended there was no quasi-partnership, no loss of substratum of the Company, and that it is not unjust or inequitable for him to continue to occupy Canbury Court to the exclusion of the petitioner. Secondly, he says that he and the 2^nd respondent should not be responsible for the petitioner’s costs and it is the petitioner who should pay the costs of the 1^st and 2^nd respondents in these proceedings. If the court should accept the submissions advanced on behalf of the 1^st respondent, there is no way that the court could grant an order to wind up the Company. If that is not resisting a winding-up order, I do not know what is.

Conclusion

45.  It is just and equitable that the Company should be wound up. Mutual trust and confidence has completely broken down. It is not possible for the parties to co-operate in an atmosphere of bitterness and suspicion. The personal animosity and conflicts between them are closely linked to the affairs of the Company, so that it is not possible to separate neatly their private affairs from business affairs (Pizem & Anr. v. Malek & Ors. (1985) 3 ACLC 612 at 635). The Company can no longer operate as a family company. It should be wound up so that its only asset can be realised for the benefit of its shareholders. This is the fairest solution to them.

46.  I order the Company to be wound up.

47.  I make an order nisi that the 1^st respondent should pay the costs of the petitioner. Except for the allegation of misappropriation of funds by the 1^st respondent, I have found in favour of the petitioner on most of the allegations. There is no reason why costs should not follow the event.