KONHILL INTERNATIONAL LTD. v. DAI PAI DONG RETAIL SHOPS CO. LTD. AND OTHERS

HCMP 2446 /2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2446 OF 2002

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J U D G M E N T

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Introduction:

1. This is an application for an interlocutory injunction in the course of a minority shareholder's petition under s 168A Companies Ordinance Cap. 32. My task has been greatly eased by a sensible agreement, reached in the course of the argument, on a number of the terms of an undertaking which the 2nd, 3rd and the 4th Respondent are willing to give. Unfortunately not all the terms sought by the Petitioner have been agreed and so, instead of giving undertakings in the agreed terms, the parties are content that the agreed terms should be included in any injunction granted. I will in due course, set out the agreed terms.

2. One issue only remains for decision. It is whether there should be a mandatory order against the 1st Respondent requiring it to pay to the Petitioner a sum of $400,000 being management fees admittedly owing to the Petitioner.

Background:

3. The Petitioner, the 2nd Respondent, and the 3rd Respondent are shareholders in the 1st Respondent (the company). The company operates, through a complex network of other companies, a chain of food shops, and has been very successful. The Petitioner, and the 2nd and 3rd Respondents are directors of the company. The beneficial owner of the shares in the Petitioner is Mr. John Tung. The beneficial owner of the shares in the 2nd Respondent (Dai Pai Dong Food) is Mr. Simon Wong, and in the 3rd Respondent, (City Action) his wife, Iris Leung. Mr Simon Wong is effectively the beneficial shareholder of all the shares in the 4th Respondent (Kampery), which, although not a shareholder in the company provides financial management services to the company. Each of the individuals has been nominated by the companies they own to represent the companies on the board of the company.

The dispute emerges:

4. Until the end of the year 2001 the three director companies were each paid a sum of $100,000 per month by way of management fees. At the end of the financial year, depending upon the profit made, a dividend was declared and adjusted against the management fees that had been paid. It is the case for the Respondents that an agreement was made at the end of the year 2001 that, first because of declining profits, and second because of the need to make funds available for a proposed Initial Public Offering (IPO) on the GEM Board, of the company and Kampery, the payment of management fees would be suspended. This agreement is denied by the Petitioner, and that will be a matter for trial in due course. In May 2002, in the course of a meeting with financial advisers to the parties in relation to the proposed IPO, a suggestion was made, for the first time, that the company would not be included in the IPO. This greatly concerned Mr Tung. The company is the only company involved in the flotation in which Mr Tung is a shareholder. If the IPO were to proceed without the involvement of the company Mr Tung would not be able to share in the benefits that arise from a successful IPO. As the company and Kampery have been operated, effectively together, with the long term view of an IPO, Mr. Tung would be deprived of the benefits of several years of hard work.

5. In the past it had been the practice that Mr Tung would be issued with blank cheques drawn on the company and signed by one of directors. If it was necessary for Mr Tung to draw money on the company he would complete and sign a cheque. Although he had apparently not previously complained of the non payment of management fees during the first half of 2002, with the prospect of not being included in the IPO, he now complained. When the other shareholders did not respond and pay the management fees, Mr Tung completed four cheques for the amount of the management fees due and presented them. The cheques were stopped, solicitors were consulted, Mr Tung was refused permission to bring solicitors to a directors meeting, and the petition was issued. At the directors meeting, Mr Tung being absent on legal advice, a resolution was passed in which the company acknowledged that the management fees were due to the Petitioner.

6. The position of the Respondents is that they have not had their management fees for the relevant period and so neither should the Petitioner. Although counsel for the Petitioner that contended that on the evidence the Respondents had received their management fees I am not persuaded that that is so. The evidence shows provision being made for the fees, but does not show actual payment. Thus, the Respondents say that as all three directors are being treated equally there is no unfairness to the Petitioner. Superficially, these appear to be good arguments in the circumstances, to resist immediate payment of an admitted debt.

7. But the matter does not end so simply. It is plain from the papers that the company is successful and is cash-rich. It has been the practice in the past, with the acquiescence of Mr Tung, for substantial sums to be advanced by the company to Kampery. It seems clear that Mr. Tung acquiesced in these payments because, although they were not at all to his direct advantage, he having no interest in Kampery, the joint proposal to undertake an IPO was being realised. At the end of the year 2000 the sum advanced was approximately $1.5 million. By the end of 2001 the sum advanced had grown to some $10 million. It is common ground between the parties that, after allowing for offsets due by the company to Kampery, the net amount presently advanced to Kampery, on an unsecured and interest-free basis, is some $6 million. The amount outstanding at any time appears to fluctuate, with funds passing between the company and Kampery, both ways, regularly.

8. Thus, although Dai Pai Dong Food and City Action may not have been paid their management fees, Kampery has continued to be able to draw on the company on most favourable terms, and to use it virtually as a bank. Paragraph 4 of the agreed terms reflect the Petitioner's concern in respect of this matter and rectifies the situation. In addition, it appears clear that Kampery has been paid fees for its financial administrative services. It is significant that Simon Wong is beneficially entitled to all the shares in both Dai Pai Dong Food and Kampery. Thus he continues to receive financial advantage from the company.

9. There is a further factor. The company is a shareholder in Market Web Enterprise Limited which owns, again through an network of other companies another chain of restaurants called "Kin Yat". Management fees paid by Market Web Limited ought to be paid, at least in part, to the company. But they are paid to Kampery and City Action. Again, Mr. Tung receives no return on his investment but Simon Wong and Iris Leung receive a return on their investment. It is no answer to say that Iris Leung does the work in her capacity as a director of City Action Limited, for that fails to recognise the involvement of the company in the Kin Yat enterprise.

10. I am satisfied that the fact that each of the three director companies were treated in the same way in respect of management fees is no answer. The mere fact that parties are treated equally does not prevent that treatment from being unfair. The payment of management fees is the only benefit received by the Petitioner from the company. Kampery not only continues to receive it is financial administrative services fees, but has freely drawn upon the company's resources to the extent of very significantly increasing the debt due by Kampery to the company. City Action receives fees for its work in the Kin Yat division of the business of the company. But Mr. Tung received nothing for his work during the relevant period. Had Kampery and City Action not received the benefits they have had, there might be an argument that the parties were all being treated equally and fairly. But, so long as Kampery continues to enjoy its ability to draw on the company's cash resources, and City Action receives management fees for the Kin Yat division, the Petitioner is not being treated either equally or fairly. In reaching this conclusion I have had regard to In re Sam Weller & Sons Ltd [1990] 1 Ch 682.

11. It is beyond doubt that the sum of $400,000 is due to the Petitioner. Apart from anything else, the debt has been admitted by a resolution of the company. Having regard to the ability of Kampery to draw upon the company's funds, the financial advantage received by City Action, the admitted nature of the debt, and the present ability of the company to make the payment, I am satisfied that it is just that that sum should now be paid to the petitioner.

12. The circumstances are similar to those in Ferguson & Anor v Maclennan Salmon Co Ltd & Ors. [1990] BCC 702. There, an interim order for part payment of the share purchase price due following a minority shareholder's oppression petition was ordered as it was plain that at the end of the day a sum in excess of the interim payment would be made. Here, whether or not the Respondents are ordered to purchase the Petitioner's shares in the company, the management fees will be due. Further, having regard to the circumstances put before me I am satisfied that there is a very strong likelihood that the only sensible resolution of the petition will be an order directing the Respondents to purchase the Petitioner's shares at an appropriate valuation.

13. For these reasons I am satisfied that there should be a mandatory order against the company now requiring payment of the outstanding management fees of $400,000 to the Petitioner.

14. I now set out the order, recording the paragraphs 1 to 5 inclusive were the subject of agreement during the course of argument:

"1. Until the trial or other disposition of the Petition by hearing or otherwise, or until such time as this order is varied or discharged, the 2nd Respondent and the 3rd Respondent, or either of them, (whether by their directors or employees or agents or any of them or otherwise howsoever), shall not do any of the following acts:

(a) In any manner whatsoever pay to the 2nd and/or 3rd Respondents management fees or fees as participation in the profits of the 1st Respondent, without paying to the Petitioner, at the same time, an amount equal to any sum as may have been paid to the 2nd and/or 3rd Respondents;

(b) Alter the existing constitution of the Board of Directors of the 1st Respondent despite Article 7 and Article 14 of the Articles of Association of the 1st Respondent, and subject to:

(i) all rights to remove the Petitioner as a director as otherwise provided in the said Articles of Association and/or and common law for breach of a director's duty;

(ii) the Petitioner limiting its rights and obligations as a director of the 1st Respondent to:

(a) exercising a director's rights to inspect company documents of the 1st Respondent as provided in the Companies Ordinance, Cap 32 and subject to the conditions of inspection and hearing provided; and

(b) objecting to any decision by the Board of Directors which decision would amount to a breach of the orders herein;

(iii) the Petitioner refraining from interfering with the 1st Respondent's treatment of the audited accounts of the 1st Respondent as approved by a certified accountant for tax saving purposes and/or listing purposes, with such treatment being subject to a prior resolution of approval by the Board of Directors;

(c) Obstruct, prevent or restrict the Petitioner's rights to inspect documents as provided under the Companies Ordinance, Cap 32, subject to:

(i) 24 hours notice in writing being given to the 1st Respondent;

(ii) the condition that the Petitioner shall not remove from the 1st Respondent any company documents whether belonging to the 1st Respondent or otherwise or cause unreasonable disturbance, interruption of or interference to or with the daily operations of the 1st Respondent;

(iii) the right of the Petitioner to obtain any copies the thereof upon request according to the Companies Ordinance, Cap 32:

(d) Permit, and keep proper records of, the transfer of funds from the 1st Respondent to the 4th Respondent or any subsidiary thereof whether directly or indirectly, for a total sum of more than $500,000 within a period of 2 weeks and to repay the same sum to the 1st Respondent within 2 weeks of such transfer together with interest at the best lending rate obtainable from a local bank:

(e) Prior to the conclusion of the hearing by this Honourable Court of the merits of the Petition, taking any steps to cause or procure the 1st Respondent to incur any costs in relation to the competition, save costs to be reasonably and properly expended by the 1st Respondent on the giving of discovery or the making of any necessary application, and LEAVE IS HEREBY RESERVED to the 1st, 2nd or 3rd Respondents to apply any time, on 2 clear days notice, for approval by the Court of the payment of such costs by the 1st Respondent.

2. The 1st respondent shall within 7 days of the date of this order pay to the Petitioner the sum of $400,000 being management fees payable by the 1st Respondent to the Petitioner period from 1 February 2002 to 23 May 2002, together with interest at judgment rate from 23 May 2002 to the date of payment"

15. I wish to record two matters raised in the course of argument. First, the effect of Articles 7 & 14 of the Articles of Association is that the Petitioner will cease to be a member of the Board of Directors on 31 December 2002. The intent of the orders made is that the Petitioner will be re-appointed a director, and will continue to be a director of the company until the resolution of the petition. Second, counsel for the Respondents acknowledged in the course of argument, that any treatment of the accounts of the company pursuant to paragraph 2(c) of the Order will not necessarily be binding on the Petitioner in any valuation of the shares in the company, if the effect of such a treatment were to reduce the value of the shares when the company is viewed, by itself, for valuation purposes.

Costs:

16. There will be an order nisi that costs on the application for the interlocutory injunction be in the cause.