LEUNG CHI TUNG v. AU YEUNG FAN AND OTHERS

HCCW 504/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 504 OF 2005

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J U D G M E N T

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The Parties

1.  These proceedings concern the company called Fansway International Limited (“the Company”).  The Company, incorporated on 16 July 1999, was acquired by the Petitioner and the 1^st Respondent on 20 December 1999, with the Petitioner holding 49% of its shares and the 1^st Respondent 51%.  Both the Petitioner and the 1^st Respondent became the only 2 directors of the Company.

2.  On 22 December 2003, the Company’s nominal capital was increased with the allotment of new shares.  The 2^nd Respondent was allotted 8% of the shares and became a shareholder.  The Petitioner’s shareholding was reduced to 45.08% and the 1^st Respondent’s 46.92%.  The 2^nd Respondent was appointed an additional director of the Company.

Parties’ Businesses

3.  In about September 1990, the Petitioner set up a trading business under the name of Tung Shing Industrial Trading Co. (“Tung Shing Co.”), dealing mainly in PVC man-made leather and garment.  The Petitioner and the 1^st Respondent came to know each other in about 1994.

4.  In January 1996 the 1^st Respondent, then a resident in Macau, started a trading business in Hong Kong in the name of Hoi Shun Development Trading Company, (“Hoi Shun”) dealing in spare parts for motor vehicles and other plastic products.  The Petitioner assisted him with the formalities for registering the business and further allowed the use of Tung Shing Co’s address at M/F, No.90, Tai Nan Street, Shamshuipo, as Hoi Shun’s business address.

5.  About the end of 1996 or beginning of 1997, the Petitioner, the 1^st Respondent and one Mr Ho Kin Wai joined together in a venture of investing in real property in Hong Kong.  The partnership in this venture continued until the Petitioner and Mr Ho withdrew in about mid-1998.  This business ceased altogether at the end of 1998.

6.  Since then there was apparently little contact between the Petitioner and the 1^st Respondent other than the occasional phone calls until about mid-1999 when they had a chanced meeting on a ferry returning from Shunde to Hong Kong.  In conversation the Petitioner told the 1^st Respondent about his business of trading in flocking fabrics.  The Petitioner spoke of the potential for good profits in the production of these fabrics and suggested that both of them might consider setting up a factory in the Mainland for such production. 

7.  The Company was eventually acquired at the end of 1999 as a vehicle for launching their production business.  The understanding was that the 1^st Respondent would be responsible generally for financing the acquisition of the land and the building of the factory.  He would also be responsible for liaising with the local authorities to procure the requisite approvals and business licenses for the factory’s construction and operation.  On the other hand, upon completion of the factory, the Petitioner would be responsible for the day-to-day management of the business and the production.  On this basis, both parties regarded themselves as having equal interest in the business, although apparently on advice it was considered better that they should split the shareholdings in the Company in the ratio of 51:49.

8.  Then in about March 2000, the Petitioner and the 1^st Respondent formed a company on the Mainland called Bao Feng Flocking Factory Shunde Co. Ltd. (寶豐植絨有限公司) (“Bao Feng”).  Bao Feng was and still is wholly owned by the Company.  Bao Feng in turn owns and operates the factory in the San Zhou Industrial Development District in Shunde, Guangdong (“the Factory”).  The Petitioner and the 1^st Respondent were both directors of Bao Feng. 

9.  The Factory was successfully set up.  The Petitioner had duly taken charge of the management and operation of the Factory and Bao Feng.  Because of his management role, the Petitioner was nominated the chairman of the board of Bao Feng, and also designated as the legal person (法人) representing Bao Feng.  Trial production at the Factory began in about August 2000.

10.  In about mid-2001, at the suggestion of the Petitioner, Shunde Wing Shun Knitting Dyeing Factory Limited (“Wing Shun”) which in turn owned a factory in Shunde (“Wing Shun’s Factory”) was acquired.  Wing Shun was acquired for the purpose of manufacturing and supplying materials to Bao Feng for Bao Feng’s production of the flocking fabrics.  A Hong Kong company by the name of Sino Union (“Sino Union”) was also acquired as the holding company of Wing Shun. 

11.  In 2002, the Petitioner recruited the 2^nd Respondent to take charge of Wing Shun’s production.  It so happened that the 2^nd Respondent was in fact related to the 1^st Respondent’s wife.  At the Petitioner’s suggestion, the 2^nd Respondent was made a director of the Company and was allotted 8% of the shares in December 2003.

12.  The 1^st Respondent had other business interests.  After his real-property venture, he formed one Champion Essence International Limited (“Champion Essence”).  Champion Essence carried on an import/expert business in Hong Kong, dealing in a variety of commodities ranging from motor vehicles, motorcycles, machinery, spare parts to raw materials. 

13.  Sometime in 2001 the 1^st Respondent, together with others, started another business in Jiangmen dealing in motor vehicles under the name of Jiangmen Mei Cheng Auto Trading Limited (“Mei Cheng”).  In addition, at about the end of 2003 the 1^st Respondent also set up a metal-plating business in the name of Jiangmen Wah Tin Plating Company Limited (“Wah Tin”).  On the 1^st Respondent’s invitation, the Petitioner had also invested in the business of Wah Tin, but had later withdrawn because the business was apparently not very profitable.  

14.  Later, the 1^st Respondent further invested, with others, in a business in the production and trading of electrical appliances.  This was a substantial business with an overall investment of US$10 million.  The 1^st Respondent (through Champion Essence) was a 15% shareholder of a holding company in Hong Kong called Victory (H.K.) Electrical Limited (“Victory HK”).  Victory HK in turned owned a Mainland company called Guangdong Victory Electronic Co. Ltd. (“Victory GD”), which in turn owned the manufacturing plant that produced the products. 

15.  In addition to having an investment in Victory’s production, the 1^st Respondent also held business interest in one of its customers, namely, Treasure Rise Enterprise Co. Ltd. (“Treasure Rise”).  Treasure Rise was established in 2003.  Both the 1^st Respondent and the Petitioner, among others, were shareholders and directors of Treasure Rise.  Treasure Rise traded in Victory’s products under the name “UMME”, which was a brand name developed by Treasure Rise. 

16.  One other company that features prominently in this case is Tung Shing Industrial (H.K.) Limited (“Tung Shing Industrial”).  It was incorporated in November 2001.  Its only 2 shareholders and directors were, and still are, the Petitioner and his father, Leung Wai Kong.  Tung Shing Industrial had its registered office at G/F, 78 Tai Nan Street, Shamshuipo.  More will be said about Tung Shing Industrial later.

The Dispute 

17.  The Petitioner’s case is that the Company was essentially a quasi-partnership.  From inception, it has always been the common expectation between him and the 1^st Respondent, and later also the 2^nd Respondent, that he should be able to participate in the management of the Company, Bao Feng, and the Factory. 

18.  The Petitioner’s complaint in these proceedings is that on 21 May 2005, at a meeting among the Petitioner, the 1^st and 2^nd Respondents, unlawful attempt was made by the 1^st Respondent, first, to cause shareholders resolutions of the Company to be passed to the following effect: (i) that the Petitioner be removed as a director of the Company; (ii) that the Petitioner be removed as Bao Feng’s board chairman and designated legal representative; (iii) that the 1^st Respondent be appointed as Bao Feng’s board chairman and designated legal representative; and (iv) that the 2^nd Respondent be appointed as Bao Feng’s director.  Secondly, board resolutions of Bao Feng of similar effect were also attempted to be passed.  I should mention here that the 2 sets of minutes containing the impugned resolutions were, in fact, not signed.

19.  Further according to the Petitioner, on 10 June 2005 the 1^st and 2^nd Respondents had purportedly caused a board meeting of the Company to be held at which several resolutions were purportedly passed, namely, (i) that an extraordinary general meeting of the Company be held on 15 July 2005 to resolve that the Petitioner be removed as a director of the Company; (ii) that the Petitioner be removed as Bao Feng’s director, board chairman and its designated legal representative; (iii) that the 1^st Respondent be appointed as Bao Feng’s board chairman and designated legal representative; (iv) that the 2^nd Respondent be appointed as Bao Feng’s director; and (v) that Madam Lau Wai Lim (the wife of the 1^st Respondent) be appointed as Bao Feng’s director.

20.  It is the Petitioner’s case that he had never agreed to be removed from management of the Company, Bao Feng or the Factory.  He contends that the resolutions passed by the Company, or attempts to do so, to remove him from his various positions amounted to conduct unfairly prejudicial to his interest as a member of the Company.  The Petitioner seeks an order that his shares in the Company be purchased by the 1^st and/or the 2^nd Respondent. 

21.  Furthermore, the Petitioner claims that the purported shareholders resolutions of 21 May 2005 would, in any event, be unlawful and void for non-compliance with the notice requirement under the Companies Ordinance.  The Petitioner also claims that the purported board resolutions of 10 June 2005, being attempts to circumvent various provisions in the Bao Feng’s constitution, were also unlawful and void.  The Petitioner seeks a declaration to that effect in respect of both sets of resolutions.

22.  The 1^st and 2^nd Respondents’ case, on the other hand, is that at the meeting on 21 May 2005, there had been discussions between the Petitioner, the 1^st and 2^nd Respondents on a number of matters concerning the management and operation of Bao Feng and the Factory.  The discussions covered a number of topics, including irregularities discovered by the 1^st Respondent in the dealings between Bao Feng and the Petitioner’s Tung Shing Industrial.  These irregularities allegedly gave rise to secret profits for the Petitioner as well as the accrual of substantial indebtedness owed by Tung Shing Industrial to Bao Feng, all to the serious detriment of the Company.  The discussions also concerned the purchase of a production line for the Factory involving some RMB 2 million without prior consultation, as well as the irregularities in the keeping of Bao Feng’s accounts which potentially would expose Bao Feng to serious troubles with the Mainland tax authority.  The upshot of the discussions, according to the 1^st and 2^nd Respondents, was that 2 sets of draft minutes, one for the shareholders of the Company and the other for directors of Bao Feng were prepared.  It is the 1^st and 2^nd Respondents’ case that the Petitioner had in fact agreed to the matters evidenced by the draft minutes.  The contents of the drafts (containing the resolutions referred to in paragraph 18 above) were agreed upon among the parties after revision of the wordings.

23.  In response to the complaint of non-compliance with notice requirement, the 1^st and 2^nd Respondents contend that the resolutions took effect upon the agreement even though the minutes were not signed, and that such notice as might be required for convening the meeting had been effectively waived by the Petitioner in circumstances when all the parties had reached agreement. 

24.  As for the Company board meeting on 10 June 2005, the 1^st and 2^nd Respondents contend that inasmuch as resolutions had been duly passed at the previous meeting on 21 May 2005, the act of confirming the previous resolutions could not have amounted to unfairly prejudicial conduct. 

25.  I should observe here that the Respondents’ case is that the Petitioner’s removal was a result of a consensual arrangement agreed upon by all the parties at the May 21 meeting.  The allegations concerning the Petitioner’s improper dealings involving Tung Shing Industrial are relied on only as part of the “essential background events” leading to the May 21 meeting: see Skeletal Opening Submission of 1^st and 2^nd Respondent.  It is not the Respondents’ argument that the Petitioner’s misconduct would in any event have justified his exclusion against his wishes even if the Court were not to accept that the removal was a consensual arrangement.  However, in the event of the Court making a buy-out order, the Respondents contend that the Petitioner’s secret profits should then be taken into account in the valuation of the shares.

Dealings between Tung Shing and Bao Feng

26.  As noted above, the Factory commenced trial production in about August 2000.  The Petitioner was put in charge of the day-to-day management of Bao Feng and the Factory.  The 1^st Respondent was much occupied with his motor vehicle business in Jiangmen and he was content to leave matters of daily operation to the Petitioner.  The 1^st Respondent would visit the Factory only about once or twice every few months.

27.  According to the 1^st Respondent, it was not until late 2004 that he was alerted by the manager of the Foshan branch of the Bank of Communications to the improper dealings between the Petitioner’s Tung Shing Industrial and Bao Feng.  The 1^st Respondent had known the manager because the same bank also served his businesses in Jiangmen.  According to the 1^st Respondent, he was advised by the manager to pay attention to Bao Feng’s financial affairs.  This arose because a bank loan to Bao Feng of RMB 5.5 million was due for repayment after Chinese New Year in 2005.  In the course of reviewing Bao Feng’s books and accounts, the manager had discovered that Tung Shing Industrial had become the single largest customer of Bao Feng, and also that substantial trade receivables due from Tung Shing Industrial had been allowed to accumulate in Bao Feng’s books.  The 1^st Respondent was advised to examine the accounts of Bao Feng. 

28.  It was then for the first time, said the 1^st Respondent, that he had known about the unauthorized dealings between Tung Shing Industrial and Bao Feng.  The news had prompted him to make inquiry with Bao Feng’s in-house accountant, Miss Ho Wai Hing.  According to his investigation he subsequently caused to be made by the auditors, Tung Shing Industrial was found to be indebted to Bao Feng to the extent of over RMB 9 million.

29.  Also, due to Bao Feng’s inability to raise sufficient funds to repay the RMB 5.5 million loan, the 1^st Respondent was obliged to make arrangement for an advancement of RMB 2 million from Victory GD to Bao Feng to facilitate a rescheduling of Bao Feng’s loan.  The 1^st Respondent was much troubled by Bao Feng’s poor cash flow because at the end of 2004, when the 1^st Respondent had asked for an early distribution of Bao Feng’s profits for that year (to enable him to meet an investment call for Victory GD), the Petitioner had allegedly told him that Bao Feng had made profits of about RMB 8 million for the year in 2004.

30.  The Petitioner’s version of event is quite different.  He maintained that the 1^st Respondent had always known about the Petitioner’s interest in Tung Shing Industrial, and also the dealings between Tung Shing Industrial and Bao Feng.  It is the Petitioner’s case that the 1^st Respondent had all along consented to such an arrangement.  I will deal with this issue in more detail below.

31.  It is not disputed the 1^st Respondent had always known of the existence of the Petitioner’s Tung Shing Co.  Indeed, when Hoi Shun was formed in 1996, the 1^st Respondent was allowed to use the business address of Tung Shing Co. as Hoi Shun’s address.  It is also not disputed that at their chanced meeting on the ferry in mid-1999, the 1^st Respondent was told about the Petitioner’s business of trading in flocking fabrics.  It is obvious that the 1^st Respondent, himself unfamiliar with that trade, must have been persuaded to enter into the joint-venture by largely relying on the Petitioner’s connections as well as his already established business in such trade.  The exact entity through which the Petitioner conducted the business is immaterial.  (Unless otherwise required by the context, I would simply refer to the entity as “Tung Shing” without distinguishing between Tung Shing Co. and Tung Shing Industrial.)

32.  There is also little doubt that the newly formed joint venture would have to depend heavily on the business from Tung Shing’s existing customers.  Although Bao Feng had recruited sales staff from the inception of its operation, I have no doubt that the 1^st Respondent fully realized that the continuing business from Tung Shing’s existing customers would be essential to the success of the joint-venture, and in particular in the initial period before Bao Feng had firmly established its own clientele.  What the 1^st Respondent complains of is the fact that the Petitioner had caused the customers’ orders to be placed with Tung Shing instead of directly with Bao Feng and that the prices at which Bao Feng sold to Tung Shing were on average about 3 to 5% lower than prices charged by Bao Feng to its mainland customers, thus resulting in unauthorized profits being made by the Petitioner from the price differentials at the expense of Bao Feng.  The question I have to decide is whether any agreement has been reached between the parties to sanction such an arrangement, or alternatively whether the circumstances were such as to give rise to an inference of acquiescence (informal though it may be) on the part of the 1^st and 2^nd Respondent.

33.  I say at the outset that I am not satisfied that at their meeting on the ferry in mid-1999, there was discussion as to the specific manner in which the proposed joint-venture was to carry on the business.  After all, that occasion was only a chanced meeting, and I find it more probable that only very general matters were discussed, such as the proposed overall investment, the proposed sharing of their respective interest in the business.  It is not disputed that during the conversation, it was mentioned that Tung Shing Co. was obtaining its supply of fabrics from a factory in Gaoming and that there would be good prospects for an investment in the production of such fabrics.  However, it seems to me that as the Petitioner was trying to get the 1^st Respondent interested in setting up the joint-venture, it is unlikely that the Petitioner would even want to mention, let alone reaching any agreement, that he should be allowed to trade in the fabrics through Tung Shing or to keep Tung Shing’s customers. 

34.  On the other hand, however, after the Factory was eventually set up and operation commenced, it is the Petitioner’s evidence, which I accept, that monthly financial statements in the form of balance sheets (資產負債表(匯總)) were prepared by the accounting staff of Bao Feng.  When the Factory commenced full production in about March 2001, he began to include in the balance sheets the figures relating to the sales to mainland customers as well as those to Tung Shing.  As far as sales to Tung Shing was concerned, there were monthly sales accounting statements (銷售產品對帳單) recording the sales accounts between Bao Feng and Tung Shing.  In addition, as Tung Shing later purchased raw materials required by Wing Shun for production of the fabrics, it became necessary to reconcile the accounts between Bao Feng and Tung Shing, which exercise was carried out monthly by the respective accounting staff of Bao Feng and Tung Shing.  Upon reconciliation of the respective accounts, the balance would be entered into Bao Feng’s monthly balance sheets. 

35.  Samples of the monthly balance sheets have been produced by the Petitioner.  I accept that as a result of the events after May 2005, he does not have access to the full set of the monthly statements to be produced for these proceedings.  From the samples that he has produced, each monthly statement included not only the balance sheet for the month, but also attachments containing the breakdown of various items.  Materially, among the attachments was a Note setting out the sales figures to Tung Shing and various other customers for the month (at pages 4150, 4189, 4214).  Although there is a dispute as to whether these Notes were included as part of the attachments to the monthly balance sheets, on balance, I am satisfied that they were, at least since commencement of full production by the Factory.  On this point, I prefer the Petitioner’s evidence to that of the 1^st and the 2^nd Respondents’.

36.  According to the Petitioner, and I accept, there were also weekly meetings of the sales teams in Bao Feng where sales matters such as problems with customers’ payments and customers’ complaints over quality of products were discussed.  Customers records, compiled under the names of the sales representatives in charge, were printed for discussion at these regular meetings.  I would also accept that at these sales meetings, operational matters were openly discussed and such matters would probably concern not only sales to mainland customers but also sales to Tung Shing.

37.  However, it does not appear likely to me that the Petitioner would discuss at these sales meetings questions such as the extent of the accumulated receivables due from Tung Shing or matters of pricing regarding sales to Tung Shing.  Indeed, as far as pricing was concerned, the Petitioner’s evidence is that it was determined by him alone.  Tung Shing’s indebtedness to Bao Feng and pricing for sales to Tung Shing were not simply operational matters but matters which touched upon the interest of the respective proprietors of Bao Feng.  I find it unlikely that the Petitioner would see it appropriate to discuss such matters with sales representatives or that the sales representatives would find it comfortable to get involved in such discussions.  In this connection, I also do not accept the Petitioner’s evidence that the 1^st Respondent had on occasions attended these sales meetings.  It seems more likely that the 1^st Respondent did not concern himself at all with operational matters, and indeed even management, of the Factory and Bao Feng. 

38.  I agree in this connection with the submissions made by Mr Yu on behalf of the Respondents, that assertions that through these weekly meetings 1^st Respondent had become aware of the transactions between Tung Shing and Bao Feng were not mentioned in any of the affirmations by the Petitioner himself or those filed by his solicitor on his behalf.  I have taken note of that in coming to my findings in the 2 preceding paragraphs.

39.  For the same reason I am also not satisfied, on balance, that the Petitioner had discussed with the 1^st Respondent during their games of golf as to matters relating to the extent or details of Tung Shing’s dealings with Bao Feng.  I also do not accept the Petitioner’s evidence about the occasion before Chinese New Year in 2003 when the Factory manager, Wong Yiu Wah, had allegedly said to the 1^st Respondent in the presence of the department heads that the satisfactory trading performance in the year 2002 would not have been achievable had it not been for the orders from Tung Shing. 

40.  However, it is not to say that the 1^st Respondent had no knowledge of the dealings between Tung Shing and Bao Feng.  I would return to the monthly balance sheets.  The 1^st Respondent’s evidence was that he had seen some of the monthly balance sheets but after 2001 he had instructed the accounts staff not to print them out because potentially they would give rise to serious problems if the tax authority were to get hold of them.  This differs from the Petitioner’s account, and I prefer the Petitioner’s evidence on this question.  I accept the Petitioner’s evidence that the monthly balance sheets including the attachments, about 10 to 20 pages in all, were made available to the 1^st Respondent.  I accept also that since the commencement of the Factory’s operation, there was a practice of placing these monthly balance sheets and the attachments on the desk of the 1^st Respondent.  If the 1^st Respondent did not pick up the documents, they would be put in his drawer.  I accept that this was a practice which continued up to the time Bao Feng moved to the present office at the new Factory compound in October 2004.  

41.  In this connection, I would also accept that copies of some of Tung Shing’s documents headed Schedules of Payables by Tung Shing Industrial Limited (東盛實業有限公司應付明細表) were kept not only at Tung Shing’s office, but also at Bao Feng’s, and such documents would have been available for inspection by Bao Feng’s directors. 

42.  As noted above, which I have found to be the case, each monthly balance sheet contained a Note setting out the sales figures to Tung Shing and various other customers for the month.  According to the Notes which had been produced for the months of January and June 2002, there were references of sales to Champion Essence.  Produced in evidence were also sales accounting statements (應收帳款對帳單) for March 2002 recording the sales from Bao Feng to Champion Essence.  It would be remembered that Champion Essence was the 1^st Respondent’s trading company in Hong Kong.

43.  The Petitioner and the 1^st Respondent gave different explanations for these sales records that make reference to Champion Essence.  On this question, I would again prefer the evidence of the Petitioner.  I accept his evidence that from sometime in 2001, the 1^st Respondent through Champion Essence had canvassed business from customers for flocking fabrics.  Champion Essence in turn placed orders with Bao Feng to fulfil its resale obligations.  The sales to Champion Essence are significant in the context of the issue I have to resolve.  On balance, I would accept that the 1^st Respondent had used Champion Essence to procure fabrics for resale because he was aware of the same arrangement between Bao Feng and the Petitioner’s Tung Shing.  As it happened, the amount of such orders that Champion Essence managed to procure was small and the 1^st Respondent ceased canvassing for such business by the end of 2002.  It was then left to Lo Wai Leung, a contractor known to the 1^st Respondent, to continue but even Mr Lo only carried on for another 6 months and eventually gave up because it was unprofitable.       

44.  In this connection, I also regard as significant the incident of the 1^st Respondent’s application for a visa to visit the United States in May 2003.  The incident arose from an invitation by a potential business partner, one Synthon Industries Inc., to a number of individuals to visit their factory in the U.S.  The invitation was extended to these individuals as representatives of Tung Shing Industrial, obviously labouring under the wrong impression that Tung Shing Industrial operated and was the proprietor of the Factory.  The 1^st Respondent did not query the reference to Tung Shing Industrial.  To the contrary, when he actually made his application for a visa, he was content for Tung Shing to sponsor his application by claiming that he was Tung Shing’s factory manager.  It seems obvious that when he eventually visited the U.S. factory, he did so as part of Tung Shing’s delegation.  If 1^st Respondent were truly unaware of the involvement of Tung Shing in relation to Bao Feng, I would have been very surprised that he did not raise immediate query with the Petitioner regarding Synthon’s misconception.  I do not believe he could plead ignorance to the fact that he was held out as connected with Tung Shing.  Nor am I convinced by his explanation that the letter identifying him as Tung Shing’s factory manager was written out of convenience only, or that he did not know the capacity in which he was introduced to their hosts at Synthon.  I think the most probable explanation was that he was quite content for the Petitioner to have full management of Bao Feng’s affairs, and because he (the 1^st Respondent) knew of the close connections between Tung Shing and Bao Feng in their dealings he did not find it exceptionable for Tung Shing to be held out as operator of the Factory. 

45.  In the light of the foregoing discussion, I do not believe that the transactions between the Tung Shing and Bao Feng were conducted in a clandestine manner.  To the contrary, sales and accounts staff, and even the Factory manager, Wong Yiu Wah (who was involved in endorsing delivery to Tung Shing) had all along known about such transactions.  Also from very early on, and probably soon after the commencement of full production of the Factory, the 1^st Respondent was already aware of such dealings.  Not only did he know about the fact of these transactions, he was also aware that Tung Shing was making a profit out of the resales.  Although he might not have known precisely the price charged for Tung Shing’s transactions or the implications of the Tung Shing’s transactions on Bao Feng’s cash flow (by way of outstanding receivables), he was himself too occupied with his other businesses and was content to allow the Petitioner to continue the same mode of operation so long as profits were continued to be made in Bao Feng’s business. 

46.  As for the 2^nd Respondent, he was solely concerned with production matters, initially of Wing Shun and later also of Bao Feng.  He was not concerned with management at all.  Although on record he became a shareholder and director of the Company in December 2003, he was only formally recognized as such after Chinese New Year in 2004 when he paid up his contributions.  He admitted in cross examination that he had since asked either the Petitioner or the accounts staff for Bao Feng’s trading records and such records were duly given to him.  Although he seemed to suggest at one stage that the Note (page 4214) was not attached to the monthly balance sheets, his denial was later qualified and it seems it was a matter of his impression only.

47.  My assessment of the evidence is that the 2^nd Respondent had also known about the dealings between Tung Shing and Bao Feng at least from the time he became the Company’s director and shareholder, if not before.  Fairly understood, his evidence suggests that he had all along known about such dealings, but he only came to realize after the May 21 events that 1^st Respondent was in fact denying knowledge about the transactions with Tung Shing. 

48.  Before I leave the subject, I should briefly mention the allegation that the fabrics sold to Tung Shing were at prices about 3 to 5% lower than those sold to other mainland customers.  The Petitioner’s case was that since 2000, the 1^st Respondent had expressly agreed to allow the Petitioner to freely determine the prices for the sales to Tung Shing.  In any case, the price difference was justified because of the lesser risk of Tung Shing’s delaying or defaulting payment.  On this question, for the reasons already discussed, I do not find that such an agreement could have been reached at the chanced meeting on the ferry in mid-1999.  Insofar as it is said to have been made at some later date, I do not think the evidence is clear enough to support such a finding in favour of the Petitioner.

49.  However, the question of the price differentials has to be considered in the context of my findings that both the 1^st and 2^nd Respondents were well aware of the transactions with Tung Shing and the fact of Tung Shing deriving a profit out of them.  In the light of my findings, I do not believe it is relevant to consider the question whether the Respondents knew precisely the extent of the profits or the discount to Tung Shing.  What matters is, and I do find, that in the circumstances that I have found, the 1^st and 2^nd Respondents have respectively acquiesced in allowing the Petitioner to trade with Bao Feng through Tung Shing and derive a profit from such transactions.  Acquiescence by both of them in the circumstances binds the Company and there is no question of the Company being permitted to seek redress against the Petitioner in respect of the profits he had made: Gore-Browne on Companies, 45^th edition, 16[23].

Events on 21 May 2005

50.  The 1^st Respondent and the Petitioner gave different accounts of the reason for the meeting on 21 May 2005.  First, although I have found that monthly financial statements were available to the 1^st Respondent, it is probable that he had not paid much attention to the details.  He was content to leave the management to the Petitioner although, as I have found, he had for a long time been aware of the fact that Bao Feng was dealing with Tung Shing. 

51.  I accept that when the bank manager mentioned to the 1^st Respondent of Tung Shing being Bao Feng’s single largest customer, he was suddenly awakened to the situation.  Although, as I have found, he was from very early on aware of dealings involving Tung Shing, he was quite probably unaware that such dealings accounted for a substantial part of Bao Feng’s business.  Further, he was troubled when he realized that Bao Feng did not have sufficient funds to repay the loan due in February 2005.  He obviously felt that the situation was wholly unsatisfactory.  He had made inquiry with Miss Ho, Bao Feng’s in-house accountant.

52.  The 1^st Respondent had discussed the matter twice with the Petitioner about Chinese New Year in 2005.  I believe the 1^st Respondent must have felt that the situation ought to be “regularized” but the Petitioner had seen no reason for any change to the arrangement.  The discussions did not result in any definite plan to resolve their differences.  They merely agreed to talk again at another time.  Although after Treasure Rise had moved into the new Factory compound and the 1^st Respondent had attended the office more regularly than he did previously, he and the Petitioner had not had the opportunity to arrange for another discussion regarding Bao Feng until May 2005.

53.  On 18 May 2005, the Petitioner contacted the 1^st Respondent by phone.  This was prompted by the Petitioner and the 2^nd Respondent’s visit to an exhibition in Shanghai where they desired to purchase new production facilities to be added to the Factory’s third production line.  The Petitioner wanted to discuss with the 1^st Respondent about the requirement of extra factory space to install the additional equipment and the need for new business to support the expansion.  The 1^st Respondent also wanted the opportunity to continue with their previous discussion of the unresolved differences.  A meeting was thus arranged for May 21, a Saturday, at 10 o’clock in the morning, at Bao Feng’s office.

54.  I do not accept the Petitioner’s evidence that on 21 May, the 1^st Respondent simply called him on the phone to convene a meeting in half an hour.  The meeting was pre-arranged.

55.  The parties have again given different accounts of what happened at the meeting on May 21.  Having considered the evidence given by the Petitioner, and the 1^st and 2^nd Respondents, I do not consider that either side has given a version of the events that is entirely accurate.  I would set out my findings below. 

56.  On that day, May 21, the 1^st Respondent arrived at his office before 10 o’clock.  He called the Petitioner and after about 10 minutes, the Petitioner and the 2^nd Respondent arrived at his office.  At the beginning of their discussion, only the 3 of them were at the meeting.

57.  I accept the 1^st Respondent’s evidence that a number of topics were discussed.  The Petitioner mentioned the exhibition in Shanghai and the purchase of the additional equipment.  He also complimented the 2^nd Respondent on his performance and suggested that Bao Feng should let the 2^nd Respondent have the use of a car.  The 1^st Respondent queried the Petitioner’s decision to make the purchase of the additional equipment because he thought, being capital expenditure, he should be consulted before any decision was made.  The 1^st Respondent also raised the question regarding the transactions with Tung Shing.  He was concerned about the outstanding receivables due from Tung Shing which affected Bao Feng’s cash flow.  Further he was troubled by the fact that a substantial part of Bao Feng’s business arose from the “connected transactions” (meaning dealings with Tung Shing).  He mentioned that as the Petitioner controlled both Tung Shing and Bao Feng, there was a question of conflict of interest.  However, the Petitioner disagreed that there was any conflict.  The 1^st Respondent intimated that he was only seeking to “regularize” Bao Feng’s operation for the future and he was not seeking redress for the past.  The 2^nd Respondent had kept relatively quiet during that discussion.  During the discussion, the 1^st Respondent also raised his concern regarding the treatment of Boa Feng’s accounts which, if questioned by the tax authority, could give rise to very serious problems.

58.  During the discussion, the 1^st Respondent had asked the 2^nd Respondent for his views.  The 2^nd Respondent wanted to maintain his neutrality because, though a shareholder and director of the Company, the reality was that he regarded both the Petitioner and the 1^st Respondent to be his boss.  It was only after a long while that he eventually said that the situation should be “regularized”, meaning that the Petitioner should cause Tung Shing’s customers to be transferred to Bao Feng.

59.  There was also a suggestion that there should be a period of 6 months for the arrangement to be put in place, and in the interim period, the Petitioner should be appointed as the manager of Bao Feng.  His appointment would be reviewed in 6 months, and any further appointment would depend on the completion of the transfer of Tung Shing’s customers to Bao Feng.

60.  The discussion between the 3 of them continued for about an hour and a half when Mr Suen, a lawyer for Victory GD and Treasure Rise, came into the office.  I do not believe Mr Suen’s presence was a coincidence.  I believe he had been asked by the 1^st Respondent, in advance of the meeting, to come to the office.  I should also mention that at some stage before Mr Suen’s arrival, Wong Yiu Wah also appeared but he was asked by the 1^st Respondent to wait outside the office.  Again I believe Wong’s presence was pre-arranged by the 1^st Respondent because Wong was at the time a director of Bao Feng and his signature would be required for any resolution passed by Bao Feng.

61.  In Mr Suen’s presence, questions regarding Tung Shing were again raised.  Mr Suen commented that the Petitioner’s connections with Tung Shing and Bao Feng would give rise to conflict, and that the transactions between them would constitute “connected transactions”.  Mr Suen suggested that the shareholders should resolve the situation immediately.  He further suggested that as a stopgap measure to avoid any problem with the tax authority, the Petitioner’s status as Bao Feng’s designated legal representative (法人) should be terminated.  With a change of the legal representative, the newly appointed person could always plead ignorance if ever questioned by the authority.

62.  The parties had further discussions before breaking off for lunch.  I accept that the 1^st Respondent had asked one Mr Fong Shing, a clerk of Treasure Rise, to prepare some documents to record the proposals which they had discussed.  The 1^st Respondent instructed Mr Suen to assist Mr Fong in the drafting.

63.  However, I do not accept the Respondents’ evidence that the Petitioner had, at any stage, agreed with the proposals.  I also do not accept the evidence that after lunch, the parties had made revisions to the drafts as prepared.

64.  I do find, on the other hand, that after lunch when the drafts (of the shareholders resolutions of the Company and board resolutions of Bao Feng) were presented to the Petitioner for consideration, he refused to sign them.  He took the drafts, went back to his own office, telephoned his lawyer for an appointment and drove off straight away to consult the lawyer.  I consider these circumstances as strong evidence indicating that he had never in fact agreed with the proposals. 

65.  There is no doubt that for the whole meeting that morning, there was a lot of pressure on the Petitioner.  There was strong demand for him to relinquish management of the Company, Bao Feng and the Factory, and to hand over Tung Shing’s customers in favour of Bao Feng.  As I have found, Mr Suen’s presence was pre-arranged by the 1^st Respondent and Mr Suen’s comments no doubt brought further pressure to bear on the Petitioner. 

66.  As I have already found, it is more probable that the Petitioner had never agreed to the demands made of him on that day.  It is not necessary for me to speculate why he did not protest immediately when the proposals were put forward.  He might well have considered it futile to protest as no one was on his side.  But the fact remains, significantly, that he had refused to sign the drafts when they were presented to him.

67.  Accordingly, I am of the view that the Respondents’ contention of a consensual arrangement for the Petitioner to relinquish management of the Company, Bao Feng and the Factory (allegedly as evidenced by the unsigned drafts of shareholders resolutions of the Company and board resolutions of Bao Feng), ought to be rejected.

Resolution of 10 June 2005

68.  It is not disputed that the purpose of the 10 June 2005 meeting was to cause the Company’s board to endorse the removal of the Petitioner as Bao Feng’s director, board chairman and its designated legal representative, and to cause an EGM of the Company to be held in July 2005 to resolve that the Petitioner be removed as a director of the Company.  As already noted in the earlier part of this judgment, the 1^st and 2^nd Respondents’ justification for passing the resolutions at this meeting was based on the consensual arrangement allegedly reached at the previous meeting on 21 May 2005.  In view of my finding against the alleged consensual arrangement, there is no other reason to justify the June 10 resolutions to remove the Petitioner. 

Validity of the Resolutions

69.  The Petition is based partly on the contention that neither the Company’s shareholders resolution of May 21 nor the directors’ resolution of June 10 was valid.  I believe that in the context of the present proceedings issued under Section 168A of the Companies Ordinance, such contention is both unnecessary and irrelevant. 

70.  The sole question for these proceedings is whether the Petitioner has made out a case that the affairs of the Company have been conducted in a manner unfairly prejudicial to his interest as a member.  It is not necessary for the purpose of these proceedings to show that the resolutions were invalid and had no effect.  The material question is whether the act of excluding the Petitioner from management (if the resolution was valid) or the attempt to do so (if the resolution was not) amounted to unfair prejudicial conduct in the circumstances of the case.

71.  That said, however, I would briefly give my views on the question of validity for the sake of completeness.  First, as for the purported shareholders resolutions of the Company of May 21, there was no prior notice either of the meeting or the proposed resolutions.  In view of my rejection of the Respondents’ contention that an agreement among the shareholders had been reached in terms of the resolutions, the notice requirement as prescribed in the Companies Ordinance cannot be regarded as waived.  Accordingly, no resolutions of the Company can be regarded as having been validly or effectively passed at the May 21 meeting. 

72.  As for the Company’s board resolutions of June 10, first, the resolution directing an EGM to be convened in July 2005 must be valid.  But this resolution does not itself have the effect of removing the Petitioner from his office as a director.  The question of the Petitioner’s removal is for the EGM to decide in July.  Second, regarding the resolution that the Petitioner be removed from various positions in Bao Feng, the resolution itself, being a resolution of the board of the Company, does not carry the effect of removing the Petitioner from his positions in Bao Feng.  On the other hand, any question of its effectiveness and validity as a resolution of Bao Feng must be governed by Boa Feng’s constitution and Mainland laws.  This court is not in a position to determine any such question in the absence of evidence on such laws.

73.  As already mentioned, questions of validity of these resolutions are quite irrelevant for the present proceedings.  I would decline to make any declarations regarding their validity or lawfulness.

Unfairly Prejudicial Conduct

74.  I am satisfied from the evidence on the background leading to the acquisition of the Company as well as the relationship of the parties that the Petitioner and the 1^st Respondent (and later the 2^nd Respondent) has each a legitimate expectation to participate in the management of the Company, Bao Feng and the Factory.

75.  I have found that the Respondents have failed to make good their case of an agreement on the part of the Petitioner to relinquish his management positions in the Company and Bao Feng.  The attempts to remove the Petitioner from such positions were, in my view, conduct unfairly prejudicial to the Petitioner.  I find that the Petitioner has made out a case under Section 168A against the Respondents.

Reliefs

76.  On the authority of Re Wong To Yick Wood Lock Ointment Ltd. [2001] 2 HKC 618, when alternative reliefs such as those under Section 168A are available, an order for winding-up should not be granted.  In the present case, I consider it improper for the Petitioner to have maintained the claim for a winding-up all the way to the end of the trial.  No justification was proffered.  I decline to grant the order sought. 

77.  In the circumstances of the case, I consider the fairest way of disposing of the dispute between the parties is to order the 1^st and 2^nd Respondents to purchase the shares of the Petitioner in the Company and I will grant relief to that effect. 

78.  I would direct that the Petitioner’s shares should be valued as of 21 May 2005.  The value of the shares should reflect the market value of Bao Feng as of the valuation date.  The valuation should be made on the following basis:

(i)	that dealings between Bao Feng and Tung Shing Co. and/or Tung Shing Industrial, including any sales discounts were proper;
(ii)	that Bao Feng is not entitled to recover from the Petitioner, Tung Shing Co. and/or Tung Shing Industrial any profits derived from such dealings;
(iii)	that Bao Feng’s account payables to all creditors (including Tung Shing Co., Tung Shing Industrial, the Petitioners and the Respondents) and Bao Feng’s account receivables from all debtors (including Tung Shing Co., Tung Shing Industrial, the Petitioner and the Respondents) shall be taken into account in the valuation.

79.  I would further direct that the valuation of the Petitioner’s shares is to be undertaken by a firm of accountants:

(i)	listed on the website of the Institute of Hong Kong Certified Public Accountants in its “List of Hong Kong CPA practices with Business Contracts in the Mainland”;
(ii)	which has a joint venture accounting firm, a representative office, or an affiliated firm in Shenzhen or Guangzhou;
(iii)	to be chosen by the Petitioner, the 1st and 2nd Respondents by lot in the presence of the solicitors of the Petitioner and the Respondents, from a shortlist of not more than 6 nominees (the number of nominees being always equal between the Petitioner on the one side and the Respondents on the other).

80.  I give liberty to apply on the appropriate directions to be given to the expert for the purpose of valuation and generally. 

81.  I would make an order nisi that the costs of the Petitioner in these proceedings are to be borne by the 1^st and 2^nd Respondents.